Howard Rich: Kicking the Can Right Off the Cliff

Howard Rich wrote an editorial at the Investor's Business Daily which rather long-windedly bemoans the spendthrift ways of politicians.  Most of us can appreciate his reasons for being upset, but we are fully capable of doing our own moaning and trashing about in pain.  But buried deep into his piece was this nice summary of some very foreboding financial figures:

According to a January 2009 paper from the National Center for Policy Analysis, the average European Union nation needs to place more than four times its current gross domestic product in the bank (earning interest) just to fund current obligations. In fact, the NCPA report found that by 2020, the average EU nation will have to raise its tax rate from 40% to 55% of the national income just to cover existing benefits.

In Japan — which has the world's highest percentage of debt to GDP — fiscal policy is "out of control," according to Harvard economist Kenneth Rogoff, who predicted the 2008 U.S. bank failures. According to the latest estimates from the International Monetary Fund, total Japanese borrowings will soar to 204.3% of the nation's economic output in 2011.

Meanwhile in America, total public debt will exceed GDP for the first time since the World War II era, part of a massive borrowing spree that has seen the nation more than double its debt over the last six years. "The U.S. is in a state of paralysis in its fiscal policy," Rogoff said last month. "When they start tightening monetary policy even a little bit, it's going to send shock waves through the system."

In addition to this brewing global and national crisis, U.S. states and municipalities are facing similar ticking time bombs. A March 2010 Northwestern University report discovered that the total unfunded liability of state government pension funds was $3.2 trillion — or more than $2.2 trillion higher than government officials estimated.

Note that last paragraph:  Government officials are claiming that state government pension fund liabilities are only 31% of what they really are.  To be that wrong, they have to be lying to the taxpayers.  That cannot be a mistake.  Of course, by now, one has to be really, really obtuse not to have come to understand that most of our politicians and bureaucrats have made it a standard practice to lie to us all of the time.  Clinton seemed to raise the commitment  to the lie to a new standard, but Obama has readily surpassed him in his commitment to lying.  Given the pitiful state of the planned economies and socialist states of Europe that Obama so much wants to transform the United States of America into, well .... you really must lie.  There is no truthful way to make those European Big Brother states palatable.

Some Objectivists tend to think that discussing mere matters of the amount of debt is not very important because it is not a matter rich in ethical content.  I disagree.  The Preamble of the Constitution noted our responsibility to our Posterity which was to be recognized by the very limited government of the Constitution. George Washington also reminded Americans that they had no right to saddle their posterity with debt.  He was very right and very wise.  Passing the debts of our governments today on to our children and our grandchildren is a heinous thing to do.  We have essentially been doing just this since the Social Security Act was passed in 1935.   The Medicare program has raised this practice to new heights.  Then came Medicaid, ObamaCare, and bailouts in TARP and now forever into the future with the Financial Industry Bailout and Consumer Spying Act which is said to likely be passed by Congress later today, and incredible subsidies to alternative energy firms who environmentalists will never allow to build any power plants.  There is no fun in spending money you actually have to earn, so the national governments prefer usually to just run the printing presses as long as need be.  Of course this drives down the value of everything the private sector does as productive work, but hardly anyone ever noticed as long as they were bribed with some goodies.  But, the number of necessary goodies kept escalating and now there is not more room for further escalating them.  The ever more meager productive private sector is now just too small in Europe, Japan, and the U.S. to support the Leviathan governments with all their redistributed goodies.

Speaking of which, Glenn Beck's 26 May 2010 show dwelt on the same Big Brother watching over the peasants bank accounts, credit card transactions, and ATM transactions that I discussed in the early morning hours of the 26th.

Putting the Fox in the Chicken Coop

While the recession was actually initially the result of the sudden rise in oil and gasoline prices in 2007 and started first in many other countries throughout the world, the popular mythology is that it started in the U.S. and was due to sub-prime mortgage loan defaults and errors of our financial institutions. The later did make the recession worse and those failures came home to roost suddenly due to the effects of the initial recession caused by the oil and gasoline price spike. Congress, in its usual tradition, responded by claiming that the fault was that entirely of Wall Street and our banks and called for more regulation of those private institutions.

The Congress that wants to regulate the banks and the financial industry more, itself hugely contributed to the problems we recently experienced with more stringent requirements being added to the Community Reinvestment Act and with their encouragement given to Fanny Mae and Freddy Mac to buy up risky home mortgages so they would pass them on to investors.

I am presently reading Glenn Beck's Common Sense. He reminds us that Congress has a history of managing its own bank. The House of Representatives had a bank of their own. The customers were the Representatives themselves. They bounced 8,331 checks and had to close their bank. It had no penalties for overdrafts, so Congressmen apparently felt little responsibility for not writing checks in excess of their balances. Guess they got used to doing that with the balances of taxpayer money in the U.S. Treasury, which were never large enough to cover their spending habits. They always felt free to overdraw that balance and apparently felt equally free in overdrawing their personal balances.

Of course, no Congressman was ever held accountable for these overdrafts of the House Bank, just as they are never held accountable for overspending tax revenues. But, Congressmen are always ready to have someone else take a fall for them. In the case of the House Bank, they had the House Sergeant-at-Arms sentenced to 24 months in jail. Similarly, instead of taking the blame for their role in encouraging sub-prime and risky home mortgages, they blamed the banks and Wall Street financial institutions. They proposed more regulations to be determined by themselves to correct any such future problems. They also responded to the financial portion of the crisis by taking a financial role in 500 American banks, including most of the largest banks in the country.

Do not let it be said that the House of Representatives is ever slowed down in expanding its powers, at the expense of further violations of our Constitution, by any rational assessment of its own competency. No, these people are absolutely lacking in any power of introspection and self-evaluation. Such people are truly dangerous when vested with immense power.

And now they also want to exercise much more control of our health care and our energy production and use. What do you suppose their competency is in those fields?

In the field of health care, we already know a great deal from the history of Medicare and Medicaid. They have allowed huge cost overruns in both programs and run up huge debts with both. They have responded by decreeing too low doctors fees and hospital charges in some areas, which has led to doctors and hospitals desperately padding their bills and transferring many costs to their private patients. This is a big factor in the high rate of increase in health insurance costs, which Congress now uses to try to justify its taking still more control of the health care industries. The fox is already in the chicken coop here, but he wants to bring in his vixen to help him slaughter the chickens at a faster rate.

In the field of energy production and use, Congress also has a long history. Since Jimmy Carter, there have been massive government programs to develop alternative energy sources. Many years of research and development and pilot programs and what do we have to show for it? Damn little. Only about 2.4% of the electricity generated in the U.S. is from renewable energy sources other than the old standby of hydroelectric power. Much of that is used only because of state and federal mandates and due to subsidies. In other words, it is still not price competitive after all these years. Congress has been effective in preventing any rational plan for the storage of nuclear waste, which has greatly hurt the nuclear power industry.

For transportation purposes, Congress has given us huge subsidy programs for ethanol. Ethanol from corn actually provides no new and no net energy. It is just a conversion program to turn corn food into fuel while using up equal amounts of energy produced by other energy sources. This program is very effective in driving up the cost of food as well. Congress has also been very effective in thwarting all efforts to discover and produce more oil and gas in America and offshore.

Once again, Congress has shown no competence in the field of energy use and production. But, this weasel is in the chicken coop and causing havoc. The weasel now wants to hugely expand its powers with carbon cap and trade taxing and mandating. The weasel is not yet satisfied with his chicken slaughtering capability. No, it wants to bring its bitch or jill into the coop to speed up its rate of kill.

Mark Calabria - A Fake Financial Fix

Mark Calabria, the new director of financial regulation studies at the Cato Institute, has written an op-ed in the 18 June 2009 New York Post entitled A Fake Financial Fix about the Obama plan to acquire further power over the financial industry while refusing to address the huge problems already caused by federal control over the banking system and in many respects over other parts of the financial system. This is worth reading.

Of course he asks how the government which was caught unaware of the Citibank and Bank of America problems might be expected to offer any real safety net to the broader financial markets. He failed to note that this same government forced Bank of America to take a $16 billion loss in acquiring Merrill Lynch, which weakened the Bank of America greatly. He notes that the federal plan will essentially designate some private institutions as too big to fail and will commit the government to future bailouts of those institutions. This provides these bigger institutions advantages in giving them lower interest rates for money they borrow and makes it harder for smaller financial firms to compete. This system would rig the financial markets to make the very big companies bigger and to protect them from competition. This is the usual pattern followed whenever government increases the regulation of business. It increases the cost of doing business and slows down decision-making processes. It distracts business management from making real business decisions by funnelling their time into handling government paperwork, petting government bureaucrats, and forcing them to devote more time and money to political influence peddling.

Calabria notes that 40% of the subprime mortgages passed through the hands of Fanny Mae and Freddy Mac, the government-sponsored institutions, which may cost the taxpayers more than $300 billion. This is twice the cost incurred in rescuing AIG. Despite this, these politician favorites are not included in the financial regulation plan by Obama. In other respects there is also no intention in this plan to reduce government efforts to encourage homeownership by subprime borrowers. This is really the way to address the problem, right folks?

As Mark Calabria notes, this is just politics as usual. The government messes up big-time and the problem is blamed on business or Capitalism. The government, in the throes of economic crisis, claims the solution to the problem is more government. It gets many big companies to go along with the grab for power by government by offering them special advantages and protected markets. It then moves quickly to pass new laws, before wiser heads have time to identify how what they are doing is foolish and above all before wiser Americans can inform the general public about how badly they are about to be taken advantage of. Small businesses and consumers are the big losers, even as the politicians and the main stream media will pretend that the increased government regulation is for the purpose of protecting them.

Reynolds - High Oil Prices Caused Worldwide Recession

Alan Reynolds is one of my most favorite economists. He has written another very good and very important article, It Didn't Start Here, which was published in the New York Post on 9 April 2009.

The recent G-20 meeting in London produced a consensus: The United States started and caused the worldwide recession. The United States should be humbled. Obama agreed. The Finance Minister of Germany, Peer Steinbrueck, said the Anglo-Saxon attitude in America and Great Britain had encouraged risky lending and investment practices due to "an exaggerated fixation on returns."

Reynolds says, "Hey, wait a minute folks, let's look at the data." Examine when industrial production first started declining in some countries. It began to decline in Canada in July 2007, in Italy in August 2007, in France in October 2007, and the Euro area as a whole in November 2007. Japan's production reached a peak in October 2007, though it had a one-month uptick in February 2008. The decline in the U.S. was in February 2008.

In January 2008, the OECD leading indicators were down from a year before by 4.1 points in Ireland, 2.8 points in Japan, 2.6 points in Korea, 2.3 points in Sweden, but only 0.8 points in the U.S. Stock prices are another leading indicator. Stock prices peaked in Japan and in the Euro area four months before they peaked in the U.S. and the U.K. in October 2007!

In the 4th quarter of 2008, real GDP was lower around the world than it had been 1 year before, but it had dropped by much less in the U.S. than almost anywhere else. The list is:

Taiwan, -8.4%
Turkey, -6.2%
Sweden, -4.9%
Japan, -4.3%
Singapore, -4.2%
Denmark, -3.7%
South Korea, -3.4%
Italy, -2.9%
Hong Kong, -2.5%
Great Britain, -2.0%
Germany, -1.7%
Mexico, -1.6%
France, -1.1%
U.S., -0.8%
Canada, -0.7%

So, how did the the failures of U.S. and British banks and financial institutions in September and October of 2008 cause the recession which had started in Japan and in Europe in January 2008?

The housing price boom and the low cost of borrowing in the U.S. and in Britain were problems, but they were also problems in a number of other countries. These problems developed later and many countries which went early into recession, such as Japan, Sweden, and Canada had had no housing booms. Reynolds points out that James Hamilton of the University of California at San Diego showed in 1983 that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." Reynolds says the years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each soon followed by a recession. He also notes that in January 2008, he wrote that the US economy was likely to slip into recession due to the high energy costs no matter what the Federal Reserve did with respect to monetary policy.

The logical conclusion from this is that the U.S. was probably doing a whale of a job in diminishing the worldwide recession. Indeed, the dollar value of US imports did not start to fall until August 2008 and our purchases of consumer goods did not fall until September 2008. Strange that so many in the rest of the world are so eager to blame the US for this recession, including the very anti-American Barack Obama! It would be more logical to see the U.S. as the hero in these trying times.

Reynolds points out that Jagadeesh Gokhale, his colleague at the Cato Institute, noted that "the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad."

So, it would appear that part of the reason that existing home prices were shooting up was because new home building was becoming more expensive and few homes were being built, due to the energy crisis. The energy crisis certainly weakened the U.S. auto industry, which was making all of its profits and most of its income from SUVs, trucks, and large cars. When people were paying more than twice what they had been paying to fill their gas tanks, they became less likely to be able to pay more for home mortgages or to make payments on such new cars as they did buy. The banks came under increased pressure and the many high-risk loans that government had pushed them into became a real liability, albeit one exaggerated by the Sarbanes-Oxley mark-to-market asset evaluation requirement. Another gift from government.

So, what would a rational response be to minimizing such a future spike in energy costs, given that such spikes are the chief cause of recessions? For the U.S., it would be to allow oil and gas drilling in the Eastern Gulf of Mexico, as was approved by George Bush, but then immediately killed by Obama. It would be to open ANWR to drilling. A non-starter with our very foolish Obama. A rational response would be to sell off much of the excessive federal holdings of land in the western US and encourage companies to drill for oil and gas using modern good practices. When OPEC, which did cause the present worldwide recession, spikes prices upward, the US production facilities could run production at full output and hold down the price increases a bit in the U.S. This would help to moderate our future recessions.

What very irrational, shall we say, even insane policy are we following? First, the media and the government are blaming American banks and financial institutions for this recession, while claiming that this means they need to be be managed by our ever-perspicuous government. Second, they are using this to broadly blame Capitalism. Note that OPEC is a cabal of nationalized oil companies, which have nothing to do with Capitalism. Furthermore, Obama and his cut-throat gang are using this crisis as a means to cripple the fossil fuel energy industries in the U.S. One of the reasons the U.S. weathers the oil price spike caused recessions better than many other countries is because we have the world's greatest reserve of coal. We still use it to produce half of our electricity. Without it, we will be even more subject to the whims of OPEC and to the subsequent OPEC-caused recessions.

Do you suppose it is possible that the same impulse that causes Obama to bow to the King of Saudi Arabia, who is an important Islamic leader, is also causing him to make the U.S. itself more subservient to the Islamic Middle East for its energy supplies? Do not argue that Obama is going to replace our fossil fuel use with alternative energy sources. First, if it is done, it will be done by the free market far more than by government or any amount of community organizing and rabble rousing. Second, he is keen on destroying the American fossil fuel industries to the point that he is already doing this with no viable alternative energy replacements in sight. This man is a destroyer, not a creator.

Instead of characterizing this crisis as a financial crisis, let us remember to call it the oil crisis. We must also recognize that while OPEC has been primarily responsible for our post-WWII recessions, we can easily be the cause of future recessions by following policies designed to increase the cost of energy!

Obama - American Rights and Interests Submissive

During the Obama presidential campaign, I pointed out that Obama wanted to make American individual rights and the interests of the United States submissive to the dominant role to be played by the United Nations and by international bodies. The Obama presidency has confirmed my understanding with a good number of dastardly deeds. Among these are:

• Patting rogue terrorist-sponsoring nations Iran, Syria, and North Korea on the head while telling them we should be more understanding of their needs, thus encouraging these bully nations to continue acting badly. Only the believed threat of strong forceful retaliation works to stop bullies.
• Stopping the programs to add components to our missile shield in Poland and the Czech Republic because the Russians are not pleased by our idea of defending ourselves from their Iranian client and from them.
• Agreeing with the G-20 nations to close down tax havens, increase the regulations of financial markets and institutions, and give more foreign aid. The tired, socialist nations of Europe and the Obama-planned similar condition of the United States need to keep the wealthy from moving themselves or their money to zones where they might have fairer treatment. The American financial system will be controlled by 20 nations and their perceived needs, not by the free market or even the free market as modified by American governments elected by the American people.
• Obama has agreed to enter into new nuclear disarmament talks with Russia, now that he and Medvedev are Comrades locked in Socialist Solidarity. Russia must reduce its warheads since it cannot afford to modernize or maintain them in any case. Meanwhile, Russia, China, Iran, Syria, North Korea, Cuba, Venezuela, Nicaragua, and Bolivia have formed an alliance aimed at the United States.
  
• He maintains the United States breaks International Law if it does not get permission from the United Nations to defend itself against the use of force by any other nation. This means, that the U.S. cannot defend itself if China, or Russia, or any of several socialist Western European countries does not desire that we should defend ourselves.
• He is more friendly to enemies of freedom and of the United States than he is to our longer term allies and to countries which more nearly share our ideas of personal liberty. See how he has shunned Great Britain, Israel, India, and the government leadership in Iraq and Afghanistan.
  
• Obama says the U.S. caused the global recession and financial crisis. Actually, banks all over the world had too many high-risk loans. This was not at all just a U.S. problem. Iceland, Great Britain, Germany, Japan, and China have all been hard hit due to their financial over-extensions, along with many other countries.
  
• Obama declares the U.S. arrogant. Taken together with the item above, this would mean the U.S. owes a great deal of service to the rest of the world. Obama loves to serve. No, actually, he loves to tell you and me that we must serve others.

The United States was long blessed with a belief in the principle that the Federal government existed to serve only as the protector of the American individual's life, his liberty, and his pursuit of happiness. The individual was sovereign and the government existed only to serve the sovereign American individuals. It was understood that the only scale of government compatible with the rights of the individual was a minimal, limited government. Our Constitution carefully described the limited powers of the Federal government and further required that the limited actions it was allowed must be carried out in a manner consistent with the general welfare. It was made clear that the general welfare could only be served by a minimalist government so that individuals would be free to manage their own lives. A more empowered government would quickly become tyrannical.

Obama hates this idea. No, it does not make him a bit uneasy. With every fiber and cell of his body and mind, he hates the idea that the government exists only to serve the self-interest of self-managing individuals. He is determined to crush this principle and anyone who stands up for it. In domestic matters, he ignores the Constitution and he gets others to go along with ignoring it by offering them bribes of power, income, and publicity. In all matters with an international component, he enlists the aid of as many other socialist and/or Muslim and/or other dictatorial regimes as he can in order to accomplish this purpose. At all times, he is completely focused on forcing every individual American to become the servant of the government, which is to be controlled by committed socialist elitists such as himself. Only people such as himself are capable of wisely choosing your values for you and only they are intelligent enough to inform you on how you will achieve the values they have chosen for you.

If you do not achieve any values that mean anything to you, that is just too damn bad. After all, they do not choose to recognize your self-chosen values. You are selfish, while they exist to serve. This makes you unworthy and it makes them gods.

Insane Mark-to-Market Finally Killed

Congress has finally killed the insane mark-to-market assets evaluations which the Democrats imposed through the Sarbanes - Oxley accounting regulation bill in the aftermath of the Enron collapse. This, in so far as a banking and financial crisis befell us, was more the cause of company failures and potential failures than even the inflated home and real-estate values which began the crisis. Yet correcting this very transparent problem, after much time with their fore paws up their Donkey hind quarters, took a backseat to all kinds of posturing and claims that the market was too little regulated. It also took a backseat to executives flying corporate jets and managers being paid bonuses.

The mark-to-market provision, coupled with threatened law suits against accountants who did not rigorously apply it, meant that an asset had to be valued at its very immediate market value. If the asset was illiquid, it was worthless. So, how much is your home worth? You have one day to sell it. How much do you think you can get for it in one day?

Of course this is nonsense. But there is hardly any nonsense too transparent that Congress will not buy into it, if they can put on a grandstand show by going along with the nonsense. That they were certainly able to do following Enron's demise. But, they could have quietly eliminated this part of the deadly nonsense long ago and prevented the current crisis. But, they were asleep at the wheel as usual and well, that fore paw was pleasantly occupied.

The problem of valuing somewhat illiquid assets held by banks and other financial institutions at much lower than rational values is that these institutions can commonly loan out many times as much money as the value of their assets. If the asset is artificially undervalued, then the amount of loans must drop by about 9 times the amount of the undervaluation. It is also ridiculous to tell a bank that an asset is nearly worthless when it is providing a healthy stream of income in the form of mortgage payments or other loan and interest payments. Yet, despite that healthy income, the banks were crimped in how much they could loan by the mark-to-market provision of the absurd Sarbanes-Oxley accounting act.

The end of mark-to-market and a vote in the Senate which will make it unlikely that Congress will pass a carbon cap-and-trade tax-mandate is the reason the stock market went up last week despite the fears of the federal government choosing business managers as they did for GM and as they threaten to do to banks and financial institutions.

Increasing Obama Negativity in Economist

The Economist continues to suffer disappointment in Obama after putting him on the cover twice late in the Presidential campaign and endorsing him. In the 14 - 20 March issue, it notes

At market close on March 11th, despite a rally this week, the Dow Jones Industrial Average was 16% below its level on the Friday before Mr Obama took office. At this point in Roosevelt's presidency, 54 days in, it was up 35%.

In truth, he had long promised to spend more on health care and alternative energy and to raise taxes on the rich, so little in the budget should have surprised investors.

A bigger dent to confidence comes from Mr Obama's style, not his substance. His many backers on Wall Street had taken his conciliatory manner and selection of centrist economic advisers as evidence that he would govern moderately despite, as a senator, having consistently voted on the left. They have been taken aback by his combative tone.

But the Obamabears' biggest fear is that Mr Obama's remedies are not up to the task of fixing America's deepening recession.

Mr. Geithner's own efficacy has been hamstrung by the fact he remains his department's only Senate-confirmed official: 17 other top Treasury jobs requiring Senate approval remain vacant. In 2007 the Treasury website listed 120-odd officials, from Hank Paulson, the then treasury secretary, down. The current version of the same webpage lists just one: Mr Geithner.

All this has left foreign officials and domestic bankers frustrated at the lack of consultation from the Treasury.

Whatever the cause, the strain on the Treasury is encouraging the view that Mr Obama's agenda is being driven by political advisers and Congressmen, both more attuned to voter's rage than to market confidence.

Clearly The Economist's confidence in Obama continues to erode, along with that of many others who supported him while believing he was someone very different than anyone with any wisdom would have understood him to be. They close with a quote from a former Bill Clinton aide who advised Obama to focus on the financial crisis or risk the loss of confidence Jimmy Carter suffered. Meanwhile, the market is still down 40% since it became fairly clear that Obama was going to win the presidential election in September 2008.

The 90% Axis Powers Tax

The Obama - Pelosi - Reid Axis Powers combined and voted a 90% retroactive tax on the bonuses of employees earning more than $250,000 who work for firms receiving more than $5 billion in Federal bailout money. Some of these companies were basically forced by the government to take bailout money, even many which were in no danger of failing. Others were failing companies which should have been allowed to go bankrupt, which would have terminated the contracts that required the failing companies to pay out the bonuses now being paid out. Obama, Geithner, Chris Dodd, Pelosi, and many others in the Democrat administration and Congress were well aware of these bonuses, but pretended they were not. They were caught in this transparent lie. They had foolishly circumvented the system long established for dealing with failing companies whose management had proven that they did not warrent bonuses, benefits, and other remuneration they would have had by contract if they had done their jobs well. Bankruptcy properly terminates such contracts as now have to be honored, though that is clearly unfair to the taxpayers.

The government is clearly incapable of running these companies and should clearly have stayed out of their business. The more healthy companies have learned now just how critical it is to try to get out from under the smothering, oppressive weight of the government. Those that would have squeaked through the banking problems without government help are now likely to fail as they lose all of their best employees. No capable manager will tolerate working under the oppressive, mean-spirited dictatorship of this government.

Legislation applied to prior events is clearly unconstitutional, yet this is not the first time that retroactive laws have been allowed to stand despite that fact. The Supreme Court does not enforce the Constitution's limits on the power of the Federal government and neither the Congress or the President take their oaths of office to uphold the Constitution at all seriously. Our politicians are very rarely men of principle.

A Request for an Overview Discussion of the Financial Meltdown

I have received a request that I provide an overview discussion of what I believe caused the home mortgage and financial crisis we suffered. Robert G. Curry wrote:

I wonder if you have given some thought to the causes of the current financial meltdown. The history leading up to what happened this year, etc.

Have you covered any of this on your blog?

It would be informative to be able to get an overall picture of the actions from the Carter years to the present of who did what, and who's primarily to blame, both through actions or neglect of action, for the meltdown.

How did we get from the so called "Fair Housing Act," through the "No Red Lining," to the "NINJA" loans, to the packaging of junk mortgages as A rated bonds, to the insuring of those bonds by the people at AIG, to the bailouts?

My response to Robert was:

I have discussed it a number of times, but not as comprehensively as you are suggesting I do. Partly, this is because it is a complex history. Partly, because the time period from Sep through Dec is our busy season in my laboratory, though all of 2008 was very busy for me. But, there is also a very critical component to the housing and financial meltdown which is due to problems caused by local and state governments in addition to the unhealthy contributions to the problem made by the Federal government. This really complicates the issue. I have addressed some of the local problems in a few posts as well.

When you look at where the mortgage defaults have occurred, you find that they are very far from an even distribution across the country. Mostly, the problem spiked in those areas where local and state government have such restrictive policies on home-building that home prices have become inaffordable for most people who in other parts of the country could readily buy a home with their income. In California, the average home buyer is paying 8 times his income to buy a home, when paying more than about 2.5 times your annual income for a home makes you a sub-prime borrower. We can argue that the average home buyer in California has no business buying a home, but human nature being what it is, they still badly want a home. In large part, the fact that homes cost so much in California is because of local and state government policies. For the most part, this is the pattern of where mortgage defaults are occurring. In Nevada the problem is that the Federal government owns 84.5% of the state and land around Las Vegas is not available because it is penned in by Federal land. Florida is another area with a spike of failures, where apparently there is a lot of speculation in homes based on quick improvements and rolling over the homes. This may have other explanations, maybe just that a lot of baby boomers are retiring or will soon and home values may have been rising due to their plans to move there upon retirement and it became an easy money fad to buy homes in anticipation of an easy resale at a higher price. Ohio and Michigan have elevated mortgage failures due in part to the very bad business climate in those states, which is causing them to lose jobs badly.

Because of these local issues, many people have put more and more pressure on Congress for affordable housing. In effect, many present home owners in local areas were happy with the rising home values due to government restrictions and maybe did like less traffic on the roads, lower taxes due to having fewer public schools to build, and more parks, but others wanted housing they could afford and some of the home owners are probably feeling guilty for favoring restrictions that they must realize are causing homes to be unaffordable. Congress does nothing to address the local building restrictions, so they have done as much as they can to press the envelope on lowering the costs of home mortgages. Many of the problem programs you named resulted in good part in response to some very vicious local housing affordability issues.

Of course, this then becomes a good lesson in how excessive government meddling in economic matters and in matters of property, causes all sorts of problems, the attempted responses to which cause still more problems.

Robert has a grasp of much of the path taken at the national level to attempt to make housing more affordable. He understands that this process began long ago and has resulted in a major problem for the economy. I was on the verge some time ago of addressing this side of the problem more thoroughly, but upon looking into it, it became clear that it was even more complex even on the federal affordable housing side of the issue than I had thought. It was going to take some real effort to sort it all out. In the process of looking into that, I realized that a good part of the reason pressure was put on the federal government to make home mortgages more available and less expensive was due to problems already caused by local and state governments which made housing in some substantial parts of the country ridiculously expensive.

There is a push-pull problem here of massive proportions. Government creates a bad problem, then government responds to the screams of pain that result by appearing to address the problems at least in part. Only then it is found to have planted many dozen rattlesnakes into our prairie dog colony. We suffer a financial meltdown and Wall Street and the banks become beggars who are put on the dole. Meanwhile, many home buyers are still sub-prime borrowers and they now cannot get loans. The home building and real estate industries then suffer, but mostly in those areas where most homes are very expensive for most potential buyers.

Meanwhile, the local and state governments are still very happy to follow policies that greatly increase the cost of housing in many communities. There is little movement on their part to address the prime reason for the housing and, ultimately, the banking and financial institution problems. Zoning restrictions, green park policies, antiquated and expensive building codes, excessive federal land ownership, disallowing pre-assembled housing so more local tradesmen will be hired, requiring excessively large home lots, high-handed and unavailable county building inspectors, and many more policies that cause home prices to be much higher than they need to be remain very popular in many communities.

So, as incensed as I am about the many bad choices made by the federal government regarding their powers to influence and control the lending institutions and to put pressure on them to follow unwise and risky lending policies, I do not want us to lose focus on the most fundamental of the originating problems. We allow local and state governments, with some assistance from the federal government, to infringe upon our property rights and thereby to deny many of us the much improved housing that we, in our pursuit of happiness, could have otherwise attained.

Rahn: Is It Constitutional?

Richard W. Rahn, a senior fellow of the Cato Institute and chairman of the Institute for Global Economic Growth, wrote a very fine article which appeared in the Washington Times on 5 November 2008 entitled "Is It Constitutional?" Rahn discusses the unconstitutionality of the government's financial industry bailouts. He expects the Supreme Court to have to make a ruling on this issue and that it will find the bailout to be unconstitutional. I hope he is right.

He also has a good discussion of what is wrong with the concept of "active rights", which is the same as what Obama has called "positive rights," which are supposed rights that justify using governmentally weilded force to make one person do things for the sake of another.

Politicians: Greed Caused Financial Crash

Politicians are all clamoring mightily that greed caused the financial crash. They claim this greed was entirely that of Wall Street fat cats with multi-million dollar golden parachutes. They are right that greed had much to do with the crash. They are wrong to locate that greed primarily on financial company executives. The primary source of greed was Washington, state, and local politicians. The greed was primarily for power and secondarily for campaign contribution money and favors to keep them from messing with business. This greed circumvented the usual constraints that financial business executives have to keep them reality-oriented. This political greed forced businesses to take foolish risks to satisfy politicians who claimed they were guilty of racial discrimination if they did not loan enough money to people who did not have enough income to pay back the loans. This was the purpose of the Community Reinvestment Act given primarily to us by the Democrats.

Fanny Mae and Freddy Mac were set up as government-sponsored businesses to encourage risky home mortgage loans to people and package those in the form of securities that financial businesses and retirement funds would buy. The oversight of the Securities and Exchange Commission was minimized by Congress. Low interest rates set by the Federal Reserve further fed the madness. Local and state governments drove up the cost of housing with building restrictions often called growth management. People in managed growth places such as California where homes cost 8 times their average family incomes clamored for subprime mortgages and Congress saw that Fanny Mae and Freddy Mac provided them. Finally, when the financial companies found that they held mortgage loan-based securities with large subprime obligations and no one would pay anything like their purchase price for them at this time, they had to write their value down to almost nothing to be compliant with Congress' Sarbanes-Oxley accounting legislation. This further insured that no one could afford to buy these securities, even though only a fraction of the mortgages they are based on will not be repaid.

Some business executives went more overboard than others, thinking that the government policies would protect them from the consequences. Most of these executives have lost their jobs and most of the value of the company stock that was used to reward them for their work has vanished. But.....as usual, our politicians are unscathed and unrepentant for their dastardly roles. They have been able to use the crisis to grab even more power. The more they clamor, the more responsibility they generally have for the mess our economy has been put in. Look primarily to these polititicians, who are so good at distracting us from the real issues, for those most responsible for this catastrophy. Remember that many of these same rascals are backers of catastrophic global warming theories that will allow the government to take control of our use of energy, as well as our financial industries. Doubt their motives at all times! Throw these rascals out of office. Sweep the House and Senate clean.

Unfortunately, both of the major presidential candidates are busy spouting the nonsense that the crash was caused by the greed of Wall Street and of fat cat executives. They are among those trying to distract us from the real issues of governmental interference in the free market. When the market is free, businessmen act to make sound investments, not unsound investments. The scale of this financial crash is itself a great indicator that it was primarily government policies that fed the problem. This was clearly the case in socialist Europe as well.

We are now unreservedly the Socialist People's Republic of the United States! We must call a spade, a spade. Rational men will soon be retiring to Galt's Gulch as Atlas shrugs everywhere. The next president of the United States will either be a moderate socialist or he will be a very committed and very radical socialist. This socialist president will have a very socialist Congress to work with. The sovereign American individual will find nothing but disrespect and, increasingly, chains.

Alan Reynolds has written an interesting article on the plight of those businessmen who most followed Washington's lead and who most went overboard with risky loans and subprime-mortgage based securities.

Depression Lunacy

There is a great deal of talk in the media, broadcast and print, that we are heading into a depression, or at least a significant recession. We had a one-month drop in manufacturing followed by a rise the next month and we had a brief leap in unemployment, which has since leveled out. Housing starts are certainly down and energy and food costs are certainly up. Despite all of this, the economy has not been knocked to the ground. It seems determined to chug on. Many companies just announced first quarter earnings which beat expectations. Consequently, stocks went up last week. But, the Gloom and Doomers have great staying power, especially with a Presidential election coming up. So, let's see what economist Alan Reynolds has to say about the state of the economy.

On 11 April, before most companies announced their first quarter earnings, Reynolds had an article appear in the New York Post. He notes that the gloomy economic news is of a credit crisis or a financial crisis. He points out that since WWII, no U.S. financial crisis has become an economic disaster. The S&L crisis of 1986-1995 was the worst financial crisis since WWII, but the economy grew by an average 2.9% a year in that time. There was a recession in that time lasting 8 months and beginning with the invasion of Kuwait by Iraq when oil prices jumped 113%. By then, the S&L problems were healing.

So, what is going on now? The LA Times asked on 20 March if another Great Depression was just over the horizon. On 6 April, the NY Times claimed that the "focal point for the stock market's difficulties" is that "banks have been reluctant to lend money to one another, or to anyone else." Reynolds points out that this is nonsense since the six-month London Interbank Offered Rate (LIBOR) would not have fallen from 5.3% to 2.6% in the last year if this were so. Bank loans to "anyone else" have increased by 8% according to Federal Reserve Board data since last August. As a further anecdotal measure, numerous companies are calling me daily eager to loan my laboratory money to buy equipment!

So, where is the difficulty? Reynolds says, "It is in selling or valuing exotic securities." The IMF, the Washington Post reports, says the crisis will cost nearly $1 trillion. Well, that estimate was for the entire world, not the U.S. This is the accounting loss of 4.1% on all sorts of loans and securities. The IMF estimates losses of $115 billion on mortgages alone. But, these accounting losses are in many cases only temporary. In many cases the future cash flow produced by the mortgages will be much higher than implied by the accounting loss declared. Standard and Poors says these write-down losses may be as much as $285 million. Well, in comparison, the S&L losses were 3% of GDP, which would be $450 billion now! Reynolds notes that many of these potential losses will be to foreign banks now, rather than U.S. banks or S&Ls as they were in the S&L crisis.

The villain socialist Paul Krugman (remember the guy of a few posts ago who did not like BB&T giving money to universities to teach Ayn Rand's philosophy) told Fortune that we should expect $6 or 7 trillion in capital losses in housing. Reynolds notes that the Federal Reserve estimated the value of household real estate was $22.5 trillion in the 4th quarter of 2007. A 30% fall in house prices would generate a $6.8 trillion loss! A 30% decrease in value across the nation is unlikely. Furthermore, Reynolds points out that this household real estate is not just single family homes, but it is actually all commercial, farm, and rental property as well owned by households and nonprofit institutions!

Further, the often quoted S&P Case-Shiller index of house prices only covers single-family homes in 20 metropolitan areas. The extra-expensive LA, San Francisco, and San Diego areas are weighted heavily at more than 25% of the total loss of 10.7% for home values in this index. Data for the whole country show that single-family homes lost 3% in the year ending in January. Between the 4th quarters of 2006 and 2007, home values rose an average of 3.8% in 29 states not appearing in the S&P Case-Shiller index. Two states not included in the S&P index actually did see home values decrease, but it is clear that the home value losses are largely localized to metropolitan areas heavily overweighted in the S&P index.

Others have claimed similarities to the 2000-2002 tech-stock collapse. But, Reynolds notes that in 1999 to 2000, oil prices also nearly tripled and in late 2000, the Fed increased the fed-funds rate to 6.5% with industrial production falling. Then came 9/11. So, there were more shocks to the economy than just the tech-stock collapse.

Actually, the S&L and tech-stock crises were quite mild recessions. They were brought on by worse economic conditions than we have now, so it is insane to be drawing analogies to the Great Depression. It is a common practice for socialists and some contrarians to tend to exaggerate the problems of the U.S. market. The socialists do it to create an excuse to have more government controls put in place and to hit higher income taxpayers with higher taxes. The contrarians often do it because they underestimate the resilience and resourcefulness of American producers and investors. Others do it because a frightened public will pay more money for investment advice. The media does it because frightened people watch and read the news more. As a result, you have to carefully seek out those who know what they are talking about, like Alan Reynolds.