President Obama and the Lincoln Bible

Reading time: 24 – 39 minutes

It is not so much interest rates that drive the flow of funds as the exogenous forces of war, leadership, demographics, economic theory, and technology.

New Leaders

These great random levers of economics are beyond the reach of the Chairman of the Federal Reserve Bank.

The extreme uncertainties brought by these exogenous factors, argue for a conservative bias in calculations of intrinsic value.

We call these exogenous forces, the Five Horsemen of the Investment Apocalypse: War; Leadership; Economic Theory; Technology; and Demographics.

In this article, I discuss the 2nd Horsemen: New Leadership in the context of the Market Crash of 2008.

Causes of the Crash of 2008

From the point of view of Capital Flow Analysis, the Crash of 2008 was the inevitable result of the confluence of two long-term capital flows. The seeds of today’s economic woes were implanted two generations ago:

Trade deficit drives down bond prices

The US Trade Deficit

When Richard Nixon closed the gold window in August 1971, he unilaterally revoked the Bretton Woods agreement whereby the US would exchange the dollars of other central banks for gold at $35 an ounce.

However, out of habit, custom, and lack of an alternative, the dollar continued to be the world’s reserve currency, but without the constraints of the limited supply of gold.

Because the US favored free trade and didn’t care whether the country became de-industrialized, while the rest of the world rushed to accumulate dollars by exporting more than they imported, US banks accumulated dollar deposits owned by foreigners, creating increasingly easy credit over the next 37 years.

Because there was more money available than could be prudently lent, credit standards inexorably fell, culminating in the sub-prime lending scandals of 2007 and 2008. By Q4 2008, the rest of the world held $16.9 trillion in US financial assets.

SEC Rule 10b-18 opened the door to the Buyback Era

The Stock Buyback Era:

In 1983, the US SEC issued Rule 10b-18, granting corporate executives “safe harbor” from prosecution for price manipulation or securities fraud in connection with stock buybacks.

This set off a pattern of corporate manipulation that forced stock prices upwards for over a generation, despite temporary setbacks in 1987 and 2000.

In 2008 dollars, these stock buybacks, over the years, totaled an estimated $5.7 trillion, making the average investor (which made up at least half of the population) feel much richer than he or she actually was.

This wealth effect allowed people to feel comfortable living on borrowed money.

Easy credit pushed real estate prices ever higher, making people feel even richer.

However, for buybacks to be effective in boosting stock prices, ever larger sums are needed.

From 2000 on, corporations were getting this money by depleting corporate cash, raiding depreciation reserves, and borrowing from banks.

The crisis in sub-prime lending was the trigger that cut off the flow of funds into the buyback game — eventually collapsing stock prices and causing equity prices to drop by $9 trillion dollars.

This happened just as Baby Boomers were about to enter retirement, cutting retirement income, and providing incentives for the whole population to stop spending and start saving.

The inevitable reduction in spending and change in consumer behavior now threatens the US with a prolonged recession. See: “The stock buyback era is over. Now we can access the damage.”

Because the US dollar was the world’s reserve currency, and because so many countries had come to depend upon selling factory output to US consumers (who used credit cards financed by the trade deficit to pay), the market Crash of 2008 became an international event.

Furthermore, thousands of banks, regulators, and issuers throughout the world, had grown accustomed to copying financial practices of the United States (the world financial leader) and, as a result, each suffered their own local versions of the wages of financial profligacy.

Who was to blame?

Without the ballooning trade deficit encouraging imprudent lending, or the assurances of the wealth effect caused by stock buybacks, it is doubtful that the Crash of 2008 would have occurred. If one wants to point fingers, there are literally millions of people to blame for these long-term unhealthy, risky flows of funds.

After all, the inevitable negative outcome of the confluence of two mighty economic flows, involving most of the population and dating back almost forty years, can hardly be the fault of only a few people.

In a sense, we are all to blame ...

However, certain laws and actions permitted by regulators, aggravated the situation. Among these, I would cite the Community Reinvestment Act of 1997 (and its numerous amendments) that profoundly weakened sound credit policy by injecting political considerations.

I would also cite the 1953 decision of the New York Stock Exchange (with the approval of the SEC) to allow members to incorporate, thereby eliminating personal liability from the decision process of investment bankers.

The events leading up to the Crash of 2008 happened in both Democrat and Republican administrations, over many years.

It would not be intellectually honest to pick out any one person or restricted group of persons to blame.

Except for the children, we all are to blame.

An untested leader in a crisis

As chance would have it, the Crash of 2008 occurred in the midst of a presidential election. Everyone knew that something had gone radically wrong and that changes would be required.

It can't be that hard to be President ...

Most of the population had never been through economic hard times. Their whole lives had seen easy credit, high employment, and rising asset values.

Compared to earlier times, since the mid 1980s most voters had been enjoying one long happy party.

People who were in their thirties when Jimmy Carter left office, were now in their late fifties — old fogies to the younger generation seeking change.

Those who were of voting age in the Great Depression, if still alive, would be in their nineties — obviously “over the hill”.

On this scene, came a New Leader — a man with a silver tongue, promising CHANGE.

Of all the candidates for President of the United States, Barack Obama stood out with one highly unusual qualification — he had absolutely no experience with any type of executive responsibility. He never was a governor of a state, a mayor of a city, an executive of a business (big or small) … he never was in the military. He had been in a state legislature and the US Senate, but had not stood out in any way, other than having voted “present” on most issues. Even his own campaign for president was run by political operatives. His executive skills were entirely untested and unknown.

Of course, Barack Obama was not much different from most that voted for him, for most people are not CEOs, governors, or executives.

Since the  end  of the draft, most young people have never even served in the military.

And most people — especially the young — who never have actually had to sit in an executive chair, make decisions, and be judged by results — many of whom voted for Obama — felt, well it just can’t be that difficult to run the most powerful country on earth!

Change is more important than experience.

And so he won the election.

In doing so, he became the Second Horseman of the Investment Apocalypse: a New Leader.

The audacity of hope

When Barack Obama became president of the United States, I hoped that he would succeed. Some things he did during the transition period led me to believe that this hope was not unfounded.

Lula and Fidel

I also remembered the case of Luiz Inácio Lula da Silva, a radical labor leader, lathe operator, with little formal education, who became president of Brazil, spouting Karl Marx and rushing to embrace Hugo Chaves and Fidel Castro — but, who, it turned out, became one of Brazil’s better presidents, bringing prosperity and better times to a hundred million people by moving to the center.

It seemed that Barack Obama might do the same — after all, he had a degree from Harvard — he must be smart!

And so, there was the audacity of hope.

The ominous Lincoln Bible

When I learned that Barack Obama had decided to be sworn in on the same Bible used by President Lincoln in his first inauguration, I began to wonder. What did this signify?

It seemed a tiny thing … but still …

No other president had used the Lincoln Bible to be sworn in.

Some used the Washington Bible. Many brought family Bibles. The choice was definitely a “change” from precedent. Maybe the Obama family did not have a Bible.

Maybe he felt uncomfortable using the Washington Bible — after all, Washington was a slaveholder.

What exactly was Barack Obama trying to say with this symbolism? What message did he mean to send?

Lincoln's first inaugural Bible

Lincoln was the most divisive president

Obama had campaigned as a “uniter”, but Abraham Lincoln was the most divisive president in US history. In many states in the South, he got no votes at all.

His election led directly to the Civil War — the deadliest war in American history.

Lincoln promised not to ‘free the slaves’

At first I thought that the Lincoln Bible might have something to do with Lincoln having “freed the slaves”, but no …

In his first inaugural address, Lincoln said, “I have no purpose, directly or indirectly, to interfere with the institution of slavery in the States where it exists. I believe I have no lawful right to do so, and I have no inclination to do so.” He also said that he would defend the fugitive slave clause of the Constitution, delivering any escaped slave back to his “owner”.

Lincoln was humble; Obama not

The choice of the Lincoln Bible was strange in other ways. Lincoln was homely, humble, and so unpopular on being elected that he had to sneak into Washington in disguise — a far cry from Obama’s triumphal entry that was meant to imitate Lincoln’s entry into Washington.

Stranger still, Lincoln was a Republican, not a Democrat.

Lincoln had been born, raised with little formal education, and had lived his entire life in Illinois. Obama was born in Hawaii, had grown up in Indonesia, had attended an exclusive prep school and Harvard University, working for a short time in New York City, before moving to Illinois to garner political support in the black districts of Chicago.

Lincoln praised his  predecessors

In Lincoln’s first inaugural, he referred to those “greatly distinguished citizens, [who] have, in succession, administered the executive branch of the government. They have conducted it through many perils; and, generally, with great success.”

In contrast, Obama dissed the Bush administration, speaking of “failure to make hard choices”, the need to “restore science to its rightful place”, and rejecting as “false the choice between our safety and our ideals”.

Justice Thomas and Lincoln's First Inaugural

Lincoln honored the Constitution

Lincoln’s first inaugural address — when the Lincoln Bible was used — was devoted almost entirely to stating the position of a strict constructionist of the US Constitution — it could have been written by Clarence Thomas, the US Supreme Court Justice that Barack Obama had said he would like to see off the court in his interview with Pastor Rick Warren at the Saddleback debate.

Note: Janet Napolitano, President Obama’s choice for Secretary of the Department of Home Security was the lawyer for Anita Hill in the political hearings in which the far left attempted to block Clarence Thomas’ nomination to the Supreme Court. Barack Obama, unlike Clarence Thomas, is not a strict constructionist.

And then, of course, there is the fact that Lincoln left office feet first — not a good omen.

Obama’s flash of hubris

The choice of the Lincoln Bible and the Disneyworld version of Lincoln’s train trip to Washington revealed more about Barack Obama’s character than perhaps he intended.

Since Lincoln is often recognized as America’s greatest president, with a huge memorial on the Washington Mall, Obama seemed to be suggesting that he considered himself equal to Lincoln in stature — a flash of hubris that Lincoln himself would never have displayed.

The selection of the Lincoln Bible suggested a certain shallowness of thought and a willingness to distort or misread history. The choice hinted of over-weening self-conceit, a lack of humility or modesty, excessive-confidence and a sense of “destiny” more often seen in dictators than presidents of democracies.

The choice of the Lincoln Bible was not reassuring as to what might be coming.

Obama’s first hundred days

President Obama revealed in his first one hundred days in office that misgivings about his lack of executive experience were not unfounded.

Any executive taking any position of leadership starts with a limited store of goodwill, limited financial resources, and, usually, the inability to go back and correct serious mistakes. Like life, an executive’s term of office goes only in one direction. Time’s arrow points one way — forward.

Furthermore, executives must be able to make “hard choices” — exactly what Barack Obama claimed to be the failing of George Bush. As commander of the military, a president must send young people off to die. A governor must decide whether or not to commute a death penalty. The owner of a small business must tell that nice young man with three children and a pregnant wife that he is fired. Many people can never be effective executives because they cannot make the decision as to who stays in the lifeboat and who must be tossed into the raging sea. Catherine the Great was not a nice lady.

All executives make mistakes. An experienced executive knows this and harbors his or her resources. It is hard enough to succeed in a world full of mischance and bad luck — one doesn’t need to make things worse by carelessly pissing away essential resources.

Here the question is not whether one agrees or not with Obama’s intentions regarding economic recovery, health care, taxes, stem cell research, or renewable energy. The question is whether he has the executive ability and temperament to carry out even these intentions, for better or worse.

To me, it seems that Obama’s first 100 days indicate that the President has a way to go on the learning curve as to what it takes to be an effective executive:

Official 'Spending is Stimulus' logo

The Recovery and Reinvestment Act of 2009:

On February 6, 2009, President Obama, to the laughter and applause of a friendly, partisan crowd, said, his voice dripping with sarcasm, “So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is?”

On February 17, 2009, President Obama signed into law a $787 billion spending bill written by Congressional Democrats, with the support of only 3 Republicans in the House and Senate.

The bill was rammed through by Nancy Pelosi and Harry Reid, and read by virtually no one in Congress.

The bill was not based on a proposal submitted by the President, but instead consisted of an uncoordinated package of pork-barrel spending for favored Congressional constituencies.

On January 28, 2009, before the bill was signed, about 200 economists placed a full page ad in the Wall Street Journal and New York Times opposing passage of the bill as wasteful and ineffective.

In February 2009, the Congressional Budget Office issued a series of reports indicating that the short-term effects of the bill were expected to be negligible (in other words, there was no reason to rush things through Congress, without anyone reading the bill), and that there were wide differences of opinion as to the effects in the longer term.

On March 11, 2009, the Wall Street Journal published a survey of 49 senior economists giving President Obama and Secretary of the Treasury Geithner failing grades for their handling of the crisis and the stimulus plan.

In Hartford, CT, crowds protesting the 'Stimulus Bill' (April 15, 2009)

On April 15, 2009, about 250,000 American citizens in spontaneous protests in over 750 cities across the nation voiced opposition to the government’s handling of the stimulus plan.

As a result of the “Stimulus Bill”, Obama demonstrated remarkably weak leadership by having surrendered the initiative to Congress.

By allowing the “stimulus bill” to be enacted, without controlling the content and without bipartisan support, the President managed to incur the wrath of millions of citizens, demonstrating a lack of fiscal prudence and even commonsense and reducing his chances of getting funds he might need in the future for projects that were on his agenda.

Assertions that all economists were on his side proved false and the President managed to unite the Republican base.

The “stimulus bill” was a unique opportunity to get carefully directed funding for all of his favorite projects.

As his advisors noted, “A crisis is too valuable to squander.”  Nevertheless, he blew it.

Staffing problems:

The United States government is an extremely complex organization and to get anything to move in a coherent direction requires a strong staff of coordinated capable leaders.

An experienced executive knows that to carry out a program successfully, it is necessary to be supported by many loyal, competent executives.

It is necessary to delegate and to have people to whom such delegation can be safely entrusted.

US presidents that have executive experience, such as governor of a state, usually have a ready group of tested executives that they can bring with them to support their goals.

Can President Obama trust the Clintons?

This practice is usually criticized by the opposition as “cronyism”, but it is, in fact, about the only way that an executive can take over an enterprise and be reasonably comfortable with the qualifications and loyalty of those that will determine the success of his or her administration.

Barack Obama came to office without this advantage.

Furthermore, he announced that he looked forward to being assisted by advisors with many different points of view — like a college debating society, and that he would not admit former lobbyists to his administration and that he would insist on rigorous vetting of those who might be chosen.

Such criteria, while seeming like “change” to crowds of college students, can easily be seen as unrealistic by anyone with executive experience and, in this case, made it much more difficult to recruit the people necessary to lead the most powerful nation on earth. This was especially unfortunate for a president without a tested team from prior executive experience.

As of April 26, 2009, President Obama had announced, nominated, or had had confirmed only 120 out of 486 top positions in his administration.

Of those selected, only 5.8% were people considered to be “close to the Obamas”, while 67.5% were either former Clinton appointees or people considered to be “close to the Clintons”.

The second largest group of appointees were people who had attended or taught at Harvard University, making up 39.1% of the total.

The small circle close to the President was limited to his wife, his campaign managers, Chicago political operatives, and basketball buddies.

In other words, because of his lack of an executive background, the President will have to lead a team that he cannot rely upon to be trusted or loyal — he cannot even be sure, from his own knowledge, of their executive capabilities.

When things get rough, as inevitably happens, and as members of the administration begin to think of saving themselves, writing a book, or currying favor by leaking information, the President will find himself increasingly isolated.

For a person who, above all else, appears anxious for praise and who wants to be compared to Abraham Lincoln, President Obama may be in for difficult times. This does not bode well for the future of the country or the world.

From Executive Privilege to Lèse majesté:

Anyone in an executive position, from the smallest business owner to kings and monarchs, knows that the continued ability to rule depends not upon popularity, but on the rule of law.

Whether it be the “Divine right of kings”, “Executive Privilege”, or a simple partnership agreement, those in power cannot afford to weaken the legal rules that force others to respect their position and decisions.

In the United States, built upon a delicate system of balance of powers between the legislative, judicial, and executive branches, a President that moves to reduce his or her own powers is weakening not only his own Presidency, but also that of future presidents.

On April 17, 2009, against the advice of his own Director of the Central Intelligence Agency and with numerous warnings that what he was about to do would weaken the national security of the country, President Obama authorized the release of CIA memoranda describing “enhanced interrogation techniques”.

You can't fool all of the people, all of the time ... (A. Lincoln)

He also said that no CIA officials would be prosecuted for the behavior that had legal clearance of the former President and were undertaken in the due course of their duties.

On April 21st, he reversed himself, saying that former lawyers of the Bush administration could be prosecuted for their legal advice on the matter.

The result was an immediate call from the far left for show trials of Bush officials, presumably to include the former President.

There was a violent reaction from the right, signaling the end of any spirit of bipartisanship in Congress for the remainder of the administration.

Obama’s action were taken to please the far left of his political base, but, in fact, impaired his own ability to govern by weakening the essential doctrine of executive privilege.

Going back on his own decision revealed a serious flaw in his executive temperament.

On April 23rd, the Wall Street Journal’s lead editorial was titled, “Presidential Poison”:

Mark down the date. Tuesday, April 21, 2009, is the moment that any chance of a new era of bipartisan respect in Washington ended. By inviting the prosecution of Bush officials for their anti-terror legal advice, President Obama has injected a poison into our politics that he and the country will live to regret.

Since the Wall Street Journal has twice the circulation of the New York Times and almost three times the readership of the Los Angeles Times, and is owned by Newscorp, that controls Fox News, the dominant cable news channels, it is reasonable to conclude that President Obama’s behavior in this case was not likely to advance his popularity or ability to govern.

President Obama showed a profound lack of concern for the requisites of executive power.

By opening the door to the prosecution of Bush administration lawyers, he removed the protection of executive privilege from his own officials — when the next administration takes over.

Could it be that he thinks there will be no “next administration”?

It is hard to say.

This behavior seems to indicate an inexperienced leader, encased in a cocoon of sycophants, amused with the toys of office — like Airforce One — rushing here and there to carefully staged “town hall meetings” of selected, approving audiences — to boost his own ego — while letting the chance for effective governance slip away.

The Maersk Alabama Incident:

On five days in April 2009, a US flagged vessel was captured by four Somali pirates, but the American crew was able to retake the ship, as the pirates escaped on a lifeboat with the ship’s captain as hostage.

With international press coverage, American naval forces came to the scene and after five days were able to kill three of the pirates, capturing the fourth, and freeing the captain on Easter Sunday.

President Obama directly supervised this operation.

American military take control of lifeboat after rescuing Captain Phillips

The American press portrayed the incident as an example of President Obama’s leadership in a military situation.

However, on the Internet, among military bloggers, foreign news sources, and according to Fox News military analyst, Colonel David Hunt, the role of President Obama was not quite as stellar as portrayed in the liberal media.

Most Americans have moved on from this story now and are quite happy to believe that they are safer now the President Obama has demonstrated a degree of military prowess.

However, foreign military analysts can see quite a different picture, in which the President comes off as inexperienced, vacillating, and a weak potential enemy.

Although the facts of the matter are unlikely to be confirmed by the White House, the evidence seems to indicate that President Obama took direct charge of the incident, revoking the normal rules of engagement, ordering the navy to only fire on the pirates if the hostage’s life was in imminent danger, refusing to send in Navy Seals, as requested by the commander on the scene, for days, and instead, injecting the FBI in an attempt to negotiate with the pirates.

The incident finally ended when the commander on the scene, seeing an opportunity to decide that the hostage captain’s life was in “imminent danger”, ordered the Navy Seals to shoot the pirates and save the brave captain.

Commonsense analysis of the reported facts, combined with open source information on the Internet, suggests that President Obama overrode commanders on the scene, attempted to micro-manage the event from afar, showing a preference for civilian intervention (the FBI negotiators) to decisive military action (the Navy Seals).

In this, his actions resemble those of Jimmy Carter during the Iran hostage crisis, rather than those of the Bushes during the first and second Iraq wars.

This behavior, combined with the release of memoranda on secret interrogation techniques and the President’s apparent preference for relying upon the United Nations for US national security, is likely to be perceived by America’s enemies as a sign of weak leadership.

The rapidly deteriorating situations in Iran and Pakistan, with a potential for nuclear war, and with a President who is slashing defense spending and not eliminating the possibility of show trials of Bush administration officials and further disclosures of classified intelligence information that will weaken the country — these are not good portents.

In the event of an attack on the US homeland, it does not seem likely that Presidents Obama’s popularity with the masses will survive — and with this, his ability to govern effectively

Unsure leadership and the economic crisis

In October 1962, the world came to the brink of nuclear war with the Cuban Missile Crisis.

A year earlier, President John F. Kennedy had demonstrated weakness and vacillation in the failed Bay of Pigs Invasion.

Soviet Premier Khrushchev, on meeting with Kennedy, came away with the impression that he was a weakling who would back down to a Soviet threat.

A US President cannot afford to appear to be weak, either in executive capabilities or in determination of purpose.

President Obama, in his first one hundred days, may still be popular among part of the US population and the anti-American crowds of Europe, but enemies of the United States cannot miss the signals send regarding his leadership and resolve.

The solution to the current economic crisis may come about simply by the government doing nothing. As in the Great Depression, when FDR (another fan of the “spending is stimulus” doctrine) prolonged the US crisis long after other countries had recovered, the current US economy under the leadership of Barack Obama may suffer the same fate.

Of course, it is impossible to predict what will happen, because where the center of leadership of the country will come to rest over the next year or so, is not clear.

Will Congress continue to dictate economic policy?

Will the partisan divisiveness stirred by Barack Obama lead to loss of control of Congress in 2010?

Will there be an attack against the United States, taking advantage of weakened intelligence services (as in the Clinton administration) and signals of a weak President (as in the Cuban Missile Crisis)?

However, it now seems less likely the President Obama will be successful in pushing through all the programs promised during the campaign. Even as his executive skills improve and the administration becomes more fully staffed, time’s arrow has already moved on.

The election campaign of 2010 has already started.