Urgent Letter To The President


The President
White House
Washington, D.C. 20500

Dear President Obama:

I observed with some concern a photo of you and your glum economic team in the White House Rose Garden during your September 3 address on the jobs report.

I am aware that you are gravely concerned about the economy and the employment situation. Understandably so since your policies of fiscal and monetary stimulus have failed to create economic growth or employment. Yet despite such failures you advocate more of the same remedies in the face of their failure.

On Labor Day you announced new spending of $50 billion on infrastructure construction to create “jobs”. This is in addition to the American Recovery and Reinvestment Act commitment of $499 billion for similar projects. According to your web site, Recovery.gov, only $296 billion of that amount has been spent so why do we need more?

Yet the economy is stagnant, if not declining, unemployment is high and going higher, and credit is still largely unavailable to most American businesses even if they were willing to borrow. Home buyer credits have failed to stop the decline in home prices and Cash for Clunkers has had no lasting effect on the auto or appliance industries.

I suggest that since existing policies have failed to revive the economy, your Administration should try something different. I offer you several innovative policies that would actually speed a recovery and lead to higher employment.

The problems that we need to quickly solve are:

  • High unemployment.
  • Declining output.
  • Credit freeze.
  • Surplus of housing and commercial real estate.
  • High private debt load.
  • High federal debt.

Until the economy starts growing again, these problems will persist.

Unless we understand the causes of our problems, solutions are not easy. Because you place great emphasis on “what works” rather than economic theory, I will get to the specific issues straightaway.

Here are some guiding principles for “what works”:

  1. Economies can repair themselves without a lot of government help. History has proven this time and again.
  2. Government interference in the repair process can hinder recovery or even make things worse.
  3. Government spending is very inefficient.
  4. Individuals can make better choices about what to do with their money than the government.
  5. Economic growth only comes from private enterprise. The corollary of this is that government can only spend money, not make money.
  6. Since government produces nothing, then real growth and real jobs can only come from private enterprise.
  7. If government spending is inefficient and if economic growth comes only from the private sector, then taking vast amounts of money out of private hands and putting it into government hands will hinder growth.
  8. Government spending to revive an economy has failed wherever and whenever it has been tried.
  9. More legislation increases uncertainty for businesses, making them reluctant to expand (called “regime uncertainty” in economic terms).

With these time-tested guiding principles in mind, here are some specific policies that you should immediately implement to allow the economy to quickly recover. They will “work.”

Fix the Banks

Cure the credit freeze by eliminating policies that cover up the fact that many of our banks are financially unsound. These policies generally relate to how banks value the assets that secure real estate loans, primarily commercial real estate (CRE) loans. These policies allow banks to overvalue their loan assets. These policies include “mark-to-make-believe” (rather than “mark to market”) and “extend and pretend” each of which allow banks to maintain a fiction. If the actual values of these loans were realized, banks would be required to foreclose on these bad assets. By getting these loans off their books, they would be able to recapitalize and become  financial sound.

Why is this important? It is the only way to restore credit to small- and medium-sized businesses and resolve the oversupply of CRE. Big businesses have plenty of credit from the big money center banks. It’s the regional and local banks which finance the rest of us that are in trouble.

We have just gone through the world’s biggest financial bubble. During this bubble, projects that made no sense but for the cheap Fed money and the false appearance of paper prosperity, were hugely over-produced. Now that the bubble has burst, we are in the mopping up stage of recovery. Banks are reluctant to extend credit because they are unsure of their financial future. The longer banks hold on to these malinvestments, their balance sheets will remain clogged up, and credit will remain restricted. Yes, more banks will go out of business; the process is never pretty but it is necessary. It is important to keep in mind that until this done, millions of unemployed Americans will stay jobless longer.

Bring Back the RTC

If you allow banks to fail as did President Bush I (mostly S&Ls actually), then there will be many foreclosed CRE projects that will need to be liquidated by the FDIC. Alan Greenspan, then Fed chairman, for all his faults did the right thing by urging the creation of the Resolution Trust Corporation, a separate entity whose function was to liquidate S&Ls and sell off the foreclosed assets from failed institutions. It actually worked pretty well and a huge slug of bad real estate, mostly apartments, were sold off to investors. The investors got great deals, but, more importantly, the economy recovered sooner.

The RTC dealt with 747 S&Ls with total assets of $394 billion (according to the Wikipedia article). According to the latest FDIC report there are 829 “problem” banks with $403 billion in assets as of Q2 2010. It is conceivable that this idea would work again.

Stop Passing Laws

Surveys reveal that the number one problem for business is uncertainty created by the government. They have been hit with an onslaught of complex legislation the consequences of which they don’t understand. This is called “regime uncertainty” in economic terms. The truth is, according to the surveys, that even if credit was available, businesses aren’t borrowing because they don’t know what the government will do to them next. Consider that three major pieces of legislation have been passed during your administration: the American Recovery and Reinvestment Act, the health care bill, and the Dodd-Frank financial overhaul bill. Further, they are uncertain if taxes on them will be raised.

No new laws are required to allow the economy to recover. I urge you to speak to business and tell them that we Americans trust their ability to drive our economy, and that your Administration will enact no new laws that will create greater burdens on their ability to expand, borrow, hire, and reap profits.

Stop Useless Spending

While your Administration has gamely tried to convince us that you have created jobs, we know that is fiction. The CBO report and claims by prominent economists have no credible evidence that any real jobs were created. If it were the case that government could create jobs then there would be no need for the private sector. Of course you know well that history has proven that policy to be a disaster.

Only private enterprise can create a real job. Having the government pay people to work is not a “job” in the same sense as a job in the private sector. When a business hires an employee, it is because somewhere down the line consumers want the end product of his or her productivity. The job created by the business is generated by economic activity until consumers decide otherwise.

If the government pays someone to do something, it isn’t generated by economic activity. When the money stops, the job stops. That has been the case of all of fiscal stimulus spending. While someone is earning money from the government, the money to pay him or her comes from taxes, which ultimately can only be generated from private enterprise.

If the government takes money out of the economy to pay people to do things it wants done rather than let the economic forces of private enterprise work, then businesses who create real jobs will have less money with which to expand their businesses. You should consider what the person from whom the money was taxed was going to do with the money. It would aid recovery to let private enterprise keep their money.

Encourage Saving Rather Than Spending

With historically high debt loads, job uncertainty, a lack of retirement funds, and declining home values, is it not reasonable for people to increase savings? Urging people to spend at this time runs counter to people’s innate sense to take care of themselves. While people are trying to repair their financial condition after the housing and credit bubble, urging more spending is reckless advice. People are rightly using their common sense.

There are two substantial benefits to saving. It allows families to reduce their debt burdens. Once they pay down their debts, they will be more willing to spend without the fear that they will end up homeless. Saving also creates the new capital that will be required for businesses when they decide to expand. It is not as if the Fed can just print dollars to create wealth and capital; wealth can only come from savings.

Policies that encourage spending such as Cash for Clunkers or home buyer credits or various tax credits for government-favored projects only encourage spending and thus reduce savings. Furthermore, they appear to have no lasting economic impact.

Don’t Raise Taxes

In light of the detriment to the economy of giving the government more of our earnings right now, an increase in taxes would be harmful to a recovery. While we face a serious deficit in the federal budget, the only way to pay down national debt is to have a vigorous growing economy and a reduction of government spending. With the right policies put in place, lower taxes would help create economic growth.

Raise Interest Rates

Fed policies to expand the money supply to create inflation will eventually succeed. Thus they are planting the seeds for perpetual stagnation and inflation. To prevent this new disaster, the Fed should immediately raise the Fed Funds rate and stop new attempts at quantitative easing. This will have an immediate positive impact. First, it will encourage saving as people seek higher, safer returns on their capital. Second, it will unmask malinvested projects, clear away the burden of their related debt load, and allow capital to be redirected to profitable ventures. Third, it will prevent the rise of inflation which robs savers of their wealth. Fourth, it will prevent the creation of a new destructive stagflationary cycle.  Fifth, as in the Volcker era, greater savings and low inflation will eventually lead to new economic growth and higher employment.

I strongly urge you to adopt these innovative solutions to solve our nation’s desperate economic problems.


Dr. Jeffrey Harding


24 comments to Urgent Letter To The President

  • Buck

    Dear President Obama:

    I observed with some concern an outline of specific economic policies recently recommended to you by one Jeffrey Harding.

    While I concur with his assessment of the problems that plague us along with the general tenets of most of his recommendations, I am compelled to lodge sharp protest and warning against the implementation of his final measure: raising interest rates.

    Firstly, the notion in principle runs in complete contradiction to his own stated “guiding principles for ‘what works’”. Secondly, disastrous, immediate negative effects are left unstated, i.e. sharply increased debt servicing costs to private and public sectors choking on unprecedented levels of debt, instantly pushing the country into sharper contraction. Lastly, the measure purports to solve so-called phantom problems that do not even exist, primarily Fed induced inflation. Unprecedented monetary stimulus has failed to create inflation or new credit growth. Despite such failures Mr. Harding maintains a strange faith in the wizardry of the Fed, simply alleges that more of the same remedies will “eventually succeed.” Mr. President, this is akin to asking you to preemptively institute the highest windfall gains tax in history in anticipation of your economic recovery that is bound to be around the corner, despite all evidence to the contrary.

    I strongly urge you not to even remotely consider the ‘innovative’ interest-rate solution as proposed. It makes no sense.

    Pursue the other specified policies full throttle.



    • Bearster

      Buck, do you think that if we had a free market in money and credit (they aren’t the same thing, btw) that interest rates would be set to essentially zero?

      One of the fascinating ideas published by Professor Antal Fekete is how, in a gold-based free market, interest rates would be set. It’s fairly simple. The floor would be set by the marginal saver. At some point, the marginal saver says “fughettabouditt”, withdraws his gold coins from the bank, and puts them in a vault or under the mattress. In a gold system people have an alternative to saving: hoarding. The hoarder reduces the amount of money in the banking system, and to keep their ratios constant, banks are forced to curtail lending and raise rates. Higher rates, of course, attract savers once again.

      The ceiling on interest rates is set by the marginal entrepreneur. When his rate of profit falls below the interest rate (or the interest rate rises above his rate of profit), he liquidates his business and invests the capital in the bonds of another entrepreneur–earning a higher rate than he could in his own business.

      The actions of these two groups create a tight range for interest rates. This is important, in fact the most important property of a gold standard is not constant prices (prices would be falling with each improvement in efficiency) but stable interest rates.

      This is important because rising rates hurt lenders. Imagine if you buy a bond when the interest rate is 5%. And then shortly rates go up to 10%. You take a very large loss.

      Analogously, if rates fall, it is borrowers who get hurt. This can seem counterintuitive, so let me explain. If a business sells a long-term bond at 6% and then rates fall to 4%, what happens to the liquidation value of the bond? It goes up, alot. It’s all well and good to say that the business can keep paying the bond off until maturity, but that is not always possible or desirable (for example, it may need to refinance, participate in a merger or acquisition, etc.) Another way to look at the problem is that if a business borrows, say, $1M to buy equipment to make pens at 6%, it may have a monthly payment of $6000 (I am making up numbers that are probably not correct but bear with me). Then later the government forces rates down to 3%. A competitor borrows the same $1M to buy the same equipment to make the same pens. But his monthly payments are $3000. Clearly this competitor can underprice the original company. If so, the competitor makes a satisfactory rate of profit but the original company has to choose from one of three bad alternatives:
      (1) match the competitor’s price and run at a loss every month
      (2) keep its prices high, and sell fewer and fewer pens
      (3) liquidate the business

      Businesses need low and stable interest rates.

      While the Fed was created with the promise of stabilizing the economy, if you look at any long-term graph (interest, unemployment, GDP, etc.) you will see tiny ripples before 1913. They grew much larger since then, and particularly after 1971 (when the last vestiges of the gold standard were eliminated). Today it looks like they are oscillating ever more wildly in some mad function that is diverging to either positive or negative infinity. Did you see the graph last year of the marginal productivity of debt (how much new GDP was added for every new dollar of debt)? This is a perfect example of increasing oscillation… I don’t recall now exactly when it went negative, but for a while it showed a clear relationship new debt subtracts from GDP. I haven’t seen it in a while, but I would guess that during the stimulus peak, it went positive, but is sinking negative again.

      So forget about the savers who are being eaten alive by zero interest rates. Who cares about grandma?? Forget about savings as such, keynes “proved” we don’t need no steenkin’ savings. Don’t worry at all that with zero interest people are forced to look for higher risks to get a reasonable rate of return, perhaps they even went so far as Greece or Ireland, eh? But don’t even think about that either. Just think what will happen to borrowers (i.e. most businesses) if they cut the rate of interest in half again! (yes, it’s not a linear process with a finite terminus at zero, it’s an iterative process with an asymptote at zero).

      I hope this post wasn’t too long, but there are some important points I wanted to make!

      • Buck


        Thank you for your exposition on interest rate movements in ‘gold-based free markets’.

        I don’t claim to know what interest rates might be today under a hypothetical “free market in money and credit”, but here is what I do know:

        Periods of severe monetary expansion with resultant crashes will likely proceede in spite of any rules intended to prevent them. This is the case historically especially in “free markets in money and credit”. During periods of economic optimism and growth, free markets have always found a way to supply the ‘demand’ for an expanded money supply, even in spite of existing rules (government, market, or otherwise) intended to prevent such dynamics in the name of maintaining ‘sound’ money.

        There have been many examples of this process throughout history which I will not attempt to detail here. Suffice it to say that under a metal standard, when the metals are in short supply, people spontaneously and quite ‘freely’ adopt money ‘substitutes’ (other commodities, etc.) and credit instruments that stretch money supply beyond any kind of arbitrarily imposed limit. This is a fact.

        Lets be clear: I am no cheerleader for the Fed. Quite the contrary. I am just here to inject some balance into lopsided debate. I do not blindly believe that so-called ‘free market money’ is a panacea to magically cure all ills.



        • Bearster

          Frankly I see four problems with this post:
          1) Stating something does not make it so
          2) Especially when you don’t define your terms, switch contexts, and obfuscate that some parts I was literally unable to parse
          3) I don’t think we’re using the same meaning for any of the critical words to this conversation, such as supply, demand, free market, money, credit, “free”, etc.
          4) you have badly substituted your straw man for my point. Please re-read my posts and tell me where I said that a free market in money and credit was a “panacea” that had “magical” properties that “cured all ills”. I explained which ills it does not have–which our current system is dying from

          P.S. The “scare quotes” around “free market money” was really uncalled for, as if the whole notion is so absurd that it has to be set off that way for the reader!

          • Buck


            With all due respect, I intentionally steered clear of attacking any point of yours, much less a straw substitute. I believe an honest re-read of my reply will reveal I specifically addressed you in the first two sentences; everything thereafter (post’:') was me on a soapbox, just speaking ‘my mind’. In this vein, I even went out of my way to make clear my ‘personal’ position on the Fed. For what its worth, I read your initial reply to my comment in much the same manner.

            If I gave some other impression, my apologies.



            PS – You will find I make liberal use of ‘quotes’. Don’t read too much into it. ;)

  • Louis Ashamallah

    Don’t raise interest rates, end the Fed instead.

    Let interest rates rise on their own to a market-clearing level. I’m a lender, not a borrower, and only I should decide at what point I’m willing to part company with my hard-earned capital, and for how long.

    • Buck


      Please explain by whom and what manner you are being forced to lend capital at terms dissagreeable to you.

      I will then alert the proper authorities.


      • Bearster

        Buck: unless he withdraws his capital from the system (i.e. buys gold) he deposits it in a bank, buys a treasury, or buys some other kind of security…at rates dictated by the Fed.

        Savers are unwillingly participants in the ponzi system.

        • Buck

          Like I said, point us to the culprits that are forcing him to lend.

          • Anonymous

            I’m not forced to lend, I want to lend. I’m forced to accept substandard rates if I remain within the banking system because the Fed controls the rates, rather than permitting a free-market to establish rates. In any other industry, this would be considered “price-fixing” and would be illegal. I can and do choose other lending options (primarily corporate bonds), but I wish I didn’t have to.

  • Dear President Obama,

    Congratulations on your many small victories against the premier symbol of capitalism today, The United States of America. We admit that we are surprised about how gullible Americans can be. After all who would have believed that they could not see that you were destroying the economy intentionally. No one in the politburo imagined in our wildest dreams that the American public would watch you do EXACTLY the opposite of what should have been done to save their freedoms and they would put it down to your incompetence. We would have never guessed that their racism went so deep that they couldn’t imagine a black man deliberately destroying the worlds example of individual freedom. They didn’t think you were smart enough…heh.

    I hope that you thank all those who went before you to prepare the way. Even the useful idiots served a purpose in our decades long plan to bring the US down.

    Yours Truly,


  • jag

    Obama could gain an enormous amount of credibility if he announced a freeze, if not a rollback, of federal salaries.

    Recent studies have demonstrated that (to no one’s surprise) federal salaries and benefits have risen to a level that is grossly out of alignment with the private sector.

    Imagine the impact of a policy which said federal salaries and benefits would be REDUCED one percent a year until the voluntary turnover rate of public employment equaled the voluntary turnover rate of the public sector (those who leave for better or different employment).

    The argument is made that federal employees are higher paid because they have greater than average talent and credentials. That’s all well and good to suppose but in light of the fact that federal employee’s rarely leave federal employment for the private sector it seems obvious that their compensation is more than satisfying than anything they could currently find in the private sector. As their compensation falls, clearly the relatively underpaid “talent” would begin to leave for greener pastures. As the decrease in compensation is small, the disruptive effect would likely be minimized and, as the trend of voluntary separation grows more visible, ending the program at a more appropriate compensation level would not be particularly difficult.

    A program like this would go a long way towards actually demonstrating that the predatory public sector was willing to accept some sacrifice that the private sector, currently, virtually totally absorbs. It would also likely encourage skeptics who fear deficits are totally uncontrollable and strengthen confidence in the management and sobriety of fiscal policy.

  • Vitaeus

    of course these suggestions don’t make money for anyone involved in government, therefore they are obviously not the best for the Country

  • Buck


    I would guess the fiscal impact to be slighly negative, albeit minimized as you note. The tradeoff in terms of credibility and perception would likely be worth it though.

    Two thumbs up.


  • Matt H

    I think what our Econophile is suggesting is more a shift in the use of our government’s current set of tools. As if this were something that Mr. Obama might be more comfortable doing than just removing the Fed/cutting off his arm.

    Not that I am in disagreement with a removal of the Fed, but if parleying its power into uselessness works, then I’m all for it.

  • “By getting these loans off their books, they would be able to recapitalize and become financial sound.”

    Where exactly is the money going to come from to “recapitalize” said banks, and moreover WHY would you recapitalize banks which lost $Trillions through fraudulent practices?


  • Matt H

    That’s what banks do. Banks, and lending in general is a healthier institution without government programs. Also, it was government housing programs that supplied the Banks with any “fraudulent” motion.

  • Jim

    It’s a great letter Jeff. I sincerely hope that there are some that will be elected in November who will try to implement these solutions. I have no faith that the current cabal would be interested. Their agenda is not the same as ours.
    One would think that we already have a state run media to hear Gibbs, Biden and Obama talk of their success in handling the crisis. Very North Korea-ish.

    By the way, I was truly enjoying Bearsters’ explanation of interest rates until I got to the “it’s an interative process with an asymptote at zero.” It all unraveled for me.

    • Bearster

      Sorry if I was unnecessarily wordy. By “iterative” I mean there is a fairly simple set of rules. The complexity comes from applying the rules. And then applying the rules to the result. And then doing it again. This is how fractals such as the Mandelbrot set are produced.

      By “asymptote at zero” I meant that the currency is always losing a fraction of its current value, this approaches zero but doesn’t reach it (until the currency collapses–I should have said this more clearly). Think of having, say, 100. If you cut this in half, you have 50. Cut it by 2/3 and you have roughly 17. Cut this by 10% and you get roughly 15, etc. This will be a crazy, volatile, jerky process that will make seemingly-unreasonably large moves in response to unpredictable events, different asset classes will be strongly tied together for seemingly no reason and then they will move in different directions all of a sudden (like AUDJPY and S&P 500 Index did recently, for example).

  • Can I sign my name at the bottom, too?

  • Joe P

    Dear Dr. Jeffrey Harding,

    Economy does not run on money, it runs on food, fuel, energy. Wealth of a nation is proportional to how much energy it produces and consumes. Problem is USA does not produce enough energy to sustain the current prosperity level.

    Solution is not possible with changes to money supply, taxation, savings or any kind of financial jugglery.

    Solution is only possible with focused government policy shift towards producing more energy from sources like Thorium reactors, Hydrogen fuel cars, harvesting of solar energy.

    The petroleum oligarchs are blocking the solution. The key problem is how to remove the oligarchs. Once they are removed prosperity will return…. think.

    • Matt H

      So all of our global economic pandemonium boils down to oil consumption? Economic policy does not matter? That’s a pretty conspiratorial idea. Market economics would suggest otherwise.

      • Joe P

        Keynesian economic theory died with the Iraq invasion. Keynesian fiat currency system is not “Market Economics”, if it was it wouldn’t have failed.

        Economic policy matters, the required policy change is shift towards non petroleum energy sources.

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