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Anna Schwartz
Bernanke Is Fighting the Last War
‘Everything works much better when wrong decisions are punished and good decisions make you rich.’

Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, “Nothing,” Anna Schwartz says, “seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market.”

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”

So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is “the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.”

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in “A Monetary History,” the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they’d lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: “If the borrowers hadn’t withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress,” deepening the crisis and causing still more failures.

But “that’s not what’s going on in the market now,” Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”

“Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound. So if you could get rid of them, that would be an improvement.” The only way to “get rid of them” is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson’s original proposal to buy these assets from the banks was “a step in the right direction.”

Rather, “firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years.”

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Boaz ItsHaky says he’s up to the challenge of unseating incumbent Democratic Congresswoman Rosa DeLauro on November 4. DeLauro has represented Connecticut’s third district for nearly 18 years, and won her last re-election with 76 percent of the vote. In the first of two stories on the third district congressional candidates, WSHU’s Craig LeMoult spoke with ItsHaky, who says his professional training gives him a different approach to politics. He’s an acupuncturist.

Under the Radar: Acupuncturist Tries to Stick It to DeLauro
October 14, 2008
By Shira Toeplitz
Roll Call Staff

Acupuncturist Boaz “Bo” ItsHaky takes a holistic approach to Congressional politics.

The 49-year-old Republican believes that in order to cure the ills of individuals, their surrounding environment must also be treated.

“Every individuals’ well-being is strongly affected by the well-being of our nation,” ItsHaky said.

Therefore, the Western medicine [should read Oriental Medicine] specialist has ordered a comprehensive prescription to alleviate our nation’s ills: A bid for Connecticut’s 3rd district, a seat held by Rep. Rosa DeLauro (D) for nine terms.

“The approach of contributing on a larger scale fits right into the philosophy of the model of medicine that I practice,” ItsHaky said.

ItsHaky’s political journey began on a kibbutz in Israel. Until age 21, he lived and worked in the traditional community where all the inhabitants share everything.

But it is because of this experience, he said, that he learned the dangers of socialism. That kind of community, ItsHaky said, creates a mentality among residents that everything will be provided for them and therefore innovation is no longer necessary.

“I have seen socialism firsthand living in a commune, which is a kibbutz, and I have seen that it doesn’t work,” he said.

But on the other side of economic policy, ItsHaky also expressed wariness about the dangers of “chronic capitalism” [should read "Crony Capitalism"] — and sees the recent economic crisis as proof of this condition.

“I consider myself to believe in ‘peoples’ capitalism,’ which is completely different and what I believe our Founding Fathers [thought] should be the appropriate or the right form of capitalism,” he said.

After leaving the kibbutz, ItsHaky served his required three years in the Israeli army. It was in his post-military travels to the Far East, however, that ItsHaky first began to learn about Asian medicine.

In 1989, he moved to Bethany, Conn., and in 1992, he said he officially became a U.S. citizen. Soon after, he began studying Asian medicine in America.

In fact, ItsHaky was completing graduate work at the Tri-State College of Acupuncture in New York City on Sept. 11. 2001. He said he was studying about a dozen blocks north of Ground Zero when the planes hit the Twin Towers.

“In general, I thought up until that moment, I thought my contribution to the well-being of our society and our country would be on the small scale, such as practicing acupuncture, helping individuals one on one,” ItsHaky said.

It was on that day, however, that ItsHaky said he reconsidered his life’s mission. Now, in addition to seeing 20 to 25 patients per week at his offices in Connecticut, ItsHaky is committed to running for office.

ItsHaky first ran as an Independent for first selectman in Bethany in 2005, a bid that he said he lost by a large margin. The next year, ItsHaky served as a member of the Bethany Republican Town Committee and unsuccessfully ran for state Senate. Then, in 2007, ItsHaky was elected by party officials to represent that same district at the state GOP Central Committee.

ItsHaky said he never planned to challenge DeLauro, who is not considered to be vulnerable by the national political parties. ItsHaky said he planned to work his way up through the state House and Senate first.

But state Republicans, he said, were in a bind looking at an empty slot on the 3rd district ballot. ItsHaky approached them and offered up his candidacy. But since that incident, ItsHaky said the state party has not come through on some of its promises to help him.

“Promises made were not delivered,” he said. “But on second thought, I’m not surprised. I’m considered to be an outsider.”

So far, ItsHaky has had to run a financially skeletal campaign. With a campaign budget that he describes as “literally nothing,” he has no staff or headquarters.

Connecticut Republican Party Executive Director Christopher Healy said that despite these minimal resources, ItsHaky has done a “stellar job” holding DeLauro accountable.

“Bo was generous enough to jump in at the 11th hour to be our candidate, and one of my regrets is that I wish we had more resources to give to him,” Healy said. “Bo is certainly an energetic, smart and thoughtful person.”

It’s also easy for ItsHaky’s campaign to be overshadowed by races in the state’s other five Congressional districts this year. Rep. Christopher Shays, the last GOP House Member in New England, is in another targeted race this cycle, while state Sen. David Cappiello (R) is attempting to put the 5th district back into Republican hands from freshman Rep. Christopher Murphy (D).

Healy said the party has given ItsHaky technical assistance, spread the word about his candidacy and coordinated with his campaign.

“It’s always an uphill battle in that district, but I think he’s doing what needs to be done to challenge Rosa DeLauro’s lack of representation, based on the fact that she’s a member of the leadership and spends a good deal of her time raising money for other candidates around the country,” Healy said. “I’m an optimist about everything, including this.”

After all, DeLauro does have plans to debate ItsHaky.

“As in past elections, Congresswoman DeLauro and her opponent will debate,” DeLauro campaign director Chuck Swirsky said. “She takes every election seriously.”

Until then, ItsHaky will be waiting on pins and needles.

2008 © Roll Call Inc. All rights reserved.

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Congress was front and center in the national news last week and the American people were far from impressed. If they could vote to keep or replace the entire Congress, 59% of voters would like to throw them all out and start over again. The latest Rasmussen Reports national telephone survey found that just 17% would vote to keep the current legislators in office.

Today, just 23% have even a little confidence in the ability of Congress to deal with the nation’s economic problems and only 24% believe most Members of Congress understand legislation before they vote on it.

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