Cause of the Financial Crisis: Left vs Right

Their Mistake Was Trusting the Government
03/13/09 - ChicagoBoyz by Shannon Love

Shannon Love participated in a detailed, interesting discussion of his post about the failure of a small bank and the causes of the financial crisis.

Here is an edited version of what appears at the link. I intend it to be a bit more readable, and intact in tone and meaning. Red marks the comments of Shannon and his supporters. Blue marks the comments of his critics on the Left. Gray marks my editorial comments.

Rep. Maxine Waters was a major investor in OneUnited Bank, which lost heavily on its investment in Fannie Mae and Freddie Mac when they were taken over by the Treasury.

Ironically, she fully supported Fannie and Freddie in her congressional role on the House Financial Services Committee. That committee had oversight and detailed knowledge of what Fannie and Freddie were doing. They supported lending to risky borrowers without verifying the loan applications.

Her experience is an example of what happened to banks worldwide because of Fannie and Freddie and their government supported actions in the housing market.

Read more for the discussion ...

Shannon Love:

For leftists, OneUnited should represent the perfect small, minority owned bank. The “socially responsible” Maxine Waters invested in the bank and sat on its board. There is no evidence that it made predatory loans.

Yet, OneUnited failed, but not due to any short-sighted, greedy decisions of the bank’s management. The bank’s management and board members, including Waters, trusted that the mortgage-backed securities (MBS) issued by the government sponsored enterprises (GSEs) Fanny and Freddie were worth the paper they were written on.

OneUnited is a microcosm of the entire financial collapse. Over the past 40 years, the GSEs have piled up a vast store of toxic assets created by the attempt to get something for nothing, by fooling the market about the risk of residential mortgages.

A "toxic asset" is a loan that is hard to investigate or value. A "good" loan is supported by an honest borrower and by a house with enough value to repay the loan. A "toxic" loan may have a borrower in default or who can go into default, backed by a house of little value or fraudulently represented value. -amg.

Ratings firms gave the GSEs, and the MBS they issued, top ratings because of their implied government guarantee and oversight. Banks like OneUnited bought into the political myth, and now they and everyone else are paying for it.

I regard the failure of OneUnited and other institutions as the result of government action. Leftists need to explain why this is not true. They won't, of course.

Fred Lapides:

So, that explains the entire economic meltdown? Then, why is Greenspan apologetic? Glad to see the SEC, under Bush, and the credit rating dudes are all in the clear.

Shannon Love:

They are not in the clear. But the critical failure, the one that did everyone in, was with the GSEs. If everybody else had performed perfectly, the failure of the GSEs would still have brought down the system.

Look at Maxine Waters' bank. Are you seriously going to suggest that one of the most radical leftists in the congress was playing fast and loose? Should the SEC and other regulators have prevented her bank from purchasing government sponsored securities?

We're paying for 40 years of intentional market distortion. The crisis was caused by issuing too many risky loans. The entire reason for the existence of Fannie Mae and Freddy Mac was to encourage lenders to make loans that the free-market had determined were too risky.

How exactly was the SEC supposed to prevent that?

BGates:

Are you seriously suggesting that being a radical leftist puts Waters above suspicion?

Shannon Love:

No, but it probably puts Waters above suspicion for someone like Fred Lapides.

The sad truth is that no fraud is needed to bring down an institution if they bought into the GSEs. A lot of people fell for it across the financial world.

The basic problem is that the market is like Mother Nature; you can't fool her without paying a price. Government programs tried to trick the market and now we have to pay the consequences.

Andrew Garland:

Fannie Mae and Freddie Mac were specifically put outside the regulation of the SEC.

Congress maintained close oversight of what Fannie and Freddie were doing, and approved of it. Congress created OFHEO (The Office of Federal Housing Enterprise Oversight) especially to regulate Fannie and Freddie. The much larger and more visible SEC (Securities and Exchange Commission) was available, but Congress wanted its own regulator.

OFHEO was captive to House congressional committees, and outside the influence and control of the Bush administration.

This seems unconstitutional to me, but I am not an expert.

The House Financial Services Committee did not object, and actually encouraged more lending to subprime borrowers. Barney Frank (D. MA) has served as most senior Democratic member on this committee at least since 1992, and has chaired the committee since 2007 in the Democratic majority.

There is a long history of Barney Frank proclaiming that all was well with Fannie and Freddie, and no further oversight or inquiry was needed.

"We Guarantee It"
A collection of news and analysis about the causes of the mortgage and financial crisis. How the government directed massive resources into subprime lending by implicitly guaranteeing the actions of Fannie Mae and Freddie Mac.

Zach:

Despite the rating agencies and the role of Fannie and Freddie, there was still considerable private sector action needed to make this crisis endemic to the system itself.

1. Greedy, mostly middleclass homeowners who sought homes slightly outside their means.

2. CDO's which made "too big to fail" a reality

A "CDO" is a Collateralized Debt Obligation. This is a collection of MBS bonds that is bundled together and sliced into layers. Each layer is a CDO bond having a different priority of repayment, if there are losses in the underlying MBS bonds. This complexity is blamed for the current difficulty in "unwinding" the bond obligations and renegotiating the underlying mortgage loans. -amg.

Saying that leftists have to explain themselves is just a hyperbolic, knee-jerk simplification.

Shannon Love:

Blaming financial problems on greed is like blaming a building collapse on gravity. Both are universals that need to be planned for. Creating a system that will fail if people are "greedy" is just stupid.

The central problem here is that government intervention blinded the market to the risks of residential mortgages. The government made it seem safe to buy securities based on bundled mortgages. That is why their use grew in the private sector. Indeed, most of the growth in the industry came about as private institutions took market share from the GSEs.

This isn't a moral problem of greed. The government intentionally destroyed information so that the financial system could no longer calculate risk. Once blinded to risk, the entire system began to come off the rails.

Leftists who extoll the virtues of political systems versus private alternatives should explain why government issued securities proved to be worth less than similar, private securities. If the political system makes such great decisions, then the GSEs should be a financial Gibraltar in a private collapse, instead of ground zero.

Sean F:

The issue is not with greed, which is universal. The issue is with market failure to accurately price risk. The market is imperfect, like any human creation.

Factors such as imperfect information and bad incentives make it more likely for market failure to occur. To oversimplify a little, markets aggregate human behavior and markets are more likely to fail where humans don't know very much and have structural incentives to behave badly. Both of those things were true about the US banking and securitized debt markets.

It is unsurprising that Canada, which regulated CDO and MBS trading in general, has come out of this rather well. It is unsurprising that Iceland has come out of this mess in perhaps the worst shape, whose banking system was run by an ideologue whose favorite thinker was Hayek.

Personally, I think the current economy is a huge problem for the conservative movement in the US.

Here's why. People are remarkably reluctant to admit mistakes. Political opinions and "truths" tend to be formed early and are very resistant to change. Cognitive dissonance (when the real world annoyingly refuses to do what we think it should) actually tends to encourage further denial.

And the conservative movement in the US is in denial right now. It experienced some success with the idea of solving economic problems through tax cuts and deregulation. It then jumped to the unwarranted conclusion that deregulation and tax cuts were the panacea to any economic issue. Predictably, that led to a giant mess.

Now, the movement is in denial and produces convoluted explanations that convince only those who are already conservatives. I think this is good news for the Democrats because the Republicans will lose independents, new voters, and the educated.

The whole effort to paint the GOP as the party of Rush was a masterstroke. It's hard to deny because it's at least partially true. The conservative "base" has only helped the GOP electorally - so far. If Rahm's strategy to make the GOP "base" an electoral liability pays off, we could experience a realignment along the lines of 1980.

So in short: the GOP's attempt to blame the collapse on Clinton, Maxine Waters, and big government is a good strategy -- for the Democrats.

K.J. Webb:

What is it, Sean F, that you think conservatives are denying? If it's the ability of the Dems to make rhetorical hay out of the crisis, you could be right. Politics ain't beanball, as a noted Chicagoan once said. And another notable once said that a conservative is someone who stands athwart history and yells Stop.

But if you're really talking about the roots of the crisis, and not just indulging in schadenfreude, then I haven't really heard you take issue with Shannon's thesis that at the bottom of it all is a government policy, which encouraged making loans to folks who would not otherwise have gotten them, with ensuing moral hazards and unnatural events cascading therefrom.

I'm a Canadian. Right now we're sitting somewhat prettier than we customarily do when we compare ourselves with our elephantine neighbour. However, history matters. Canada didn't have to confect a social policy to deal with a legacy of slavery and a permanent underclass.

It didn't matter so much to Canadians that it was relatively harder for our poor to get credit, not having institutions like Fanny and Freddie. We didn't see the necessity, given that there aren't racial and cultural divides in need of healing.

In big cities like Montreal, the poor and somewhat poor happily rent apartments all their lives and don't think of buying a house. Nobody thinks they need to do this to show that that they've escaped the noose of poverty and racism.

Canadians are inherently less likely to take risks anyhow. This is broadly the cultural effect of a former colony in a northern climate with a great playground for adventure next door. The risk-takers in our midst usually head off south of the 49th [the U.S.]. These are not reasons for national congratulation, particularly, but history and culture matter.

A dose of reality always gets administered by the dismal science [economics] when nature is mocked. It may be hard for a liberal to believe, but conservatives see such effects as validation. As another Chicagoan said [economist Milton Friedman], ideas have consequences

Shannon Love:

Sean F said:
The issue is not with greed, which is universal. The issue is with market failure to accurately price risk. The market is imperfect, like any human creation.

Factors such as imperfect information and bad incentives make it more likely for market failure to occur. To oversimplify a little, markets aggregate human behavior and markets are more likely to fail where humans don't know very much and have structural incentives to behave badly. Both of those things were true about the US banking and securitized debt markets.

I agree with everything in these paragraphs. Where you go off the rails is your lack of examination of why the market failed to accurately price risk.

Let me give you a hint: The commercial real estate market has no government intervention at all, it has some securitization, and it was fine until the entire financial system tanked. You have previously argued that private individuals cannot price risk without the guiding hand of the State. If so, why didn't the commercial real estate market bubble and burst before the heavily regulated residential market?

The market did not price risk properly because the government set out specifically to blind the market to the risk of residential mortgages. The entire point of the creation of Fannie, Freddie, and other GSEs was to hide the risk of residential mortgage lending!

Do I need to repeat that?

You claim that free-market advocates are in denial, but it is you that can't see the problem, even when you type it out yourself. Unless you can explain why 40 years of government intervention in the market did not produce dangerous distortions, you look really foolish.

K.J. Webb:

In a talk show interview, Phil Donahue accused Milton Friedman of basing everything on greed. Friedman pleaded guilty, but asked incredulously whether Donahue really believed that leaders in the Communist world, and politicians in general, operated on some different principle. Donahue didn't have much of a reply except to suggest that virtue would be a better principle.

Doesn't that say it all about the wishful thinking of the liberal worldview? And there is a sinister implication that if you aren't virtuous, then a Robespierre or Pol Pot will see that you get that way.

Tyouth:

The government made securities based on bundled mortgages seem safe. That is why their use grew in the private sector.

When the GSEs changed the rules of the game by backing insecure loans, private institutions figured to stay in the game and began the same loose practices in order to stay competitive and get what they saw as their share of the spoils.

You can call it greed if you want to, I suppose, although it also might be seen as a matter of keeping one's job, a created moral hazard.

Ginny:

In previous booms and busts, weren't commercial properties hit harder than private ones? They would seem considerably more volatile in theory, but they haven't been exceptionally problematic at this time. This may indicate how much more tinkering it takes to increase that volatility.

Sean F:

To KJ Webb:

I think conservatives are denying the responsibility for the economic collapse that occurred under 8 years of a conservative presidency that prided itself on a lack of oversight and a lack of regulation of new financial products. And of old financial products too, like stocks. The SEC went down the tubes.

The excuses go something like this. Bush wasn't conservative (so only successful conservatives are conservative?), and excessive regulation was really the problem.

The problem is that sure, people tend to believe even imperfect explanations if the explanations reinforce their current beliefs, and yes, these explanations might convince conservatives. They're not likely to convince non-conservatives, because they're not very credible. When even Greenspan thinks deregulation was the problem, the old time religion just ain't gonna fly, if you pardon the mixed metaphors.

To Shannon Love:

You are rational and smart, from what I've seen of your posts. Try a thought experiment -- assume you're not correct. Assume that government policy with Fannie and Freddie wasn't the problem that led to the collapse. Don't assume they didn't distort the market -- that would be unrealistic -- but set aside, for a minute, the assumption that their distortion was the trigger.

Look at all the evidence suggesting that something other than Freddie and Fannie was the problem. Give it a fair hearing, no preconceptions. Do what I do. read the rational people you don't necessarily agree with you ideologically. Try Krugman. Read Marginal Revolution. Not everyone's opinion is entitled to the same weight so discount those who, regardless of partisan affiliation, don't have any basis for their opinions.

You may still come out the same way, believing regulation is somehow, as usual, the problem. But you may not. At least you may not be so sure whatever answer you have is correct.

Dave T:

To Sean F:

If deregulation is the source of the current economic problems, then what, specifically, needed to be regulated? If something like risky mortgages needed further oversight, for example, that would put banks and other lenders in a difficult position.

On the one hand, Fannie Mae and Freddie Mac were encouraging such mortgages and willing to buy them. On the other hand, a stronger regulatory body would be telling lenders that they can't do those mortgages.

So, Fanny and Freddie would themselves really need to be regulated. Without Fannie and Freddie to buy those loans, banks would be less willing to take on any risky mortgages. The responsibility for that regulation would fall on Congress, rather than the President. And now, we have the problem that Barney Frank and others prevented any such further restrictions on Fannie and Freddie.

K.J. Webb:

Let me see if I understand you, Sean. You're willing to half accept that the underlying cause of our current problems was government policy regarding Fannie and Freddie. But you think that lots of regulation could have controlled the underlying pathology, permitting the benign aspects of market distortion and suppressing the malignant ones.

That is, poor people would get loans backstopped by the government (a good thing), and the same government would root out all the morally hazardous activity that would otherwise naturally flow from this policy. Voila: the Just Society.

Conservatives don't deny the possibility of crisis, whoever is at the helm. Indeed they think it's part of the structure of reality. Liberals think it's always preventable and always someone's fault, likely someone with evil in his heart, a greedy Republican or Texas yahoo, or both.

Sean F:

To KJ Webb:

First of all, I disagree that "liberals always think it's preventable and always someone's fault." It does not jibe with my experience, but I do get what you mean, and it is probably how conservatives see liberals. Reverse the words and it probably equally and more accurately (in my admittedly biased perception) applies to how liberals see conservatives, especially social conservatives.

Any attempt to "remedy" human behavior through enforced control is bound to fail. Human behavior is, for better or for worse, human behavior. Yes, of course government regulation of private activity, economic or not, always creates its own set of problems.

But one has to maintain a sense of proportion. The solution is not always worse than the problem. Our system of criminal justice is plagued with all sorts of problems. Would you rather have no police system and no criminal courts at all?

Also, I don't think that government policy was "half the problem". The policy probably made it worse. Would regulation of the CDO market have helped? It may not have eliminated the problem but it may very well have. And we came to know about the problems with Fannie and Feddie first, before the full scope of the crisis emerged, only because they were regulated and subject to public disclosure requirements.

Personally, I think you're right. We probably will see some liberal ascendancy as the pendulum swings back a bit. We're also likely to see liberal overreach; the left is just as susceptible to that as the right.

Personally, I suspect the growth of the regulatory state -- police, the SEC, zoning laws, whatever -- is really the result of the increasing and mindboggling complexity of modern life. State action is not a great tool to order human life. I don't know whether my view is shared by most of those on the American left, but I'm certainly not a big fan. I just don't see a better alternative. Some regulation, at least, is essential.

At a (rather pessimistic) minimum one could say that regulation through the political process at least legitimizes outcomes and prevents social instability.

One reason I don't hate taxes as much as I could is that I do think it's the price we pay for civilization. I can't think of one society that has endured as a democracy for a long time without a strong middle class and the attendant lower levels of income inequality that implies.

In my view the naive ones are conservatives who buy into the "research" churned out by think tanks like AEI. They imagine they are living in some heroic Randian free-market Eden with rewards for the deserving, risk-taking, yet honest, small business, salt of the earth, and with justice for everyone else.

K.J. Webb:

Sean, you're one of a vanishing breed - a liberal one could actually have a conversation with. I reckon that's why you're a regular on this site!

I will grant the wisdom of much of what you say about government as a sort of necessary evil, and it being a question of where we draw the line. At the very end of your post you make the natural assumption of all good liberals, that the real goal of the regulatory state is redistribution. You believe that disparities of wealth are socially destructive, perhaps evil.

When you say that regulation "legitimizes outcomes", aren't you really saying that it rigs the deck to get the outcomes which it wants? For only the best of reasons, of course!

That's what makes a reasonable guy like you, one that's half right!, a man of the Left on a continuum that leads to the Naomi Kleins of this world.

Thomas Sowell has written well on the reason socialism never dies. We thought it had been finally discredited some time in the late 80's, but he knew otherwise. The longing for utopia is perennial. So is the longing to soak the rich. I have some of those longings from time to time myself.

Shannon Love:

To Sean F:

Look at all the evidence suggesting that something other than Freddie and Fannie was the problem.

I would point out that your role in this conversation is to provide that evidence. Yet, although I've asked repeatedly for you to provide alternative evidence, you never do so. For example, you should explain why the commercial real estate securities market did not boom and bust.

Instead you make arguments like the following:

Try a thought experiment -- assume you're not correct. Assume that government policy with Fannie and Freddie wasn't the problem that led to the collapse. Don't assume they didn't distort the market -- that would be unrealistic -- but set aside, for a minute, the assumption that their distortion was the trigger.

I have had religious people make this exact argument to me in discussions on evolution/creationism. They ask me to ignore actual science and instead think about the possibilities of their particular religious explanation. I am unwilling to consider a religious explanation for matters subject to scientific study. They claim that this makes me closed minded and a slave to scientific authority.

You've made the same type of argument: You consider it axiomatic that markets will fail without continuous political interference. You take the recent collapse as "proving" your axiom and don't understand why I don't see that. Just like the creationist, you want me to ignore data and instead just adopt your viewpoint as an act of faith.

It ain't gonna happen.

You can't ignore the role of the GSEs (Fannie and Freddie) in the collapse for two reasons:

(1)  The GSEs were huge. Imagine what would happen to the economy if every bit of debt issued by the federal government prior to 2009 had been declared worthless overnight. That is pretty much what happened with the GSEs. If you want me to ignore them, you need to present a stronger, numbers based argument. You need to explain how the economy could have survived such a massive hit.

(2)  You need to explain your position, that even though the GSEs' insolvency preceded the crisis in the rest of the financial system, that the GSE insolvency was actually caused by the failure of the private parts of the financial system, and not the other way around.

I don't insist that the GSEs alone caused all the problems in the world's financial system. Obviously, the GSEs did not cause the problems that German and French banks have in Eastern Europe. However, they did play an enormous role in the damage done to the American part of the system. You have offered me no intellectual or quantitative argument for why I should think otherwise.

You are an honest and thoughtful guy, but I think you have a bad case of leftist insularity. You think it is so obvious that political intervention in the economy is usually for the better, that you don't even understand contrary arguments enough to shoot them down. You fall into the religious type of argument above, because you don't personally know anyone who thinks otherwise.

You believe that we here at a libertarian blog are just gaga over Bush's big-government conservatism. This shows that you really don't understand how we think. You don't address the factual argument we make, instead you invite us to abandon our intellectual constructs and make a leap of faith to join your "church".

Sean F:

To KJ Webb and Shannon:

Thanks for your gracious comments. The reason I read Chicagoboyz is because I find the posts interesting, the dialogue rational, and the posters intelligent. Quite unlike a lot of the blogosphere.

FYI, my aim is not to “convert” anyone. Joining a movement requires loyalty and faith – two things I suspect you can’t afford to have, if you want to think for yourself. I post here for selfish reasons - because debating ideas with thoughtful people helps me think through things, and because I think I can learn more by having a discussion with those who have a genuinely different perspective.

To Shannon:

Yes, the GSEs MBS debt was huge. But why do you think that somehow proves that big government or regulation was to blame for poor decisions at the GSEs? And why do you think that the GSEs' debt is the most important trigger of the entire financial crisis when so many other actors were involved? The real story is more interesting.

1.  Mortgage brokers, all private, are an unregulated part of the financial market with no controls. In the mid-1990s, they began surging growth by targeting high-risk borrowers, to the point that 20.1% of all US mortgages were subprime. They didn’t care about the risk because they repackaged and sold the loans immediately to investment banks. The credit rating agencies were paid to rate, and had an incentive not to upset their customers. They rated the higher tranches of CDO bonds as considerably lower risk than they actually proved to be.

Fannie and Freddie, and private institutions, bundled collections of home mortgages into MBS bonds (Mortgage Backed Securities). Private institutions bundled MBS into CDO bonds (Collaterallized Debt Obligations).

Mortage payments support the repayments of principal and interest on the MBS, and so on the CDOs. The CDOs are divided into layers called "tranches". If there are any mortgage defaults, the "higher" tranches ae paid first, leaving any losses entirely to the lowest or lower tranches. Buyers of CDOs knew this, and CDO tranches were priced accordingly.

2.  The investment banks made a lot of money selling these loans (now smelling like roses) as MBS to international investors. By 2007, the international market for these loans was $1.5 trillion.

3.  AIG and other international insurers sold insurance (credit default swaps) to the buyers of these loans who needed to hedge their risk. AIG probably knew that their risk estimation completely ignored systemic risk, but the money was too good to pass up. Investors thought they were golden because they had high-grade MBS bonds backed by insurance.

4.  This whole thing worked as long as payments were being made. When the economy slowed, payments stopped being made, and the whole system came crashing down, because the risk estimation, from everyone, was completely off. Some people, certainly the mortgage brokers, knew this from the start. But they didn’t have the right incentives to care, not when so much money was to be made in the short term.

Who came out ahead? According to the Prospect article below, the executives and officers of some mortgage finance companies cashed out before the market crashed.

• The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007.
• The three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006.
• Paul Krugman reported in The New York Times that the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million last year.

But they are just poster boys. The financial services industry made a killing by packaging sows ears as silk purses.

And where do the GSEs come into this? They were a part, but not the central part by a long shot. In 2000, Fannie, a "mortgage insurance" company, made a fateful decision to expand into sub-prime, relying on computer models to manage risk. Why? Politics. The Bush Administration wanted to expand home ownership, and the Democrats were not going to complain. If you want to be a cynic, the real explanation is supercharged stock prices. Franklin Raines was the CEO of Fannie for a while. He made $90 million between 1998 and 2004.

In 2004, Angelo Mozilo of Countrywide threatened to end it’s partnership with Fannie unless Fannie bought Countrywide loans. In 2003, Fannie had lost 56% of its business to competition from Wall Street banks. Also, Mozilo was a major GOP donor and player. The new CEO, Mudd, caved and agreed. Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. By 2007, the whole thing came crashing down.

Fannie wasn’t the cause of the crisis. It made the crisis worse because it was captured by unregulated mortgage brokers like Countrywide, who used it for their own short term profit.

See The NYTimes: Fannie, or more generally The NYTimes: The Reckoning.

Who is really responsible? Very poor structural incentives, a belief in deregulation for the sake of deregulation, a complete failure by the Bush Administration, and unwarranted faith in the ability of free markets to fix their own failures despite all the causes for market failure being present.

If you can get past the partisan language, the authors of the Prospect article below think conservative dogma had a major part to play in this crisis, and they make good factual points. An early analysis, from 2007 is eerily prescient. Looking back from 2009, they were dead on.

The American Prospect: Conservative Origins of the Subprime Mortgage Crisis

Shannon Love:

Yes, the GSE MBS debt was huge. But why do you think that somehow proves that “big government” or “regulation” was to blame for poor decisions at the GSEs?

Because they were government creations.

• They operated under an implied government guarantee that allowed them to borrow money at around half the cost of private actors.
• They operated under a custom set of laws and accounting regulations established by congress purely for the GSEs.
• They were created solely for the purpose of distorting the market to encourage the making of loans that the free-market judged as too risky.
• There is simply no way that their distortions of the market and their eventual catastrophic failure cannot be laid at the feet of the political system.

I don't think you understand just how huge the GSEs were in terms of market share of the MBS market.

Since the late 1980's, the GSEs bought at least 40% of every residential mortgage issued in the U.S. That grew to 54% by 2003, when they got busted for corruption.

Unlike in the private sector, most of those mortgages were bundled into MBS. The accumulation of these long term MBS means that 60%-70% of all MBS in the market today were issued by the GSEs.

Almost every company that went broke due to MBS, such as Waters pet bank, did so because they bought government sponsored MBS. Had the GSEs remained solvent and their MBS retained their value, we would not now have a major crisis even if every private issuer failed.

That is one reason why the GSEs and the political complexes that created them bear the lion's share of the blame in the crisis.

I would point out that when it came to the regulation of the GSEs, the Democratic and Republican roles reversed. Bush tried on 18 separate occasions to bring the GSE practices in line with those of private issuers. The Democrats shot him down each time. This is especially important because the GSEs did not have the external discipline of the market as private actors did. They really needed political oversight.

The GSEs had the implicit guarantee of the government. Private banks would lend them money, buy their corporate bonds, no matter how risky was their inventory of mortgages. They could do what they wanted unless restrained by government regulation. But, the oversight committees encouraged further and riskier purchases of subprime loans. -amg

Mortgage brokers, all private, are an unregulated part of the financial market – no controls.

This is not true. All private mortgage issuers operate under the same set of federal and state laws. Countrywide and a small town bank all operated under the same laws. But, mortgage brokers didn't have the same free-market limits as did small banks that kept their mortgages in house.

In the mid-1990s, they began surging growth by targeting high-risk borrowers – to the point that 20.1% of all US mortgages were subprime.

Well, here the government played a role. It doesn't take a genius to know that high risk borrowers are more likely to be people in the bottom half of the income distribution. These are exactly the people that the Clinton administration sought to help by leaning on banks and by empowering leftist organizations to sue banks for discrimination.

This led to changes in long standing lending standards evolved in a free-market. Banks can't legally discriminate between borrowers, so changes in lending standards for some borrowers became changes in standards for all borrowers. Again, a government intervention drove a change that the free-market would not have made, because subprime loans are too risky.

They didn’t care about the risk because they repackaged and sold the loans immediately as MBS to investment banks.

You left out a part. It should read, "They didn’t care about the risk because they sold the loans to the GSEs which repackaged and sold the loans immediately as MBS to investment banks."

The GSEs were created specifically to sever the issuing of a mortgage from the risk of holding it. The mortgage brokers, both pure brokers and banks who acted like brokers, were not bugs in the GSE system, they were its intended agents!

The entire point in creating the GSEs was to induce banks to make loans that the free-market judged as too risky. To this end, they induced mortgage issuers to pay attention only to whether they could sell the mortgage to the GSEs.

The GSEs, with their government backing and political mandate, grew less and less concerned about the risk of the mortgages they bought. The entire risk assessment system of the residential mortgage market broke down. Which, again, was the point of creating the GSEs in the first place.

1.  The credit rating agencies were paid to rate, and had an incentive not to upset their customers. They rated the higher tranches as considerably lower risk than they actually proved to be.

There was no significant residential MBS market prior to the GSEs. No private MBS issuer could assure buyers that the securities would retain their value. The government stepped in to address this "lack" in the market. Only after the GSEs had been issuing such securities for nearly 30 years, did private institutions find they could also issue them.

The GSEs conditioned the market to treat MBS as safe investments, an intentional distortion. The private issuers used the same risk assessment methods of the GSEs. The rating agencies gave good ratings to the GSEs based initially on their [implicit, not formal] government backing, so they had no reason to downgrade the private issuers.

Again, without GSEs, there would be no high rating for MBS. The industry would not have developed on its own to the scale it did.

2.  The investment banks made a lot of money selling these loans (now smelling like roses) to international investors. By 2007, the international market for these loans was $1.5 trillion.

The GSEs did this first. You imply that the private MBS issuers where doing something different and irresponsible when in fact they were following the GSEs. And again, the accumulation of GSE MBS was so large that even if the private issuers remained solvent, the failure of the GSEs would have destroyed the system.

3.  AIG and other international insurers sold insurance (credit default swaps) to the buyers of these loans who needed to hedge their risk.

Which would have worked if the GSEs had not collapsed. We see private actors using the statistical models of the GSEs to assess risk. Had the GSEs not existed, this market would not have existed or it would not have grown so large.

4.  This whole thing worked as long as payments were being made. When the economy slowed, payments stopped being made

That is wrong. The whole system worked as long as the market value of the properties backing the MBS stayed up. When those values tanked, the MBS became worthless. It had little to do with the money coming in the door. Instead, the accountants downgraded the value of the GSE issued MBS to near zero. Anyone who held those MBS as assets found themselves technically insolvent, such as Waters' bank.

In 2000, Fannie, a mortgage "insurance" company, made a fateful decision to expand into sub-prime loans, relying on computer models to manage risk. Why? Politics. The Bush administration wanted to expand home ownership, and the Democrats were not going to complain.

You need to check your dates. Bush assumed office in 2001 and Fannie and Freddie had both been increasing their subprime lending since 1995. Bush certainly wanted to increase home lending, all politicians do, but when it comes to oversight on the GSEs, Bush is clearly on the side of the angels. He tried 18 times to reform their practices, but got shot down by the Democrats every time. The record on this is very clear.

The damage to the market was already done by the time Bush came into office. All of the trends that would lead to disaster were already running. Had Bush gone to the mat to restrict lending to home buyers, who would have supported him? Certainly, not the Democrats.

Fannie wasn’t the cause of the crisis. It made the crisis worse because it was captured by unregulated mortgage brokers like Countrywide, who used it for their own short term profit.

Fannie and Freddie did cause the crisis, because they created the entire residential MBS market along with the intentional alteration of the perception of risk.

• Had they never existed, the residential MBS market would be small and stable like the commercial MBS market.
• Had they never existed, there would have been no mortgage brokers or banks acting like mortgage brokers.
• The American Prospect article simply ignores the creation of the GSEs as instruments of market distortion.
• It ignores the role of the GSEs in the rise of the mortgage broker.
• It ignores that the mortgage industry is the most heavily regulated part of the financial sector.
• It ignores that the volatility of the mortgage industry has increased as regulation has increased.
• It ignores that the least regulated sectors work just fine, such as commercial mortgages.

I've read dozens of articles, blog posts, and comments from the leftist perspective, and none of them address any of the complaints of the free-market perspective. Indeed, just like the articles you link to, they don't give a hint that they understand the crucial free-market role of prices as a means of communicating information such as the risk of mortgages.

Instead, they see a moral drama, a narrative, in which the noble and altruistic leftist restrains the greedy and stupid business people. The entire story is not a technical examination of a system, but a morality tale with the conclusion that one political group should be dominant over the other.

If you want to criticize free-market types, conservative or not, criticize us for not recognizing the market distortions and responding accordingly.

• We should have pushed harder and sooner for more oversight of the GSEs.
• We should have forced rating agencies to asses the risks of private MBS without regard to the GSE versions.
• We should have destroyed the GSEs.

In the end, we collectively produced this problem by wanting something for nothing. We wanted houses, but we couldn't accept the verdict of the market that we couldn't afford them.

Our short sighted politicians gave us the easy answer of tricking the market. Back in the 70's, we built our housing policy around the guarantee of the Federal government, to hide the risk of mortgages. We were going to have a major problem. The market cannot be fooled forever.

Sean F:

You're saying that the GSE's distorted the market perception of risk and created the problem. That view allows you to sidestep any responsibility for private actors, and retain your trust that unregulated free markets don't fail.

But consider, if the GSE's were mostly responsible for the bulk of the crisis, then the commercial MBS market should be fine. After all, you claim it is the GSE's that are the major source of the distortion. So a market subject to the same forces but without the GSE's should be fine, or at least much less affected.

And therein lies a problem. The facts. The commercial MBS market is as dead as a dodo. See Commercial Mortgage Alert for a rather depressing roundup of the current news.

The above link is to the front page of a blog on mortgage news. The headlines change over time. It is not directly possible to identify the source of Sean F's conclusion. -amg

Perhaps one could jump through a few more hoops and come up with yet another explanation that somehow implicates the GSE's. I'm sure it might be fun to try. But at some point, you run into Occam's razor.

For most of those without the faith that markets can effectively self-regulate, anyone not part of the conservative movement, the simpler explanation is probably correct.

The conditions for market failure were ripe. The market failed. That doesn't mean markets are bad, they're great, better than most other forms of economic ordering.

But they're not perfect. Lowering taxes and trusting in the market doesn't always work. Deregulation or non-regulation can sometimes lead to an incredible amount of value destruction and market failure. It isn't always good.

I think this is very hard for the GOP to accept. Goes against the dogma. I think the party needs some more electoral drubbing before that happens. Sort of like the Democrats and welfare reform.

Shannon Love:

If the GSE’s were mostly responsible for the bulk of the crisis, then the commercial MBS market should be fine.

I will turn the question around in two ways.

First, if the free-market is to blame, why didn't the commercial real estate market exhibit the same rabid boom, and why didn't the commercial MBS fail? If your model is true, we should expect to see a correlation between the degree of government intervention and oversight and the stability and reliability of the market. Instead, we see the opposite, in many different financial sectors.

Second, if the free-market is to blame, why did the GSEs fail? They were and are government creations operating under special laws and with government backing? If any government agency should have been able to judge the systemic risk of the residential mortgage market, it was the GSEs. Why didn't they see the problem years in advance and limit their purchases to safe mortgages?

Why did they fail before the private entities? Why did their failure bring down so many otherwise solvent private entities? If government regulation is so good and great, why aren't the GSEs safe harbors in a financial storm, instead of the eye wall [most destructive part] of the hurricane?

At best, you are arguing that the politicians you place so much faith in are no better at managing risk than the free market. At worst, the political intervention created the problem.

And, I will answer your question directly. As a leftist, you have a hard time understanding that conditions alter economic behavior, especially government force. The GSEs distorted the entire residential mortgage market and altered the behavior of all actors in the market, whether they dealt directly with the GSEs or not.

Almost all players did deal directly, either selling mortgages to the GSEs 50% market share or buying their MBS or stock. The GSEs altered the standards and practices of the entire industry over the course of 40 years, as they were designed to do.

Even if private companies had done everything right (which they never do), the failure of the GSEs would have brought the system down, and they were certain to fail. The cost of distorting the market had to be paid eventually.

Without GSEs, there would be no failure. Without the example of the GSE MBS, no private company would have gone into the business, because no private buyers would invest in such risky securities based on only the assurances of a private issuer.

No private issuer could purchase the large numbers of mortgages needed to get statistical protection against mortgage defaults. It took the enormous pockets of the federal government to get the ball rolling. Only after two decades of large scale government backed MBS flooding the market, could private issuers get a foothold by using the same standards as the GSEs.

The GSEs are the elephant in the leftist parlor. You are sitting around sipping tea and leaning around the elephant to talk about the failure of the free-market. You won't acknowledge that it's your elephant that you brought to the parlor. You won't even admit that it died. Its comical.

The market failed. That doesn’t mean markets are bad. They’re great, better than most other forms of economic ordering. But they’re not perfect.

Perfection is for leftists and their utopias. The only thing that free-marketers assert is that the free-market is more robust than political meddling. The failure of the GSEs and the politically regulated markets, and the stability of the unregulated markets bear this out.

Markets fail, but they fail small-time. It takes the power and enormous scope of government to wreck an entire economy.

Obama Thanks Himself Reading Teleprompter

The truth about Barack Obama's Irish teleprompter "gaffe"
03/24/09 - Telegraph.co.UK by Toby Harnden

Well, it seemed a bit fishy to me and there was no video. And upon further investigation - Obamaphobes and dittoheads brace yourselves for a big disappointment - I can confirm that there was no gaffe by the president.

Harnden reports that Obama's remarks were a joke, following up on Brian Cowen's minor mistake in reading a few words of Obama's speech from the teleprompter. There is really nothing here but a simple mistake and good humor all around.

-----------
The following was my take on what was reported.

Obama Reads Teleprompter and Thanks Himself
03/18/09 - Fox News via AP

There is now strong evidence that some politicians are "replacements". They have been kidnapped by aliens and replaced with lifelike but imperfect substitutes. (smile)

[edited] Irish Prime Minister Brian Cowen gave a speech at a St. Patrick's Day celebration at the White House. It was the second time that evening he would give the same speech to two different groups.

Cowen was 20 seconds into his second presentation when it dawned on him that he was reading word for word the speech that Obama had just read from the same teleprompter.

Cowen stopped and looked back at the president to say "That's your speech."

Obama laughed and returned to the podium to offer some remarks. It seems that he then read some of Cowen's remarks from the Teleprompter. In doing so, President Obama thanked President Obama for inviting everyone over.

So, politics isn't so hard. Just read from the little screen. Probably this is why politicians have been chosen as the first to be replaced. Few of the public will notice.

Thankfully, the replacements do not think ahead. "Obama" knew that the Teleprompter had just shown the wrong speech. You would think that he would be wary of what was displayed. But, he automatically read what was there.

Fellow humans, the replacements have weaknesses, and we have some hope in our fight to regain the world.

The Godfather's White House

Welcome to Franicis Ford Coppola's White House
03/17/09 - PajamasMedia by Nicholas Guariglia

Thin-skinned President Corleone and his crew go after their enemies.

The Godfather, part IV
03//09 - PowerLineBlog by Scott Johnson

About the above article.

[edited] The Obama administration has taken on a thuggish mien from Obama's first days in the White House. Nicholas Guariglia captures the essence of what is transpiring by comparing Obama's White House to "The Godfather".

About the press:

The Obama-journalist relationship has been a one-sided love affair: the more they appease him, the more he disdains them. And yet, still, many journalists are all too willing to bow their heads, kiss the don's ring, and play the role of hit man, stuttering and stammering in the presence of their boss like an overly eager Luca Brasi rehearsing what he's going to say.

Regulatory Costs

Take the pressure off
03/16/09 - WashingtonTimes by Wayne Crews

Lifting heavy regulation by government would be a big stimulus.

[edited] America now has the biggest government in world history. It will spend $3.55 trillion ($3,550 thousand million), before counting President Obama's ambitious "stimulus" agenda.

Renewable energy, carbon caps, internet neutrality, and universal health care will cost trillions more. There are also hidden regulatory costs these and other proposals will impose on American business and the people.

The Federal Office of Management and Budget seeks public comment on how “to improve the process and principles governing regulation.” We're glad they asked!

Nearly 70 agencies created 4,004 rules in 2008, and the Federal Register of regulations adds almost 80,000 pages annually. These regulations on business, health, safety, and environment cost an additional $1.2 trillion annually.

Deregulation would stimulate the economy. But, federal agencies rarely admit that rules are poorly targeted or too costly. For example, a 15 MPH speed limit would save lives. A benefit could be claimed, if you ignore the costs hidden in delays. Costly agency regulation isn't affordable anymore.

The recent Consumer Product Safety Improvement Act (CPSIA) regulates testing of items intended for use by children. This "zero tolerance" regulation is threatening to close 10,000+ small businesses that make children's goods such as quilts, toy blocks, and books.

Bailouts by John Stossel

20/20 and Reason: “Bailouts & Bull”
03/14/09 - QAndO.net by Jason Pye

John Stossel of ABC's "20/20" program asks questions about the bailouts. At the end, he asks Democratic House Majority Leader Steny Hoyer if the stimulus will work. "I hope so" replies Hoyer. Video 1:00 to 7:46.

[edited] There are six videos. In the first one, Stossel talks to 18 economists about why the “stimulus” was a bad idea. He asks House Majority Leader Steny Hoyer if debt got us into this recession, then why is creating more debt going to get us out? One economist says that one dollar taken out of the economy is one less dollar to be spent in the private sector.

-------------
Why Spending Stimulus Plans Fail
They take a dollar to give a dollar.

A Short Argument Against Stimulus
Economist Henry Hazlitt reminds us that you can't help an economy by spending when you have to hurt the economy with taxes or inflation.

Let's Counterfeit Our Way to Wealth
If the Obama team is right about economics, then counterfeiting should be a way for us all to become rich.

A Tested Stimulus Plan
The housing bubble was a giant stimulus. We are now living in the post-stimulus economy. How do we like it?

The Bank's Mistake was Trusting the Government

Their Mistake Was Trusting the Government
03/13/09 - ChicagoBoyz by Shannon Love

Rep. Maxine Waters was a major investor in OneUnited Bank, which lost heavily on its investment in Fannie Mae and Freddie Mac shares when they were taken over by the Treasury.

Ironically, she fully supported Fannie and Freddie in her congressional role on the House Financial Services Committee. That committee had oversight and detailed knowledge of what Fannie and Freddie were doing. They were lending to risky borrowers without verifying their loan applications.

Her experience is an example of what happened to banks worldwide because of Fannie and Freddie and their government supported actions in the housing market.

[edited] For leftists, OneUnited should represent the perfect small, minority owned bank. The "socially responsible" Maxine Waters invested in the bank and sat on its board. There's no evidence it made predatory loans. Yet, it failed.

It failed not due to any short-sighted greedy decisions of the bank's management, but because the bank's management and board members, like Waters, trusted that the mortgage-backed securities issued by the government sponsored enterprises (GSEs) Fanny Mae and Freddie Mac were worth the paper they were written on.

OneUnited is a microcosm of the entire financial collapse. Over the past 40 years the GSEs have piled up a vast store of toxic assets created by the attempt to get something for nothing by fooling the market about the risk of residential mortgages. Ratings firms gave the GSEs top ratings because of their implied government guarantee and oversight. Banks like OneUnited bought into the political myth and now they and everyone else are paying for it.

A comment posed that the housing crisis is a failure of the free market under lax regulation. Shannon Love replied:

[edited] The commercial real estate market has no government intervention at all, it has some securitization, and it was fine until the entire financial system tanked. You argued that private individuals cannot price risk without the guiding hand of the State. If so, then why didn't the commercial real estate market bubble and burst before the heavily regulated residential market?

The residential market couldn't price risk properly because the government set out specifically to blind the market to the risk of residential mortgages. The entire point of the creation of Freddie Mac and other GSEs was to hide the risk of residential mortgage lending!

Use Inflation to Fool People

We Were All Keynesians Then
01/09/06 - Cato.org by economist Ike Brannon
(via The Angry Economist)

Keynesian economists expect most people to be slow-witted and unable to make rational economic decisions. The government tries to fool people into working harder by inflating the currency to just the right amount. But, it doesn't work for long.

[edited] In 1961, John Muth published in the journal Econometrica, demonstrating that people thoughtfully use available information to predict future prices, and then make economic decisions based on "rational expectations".

Muth's insight was radical during that heyday of Keynesian economics. Today, it is an accepted part of the canon of economics.

"Rational expectations" says that entrepreneurs and workers do not assume that prices will be constant when they need to forecast future prices. They use all available information to estimate what prices will be, and their estimate is correct on average. They will make mistakes, but they will not be consistently wrong.

Muth demonstrated that rational expectations explained prices quite well for a market in hogs, thought to exhibit wide, predictable price swings.

Muth's paper was published at the time that Keynesian economics had become ascendant in the political world. Policymakers thought they could permanently increase employment by increasing inflation. Supposedly, higher inflation fools workers, who mistake a rising dollar wage for a real increase in their buying power. As a result, people would take jobs they would not otherwise take, and work more hours than they would otherwise work, increasing employment and output.

Muth's work explains why the 1970's economy experienced "stagflation", slow economic growth and inflation at the same time. Rational expectations predicted that people may not always make economically optimal decisions, but they can't be consistently fooled by government policies.

Publicly Challenge Politicians

Congressman McClintock Urges Opposition to Climate Change Legislation
03/09/09 - Business & Media Institute by Jeff Poor

[edited] Rep. Tom McClintock (R-CA) advised how to fight the good fight against Draconian climate change legislation.

Don’t write officials a letter. Write that same letter to the local newspaper, or put it on a blog. Mention them by name and ask how they’re voting, and other inconvenient questions.

Don’t visit them in their office. Visit them at a public meeting where you can hold them accountable in front of their constituents. Call them on a local talk show, not at their office.

Cargo Cult Economics

Main Point and Conclusion
Spending and saving by individiuals is more "stimulative" than taxing and spending by government.

Lowering tax rates gives 3:1 return on GDP
A rate increase that raises $1 of tax kills $3 of GDP (jobs). A rate reduction increases GDP by $3 for each $1 not collected.

Last year's $78 billion tax rebate flopped
Martin Feldstein is an economics professor at Harvard. He says Obama's tax "rebates" won't work either.

Government Spending Divides, Does Not Multiply
Robert J. Barro is an economics professor at Harvard. He found that spending in World War II decreased GDP by 20% (an economic multiplier less than 1). Government spending actually killed GDP, even assuming that the spending itself was useful.

Spending did not end the Great Depression
Reduced spending and lowered tax rates did it.

Unemployment was double-digit throughout the whole New Deal. One year after the end of New Deal policies and the return of economic freedom, it was under 4% despite the return of a huge number of soldiers.

The Deadweight Loss of Taxes
Martin Feldstein in 1999 examined the effects of government spending and increasing tax rates.

 

Cargo Cult

Government spenders and casual observers see personal and business spending, and the associated employment and prosperity. They come to the wrong conclusion: that the spending created the prosperity.

Sad to say, this is a type of Cargo CultArticle at Wikipedia centered around money. John Maynard KeynesEO: Political Dictionary is the shaman of this cult.

The original 02/2006 - Smithsonian Magazine
A cargo cult continues in Vanuatu to this day. Villagers worship a mysterious American, John Frum. They believe he will return some day to give them the machinery and cargo which they remember from World War II.cargo cults were formed by some Pacific islanders in World War II. They saw the army build landing strips. Then, huge, silver, bird-gods arrived filled with valuable cargo. The islanders built their own nicely decorated clearings, hoping to attract these bird-gods.

The late physicist Richard P. Feynman described how such cults are produced Cargo Cult Science by the late physicist Richard Feynman, from his commencement address at CalTech in 1974. Search the text for "cargo cult".
  This is a great speech about ideas, curiosity, real science, fake science, and scientific honesty. All of his work is clear, entertaining, and well worth buying. by greed and manipulation. The original cults and our new forms exist through simpleminded trust and a lack of curiosity and skepticism.

Read more ...

Spend

Keynes' followers are politicians who want to spend more money to increase their power. Or they are government employees, suppliers, and supplicants who want to be paid.

It is convenient and self-serving to say: "Keynes had a theory that spending creates wealth. Coincidentally, we want to spend! Let's try that theory again. If it didn't work before, it is because we spent too little. If  it didn't work for JapanEO: Spending did not help Japan, it is because they spent too little." This is good work if you can get it.

The current recession has produced cries for government action. The bad analysis is simple. We are becoming poor because not enough money is flowing around. Money has flown away, or it is hiding as savings. Prosperous people aren't spending enough, selfishly keeping their money to themselves. Poorer people don't have much money to spend, so we should give them more. Wealth will multiply when they spend it all.

So, the lack of consumption by people, and especially the wealthy, is causing the recession! In this view, we would all be better off if they bought more expensive cars, ate more caviar, and took more lavish vacations. They won't spend more, so we must take money from them and spend it for them. This is a crazy, economic defense of robbery.

"Your Honor, my client robbed these people, but in his defense, he spent it much more quickly than they would have. These people will work to replace the money in much less time than my client could earn it himself. This involuntary transaction is an efficient, cost effective way to inject money into the economy. My client's aggressive program of self-help has already eliminated some income inequality. It is a start."

Just after the 9/11/2001 attack on the World Trade Center, President Bush told the public that we would recover faster from the attack by going shopping to improve the economy. The press laughed at him, appropriately. Now, they agree with him.
 

Borrow, Spend, and Tax

President Obama and Congress have passed a Stimulus PackageHeritage.org economic research spending $816 billion ($816,000 million dollars). This is to be borrowed now as an increase in the national debt, and paid back later in higher taxes on "the rich".

$264 billion (32%) is new, immediate, means-tested welfare spending. This would be $6,700 for every officially poor person in the U.S., but it will be distributed to as many people as possible, poor and not poor. The implied increase in follow-on welfare spending will be an additional $523 billion over the next 10 years, for a total of $787 billion.

$264 billion will be distributed as checks ("refundable tax credits") to single people earning less than $75,000 per year ($150,000 for couples). Those people get a check regardless of taxes paid, making this a welfare program, not a reduction in tax-rates. The check is larger for those who paid less tax, or no tax, because the amount phases out (decreases) as income rises to the $75K or $150K limit.

The remaining $552 billion of the $816 billion will buy road repair, government jobs, teacher's salaries, and interesting business and research results from favored businesses. A favored business has given political support to congressmen and senators, or will provide jobs to unions in the politician's district or state.

The entire cost over 10 years from this one bill is $1,339 billion. That is $264 wellfare + $523 follow on wellfare + $552 in projects (not including likely cost overruns). This averages to a cost of $17,400 for each taxpaying household. Supposedly, this will be repaid by only the 2% wealthiest households.

Cynics say that Democratic politicians are buying votes by giving money to those who pay the least or zero tax. It is most efficient to take taxes from a few wealthy people to buy the votes of many poorer people.

The Obama team says that this spending will stimulate (or even shock) the economy into new life, creating wealth for everyone. Critics say that medical analogies should not drive important policies. The government does not apologize for taking the money of the well-off. The well-off have the money, and everyone else needs it.
 

Spend, Don't Save

The only catch, we are told, is that people may save the additional money or use it to pay debts, cancelling the wealth-multiplying effects. This was the explanation for the failure of the February 2008, $150 billion Stimulus bill. This bill delivered $78 billion in tax rebates in April-June 2008. The recipients spent $12 billion and saved or paid debts with the rest.

There was no effect on consumer spending above the $12 billion spent, no multiplier effect and no increase in consumer confidence. Maybe people understand the difference between a gift and a job. Keynesian economists explained that the recipients had failed their duty by not immediately spending everything they received. (Jump and return for the details)

Supposedly, the money cannot go to work if it is sitting in lounge chairs at the bank. The proposed solution is to give the money to the poor, or unemployed, or those making less than $75,000 (!) who will spend all of it, because they are not concerned about debts or saving.

It insults the recipients to expect they won't pay their debts or save. And, it is strange to think that spending money, in and of itself, is so important that it justifies taking money from taxpayers (on threat of punishment) and giving it to non-taxpayers so they can spend it. Not merely loans to get through a hard time, but outright gifts.

There is a fuzzy notion that taxpayers will benefit from other people spending their money. Supposedly, they will benefit so much that they will easily earn back more than what is taken from them. If this were true, there would already be spending clubs to take advantage of this amazing effect. We would not need government to do it. Imagine, everyone could buy a new refrigerator or dining table, and they would get back the money in a few months as bonuses above their usual salaries.

By the way, if the mere spending of money produced wealth, then: We should immediately license counterfeiters.EO: Let's counterfeit our way to wealth It would not matter how the money came into existence. The extra spending would produce that wealth.

If spending created wealth, it would be fairer and more immediate for the government to issue "spending orders", requiring taxpayers to show that they spent 10% more as their legal and patriotic duty, and to take this out of savings or investments, or even borrow the money. This would lack something from the viewpoint of the government. The politicians and their favored interests would not get to spend the money and collect the wealth it represents. They can't buy votes by ordering people to spend more of their own money.

Say that the government could give the money to people who would spend it all, with no damaging savings. There is then an inconvenient next problem: how to make those people buy things from other such people, so that the money continues to flow around. As it is, the first people go to a store or business and -zip- the money goes to a business owner and his employees, and then much of it into supposedly lazy savings.
 

Don't Spend, Save

Strangely, the government is lending money to banks, to increase savings, so that the banks can lend it to businesses to build the economy. They even want to lend money to more homeowners. The government also wants to invest in businesses, which is a form of saving. Investments are savings.

The government plans to take that money from the wealthiest taxpayers. These people currently save and invest in banks and in businesses, which supports employment, and many well-off taxpayers operate businesses and create jobs.

The government will remove some private investment and discourage small-business expansion, then it will attempt to replace that investment. This certainly harms the people who are taxed, but how does this benefit the public? I don't see that the government is a wiser investor than wealthy taxpayers and business owners.

If the government is so wise and productive, then why doesn't it earn a large profit that lowers what it needs to collect in taxes? After all of the years that the government has taxed and spent, why isn't it rich and paying us dividends? The government could prove its abilities by starting a profitable mutual fund which anyone could invest in voluntarily.

You might point to bridges and roads as being valuable products of government. They supply a non-cash dividend merely by being useful. But, the roads are paid for out of special gasoline taxes, and the government charges tolls when it builds a particularly useful bridge or road.

The government charges separately for anything that is directly useful to the public. The government uses general taxes to pay for the other things.
 

Spend or Save

So, which is it, Spend or Save?   The government says these are in conflict, and also says to do both. It is confused, saying anything that is convenient to the moment:

• Spending is good

  There is too little spending. The previous stimulus plans didn't work because the people saved and invested most of it.

• Saving and paying off debt is good

  We must support banks to lend to businesses. This saving and investment is vital to our prosperity and recovery. We are buying the bad debts of the banks so that they have the resources to lend money again.

  When you pay down your own debt, you free the lender to apply resources to additional lending. We are in a huge financial crisis because people are not paying their home mortgage loans.

Spend and Save

The government says spending creates jobs, but that saving, investing, and paying off debts leaves people out of work.

Actually, saving and investing make resources available to buy equipment and create and expand businesses. This creates jobs, makes work more productive and better paid, leads to less expensive products, and increases individual wealth.

Spending is a result of production and wealth, not the cause. Consumer spending gets attention because it is more easily measured than other money flows.

"Spending" is not the best way to analyze an economy, but we can take that view. We can see that saving, investing, and paying off debt are different type of spending. The money takes different paths; it doesn't disappear, and it all supports production and jobs.
 

Types of Spending

Consumer Spending: I buy a doughnut. This employs bakers and bakeries.

Saving: I loan money to a bank through a bank account or certificate of deposit. The banker immediately loans the money to businesses, which then spend to buy materials and equipment. One of those businesses may be a bakery or produce bakery ovens.

Paying off debt: I pay back money that I borrowed. Say I want to buy a nice TV, but I don't have $600 to do it. I could save the money in 6 months, but I want to enjoy the TV immediately, and I am willing to pay more to buy now.

A credit card company lends me $600, and I spend it on the TV. I will pay back about $110 per month for 6 months, $660 in total, $60 in interest above the borrowed amount. I think that is a reasonable extra cost to be able to use the TV immediately, rather than waiting to save the entire amount first.

My repayments of debt don't go on vacation in the hands of the lender. He will lend that money to other people, and the $60 of interest pays the people who invested with the lender and work for the lender. My repayment of debt supports further consumer spending.

Investing: I buy shares in a company or partnership. The company spends the money to buy equipment, establish its operation, and pay employees until it is profitable. Some of those businesses may be new bakeries.

Buying shares in a company is usually a transfer of ownership from another shareholder. The company doesn't get that money; it goes to the seller of the shares. How does this help the company or the economy?

• Owning shares is a type of saving. Dividends from shares provide income, and there is a chance that the share price will increase.
• The seller will use the money to spend or invest in other things.
• The share price establishes a value for the company. The company can use that value to borrow from banks or issue more shares to support expansion, to create jobs.
• A purchase of company shares may be an original issue where the company gets the money directly for expansion.

Spending for a Reason

I might buy a doughnut to get through lunch. I might borrow and repay a debt to enjoy a TV through the winter. I might buy corporate shares to get through retirement. People work for me in all of these ways according to what I buy. I worked and created something of value to earn the money that I spend for their work.

If a large number of people stop buying doughnuts and save or invest instead, then doughnut makers may lose their jobs, to find other jobs at the newly supported companies. Or, they may sell doughnuts to the employees of the new or expanding companies. We can't know in advance.

I get to choose what I buy because I have already produced something of value and received money in exchange. I earned the right. No one has the moral authority to tell me that I must buy doughnuts instead of TV's or investments. I worked to earn my money, and I want the benefit of that value. The purpose of an "economy" is to serve the individuals of the society, not to create economic statistics that meet some particular theory.

The strangest part of Keynesian economics, the economic theory of Obama and his team, is to regard spending as dynamic and saving as sleepy. In fact, the immediate difference is only what is produced, doughnuts or machinery. There are current jobs in both activities. Further, saving directly supports the growth of businesses, which make productive jobs and affordable consumer goods possible.

Spending promotes growth and efficiency in a slower way than saving. A company that sees a strong demand for its product will save part of its profits. It will use these savings to buy equipment and grow larger, to employ and produce more.

A company can save over time to buy equipment, like saving for a TV. Or, it can borrow and use investments from others who have already saved, like borrowing on a credit card to buy a TV. In either case, saving must be done first to pay for expansion of the business and to support more jobs.
 

Spending on Restaurants

Consider for example a restaurant called Eating Place. It is only half-full at lunch, selling half as many meals as it could with its tables and kitchen space. It has fired workers and may fire more, considering how few customers it has. Management is unsure about offering fancier food at a higher price, or simpler food at a lower price, or different food at the same price, or investing to change the furniture and interior design. They don't know what to do, and they don't have much money to do it.

The government has a plan to increase employment. It takes more tax from the well-off people in town and it gives it to the less well off. It announces that there is a stimulus so that businesses can plan to hire more workers.

Business goes up slightly at Eating Place. It seems that it was empty for a reason. People are not saving-up to eat there. Business goes up more at Better Place down the block, where people splurge a bit to enjoy their windfall.

Eating Place employs an extra waiter during the stimulus, then fires him after business drops again. Better Place hires two waiters during the stimulus, and fires them afterwards. Neither restaurant invests in new plans or expansion, because they know the stimulus is temporary.

The owners at Eating Place decide to redecorate and change their menu. They are disappointed to find that no one will invest with them. The investors mention that the government is raising taxes and they can't predict how eating patterns will change.

The investors think about expanding Best Place two blocks away to serve the prosperous government contractors who will want to eat out more often. They are unsure, because there also will be a decrease in business from the people who are paying more tax. The investors will wait and see.
 

Spending on Stimulus

Jobs increase slightly during a "stimulus", then decrease. Expected higher taxes and unpredictable government actions cause investment to slow or stop, until people can measure the new pattern of demand for restaurant meals and everything else.

The government can only spend and invest money that it takes from taxpayers who are already spending and investing. This is at most one-for-one, so there is no improvement in the economy. Worse, people don't want their money taken from them, so they spend more on avoiding taxes instead of investing more. Worse, the government changes the rules and threatens to continue changing the rules, making prediction harder or impossible and discouraging investment.

Obama's team justifies tax-and-spend by claiming that there is a 1.5 multiplier on government spending and investing, which they say creates more wealth and jobs than private activities. They say they will spend all of the money that they collect in tax, unlike the taxpayer who would save part of itNational Center for Policy Analysis.

[edited] Keynesians believe that every dollar of government spending increases GDP by more than a dollar due to the "multiplier effect." Keynesians concede that tax cuts are also stimulative. However, they claim the multiplier effect for tax cuts is smaller because some of the tax reduction is saved (!) rather than spent on consumption.

That isn't a "multiplier". They are only claiming to spend more of what they collect than the taxpayer would. But, "spending" is not better than "saving" for supporting jobs; in fact, saving is better. They are only measuring consumer spending, so they think consumer spending is everything.

The spending and the saving of taxpayers is just as "stimulative" as when the government takes the money and spends it. Politicians make a shameful, distorted argument for raising taxes so that they and their supporters can benefit from the money. This is a crazy, economic defense of robbery.

From the National Center for Policy Analysis:

[edited] Contrary to Keynesian theory, tax reductions appear to have a greater multiplier effect on GDP, consumption, and investment than spending. Christina Romer is chairman of the Council of Economic Advisers. She and David Romer found that $1 of tax cuts raises GDP by about $3. The incentive effects of reduced tax rates explain this result.

GDP is "Gross Domestic Production", the total production of the United States. Greater GDP translates roughly to more jobs. Taken another way, $1 of increased tax collected through higher tax rates causes a $3 reduction in GDP, killing jobs.

The incentive is to keep more money after-tax. The effects are to increase the investment of time and money by imaginative and productive people. The "multiplier" from lower tax rates is that entrepreneurs will find more productive ways to employ more people. Their success produces a permanent increase in prosperity for the employees and the owners, and lower prices or better products for their customers.

(Return to beginning)
 

Rules and Taxes

A threat by government, new rules or higher tax rates, threatens the incentive to produce low-profit products and to develop new products. Higher after-tax profits drive a demand for more workers. The threat of lower profits causes employers to lay off workers to avoid losses.

Losses are discovered in a time of crisis, and there is suddenly less wealth to trade, invest, and risk. The government should do less to disrupt the economy so that investors and workers can adjust to meet changing demand. The government has a long history of interfering with this adjustment. Private enterprise and a free market has a history of being successful.

People cry for the government to do "something" in a time of crisis. Doing "nothing" means not threatening the new relationships and risks that people must arrange to meet the new challenges. The government didn't create the economy and it can't directly intervene to "fix" the economy. The entrepreneurs and businesspeople of the society are not in the government. This explains why large-scale government interventions decrease employment, destroy efficiency, and make crises worse.

The problem is not to fix a broken part in the economic machine. The problem is to rebuild part of that machine to produce different products in different amounts. Only the entrepreneurs and managers of the free economy have the knowledge and incentive to do that well.
 

Cargo Cult Results

We observe that the Cargo Cult islanders have built a few clearings, each one larger and more decorated than the last. But, no bird-gods have visited or even come close. Nothing much has changed, but they have less food because the people of the village have no time to tend the sweet potatoes. They are busy building clearings.

The leaders call a tribal council. They discuss the anger of the villagers and decide that it will not go well for them if they do not succeed. They decide to build a gigantic clearing more wonderful than any so far. That surely will work, according to their deepest religious belief, and they will become legends in their tribe. They are old, and do not want to give up their honor and leadership.

---
So, tell me again. What is the benefit from stimulus spending taken as increased taxes from investors and businessmen? Where is the supporting data? What was the effect from recent, smaller trials, and in other countries? Why does Obama's team say that it will work this time, but only if it is gigantic?
 

More

The Tax Rebate Was a Flop,
Obama's Stimulus Plan Won't Work Either
August 6, 2008 - By Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, a professor at Harvard, and contributor to The Wall Street Journal.

He discusses the Economic Stimulus Act of 2008Wikipedia. Part of the plan was to manipulate the psychology of consumer confidence.

[edited] Those of us who supported this spending package reasoned that the program would boost consumer confidence as well as available cash. We hoped the combination would cause households to spend a substantial fraction of the rebate dollars, leading to more production and employment.

An optimistic and influential study by economists at the Brookings Institution projected that each dollar of revenue loss would increase real GDP by more than a dollar if households spent at least 50 cents of every rebate dollar.

[ This assumed that every $1 spent would increase GDP by $2, the magic multiplier. Note that no mention of this multiplier is made again. Why didn't it apply to the money actually spent, and also to the savings? ]

Tax rebates of $78 billion arrived in April-June 2008. The GDP figures are in, and the level of consumer outlays only rose by an extra $12 billion, or 15% of the refunded taxes. The rest went into savings, including the paydown of personal debt.

The rebates added $78 billion to the permanent national debt. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity.

(Return)

---------------
The government Is a Bad Investor and Spender

Investing requires a good outcome from careful organization and planning, which is measurable by profit. The government rarely makes a profit, and the bureaucracy wastes much money proving that it made good decisions, regardless of the money lost.

Below, Mr. Barro estimates that government military spending in World War II resulted in $80 in GDP (production) as a result of each $100 spent. The $100 was GDP by definition. There was an associated loss of $20 in other production because of the disruptive effects of that government spending.

This was a cost of war. There is no reason to bear this cost in a time of peace, except for the most vital of public needs.

Government Spending Is No Free Lunch
by Robert J. Barro, economics professor at Harvard University and a senior fellow at Stanford University's Hoover Institution.

[edited] A particularly good case to examine is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that World War II spending increases provided the stimulus that finally got us out of the Great Depression. I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.

I have estimated that World War II raised US defense expenditures by $540 billion (in 1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 80% (430/540).

Put another way, the war lowered components of GDP aside from military purchases. The largest declines were in private investment, non-military government purchases, and net exports. Personal consumer spending changed little. Wartime production siphoned off resources from other economic uses, so there was a decrease rather than a multiplier.

This analysis shows that war spending did not bring the U.S. out of depression. If anything, war spending suppressed GDP and employment.

---------------
FDR's Policies Prolonged the Depression
08/10/2004 - UCLA Newsroom By Meg Sullivan

[edited] UCLA economists Harold L. Cole and Lee E. Ohanian conclude that New Deal policies prevented economic recovery for seven years.

Roosevelt's policies kept wages 25% higher than they naturally would have been, for three years in 11 key industries. But, unemployment also was 25% higher. Gains in productivity at the time should have produced higher employment at lower wages.

Ohanian: "Why the Great Depression lasted so long had been a mystery. We worried about what conditions might produce another 10-15 year economic slump. We found that a relapse isn't likely, unless lawmakers gum up a recovery with ill-conceived stimulus policies."

Cole: "The Depression dragged on for years. That fact convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions. So, government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

------
Spending did not end the Great Depression
Reduced spending and lowered tax rates did it.
04/2010 - Planet Yelnick

[edited] What happened in 1945 at the end of WWII? FDR was convinced the only way to employ the 12 million returning soldiers was another New Deal program, but he died before he could impose his plan. The new President Truman proposed it, along with national healthcare.

Both the Congress and Senate had Democratic majorities. They said "No" to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes across the board. Top marginal corporate tax rates effectively went from 90% to 38% after 1945.

By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the higher tax rates of the war years. Price controls ended by the end of 1946. The U.S. began running budget surpluses.

Unemployment was double-digit throughout the whole New Deal. One year after the end of New Deal policies and the return of economic freedom, it was under 4% despite the return of a huge number of soldiers.

------
The Deadweight Loss of Taxes
12/29/08 - EasyOpinions by Andrew Garland

The term "deadweight loss" refers to what is lost or never produced because of some policy. A higher income tax rate produces responses that decrease investment and production (jobs).

The primary effect is to remove money from individuals who would invest it more efficiently than the government. People will also work less, earn less, and pay less tax, if they don't think the extra money they could make is worth the extra hours or risk.

The secondary effect is to give investments a lower rate of return after tax, so investors tolerate less risk and invest more in tax free bonds and legal advice to avoid taxes. This also lowers investment in new activities and reduces opportunities for better paying jobs.

In November 1999, Martin S. Feldstein was the George F. Baker Professor of Economics at Harvard University and former President of the US National Bureau of Economic Research. He investigated the current effects of income tax rates on the economy.

Tax Avoidance And The Deadweight Loss Of The Income Tax

[edited] Traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on compensation and consumption [jobs]. The full deadweight loss is easily calculated to be as much as 30% of total revenue.

The deadweight loss caused by increasing tax rates above current levels may exceed $2 per $1 of revenue increase.

I will restate this. Government activities and transfer payments had better be useful to the society, because economic output has already been lowered by 30% of the taxes currently collected. And further, $2 worth of production (jobs) will be destroyed for every additional $1 collected through increased tax rates.

This is a severe loss, because there is no "stimulus" from that "extra" $1 in government spending. That $1 would have been invested or spent anyway. Taxes only move goods around from some people to other people, at great expense.

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More About Deadweight Loss
10/13/10 - Cato Institute by Christopher J. Conover

[edited]:  When the federal government takes an additional dollar from taxpayers, the actual cost to society is generally $1.44. The additional $.44 is the deadweight loss of taxation. When Congress shifts a dollar from Peter to Paul, it leaves society $.44 poorer. Martin Feldstein estimates $1.65 poorer.

University of Chicago economist Harald Uhlig estimates that each dollar of federal borrowing (deficit spending) ultimately costs our society $4.40.

------
Stimulus Package Unveiled
01/16/09 - Online.WSJ
by N.Bendavid, E.Williamson, and S.Reddy

A review of the details in the Stimulus Package.

Details of the two-year package, which calls for $550 billion in new spending and $275 billion in tax relief, will likely change as the bill works its way through Congress. But the document provides the first blueprint of how President-elect Barack Obama and congressional Democrats plan to fight the historic economic downturn, which has already wiped out 2.6 million jobs.

------
Welfare Spendathon: House Stimulus Bill Will Cost Taxpayers $787 Billion in New Welfare Spending
02/06/09 - Heritage.org by Robert E. Rector

A review of the welfare in the Stimulus Package and likely hidden costs.

The recently passed U.S. House of Representatives stimulus bill contains $816 billion in new spending and tax cuts. Of this sum, $264 billion (32 percent) is new means-tested welfare spending. This represents about $6,700 in new welfare spending for every poor person in the U.S.

But this welfare spending is only the tip of the iceberg. The bill sets in motion another $523 billion in new welfare spending that is hidden by budgetary gimmicks. If the bill is enacted, the total 10-year extra welfare cost is likely to be $787 billion.

See Also

"Keynesian Economics" in The Political Dictionary
The political meanings of common terms. (Sarcasm Warning)

The Department of GDP
You can spend, or government will do it for you.

The Myth of the Economic Multiplier
You don't create $40 in wealth by paying $10 to mow your lawn, and government spending doesn't multiply either.

A Short Argument Against Stimulus
Spending isn't so stimulating when you know that it must be paid back.

The Deadweight Loss of Taxes
Collecting $1 in extra tax kills $2 in production.

We Guarantee It
Government guarantees invite reckless actions and cause economic crises, including the current home mortgage mess. A government guarantee is a blank check on your personal account. The government will make good on the guarantee with your resources, and cause the next even bigger recession.

The Government Bailout IS the Problem
See the Angry-Economist "The Failout" by Russ Nelson

The economy is bad because no one can predict the future with a big government elephant stomping around. The elephant can't solve the problem, and it scares away the elves who can solve the problem. The elves are small, but they are smart and there are a lot of them.

Russ Nelson: Credit is scarce because nobody wants to lend and nobody wants to buy. The Federal Government is threatening to borrow and spend a TRILLION dollars.

Obama Team: No Nuclear Energy

Obama Administration: No on Nuclear Energy
03/06/09 - RedState by Francis Cianfrocca

Modern nuclear power can be stopped in many ways.

[edited] Energy Secretary Steven Chu told the Senate Energy and Natural Resources Committee that using the Yucca Mountain underground repository for storing nuclear waste is no longer an option. The proposed budget provides only token funding for the site.

Chu: We have better options than Yucca Moutain for storing commercial nuclear waste.

Providing nuclear waste storage has been a key barrier to expanding nuclear power in America. There are no clear alternatives to the Yucca site. America’s nuclear plants now store their waste on-site, above ground.

Chu and President Obama are saying in veiled language that they will not allow nuclear power to stage a comeback. If these guys get everything they want, America faces a future of much higher energy costs.

The Government Bailout IS the Problem

The Failout and Krugman
02/29/09 - Angry-Economist by Russ Nelson

The economy is bad because no one can predict the future with a big government elephant stomping around. The elephant can't solve the problem, and it scares away the elves who can solve the problem. The elves are small, but they are smart and there are a lot of them. The economist Paul Krugman has spun a theory for recovery. Will he bet on its success?

[edited] The problem here is simple: credit is scarce because nobody wants to lend and nobody wants to buy. The Federal Government is threatening to borrow and spend a TRILLION dollars.

If you are bank, would you loan money if you knew that an A-grade customer was going to be spending a TRILLION dollars soon? Of course not. Even if they choose not to get their loan from you, the price of lending is going to go up. It must go up when a TRILLION dollar buyer is showing up. So nobody is lending now.

And why would anyone buy anything now. You want to be positioned correctly for the TRILLION dollars which is going to enter the market soon. You don't want to invest your money in something, only to find that the market has shifted and your investment is toast.

The failout is not the solution to our problems. It is the CAUSE of our problems, merely by being threatened as a government action.

Why is this not obvious to everyone? I blame Krugman.

I wonder if Paul Krugman has borrowed huge amounts of money and spent it already? If he hasn't done it, then why should we do it? If he doesn't trust his own theory for his own household, then why should we trust his theory for our country?

Of course he hasn't done it, because his theory requires that many people behave differently together than each person would for himself. The group is made up of individuals, so how can that be?

Krugman's theory has no legs. That dog don't hunt.

-----
Why the Slow Recovery?
02/03/10 - Cato at Liberty by David Boaz

(edited excerpt)

President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back. Answer: Taxes, regulation, and uncertainty. Some headlines:

• Wealthy Face Higher Taxes.
• Big Firms Would Face Deeper Tax Bite.
• A Red-Ink Decade/Obama Budget Sees Years of Deficits.
• Obama to target overseas tax breaks.
• Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.
• Obama budget would spend billions more.

The Economic Policy Institute illustrates this with a graph, at the link.

Employers, investors, and entrepreneurs are discouraged by higher taxes, more regulation, a larger share of GDP shifted to government, and expected Fed monetization of the soaring debt.

Obama budgeteers are flipping through the tax code for ideas.

Robert Higgs observes that regime uncertainty prolonged the Great Depression. Investors were worried about what FDR might do next.

Will Wilkinson:  Treasury Secretary Tim Geithner has said that businesses need certainty today to make long-term plans for tomorrow. But, creating completely irresponsible, economically chilling regime uncertainty appears to be the intent of the Obama administration.

The Housing Crisis in a Nutshell

The Housing Crisis, in a nutshell
02/24/09 - Angry-Economist by Russ Nelson

[edited] Pretend that you are a bank.

• You make a loan to somebody, say with no down payment at all.
• Because you're loaning money to everyone that doesn't run away fast enough, everyone thinks they can own a house.
• The price of houses rises 20%. The loan you originated is now only a loan for 80% of the value of the house, so your risk has gone down.
• In fact, your risk has gone up; way up.
• But because there's a school of thought that says that your risk has gone down, people are willing to buy your risk and turn it into a stock.
• All sorts of people bought "80%" risk mortgage stocks that were really 100% risk mortgage stocks; people who shouldn't have been investing in anything that risky.
• And because these mortgages were intermingled with real 80% risk mortgages, nobody knows which of these stocks is worthless, so nobody realy knows how much money they have.
• Time is the only cure for this, but during that time nobody really knows how much money they have, so nobody will want to spend anything.
• What will the stimulus do to change this? Nothing. In fact, it will make the problem worse because if the feds are borrowing that much money, nobody has any incentive to loan to more risky folks (which is everyone).

Obama and God

Obama's Interview with Cathleen Falsani
11/11/08 - blog.BeliefNet by Steven Waldman

Barack Obama's thoughts about his religion, followed by my comments.

Waldman: The most detailed and fascinating explication of Barack Obama's faith came in an interview he gave March 27, 2004 to Chicago Sun Times columnist Cathleen Falsani when he was running for U.S. Senate in Illinois.

[excerpt]

Obama:   And so, the biggest challenge, I think, is always maintaining your moral compass. Those are the conversations I'm having internally. I'm measuring my actions against that inner voice that for me at least is audible, is active, it tells me where I think I'm on track and where I think I'm off track.

It's interesting particularly now after this election, comes with it a lot of celebrity. And I always think of politics as having two sides. There's a vanity aspect to politics, and then there's a substantive part of politics. Now you need some sizzle with the steak to be effective, but I think it's easy to get swept up in the vanity side of it, the desire to be liked and recognized and important.

It's important for me throughout the day to measure and to take stock and to say, now, am I doing this because I think it's advantageous to me politically, or because I think it's the right thing to do? Am I doing this to get my name in the papers or am I doing this because it's necessary to accomplish my motives.

Read more ...

[excerpt]

Falsani:   Do you pray often?

Obama:   Uh, yeah, I guess I do.

Its' not formal, me getting on my knees. I think I have an ongoing conversation with God. I think throughout the day, I'm constantly asking myself questions about what I'm doing, why am I doing it.

One of the interesting things about being in public life is there are constantly these pressures being placed on you from different sides. To be effective, you have to be able to listen to a variety of points of view, synthesize viewpoints. You also have to know when to be just a strong advocate, and push back against certain people or views that you think aren't right or don't serve your constituents.

And so, the biggest challenge, I think, is always maintaining your moral compass. Those are the conversations I'm having internally. I'm measuring my actions against that inner voice that for me at least is audible, is active, it tells me where I think I'm on track and where I think I'm off track.

It's interesting particularly now after this election, comes with it a lot of celebrity. And I always think of politics as having two sides. There's a vanity aspect to politics, and then there's a substantive part of politics. Now you need some sizzle with the steak to be effective, but I think it's easy to get swept up in the vanity side of it, the desire to be liked and recognized and important.

It's important for me throughout the day to measure and to take stock and to say, now, am I doing this because I think it's advantageous to me politically, or because I think it's the right thing to do? Am I doing this to get my name in the papers or am I doing this because it's necessary to accomplish my motives.

Falsani:   Checking for altruism?

Obama:   Yeah. I mean, something like it.

Looking for -- It's interesting, the most powerful political moments for me come when I feel like my actions are aligned with a certain truth. I can feel it. When I'm talking to a group and I'm saying something truthful, I can feel a power that comes out of those statements that is different than when I'm just being glib or clever.

Falsani:   What's that power? Is it the holy spirit? God?

Obama:   Well, I think it's the power of the recognition of God, or the recognition of a larger truth that is being shared between me and an audience.

That's something you learn watching ministers, quite a bit. What they call the Holy Spirit. They want the Holy Spirit to come down before they're preaching, right? Not to try to intellectualize it but what I see is there are moments that happen within a sermon where the minister gets out of his ego and is speaking from a deeper source. And it's powerful.

There are also times when you can see the ego getting in the way. Where the minister is performing and clearly straining for applause or an Amen. And those are distinct moments. I think those former moments are sacred.

Observations

I have an ongoing conversation with God. I'm constantly asking myself about what I'm doing, why am I doing it.

This is what a TV evangelist would say. It is good to closely examine policy. It is strange for someone to constantly question his own actions and motives.

and push back against certain people or views that you think aren't right or don't serve your constituents.

So, there are two types of views. The ones that aren't right, and the ones that are right but that don't serve your supporters. Why make that distinction? This assumes that there are many right things to do, and the politician can choose the one that particularly serves his supporters.

I'm measuring my actions against that inner voice that for me at least is audible, is active

Obama is in constant moral struggle. I think good policies benefit everyone and encourage voluntary cooperation. Those policies do not require a moral struggle.

I hope his moral struggle does not involve choosing who to hurt for the greater good. To me, it is a fundamental requirement of Democracy not to use the power of the state to hurt anyone. I am worried that I don't understand what that moral struggle is about.

I personally do not have an "audible" inner voice, but a set of feelings and desires that can be made more specific by careful thought and observation. I look to the world and collected experience to guide my views. My desires suggest solutions; my intellect guides me to the solutions that will work without harm.

I think it's easy to get swept up in the vanity side of it, the desire to be liked and recognized and important.

Obama is in constant struggle not to be vain and self-serving.

Throughout the day I measure and take stock. Am I doing this because it is good politically, or because I think it's the right thing to do? Am I doing this to get my name in the papers or am I doing this because it's necessary to accomplish my motives.

Another struggle, here against selfish motives. It seems that he has not definitely won that struggle, or does not know if he has won it.

When I'm talking to a group and I'm saying something truthful, I can feel a power that comes out of those statements that is different than when I'm just being glib or clever.

I think it's the power of the recognition of God, or the recognition of a larger truth that is being shared between me and an audience. I see there are moments that happen within a sermon where the minister gets out of his ego and is speaking from a deeper source.

It bothers me that "saying something truthful" is special. This may be a complaint that his political career requires lying. I have seen him bend the meanings of his promises and words.

Obama feels a special connection to God and a larger truth. This is different than the power he feels when being glib or clever. He enjoys being the instrument of a deeper, divine source. This is not an escape from ego; it is a celebration of ego.

Obama is a Gifted Talker

The sobering voice of Mr. Market
03/04/09 - PowerLineBlog by Scott Johnson

[edited] Obama's self-awareness has been a source of his strength. Has he been misled by it?

Fred Barnes quotes Obama letting his hair down with a group of television anchors at a White House lunch. Obama assured them he likes being president. "And it turns out I'm very good at it."

What could he mean? Paul Mirengoff has rightly identified Obama's "faith in words" as his leading characteristic:

"Obama's faith in words is a function of his life experiences. His faciility with words is extraordinary, and it accounts almost entirely for his astonishing success in life. Obama has never run anything substantial other than a political campaign, so he has not yet confronted the limits of his words. He has dabbled in lawyering, where words can take on a disproportionate significance, and in teaching law, where words are the be-all and end-all."

Don't Worry, Be Happy
Obama gives the markets the back of his hand.
03/03/09 - WeeklyStandard by William Kristol

[edited] Now, Obama wants to focus on "long term" issues like health care, energy, and education -- while not showing any urgency about the banking crisis.

Instead, the Obama administration throws more money at Citi and AIG. This at best simply puts off the day of reckoning (but at some considerable cost); at worst, Obama's Treasury is fiddling while Rome burns.

Everyone agrees the toxic assets have to be separated from the rest. The Obama administration has shied away from embracing any solution. Has a single toxic asset actually been seized, separated, sold, or de-toxified? I don't think so.

The stock market isn't like a tracking poll. Polls were about the electoral prospects of Barack Obama. The stock market is about real money, about the livelihoods of real Americans.

Obama's political advisors may have told him that dealing with the banking system will be politically difficult. Treasury Secretary Tim Geithner may want to build up his political capital after a rough confirmation before he steps up to the plate. Larry Summers may not want to endanger his chance to be Fed chairman by being identified with an unpopular bank "bailout".

I'm told almost every theme in Obama's speech last Tuesday night was focus-group tested, and the speech played pretty well politically. But the markets weren't impressed. Isn't it time for Obama and his team to get up the nerve to stop playing politics and to govern?

Government vs The Market

Government, the Downturn, and Responsibility
03/01/09 - CafeHayek by Don Boudreaux

Mr. Nouriel Roubini is an economist, interviewed by the Wall Street Journal on Februry 21. He recommended nationlizing the banks because markets have failed to price and trade assets, due to excesses, greed, and irrational exuberance. Some readers responded in letters to the editor.

[edited] Mr. Roubini makes no mention whatsoever of the government interventionism that is largely the cause of our current crisis.

• Was the Federal Reserve's policy of holding interest rates below the real rate of interest and thereby causing a credit bubble and debt-fueled consumption a market failure?
• Or was the market failure that market participants did not read F.A. Hayek's "Monetary Theory and the Trade Cycle" and divine the peril that was not being signaled through the price mechanism?
• Or does Mr. Roubini consider it a market failure that lenders were coerced by the government to make mortgage loans that never would have been made based on market-driven underwriting standards?
• Is the failure of unqualified homebuyers to decline the cheap, no-down-payment loans that lenders were coerced to offer them another market failure?
• Was it market failure that lenders knew they would never have to suffer the consequences of reckless underwriting when they could dump their rotten portfolio on the taxpayers via the government-backed Fannie Mae and Freddie Mac?

The word "market" does not mean an old man in a turban who rubs his chin and suggests a price. It means all of the people with an interest in the problem, with intelligence and experience bought with thousands of hours of study and action.

These people are wiser and better than an academic economist who has spun theories and equations, claiming to understand what government-forced result is good for us all. But, the government pushes the self-interest of its politicians and favored interests, claiming that it knows best.

Tolerance, Muslim-Style

Tolerance, Muslim-Style
03/01/09 - AdviceGoddess by Amy Alkon

[edited] Ramzan Kadyrov is age 32, a former militia leader, and president of the Russian state of Chechnya. He finished afternoon prayers and explained "with chilling composure" why seven young women were shot in the head and deserved to die.

He said the women had loose morals and were rightfully shot by male relatives in honor killings. "If a woman runs around and if a man runs around with her, both of them are killed." Kadyrov is imposing Islamic values to strengthen the traditional customs of predominantly Muslim Chechnya.