Comments and observations on social and political trends and events.

Tuesday, October 28, 2008

Spreading the Wealth and Selfishness: Obama’s Altruist Trojan Horse

I’ve posted links to Investor’s Business Daily (IBD) because I consistently agree with their editorials. I highly recommend their series titled The Audacity of Socialism. Like most right-of-center publications they properly decry the abuses of liberal policy but fall short of challenging the moral premises behind liberal policy. Therefore it is refreshing to see this quote in the editorial “Defining Problems With Socialism For The Post-Cold War Generation” posted on October 27, 2008.

[Socialists] see capitalism with its profit motive as vulgar and immoral
because it's at odds with altruism — the idea that the general welfare of
society is the proper goal of individuals.

What they fail to realize is society is the greatest beneficiary of our
system of rational self-interest. The poorest of the poor and the laziest of the
lazy still benefit from the genius of the entrepreneur and the risk-taking of
the venture capitalist.

The article starts off also with good advice to McCain: slapping the label socialist onto Obama won’t make nearly as much impact as spelling out the personal consequences of Obama’s socialist policies. To most people, especially the younger generations, the term socialism has no meaning. They would take more offense to saying Obama doesn’t like “Dancing With The Stars.”

Returning back to the first point about the altruist premise behind socialism IBD does fall somewhat into the trap that most conservatives do: saying that the invisible hand of the market ultimately helps people more than government handouts. While I agree this doesn’t go far enough. This answer looks at the recipients, not at those who create values. We also need to reinforce the idea that people own the values they created and obtained. Redistribution inevitably means taking -- by force -- values from people who obtained them by investing their time, energy and resources. Everyone has heard the well known saying that “Time is money.” Well, the reverse is true too: money is time. When someone advocates increasing taxes to pay for their pet redistributionist programs they essentially are laying claim to the time it takes for us to pay for the increased taxes. If you dig deep enough what they are saying is that your life and your time is ultimately not yours.

A lot of issues are packed into the idea of redistribution which I’ll get to shortly. Suffice it to say a moral case can be made against “spreading the wealth around” as Obama would say. Congratulations to IBD for bringing this into the light.

UPDATE: As reported Jack Tapper's ABC blog he quotes how Obama responded recently to McCain's and Palin's charges of Obama being socialistic. His reply followed by Tapper's comment:

"John McCain and Sarah Palin they call this [Obama's policies] socialistic," Obama continued. "You know I don’t know when, when they decided they wanted to make a virtue out of selfishness."

It's unclear if this was a nod to the Ayn Rand book "The Virtue of Selfishness," with all that the invocation of Rand implies.

It would seem to be, given the themes of Rand's work, what happens when independent achievers are demonized.

Which would fit with this description of those who want to keep their hard-earned tax dollars as "selfish."

Atlas may not be shrugging, but Obama is.

It's interesting as we come into the home stretch to see Obama slipping a bit in his normally well-controlled efforts to disguise his agenda. First was his "spreading the well comment with Joe the plumber." Now this. In any case bravo to Tapper for his catch.

Monday, October 20, 2008

The cause of our problems: the perils of a liberal Republican administration – Addendum

In my earlier post I provided the rankings the Fraser Institute gave to the U.S. and other countries using a number of different criteria. As I dug deeper into their report several more interesting facts come out that shed light on the claims that our financial problems are caused by 8 years of unfettered capitalism.

Consider this. The U.S. ranks as follows in these categories. The country in parenthesis ranked first in that category.

Credit market regulations: 23 (New Zealand)
Business regulations: 25 (Iceland)
Size of government: 42 (Hong Kong)
Legal system and property rights: 21 (Finland)

Not one of the U.S. rating falls in the top ten. Doesn’t exactly paint the picture of rampant capitalism, does it?

Friday, October 17, 2008

The cause of our problems: the perils of a liberal Republican administration

While researching recent posts on the financial crisis I found a publication by the Fraser Institute, a Canadian based organization “measures and studies the impact of markets and government interventions on the welfare of individuals. In our research, we bring together academics, economists, and policy analysts from around the world. The Institute's list of researchers has grown to include more than 350 authors in 22 countries (six of whom have been awarded Nobel Prizes), comprising more than 600 Institute publications and thousands of articles.” The publication, titled “Economic Freedom of the World: 2006 Annual Report,” contains some interesting tidbits that undercuts the accusations that “unfettered capitalism” caused our recent financial woes.

The report analyzes economic freedom in 42 different measures falling into four broad categories:

  1. personal choice
  2. voluntary exchange coordinated by markets
  3. freedom to enter and compete in markets
  4. protection of persons and their property from aggression by others.

Results? The U.S. ranks 8th out of 141 countries. The countries ahead of us (starting with #1): Hong Kong, Singapore, New Zealand, Switzerland, the United Kingdom, Chile, Canada and Australia.

I find it interesting the Switzerland is the only European country ahead of us even though it is clear that Obama’s and the Left’s agenda is to turn the U.S. into another European socialist/welfare state. We can see how well that’s working!

The report reaches several conclusions. The following list is quoted verbatim.

  1. Countries with more economic freedom have substantially higher per-capita incomes.
  2. Countries with more economic freedom have higher growth rates.
  3. Countries with more economic freedom attract more foreign investment.
  4. Total investment is slightly higher in countries with more economic freedom.
  5. Private investment spending is much higher in countries with more economic freedom.
  6. The share of income by the poorest 10% of the population is unrelated to the degree of economic freedom in a nation.
  7. The amount of per capita, as opposed to the share, of income going to the poorest 10% of the population is much greater in nations with the most economic freedom than it is in those with the least. [HCS note: the average annual income in the least free quartile is a measly $961 as compared to $8,730 in the most free quartile.]

You might say, so what? Maybe economic freedom isn’t all that it’s cracked up to be, that there are other things more important than making money. Fair enough. Let’s take a look at the rest of the conclusions the report draws from their data.

  1. Life expectancy is over 20 years longer in countries with the most economic freedom than it is in those with the least.
  2. With fewer regulations, taxes, and tariffs, economic freedom reduces the opportunities for corruption on the part of public officials.
  3. Political rights (e.g., free and fair elections) and civil liberties (e.g., freedom of speech) go hand in hand with economic freedom.
  4. Environmental stresses on human health are lower and ecosystem vitality is greater in countries with more economic freedom.

However, a closer look at the data in this report also refutes the claims that the 8 years of Republican deregulation lead us to our current financial predicament. The Fraser Report provides the previous freedom rankings all the way back to 1970. Here are the rankings broken down by President.

Reagan (1981 – 1989): rank increased from 4th to 3rd, economic freedom score increased from 7.5 to 8.3 (with 10 being the maximum score).

Clinton (1993 – 2001): rank stayed at 3rd, score dropped from 8.3 to 8.2 but peaked at 8.6 in 2000.

Bush (2001 – 2009): rank dropped from 3rd to 8th (!), score continued to drop to 8.0 in 2006, the last date available.

Conclusions: economic freedom increased 0.6 points during the Reagan years and peaked during the Clinton administration but started to drop before the end of his term. More importantly, our ranking and score dropped 0.6 points and our ranking slipped 5 spots during the Bush years. To be fair the comparative ranking could indicate that other countries overtook us. However, the decline in our overall freedom score shows that we’re back to where we were in 1990, the end of Bush Senior’s term. How about that for irony!

Thursday, October 16, 2008

What Caused the Loan Crisis

The following condensation of a series from the Investor's Business Daily explaining "What Caused the Loan Crisis" has been circulated via e-mail. (Hat tip to Frank for sending this to me.)

1977: Pres. Jimmy Carter signs into Law the Community Reinvestment Act the foundation and cornerstone for the impending disaster.. The law pressured financial institutions to extend home loans to those who would otherwise not qualify.

The publicized premise: Home ownership would improve poor and crime-ridden communities and neighborhoods in terms of crime, investment, jobs, etc.

The Results: Statistics bear out that it did not help.

How did the government get so deeply involved in the housing market?

Answer: Bill Clinton wanted it that way.

1992: Republican representative Jim Leach (IO) warned of the danger that Fannie and Freddie were changing from being agencies of the public at large to money machines for the principals and the stock-holding few.

1993: Clinton extensively rewrote Fannie Mae and Freddie Mac's rules turning the quasi-private mortgage-funding firms into semi-nationalized monopolies dispensing cash and loans to large Democratic voting blocks and handing favors, jobs and contributions to political allies. This potent mix led inevitably to corruption and now the collapse of Freddie and Fannie.

1994: Despite warnings, Clinton unveiled his National Home-Ownership Strategy, which broadened the CRA in ways congress never intended.

1995: Congress, about to change from a Democrat majority to Republican. Clinton orders Robert Rubin's Treasury Dept to rewrite the rules. Robt. Rubin's Treasury reworked rules, forcing banks to satisfy quotas for sub-prime and minority loans to get a satisfactory CRA rating. The rating was key to expansion or mergers for banks. Loans began to be made on the basis of race and little else.

1997 - 1999: Clinton, bypassing Republicans in Congress, enlisted Andrew Cuomo, then Secretary of Housing and Urban Dev elopement, allowing Freddie and Fannie to get into the sub-prime market in a BIG way. Led by Rep. Barney Frank and Sen. Chris Dodd, congress doubled down on the risk by easing capital limits and allowing them to hold just 2.5% of capital to back their investments vs. 10% for banks. Since they could borrow at lower rates than banks their enterprises boomed.

With incentives in place, banks poured billions in loans into poor communities, often "no doc", "no income", requiring no money down and no verification of income. Worse still was the cronyism: Fannie and Freddie became home to out-of work-politicians, mostly Clinton Democrats. 384 politicians got big campaign donations from Fannie and Freddie. Over $200 million had been spent on lobbying and political activities. During the 1990's Fannie and Freddie enjoyed a subsidy of as much as $182 Billion, most of it going to principals and shareholders, not poor borrowers as claimed.

Did it work? Minorities made up 49% of the 12.5 million new homeowners but many of those loans have gone bad and the minority homeownership rates are shrinking fast.

1999: New Treasury Secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses. Congress held hearings the ensuing year but nothing was done because Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place. "We manage our political risk with the same intensity that we manage our credit and interest rate risks," Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama advisor, bragged to investors in 1999.

2000: Secretary Summers sent Undersecretary Gary Gensler to Congress seeking an end to the "special status". Democrats raised a ruckus as did Fannie and Freddie, headed by politically connected CEO's who knew how to reward and punish. "We think that the statements evidence a contempt for the nation's housing and mortgage markets" Freddie spokesperson Sharon McHale said. It was the last chance during the Clinton era for reform.

2001: Republicans try repeatedly to bring fiscal sanity to Fannie and Freddie but Democrats blocked any attempt at reform; especially Rep. Barney Frank and Sen.Chris Dodd who now run key banking committees and were huge beneficiaries of campaign contributions from the mortgage giants.

2003: Bush proposes what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago". Even after discovering a scheme by Fannie and Freddie to overstate earnings by $10.6 billion to boost their bonuses, the Democrats killed reform.

2005: Then Fed chairman Alan Greenspan warns Congress: "We are placing the total financial system at substantial risk". Sen. McCain, with two others, sponsored a Fannie/Freddie reform bill and said, "If congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole". Sen. Harry Reid accused the GOP ;of trying to "cripple the ability of Fannie and Freddie to carry out their mission of expanding homeownership" The bill went nowhere.

2007: By now Fannie and Freddie own or guarantee over HALF of the $12 trillion US mortgage market. The mortgage giants, whose executive suites were top-heavy with former Democratic officials, had been working with Wall St. to repackage the bad loans and sell them to investors. As the housing market fell in '07, sub prime mortgage portfolios suffered major losses. The crisis was on, though it was 15 years in the making.

2008: McCain has repeatedly called for reforming the behemoths, Bush urged reform 17 times. Still the media have repeated Democrats' talking points about this being a "Republican" disaster. A few Republicans are complicit but Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats. That's why taxpayers are now being asked for $700 billion!!

Postscript: ACORN is one of the principal beneficiaries of Fannie/ Freddie's slush funds. They are currently under indictment or investigation in many states. Barack Obama served as their legal counsel, defending their activities for several years.

Sunday, October 12, 2008

Federal Reserve and the financial crisis: "Coin in the fuse box"

Much of the commentary from the free market economists has centered on the role of Fannie Mae, Freddie Mac and the Community Reinvestment Act have in creating the housing bubble which lead to our current financial woes. The Federal Reserve hasn't been mentioned as much. The Prudent Bear has a good article explaining how the Fed "helped" by artificially lowering interest rates. (Hat tip to Greg Nyquist.) Ironically the term "coin in the fuse box" comes from an article Alan Greenspan wrote before he was Fed chairman.

Saturday, October 11, 2008

Tips for Thinking Objectively

Here is one page summary of cognitive distortions thanks to Michael Prescott. Has some good advice!

Friday, October 3, 2008

Premises behind the financial crisis

It has been fascinating to note the host of premises and beliefs that lie behind the current financial fiasco, many of which are implicit or simply are not noticed. (When I say fascinating I mean akin to the kind we feel when driving by a horrific traffic accident where you can’t resist looking.) Due to the length of the list I’m not going to comment in detail. It would take a book the size of the bailout bill to address all of them.

Here they are in no particular order of importance.

Economic egalitarianism: the belief that government should ensure equal economic outcomes. (I discussed this idea in an earlier post.)

Psychology trumps economics: that greed is a more fundamental and better explanation than the principles of economics and the impact of government policy on economic decisions. Misses the point that most people and businesses are motivated to improve their condition and that this force is always at work. Why did greed suddenly cause this meltdown? What allowed it to get out of control? Answer: laws that encouraged banks to lower their lending standards, plus the role of Fannie Mae’s management who aggressively marketed their company as a safe investment while cooking the books.

  • Question: if banks were driven by pure greed why do they need to be forced to loan more money? Answer: because they also have to protect their bottom line. In order to make a profit they need to ensure that the people to whom they lend money will be able to pay it back. Greed therefore is balanced by prudence.

    I have issues with using the term greed which I believe is used as a derogatory, emotion-laden synonym for self-interest and the desire to improve one’s situation. The dictionary definition of greed is “excessive desire for having.” What is considered excessive? Who determines what is excessive?

Punishment of the good for being good: people who did not overextend themselves by buying homes they couldn’t afford and/or didn’t leverage their home’s equity into credit will pay for the sins of those who did.

The best defense is a strong offence (along with denial of responsibility): blame the mess on the 8 years of Bush, on “deregulation,” “greed” without explaining exactly how. Deny the role of your own policies in the fiasco then demand more of the same to “fix” it.

Good intentions (desire to help the people who couldn’t afford homes) absolve you of blame. This includes the management of Fannie Mae who cooked the books to make their business look better than it really was and to maximize their bonuses.

No distinction made between kinds of “greed”: While I dislike how this word is bandied about I’ll use it for the purpose of illustration. As I said above greed is being used as a purposely negative term for self-interest and the desire to improve one’s condition. Having said that there are at least two breeds of greed: (1) the drive to create or produce value (which is what motivates the businesses in the free market), or (2) the greed of obtaining the unearned (Freddie Mac and Fannie Mae senior management plundering tax payers to line their pockets, people buying homes knowing full well they couldn’t make the payments, lawmakers adding pork programs to the bailout bill, and so on.)

Ends justify the means: the “good” intentions of wanting to help people buy homes justify strong arming banks into suspending prudent underwriting standards (e.g., ACORN [to which Obama has ties] fostering activities to intimidate banks, passage and enforcement of the Community Reinvestment Act.)

Ends justifies the means – Part 2: using the bailout plan as an opportunity to shoe horn additional pork into it for unrelated programs and to get the toe in to door for carbon footprint taxes.

Wishes override reality: if banks don’t make loans according to sound underwriting principles let’s encourage them to be more “flexible.” Reality is negotiable!

The role of government is to ensure businesses are serving the community. This is the foundation of arguments for passing the CRA and other laws. However this flies in the face of the greed argument. If businessmen wanted to rape and pillage, I mean maximize profit, you wouldn’t have to force them to loan money. Their profit motive gives them an incentive to “serve” the community. If certain communities aren’t being served that signals the presence of other forces dissuading businessmen from selling their product or service. Implicit in this argument is the belief that customers have a right to demand the services and goods provided by businesses. Of course, this idea underlies arguments for universal health care and whatever other service or good deemed to be too valuable to trust to the market. (Another topic that’s big enough to fill a book.)