Monday, September 29, 2008

Yea - It Was the Lack of Regulation

From the NY Times September 30, 1999:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

And.... drumroll please.....

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

"From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter Wallison a resident fellow at the American Enterprise Institute. "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

Ha! Our brilliant state planners at work...

Mr. Posner is a Smart Guy

Bailout Economics for Dummies.

Shop (and bank) Locally

Commenting on Friday's WaPo article regarding the continued growth of local banks while the Wall Street conglomerates fail, Timothy Lee at CATO tells us to bank locally:
It’s important to remember that “the financial industry” is sprawling and diverse. Some banks are on the verge of collapse. Others appear to be doing just fine. It would be unfair to these more prudent banks (not to mention taxpayers) to bail out their irresponsible competitors. And it’s a mistake to assume that, simply because a few reckless Manhattan firms have fallen, the entire financial industry is on the verge of collapse. It may be that these are simply firms that made too many bad investments, in which case their bankruptcy is precisely what is supposed to happen in a free market. Any Congressional action should be focused on preserving the health of the financial system as a whole, not at preventing the bankruptcy of individual firms that made bad investments.
"Financial Sustainability" - it's the new black.

Mike Canon Gets It

In his speech on the financial crisis, President Bush remarked:

Our system of free enterprise rests on the conviction that the federal
government should interfere in the marketplace only when necessary.

Hmm. I wonder what happens if I substitute other words for “free enterprise” and “in the marketplace.”

Our system of free speech rests on the conviction that the federal
government should interfere in the marketplace of ideas only when necessary.

Eeew. I don’t like the sound of that. But I guess it’s consistent with the Bush administration’s policy of paying columnists for sympathetic opeds. Let’s venture on.

Our system of a free press rests on the conviction that the federal government should interfere in the media only when necessary.

Well . . . The New York Times might object . . . but I guess if George W. Bush says it’s necessary . . .

Our system of freedom of religion rests on the conviction that the federal
government should interfere in your church only when necessary.

Holy smokes.

Our system of freedom from unreasonable search rests on the conviction that the federal government should interfere in your phone calls only when necessary.

Friday, September 26, 2008

200+ Economists...

It seems over 200 economists have signed the following petition opposing the bailout (signatures here):

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

Where Did You Stand in '08?

I predict, that should McCain lose in November, the bellweather question for any Republican hoping to win the 2012 nomination will be, "where did you stand on the bailout question?" Just as Iraq seemed to propel Obama over Hillary, this is the fundamental question of the moment. And for those of you taking notes on the right, you could do a whole lot worse than Governor Mark Sanford of South Carolina. (Tip to Balko at Reason).

Thursday, September 25, 2008

Flying Blind

The insight of George Will:
In 1945, Britain's Labour Party explained its nationalization policies by saying that socialism should include government "control of the commanding heights of the economy."

In 1945 Britain, this meant the stuff of industrialism -- iron, steel, coal, railroads, etc. In 1945, Aneurin Bevan, a leading Labour politician, said: "Britain is an island bedded on coal and surrounded by fish; only an organizing genius could produce a coal shortage and a fish shortage simultaneously." Socialism soon produced that.

Today, the commanding heights of America's economy are financial services, and regarding them, the line between the public and private sectors is being blurred to indistinctness. What is the American equivalent of coal and fish? We might find out.

Indeed we will. I'm on pins and needles over here. Here we have a transfer of assets, valued somewhere between $0 and $2.5T, into the anxious hands of executive branch bureaucrats, of whom, I surmise, have little more than an elementary understanding of mortgage-credit-risk evaluation*, have little to no real public accountability, and are certain make lots of new friends on K Street.

*I base my conclusion on this article by Arnold Kling wherein he states:
I am wearing two hats in opposition to the bailout idea. One hat is my libertarian hat, which does not like the power grab. The other hat is the applied financial economics hat, which was my career in the late 1980's and early 1990's. Speaking from the latter point of view, I have to warn that nobody involved in the bailout proposal has sufficient knowledge of mortgage credit risk. They are like Dick Syron--in over their heads without realizing it. The last thing we need in the mortgage market is another large, inexperienced player.
That's my biggest problem with the bailout plans. I don't think anyone, particularly in Congress, or even the Fed, really understands the big-picture situation. Each supposed solution has only led to another problem (beginning with Bear Sterns in March), which leads me to believe that either nobody has really taken the time to fully analyze the trail of liabilities, or in the alternative, we are witnessing the implementation of one masterful massive wealth transfer conspiracy under the guise of economic-fear-mongering. Being a libertarian kook, I fully realize that our government is far too incompetent to pull off the latter and, unfortunately, far too capable of forging ahead despite the former. So, here we are. One more bailout. And you, me and the next 8 or so generations of American taxpayers just purchased a whole-lot-of of snakeoil from one set of shysters and are handing over control of the same to some other well-connected technocrats to hold in our trust, while we are left hoping that this latter group somehow attain the superhuman ability to process copious amounts of macro-level information while simultaneously staving off the wishful favor of the corporate welfare whores and their lackeys in the legislature. I'm less than optimistic.

Leave it to the Law Professor

... to get it all right.

Best Trade Ever?

One can hope, I suppose. I admit that Paulson is no dummy, and Bernanke has spent his entire career studying the root causes of the Great Depression. Still, power does weird things to people and, IMO, this whole fandango reeks of wonkish social engineering.

Me Too, Me Too

Get in line while the get'ins good:

With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors, Ford, and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend—separate from the controversial Wall Street bailout plan—includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."

Yea. The 'Bush Legacy' that just keeps on givin...

And We Have a Deal....

IMO, there's absolutely no upside here at all except it mostly likely means the end of any major new spending initiative under President McCain or Obama. And maybe all this new spending will mean bringing the boys and girls home from Iraq sooner rather than later.
It all kind of reminds me of an episode of the West Wing:
BARTLET: Gentlemen, let's talk about what we're talking about. You're worried thatI'm going to announce I'm deploying 150,000 American soldiers three weeksbefore the election and suddenly your race is about my war.
Santos and Vinick glance at each other.
BARTLET: You can speak candidly.
SANTOS: It does change the nature of the election. But more importantly, a new President would have an easier time brokering a diplomatic solution.
BARTLET: If I thought we could wait until after election, we would wait.
VINICK: What's this going to cost?
BARTLET: It depends on how long we stay.
SANTOS: It doesn't matter. The first 100 days in office are the most productiveof the whole term and there's no way we can extricate ourselves from fromsomething like this in three months. It's not about the money. You're blowingany political capital we might have by forcing us to fight a war.
VINICK: Do we have an estimate?
BARTLET: First twelve months: 70 billion.
VINICK: I can say goodbye to my tax cut. Your education plan is certainly off thetable. What's a victory in this?
Life imitates art, imitating life....

Wednesday, September 24, 2008

Best Blurb I've Read All Day

"I must tell you, there are those in the public debate who have said that we must act now. The last time I heard that, I was on a used-car lot," said Rep. Mike Pence, R-Indiana. "The truth is, every time somebody tells you that you've got to do the deal right now, it usually means they're going to get the better part of the deal."

Yep. Reminds me of Dwight Shrute.


In the 2004-05 school year (the latest with available data), the nation spent about $520 billion, adjusted for inflation, on public schooling, a figure that in two years would surpass the utterly atrocious $1 trillion some people fear taxpayers are about to eat saving investment bankers. And, of course, we’ve been paying through the nose for public schools for decades. But what do we have to show for it Flat achievement, sinking international academic standing, and a lot more teachers and school employees living off the taxpayers.

Without question, from taxpayer and simple justice perspectives, the proposed rescue of private companies that took big chances and lost is unconscionable. It’s hardly, however, a sign that free markets don’t work. Indeed, considered alongside the perpetual bailout that is public schooling, it just highlights once again that government—the constant bailer—is the real problem, not a free market that would punish both bad bankers, and bad schools, if only it were allowed.

The Entangled Financial Webs We Weave

Only insert "governments" for "we."

Rounding up some suspects:

Don Boudreaux on monetary policy.

Frank Shostak on Fannie and Freddie.

Randal O'Toole on land use regulations.

Chris Dillow on the principal agent problem.

Russ Roberts on perverse tax incentives.

Meanwhile, Robert Higgs disputes the idea that the credit market is "frozen," and David Cay Johnston suggests some questions for skeptical business journalists. Ilya Somin sees a slippery slope ahead.

Via Reason.

Tuesday, September 23, 2008

We're All Socialists Now


The Most Leftist Administration in History?

According to George Will (and he's not talking about Obama):

The New Deal never acted so precipitously on such a scale. Treasury Secretary Paulson, asked about conservative complaints that his rescue program amounts to socialism, said, essentially: This is not socialism, this is necessary. That non sequitur might be politically necessary, but remember that government control of capital is government control of capitalism. Does McCain have qualms about this, or only quarrels?

You have been warned. Whole thing here.

Monday, September 22, 2008

Land Use Restrictions and the Housing Bubble

A nice history here.

Ron Paul on Bailouts

Bush-Clinton Interventionism

Steve Chapman digests the similarities:

The president's arrogant, go-it-alone style has done much to alienate our European allies, so you will not be surprised to hear this complaint from the French foreign minister: "We cannot accept either a politically unipolar world, nor a culturally uniform world, nor the unilateralism of a single hyper-power." But you might be surprised to find that the statement was made in 2000—in a fit of pique at President Clinton.

Whole thing here.

Wednesday, September 17, 2008

Happy Birthday US Constitution

221 years old...; but, alas, none of the major Presidential candidates really care.

Where have you gone Dr. Paul? And speaking of Paul, did anyone notice that gold was up 8.25% today, while the Dow plunged 448 points (4.1%)? Of course not. The only people who really care about such mundane subjects as monetary policy are those that also tend to take Constitutional rights seriously.

Pimping for the Public

BO and John McCain have both been all over the "public service" bandwagon of late. The charade just makes me cringe. I particularly like Nick Gillespie's summation:
As the father of two young sons, I find fewer things more galling, nauseating, and mildly nightmare-inducing than politicians hectoring or cajoling ordinary American citizens to listen to the grand call of "national service," to serve a cause greater than one's self. As Republican presidential candidate Sen. John McCain has put it, "The richest men and women possess nothing of real value if their lives have no greater object than themselves." Which often (though certainly not always) means suiting up to fight a stupid elective war or, far less gruesome but still frustrating, putting an upper-middle-class career on ice for a coupla-three years while punching the clock at a public-sector sinecure of dubious policy effectiveness.
Seriously. And McCain's military tenure aside, the mere notion that spending a career in government, be it in Springfield or D.C., is some form of selfless service for the little man is pure garbage. Being a senator is not serving the public and the men and women that seek the post do so to stroke their respective ego's and aggrandize their own power and prestige. It's not "public service," its public office and the motivation for seeking the same is self-promotion. To be sure, whenever Mr. McCain begins a sentence with mention of his "self-sacrifice" and "service" to the people of Arizona, you can be certain that he's looking to push the Johnny Mac agenda all over you and me.
Whole thing here.

Calling All Regulators

Tyler Cowen makes some good points in the NYT:

[F]inancial regulation has produced a lot of laws and a lot of spending but poor priorities and little success in using the most important laws to head off a disaster. The pattern is reminiscent of how legislators often seem more interested in building new highways — which are highly visible projects — than in maintaining old ones.

The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated. To be sure, these institutions contributed to the severity of the Bear Stearns crisis and to the related global credit crisis. But it’s not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies.

In other words, the regulation that we have didn’t work very well.

There are two ways to view this history. First, with the benefit of hindsight, one could argue that we needed only a stronger political will to regulate every corner of finance and avert a crisis.

Under the second view, which I prefer, regulators will never be in a position to accurately evaluate or second-guess many of the most important market transactions. In finance, trillions of dollars change hands, market players are very sophisticated, and much of the activity takes place outside the United States — or easily could.

Whole thing here.

Wednesday, September 10, 2008

Barr Seeks Paul


My money is on Paul saying, "no." But it would shake up things for me, to be sure.

Monday, September 08, 2008

Bailouts and Censorship

David Boaz comments on theFreddie/Fannie bailout:

Capitalism is a system of profit and loss. It works because each person and each company, in seeking its own interest, is led “as if by an invisible hand” to supply goods and services that others want. Companies that satisfy consumers prosper. Companies that can’t produce goods that consumers want–like Chrysler, repeatedly–suffer and sometimes go out of business. The failures are often painful. But as Dwight Lee and Richard McKenzie wrote in their book Failure and Progress , “Economic failure is to the economy what physical pain is to the body. No one enjoys pain, but without it the body would lack the information needed to maintain its health.” Government subsidies to prevent business failure simply keep pouring money into businesses that are relatively unsuccessful at satisfying consumer desires. They are, among other things, censorship of vitally needed information. Employees, entrepreneurs, and investors need to know where their money and talent are most valuable. Profits and losses are key indicators of that.

Whole thing here.

Freedom's Just Another Word...

...that was largely ignored by both parties during their respective conventions. And Steve Chapman noticed:

You will scour the presidential nominees' acceptance speeches in vain for any hint that your life is rightfully your own, to be lived in accordance with your beliefs and desires and no one else's. The Founding Fathers set out to protect "life, liberty and the pursuit of happiness," but Barack Obama has a different idea.

The "essence of America's promise," he declared in Denver, is "individual responsibility and mutual responsibility"—rather than, say, individual freedom and mutual respect for rights. The "promise of America," he said, is "the fundamental belief that I am my brother's keeper; I am my sister's keeper."

In reality, that fundamental belief is what you might call the promise of socialism. What has set this country apart since its inception is not the notion of obligations but the notion of rights."All previous systems had regarded man as a sacrificial means to the ends of others, and society as an end in itself," wrote the novelist and philosopher Ayn Rand. "The United States regarded man as an end in himself, and society as a means to the peaceful, orderly, voluntary co-existence of individuals."

That idea got lost somewhere between Thomas Jefferson and John McCain. What do Republicans believe in? McCain told us Thursday: "We believe in a strong defense, work, faith, service, a culture of life, personal responsibility, the rule of law.... We believe in the values of families, neighborhoods and communities.

"Would it be too much to mention that what sustains the American vision of those things is freedom? That without it, personal responsibility becomes hollow and service is servitude? Apparently it would. Republicans are big on promoting freedom abroad, but in this country, the term encompasses a lot of things they don't like—the right to a "homosexual lifestyle," the right to protest the Iraq war, the right to privacy, the right not to recite the Pledge of Allegiance, and more. Conservatives who once thought Americans had too little freedom now sometimes think they have too much.

Liberals, on the other hand, are wary of embracing freedom precisely because of its historic importance to the right. They fear it means curbing the power of a government whose reach they want to expand.

Whole thing here.

Thursday, September 04, 2008

Palin and Jury Nullification

This is encouraging.

Palin the Shrewd

Tim Cavanaugh's take Palin's speech:
In Palin's delivery, the ancient battle cry of the American working class—"You think you're better than me?"—was emptied of its narcissism and butch bluntness, reconfigured with qualities we don't ordinarily associate with salt of the earth Americans: dry wit, newsy allusiveness, a confidence that the people you're addressing don't need to have the jokes explained to them. It wasn't surprising that the hockey mom pounded Barack Obama bloody with sallies against his alleged elitism (though whoever put out the pre-speech disinformation that Palin would not be used as an "attack dog" deserves an award at this year's Rovies). It was surprising that she did so while maintaining such a sunny, gracious, genteel demeanor. Through 3,000 words of political aikido, Palin seemed to be doing something the left and right agree working people should never be allowed to do. She seemed to be enjoying herself.

The aw-shucks quality and class warfare elements here are familiar. The indirection, sarcasm, and unembarrassed intelligence are new. It's a measure of how surprising Palin's style was that so many of her detractors could respond only with rage, incomprehension, and irrelevant comprehension. In particular, Palin's Democratic counterpart Joseph Biden's predictable-as-Pickett's-Charge objection that the speech lacked substance sets up a very plausible scenario for the vice presidential debate: I'm willing to predict that the hyper-informed Biden will demonstrate his mastery of the facts, leave no doubt about his flair for complex policy questions, get his ass handed to him in the debate, and never understand what went wrong.
Whole thing here.

Wednesday, September 03, 2008

McCain the 'Great Man'

Matt Welch knocks it out of the park with this one (yet again):

Nowhere is McCain's militaristic conception of citizenship more on display than in his writings on Teddy Roosevelt, the interventionist and empire-building president whose video tribute at last night's convention was greeted mostly by stony silence.

"In the Roosevelt code," McCain writes in Worth the Fighting For, "the authentic meaning of freedom gave equal respect to self-interest and common purpose, to rights and duties. And it absolutely required that every loyal citizen take risks for the country's sake.... He distrusted leading financiers of his day who put profit before patriotism.... He respected the role business conglomerates played in America's emergence as a great economic power, but he also understood that unrestrained laissez-faire capitalism would crush competition from smaller businesses.... He fought the spirit of 'unrestricted individualism' that claimed the right 'to injure the future of all of us for his own temporary and immediate profit.'... He sought not to destroy the great wealth-creating institutions of capitalism, but to save them from their own excesses."

Roosevelt is McCain's great hero, the man he would most attempt to emulate in the White House. Yet his short and frantic life contains warnings McCain has never seemed to heed. Aside from the fact that the aggressive, Navy-led imperialism that McCain admires so much was fueled in part by outright racism (T.R. once wrote, for example, that "the most ultimately righteous of all wars is a war with savages"), the grand tragedy of Roosevelt's Bully Boy career was that, at some point, he lost the ability to distinguish between his own personal ambitions and the general fortune of the country.

"It would be a mistake to nominate me," a White House re-seeking T.R. said in 1916, "unless the country has in its mood something of the heroic." Ninety-two years later, the grandson of one of Roosevelt's sailors is veering perilously close to the political narcissism he's long warned us about.

Tuesday, September 02, 2008

Libertarians on Palin

Balko here:

I don’t buy the "no experience" critique. Frankly, I’d rather have someone in the White House who hasn’t been corrupted by too much time in politics.

Welch here:

Choosing Palin makes for potentially great politics, but it makes a mockery of McCain's claim to be the national security adult in this race, especially considering that if he's elected, he'll be the oldest first-term president in American history.

David Harsanyi here:

But stepping outside the horserace aspects of 2008, Palin is the most libertarian Republican that’s been on a major ticket for a long time. This ideological storyline should appeal to many Western voters.

And more from Harsanyi here:

Then there is a question of authenticity. And it matters. Those who will do anything for power, will say anything and support any position that is convenient. From John McCain to Joe Biden to Obama, one gets the sense that political office is their life's work. All of them have made attempts to create the perception that, hey, they're ordinary Americans just like you. Palin won't have to work at genuineness. With Palin, you get the impression she can take politics or leave it. Her life certainly hasn't been saturated with policy, favor trading and back scratching.

Of course, Washington has a mysterious power to turn perfectly reasonable, wholesome, well-meaning human beings into equivocating crooked gasbags. But, from the little we know about Palin, such a transformation doesn't seem likely. And for libertarians - in the broadest sense of the small "l" word -- she's the best candidate they can expect.

Jeff Patch here:
Comparing her experience to Biden borders on ridiculous. Since when do libertarians find encouragement in government, much less someone who has spent 36 years in Washington funding programs like Amtrak and prosecuting the drug war?