In the 1939 Frank Capra fictional movie classic, ‘Mr Smith Goes To Washington’, we find after the death of a US Senator named Samuel Foley of a western state, the Governor of that state Governor Hubert “Happy” Hopper through pressure from his children appoints their Boys Club leader Jefferson Smith played by Jimmy Stewart to ‘go to Washington’ and take on the corruption and to build a boy’s park in his home state. Unfortunately for Mr Smith, being wet behind the ears and not knowing the harsh realities of the Belt Way and how favors and projects are bought and paid for, his efforts are challenged; as his colleague, also of the same state, senior Senator Joseph Pain played by Claude Rains and a powerful media magnate Jim Taylor who ‘runs the state’ plot Mr Smith’s demise through accusations of fraud and self aggrandizement in stealing the Boy’s Club money.

While Mr Smith is vindicated to some extent at the end of the film as the political graft of his state’s senior Senator Paine and media magnate Taylor is exposed, still you turn the movie off thinking that nothing really changes in Washington, DC.

I highly recommend the movie to our younger generation, and while it is in Black & White (for some reason that’s a ‘deal breaker’), you’ll enjoy it very much. But let’s modernize this story for today and address what most think – that ‘nothing really changes’ in Washington. Whether it’s a new President every four or eight years or even a grassroots movement like in 2010 when the GOP picked up many Congressional House and Senate seats, the frustration of most is the same as they see continued: budget deficits, US debt, and monetary policy that Washington uses to unconstitutionally over promise on yet more social, economic and foreign policy intervention at the expense of the Individual.

Enter Ron Paul stage left, arguably a ‘modern day Jefferson Smith’. While Paul raises the volume of conversation on both sides of the aisle and can even dominate a family dinner conversation; love, hate or ambivalence toward him, most would agree he has been consistently promoting the dynamics of applying the original meaning of constitutional limited powers, that there are specific delegated powers that belong to the federal (General) government and the non delegated powers belong to the states, municipalities and the Individual.

Representative Paul, retired last month and while we could discuss his failure/success in passing ‘constitutional’ federal legislation, he was known as ‘Dr NO’ where Washington tried to pass overreaching legislation that tread on state non delegated powers and he brought a voice to the forefront of the need to get back to limited government. Like Smith in the movie, Paul was marginalized by government collusion, insider deals and ‘Greater Good’ promises of national security, healthcare for all, and equality for the good of the ‘General Welfare’.

While it is important to send Congressmen to our US Capitol that understand and will vote pro-Constitution in an effort to protect Individual Liberties, it is even more important to send them to the state houses to resist federal overreach into non delegated powers.
Federal policies like the National Defense Authorization Act, Affordable Care Act and new federal Gun Control legislation are generally written in Washington and while they include invitations to special interest groups that can have influence in ‘authoring’, getting behind and supporting the legislation, the bill drafting rarely include the states or citizen groups of which they will have the greatest impact. The good news is that many states are standing up to these bills that while well intended, take away the non delegated powers of the states and create unintended results as have been seen through education, retirement, healthcare and employment.

The founding generation understood that limited enumerated federal power and all other power left to the states protected against a fragile and monolithic government structure that would be impervious to change and market dynamics. To paraphrase David Brooks, his recent comments on Meet The Press regarding the Newtown, CT shooting and federal gun control bills, “‘in New York City there’s literally a police station around the corner, a few minutes away, while in a small town in Wyoming, it could take 45 minutes to an hour if you are lucky..’” Brooks was emphasizing the differing needs and wants throughout the country and that to create ‘one size fits all’ policies are not practical and can be counterproductive.

Robert Natelson of the Goldwater Institute writing in The Original Constitution (2010), “One of the great achievements of the federal convention (1787) was the idea of dual sovereignty. Previously, people had conceived as sovereignty as an attribute always located in some one place. The Framers, however, drafted a document that divided sovereignty between states and federal government—or more precisely between the American people as a whole and subsets of the American people operating through their state governments.” Natelson goes on to use the Ratifiers’ understanding of what they were signing as delegates of the Colonies (States) at the time. He digs into rare documents of the colonial conventions that expose their fear of a runaway federal government that would eventually create one sovereign government and the rights of the people would be lost. While the states and local governments had the power to create or support churches, currency and covenants on how to live, they did not want that falling into the hands of a ‘General Government’.

Unfortunately for the signers it wouldn’t be long before those constitutional lines would be challenged as both Virginia and Kentucky in 1799 created resolutions written by Madison and Jefferson in opposition to the Alien and Sedition Act in part but also as the seeds of a monolithic process were already at work as the Federal Government proposed that they could regulate their own power through their three branches of Government. These resolutions were a wakeup call that the states had sovereign powers and that it was within their constitutional rights to defend them.

Madison warned, “Though clothed with the pretext of necessity, or disguised by arguments of expediency, may yet establish precedents which may ultimately devote a generous and unsuspicious people to all the consequences of usurped power.” Big Government if sold properly galvanizes a constituency of a majority over a minority only when the states shirk their responsibilities.

At the website Tenth Amendment Center, you can see which states have started to resist federal overreach into the non delegated powers of the states. Between ‘Health Freedom Acts’, Nullification, No Medicare Expansion and outright Rejection there are more than 40 states involved in resisting federal power in the Affordable Care Act. There are 17 states currently in different stages of nullifying the National Defense Authorization Act (NDAA 2012) legislation that allows the federal government to violate Due Process rights and potentially to commandeer state resources without state authorization.

Unfortunately, these success stories of the States standing up for their rightful powers and responsibilities are not covered on national news outlets and there is an obvious need for more resources and involvement in each state to resist a growing federal government and its overreach into state non delegated powers.

If, like after watching the 1939 classic ‘Mr Smith Goes To Washington’ you find yourself saying, “What can I do? Can there really be change?” The answer is yes but it’s not in Washington politics but at your State House or in your local legislative District. The powers of Nullification, Interposition and other Article V tools have lain dormant for years, but today is the day for states to take action. Get involved by getting local in your politics. You can find out what’s going on in your state by visiting the Tenth Amendment Center.

For years Wall Street and Washington has siphoned off our ‘best and brightest’ to concentrate power, isn’t it time through the sovereign powers of the states to diffuse Washington’s unconstitutional stranglehold on society?

Christopher M. Mahon, Editor

In an article yesterday in Bloomberg, Mark Zandi of Moody Analytics has said that the chance of major defaults in the muni bond market was ‘near zero’. Do you feel better now? Whew!

Before you sit back in your easy chair and turn on reruns of Lou Rukeyser’s Wall Street Week, there’s probably something else you should consider; the same group of soothsayers were spreading the elixir of calm and `happy days are here again’ in 2008 and using pretty much the same message.

Zandi, speaking before the National Governor’s Assn winter meeting in Washington said, “I think that the very loud hand-wringing over the prospects for major municipal-bond defaults is entirely misplaced.”

The Bloomberg article ‘Risk of Widespread Municipal Defaults’ by Mark Niquette and William Selway goes on, “Thomas Doe, founder and chief executive officer of Concord, Massachusetts-based Municipal Market Advisors, said he has seen nothing to change his view that general-obligation debt at both the state and local level is secure.“I don’t want to be Pollyanna about it,” Doe told the governors. “I have great confidence in you all, the markets do have confidence in you as well, and the informed investor, the institutional investor, understands that your debt is good.”

What Zandi and Doe fail to see or recognize is that much of the past year’s state revenues were subsidized in part by the Federal bailout that was a ‘one and done’ stimulus to teachers and other state employees which is now gone. Also as Meredith Whitney of the Whitney Group and other muni bond analysts have commented that 49 out of 50 states have mandatory balanced budget requirements and there needs to be substantial cuts in spending (particularly retirement/health care for govt employees) which is now starting to be addressed as seen in some of the collective bargaining controversies stirring in a few states.

Zandi and Doe and others who are now forecasting recovery and dismissing troubles in the muni market are the same ones who called bottoms too early in the housing collapse and never even saw the financial crisis of 2008. Zandi is a student and believer of Keynesian economics in the same vein as Krugman and Bernanke, that if government steps in to support the economy when private industry and household spending falters then recovery is right around the corner. Ironically, Zandi wrote a report on economic stimulus packages and their effect on the United States economy which was cited in Christine Romer’s report back to President Obama which influenced  bailout legislation (American Recovery and Reinvestment Plan).  Harvard economist Robert J. Barro and many other economists are now questioning Zandi’s model and the need for federal government intervention.

While Whitney and others who forewarned the 2008 financial crisis are hopeful, they are also realistic in gauging the political and wrong-headed economic principles like Zandi’s that governs public policies. There is a way out of this mess but it doesn’t come from creating more debt, quantative easing or any other government led options; it is rather cutting government, reassuring markets that there aren’t any government surprises coming so that prices will stabilize and surpluses (housing inventory) will wind down through private market mechanics.

In another ill forecasted article by Mark Zandi, he proclaimed, “I’m an Optimist!” Are you an optimist when it comes to government stimulus packages or federal reserve quantitative easing schemes? Well just like Burt Lancaster’s character in Elmer Gantry, they are firing up the revival organs to the sound of ‘happy days are here again’ as the message is being preached of government salvation that comes at a great price…your money and your freedom. ‘Do you hear me brothers and sisters!’

Risk of widespread Municipal Bond Defaults

Why Mark Zandi’s 2009 Housing Prediction is Wrong

‘Replacing the government of persons by the administration of things.’ Saint-Simon

To paraphrase Isaiah Berlin from his essay, ‘Two Concepts of Liberty’, When men lose interest in their ends, they lose control of their means. When we hand over the education of our children, or our healthcare to experts we also lose control over it as well, keeping our fingers crossed that men and women of excellent education and pedigree themselves can figure it out. But like Saint-Simon understood, caregiving except by the closets of relationships or through an individual’s compassion with their own resources, warps into duty and the object into a byproduct of the means.  

Wisconsin, arguably the birthplace of Progressivism, is ground zero of the upcoming budget battles between the states and unions; contracts negotiated during better times, that are benefit-rich, stand in contrast to plummeting state revenues and many private workers who are unemployed or underemployed.

There is a strange irony, as this plays out in Wisconsin, where Robert La Follette, the former Senator and Governor of the state, championed the early Progressive movement. Like a thread that enters into the first stitch of a garment, could the same thread becomes it’s unwind?

The early Progressive movements started as modest private initiatives in the cities such as Chicago, Boston and NY in the late 19th Century to address wages, poverty, illiteracy and shelter in the growing immigrant population and later in the post war African American population through settlement house, labor, education and other social movements that made their way from Europe.

Women such as Jane Addams and Ellen Gates Starr, founders of the Hull House in Chicago, came from well to do families (Duponts, Carnegie) that benefited from the industrial age and believed that they had a `personal responsibility to clean up their cities’ and give back to society. Addams’ father like many of that generation were ‘Lincoln Republicans’ who saw the charitable needs of their day. By the turn of the century there were thousands of settlement houses throughout the major cities in the US with facilities to feed, shelter and educate the masses. Successful ventures like Hull House in Chicago and Henry Street Settlement in NYC were the beneficiary of discriminating donors who inspected their facilities and results. Because these were private initiatives at the outset they were free to raise funds, experiment with methodology and be exposed to competition. Competition at the time was mostly from national organizations like the Salvation Army. What was unique about the settlement house movement and made it effective was that it was local, flexible and responsive to the needs of their neighborhood clients. What worked in one neighborhood might not work in another.

There also was labor and education movements that were growing as well. Initially the labor movements were setup as European Guilds which focused on training and skill development, later the movement turned more toward collective bargaining for higher wages. The labor movement gained traction in the early 20th century, which was aided by the derogatory termed ‘Muckrakers’ of the time like Upton Sinclair and his book, ‘The Jungle’ which described the working conditions in the slaughter houses of the Midwest.

While public education has always been a part of American history on some level; until Horace Mann, Secretary of Education in MA in the early 19th century introduced the ‘Prussian Model’ of professional teaching, most education if not home schooled were a loose collection of neighborhood schools with parents volunteering to teach the children. During the progressive era John Dewey, who taught at University of Chicago and Columbia, where he experimented with radical changes in education theory, purported that in order for society to change it must first be introduced into the classrooms. He was the first to suggest that curriculum, teacher certification and methodology should be centralized and more directly managed through the federal government. While public education existed before as a function of state and local administration with little federal guidance, Dewey radically changed it so that the states were mere agents of federal management and planning.

Robert La Follette and Wisconsin’s Progressive legacy is similar to the early beginnings of the movement. While La Follette championed a number of progressive reforms, including the first worker’s comp system, railroad rate reform, the minimum wage, the open primary system, women’s suffrage, and progressive taxation. He created an atmosphere of close cooperation between government and the citizens. Unfortunately, La Follette like the early progressives of the 19th century never imagined what the mixture of admirable causes (poverty, education, wages), unions and politics would turnout. The unintended consequences come from the insulation of bad theory, protocol and application that no longer has to compete for dollars or victims.

Social reform that is fueled by private initiative has proven to bring about wanted change, however once it has been ‘weaponized’ through union and political power it becomes something else. That ‘something else’ is protesting on the streets of Madison this week.

“Capitalism without bankruptcy is like Christianity without hell.” (Frank Borman)

“It is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay.”
(Ralph Waldo Emerson)

Ironically in searching for a couple of quotes to lead this article off on Bankruptcy, I found more quotes on the subject by politicians who warned if we as a nation didn’t `invest’ more money through government for things like health care, education and wages that it would lead to bankruptcies of all types. ‘ In this most powerful nation in the world, lack of access to health care should not force local and state governments, companies and workers into bankruptcy, while causing unnecessary illness and hospitalization.” (John Conyers) 

In a New York Times article this morning (January 21, 2011) Mary Williams Walsh talks about the quiet meetings happening in the House and Senate regarding the growing possibility of State bankruptcies. Currently there are constitutional issues that prevent states from seeking bankruptcy relief unlike local municipalities, but lawmakers having started to entertain a few inquiries by states such as California and Illinois and are rushing through the corridors of DC preparing a `Best Practices’ plan of approach.

Many are in denial that some States are in the kind of financial peril that warrants bankruptcy discussions (come on! We read it in the Times!) but another ironic quote is Bob Lutz the auto executive commenting on GM’s financial condition, “Imminent GM bankruptcy was always fiction, created by Wall Street and the media.” Here at ACD we brought up the possibility over a year ago and investment managers like Meredith Whitney as recently as December suggested that with 49 states that have mandatory balanced budgets in their charters will be forced to make dramatic spending cuts, pay increased debt finance costs or default on loans that are coming due later this year. Whitney and others are forecasting that unemployment will rise later this year due in part to spending cuts forced upon the States.

The two big questions that will affect the outcome are: How much will the Federal Government become involved (which can distort process) and what liabilities will the States renegotiate on? The NYTimes article mentions a type of Federal Board that could set standards and regulate the process, like with the Savings & Loan crisis of the late 1980s. Fortunately or unfortunately, when decisions come out of Washington they are politicized and decisions regarding viability and allocating resources which free markets would go one way, Washington could take a different root. This brings up the liabilities, some  that might be on the table to negotiate or eliminate through a bankruptcy process are: Pensions (retirees), Bondholders and Union Contracts. Most financial analysts rate the priorities as Bondholders or Union Contracts first and retirees Pensions as last. In recent years Federal and State wages have far exceeded private wages and while most Bondholders tend to be retirees, there’s still an understanding of risk (albeit, low) in Bond ownership.

The good news is the discussions about where to cut state spending and how to work out their liabilities is starting to be done head on rather than temporarily refinanced and kicked down the road for another day, let’s hope it leads to market driven answers with a minimum amount of government intervention keeping with constitutional principles.

Path Is Sought For States To Escape Debt Burden