Richard Fuld, who was CEO of Lehman Brothers when it went bankrupt in 2008, blames federal regulators for not rescuing his firm, which pushed it into bankruptcy.  Since when is it the government’s job to save firms from their own mistakes and keep them out of bankruptcy?

Fuld accurately notes that the federal government did save several firms from bankruptcy, including some of Lehman’s competitors.  But the right question is: Shouldn’t the federal government have let those firms go bankrupt too, rather than arguing Lehman should have been saved from bankruptcy?  Thousands of firms went bankrupt in the past two years, including hundreds of banks.

The only reason Fuld gives (in this article, anyway) why Lehman should have been rescued is that some other firms were.  But firms that went bankrupt far outnumbered those that were rescued.  The firms that were rescued were, the argument goes, too big to fail.  Lehman Brothers obviously was not too big to fail, because it failed.

It’s hard to have too much sympathy for Fuld, because even as he led his firm to bankruptcy, he personally received more than half a billion dollars in compensation from the firm.  His personal return was pretty good, even though the risks he took to get that return bankrupted his firm.

I do think politics played a big part in who got rescued and who didn’t, but that’s always the nature of government.  Every government action is political.  If Lehman had the same government connections Goldman Sachs did, the outcome would have been different.  Still, how much sympathy can you have for someone who got half a billion dollars out of a company before leading it to bankruptcy?

Recent data suggest that there has been a decline in illegal immigration into the United States, according to the Dallas Morning News. At the same time, “the national debate over illegal immigration grows more vigorous and polarized.”

This trend is not isolated to the issue of immigration. Often, just as a real or perceived problem is in retreat, hysteria and concern swell. Lots of activists and government busybodies in the 1920s and 1930s condemned the horror of child labor, for example, just as it was disappearing.

With immigration, however, the situation is very different, as even most opponents of illegal immigration say they don’t generally oppose immigration itself. Yet they do not seem to want to make all immigration legal simply by ending immigration controls.

But why is it that this issue has become a hot button, once again? It appears to becoming more of a national controversy than in many years. Even as illegal immigration is declining and Obama has increased deportations, nativist frenzy has ballooned. Perhaps there is cynical politics at play? George W. Bush was the most rhetorically pro-immigration president, probably, since Ronald Reagan. While many conservatives complained about America’s alleged “open borders” during the Bush years, the concern seems to have stepped up as a priority quite a bit. For many folks, the need to crack down on illegal immigration is one of their top of issues. It is particularly unfortunate for conservatives to have fallen for this, as so many of the first anti-immigration activists in the modern era were radical environmentalists, population controllers, and unionists on the left. There is nothing free-market, individualistic or Constitutional about border walling—it is, and should be, the domain of economic collectivists.

And what’s the supposed solution? Even more deportations? Arizona-style crackdowns on all of us? Prohibitions against employers hiring who they want to? It is to be hoped that if opponents of Obamunism cannot embrace immigration, they can at least stop worrying about aliens coming here to work and instead focus on the federal government that’s looting from all of us.

On August 24, I posted some data and analysis on yield curves for high-grade corporate bonds since the beginning of 2008, seeking to determine whether changes in these curves are consistent with the hypothesis that the current economic crisis has given rise to regime uncertainty. If it has done so, the yield curves should display increased spreads between the period immediately before the financial panic in the latter part of 2008 and the period since mid-2009, when the extraordinary volatility of the bond markets had ceased.

A reader of this post, Chris Lemens, commented: “I would imagine that, if the yield curves for both private and federal bonds moved similarly, that would mainly tell us about inflationary expectations, not regime uncertainty. (Well, inflation is a kind of regime uncertainty, but you know what I mean.)”

Here, I respond to Lemens’s comment, which raises an important issue, inasmuch as economists commonly interpret a steepening of the yield curve as indicative of increased inflationary expectations and nothing else.

First, one should appreciate, as Lemens does, that changes in expectations about future inflation may themselves reflect changes in regime uncertainty. If, for example, bond traders came to expect a transformation of government policies that would entail a substantial further attenuation of private property rights, they would also be likely to expect that in the future the rulers who preside over the new economic (dis)order will find themselves in serious economic trouble. (Economies without fairly firm private property rights do not work well.) Perhaps the most time-honored of all government actions to escape from such difficulties is the issuance of more and more new money, to be used sooner or later to pay the government’s bills; and the virtually inevitable consequence of such large-scale monetary effusion is a rising rate of general price inflation for newly produced goods and services, along with a diminished rate of real economic growth, perhaps even economic contraction.

So, increased regime uncertainty may give rise to increased inflationary expectations. But increased inflationary expectations may also occur in a context of substantial certainty with regard to the persistence of the existing economic order. Traders may expect that the government’s actions will lead to a greater rate of price inflation simply because the government (that is, its central bank) is adopting an easier-money policy, not because the government will pose a substantially greater threat to private property rights across the board in the future than it does now. In light of these realities, we must be careful about how we try to tease from the yield-curve data a distinction between increased inflationary expectations per se and increased regime uncertainty.

To pursue this inquiry, I have constructed bond yield curves (again using the data and the graphing tools available at Bondsonline.com) for U.S. Treasury securities, creating the same comparisons by term to maturity that I examined for corporate bonds in my previous post. These graphs are shown at the end of this post. The Treasury spreads show a number of important differences with the corporate spreads.

First, most notably, the Treasury yields have neither the extreme volatility nor the yield curve inversions that the corporate yields display between September 2008, when the financial panic developed, and mid-2009, when it subsided. All of the Treasury bonds examined here (2 years, 5 years, 10 years, and 20 years to maturity) show substantial drops in effective yield in the final months of 2008, as traders scrambled for the imagined security and liquidity of U.S. government securities during the crisis, bidding up their prices and hence depressing their yields. From the beginning of 2009 onward, however, Treasury yields returned to more or less their previous levels, although at the shortest maturities, the Treasuries continued to yield much less than they had before the panic. The 2-year bond has yielded a steady 1 percent since the end of 2008, even less in recent months. The yield on the 5-year bond has also tailed off substantially in the past six months or so.

On the Treasuries with longer terms to maturity, the post-crisis persistence of approximately the same yield as before the crisis suggests that traders now expect no greater inflation than they did before the panic. Data for real yield on TIPS (Treasury Inflation-Protected Securities)―bonds that pay interest and principal adjusted for changes in the price level―show increased yields for a few months beginning with the crisis in September 2008. But after January 2009, these yields returned to more or less the level they had maintained before the crisis. The fact that the nominal yields on longer-term Treasuries, relative to the yield on TIPS of corresponding maturities, were no higher after the crisis had subsided also suggests that traders have not adjusted their inflationary expectations upward in the wake of the crisis.

Unlike the corporate bond spreads, the spreads for Treasuries did not become uniformly greater from mid-2009 onward. The yield curve steepened at the lower end, but this change reflects almost entirely the reduction in the 2-year bond’s yield, inasmuch as the longer term bonds examined here all returned to approximately the yield they had established before the panic. Spreads on longer-term bonds against the 5 year bond and against the 10 year bond have not widened noticeably since the end of 2008. At the longer end of the yield curve, spreads have remained approximately constant; indeed, they have remained about the same as they were immediately before the panic.

In sum, the widening of corporate yield spreads after mid-2009, which I documented in my previous post, has no counterpart in the Treasury yield spreads. The Treasuries also show no indication that expected inflation was substantially greater after the crisis than it was before the crisis. Whatever has caused the corporate yield spreads to widen during the past 15 months or so, it probably was not an increase in expected future inflation.

In my judgment, a very plausible reason for this widening is the emergence of regime uncertainty, which expresses itself in the traders’ insistence on a risk premium (reflecting the diminished expected security of future private property rights) that increases with a corporate bond’s term to maturity. The fact that other forms of evidence, including a great deal of direct testimony by businessmen and others, also points in the same direction only strengthens my confidence in this hypothesis.

The following charts show the Treasury bond yield spreads discussed above.

Last Spring President Obama tried to talk German Chancellor Angela Merkel into continuing massive deficit spending to support the sagging economy.  Quitting now, Obama argued, would cut the recovery short and risk major economic problems.  A more sluggish German economy would slow world recovery, including recovery in the U.S.  Merkel’s response was that narrowing deficits and showing some fiscal responsibility was the better road to recovery.

If Merkel had bought Obama’s argument, these major players would have been on the same page, and we could legitimately ask, even though the recovery is stalling, whether things might not have been even worse without the federal government’s stimulus.  But Merkel didn’t buy the argument, so we can compare the U.S. recovery, where the strategy has been continued deficit spending and more fiscal stimulus to prop up the weak economy, with the German recovery, where fiscal policy has turned to fiscal responsibility and moving toward balanced budgets.

Figures announced this week show that in the second quarter the U.S. economy grew at a 1.6% annual rate.  Economic growth in the 16-nation euro zone was 3.9%.  That includes Greece, Spain, and Portugal, who are part of that 16-nation group.  Germany, by itself, grew at a 9% annual rate.

Is the Obama stimulus package working?  One way to judge is to compare US economic growth with economic growth in Germany, where Chancellor Merkel has rejected deficit spending for stimulus as fiscally irresponsible.  In last Spring’s debate on economic policy between Obama and Merkel, the evidence appears to tilt toward Merkel.

The U.S. Court of Appeals for the Ninth Circuit, much ballyhooed as liberal-leaning, is joining the rest of the former so-called “liberal” wing in falling into lockstep behind ever-increasing police powers. The appeals court last week declined a defendant’s request to review drug agents’ sneaking onto his property to affix GPS tracking devices to his private vehicle, and tracking his movements using such devices over a period of four months—with no search warrant—as a violation of his Fourth Amendment Rights.

The appellate court’s ruling essentially gives law enforcement agencies in the nine Western states under the Ninth Circuit’s jurisdiction the legal authority to surreptitiously enter personal property and attach a GPS tracking device on vehicles parked there without first obtaining a warrant.

The court’s ruling was a double win for the police state, holding that the police can enter your private property—in this case, the defendant’s driveway—and that the government can track your movements at will—in this case with GPS devices attached to your private vehicle. Apparently the court believes there is no reasonable expectation for privacy in your driveway, because strangers can walk onto it any time. By this logic, of course, Google satellite could be argued to have now removed a “reasonable” expectation of privacy anywhere on one’s property: after all, strangers can now peer into your backyard, so it must be OK for government agents to enter anytime—right?

The one dissent in the ruling came from a “conservative” judge, appointed by Ronald Reagan: Chief Judge Alex Kozinski. Judge Kozinski pointed out that a ruling that there is no reasonable expectation for privacy in one’s own driveway means that rich people who can put up gates and fences can essentially buy a right to privacy, while those who cannot afford such barriers have to accept the government’s right to sneak in at will:

“There’s been much talk about diversity on the bench, but there’s one kind of diversity that doesn’t exist,” he wrote. “No truly poor people are appointed as federal judges, or as state judges for that matter.” The judges in the majority, he charged, were guilty of “cultural elitism.”

For more on this new divide between our elite rulers and we just plain folks, see also: “A Splendid Essay on the Two Great Classes in Contemporary America“

The Independent Institute’s Senior Fellow William Shughart on Human Events, bringing the real costs of the federal bailouts to YOU.

Check out MyGovCost‘s Government Cost Calculator for more!

T-Minus just a few hours folks. The wait will be over. The site will be up. The Government Cost Calculator will crunch. Outrage will inevitably ensue and hopefully, some spend-hungry political heads in Washington will roll. As the countdown to Tuesday’s launch of the Calculator winds down, Americans are winding up!

Check out the latest buzz on Right Truth!

Independent Institute Senior Fellow Robert Higgs is interviewed by Scott Horton of Antiwar Radio on the widening gap between public and private sector pay, the increasing affluence of military towns compared with others, the disappearance of traditional checks on government power, and the predation and incremental “ratchet effect” of expanding governmental powers that increase “temporarily” during wartime but never really recede.

[audio:2010_08_27_higgs_antiwar.mp3]
Download audio file (28:41 minutes)

Please also see the following books by Dr. Higgs:

Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity

Crisis and Leviathan: Critical Episodes in the Growth of American Government

Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government

Against Leviathan: Government Power and a Free Society

Opposing the Crusader State: Alternatives to Global Interventionism

Economists and pundits, who contend that the Federal Reserve System has little room to maneuver in using monetary policy to jump-start our anemic economy, often have claimed that America is mired in a Keynesian liquidity trap, a situation in which the demand for money is unresponsive to changes in market interest rates. After all, those commentators emphasize, the Fed has adopted a target for the federal funds rate (the interest rate charged on overnight interbank loans) of between zero and 0.25 percent. The implication is that further reductions in that rate will have little or no effect on the incentives of businesses to invest in new plant and equipment or of consumers to borrow in order to finance the additional spending necessary to raise GDP growth above the (recently downwardly revised) estimate of 1.6 percent during the second quarter of 2010.

But those commentators overlook or ignore the easily verified reasoning of John Maynard Keynes, who defined a liquidity trap in terms of long-term rather than short–term interest rates. The long-term (ten- or 30-year) rate on Treasury securities now runs at about three percent, meaning that the Fed still has arrows in its quiver. Unfortunately, however, those arrows, the use of which would demand the central bank engage in further “quantitative easing”, requires it to purchase more under-performing, “toxic” assets from banks and other financial institutions that lent money to homeowners who could not repay their mortgages. Engaging in such transactions places more bad debts on the Fed’s balance sheet, constrains its ability to conduct monetary policy in the future and raises the specter of higher rates of future price inflation.

In his recent speech at Wood’s Hole, Wyoming, Fed Chairman Bernanke was right to say that economic recovery cannot depend solely on the policies of the central bank over which he presides. But the fiscal discipline (spending and tax cuts) required to achieve that goal is incompatible with the vote motives of incumbent politicians or their challengers for political office.

In consequence, the United States will not return to genuine economic prosperity for years to come. Americans ought to be grateful if a “double-dip” recession is the only price they are forced to pay as the result of recent monetary and fiscal policy choices. It would be far better to make the Bush tax cuts of 2001 and 2003 permanent, to reduce the tax rate on corporate income and estates to zero, and to limit government at the federal level to the powers granted to it by the people and the Founders of our compound republic.

America will be able to reclaim the path to prosperity only if the federal government and its central bank get out of the way.