I don’t have to tell you things are bad. Everybody knows things are bad. It’s a depression. Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there’s nobody anywhere who seems to know what to do, and there’s no end to it.

We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that’s the way it’s supposed to be!

We all know things are bad – worse than bad – they’re crazy.

It’s like everything everywhere is going crazy, so we don’t go out any more. We sit in the house, and slowly the world we’re living in is getting smaller, and all we say is, “Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won’t say anything. Just leave us alone.”

Well, I’m not going to leave you alone.

I want you to get mad!

I don’t want you to protest. I don’t want you to riot. I don’t want you to write to your Congressman, because I wouldn’t know what to tell you to write. I don’t know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you’ve got to get mad.

You’ve gotta say, “I’m a human being, goddammit! My life has value!”

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

“I’m as mad as hell, and I’m not going to take this anymore!!”

Network was released just two years after the 1973-74 stock market crash. And Beale’s mad rant to camera was very much a product of its time, capturing brilliantly the out-of-control inflation, the recession, the Cold War.

But we bring it to your attention today because Beale could just as well be talking about our “Great Recession,” the one brought on by easy credit, corrupt government, shoddy regulation, bungling corporate management and the credulity of the herd. And because Beale’s speech has one vital ingredient, something that’s sorely missing from our current predicament: anger.

So today, dear reader, we’re going to get mad, Howard Beale-style. We’re going to stick our head out the window and yell. And if you’re reading this, wherever you are, we ask you to do the same. Get mad… Remember who’s responsible… And most important, start putting in place your plan to survive this whole stinking mess.

As the author of Bailout Nation, Barry Ritholz, wrote last week at The Daily Reckoning, the recklessness and incompetence that led to the economic meltdown seemed to be a team effort, “but that does not mean we cannot attempt to highlight those whose contributions have disproportionately led to the final catastrophe.”

First on Ritholz’s list of culprits, and on ours, is the man they once called “the Maestro,” former Fed chairman Alan Greenspan. According to Ritholz,

Several of Greenspan’s policies proved to be wildly misguided: the regular interventions to protect asset prices and bail out investors, the irresponsibly low rates after the post-2000 crash, and his nonfeasance in supervising lending. Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost. We now know what that cost is, and it’s astronomical.

Here we part company with Ritholz. The lack of regulation did not cause the collapse. It was bad regulation combined with the implicit promise of government bailouts led to the extravagant and poorly calibrated lending and financial risk taking that finally blew up the financial markets last year.

But whatever your view on Greenspan’s regulatory errors, his decision to keep interest rates artificially following the 2000 stock market crash was incredibly dimwitted. First, it facilitated the re-election of one of the nation’s most blundering presidents George W Bush in 2004. Second, it fueled mass speculation. This led to an inflationary spiral that pushed commodities prices and real estate valuations into the stratosphere.

Of course, the Maestro was just doing his bidding. And who knows, maybe the old fool really did believe that all that funny money would one day find a good home.

Congress, on the other hand, was supposed to look out for the interests of the American people and uphold the Constitution. Yet over the years it has eroded so much of what once made America great.

Instead of a free market, it has given us central planning, fiat money, the biggest deficit of any serious country in the world. It has destroyed the value of the dollar. It has given us a national debt, the interest on which cost the American taxpayer $260 billion last year alone. It has given us Fannie Mae and Freddie Mac and laws criminalizing banks’ failure to lend to subprime borrowers. It has given us an unfunded liability for Social Security and Medicare that now measures just under $100 trillion or 700% of annual GDP.

On Congress’s watch, the America that routed Hitler’s armies, rebuilt Europe and defeated the Soviet Union has been brought to its knees.

Maybe we’re just tired and grumpy. We’re on our way to Berlin to see how the German economy is holding up, and we’ve been traveling all day. But we see this as reason to get mad.

As the ancient Greeks knew well every crisis is an opportunity. (It’s engrained into their language: the original Greek word “crisis” translates into opportunity.) The Great Depression led to the creation of the Securities Exchange Commission, deposit insurance and the Glass-Steagall Act, which separated investment and retail banking.

To what end will the current crop of American politicians use this “Great Recession” (as James Grant of Grant’s Interest Rate Observer calls it) or “Greater Depression” (as Casey Research’s Doug Casey terms it)?

To begin, we might reasonably expect our dear leaders to allow the crisis do its work. As Joseph Schumpeter taught us, and important function of economic crises such as the one we’re now experiencing is they help rebalance an economy and make it more efficient.

According to Schumpeter’s core idea of “creative destruction,” downturns, if left to their own devices, have the positive effect of weeding out inefficient and failed companies and allowing more capable businesses take their place. They also encourage investors to reallocate their capital sectors and businesses with more chance of success.

On a wider scale, our current crisis is perhaps a once off chance to rebalance global trade – something that has been dangerously out of whack for some time now. We know that leading up to the collapse Americans lived beyond their means: they spent too much money they didn’t have. Meanwhile, the Chinese saved too much and spent too little. As a result, America imported (and consumed) too much and exported (and produced) too little.

This is now naturally being rebalanced: personal savings rates in the US are now rising back toward their historical average. The Bureau of Economic Analysis revealed that Americans in May on average saved 6.9% of their after-tax income – the highest level in 15 years.

White House chief of staff Rahm Emanuel and those that surround him in the Obama administration appear to have a different view of the opportunity that’s been created by the current crisis. (Readers will recall that Emanuel famously urged his fellow Democrats to remember never to let “a serious crisis go to waste … it’s an opportunity to do things you couldn’t do before.”)

Unfortunately, Team Obama isn’t much interested in Schumpeter’s creative destruction or the allowing debt-crippled Americans save and pay down their debts. Instead, it’s bent on the twin political wonders of bailouts and ‘stimulus’ packages.

The government has so far spent $439 billion of the $700 billion TARP slush fund on bailing out failed banks, insurers and auto makers. (So much for creative destruction.)

The Congressional Budget Office now admits that most of the money it shelled out to GM, Chrysler and their financial arms and suppliers ($55 billion) and to AIG ($70 billion) will be lost. And losses for the bailouts of Citigroup and Bank of America are now expected to come in at $9 billion and $10 billion respectively. (Yes, dear reader, we’re angry…)

President Obama billed the first ‘stimulus’ package as “making dramatic investments that would revive our flagging economy.” But as we know now, the truth lies elsewhere. The Wall Street Journal estimates only “about 12 cents of every $1” of that particular spending bill is “for something that can plausibly be considered a growth stimulus.”

The 647-page bill rushed through Congress was impenetrable enough to keep all but the most determined snoops away. But we know now it contains $1 billion for Amtrak, a railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 billion for the National Endowment for the Arts; $400 million for global-warming research; $650 for to pay for digital TV conversion coupons; and $150 for the Smithsonian (among other boondoggles).

We also know that the unemployment rate today is 9.5% – nearly 20% higher than the Obama White House said it would be with its much-hyped $787 billion ‘stimulus’ package in place.  And that it in May it took $6.52 stimulus dollars to increase consumer spending by $1. As David Rosenberg of Gluskin Sheff puts it, the money from Uncle Sam is going into the coffee can instead of being used to buy more coffee: Americans are saving, rather than spending, their stimulus.

In addition to the Obama’s first failed ‘stimulus,’ a second spending bonanza is now being proposed. This is a grave mistake. Americans are finally saving more and consuming less. They are even taking tentative steps to paying down their all too onerous debt burdens.

What does the government do confronted with this prudent behavior? It panics. And it immediately tries to reverse the trend. It borrows money out of pocket from foreigners and prints dollars to try to jumpstart the very trend – debt-driven spending – that led us to the current collapse.

The truth is no amount of Keynesian stimulus will replace the roughly $12 trillion lost in household wealth. Former political lights tried this throughout the 1960s and 1970s. The result? Poor growth and high inflation.

We can’t escape the fact that overspending, overborrowing and undersaving caused this crisis. It’s wrong to believe that it’s also the cure.

Before you tell me I’m wrong, let me ask it this way…

• If inflation returns, or even hyperinflation…
• If the economic crisis persists and gets worse…
• If uncertainty and fear continue, and chaos and rioting begin…
• If stock markets languish or suffer another meltdown…
• If the recovery spending of the world’s governments proves futile…
• If government interference in the economy continues to increase…
• If the value of the U.S. dollar takes a major fall…
• If world recovery from the current recession/depression takes years…
• If you’re still wondering whether you have enough “safe” money…

…would you feel you own enough gold?

If all those things come to pass, I suspect many of us, including myself, would wish we had a few extra gold coins or bars stashed away.

So let’s assume you answered “No” to my question and need to add some ounces to your collection… is now a good time to buy?

The Best Time to Buy Gold?

Before glancing at the chart below, if you had to pick the month with the weakest average gold price, which would you select?

In our current 8-year bull market, June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy.

How does this compare to the bull market of the 1970s?

In the last great bull market, summer also was a good time to buy gold (although April was even better.)

What about gold stocks?

Since 2001, July and October have been the weakest months for gold stocks, as measured by the AMEX Gold Bugs Index, and the best times to buy.

However, keep in mind that these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

Don’t lose sight of where we are at this point in the recession – in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment – and markets – could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power.

How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.

Having physical gold in your possession is always a good idea in times of economic turmoil – there is no “uncertainty hedge” like it. But to actually make money, you should also look at premium gold stocks. Our current favorite has been so consistently successful that we call it “48 Karat Gold.” Click here to learn more.

I first recommended that Investor’s Daily Edge readers buy the silver ETF (SLV) on February 5th . I hope you followed my suggestion. SLV is up over 23% since then.

It’s not too late for you to get in. The white metal and its tracking shares are still a great buy.

Silver is a precious metal so it does great when people get worried about the market, inflation and geopolitical risk. Monetary inflation is already here. It is only a matter of time before price and asset inflation arrive as well. Silver is a hard asset that holds it value in inflationary times and will maintain its purchasing power.

Silver is also an industrial metal, therefore it goes up when global manufacturing activity picks up and should do quite well when we finally emerge from this economic crisis.

Silver is also in short supply and has limited above-ground stock-piles that are being depleted. Demand exceeds supply so prices for silver should continue higher. Finally, silver is in a technical uptrend.

You can buy silver bars or buy silver coins like American Silver Eagle bullion coins or Canadian Silver Maple Leaf coins. Physical silver can be stored in a home safe or in a secure hidden location that only you and another trusted person know about.

The Silver Exchange-Traded Fund (SLV) represents an easy way to invest in silver.  This ETF is very liquid and cost effective.

Silver can quickly blast above $20 per ounce or more. Make sure you own some.

Source: Next Stop for Silver: $20 Per Ounce

Buiter warns that the “the next big crisis … will be a crisis of state ‘overreach’ and of government failure” and that “stultifying state capitalism, initiative-numbing over-regulation and overambitious social engineering may well be the defining features of the next socio-economic system to fail.” We’ll drink to that.

What follows is the conclusion of the Den Uyl lecture Buiter gave in Amsterdam on 15 December 2008 (emphasis added). Print it out and stick it to the door of your fridge. It’s one of the best accounts we’ve read of the brave new world will be ushered in by the recent financial collapse.

Reaction follows action in politics as in physics. The inevitable result of the financial collapse and deep contraction we are going through now will be at least a decade of over-regulation in the financial sector. Popular outrage at the excesses that were permitted to range unchecked during the era of self-regulation and light-touch regulation will have to be assuaged. The ‘pound of flesh’ demanded by the body politic is likely to involve a fair amount of ‘if it moves, stop it’ type regulation. That is regrettable but politically unavoidable.

The public no longer trusts the captains of finance and the politicians and appointed officials who either actively contributed to the excesses (like Larry Summers and Timothy Geithner during the Clinton administration or Gordon Brown in the UK) or failed to warn or protest sufficiently vigorously when these excesses begin to materialise on their watch (Ben Bernanke (in public service since September 2002), Mervyn King (at the Bank of England since March 1991) and most other leading central bankers). Neither the public nor the new vintage of politicians that will take over is likely to listen to those who either actively contributed to the disaster or failed to foresee it or warn against it.

Over-regulation will harm the dynamism of the economy. How serious the damage will be is not clear. What is clear is that a lot more regulation, and regulation different from what we have had in the past, will be required to reduce the likelihood of future systemic failures and to better align private and public interests.

Buiter message is clear: the rules are going to change, whether you like it or not. Investors who fail to understand this will get badly burned as they try to make their way in the new economy.

My article for Investor’s Daily Edge on 04/09/09 recommended the iShares MSCI Brazil Index (EWZ).  This Exchange Traded Fund holds a nice basket of Brazilian stocks and seeks to mirror the Brazilian stock market as measured by the MSCI Brazil index.

If you took my advice, you’d have seen a big short-term gain as the Brazilian ETF rose over 22% in less than two months.  Our staff here at Investor’s Daily Edge strives to give you information that can help you accumulate wealth and enhance your financial well-being.

If you missed this opportunity to get into EWZ, it’s not too late.  This Brazilian ETF has the potential to run much higher as Brazil is one of the best emerging markets to invest in.  Let me explain:

During a recent trip to Brazil, I observed an economy that is flourishing.  Brazil is a country that is blessed with a bounty of natural resources.  Two hundred million Brazilian people are striving to live a better life and they are well on their way to becoming a developed country like the U.S. or Japan.  I foresee Brazil becoming a global superpower within 20 years.

Brazil is an agricultural and commodities powerhouse with large and well-developed mining, manufacturing, and service sectors.  The world’s population is exploding and Brazil’s rich farmland has the potential to feed the budding masses.  Plus, Brazil has plenty of oil deposits; in fact, they just found another 8 billion barrels in the Tupi offshore oil field.  They have plenty of natural resources that they can export to the rest of the world.  And, once the world finally pulls out of this economic crisis, you will see commodity demand and prices skyrocket… Brazil will be sitting pretty.

Brazil continues to push industrial and agricultural growth and development of its vast interior.  Exploiting huge natural resources and a large labor pool, Brazil is at the moment South America’s top economic power and is expanding its presence on the world stage.

Brazil’s ethanol industry is powerful and is on the rise. The country turns a good portion of their sugar cane crop into alcohol fuel for their cars.  The world is seeking alternative sources for traditional fuels and Brazil is well positioned to deliver.

America was Brazil’s top trading partner until last month, but China surpassed the U.S.!  And, China is looking to widen its exposure to Brazil’s massive amounts of natural resources.  From 2006 to 2008, China/Brazil trade surged at an average annual growth rate of 50%.

China is securing energy resources to power its economy by providing a loan to Brazil’s Petrobras which will supply China with 150,000 barrels of crude a day this year and 200,000 barrels in 2010.  Brazil and China recently signed multiple accords to promote trade, investments and cooperation between the two nations.  And this bilateral trade will be done using Brazil’s currency the “Real” and China’s currency the “Yuan”, not the U.S. dollar.

Brazil’s economy has been quite stable under President Lula da Silva.  He is pushing further economic reforms to reduce taxes and increase investment in infrastructure.  Brazil’s debt achieved investment grade status early in 2008, which in turn encourages more foreign investment.

Plus, Brazil has a growing tourism industry due to their amazing beaches and friendly people.  Check out this incredible picture of Rio.

Not only is Brazil a beautiful country, but it’s a great place to invest for the long run.

Again my favorite way for you to play Brazil is the iShares MSCI Brazil Index (EWZ).  This Brazilian ETF offers excellent profit potential.  Pick some up today…

Source: Invest in Brazil Now!

What makes Patterson’s comments particularly interesting is that he’s a TARP insider. He used TARP matching funds to buy Michegan bank Flagstar Bancorp. Patterson’s firm ended up with 80% of the Flagstar shares. The government managed to secure a mere 10% stake.

Patterson reckons Team Obama is only putting off the necessary day of reckoning by pretending the US banking system is still solvent. Speaking at the Qatar Global Investment Forum he had this to say about the government’s handling of the banking crisis:

It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100 billion of the $700 billion TARP funds. They think they’re doing this for the greater good of society.

When market participants like Patterson speak, we listen. First, these guys are not towing the government line. Second, they have skin in the market. This puts them in a different class than the mainstream commentariat. We call these people underground investors. And we do our best to bring you their money-making advice and market intelligence on a daily basis. Don’t bother looking for them on CNNMoney or on CNBC. You won’t find them there.

Patterson doesn’t believe we’re about to see a V-shaped recovery…

This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance.

Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well.

He also sees the economic crisis ending in a deliberate inflation…

The US government has thrown 29% of GDP at this crisis compared to 8% in the early 1930s. The Fed’s balance sheet has risen from $900 billion to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road.

When combined with iron or nickel, it is used to create corrosion- and wear-resistant, high-strength products. It’s also contained in both lithium and nickel rechargeable batteries.
That means a lot of demand now and into the future. But right now, hardly anybody’s mining it. See, as the economic crisis wormed its way into industries across the globe, demand for cobalt softened. One year ago, cobalt was priced over $50. Today it’s priced at around $16.
Notes can reveal that one tiny company holds the key to the U.S. supply of cobalt. And it just got final clearance to break ground on one of the biggest moneymaking mines the U.S. seen in decades. The supply shortage could launch this penny stock to $10… $12… even $18 by November 20, 2009.

Demand-pull inflation is described as too much money chasing too few goods.

The U.S. government is heavily in debt to the tune of over $11 trillion. How will we pay this back? We will certainly not default on our debt anytime soon. It’s possible that the government could simply inflate its way out of this mess, so essentially the biggest debt ever amassed could be paid back with almost worthless dollars.

The Chinese see the writing on the wall and are getting worried. For years we’ve been getting all this cheap stuff and we’ve given them paper IOUs. They will be left holding a mountain of devalued dollars and Americans will keep all the inexpensive goods we have accumulated over the years.

We learned from the Great Depression that deflation is to be avoided by all means necessary. They call Ben Bernanke “Helicopter Ben” because he once referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation. We have recently seen some indications of deflation during this recession, but it’s quickly being eliminated by just speeding up the money printing press. In this case, deflation ultimately leads to inflation.

The Fed cut interest rates to almost nothing in an attempt to head off the deflationary effects of falling house prices and weakening consumer demand. This “reflation” shows us that the Fed is no longer focused on fighting inflation; they are now completely focused on avoiding a depression.

Why is inflation bad? Well, inflation hurts people who have saved up a nest egg and those who live on a fixed-income. The same dollars buy less goods and services. Also, wages never go up as fast as inflation, so working people can experience an increase in their cost of living, without the pay raise to go along with it.

The average American household is heavily in debt, so inflation will allow them to repay their debt in devalued dollars. I once heard a story of a woman in post war Europe that paid off her entire mortgage for the same amount of money that was needed to purchase a book of matches. Knowing this, today’s 30-year fixed rate mortgages at 5.10% look really good…

It’s important that you shield yourself from inflation to protect your wealth and buying power. I think the worst case scenario would be inflation rates similar to the 1970’s as we emerge from this recession.

Ultimately, you can protect yourself from inflation by investing in the right hard assets like gold, silver, copper, oil and even real estate.

Another great way to protect yourself from inflation is to purchase Treasury Inflation-Protected Securities (TIPS). They eliminate inflation risk – while providing a real rate of return guaranteed by the United States government.

The Treasury uses the Consumer Price Index (CPI) as a guide to adjust the principal for inflation on a semiannual basis. A fixed interest rate is paid semiannually on the adjusted principal. In that way, both interest payments and the principal are adjusted for inflation.

TIPS can be purchased directly from the government through its TreasuryDirect program and on the secondary market through banks and brokers.

My favorite way to invest in TIPS is to buy the iShares Barclays TIPS Bond-Exchange Traded Fund. It trades under the symbol TIP. This ETF has low fees, it is very liquid, and holds a diversified portfolio of TIPS of varying maturity dates.

Bottom line: Protect yourself from inflation by having some of your portfolio in TIPS, especially when it’s clear that the recession is behind us.

Source: Inflation is Coming – Protect Yourself with Treasury Inflation-Protected Securities (TIPS)

This from Ted at Investor’s Daily Edge:

The stock market is still in panic mode; investors have lost too much and are dumping their stocks in an attempt to salvage what little money they have left.

The more they sell, the worse the market gets. The worse the market gets the more they sell. It’s like a nightmarish game of dominoes.

Granted the new giant stimulus package, a bigger round of rescues, and the largest deficit financing of all time are going to have an effect on this economic crisis. Some of these policies will help, but they may also backfire and aggravate the crisis. Just don’t count on the government to bail you out.

Unfortunately, it looks like the stock market will actually get worse before it gets better. Please don’t try to pick a bottom, bottom picking in this bear market is extremely risky so be careful. Wait to see a sustained recovery before stepping back into stocks.

Here are a few reasons to be bearish:

• GDP declined 6.2% in the fourth quarter and GDP will probably have a similar decline in the first quarter of this year. This is a much bigger drop than most experts were forecasting. And there is evidence that the decline is accelerating.
• U.S. consumer spending is dropping like a rock and this is killing the economy. Consumer spending accounts for about 70% of total economic activity in America.
• The media is extremely negative. Every time you turn the nightly news on, you see financial disaster everywhere. The news loves to report that more people are being laid off, more businesses are going bankrupt, real estate is going lower, etc. All this negativity scares people into selling their stocks and spending less.
• Government borrowing is exploding and this will have dire consequences including higher inflation.
• We are witnessing the collapse of a mountain of debt in the private sector and the public sector may be next. Many governments around the world could end up defaulting on their debt, which would have severe economic repercussions.
• The number of troubled banks is increasing and the amount of toxic assets on their books is continuing to expand rapidly.

The bad news is there is no growth engine, at the present time, to pull us out of this economic slump.

So what are we supposed to do now?

You need to protect your nest egg and protect yourself against further losses. Get your money growing again and protect your capital by cutting your losses. Lower your exposure to the stock market by selling off the poor performers and diversifying into contrarian investments like natural resources including gold and silver. Just use common sense and stay flexible with a well-balanced portfolio.

You should have at least 10% of your assets in gold and silver as an insurance policy. All of my indicators suggest these hard assets will soon move to new record highs. In fact, I think gold and silver are in for an extended bull market even as most stocks face an extended bear market.

You should also think about doing put options or shorts on weak companies. You can make a tremendous amount of money as a company’s stock declines. A good service to look at is Andrew Gordon’s Red Flag Insider. His service has performed extremely well in this bear market.

This economic crisis may not be over for years, but after the selling wave in stocks is over — I expect to see a major rally take place, with the Dow gaining back 50% or more of its losses in just months. So be prepared and I will keep you posted on how to play it.

Source:  Is Dow 5,000 a Possibility?

It no doubt reflects a fault in my makeup that I found it not entirely convincing – but then I’m a math major and a former banker.

The speech – which took the place of the State of the Union address since it’s Obama’s first year in office – concentrated almost entirely on economics, and in particular on the financial and economic crisis currently facing the United States. President Obama’s comments were least convincing when they focused on the financial aspects of the crisis.

President Obama’s first mistake was in blaming the entire current situation on Wall Street. That’s attractive, populist rhetoric, but where was the acknowledgement of the U.S. Federal Reserve’s role in the debacle, inflating the money supply 70% faster than gross domestic product (GDP) for more than 13 years, so that asset bubble after asset bubble caused the incentive structures on Wall Street to go haywire?

Where, too, was the (admittedly subsidiary, maybe No. 3 after the feckless Fed and the greedy bankers)  role that Congress played over decades, messing up the housing market by creating unregulated irresponsible government guarantee monopolies in Fannie Mae (FNM) and Freddie Mac (FRE), an extra excrescence that no other advanced economy has found necessary to finance housing?

Bashing bankers is good rollicking stuff for a campaign speech, but it is less appropriate here, when the problems must actually be fixed. This rhetoric actually obscures the reality of the current problem, and diverts attention from the still-dangerous presence of U.S. Federal Reserve Chairman Ben S. Bernanke, whose role in creating the disaster is in danger of being exceeded by his role in perpetuating it. If Bernanke’s current rapid expansion of the money supply leads to violent inflation, as is likely, the crisis will indeed be prolonged for a decade, as Obama claimed was possible without government action.

President Obama’s second inaccuracy on the financial side in last night’s speech was in diagnosis. Lending in the U.S. economy has not seized up. It did seize up for about two months after the September crisis, but even by the end of the year loan growth had resumed, as figures from the major banks show. The commercial paper market has reopened and the investment-quality bond market has run at high volumes since the beginning of January.

Only one major source of “easy money” in past lending markets has disappeared – the securitization business: Almost nobody will now invest in securitization structures, and with good reason. However, as my investigative analysis of the nation’s Top 12 banks last week demonstrated, most of the major U.S. banks are in better shape than we believe, and are actually making money.

Their profitability has been greatly increased by the disappearance of competition from securitization – loan margins at the healthy US Bancorp (USB), for example, increased from 3.7% to 3.9% in the fourth quarter of 2008, and will have increased still further now.

Other than a few huge “zombies,” most banks are now making good money the old-fashioned way, through the interest margin between borrowing and lending rates. They will continue to do so, provided the government doesn’t (as President Obama and U.S. Treasury Secretary Timothy F. Geithner are currently readying to) introduce artificial competition, by inventing new taxpayer-funded vehicles to make consumer loans and drive margins down.

Yes, loans need to remain available for houses, automobiles and other purchases, but there’s no reason why they should not be somewhat more expensive – to rebalance the U.S. economy, the U.S. consumer needs to save more, not borrow more.

As well as being shaky in his knowledge of banking, President Obama is coming to make me question his math. Reducing the budget deficit from 10% of GDP, its level in 2009, to $500 billion, about 3% of GDP by 2013, is a hell of a task. That 7% swing in the budget balance is almost double the largest four-year swing ever achieved since the end of World War II: 3.8% in 1996-2000. Even during the 1990s economic cycle as a whole – a period of exceptional economic good fortune and budget thriftiness – the swing in the eight years from 1992 to 2000 was only 7.1% of GDP.

The problem with trying to tighten fiscal policy so rapidly is the negative “stimulus” effect it would cause. If the U.S. economy does anything in mid-2010 but zoom like a Saturn V rocket roaring off the launch pad, sucking 7% of GDP out of government demand over so short a period is likely to abort the recovery and push the economy back into a depression. Furthermore, Obama intends to do this without raising the taxes by one penny on anybody earning less than $250,000, and while increasing the size of the armed forces, their pensions, and spending more on energy, healthcare and education.

Maybe I’m a grouchy old skeptic, but it doesn’t look to me as if the math adds up.

Look, President Obama is a wonderful speaker, he really is, and he gave quite a performance in his address to Congress last night. As a gnarled old Republican, I’m prepared to admit he’s as good as former President Ronald Reagan, I may even nurse a faint suspicion that he’s better than Ronald Reagan.

But to be a great president, Obama will need to pursue policies that are sufficiently middle of the road so as not to destroy the superb private sector that’s the backbone of the U.S. economy, and that are also cleverly designed to work properly. It’s the math, the economics and the finance, not the language, the arts and the humanities, where there are still doubts.

Source: Despite Great Speech, President Obama Presents Risky Plan