To restore credibility, the Congress must go back to $4.5 trillion deficit reduction plan

Posted by Shyam Moondra

If we had a law that automatically suspended the Congressional members without pay on grounds that they irritated the citizens beyond what would be considered normal, then this would be that moment. The failure of the Super Committee to come up with a paltry $1.2 trillion deficit reduction plan would be considered a valid trigger for putting the entire Congress on temporary suspension until they came to their senses.

It’s shocking to see how bad things have really gotten in the Congress. Democracy is about finding common ground; if elected officials can't engage in give-and-take, then the government would be at stand still, the problems wouldn’t get solved, and the people would be forced to suffer unnecessarily. The bi-partisan Super Committee knew that it was important to reach an agreement on a deficit reduction plan to avoid economic fallout that could lead us into another recession. Since their announcement last Monday on lack of agreement, the stock market has already declined by 5%. The Super Committee’s colossal failure has dampened the confidence of the investors in the government’s ability to solve major economic problems. Simply put, the Super Committee, and by extension the entire Congress, failed to fulfill its duty to the nation.

The House and Senate members need to put their own re-election or party interests aside and focus on doing what's right for the country. Rich people benefited the most under President George W. Bush, so what’s wrong in asking them to pay more in taxes to help reduce deficit? The deficit is too large to be fixed just by spending cuts; it's imperative that we also raise revenues. We can't cut spending too much at a time when economy is struggling; if we did, it would undoubtedly slowdown the economy and push the unemployment rate into double digits.

President Barack Obama and House Speaker John Boehner must go back to their original $4.5 trillion plan and take it from there. The market and country are looking for a big plan to inspire confidence. A $1.2 trillion plan would not make much difference and it will in fact send a negative message to the markets. I don’t think we can wait for another year to do this after the 2012 election; this issue must be tackled by the current Congress right now.

Here is my 10-point plan that should be considered:

1. Let the Bush tax cuts for the rich people (those who make more than $500,000 a year) expire at the end of 2012, but extend the Bush tax cuts for the rest of the people for four more years. A special temporary income tax surcharge for millionaires and billionaires should also be on the table.

2. Reform the tax code. First, eliminate most deductions for those who are making $500,000 or more. Second, eliminate all tax subsidies given to oil companies, hedge fund managers, drug companies, and rich farmers. Third, close all corporate tax loop-holes and shut-down tax-havens that make it possible for corporations to escape paying their fair share of taxes (when GE pays 0% or Google pays only 2% in taxes, that's not right).

3. Cut the defense budget by at least 10%.

4. Medicaid program is largely wasteful and there is a lot of fraud perpetrated by the service providers and patients. Just give a fixed lump-sum amount to the states and let them manage medical care for the poor. We need to ration this benefit rather than making it an open-ended entitlement.

5. Social Security and Medicare are like insurance polices; the government should not change the terms of those polices mid-stream. If we want to reform these programs, it should be done for those who are just entering the work-force and not for those who already paid into the plans. These programs didn't add to the deficit, so there is no need to make drastic changes for those who are already receiving benefits or those who have already paid the premiums but haven’t yet started receiving benefits. We can make some minor adjustments such as modifying the formula for calculating COLA for SS and slightly increasing the premiums and deductibles for Medicare. However, the eligibility age for benefits for these programs should not be increased.

6. Streamline government structure. Texas Gov. Rick Perry's suggestion to eliminate some agencies is a serious proposal worth exploring. For example, Interior, Energy, and EPA could be combined into one Department.

7. We are falling behind in education, so we need to invest more in that area to remain competitive in the global market place. It's ironic that we are spending more money on building prisons but reducing funding for education; that doesn’t sound like the right prescription for a promising future.

8. Cut down foreign aid budget to bare minimum. We can't afford to keep giving tens of billions of dollars of aid every year to Egypt, Pakistan, Israel, and others, especially at a time of financial crisis at home.

9. Ban pork-barrel spending, earmarks, etc. Most of this spending is wasteful and often done to benefit big campaign contributors, which breeds corruption.

10. Cut salaries and benefits of members/staff of Congress that are way too generous. The country is going through a rough time, so everybody should make sacrifices.

If Obama and Boehner hammer out a plan to reduce deficit by around $4.5 trillion over ten years, it would be viewed as very positive by the financial markets, it would remove uncertainty and thus facilitate new capital spending by corporations, and in a short period of two or three years we would see a vibrant economy with significant job creation. The American people are anxious to see strong leadership from Obama and Boehner and others in the Congress to get this done quickly.

Super-duper Committee up in smoke – Republicans stuck between a rock and a hard place

Posted by Shyam Moondra

When President Barack Obama and House Speaker John Boehner couldn’t agree on a grand deficit reduction plan, which would have reduced deficit by $4.5 trillion over ten years, they kicked the can down to the Senate and House. When Congress couldn’t reach an agreement, they appointed a Super Committee, consisting of six Democrats and six Republicans evenly divided between the Senate and House, to come up with a plan to reduce deficit by $1.2 trillion over ten years which would then be voted up-or-down by the full Congress without any amendments or filibuster. And if they failed to agree on a plan, there would be automatic cuts in discretionary spending worth $1.2 trillion of which about $500 billion would be realized by slashing the defense budget.

As of now, it looks highly unlikely that the Super Committee would agree to any plan. This would represent a colossal failure on the part of Congress that had a record-low approval rating of just 9% going into the Super Committee deliberations. Last time, when Congress failed to agree on the debt ceiling plan, S&P reduced the rating of U.S. government securities from AAA to AA+ and the stock market crashed by over 1,000 points. This time, market may not react that badly because the expectations are so low from this “do nothing” Congress. Everyone knows that it would be a miracle if the Super Committee could somehow wave a magic wand and overcome political gridlock.

Republicans are insisting that the income tax cuts for the rich enacted by President George W. Bush be made permanent, which is, of course, vehemently opposed by Democrats. The Democrats argue that the rich benefited the most under Bush and, therefore, they should also share in the pain of balancing the budget. Republicans’ intransigence on the issue of tax increase is remarkable because an overwhelming majority of the voters, including many Republicans, in fact support the idea of making rich people pay more in taxes to bring down deficit. Unfortunately, many Congressional Republicans signed a pledge to not vote for any tax increases; this pledge was sought by a political organization, Americans for Tax Reform, which is funded mostly by wealthy individuals and foundations. Many Republicans understand that the current level of deficit and debt can’t be reduced just by spending cuts and that some tax increases would be necessary. However, they are afraid to speak up in favor of tax increases because they fear retaliation from Americans for Tax Reform which could jeopardize their chances of getting re-elected. Republicans are indeed stuck between a rock and a hard place.

Now it looks like the tough issues of budget deficit and debt wouldn’t be addressed until after the 2012 election. Republicans have put themselves in a Pandora box – they are resisting tax increases for the rich even in the face of strong support from many of their own constituents. It’s hard to see how Republicans could stand to gain in 2012 from their impractical position. Ultimately, it would now be up to the American people, who would have to vote wisely. In 2012, the voters must elect people who would listen to their constituents, be willing to compromise, and do what is best for the country, even in the face of threats of retaliation from a lobbyist organization.

Does a paltry 9% approval rating render the U.S. Congress as illegitimate?

Posted by Shyam Moondra

The latest CBS News/New York Times opinion poll shows that the approval rating for the U.S. Congress is at an all-time low of just 9%. That means a whopping 91% of the American people don’t trust the Congress’ ability to make the right decisions. Under the democratic systems of many other countries, this level of lack of support for a government would have amounted to a “no confidence” vote and triggered immediate new elections. However, under our constitution, we are stuck with the political gridlock until November, 2012 at which time voters would have to decide who should lead the country going forward, especially in the House of Representatives. Last Sunday, on ABC’s This Week program, when asked to comment on the declining popularity of Congress, House Speaker John Boehner (R) said that Congress always had low approval ratings. Boehner's dismissive attitude seems to suggest that he doesn’t think the views of an overwhelming majority of Americans are all that relevant. And that means the business as usual until the new elections are held in 2012.

In yesterday’s local elections, Republicans suffered severe blows on their core issues. In Ohio, the voters overwhelmingly rejected a law curbing union bargaining rights for public employees. This result may be the first clear indication that voters may be growing disenchanted with the Tea Party-backed Republicans, who have advocated deep spending cuts and opposed tax increases. In Mississippi, the voters rejected a controversial amendment that would have defined life as beginning at conception. This amendment would have made it impossible to get an abortion in the state and hampered the ability to get the morning-after pill or birth control pills that destroy fertilized eggs. Disposing of unused fertilized eggs could also have become illegal, making in vitro fertilization treatments more difficult. These two voting results dealt a blow to the Republican establishment and point to a significant shift in the voter sentiment heading into the 2012 election season.

Just as European welfare state is causing upheaval in Europe, the pro-rich policies in the U.S. are leading to just as disastrous results. The gap between the rich and poor is widening and discontent among the population at large is increasing. In a recent Wall Street Journal poll, 60% of the respondents said that the current structure of the economy favors a small portion of the rich people over the rest of the population. And that is the basis of “Occupy Wall Street” protests that are now spreading across American cities and across continents. The Occupiers are saying that the gap between the rich and poor is real and it's a direct result of Republicans favoring the affluent people, who make generous campaign contributions to Republican candidates. The protesters believe that the future of America lies in making the middle-class, which accounts for two-third of economy, stronger.

Given the shift in the electorate sentiment, the Congress needs to do the following:

• Ban campaign contributions by corporations that are polluting our political system. Big money from big business is drowning out the voice of the ordinary citizens. Through their relentless lobbying efforts, the corrupt corporations are able to win special breaks often at the expense of consumers.

What we have is institutionalized corruption that allows Rep. Paul Ryan (R) to collect close to $1 million in campaign contributions from the insurance industry and then propose to dismantle Medicare forcing all elderly people to buy their insurance from private insurance companies, creating a profit bonanza for the insurers.

• Ban revolving door practices where former members of Congress and/or staff become lobbyists and corrupt our governmental system for personal gain.

• Increase taxes on rich individuals making $500,000 or more a year and impose an absolute minimum income tax rate (e.g., 25%) for all corporate income, including profits from overseas operations (no more off-shore tax havens). Republicans equate higher taxes to big government; however, it’s not a question of big government or small government; it’s a question of fairness. During the last two decades, the rich people and corporations, especially financial institutions through highly leveraged bets, did quite well and paid relatively low taxes (thanks to lower tax rates and tax loop-holes). During this period, the executive compensation went through the roof. So, overall, a relatively small percentage of the population did exceedingly well, while the middle-class and low-income people lost ground. We need to reform the tax code to make it fairer.

• Stop all corporate tax subsidies and special treatments given to oil companies, hedge fund managers, drug companies, and rich farmers.

• Impose limits on how much corporate CEOs can make (as a multiple of the lowest paid employee in the company). Ban golden parachutes accorded to executives, especially to those who were fired for non-performance or those who are retiring.

• Create an environment where corporations are induced to become more ethical via stricter enforcement of the laws against insider trading and manipulation by the SEC, CFTC, Federal Reserve Board, and FDIC.

The sooner we make these fundamental reforms, the better off we would be as a country. If we continue on the current Republican path of favoring the rich, this country will break-apart and we may even see protests turning violent.

President Herman Cain? Have Republican voters gone berserk?

Posted by Shyam Moondra

In recent years, the voting record of Republicans has been mystifying. Here is their track record:

• First, they voted for right-wing ideologues like House Speaker John Boehner and House Majority Leader Eric Cantor who adopted the disastrous policy of “say no” to everything that Democratic President Barack Obama proposed, took inflexible position on the debt issue that resulted in the S&P downgrade of the U.S. government securities, and pursued a strategy of deliberately damaging the economy and driving up the unemployment rate with the expectation that a weakened economy would make it easier for them to win the presidency in 2012.

• Second, Republican voters embraced the members of the toxic Tea Party that openly advocated a default by the government on its debt which would have brought disastrous results for the global economy.

• And now, the Republican voters are rooting for an unlikely candidate, Herman Cain, who is currently leading the pack. Cain, a Black man, has no political experience (he already made several gaffes), has questionable background (recent reports suggest that he engaged in sexual misconduct), and has flip-flopped on the core Republican issue of abortion. And to top all that, in a bizarre campaign ad, his chief-of-staff is shown puffing away on a cigarette.

What the heck is going on? Why are Republican voters being so erratic and nonsensical? Today, the country is in a big fix largely because of how the Republican constituents voted and what the elected Republicans did. President George W. Bush and Republican Congress caused most of the current budget deficit and national debt by spending over $1 trillion on the unnecessary war in Iraq, by handing out $1 trillion worth of unnecessary tax cuts to the rich and tax subsidies to the corporations, and by relaxing regulations that led to the financial crisis requiring close to $1 trillion in bank bailouts.

Here is a winning strategy for Republican voters for the upcoming 2012 elections – exercise good judgment and elect better quality people who would fight for the middle-class and not for the rich campaign contributors. Republicans must elect people who are not hardcore ideologues and who are able to solve people's problems by reaching out to the opponents and making the necessary compromises.

Obama’s impressive use of brains over muscles

Posted by Shyam Moondra

A year ago, it was unthinkable that the long sought Al Qaeda master-mind, Osama bin Laden, would be killed in a daring raid deep inside Pakistan by the U.S. Special Forces that used secret stealth helicopters unknown to the world. No one could imagine that a combination of effective diplomacy at the UN and surgical strikes by the U.S. and NATO forces would be enough to enable the Libyan revolutionaries to kill the brutal dictator, Muammar Gaddafi, and put Libya on a path to democracy. Who could have thought that the political and diplomatic support by President Barack Obama would be enough for the Egyptian people to oust the strongman, Hosni Mubarak, and for the Tunisians to depose their ruthless leader, Zine al-Abidine Ben Ali? It was an unexpected surprise when the U.S. military used a high-tech unmanned drone to get Anwar al-Awlaki, the dangerous Al Qaeda leader based in Yemen. In fact, American unmanned drone attacks have killed a score of other high-value targets in Pakistan, Afghanistan, and Yemen. What’s more impressive is that Obama got all of this done without using an overwhelming military force and at a cost of around $1 billion compared with over $1 trillion President George W. Bush spent on the wars in Iraq and Afghanistan.

From the above foreign successes, a few things become clear about Obama’s strategy:

• As a first step, Obama prefers to use diplomacy and political and economic means (e.g., sanctions) to bring about the desired changes. On Libya, Obama insisted that the Arab League first formally ask for help through the U.N. Obama then skillfully persuaded the major powers at the U.N. to start with economic sanctions followed by minimal force to protect the unarmed civilian protesters. In case of Egypt, Obama successfully leveraged the military-to-military relations between the U.S. and Egypt to dissuade the Egyptian generals from firing upon the unarmed protesters that eventually led to the downfall of Mubarak.

• Obama prefers multi-lateral approach as opposed to going alone as Bush initially did in Afghanistan and Iraq. Given our weakened financial situation at home, Obama is acutely aware that the U.S. can no longer be the world police.

• Obama keeps his options open and uses the military as a last resort, even in the face of criticism from the right-wing Republican hawks. For example, Obama was wise to ignore Sen. John McCain’s advice to put American forces on the ground in Libya. Obama correctly understood that the American people had absolutely no appetite for engaging in yet another costly war.

• Obama doesn’t feel the need to always have the U.S. in the lead. In Libya, he ordered the U.S. Air Force to initiate the early surgical strikes but then let the French and British forces takeover the operation. Obama’s willingness to lead from behind was brilliant; he got the job done at minimal cost without endangering the lives of American soldiers, while at the same time he let our allies shine in the limelight.

• Obama combines first-rate intelligence and smart technologies (e.g., unmanned drones, stealth helicopters, and laser bombs) to execute military campaigns cheaply and with minimum casualties.

• Obama seems to understand that raw military force in Muslim countries does more harm than good. He prefers to use military covertly in a subtle manner rather than in a more visible way such as deploying overwhelming heavy armored ground forces. The Islamic extremists can easily exploit heavy military presence on the ground by framing the U.S. as a country in war with the Islam.

• Obama uses patience as a virtue. Unlike Republican predecessors, Obama doesn’t shoot first and then ask questions. Bush was known to have the cow-boy mentality in dealing with international problems. Obama is very deliberate and he exhausts all political and economic means before resorting to force. In case of Libya, initially he relied on diplomacy to have Gaddafi relinquish power in a peaceful way. Many Republicans called him timid and urged him to take stronger action right away. The ultimate results show that Obama’s patience and deliberate way of tackling the crises proved to be very effective.

Obama has demonstrated that you can accomplish security goals by using brains over muscles. Republicans usually have the reputation of being strong when it comes to defense and security, but Democratic Obama has shown an uncanny ability to use the military force in a very intelligent way and achieve the desired results with minimum loss of American lives and at minimum cost. Time and again, Obama has convincingly shown that you can do more with less. Obama’s string of successes in a short period of time has made him the most successful security president of modern times. Even some of Obama's Republican critics have conceded that Obama has made some "gutsy" calls. Also, Obama and First Lady Mrs. Michelle Obama have tirelessly worked to ensure that the veterans and their families are treated well. Obama has proved to be one of be the most effective Commanders-in Chief in recent history. No wonder why the Republican presidential candidates have been uncharacteristically quiet on the issue of security that would normally feature as the number one issue in the presidential politics.

Obama speeded up the withdrawal of the U.S. armed forces from Iraq and put the withdrawal from Afghanistan on a fast track. In Iraq, the insurgency has its roots in the religious discord between the majority Shiite and minority Sunni populations; therefore, even if the U.S. stayed in Iraq for a few more years, the animosity between the two groups will still be there. Whatever differences exist between the two sects, those differences have to be bridged by themselves; our continuing involvement there only makes it harder for them to reconcile. In the absence of a clear-cut mission, our presence in Iraq is an unnecessary burden on the taxpayers and now that Obama has made a decision to pull them out by the end of 2011, it’s all for the best. It’s interesting that hard-core Republican ideologues are now criticizing Obama for this wise decision which is being overwhelmingly supported by the American people (as a matter of fact, the decision to pull out by the end of 2011 was originally made by Bush). Obama seems to have completely neutralized the Republican’s winning issue of defense and security.

Some political analysts argue that Obama’s intelligent foreign policy and all of his impressive successes may not be enough for him to win re-election because the people tend to vote based on economic issues. While that may be true in theory, Obama’s successes do reduce the war costs at a time when our deficits are running high; so his performance as a war-time president does have economic implications. For Obama to be re-elected, the unemployment doesn’t have to come down a lot; if, in the next year or so, economy starts showing the signs that we are moving in the right direction, that may be just enough to tilt the balance in his favor. Many Americans understand that Bush left an array of serious problems and it takes time to tackle those complex problems. Also, the people understand that Republicans control the House, so in a divided government Obama is not free to do things that he wants to do to get economy growing again. Obama’s solid leadership in foreign affairs combined with his sincere efforts on economy may be just enough to win him a second chance.

Occupy Wall Street - A populous revolt against “the government of the rich, by the rich, and for the rich”

Posted by Shyam Moondra

Occupy Wall Street, a leaderless protest by mostly young people, started out only about a month ago in New York’s financial district but has now quickly spread to other American cities and across continents. Yesterday, this rapid fire revolution turned violent in Rome, Italy. The House Majority Leader Eric Cantor (R) called them a "mob." Some conservative commentators labeled these angry young people as a misguided minority. However, the latest opinion polls paint a very different picture; these young revolutionaries in fact enjoy twice as much support among the general public as does the Tea Partiers. Not only that, the main demand of the protesters, to increase the taxes for the rich, is now supported by a whopping 73% of the people, including 53% of the Republicans.

Many conservative political pundits have taken a dismissive attitude towards the Wall Street protesters by labeling them as a bunch of losers that are anti-rich and anti-capitalist system. That’s a complete misread of the situation. These young protesters, many of them with college degrees and crushing student loans, are faced with high level of unemployment and lack of opportunities to realize their dreams. They are not anti-rich or anti-capitalist system; they are simply protesting against the inequitable system that treats rich and powerful people a lot more favorably than the ordinary folks. They are angry at the excessive compensation of corporate executives (that increased by 300% since 1990), who caused the financial crisis and still got bailed out by the government. They are angry at the Exxon-Mobil Board that granted a $400 million retirement package to a former CEO. They are angry at the report that GE paid zero income taxes in 2010. What these young people are protesting against is a system that’s designed to favor the rich and powerful. The recent census survey results clearly show the disparities and the widening gap between the rich and the poor. The rich people became rich, not exclusively because of their hard work, but mostly because of the pro-rich government policies that granted them special breaks and lower income tax rates.

The Congressional Republicans’ emphasis on spending cuts and no tax increases is just a continuation of their policy of favoring the rich over the struggling working class people. They know very well that spending cuts would negatively affect largely the low-income and middle-income families while no tax increases mean maintaining the status-quo for the rich. The low-income and middle-income families account for 67% of the overall consumer spending, so if they are hurt by government spending cuts then it would make that much harder to recover from the recession and we will continue to see an elevated level of unemployment rate. The Republicans blame President Barack Obama for initiating a class-warfare, when in fact they themselves have been engaged in class-warfare all these years by giving the rich all kinds of special breaks. It's interesting to note that a majority of the members of the Congress are themselves millionaires. Even rich Republican Presidential candidate Herman Cain’s 9-9-9 plan (a flat 9% income tax rate for corporations, a flat 9% income tax rate for individuals, and a flat 9% sales tax for everyone) is  laced with the same ill-timed pro-rich philosophy. Most low-income and middle-income struggling families, who live from pay-check to pay-check, would see a net increase in their taxes while the rich people would see a net decrease in their taxes because Cain is also proposing to eliminate capital-gains and estate taxes that largely benefit the affluent people. The 9-9-9 is actually a code language to make rich people richer while piling up on the pain for the struggling ordinary people.

Here are some actionable initiatives that the Congress could look at to reflect the mood of their constituents:

• Reform the tax code. Corporations and rich people must pay more in income taxes; it’s unacceptable when GE pays zero taxes or Google pays only 2% or Goldman Sachs pays only 10% and when billionaire Warren Buffett pays a lower rate than his secretary.

• Close off-shore tax loop-holes that corporations use to escape from paying their fair share of taxes.

• Eliminate tax subsidies to corporations (e.g., to rich oil companies, hedge funds, drug companies, and farmers).

• Impose limits on how much corporate CEOs can make (as a multiple of the lowest paid employee in the company). Ban golden parachutes accorded to executives, especially to those who were fired for non-performance or those who are retiring.

• Ban campaign contributions by corporations and their representatives that are polluting our political system. Big money from big business is drowning out the voice of the ordinary citizens. Through their relentless lobbying efforts, the corrupt corporations are able to win special breaks often at the expense of consumers.

• Create an environment where corporations are induced to become more ethical via stricter enforcement of the laws against insider trading and manipulation by the SEC, CFTC, Federal Reserve Board, and FDIC.

The Occupy Wall Street movement has sparked a debate on how the system is rigged in favor of the rich and how it has made almost impossible for the poor people to climb out of poverty. Given the increasing broad support of the Occupiers among the population, the Republican Party seems to be stuck on the wrong side of the debate just before the up-coming general election. It would be a fatal political mistake to assume that this revolution is just a fad and it will go away, and that it will have no impact on the 2012 elections.

War or no war, that is the question

Posted by Shyam Moondra

This week, America marks the 10th anniversary of the Afghanistan war, the longest running war in the nation's history. The Afghanistan campaign began soon after Al Qaeda attacked the U.S. mainland on September 11, 2001. And then we started yet another war in Iraq to topple the brutal regime of Saddam Hussein and seize Iraq’s non-existent weapons of mass destruction. The U.S. has become a habitual warrior with perpetual military campaigns undertaken by its armed forces around the world. After the World War II, the U.S. has been militarily involved in the Korean peninsula (1950-1953), Vietnam (1964-1973), Iranian hostage crisis (1979-1980), Lebanon civil war (1982-1984), Grenada (1983), Panama (1989), Gulf war (1991), Somalia (1992-1993), Bosnia (1995), and Kosovo (1999). Not to forget an assorted collection of skirmishes around the world involving Cuba, Guatemala, Angola, Cambodia, Laos, Dominican Republic, Philippines, Iran, Iraq no-fly zone, Haiti, Kenya, Somalia, El Salvador, Nicaragua, Honduras, Bolivia, Liberia, Chile, Albania, Zaire (Congo), China (to protect Taiwan isles), Yemen, Pakistan, Libya, etc. It seems like the U.S. is addicted to wars. When discussing the Pentagon’s budgetary needs, even politicians often talk in terms of how many wars the Pentagon can fight simultaneously. Our defense planning presumes that we will always be involved in wars. On the other hand, other major military powers such as Russia and China, have had less frequent armed conflicts and they spend a lot less on defense than we do. After the World War II, during the Cold War, the former Soviet Union invaded East European countries and imposed the communist rule there and in the 1980's they invaded Afghanistan. More recently, Russian military has fought against insurgents in Chechnya and invaded Georgia. China invaded India during the 1960's but more recently it has had some minor skirmishes with the neighboring countries (such as Vietnam) over the territorial disputes involving some tiny islands in the South China Sea.

In modern history, the Democratic Presidents, in general, have been reluctant to engage in wars while the Republican Presidents have been more eager to flex military muscle to achieve their foreign policy goals. President John Kennedy (D) tried very hard to not let the Cuban missile crisis turn into a major conflict between the U.S. and the former Soviet Union. President Kennedy also resisted the temptation to get involved in Vietnam. While President Lyndon Johnson (D) escalated the military campaign in Vietnam, it was President Richard Nixon (R) who expanded the bombing campaign to include neighboring countries such as Laos and Cambodia. President Jimmy Carter (D) was extremely reluctant to use military force; he was perceived as a weak president which led the Soviet Union to invade Afghanistan. Even when Carter tried to use military, for example to free the American hostages in Iran, he failed. President Ronald Reagan (R) was more open to the use of military (Grenada, Panama, Lebanon, Iran, Nicaragua, El Salvador, etc.). President H. W. Bush (R) ordered a major military campaign against Iraq to expel the Iraqi invaders from Kuwait. President Bill Clinton (D) was a reluctant Commander-in-Chief; he was primarily focused on economic issues (his election campaign strategy was based on “it’s economy, stupid”). Clinton entered the Kosovo campaign only after the Europeans kept urging him to do so and Clinton sent the American troops to Somalia in the midst of a civil war only after a drumbeat from the Congressional Republicans. Some argue that Clinton's response to Al Qaeda’s terrorist acts in Kenya and Yemen was too timid which only emboldened Al Qaeda. After the Al Qaeda attack in September 2001, President George W. Bush (R) held nothing back and unleashed the U.S. military might in Afghanistan and Iraq at a cost of over $1 trillion. President Barack Obama (D) has been very eager to end our involvement in Iraq and Afghanistan and he has been very guarded against getting sucked too deep into the civil war of Libya. Like Clinton, Obama's main focus is on economy and jobs and he is not interested in creating distractions by engaging in wars.

Most presidents are aware that it’s easy to get in but it’s very hard to get out of a conflict, given the uncertain outcomes of the wars. Bush invaded Iraq to seize weapons of mass destruction but when those weapons were not found, he changed the mission to fight Al Qaeda, and then to establish democracy, and then to nation building at a cost of almost a trillion dollars. The same thing happened in Afghanistan – the initial mission was to remove the Taliban from power because they gave sanctuary to Al Qaeda, but then the mission changed to establishing democracy, and then to nation building.

In a recent Pew opinion poll, 45% of the general population said neither of the wars in Afghanistan and Iraq has been worth the costs. And half of the public say the wars have not made them feel more secured. Even among the post-9/11 veterans, only one-third say the wars have been worth the costs. In Afghanistan, as soon as we leave, it’s almost certain that the Taliban will takeover the government. So the question is should we be spending enormous amount of money to keep the Taliban in check just for a short duration? It seems like we are fighting a battle in vain and wasting our valuable resources at a time when we are experiencing severe financial crisis at home. During the 1980’s, the former Soviet Union invaded Afghanistan but the Soviet army was forced to leave in defeat. Given the tenacity of the mobile Taliban fighters, it’s almost certain that as soon as the NATO forces leave by 2015, the Taliban would prevail over the Afghan forces. In retrospect, the best strategy would have been for Bush to negotiate a settlement with the weakened Taliban right after we installed the Karzai government there.

The Pentagon is a wasteland of tax-dollars. We spend in excess of 4.7% of our GDP on defense (up from 3.1% in 2001). The more military power we have, the more eager we seem to become to use it. Republicans are haggling over a few billions of dollars for children's programs at home while they have no qualm against spending billions of dollars in far flung places, even though they are not a direct security threat to the United States. Having enormous military assets means we are the de facto world police. The history has clearly demonstrated that our military involvement in Korea, Vietnam, Iraq, and Afghanistan have cost us the lives of thousands of our soldiers and trillions of dollars, but they have really not brought out the results worthy of those sacrifices. Knowing that we have the most powerful military in the world has sometimes led us to erroneously believe that we have the right to intervene militarily anywhere and everywhere at whim. In many cases, even though other countries can deal with their regional crises themselves but they just find it more convenient and less costly to let the well-armed (and always eager to oblige) Yankees do it. There is so much money lying around at the Pentagon that they don't care if they paid $500 for toilet seats or $100 for hammers. During the Iraq war, billions of dollars of cash simply vanished in thin air (even today, it's unaccounted for) or paid to the contractors without any proper paperwork (so nobody can tell what services were provided by those contractors). Per the government audits, the suppliers of defense equipment routinely overbill the government.

Recent wars in Afghanistan and Iraq have not made us more secured. Our presence in Muslim countries has fueled anti-Americanism among the local populations and strengthened the hands of Islamic extremists. Our involvement in the World War I and II had moral underpinnings and we were treated by the local populations as heroes or saviors, but that is not the case in Afghanistan and Iraq. Obama was wise to not jump into the civil war in Libya and wait until the Arab League formally asked to intervene. Also, Obama was correct in limiting the campaign to air support and not putting soldiers on the ground that would have been more inflammatory to some of the Islamic fundamentalists in the Muslim world.

The “Arab Spring” revolution sweeping through Northern Africa and Middle-East is being driven by the youth who are angry because of high unemployment and lack of opportunities to realize their dreams. They used Facebook and Twitter to galvanize the revolution. Thanks to Internet, the youngsters in these Muslim countries were knowledgeable about how the kids lived and what they did in developed countries, and they very much wanted to emulate those life styles. The older generation was also unhappy but they were too afraid to speak up in police states. However, when they saw the brave young people protesting in masses, they overcame their fear and felt like they had nothing to lose. The protests were not fueled by any Islamic fundamentalist groups. This revolution is in its truest sense a revolution of the masses across all ethnic groups and not driven by any particular anti-western group. The younger generation doesn't subscribe to the old rigid Islamic rules. Besides, they will be busy rebuilding their countries, so they wouldn't have time for radical indoctrination. Islamic radicalism will thus decline. This is the best opportunity for the U.S. to scale down its military operations in the Muslim world and eventually cease these operations completely. The U.S. should focus more on interacting with the younger generation to help them rebuild their countries and work collaboratively on technologies, education, and trade so that they can improve their own living standards.

Strong military helps protect our security and economic interests around the world and it serves as a deterrent to potential adversaries. Wars afford an opportunity of hands-on field experience to our armed forces that keeps them on their toes and sharp. Our huge investments in new technologies and military strategies make our military the best in the world. For example, the use of drones, the unmanned vehicles, such as the one used in last week's killing of Al Qaeda's Anwar al-Awlaki in Yemen, is proving to be very effective. Our defense funding also keeps our military industrial complex financially healthy that enables them to keep churning out new breakthrough technologies. On the negative side, our constant engagement in multiple wars is proving to be a huge financial burden on taxpayers that is becoming increasingly untenable given our high debt and budget deficit. Obama seems to have understood that the best strategy is to combine first-rate intelligence, special operations, and the use of remote capabilities (e.g., unmanned drones and other high-tech systems) to achieve the desired results at minimum cost. His focus seems to be not on big military but on smart military.

Presently, a Congressional Super Committee is trying to come up with a deficit reduction plan. If this special congressional panel fails to agree on the mandated deficit savings of $1.5 trillion by this November, there will be across-the-board cuts in all discretionary spending, including the defense budget. The potential for sharp cuts in the Pentagon budget has got Defense Secretary, Leon Panetta, quite worried because that would force us to fight wars more selectively. Now, would that be such a bad thing?

How can Republicans reverse their awful polling numbers?

Posted by Shyam Moondra

A recent CBS News/NYT opinion poll reveals growing populous dissatisfaction over the performance of the Congress in general and Republicans in particular. The congress has an approval rating of only 12%, a record low. Among the Republicans, a whopping 84% of the people think that the incumbent members of the Congress do not deserve to be re-elected. Clearly, the Republican strategy of saying “No” to everything that Democrats proposed or hitching with the extremist Tea Party or pushing the country over the cliff on the debt issue (that resulted in the downgrade of the Treasury securities by S&P) has backfired. The Republicans, especially in the House, seem to have pursued a policy of deliberately harming the economy to drive President Obama’s approval rating down thinking that a weakened incumbent president will be easier to defeat in 2012. However, the polls show that the Republican tactics and intransigence have hurt them more than Obama, who still enjoys an approval rating of 43% which is much higher than that of the Congress.

The American people understand that Obama inherited most of the problems from his predecessor President George W. Bush. Bush started a costly war in Iraq (that many believe was a war of choice rather than need), gave unnecessary tax cuts to the rich and tax subsidies to the corporations at a time of war when you normally expect everyone to pay higher taxes to cover the cost of the war, and budgeted hundreds of billions of dollars to bailout financial institutions that were on the verge of collapse (thanks to Bush’s lax regulations). When Obama became the president, he inherited an economy sliding into recession (2.6 million jobs lost in 2008, the final year of the Bush presidency), bulging budget deficits and national debt, and national icons such as GM headed for bankruptcy (and possibly hundreds of thousands of lost jobs). Obama had no choice but to stabilize the financial sector and the auto industry, undertake a big stimulus program to immediately create jobs, and extend the Bush tax cuts for two more years to help economy recover. Had Obama not done all of that, the unemployment rate would probably have gone up to 15%. Obama was correct in negotiating a long-term plan with House Speaker, John Boehmer, to reduce deficit by over $4 trillion over ten years (that included tax and entitlement reforms), a plan from which Boehner walked away because he failed to muster the support of the Tea Partiers within his party ranks.

The economy is still struggling and the people have pretty much given up on Congressional Republicans, as is clear from the polling data. So now the question is what should Republicans do in the next fourteen months to position themselves to win the White House, keep the control of the House, and possibly win the control of the Senate?


Republicans’ fallacious reasoning:

First, let’s look at the faulty thinking of the Republicans on many issues that suggests that they don’t really understand Economics 101:

• Republicans say that higher taxes on the rich will hamper job creation, but that's not true. In the current environment, it’s the increased consumer spending and not capital availability that will drive the economy. The U.S. corporations are hoarding close to $2 trillion cash, so it is not the capital that will motivate them to hire more workers. They need more demand for their products and services. However, as the polls show, this recession has decimated the middle-class and low-income families (they lost the most ground in terms of their income while the upper-income people lost the least) that generate most of the consumer demand in our economy. That means if millionaires and billionaires pay more in taxes, it will not lead to fewer jobs but to the contrary it will help reduce deficit and bring about more favorable effects on economy. In any case, Bush gave the rich people tax breaks at a time when we were engaged in two costly wars. The wars cost $1 trillion and he gave away $1 trillion in tax breaks; if he had not given away tax breaks, we would not have had huge deficit and debt as we have today.

• Republicans, especially the Tea Partiers, say that balancing the budget quickly will be positive for the economy, but that’s not true. A precipitous cut in government spending will hit the middle-class and low-income families more than the rich people and that will in fact reduce consumer spending even more. As a result, economy will revert back to recession with unemployment rate going up. In fact, most economists would readily affirm that what we really need is a short-term plan to stimulate economy and a long-term plan to bring down deficit, rather than try to balance the budget right away at a time when the economy is still struggling.

• Republicans keep saying that health care mandate is unconstitutional. Today, all of the states have mandatory car insurance and Texas even requires mandatory controversial HPV injections for 11- and 12-year old school girls. There are times when the larger public good requires government’s mandatory actions. In case of health care, if the insurance were not mandatory, the people would buy insurance only when they get sick, putting the burden of treating the uninsured people on those who do have insurance and thereby increase the cost of health care for everybody. You cannot apply a broad brush to all government mandates and label them as intrusion in the lives of the people.


This is what Republicans should do:

• Bring more civility in how the federal government works. The poll shows that 84% of the people are dissatisfied or angry about the political gridlock. The people want economic problems solved and that means Republicans and Democrats must compromise to move forward on job creation, etc.

• Stop taking a rigid ideology to the extreme that makes rational policy decisions almost impossible. It is fine to have convictions on smaller government and lower taxes, but Republicans must be flexible enough to develop pragmatic policy alternatives. President Ronald Reagan strongly believed in lower taxes, and yet, from time to time, he agreed to increase certain taxes in return for other reforms that would help him achieve his overall broader policy goals. In a democracy, especially when you have a divided government, horse trading is inevitable. Drawing a line in sand based on rigid ideology leads to a path of “my way or highway” that almost never bears fruits and it turns off the voters. In the eyes of the people, Republicans appear to be unreasonable and obstructionist.

• Embrace the concept of “smaller government” but disassociate from the toxic Tea Party. When economy was doing really bad and deficit was running high, many people were angry and they enthusiastically supported Tea Party out of frustration. However, since then, the people are coming to the conclusion that the Tea Partiers are too extreme and they have gotten in the way of economic recovery. Many of the Tea Partiers openly advocated a default on the U.S. debt that would have brought catastrophic results for the global economy. Their unyielding stand forced the Republicans to engage in an ugly debate on increasing the debt ceiling limit that eventually led S&P to lower the U.S. debt rating from AAA to AA. Republicans would be wise to disassociate themselves from Tea Party and, as Senate Minority Leader, Mitch McConnell, put it, save the Republican brand from being irreparably damaged. The extreme tendencies of the Tea Partiers are detrimental to effective governing.

• Focus on what people want. The recent poll shows that 59% of the people are concerned about economy and jobs and only 8% think that budget deficit and national debt are immediate problems. Republicans need to get off the deficit wagon and focus more on job creation. Republican presidential candidate Gov. Mitt Romney has put forward a jobs plan; the people want to see more ideas from Republicans on this issue.

• In terms of public policy issues, the polls show that over 80% of the people support reducing taxes for small businesses and increasing spending on infrastructure improvement projects (needed to be competitive in global trade); 58% support temporarily reducing payroll taxes to stimulate economy; 52% support federal aid to states to avoid layoffs of teachers (decimating education will negatively affect our global competitiveness), police officers, and fire fighters; and 56% of the people support Warren Buffett’s idea of increasing income taxes on millionaires and billionaires. These issues have a wide support among the Independents and even many Republicans. The poll also shows that there is no support for repealing the Obama health care plan which seems to be high on the Republican agenda.
• To stimulate consumer demand, we need more spending by the government in the interim, and at the same time we need a long-term plan to reduce deficit by at least $4 trillion over the next ten years that should be accomplished by a combination of tax increases on the rich, closing corporate tax loop-holes, and spending cuts (including entitlement reforms) as recommended by the bi-partisan Deficit/Debt Commission. Republicans must negotiate with Democrats a short-term stimulus plan and a long-term deficit reduction plan now, not after the 2012 election.

Republicans should stop being obstructionist and get on with the job of fixing the economy without any further delay. If they don’t, their poll numbers will only get worse and they will lose their bid for the White House in 2012.

Economic recovery is contingent upon strengthening the middle-class

Posted by Shyam Moondra

The latest Census Report for 2010 includes some startling and yet not totally unexpected statistics on income distribution in the United States. Below are the highlights from this report:

• In 2010, the number of American households living under poverty (i.e., earning less than $22,113 per year) increased by 2.6 million to 46.2 million, the largest increase in the last 50 years. These families accounted for over 15% of the population.

• The median income of the U.S. households declined for the third straight year since the recession began in 2007 and stood at $49,445. The Blacks and Hispanics suffered the biggest losses.

• Among the various income groups, the top 5% of households saw the smallest decline in income in 2010, while the bottom 20% of households saw the biggest decline of 38%.

• The richest 20% of the population accounted for more than half of the 2010 pre-tax income, while the bottom 20% got only 11%.

The above data suggests the following:

• The cherished middle class has steadily lost ground relative to the affluent upper-class over the last decade. The decline of the middle-class began with the presidency of George W. Bush, who showered the rich individuals with income tax cuts and special deductions and credits and gave away tax subsidies to corporations that ultimately benefited the rich people more than the average Americans.

• The rich got richer and poor got poorer, with the gap between the rich and the poor widening to the point that there is legitimate worry about a possible popular revolt against the government policies and resentment against the rich and powerful.

We have near zero interest rates and low inflation, and yet the economy is not getting a lift. It seems as if the old proven economic theories don’t work any more. In general, plentiful money supply, low interest rates, and increased government spending should boost the economy, but not this time. Here are the plausible reasons why we are having such a hard time in recovering from the 2007 recession that officially ended in June of 2009:

• The demise of the middle-class, the backbone of the U.S. economy, has reduced the spending capacity of the average consumers, which, in turn, is making it harder for the economy to recover. The Republicans say that businesses create jobs, which is true only if consumers spend. So, ultimately, it's the robust middle-class that will pave the way for job creation.

• The continuing weakness in the housing sector, caused by contradictory and often confusing government policies on home foreclosures, is contributing to the economic sluggishness. The government bailed out the financial institutions burdened with the collapse of the mortgage-based securities market, but more recently entities such as Freddie/Fannie and AIG, partially owned by the federal government, are orchestrating to recover the losses they sustained on their investments in those securities. Also, State Attorney Generals are pushing for huge monetary penalties on the banks for faulty procedures used by the banks to foreclose the properties. The State AGs are asking for expensive remedies such as forgiving part of the mortgage loans and/or reducing mortgage interest rates. The government’s uncoordinated actions are pushing the banks towards another financial crisis; unfortunately, thanks to the new financial regulations bill passed by the Congress, the banks cannot be bailed out any more. This raises the specter of another round of credit freeze that will devastate the economy. These government’s not-so-well-thought-out approaches are also prolonging the misery of the homeowners and thus making it difficult for the housing market to recover.

• Recent regulatory regimes adopted by the Congress for the financial sector and for health care have created a lot of uncertainty and that’s why the corporate world is not aggressively spending their cash hoard of $2 trillion on new capital projects and they are not hiring new employees. Without new hiring, the unemployment rate is stuck at an uncomfortable level of over 9% and consumers are holding back, creating a vicious cycle that is making it harder for the economy to gain traction.

The Republican Party’s focus on cutting government spending is ill timed. Most of their targeted spending cuts will affect the struggling middle-class people, which means no economic recovery and a wider gap between the rich and the poor. The stalled economy definitely needs a stimulating jolt, but the Republicans are resisting new stimulus spending, e.g., on infrastructure projects. At the same time, our budget deficit keeps growing and national debt reaching to dangerously high levels. Because of the ideological divide, we are at a cross road with no clear path to prosperity. Republicans want to balance the budget by cutting spending (which will decimate the middle-class and economy and the unemployment rate will go up) and Democrats want to balance the budget by increasing taxes (that will also negatively affect the economy).

Clearly, neither approach is correct. What we need is a balanced approach that will provide stimulus in the near-term to boost the economy but also put us on a long-term path to fiscal sanity. We need to provide some stimulus now (meaning more government spending) and, at the same time, have a long-term plan to cut spending (including reforms of entitlement programs) and enhance tax revenues. Right now, the American people desperately want more jobs; they don’t care about the deficit and debt.

The Congressional Super Committee has been tasked to come up with a $1.5 trillion plan to reduce deficit by November. Such a plan is just a first step. The financial markets are actually looking for a grand plan to reduce deficit by $4-5 trillion over ten years that consists of spending cuts (mostly in later years) and net tax revenue enhancement via tax law reforms to reduce the overall tax rates and eliminate all special interest deductions and credits. The rich people and corporations must pay their fair share of taxes. I believe the American Jobs Act, proposed by President Obama, achieves the desired balanced approach. Republicans must work cooperatively with Obama and Congressional Democrats to move swiftly on this bill right now rather than wait until after the 2012 election which is fourteen months away.

In last ten days, investors lost $2 trillion - fear and uncertainty are the culprits

Posted by Shyam Moondra

Over the past ten days, the S&P 500 index has declined by 11%, wiping out close to $2 trillion worth of wealth. This big decline over a rather short period has been reported as the largest since 1978 when economy was heading towards recession with double-digit inflation and interest rates. Of course, at the present time, we are just coming out of recession and inflation and interest rates are nowhere near the early 1980's levels. In addition, corporate profits are currently running at record levels with their balance sheets in pristine condition. Therefore, it would seem that the market decline over the last few days was perhaps a knee-jerk reaction to the ugliness of the Congressional debate over the issue of extending the federal debt-limit. Investors are fearful of the toxic environment in the Congress because it breeds uncertainty and it leads to loss of confidence in the government's ability to deal with the tough issues of budget deficit and national debt.

After the unprecedented financial crisis of 2008-2009, which was precipitated by the crash in housing market, the Fed slashed interest rates to near zero and pumped liquidity into the markets. Also, the Obama Administration asked for and received funding from the Congress to implement a big stimulus program consisting of temporary income tax relief and increased spending on infrastructure. Those efforts were successful in stabilizing the financial institutions, helping economy turn around, creating jobs, and giving a big boost to the flagging stock market that made a dramatic u-turn and recovered most of the losses of 2008. However, lately, there are signs that the economy is losing steam and some fear that we may be headed into a double-dip recession.


Negatives in the economy:

· The ugly spectacle of debt-limit debate in the Congress and the partial FAA shutdown because of the political reasons have led to business leaders' lack of confidence in the government's ability to handle major problems. The extremism of the Republican Party incited by their Tea Party comrades has hurt the overall economy. The latest opinion poll shows that 84% of Americans disapprove the way the members of Congress are doing their jobs, which is the worst rating ever. In particular, Republicans and Tea Party members received very high negative ratings.

· Recent major regulatory reforms for financial institutions and health care have contributed to uncertainty as to how those reforms would affect the corporate costs and profitability. Although the new reforms are being phased-in over time, some of the aspects of these reforms are being delayed because Republicans are holding up the funding for the implementation of parts of the reforms that they don't like. These tactics have created uncertainty and many businesses are overwhelmed with the implementation issues and unsure about what would be their eventual costs.

· On-again and off-again approach to the European debt situation has negatively affected the U.S. markets. The conflicting viewpoints within the EU community have delayed the resolution of these problems in a convincing manner. Since the U.S. financial institutions are directly or indirectly affected by all this, it has proven to be a big negative for the U.S. stock markets.

· Since the financial crisis of 2008, most governments, local, state, and federal, are tightening their belts to reduce their budget deficits. Many other countries are doing the same. In the near-term, these cutbacks in government spending around the world are negatively affecting consumer spending and thus making it harder to keep the recovery going.


Positives in the economy:

· Corporate profits are at record levels, exceeding the pre-financial crisis levels of 2007. The corporations hoard $2 trillion cash and their balance sheets have never looked so strong. However, because of the uncertainty and lack of confidence in the political arena, the corporations are holding back and not aggressively investing in capital projects.

· The consumers have done a good job in managing their household budgets. They have reduced their debt and they have been saving more. However, chronic high unemployment rate has been making them reluctant to start freely spending again.

· The declining government spending may be a negative in the near-term; however, it will be a big positive for the future because this will help keep interest rates low going forward.

· In spite of the recovery from the recession of 2008-2009, inflation and interest rates continue to be low which is ideal for continued economic growth.

. The stock market valuation is below normal. The trailing PE ratio for S&P 500 is less than 13 and forward PE is under 12. That's hardly the level that would trigger a huge sell-off like the one we are seeing now. The investors are gripped with fear and they are dumping their shares out of panic.

· The Fed has been very accommodating on monetary policy and they may be ready with QE3 in response to the market crash over the last two weeks.

· The U.S. companies are doing a very good job in exporting goods and services to other countries. In fact, the export sector is one of the strongest performers in our economy right now.


What needs to happen?

· The acrimonious political environment in Washington, DC must end to inspire confidence. The businesses need to be sure that the government officials can behave like adults and make rational decisions.

· The government needs to have another look at health care and financial regulations to bring more clarity and do away with the parts that are proving to be too onerous on businesses. Republicans and Democrats need to resolve their differences on how to move the implementation forward and remove uncertainty that's hanging over the employers, small and large.

· In light of a sharp decline in the stock market in recent days and sluggishness in economy, the Fed should immediately begin a QE3 program to provide more liquidity.

· The Obama administration and the Congress need to work cooperatively to come up with ideas for creating jobs such as targeted tax reductions, new trade agreements that will help the U.S. businesses export more of their goods and services to other countries, training the labor force for high-tech high-paying jobs, etc.

· The government needs to keep working at the budget deficit and debt problems, using a balanced approach. We need to increase taxes on the rich, close the corporate tax loopholes, and reduce wasteful government spending over time. We also need to look at entitlement reforms to preserve those programs for the long-term. The deficit problem can't be fixed overnight; excessive spending cuts at a time when economy is still struggling would be unhelpful. However, we do need a credible plan to eventually balance the budget and retire some of the national debt.

· The state and federal governments should extract procedural reforms from banks on how the foreclosures are handled, but they should not insist on huge monetary penalties. The financial institutions are not yet on sound footing, so the governments should be careful and not push the banks towards another financial crisis.

"Vinash Kale Vipreet Budhi" - Republicans gone mad and self-destruction is imminent

Posted by Shyam Moondra

On the question of increasing the U.S. debt ceiling, Republicans are playing a losing game with a weak hand - they will not achieve their goals but they will do serious harm to the country and voters will not forgive them for this.

If there is a rating downgrade or actual default on the U.S. debt, the markets will crash and rich individuals and corporations will suffer most of the losses. It's inconceivable that Republicans would be stupid enough to hurt their own supporters because that would mean less campaign contributions and a humiliating defeat in the next election.

President Barack Obama is on the right side - his suggestion to reduce deficit by cutting spending and raising tax revenues in a 3:1 ratio is very reasonable and that is a proven formula used by President Ronald Reagan and President Bill Clinton that brought prosperity. In any case, Obama is morally right in asserting that rich people also share in the pain. As President Lincoln once said you place your feet in the right place and then hold firm. Obama has overwhelming support of the American people on his position.

As to the Republicans, they have gone completely mad, or as the British would say "nutters." There is a saying in Sanskrit "Vinash Kale Vipreet Budhi" - their brains gone mad and self-destruction is imminent (do Google search to understand the phrase better). It's like Republicans supported extremist Tea Party and now Tea Partiers are destroying Republican Party. May be the decline of the United States is "written," as in karma; the God is merely using Republicans as an enabler to massive self-destruction.

In a democracy, the people are the supreme. However, at the moment, a handful of Republicans and their leaders have taken the people and their fate as hostages, and the people are helpless because the next election is so far away.

The Republican approach to debt limit is riddled with inconsistencies - they get an "F"

Posted by Shyam Moondra


The negotiations on extending the debt limit have been going on between the Republicans and Democrats for weeks without any progress. The Republicans are behaving badly. They are not negotiating in good faith and they are being inconsistent in their approach. Here are some examples:

· The House Speaker Boehmer keeps saying that President Obama has not offered a plan. The Congress spent the money during the Bush presidency and it's their job to come up with a plan. Obama has made suggestions and told the Congress what he wants, but it's the Congress' job to come up with a plan on how to reduce the deficit.

· Republicans want to balance the budget as soon as possible. Obama offered his support for a big $4 trillion plan but Republicans are dragging their feet; now they say that they prefer a smaller plan which will take forever to balance the budget.

· Republicans want to talk about what they want but walk away when others want to talk about things Republicans don't like. In negotiations, one should expect give-and-take; we have a democracy not dictatorship. Republicans want 100% of what they want and 0% of what others want - how do you expect to make a deal?

· President Bush increased the budget deficit by over $4 trillion by going on a reckless spending spree supported by the Congressional Republicans. Bush spent $1 trillion on tax cuts to the rich, $1 trillion on the unnecessary Iraq war (no WMD found), $1 trillion on bank bailouts (if Bush hadn't relaxed regulations, may be the financial crisis wouldn't have happened), and $1 trillion on tax subsidies to oil companies, farmers, drug companies, etc. So, as a starting point, why not just "undo" what Bush did (of course, war money is gone, so nothing can be done about that).

· Republicans want to slash or get rid of Social Security and Medicare. These programs didn't create the deficit (in fact, Congress has been siphoning surplus funds from Social Security and spending that money on other things), so it makes no sense to make these programs a primary target for the cuts. Reforming these entitlement programs is a separate issue and it shouldn't be tied to the debt issue.

· Sen. Hatch and other Republicans voted seven times to increase the debt ceiling during the Bush presidency (and that is primarily responsible for our problems today) but now Hatch and others are so vocal about the dire consequences of increasing the debt limit. When Republicans talk from both ends of their mouths, it doesn't inspire confidence and it doesn't look like they are fighting for their principle as they claim.

· Republicans want to reduce the budget deficit. But many of them are saying that not increasing the debt limit is better because that will force the country to live within its means. However, a default will increase the interest rates (which will increase the cost of borrowing) and slowdown economy (which will reduce the tax revenues); so the budget deficit will actually get worse not better. It's like, to get rid of the disease, just kill the patient!

· Republicans are trying desperately to protect the interests of the rich people and corporations, who benefited the most during the Bush presidency. They are even willing to let the country default on its debt; however, a default will crash the markets and reduce corporate profits (because of the slowdown in economy burdened with higher interest rates), severely hurting the very people and businesses Republicans are trying to protect from the proposed tax reforms.

· Republicans argue that even a small tax increase will hurt the economy. However, the fact of the matter is that President Clinton did exactly that to balance the budget during his second term and we had the most prosperous four years in the modern history. Most economists dispute the claim of Republicans that small tax adjustments will have ruinous impact on economy - at the moment, not reducing deficit is more ruinous than a small increase in taxes. In fact, severe spending cuts, as advocated by the Republicans, will reduce consumer spending and thus slowdown the economy.

I think Republicans are handling the issue of debt limit in the worst possible way and they have lost the confidence of the American people, as is evident from the recent opinion polls that show that up to 80% of Americans like the balanced approach being pushed by Obama. The arguments offered by the Republicans are riddled with inconsistencies and, in most part, they are nonsensical. I think Obama's ten-year plan for a $4 trillion deficit reduction that incorporates spending cuts and tax reforms (such as closing certain tax loop-holes, eliminating unnecessary tax subsidies, and limiting deductions for millionaires/billionaires) is the preferred way to go. This plan is balanced and it's large enough to put us on a path of making a big dent in the budget deficit. If Republicans continue on their current inconsistent approach, they will pay a big price in the next round of elections.

New math of political reality on debt default

Posted by Shyam Moondra


. Debt default = Congressional leadership failure = Resignations by Reid/McConnell and Boehner/Cantor/Pelosi on moral ground.

. Republicans voted to increase debt ceiling 7 times during Bush presidency = Foot dragging now makes them look like hypocrites = Big loss of credibility.

· Debt default = Lower U.S. debt rating = Market crash = Rich people lose their wealth = Lower campaign contributions = Incumbent Obama wins.

· Debt default = Republicans get blamed for their intransigence = Republicans lose control of House in 2012.

· Debt default = Messy government = National security at risk.

· Debt/deficit too high = Budget can't be balanced just based on spending cuts = Need a combination of tax revenues and spending cuts.

· Clinton increased taxes and cut spending = Led to the most prosperous 4 years in a row in modern history = Republicans are overstating the effect of tax increases.

· Bush tax cuts = huge gain for millionaires/billionaires = It's fair and moral to make them share the burden of balancing the budget.

· Too severe spending cuts = Devastating effect on middle-class = Lead to recession and higher joblessness = Republicans, the champions of the rich, get blamed for suffering = Obama wins and house goes to Democrats, both the champions of the middle-class.

· Corporate tax loop holes = GE pays zero taxes, Google pays 2%, and Goldman Sachs pays 10% = Corporations not paying their fair share of taxes = People blame Republicans for catering to business special interests.

· Tax subsidies to filthy rich oil companies, wealthy hedge fund managers, and rich private jet owners = Republicans' blind support for the rich and powerful = Populous revolt by the middle-class against Republicans = Impossible to win an election without the support of the middle-class.

. Bush piled up $4 trillion deficit because of tax cuts to the rich, Iraq war, bank bailouts, and special interest tax subsidies to oil companies and others = Social Security and Medicare didn't cause deficit = Undo Bush policies to reduce deficit rather than target elderly, children, and poor.

Republican positions on deficit reduction defy logic

Posted by Shyam Moondra

Rep. Eric Kantor (R-Va) and Sen. Jon Kyl (R-AZ), the two Republican members of the bipartisan deficit reduction group led by Vice President Joe Biden, walked out of the negotiations because of their unhappiness over Democrats' insistence on raising income taxes for the rich to supplement the spending cuts worth 1 trillion dollars that they had already identified and agreed to. Negotiations about tough issues invariably involve give-and-take. The Republicans' walking out of deliberations makes them look like a kid who throws tantrums when he is denied a candy. Their political theatrics don't sit well with the American people, who want the problem of budget deficit addressed in a serious and pragmatic way without any ideological constraints.

The arguments put forward by Republicans are deceptive and illogical and they fall short of constructive and cooperative effort that is required to resolve the serious budget issues. Below are some examples of how Republican positions are inconsistent with their stated goals.

Spending cuts vs. tax increases:

Republicans are saying that the huge budget deficit can be narrowed strictly based on cuts in government spending. They point out that any tax increases at a time when economy is still struggling would slowdown the recovery. Well, any economist would readily confirm that huge spending cuts would have just as devastating impact on economic recovery as tax increases would (Ben Bernanke, the FED Chairman, has said that precipitous spending cuts would harm the economy). The fact of the matter is that we can't come out of the big hole we have dug ourselves into without a balanced approach that relies on both spending cuts and tax increases. President Barack Obama has proposed that budget deficit be reduced by mixing spending cuts and tax increases in a 70-30% ratio that seems to be quite realistic and economically viable.

It's abundantly clear that budget deficit of trillions of dollars can't be reduced without sacrifices made by the people of all walks of life. That begs the question of fairness. Under the Republican plan, the low-income and middle-class people, especially the elderly and children, would bear the main brunt of spending cuts while the rich and powerful would be largely unscathed. The middle-class is the backbone of our economy, so it is illogical to suggest that by putting the onus of the cuts on the back of middle-class people would somehow help the economy. Also, Republicans are overstating the negative impact on the economy of any tax increase for millionaires and billionaires. President Bill Clinton increased taxes and cut spending to balance the budget and, as a result, we ended up with the most prosperous four years in the modern times.

The Republicans conveniently forget that a big chunk of the current budget deficit was caused by the income tax cuts given to millionaires and billionaires by President George W. Bush. Obama has proposed to not extend the Bush tax cuts for the rich when they expire next year. The Republicans call this a tax increase, when in fact it's reversing the previous tax cut. The rich people benefited the most under the Bush administration, so it seems fair that they give some of the gains back to help out in this time of national calamity.

Tax breaks for energy sector:

Under the heavy pressure from the lobbyists of the powerful oil companies, the U.S. Senate voted 35-61 against stripping big oil companies of $35 billion in tax-breaks over the next ten years. Republicans argue that if these tax breaks were eliminated, ultimately the consumers would pay more for their energy needs in the future. Again, this assertion by Republicans is unfounded and is deep rooted in their ideology to protect the interests of big businesses. The oil companies are expected to earn $145 billion this year, so the argument that losing $3.5 billion a year in tax subsidy would somehow harm the consumers is an overstatement. The budget deficit is too big and it would require sacrifices by everyone, including the super rich oil companies and other businesses that receive tax subsidies.

Corporate tax loop holes:

Recently, General Electric paid zero taxes, Google paid only 2% in taxes, and Goldman Sachs paid only 10% in taxes. Most companies, small and big, are now engaged in accounting gimmicks that allow them to transfer profits to tax havens in order to reduce their tax liabilities here in the U.S. When the corporate world doesn't pay its fair share of taxes, the tax burden falls more on the individuals, especially the middle-class people. The Republicans are vehemently opposed to Obama's suggestion to close these loop holes and increase tax revenues. Again, Republicans are on the wrong side of this issue.

Increasing debt ceiling:

Some Republicans, who are also Tea Partiers, are advocating that Republicans should not increase the debt ceiling and let the United States default on its debt obligations (Treasury Secretary Tim Geithner has said that if the Congress doesn't increase the debt limit by August 2, 2011, the nation will default). That may seem as a plausible negotiation tactic, but it's a dangerous game to play. The consequences of a U.S. default will be catastrophic; the stock markets will collapse worldwide, followed by prolonged severe recession that could increase the unemployment rate to the levels not seen since the 1930s. High unemployment rates would lead to political unrest throughout the world. Ironically, the asset deflation, which will ensue if the U.S. defaulted, will hurt the rich people the most, the very people that Republicans are currently trying to shield from a rather paltry tax increase.

The budget deficit and debt problems are real and they are huge. They must be addressed in a bi-partisan manner before the problems become intractable. If we let the problems fester, they will require more painful remedies and it will take longer to fix them. It's important that Republicans don't look at everything from their lens of ideology and find common ground with Democrats to get on with the process of putting our house in order. That means Republicans must accept some tax increases for the rich and they must agree to eliminate the tax subsidies to businesses and close the corporate tax loop holes. At the same time, Democrats must understand that we can't spend more than what we have, so it's imperative that spending is brought under control.

Economy losing steam - what to do now?

Posted by Shyam Moondra

The Federal Reserve Board (FRB) is primarily responsible for the 2008 financial crisis that led to the demise of prominent firms such as Lehman Brothers, brought major financial institutions close to bankruptcy that prompted federal bailouts, crashed the stock market, led to a sharp decline in home prices that triggered the record number of home foreclosures, and caused severe hardship to the American people that suffered from chronic high-level of unemployment. It all started with the easy money policy of former Fed Chairman, Alan Greenspan, who failed to adequately regulate the sub-prime mortgage market that eventually led to the housing bubble. For a while, the current Fed Chairman, Ben Bernanke, misread what was going on in the housing market and he kept saying that sub-prime mortgage was not a problem. Then he said that the problem was manageable. Then, of course, we know that the housing bubble burst and the economy crashed. In the aftermath of the crisis, Bernanke pumped liquidity into the market to avoid a repeat of the depression of the 1930s. However, out of panic, he and the Congress proposed stringent regulations of the financial institutions that are now proving to be an obstacle in achieving full economic recovery. Recently, Bernanke admitted that the FRB lacks the tools to properly analyze how the new regulations would impact the financial sector and the overall economy. It's extraordinary that the government would make major changes in the regulations without understanding the implications. The recent recurrence of economic slowdown and record high budget deficit are the proof that the 2008 financial crisis and its aftermath have not been managed well.

Here are some observations on the flawed policies of the FRB, Congress, and the Obama administration that are preventing the economy from achieving its full potential:

· In the aftermath of the collapse of the housing market, Bernanke came up with a predictable strategy of reducing interest rates to revive the housing market. However, the housing market continues to deteriorate with the housing prices now down by over 33% since the peak of 2007. Low interest rates may in fact be encouraging potential home buyers to put off their decision to buy homes. They are taking low interest rates for granted and are just waiting for home prices to come down even more. If FRB were to start increasing interest rates, homebuyers' trade-off calculations (higher interest rate vs. lower home prices) will change and they may be induced to make a buy decision now rather that play a waiting game. The Fed's low interest rate policy may thus unwittingly be delaying the housing recovery and that may, in turn, be delaying sustainable growth in the overall economy.

· When some of the big financial institutions got in deep trouble, the FRB and Congress became nervous and proposed unprecedented regulations of the financial sector, thereby moving the pendulum from relaxed regulation to the other extreme of too much regulation. In fact, some of these regulations went too far and only now it is becoming apparent that hasty passage of the Dodd-Frank bill may have done more harm than good. For example, to reduce the risk taking ability of the banks, stringent capital requirements were proposed (some FRB members are even talking about doubling the capital requirements from the current levels) that are proving to be counter-productive. If the banks are required to park a big chunk of their capital on the sidelines unproductively, there is that much less cash available to be lent to businesses and consumers. This forced contraction in credit is in fact delaying economic recovery and job creation. The FRB and Congress need to have another look at their proposals that were put together in a hurry.

· President Obama got a massive stimulus package approved by the Congress but it seems to have had less than spectacular impact on economy. Because of the bureaucracy, corruption, and inherent inefficiencies involved with government spending, it doesn't always bring about the desired results in a timely manner. In general, reducing taxes is preferable than increasing government expenditures because taxpayers, that also happen to be the consumers, are in the best position to decide how to spend money. President Obama and Congress should look at targeted tax incentives that can be offered to businesses and individuals to stimulate economy without increasing the budget deficit. Another big spending package is, however, not advisable.

· The FED and Congress also need to reconsider bank regulations related to debit card fee and credit card transaction fee. The government price controls are inconsistent with the free-market concept. If there is lack of competition or there is price fixing, it should be handled through the anti-trust laws rather than through price controls. This micromanagement by the government has in fact backfired. To cover the revenue shortfall caused by debit/credit card regulations, the banks have been aggressively increasing fees on other services and in many cases imposing fees for services that were previously "free". The end result is that the fees and fines, that were previously paid mostly by a small number of irresponsible consumers, are now being paid by all consumers. The new banking regulations were not well thought-out and should be reconsidered.

· Many people in the government, including the state AGs are out to hurt banks if they don't agree to mortgage loan modifications. The government officials are trying to achieve their public policy goals by using private funds, absolving the borrowers of any responsibility of buying homes that they couldn't afford. Yes, banks made mistakes, but it's not all banks' fault. This undue burden has put tremendous pressure on bank stock prices and that is driving the overall market down. This is also negatively affecting consumer confidence, thereby delaying economic recovery. If issues surrounding faulty foreclosures make the banking sector weak or even drive them towards bankruptcy, we will have a financial crisis all over again. These aggressive actions by some of the most liberal state AGs are not helping the economy and unemployment rate may very well hit 12%. The banks must be made to reform their foreclosure processes to make them accurate and fair, but a huge monetary penalty that some AGs are after would be counter-productive. The FRB, Congress, WH, and state AGs are pursuing their uncoordinated policies that are creating a great deal of confusion. The uncertainty caused by all this is driving the stock market and economy down.

· The stock markets are manipulated by big frequent traders that use computerized trading algorithms to move the stock prices up or down in a yo-yo manner, especially around the option expiry dates. These big players make money at the expense of small investors that are not as technology savvy. This new trend has negatively affected the integrity of the markets and driven away small investors. We urgently need to implement reforms that could include limits on short selling/options trading, requiring investors to hold securities for a certain minimum period before they could sell (e.g., until those buy trades are settled), and making such trading practices as pumping-and-dumping, high-frequency trading, etc. as unlawful.