2008 Year in Review: Dave Barry's Perspective

Dave Barry wraps up the main events of 2008. He covers some of the subjects that I commented on here but his version is hilarious. (Hat tip once again to Stephen Hicks.)

Corporatism: The Wave of the Present

David Boaz of the Cato Institute penned an article titled “Bush and Obama Opt for Corporatism Over Freewheeling Capitalist Economy” for the Investor’s Business Daily December 17 edition. It starts with the following.

Is Barack Obama a socialist? Not really. Is George W. Bush a free marketer? Not hardly. In fact, right now they both seem to be pursuing policies that are neither socialist nor laissez-faire but rather corporatist.

The Bush administration has spent close to a trillion dollars to keep the managers of big companies in the driver's seat. Instead of a free-market policy of letting the market determine winners and losers, the administration says Bear Stearns, AIG, Citigroup and other big Wall Street firms are "too big to fail." They can take dramatic risks and the taxpayers will cover them.

…

Corporatism was seen as an alternative to both the egalitarianism of the French Revolution and the laissez-faire economics of Adam Smith, with the state working closely with the different elements of society, especially labor and business.

As the Nobel laureate Edmund Phelps wrote: "The fundamental corporatist idea was to retain the private income, private wealth and private ownership of firms that (were) so central to capitalism (and found in avant-garde examples of market socialism too) but to remove the brain of capitalism — to curtail and to modify the mechanism of experiments and discoveries undertaken by unorganized entrepreneurs and financiers on which capitalism relied. . . . Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector."

We've always had some elements of the corporate state in America — subsidies, tariffs, monopoly privileges, regulatory cartels — but we've prospered because of the freewheeling entrepreneurship and creative destruction that characterizes most of our economy.

I think the most interesting part of this excerpt is Phelps’ comment about corporatism wanting to “remove the brain of capitalism.” By this Phelps means that capitalism is able to provide the endless flow of goods and services because entrepreneurs, managers and employees apply their creative forces to answer the challenges of competing against other enterprises for the customer’s business. Corporatists believe that the wisdom of government bureaucrats can replace these undirected creative, messy forces while still providing the same results.

I’d describe the corporatist’s position somewhat differently than Boaz. The corporatist wants to replace the many minds working independently with one mind, theirs. To modify Adam Smith’s “invisible hand” description of the free market, the corporatist wants to replace the independently operating invisible minds of the free market with the one visible mind of the bureaucrat who omnisciently pulls the levers of the economy.

Phelps (who won a Nobel Prize in 2006) shows in his writings that the record of corporatism fails to supports the claims of its proponents. (See the Wikipedia entry and his own web site.)

A second part of the Phelps quote stands out: “Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector.” Therefore, corporatists believe not only that bureaucrats can steer the economy better than the undirected free market but also they have the moral imperative and the right to steer the economy to better serve our “true” interests.

I agree with Boaz that corporatism is neither socialism (in which “the people” own the means of production) nor capitalism but a hybrid in which they want to harvest the benefits of the free market while giving it a lobotomy. They want to reap the effect while severing the cause.

Did Deregulation Get Us Into This Mess?

I've said in earlier posts before the Presidential election that Obama and his fellow Democrats repeated the mantra that our economic crisis resulted from the deregulatory policies of the Bush administration. In saying this the Democrats were trying to convince people that a return to regulation was needed to "fix" things. Jeff Jacoby, columnist for the Boston Globe, paints a different picture in his "The great Bush ‘deregulation’ myth" that apeared in the Jewish World Review. (Thanks to Stephen Hicks for this link. See the December 19 entry.)

Global Warming Revisited

I have not written on this subject for a while. The Presidential election preoccupied almost everyone, including me. Now the we have a new administration which claims to be more aligned with Al Gore's position on global warming which could lead to policies that directly affect us it seems an appropriate time to bring this issue back to the forefront. Here is a link to a minority report issued by the U.S. Senate Committee on Environment and Public Works. The subtitle on the web page says: More Than 650 International Scientists Dissent Over Man-Made Global Warming Claims.

Here are excerpts from the web page explaining the background of this report.

Over 650 dissenting scientists from around the globe challenged man-made global warming claims made by the United Nations Intergovernemntal Panel on Climate Change (IPCC) and former Vice President Al Gore. ... The over 650 dissenting scientists are more than 12 times the number of UN scientists (52) who authored the media-hyped IPCC 2007 Summary for Policymakers.

The chorus of skeptical scientific voices grow louder in 2008 as a steady stream of peer-reviewed studies, analyses, real world data and inconvenient developments challenged the UN and former Vice President Al Gore's claims that the "science is settled" and there is a "consensus." On a range of issues, 2008 proved to be challenging for the promoters of man-made climate fears. Promoters of anthropogenic warming fears endured the following: Global temperatures failing to warm; Peer-reviewed studies predicting a continued lack of warming; a failed attempt to revive the discredited “Hockey Stick”; inconvenient developments and studies regarding CO2; the Sun; Clouds; Antarctica; the Arctic; Greenland; Mount Kilimanjaro; Hurricanes; Extreme Storms; Floods; Ocean Acidification; Polar Bears; lack of atmosphieric dust; the failure of oceans to warm and rise as predicted.

In addition, the following developments further secured 2008 as the year the “consensus” collapsed. Russian scientists “rejected the very idea that carbon dioxide may be responsible for global warming”. An American Physical Society editor conceded that a “considerable presence” of scientific skeptics exist. An International team of scientists countered the UN IPCC, declaring: “Nature, Not Human Activity, Rules the Climate”. India Issued a report challenging global warming fears. International Scientists demanded the UN IPCC “be called to account and cease its deceptive practices,” and a canvass of more than 51,000 Canadian scientists revealed 68% disagree that global warming science is “settled.”

This new report issued by the Senate Environment and Public Works Committee's office of the GOP Ranking Member is the latest evidence of the growing groundswell of scientific opposition challenging significant aspects of the claims of the UN IPCC and Al Gore. Scientific meetings are now being dominated by a growing number of skeptical scientists. The prestigious International Geological Congress, dubbed the geologists' equivalent of the Olympic Games, was held in Norway in August 2008 and prominently featured the voices of scientists skeptical of man-made global warming fears.

...

Skeptical scientists are gaining recogniction despite what many say is a bias against them in parts of the scientific community and are facing significant funding disadvantages. Dr. William M. Briggs, a climate statistician who serves on the American Meteorological Society's Probability and Statistics Committee, explained that his colleagues described “absolute horror stories of what happened to them when they tried getting papers published that explored non-‘consensus’ views.” Briggs, in a March 4, 2008, report, described the behavior as “really outrageous and unethical behavior on the parts of some editors. I was shocked.”

Making Sense of the Current Crisis

Greg Ransom has a nice compendium of articles at PrestoPundit that explain the current financial crisis primarily from the Austrian economics point of view. (This is the school of thought that includes Ludwig von Mises and Friedrich Hayek.)

He also has a long post on "Who Is Barack Obama" that I also recommend.

The Dark Knight and No Country for Old Men: Postmodern villains vs. modern heroes

Two of my favorite movies over the last year are The Dark Knight and No Country for Old Men. On the surface these movies are very different. The Dark Knight is set in a fictitious city, Gotham, with a cartoon-based hero. Meanwhile, No Country is set in West Texas in 1980. Dark Knight showcases spectacular special effects and stunts with an implausible plot while No County the feel of an Alfred Hitchcock movie with a deliberate pace and realistic action.

While all of this is true I also believe these two films share two things in common: a postmodern villain and a hero who represents a perplexed moral center. I plan to post more on postmodern relativism but in essence it is the belief that there is no objective truth because our inherent prejudices and conceptual shortcomings prevent us from establishing hard and fast principles. Someone who buys consistently buys into postmodern relativism believes they can do anything they want regardless of consequences. A person who believes this will act as if he is an end in themselves while treating others as means to their ends.

Hence you have someone like the Joker in the Dark Knight who sets up situations in which his victims are mere toys for his entertainment. The Joker wants to show that under the right conditions everyone will devolve to his level and kill each other without second thought. Similarly, Anton Chigurh routinely dispatches anyone who gets in his way and at times uses a coin flip, the ultimate in random decision making, to decide if someone will live or die. (A coin flip is also used in Dark Knight but by Harvey Dent, the hero who does succumb to the Joker’s arguments.)

To be fair, there does appear to be one key difference between the Joker and Chigurh: the Joker doesn’t show much interest in committing crimes in order to obtain money while Chigurh does pursue the $2,000,000 of drug money. If anything, the Joker represents a more “advanced” stage of devolution than Chigurh who still has the ultimate goal of getting the drug money.

Both movies also feature a hero who fights the evil of the villain without fully gasping why his nemesis acts the way he does. They represent the “modern” worldview (i.e., reflecting the Enlightenment) which holds there is objective truth and sound principles including respect for others. As a result they cannot truly grasp what motivates the Joker or Chigurh. Their confusion and dismay is more clearly expressed by Sheriff Ed Tom Bell in a couple of conversations where he decries the increasing violence and the deteriorating moral condition of the world. Both films share a similar apprehension over the evolution of villains from the petty criminal who steals or robs for personal gain but still plays within some “rules” to the postmodern villain who merely wants to destroy value for amusement or treats humans as mere nuisances in the way of their goals.

So why do I enjoy these movies given their dark center? Because I think they capture (even if inadvertently) the sign of the times without giving up hope that truth and justice are worth upholding.

Does being objective preclude taking a political side?

During the lead up to the Presidential election I received several comments on some of my posts or I found comments posted elsewhere questioning my objectivity because I obviously sided with the Republican ticket (although with major reservations) and dared to oppose Obama. The implication seemed to be that you couldn’t be objective if you take sides. I hope it’s clear from the context of my posts that objectivity doesn’t entail permanently suspending judgment. It means supporting your conclusions with data and logic.

In any case, I happened to stumble across an interesting site, The Political Compass, that augments the normal economic spectrum of left versus right with a social scale: authoritarian versus libertarian. While the web site doesn’t express it this way their scales measure freedom along two axes. The “normal” horizontal scale of left and right measures economic freedom. The Political Compass model adds a vertical scale of social freedom with authoritarian at the north pole and anarchism at the south. Under this scheme, communism lies at the left end of the spectrum while libertarianism resides at the other end. Incorporating the vertical dimension of social freedom, fascism sits at the north end while anarchism represents the south pole. (I don’t entirely agree with the author’s equation of authoritarianism with fascism. I’d put fascism on the same horizontal scale as communism since both are variations of collectivist economics. I would also argue that the south pole is not anarchism but libertarian.)

Despite these quibbles the result is a quadrant in which the upper left is authoritarian left or state imposed collectivist. Stalin would fall into this quadrant. The lower left quadrant represents voluntary regional collectivism as championed by Gandhi. The authors place Margaret Thatcher in the upper right quadrant of the authoritarian right. I’d say it’s more appropriate to put a representative of the religious right, such as Mike Huckabee, in this quadrant. Finally, we have the lower right quadrant consisting of advocates of both economic and social freedom, such as Ayn Rand and most right libertarians.

As the authors of the web site explain:

despite popular perceptions, the opposite of fascism is not communism but anarchism (ie liberal socialism), and that the opposite of communism ( i.e. an entirely state-planned economy) is neo-liberalism (i.e. extreme deregulated economy).

The usual understanding of anarchism as a left wing ideology does not take into account the neo-liberal "anarchism" championed by the likes of Ayn Rand, Milton Friedman and America's Libertarian Party, which couples social Darwinian right-wing economics with liberal positions on most social issues. Often their libertarian impulses stop short of opposition to strong law and order positions, and are more economic in substance (ie no taxes) so they are not as extremely libertarian as they are extremely right wing. On the other hand, the classical libertarian collectivism of anarcho-syndicalism (libertarian socialism) belongs in the bottom left hand corner.

From Wikipedia about left-libertarianism:

Left-libertarianism is generally regarded as a doctrine that has a strong commitment to personal liberty and has an egalitarian view concerning natural resources, believing that it is illegitimate for anyone to claim private ownership of resources to the detriment of others.

From the Stanford Encyclopedia of Philosophy:

Libertarianism is often thought of as “right-wing” doctrine. This, however, is mistaken for at least two reasons. First, on social—rather than economic—issues, libertarianism tends to be “left-wing”. It opposes laws that restrict consensual and private sexual relationships between adults (e.g., gay sex, non-marital sex, and deviant sex), laws that restrict drug use, laws that impose religious views or practices on individuals, and compulsory military service. Second, in addition to the better-known version of libertarianism—right-libertarianism—there is also a version known as “left-libertarianism”. Both endorse full self-ownership, but they differ with respect to the powers agents have to appropriate unappropriated natural resources (land, air, water, etc.). Right-libertarianism holds that typically such resources may be appropriated by the first person who discovers them, mixes her labor with them, or merely claims them—without the consent of others, and with little or no payment to them. Left-libertarianism, by contrast, holds that unappropriated natural resources belong to everyone in some egalitarian manner. It can, for example, require those who claim rights over natural resources to make a payment to others for the value of those rights. This can provide the basis for a kind of egalitarian redistribution.

So after all of this where do I fall on their scale? According to the test on the web page I fall into the lower right libertarian quadrant, but just barely. If the most extreme score is 10 right and 10 down for the lower most corner of the libertarian my score was 2.75 right and 2.5 down. Assuming their model is valid I’d like to think that my score shows that my libertarian leanings are tempered by my attempts to look at my ideas and positions objectively.

I encourage you to take the test on The Political Compass site.

Conscious Capitalism

During the election we heard a lot about change as it applies to politics. I think it’s likely that the change we’ll see will consist of reverting back to previously tried liberal policies. I suspect that the Obamacrat’s four years are up and things aren’t any better than they are now they will argue that they need another four years to fix the sad state due to the alleged deregulation and rampant capitalism. Since I have addressed these claims in an earlier post I’d like to spend a little time talking about potential change as it applies to business. I recommend an interesting site named Flow Idealism for ideas on how businesses can evolve beyond the current model. (More on this below.) This web site was co-founded by John Mackey, CEO of Whole Foods Market. The title FLOW is described in their About Us section.

The FLOW Vision is based on the principles of economic freedom, voluntary exchange, and individual initiative, combined with social and environmental consciousness, and embodies FLOW Principles, which include commitments to human flourishing, non-violence, and radical tolerance.

The name “FLOW” has two primary roots:

1. An optimal state of human experience in which individuals are fully engaged in creative endeavors, experiencing fulfillment, happiness, and well-being. This state is articulated by psychologist Mihaly Csikszentmihalyi in Flow: The Psychology of Optimal Experience.

2. The means by which increases in the free global flow of goods, services, capital, people, and information will accelerate human progress and well-being.

Csikszentmihalyi’s book continues to be one of my favorites. His research found that we achieve a “flow” state when we take on a task that is challenging but not too challenging. It needs to test our talents enough to prevent boredom but not so much that we feel overwhelmed and therefore become anxious.

The Flow Idealism web site also provides a copy of Mackey’s Conscious Capitalism, a 16 page free download that explains Mackey’s ideas on how the current business model needs to be updated to reflect the evolution that has occurred in our cultural in the last 200 hundred years.

Although economic theory has evolved since Adam Smith wrote The Wealth of Nations in 1776, many economists continue using industrial and machine metaphors to explain how the economy works. Now that we are well into the post-industrial Information Age, these metaphors have become outdated and mislead our thinking about business.

…

The world has become much more complex since those simple machine metaphors were first developed. Unfortunately, current business thinking does not easily grasp systems interdependencies.

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[H]appiness is a by-product of pursuing those other goals and I think that analogy applies to business as well. In my business experience, profits are best achieved by not making them the primary goal of the business. Rather, long-term profits are the result of having a deeper business purpose, great products, customer satisfaction, employee happiness, excellent suppliers, community and environmental responsibility – these are the keys to maximizing long-term profits. The paradox of profits is that, like happiness, they are best achieved by not aiming directly for them.

I encourage you to check out Mackey’s ideas.

On a different but somewhat related subject, I have concluded after having worked within the corporate world for 35 years that the bureaucracy and pecking order we see in the business (and in other hierarchical organizations like government) represent remnants of the feudal era (and probably earlier). Instead of obeying kings and princes we obey managers. Communication typically flows from the top down while the minions dutifully carry out their marching orders. I’m exaggerating a bit to make a point. I’m not arguing against hierarchical organizations. Some form of hierarchy is probably needed to organize human activity. However there are unhealthy (or obsolete) forms of hierarchies that stifle creativity and upward communication of the workers/participants and there are healthy forms of hierarchies that honor the worth of each member. I think Mackey’s ideas give us a glimpse of an evolving model that is healthier than the one it will eventually replace.

The Day After

No, I’m not referring to the post-apocalyptic ABC miniseries from 1983. I’m referring to another disaster, also man-made: the McCain campaign. The American Thinker has a good analysis titled Why McCain Lost (posted November 5, 2008) of why the McCain campaign imploded. The key point is that McCain is a Reagan Democrat who wanted to play the nice moderate. However he hamstrung himself by not choosing not to challenge Obama on a number of issues. And he lacks as much understanding of economics as Obama so McCain was unable to question Obama’s economic “plan” (which essentially is a collection of spending programs).

You can't bring moderation to an ideology fight. An honorable, sincere moderate who is behind really hasn't a chance against a cynical ideologue who is ahead. Obama simply dissembled at the debates, while McCain's tongue-tied references to Ayers, ACORN, Khalidi, "most liberal senator," etc., sounded unfairly abrupt, even desperate. Maybe they were? To the bitter end, McCain refrained from "bringing Jeremiah Wright into the campaign," even though Hillary had...Why not?

It wouldn't have looked moderate enough.

It’s tough to position yourself a fundamentally different from your opponent, especially on economics, when you’re really not. National security was the major difference that McCain could have tried to capitalize on but the recent economic troubles pushed security off the electorate’s radar of concerns.

Speaking of the economy here is a prediction. If the economy is still in the doldrums (or, more likely, it’s in even worse shape) at the end of his first term the Obamacrats (Obama + the Democrats) will argue that they need another term to fix all of the abuses of Bush’s eight years. In a way they’d be right but for the wrong reasons. Bush was far from an advocate of the free market. One of my earlier posts describes the work of the Fraser Institute which has devised a measure of economic freedom. This index dropped during the Bush era, thus indicating that Bush didn’t drastically deregulate the economy. Of course, that won’t matter to the Obamacrats. To borrow the phrase of one of their heroes, the facts about Bush’s economic legacy are an inconvenient truth.

Some (nearly) final thoughts on the election

I posted this on Michael Prescott's blog under the post titled "So who is going to win this thing?" Prescott has some interesting thoughts on the election.

I too have no idea how the election is going to turn out. I’m not convinced the constant mantra of the polls about an inevitable Obama victory is necessarily true. If McCain does win it will be a testament to his dogged determination to have overcome the mainstream media’s unabashed lack of objectivity, their obvious favoritism for Obama and palpable hatred of Palin. I agree that Obama has done a wonderful job of sounding centrist while in reality he is fairly leftist, if you look at his voting record and his plan for what he would do if elected. I also believe the media harps on the polls to convince potential voters of the near hopelessness of the McCain campaign and the inevitability of an Obama election so that the polls become a self-fulfilling prophecy. While I haven’t studied the methodology of all of the polls I’ve noticed that the fine print on some CNN polls admits that they contacted, say, 40% Democrats and only 30% Republicans, thus building in an almost automatic bias for Obama.

What I think is interesting about all of this is the heavy influence of postmodernism, particularly on the Left and in the media. By that I mean the idea that there is no objective truth and therefore it’s acceptable to not strive for objectivity because it is a hopeless venture. Therefore it is OK to omit inconvenient facts, to heavily favor Obama over McCain in your reporting, and to claim the election is a fiat accompli thanks to the polls.

Plus the Left is wedded to egalitarianism, not in terms of political egalitarianism in which all of us have equal rights but in terms of economic egalitarianism in terms of equal economic outcome regardless of one’s merits and work ethic. I believe this is the fundamental premise behind Obama’s “spreading the wealth” comment when talking to Joe the plumber. There are a lot of problems philosophically and morally with economic egalitarianism which I can’t/won’t get into here.

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.

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?

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 8^th 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.

8. Life expectancy is over 20 years longer in countries with the most economic freedom than it is in those with the least.
9. With fewer regulations, taxes, and tariffs, economic freedom reduces the opportunities for corruption on the part of public officials.
10. Political rights (e.g., free and fair elections) and civil liberties (e.g., freedom of speech) go hand in hand with economic freedom.
11. 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 3^rd, economic freedom score increased from 7.5 to 8.3 (with 10 being the maximum score).

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

Bush (2001 – 2009): rank dropped from 3^rd to 8^th (!), 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!

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.

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.

Tips for Thinking Objectively

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

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.)

The Fannie Mae Implosion: A bolt out of the blue? Don’t think so!

Robert Bidinotto has posted a link to a damning video showing Congressmen including Barney Frank chastising Armando Falcon, director of the Office of Federal Housing Oversight, who blew the whistle on Fannie Mae in 2004. If you’re interested here are links to the web site and to the most recent (2006) report. The report runs 348 pages but reading the 13 page executive summary gives the lowlights of this appalling story. I have provided some quotes below.

What is even more sickening is the fact that the same web page lists reports going back to 2003. All of them share the same theme: Fannie Mae violated standard accounting rules and engaged in dubious (to put it mildly) practices to accomplish the goals of senior management.

When Franklin Raines became Chairman and Chief Executive Officer (CEO) of Fannie Mae in 1999, he sought to lead the Enterprise into a new era of growth in business volumes and profits by challenging senior management and employees to double EPS in five years. Mr. Raines also made changes in Fannie Mae’s compensation programs that enhanced incentives to achieve that goal.

A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions. Those factors included the Enterprise’s enormous financial resources and political influence, the expectation that senior management could write the rules that applied to Fannie Mae, financial rewards tied to a measure of profits that management could easily manipulate, and the relative disinterest of senior executives in adhering to standards of prudent business operations.

Fannie Mae’s Board of Directors contributed to those problems by failing to be sufficiently informed and to act independently of its chairman, Franklin Raines, and senior management, and by failing to exercise the requisite oversight over the Enterprise’s operations.

That misconduct ultimately led to the Securities and Exchange Commission (SEC) directing Fannie Mae to restate its financial results for 2002 through mid-2004, the departure of Mr. Raines and the Enterprise’s Chief Financial Officer (CFO), Timothy Howard, losses of tens of billions of dollars in market capitalization for Fannie Mae shareholders, and expenses for the restatement process, regulatory examinations, investigations, and litigation that the Enterprise has recently estimated will exceed $1.3 billion in 2005 and 2006 alone.

Improper earnings management at Fannie Mae increased the annual bonuses and other compensation linked to EPS that senior management received. Compensation for senior executives that was driven by or linked to EPS dwarfed basic salary and benefits. For CEO Franklin Raines, for example, two compensation components directly tied to meeting EPS goals accounted for more than $20 million for the six years from 1998 through 2003. Three-year EPS goals also played a crucial role in determining the size of the approximately $32 million awarded to Mr. Raines during that six-year period under a long-term executive compensation program. In total, over $52 million of Mr. Raines’ compensation of $90 million during the period was directly tied to achieving EPS targets.

The image of Fannie Mae communicated by Mr. Raines and his inner circle and promoted by the Enterprise’s corporate culture was false. In the words of one current member of Fannie Mae’s Board of Directors, the picture of the Enterprise as a “best-in-class” financial institution was a “façade.” To maintain that façade, senior executives worked strenuously to hide Fannie Mae’s operational deficiencies and significant risk exposures from outside observers—the Board of Directors, its external auditor, OFHEO, the Congress, and the public. The illusory nature of the Enterprise’s public image and senior management’s efforts at concealment were the two essential features of the Enterprise’s corporate culture. Those features, which were both supported by repeated improper manipulation of earnings, are a major theme of the report.

The Bailout: An Alternate View

Before I start here are two links to helpful explanations of the economic "crisis." Both come from the Ludwig von Mises Institute. The first, titled The Bailout Reader, lists various articles on their web site. The second, titled The Housing Bubble in 4 Easy Steps, explains how the Fed's manipulations of the interest rate contributed to the housing market bubble. See more below but first I'd like to make a comment on what passes for explanations in the media and among many politicians.

When a systemic problem surfaces like this we need to look at something that leads people to act in a certain way. The popular "explanation" is to lay the blame at the greed of Wall Street and bankers. Question: why didn't bankers greedily loan money to poor folks before the passing of the Community Reinvestment Act during the Carter era and the strengthened enforcement imposed by the Clinton administration? If bankers didn't act this way previously we need to look at a deeper, more plausible reason than greed. Answer: because the change in laws and its enforcement dictated these poor loan choices. Before these laws went into effect the bank's underwriters knew that the rate of default on the loans would make this practice unprofitable. In fact, the people who pushed for these laws did so because the argued banks were "redlining" [not loaning to certain groups of people] and therefore needed to be encouraged [i.e., forced] to do so.

Returning back to the Ludwig von Mises Institute to which I refer at the beginning. I was lucky enough to go to Grove City College for my degree in chemical engineering. Why? At the time I was not aware of Grove City's strong free market economics department, headed by Hans Sennholz, an advocate of the Austrian school of economics. This school, which includes Friedrich Hayek (author of The Road to Serfdom) and Ludwig von Mises, proposed a theory of money, banking and business cycles at odds with the Keynesian model. I happened to become friends with several older students (including Robert Bidinotto) who were taking economics. Out of curiosity I started to monitor Sennholz's classes. What he said made sense so I sat in as many of his classes (with Sennholz's permission) as I could. Sennholz even offered to award me a minor in economics if I paid the school for the credits (which unfortunately I couldn't afford).

I'm probably doing it an injustice in trying to summarise the Austrian approach but in essence they argue that government attempts to foster economic growth by controlling and manipulating the money supply and interest rates ultimately create boom-and-bust cycles that are much more extreme than would occur in an economy where interest rates responded to market signals. Having centrally controlled interest rates leads to mis-investment as businesses plan their future and expansion plans on false information. The analogy which I've drawn in an earlier post is similar to government setting price controls. The inevitable result of government price controls leads to shortages or overstock because no bureaucrat, no matter how brilliant, can predict better than the pricing system of a free market.

The Austrian economists also argue against other attempts by the government to "steer" the economy via legislation. Their arguments are based on economics while others argue that it is immoral for politicians to redistribute wealth by using the full enforcement power of government to ensure we abide by its edicts.

The current financial situation perfectly illustrates both follies of artificially depressing interest rates while forcing banks to make loans to people who normally wouldn't qualify. These policies have resulted in the exact opposite outcomes as the stated intentions of its advocates. Instead of boosting low-income neighbors it will cause them to deteriorate (while leading to frantic calls for even more government "solutions" to fix the problems caused by previous government policies). In a way their egalitarian goals are accomplished but by an opposite mechanism. Instead of helping improve the economic welfare of their intended beneficiaries, the actions of egalitarian motivated politicians makes life more difficult for the middle class, thus pushing them down.

Anyway, I hope you check out the two links at the beginning of this post. Their explanations of what happened makes much more sense than the conventional explanations.

10 Minute Explanation of the Subprime Mess

If you have 10 minutes to spare check out this clip that explains how the subprime mess happened. (Thanks to Robert Bidinotto who posted this clip on his blog.)

The McCain Puzzle

I'm puzzled why McCain doesn't harp on Obama's role in this financial mess: how Obama opposed attempts to impose oversight and controls on Fannie Mar and Freddie Mac, how Obama received so much in campaign contributions from these organizations and how he hired a former top dog to help search for a VP running mate. The MSM certainly isn't going to run these stories (although you can bet if McCain had these ties that's all you'd hear about).

I don't know if McCain feels this is beneath him, if he thinks this would come back to bite him, he is holding this as a trump card to be played at an appropriate time or if his campaign strategists are overlooking this. Wish I knew!

Meanwhile Obama is running ads tying McCain to lobbyists.

Fannie Mae/Freddie Mac Mess: A good explanation

Here is a link to a Fox News bit that does a nice job of explaining what happened with Freddie Mac and Fannie Mae.

The Unquestioned Premises Behind the Financial Crisis

While it is disturbing to watch the financial debacle unfold, it is even more disturbing that the true culprits escape notice: faulty premises.

Faulty premise #1: egalitarianism. There are different versions of egalitarianism. For instance, our political system rests on the idea that all people should be treated equal in terms of rights, due process, etc. However, economic egalitarianism strives to ensure equality in terms of equal pay, living conditions, etc. The extreme version of this is captured in this quote by Karl Marx: “From each according to his abilities, to each according to his needs.” Naturally in America this belief fundamentally contradicts the idea of meritocracy, rags-to-riches, and the America dream.

Economic egalitarianism lies behind the Left’s continual efforts to “correct” the “evils” of capitalism and under girds redistributing money from taxpayers to the “underprivileged” via welfarism. [Note how the use of this term implies that the folks who have done well don’t really deserve it, that they are privileged. A privilege being a special favor dispensed by someone.]

Eventually the Left dreamed up a new tact: instead of cash handouts, why not provide easy credit?

The Office of Thrift Supervision (a government agency I never heard of before researching this post) describes the purpose of the Community Reinvestment Act, a key law in this scenario.

History of the Community Reinvestment Act

The CRA was enacted in 1977 to encourage financial institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. It extends and clarifies the longstanding expectation that financial institutions will serve the convenience and needs of their local communities. The CRA and its implementing regulations require federal financial institution regulators to assess the record of each bank and savings association in helping to fulfill their obligations to the community and to consider that record in evaluating applications for charters or for approval of mergers, acquisitions and branch openings. The federal financial institution regulators are the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the Office of Thrift Supervision.

The law provides a framework for financial institutions and community organizations to work together to promote the availability of credit and other banking services to underserved communities. Under its impetus, banks and savings associations have opened new branches, provided expanded services, adopted more flexible credit underwriting standards and made substantial commitments to state and local governments or community development organizations to increase lending to underserved segments of local economies and populations.

I added emphasis in the second paragraph. The banks adopted “more flexible underwriting standards” no doubt because this is the only way they could comply with the law’s criteria.

Howard Husock of the Manhattan Institute elaborates.

The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

Howard Husock

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

During the seventies and eighties, CRA enforcement was perfunctory. Regulators asked banks to demonstrate that they were trying to reach their entire "assessment area" by advertising in minority-oriented newspapers or by sending their executives to serve on the boards of local community groups. The Clinton administration changed this state of affairs dramatically. Ignoring the sweeping transformation of the banking industry since the CRA was passed, the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A's for effort. Only results—specific loans, specific levels of service—would count. Where and to whom have home loans been made? Have banks invested in all neighborhoods within their assessment area? Do they operate branches in those neighborhoods?

The reason why I say egalitarianism is a faulty premise is that it violates the basic facts of reality. People are unequal in talents, ambition and, yes, in credit risk. The Left capitalizes on our sympathy for people who are less well off. However, the fact that enough people defaulted on their loans to trigger the tsunami of financial failures should be proof enough of the futility of rewriting reality to meet the desires of egalitarians.

Faulty premise #2: the belief that it is the proper role of government to “level the playing field” by manipulating interest rates and encouraging “flexible credit underwriting standards” in order to achieve egalitarian goals. By trying to suspend the basic laws of economics the CRA and other measures distort the signals normally transmitted by the market.

Recall what happened in the 1970s when former President Nixon imposed price controls to stem inflation? As is usual with price controls Nixon’s created shortages of goods as the prices set by government were below the point set by demand. Forcing banks to provide credit to people who normally wouldn’t qualify leads to increased demand for loans. However, there is one key difference. In dealing with material commodities price controls lead to shortages if the government sets the price below the market clearing level. However since money and credit can be easily created at the government’s whim the supply increases to meet the escalating demand.

Meanwhile the management of Freddie Mac and Fannie Mae highly leveraged their organizations with almost no oversight and built a precarious house of cards that was susceptible to the cold wind of falling home prices.

Financial Fiasco

Stephen Hicks has a flow chart (posted September 19) that does a nice job of showing how the current financial fiasco unfolded. Investor's Business Daily has an editorial titled, Congress Lies Low To Avoid Bailout Blame. Here are some key points from this editorial.

President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.

[Referring to Bush's actions on September 11, 2003] Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.

As for presidential contender John McCain, just two years after Bush's plan, McCain also called for badly needed reforms to prevent a crisis like the one we're now in.

Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office). [NOTE from me: Be sure to check the table of top recipients of campaign contributions from Fannie Mae and Freddie Mac at the end of the article.]

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who's who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.