US Economy

[a_majoor]

Maybe watching those "zombie" movies wasn't a waste of time after all....

http://www.reason.com/news/show/130626.html

Return of the Living Dead
What the U.S. can learn from Japan's failed experiment with "zombie businesses"

Anthony Randazzo | December 17, 2008

Killing zombies isn't typically the responsibility of America's president or treasury secretary. But if the country is going to get through the current financial crisis, President-elect Barack Obama and his economic team better get out their shotguns and aim for the head.

Today, our economy is plagued by struggling markets, liquidity concerns, and frozen credit. Twenty years ago, Japan faced nearly the exact same problems. Then they fell prey to the zombies.

After Japan's asset bubble burst in the late 1980s, their economy took a sharp downturn, prompting government officials to try bailing out banks and investing in infrastructure, much like the activity and proposals floating around America today. The results were terrible.

With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker "zombie businesses." And unless American policymakers understand the failures of the Japanese response, we will suffer the same zombie fate.

Remember that the Japanese asset bubble and the American housing bubble have eerily similar origins. Both were driven by aggressive behavior in financial institutions. Wall Street, which sought new ways to get quality returns on investments, turned to securitizing everything it could and issuing unwise subprime mortgages—all highly valued by the rating agencies, and all highly misunderstood. The Japanese aggressively pursued real property assets to the point where the inflated values were unsustainable.

In both cases, the rapid rise in rates of return led to over confidence. In Japan, it is said that the market experienced a sense of euphoria, and poor investments were driven by excessively optimistic expectations of future economic development.

The Nikkei, Japan's stock index, rose from 18,000 in 1986 to an intraday high of 38,975 by the end of 1989. Similarly in the U.S., the Dow Jones went from 7,591 in July 2002 to an intraday high of 14,115 five years later.

These large growth trends led to inadequate risk management, over-leveraged investments, and depleted capital reserves. In both bubbles, loans were given out like candy, often times to people that the banks knew were high risk.

Government practices during both bubbles share many unfortunate similarities as well. In Japan, increased capital requirements caused many firms to struggle when their assets started to depreciate. Similarly, the inflexible mark-to-market regulations in America forced firms to raise capital quickly, sometimes driving them towards bankruptcy.

In America, Federal Housing Administration policies encouraged the expansion of subprime mortgages, particularly through Fannie Mae and Freddie Mac. The idea was to expand homeownership for low-income families, though the increased demand drove housing up until the market was eventually oversaturated. Japanese regulatory policies and tax codes also caused land prices to unnaturally rise until they ultimately burst.

Given these similarities, U.S. officials should take a careful look at how Japan's response to the crisis lead to the more than ten years of recession and stagnation known as "the lost decade." We do not want to duplicate Japan's mistakes.

First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.

According to Shigenori Shiratsuka, Deputy Director and Senior Economist at the Bank of Japan, even though firms became unprofitable, the government still encouraged lending to them to prevent losses from materializing. There were heavy concerns about a failing firm increasing unemployment.

The intense lobbying from special interest groups representing various sectors of the Japanese economy further perpetuated these ill-fated loans, funneling additional funds to zombie businesses. As Shiratsuka notes, "under such circumstances, loans to unprofitable firms become fixed and funds are not channeled to growing firms, holding down economic activity."

Unfortunately, we're seeing a disturbingly similar trend in America today, as the cost of bailing out AIG continues to rise and Congress moves forward with a bailout for the auto industry. The $8.4 trillion (and growing) cost of "saving" firms deemed too big to fail completely ignores the inefficiency and poor quality of the very businesses the government is trying to save.

Second mistake. With all those loans, the Japanese government was simply too integrated into the market to have adequate incentives to create the right policies. Daniel Okimoto, former director of the Asia-Pacific Research Center, points out that the interests of Japan's economic bureaucracies, such as the Ministry of Finance, became interdependent with the banking industry.

Moreover, government officials suppressed data revealing the intense scope of the economic malaise, all while regulations were developed with government interests in mind. Transparency and public accountability were basically nonexistent.

America now finds itself in the same position. The Treasury has taken equity stakes in many major financial institutions and insurance companies, not to mention the pending partial nationalization of Detroit's Big Three. This has created a myriad of conflicting interests as well as vast potential for fraud.

Consider that while the bulk of what the Treasury, FDIC, and Federal Reserve have spent has been tracked, it's far from clear what the banks and other institutions have done with that money. Without this information, it's difficult to measure whether the $8.4 trillion has been effective. Fighting fraud is equally difficult.

Third mistake. The length of Japan's asset deflation, recession, and liquidity struggles has been blamed largely on the lack of foresighted policies and political leadership. Politicians bent on retaining their power took action that sought to solve the present day concerns, such as infrastructure projects, without regard to their long-term effects. As a result, economic growth was not sustained.

America suffers from a similar vision problem. Intent with avoiding any semblance of economic pain, federal officials have thrown moral hazard and laissez-faire principals to the wind. Creative destruction has been rejected, despite long historical proof that it is the best way for an economy to grow.

Fourth mistake. Japan tried to climb out of its economic mess by raising taxes and cutting interest rates. Okimoto cites a series of policy mistakes in a report on Japan's economic stagnation that includes a consumption tax hike, business taxes, and heavy-handed reliance on interest rate cuts that reduced investment incentives.

President-elect Obama has backed down temporarily on his oil industry windfall profits tax and his promise to end the Bush tax cuts. But he still plans on letting the Bush tax cuts expire in 2010 and has set an arbitrary cap of $80 per barrel as the most profit oil companies can make before a windfall tax.

Neither Obama nor Congress has seriously considered cutting business taxes, cutting capital gains taxes, or creating an investment tax holiday. Any of these would encourage capital investment and the growth of businesses, thereby spurring on an economic recovery. Meanwhile, the Fed continues to slash interest rates with the goal of encouraging lending today, thereby limiting investment rates of return over the long-term.

Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.

Japan's economic growth during the 80s was due in large part to consumption growth and heavy capital investment. However, during the 90s, that money dropped-off as savings increased due to uncertainty, leading to a sharp drop in demand that further hurt prospects for recovery. The same problems contributed to the flight of foreign capital from Japan as well.

To counteract the lack of private investment, the Japanese government turned to large-scale infrastructure programs. They built roads, bridges, and airports, all with the goal of creating jobs and saving the economy. But it didn't work. Public debt skyrocketed (it is now higher than GDP), unemployment doubled, and the economy remained stagnant.

While private sector investment isn't totally stalled in America today, there is great uncertainty about what the government will do next, whether taxes will increase, and what future rates of return will be considering the Fed's rate-slashing binge. Foreign investment dollars are slowing as well, partially due to the global economic dip, but also because of errant policy.

To make matters worse, Obama is planning a Japanese-styled infrastructure investment project, with the goal of restarting the economy and creating 2.5 million jobs. But the plans are unlikely to encourage long-term economic growth, the jobs are not sustainable, and the spending will increase national debt.

And while some of Japan's infrastructure projects have served society, that value must be compared to what the private sector could have created with economic policies in place that encouraged free market activity. In other words, what are the unseen losses?

Still there are reasons to be optimistic. Not only does America have the Japanese lesson to study, we are in a much better position to act than Japan ever was. Despite Wall Street's massive losses, for instance, there is over $100 billion in private capital available now for investing in infrastructure. With a little forward thinking, we can unleash the greatest new wave of investment this country has ever seen-one that originates from the private sector, not from government planners focused on propping up the living dead.

Anthony Randazzo is a research associate at the Reason Foundation.

 

[muskrat89]

And this is why I don't like bailouts. Not for Wall Street, not for Detroit.

From this article found at Fox Online http://www.foxnews.com/politics/2008/12/21/study-banks-failed-executives-earned-b/

Study: As Banks Failed, Top Executives Earned $1.6B

Nearly 600 executives earned benefits including cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, an AP analysis found.

AP

Sunday, December 21, 2008

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.

Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe "to get them to do the jobs for which they are well paid in the first place.

"Most of us sign on to do jobs and we do them best we can," said Frank, a Massachusetts Democrat. "We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!"

The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:

_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.

_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.

This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday declined to comment beyond that written report.

(...)

Read the rest of the story at the above link....

 

[a_majoor]

Too bad more people don't know the real story of the financial crisis (or worse yet deny its true and run around like 9/11 Troofers). Here is a handy summary to tell your friends and grandchildren around the campfire:

http://pajamasmedia.com/rogerkimball/2008/12/22/who-caused-the-global-economic-crisis-hint-it-wasnt-george-w-bush/

Who caused the global economic crisis? (Hint: it wasn’t George W. Bush)

Posted By Roger Kimball On December 22, 2008 @ 7:53 am In Uncategorized | 30 Comments

“Toutes choses sont dites déjà, mais comme personne n’écoute, il faut toujours recommencer.”
–André Gide

I sometimes wonder if The New York Times is secretly in league with the country’s dentists. All the teeth grinding our former paper of record occasions must be good for those in the business of capping and crowning teeth. Consider, to take only the most recent example that comes to hand, the long piece in yesterday’s business section about who or what caused the current economic crisis.

I’ll tell you in a moment who really caused it, but let’s play a game. Your mission, should you choose to accept it, is to guess whom the Times would nominate as the prime mover and scapegoat-in-chief in the global financial dégringolade we’ve been living through. Ready? You have 10 seconds to come up with the answer. . . .

OK. Time’s up. Those of you who said “Ronald Reagan” or “Margaret Thatcher” get honorable mention, but you’re still playing last week’s game. No, it should be obvious to all comers that the only possible answer to any question involving political or economic failure is George W. Bush.

That’s right, folks. It was all George’s fault. Well, if you are Times reader (which is not the same thing as someone who happens to read the Times), you already knew that. Everything is Bush’s fault.

In the great contest to determine the worst Times story ever, many, so many, are called, but few are chosen. To make it to the zenith of awfulness, a Times story must not only be factually distressed, it must also achieve that tone of absolute smugness that perfectly reflects and soothingly reinforces the self-righteous sensitivities of its readership. I wrote about one example last January when the Times, in its best more-in-sorrow-than-in-anger pulpit strains ran a story about the high homicide rates of veterans returning from Iraq. Oh dear. The brutality of war. The awfulness of Iraq. George Bush. It all added up to a psychic catastrophe. Across the US, towns and cities would need to brace themselves for homicidal rampages as returning Vets went berserk.

Alas for the story, it turned out the the homicide rate among Vets was far lower than that of the general population, a titdbit that the Times neglected to mention. At the time, I asked “[1] Why does anyone believe The New York Times about anything, ever?“, a question no one has yet answered to my satisfaction.

But one of the things that made that story about the Killer Vets so perfect a Times story was its tone. Pseudo concern underwritten by smug knowingness. That’s the recipe. Yesterday’s story about how the global economic crisis is all Bush’s fault comes from the same kitchen. It’s an exercise in histrionics, partly. The Times presents the story as it it were staging a Stephen King movie: Title: “The Reckoning.” Episode one: “[2] White House Philosophy Stoked Mortgage Bonfire.” Starring George W. Bush as the incarnation of evil. The story opens with a large picture of the President smiling in front of sign reading in huge letters “A Home of Your Own.” For those slow on the uptake, there is also this epigraph:

    “We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.”

    – President Bush, Oct. 15, 2002

The Times allows that “there are plenty of culprits” and mentions “lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.” But–and here comes the gravamen of the piece–”But the story of how we got here is partly one of Mr. Bush’s own making, according to . . .” Well, according to the cheery-picked people the Times assembled in this preposterous, factually-challenged indictment of the the President.

A few months ago in this space, I asked “Who caused ‘the biggest financial crisis since the Great Depression?‘” The answer, in brief, is the utopian policies of left-wing Democrats who required banks to lend money to people who could not–or would not–pay it back.

Let’s go through it again, step by step:

The Root Cause

    * According to Senator Chris Dodd (D. CT) the “root cause” of the problem is “the housing foreclosure crisis.”

Not 100% accurate, perhaps–it’s really a credit crisis–but close enough for government work, especially from someone who has just happens to chair the Senate Banking Committee and who, completely coincidentally, has been such a [3] conspicuous beneficiary of preferential mortgages and who, also coincidentally, leads the list of those who have received campaign contributions from Fannie Mae and Freddie Mac. (Guess who comes in [4] 2nd and 3rd?)

    * But what caused the housing crisis to which Senator Dodd alludes? The housing “bubble.”

    * And what caused the housing bubble? “Sub-prime,” i.e., risky, mortgages; that is, mortgages made to people who, in the normal course of things would have to pay a premium in order to obtain a mortgage (if they could obtain one at all) because

    a) they had bad or non-existent credit

    b) their income was insufficient or

    c) both.

Packaging the American Dream

A home of your own. It’s part of the American dream. Work hard, save up for a down payment, pay your bills on time and, presto, you, too, can buy a home.

For decades the government has done things to help Americans to realize the dream, e.g., graciously allowing citizens to keep some of their own money to help pay for the interest on a mortgage (the official term for this is a “tax deduction,” but I prefer my locution since it emphasizes the fact that it is YOUR MONEY we are talking about).

But what about people who do not work hard (if they work at all)? What about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to live the American dream?

That was the question that led to (drum roll, please)

“The Community Reinvestment Act” (see [5] here for more).

* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.

The buzz word was “[6] affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the [7] securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”

Bottom line? It forced banks to issue something on the order of $1.5 trillion in sub-prime mortgages.

$1.5 trillion, i.e., one and a half thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.

But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties. As Howard Husock, writing in City Journal way back in 2000 [8] observed: “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.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a client who [9] charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”

* In 1997, Bear Stearns –- O firm of blessed memory –- was the first to get onto the sub-prime gravy train.

* [10] Fannie Mae & Freddy Mac — were there near the beginning, too.

Anatomy of a bubble

Step 1. The intoxication: “My house is worth millions!” From 1995 - 2005, the number of sub-prime mortgages skyrocket. So did the house prices.

Step 2. The hangover: “Oh my God, my house isn’t selling. What went wrong?”

Why didn’t someone try to stop it?

[11] Someone did: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” The New York Times, September 11, 2003.

But someone intervened to stymie the Bush administration. Who? The New York Times reports:

Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Why didn’t someone else ring the alarm?

Someone else did. In 2005, [12] John McCain co-sponsored the “[13] Federal Housing Enterprise Regulatory Reform Act,” which among other things provided for more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked it?

The bill was reintroduced in 2007. But again, no luck. Fannie Mae and Freddie Mac had friends in the Senate:

* Chris Dodd, a [14] recipient of “sweetheart” loans from a Freddie and Fannie backed company.

* The junior senator from Illinois, i.e., Barack Obama, who turned to Jim Johnson, [15] former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?

* You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac: see [16] here , for example, or [17] here, or [18] here. (And thanks again to this [19] great video for the outline I précis above.)

The dog that didn’t bark.

Perhaps the most amazing thing about the Times’s little drama that casts George Bush as the protagonist of our economic tragedy is not what’s in it but what isn’t. You will search in vain for the name “Barney Frank” or the phrase “Community Reinvestment Act.” But telling the story of our economic crisis with out those elements is like staging Macbeth without Macbeth or the witches.

There is a great refusal in operation here, a refusal to face up to facts. Thomas Sowell touched on this in a typically percipient [20] column a few months ago when he wondered, not without exasperation, whether facts still mattered in our political life. The current economic crisis seems to have benefitted Democrats. But how could that be? Sowell reminds us of some forgotten facts:

    Fact Number One: It was liberal Democrats, led by Senator Christopher Dodd and Congressman Barney Frank, who for years –- including the present year -– denied that Fannie Mae and Freddie Mac were taking big risks that could lead to a financial crisis.

    It was Senator Dodd, Congressman Frank and other liberal Democrats who for years refused requests from the Bush administration to set up an agency to regulate Fannie Mae and Freddie Mac.

    It was liberal Democrats, again led by Dodd and Frank, who for years pushed for Fannie Mae and Freddie Mac to go even further in promoting subprime mortgage loans, which are at the heart of today’s financial crisis.

    Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers to the President. So did Bush’s Secretary of the Treasury, five years ago.

    Yet, today, what are we hearing? That it was the Bush administration “right-wing ideology” of “de-regulation” that set the stage for the financial crisis. Do facts matter?

None of this is new. But Gide was right: although everything has already been said, no one was listening, so it is always necessary to start over again. Go into your local bank. Look around. Somewhere you’ll see posted on the wall a notice advising customers that the bank’s lending practices follow the dictates of the Community Reinvestment Act and that federal bureaucrats regularly stop by to make sure the bank is abiding by its ruinous stipulations. When will it stop?

Article printed from Roger’s Rules: http://pajamasmedia.com/rogerkimball

URL to article: http://pajamasmedia.com/rogerkimball/2008/12/22/who-caused-the-global-economic-crisis-hint-it-wasnt-george-w-bush/

URLs in this post:
[1] Why does anyone believe The New York Times about anything, ever?: http://pajamasmedia.com/rogerkimball/2008/01/21/why_does_anyone_believe_the_ne/
[2] White House Philosophy Stoked Mortgage Bonfire: http://www.nytimes.com/2008/12/21/business/21admin.html?_r=1&hp=&pagewanted=all
[3] conspicuous beneficiary: http://www.foxnews.com/story/0,2933,366320,00.html
[4] 2nd and 3rd: http://schneiderhome.blogspot.com/2008/09/who-have-fannie-may-and-freddie-mac.html
[5] here: http://en.wikipedia.org/wiki/Community_Reinvestment_Act
[6] affordable mortgages: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html
[7] securitization: http://www.investopedia.com/ask/answers/07/securitization.asp
[8] observed: http://www.city-journal.org/html/10_1_the_trillion_dollar.html
[9] charged: http://www.suntimes.com/news/politics/obama/700499,CST-NWS-Obama-law17.article
[10] Fannie Mae & Freddy Mac: http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
[11] Someone did: http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&scp=1&sq=&
amp;st=nyt

[12] John McCain co-sponsored: http://www.theminorityreportblog.com/blog_entry/ken_taylor/2008/09/17/john_mccain_warned_of_mortgage
_collapse_in_2005

[13] Federal Housing Enterprise Regulatory Reform Act: http://www.govtrack.us/congress/bill.xpd?bill=s109-190
[14] recipient: http://rightvoices.com/2008/08/21/more-sweetheart-loan-details-on-senator-chris-dodd-d-ct-chairman-o
f-the-senate-committee-on-banking-housing-and-urban-affairs/

[15] former head: http://www.politico.com/news/stories/0608/10971.html
[16] here: http://seattletimes.nwsource.com/html/businesstechnology/2004358433_webraines18.html
[17] here: http://hennessysview.com/2008/09/15/franklin-raines-criminal-enterprise-and-barack-obama-his-accompl
ice/

[18] here: http://topics.nytimes.com/top/reference/timestopics/people/r/franklin_d_raines/index.html
[19] great video: http://www.liveleak.com/view?i=658_1222431921
[20] column: http://www.realclearpolitics.com/articles/2008/10/do_facts_matter.html

 

[Kirkhill]

From John Stossel:

Arrogant Conceit
By John Stossel

Barack Obama wants to use the recession to remake the U.S. economy.

"Painful crisis also provides us with an opportunity to transform our economy to improve the lives of ordinary people," Obama said (http://tinyurl.com/67x8ec).

His designated chief of staff, Rahm Emanuel, is more direct: "You never want a serious crisis to go to waste" (http://tinyurl.com/5n8u58).


So they will "transform our economy." ....

This is not the first time a president chose reform over recovery. Franklin Roosevelt did it with his New Deal.......... Roosevelt's priorities were criticized .......by none other than John Maynard Keynes, the British economist whose theories rationalized big government. Before FDR had been in office a year, Keynes wrote him an open letter, which was printed in The New York Times:

.... Keynes's concern. Government interventions, ....., "will upset the confidence of the business world and weaken their existing motives to action." In other words, investors will not take the risks necessary for recovery if their profits and freedom are subject to unpredictable government action. Economic historian Roberts Higgs calls this phenomenon "regime uncertainty" (http://tinyurl.com/6cjyqb).

Keynes's letter apparently had little influence on Roosevelt, who stuck to his plan. In his second inaugural address a few years later, FDR feared that signs of recovery had jeopardized his reform plans by removing the sense of emergency: "To hold to progress today, however, is more difficult. Dulled conscience, irresponsibility and ruthless self-interest already reappear. Such symptoms of prosperity may become portents of disaster! Prosperity already tests the persistence of our progressive purpose." (Emphasis added.) (http://tinyurl.com/6j7ra8)

What a shame. Free people enjoying their lives make it harder for the administration to forcibly impose its utopian vision on them. .......


The way to a lasting recovery is to greatly lighten the burdens of government. Then free Americans will save and invest.

Grand interventionist reforms go in precisely the wrong direction

No further comment.

 

[tomahawk6]

Rather than wasting money just give each taxpayer $500,000. ;D

 

[Yrys]

Falling interest rates are leading to a rush to get cheaper mortgages. Should you join in?, CNN Money

NEW YORK (CNNMoney.com) -- Falling interest rates are fueling a mortgage refinance frenzy
as homeowners rush to reduce their housing payments.

The average rate for a 30-year, fixed mortgage dropped to 5.08% last week, according to the
Mortgage Bankers Association, more than a full point lower than just a month ago. Mortgage
applications were up a whopping 48% last week, according to the MBA and more than 80%
were from homeowners looking to lower housing costs.

"It's snowing loans," said Steve Habetz, a Connecticut mortgage broker, "and they're all refis."

Among those were Elizabeth Mayer and Michael Keohane, who bought their Manhattan condo
just a little over a year ago, financing $220,000 of the purchase price with a 30-year, fixed rate
loan of 6.5%. That was affordable, with monthly payments of less than $1,400. But their new
5.25% loan will lower their payment to about $1,215, saving about $175 a month.

"It was a nice holiday gift," said Mayer.

With savings like that, it's no wonder that homeowners are coming out of the woodwork. And
mortgage brokers are beating the drums too, advising their clients to let the good times roll.

Mayer said her mortgage broker had kept her informed of interest rate declines ever since
she originally purchased her home. "He's been encouraging whenever opportunities arose,"
she said. "We missed one opportunity last spring when we just weren't able to act on it."
The broker made sure they didn't miss this chance. "He e-mailed me [about it] from South
Africa and called when he got back," said Mayer.

Who should refi...

Anyone with high adjustable-rate loans. Folks in this group should try to get into a low fixed
rate if they can. Not only will they lower their payments immediately but it would also
eliminate the possibility of future increases.

Those who would lower their rate by a percentage point or more. Borrowers who already
have a reasonable fixed rate shouldn't jump into a new loan every time rates inch down,
according to Orawin Velz, an economist for the Mortgage Bankers Association. "You should
have at least a percentage point difference before you even think about it,"  Velz said.
"If you have a 6.5% loan right now, it would be a great time to refi."

Waiting for a substantial rate decrease makes sense because getting a new mortgage incurs
some expenses. There are the costs of a new appraisal and origination and application fees.
Plus, a title search and title insurance are usually required.

All those costs, which can add up to $2,000 or $3,000 or more for a typical $200,000 loan,
are often rolled back into the mortgage, increasing the principal upon which the interest rates
are applied. If that goes up so much that it offsets the interest rate drop, it doesn't make sense
to refi.

Those who are planning to stay in their homes for a while. The increased balances usually take
a year or two to be wiped out by lower monthly payments, so anyone planning to sell the home
during the next few years probably should not refinance, unless the difference in interest rates
is very substantial.

The actual rate borrowers get depends, just as with purchase mortgages, on credit scores,
income and assets and the value of the home. "If you have a high credit score and your
equity is good, it's like a vanilla cream puff," said Velz. "You're going to get a great rate."

Borrowers with significant equity in their homes. Many homeowners have had much of their
home values erased in the post-bubble bust, eliminating much or all of their home equity -
the difference between the value of the home and the amount owed on the mortgage.

If a refi borrower's home equity has fallen below 20% of the total appraised home value,
the borrower will likely have to purchase private mortgage insurance. The insurance adds
a point or two to the monthly mortgage costs, which turns a 5% loan into a 6% or 7% loan,
erasing any advantage of refinancing. "That's the biggest hurdle for refinancing right now,"
said Velz.

Borrowers who don't think rates will decline much further. Everyone considering refis has
to decide whether to wait for interest rates to go even lower, which the Mortgage Bankers
Association has been forecasting. That's only a prediction, though, not a certainty. Rates
could turn higher instead.

Borrowers must weigh the advantages of gambling on rates turning around or locking in
savings at the present very low rates.

 

[a_majoor]

Every deflationary opportunity must be watched for and pounced on, since the Obama Administration and the Democratic congress has promised to raise taxes, regulations and otherwise take taxpayer wealth and squander it on their political friends. The bailout of the Detroit automakers is actually a gift to the UAW, and likely the first of a dazzling array of payoffs to the politically connected.

Conserving wealth should be the watchword for the prudent over the next four years.

Jerry Pournelle on the real solution:

http://jerrypournelle.com/view/2008/Q4/view549.html#Friday

The way out of our economic problems is increased production. It's a lot easier to divide up a big pie than a small pie. Socialism only works if there's very high production, enough so that the people willing to work hard are able to produce enough to keep those who want to consume hard without doing a lot of work if not satisfied -- my experience is that the non-productive consumers will always find leaders willing to demand more and more -- at least out of the streets.

There are two keys to increased productivity: low energy prices, and a well educated work force imbued with a work ethic. Eliminate either and you have a society either unable or unwilling to meet the demands of the non-productive (which includes both the deserving poor and the undeserving poor as well as those "employed" in "jobs" that consume but add nothing to the goods available for distribution). When energy prices and/or appropriate education are threatened, it's rather difficult to have a positive reaction.

I try to report good news when there is some. As to the rest, one of the characteristic actions of Jeremiah was Jeremiahiads; and while I don't think of myself as a prophet and certainly not one in his league, that seems to be my job, and I will continue to do it. Someone has to sound the trumpet.

Still, this is a reminder. Conservatism is enjoyment. We prefer not to have the obligations of making changes in things. Alas, this is not possible at this time. Still, it never harms to count your blessings. Often.

 

[Yrys]

Stop Being Stupid, NY Times

I’ve got a new year’s resolution and a new slogan for the country.

The resolution may be difficult, but it’s essential. Americans must resolve
to be smarter going forward than we have been for the past several years.

Look around you. We have behaved in ways that were incredibly, astonishingly
and embarrassingly stupid for much too long. We’ve wrecked the economy and
mortgaged the future of generations yet unborn. We don’t even know if we’ll
have an automobile industry in the coming years. It’s time to stop the
self-destruction.

The slogan? “Invest in the U.S.” By that I mean we should stop squandering
the nation’s wealth on unnecessary warfare overseas and mindless consumption
here at home and start making sensible investments in the well-being of the
American people and the long-term health of the economy.

The mind-boggling stupidity that we’ve indulged in was hammered home by a
comment almost casually delivered by, of all people, Bernie Madoff, the
mild-mannered creator of what appears to have been a nuclear-powered Ponzi
scheme. Madoff summed up his activities with devastating simplicity. He is said
to have told the F.B.I. that he “paid investors with money that wasn’t there.”

Somehow, over the past few decades, that has become the American way:
to pay for things — from wars to Wall Street bonuses to flat-screen TVs to
video games — with money that wasn’t there.

Something for nothing became the order of the day. You want to invade Iraq?
Convince yourself that oil revenues out of Baghdad will pay for it. (Meanwhile,
carve out another deficit channel in the federal budget.) You want to pump up
profits in the financial sector? End the oversight and let the lunatics in the
asylum run wild.

For those who wanted a bigger house in a nicer neighborhood, there were
mortgages with absurdly easy terms. Credit-card offers came in the mail like
confetti, and we used them like there was no tomorrow. For students stunned
by the skyrocketing cost of tuition, there were college loans that could last a
lifetime.

Money that wasn’t there.

Plenty of people managed their credit wisely. But much of the country, including
many of the top government officials and financial titans who were supposed to
be guarding the nation’s wealth, acted as if there would never be a day of reckoning,
a day when — inevitably — the soaring markets would crash and the bubbles explode.

We were stupid in so many ways. We shipped American jobs overseas by the millions
and came up with the fiction that this was a good deal for just about everybody. We
could have and should have taken the time and made the effort to think globalization
through, to be smarter about it and craft ways to cushion its more harmful effects and
to share its benefits more equitably.

We bought into the dopey idea that you could radically cut taxes and still maintain critical
government services — and fight two wars to boot!

We were living in a dream world. The general public, and to a great extent the press,
closed its eyes to the increasingly complex and baffling machinations of the financial
industry, which kept screaming that oversight would ruin everything.

We should have known better. It didn’t require a genius (or even an economics degree)
to understand a crucial point that popped up some years ago in a front-page article in
The Wall Street Journal: “Markets are a great way to organize economic activity, but
they need adult supervision.”

Did Alan Greenspan not understand that? Bob Rubin? Larry Summers?

Now that the reality of a stunning economic downturn has so roughly intervened, we
at least have the option of being smarter going forward. There is broad agreement
that we have no choice but to go much more deeply into debt to jump-start the
economy. But we have tremendous choices as to how we use that debt.

We should use it to invest in the U.S. — in a world-class infrastructure (in its broadest
sense) to serve as the platform for a world-class, 21st-century economy, and in a
system of education that actually prepares American youngsters to deal successfully
with the real world they will be encountering.

We need to invest in a health care system that improves the quality of American lives,
enhances productivity, puts large numbers of additional people to work and eases the
competitive burden of U.S. corporations.

We need to care for our environment (if long-term survival means anything to us) and
get serious about weaning ourselves from foreign oil.

And, finally, we need to start living within our means and get past the nauseating idea
that the essence of our culture and the be-all and end-all of the American economy is
the limitless consumption of trashy consumer goods.

It’s time to stop being stupid.

 

[a_majoor]

From Instapundit; the idea that we could take things back into our own hands:

http://pajamasmedia.com/instapundit/ (Dec 27, 2008)

Reader Donald Gately writes:

    You say that A.N.S.W.E.R. would love to see Icelandic-type protests here. But what if folks under 30 or 40 or 50 started staging large public protests about the Ponzi-scheme that is Social Security? What if taxpayers started staging massive protests about public pensions that let government employees (many of whom don’t have to participate in Social Security) retire at 50 with 90% pay - even while common taxpayers have to ratchet back their own retirement dates? What if financial and real-estate workers started staging protests about their jobs disappearing while the Democrats in congress do everything in their power to preserve cushy UAW deals? What if parents in neighborhoods with failing schools started actively protesting the stranglehold that the teachers unions have over their childrens’ education?

    Those types of protests would likely un-nerve the left, and might actually lead to Change that the rest of us can believe in.

It could happen.

Freedom is a self help scheme

 

[a_majoor]

More on an effective "stimulus" package. Failing a major tax cut or tax holiday, the next best thing we can do as taxpayers and consumers is to take advantage of every sale or deflationary opportunity. IF enough wind is taken out of the economic sails by the productive economy it might be enough to counteract the politicians payoffs to their supporters (i.e the UAW/Big Three bailout) and reduce the threat of inflation.

http://www.weeklystandard.com/Content/Public/Articles/000/000/015/951hvyxc.asp

Not All Stimuli Are Created Equal
The best plan is a cut in the payroll tax.
by Lawrence B. Lindsey
01/05/2009, Volume 014, Issue 16

When it comes to fighting recessions, there's a tendency to see "fiscal stimulus" packages as wasteful, as a form of "throwing money at the problem." The critics have a point. But the conclusion that therefore we should do nothing is also wrong. Instead, careful attention should be paid to the details. Just as a family pinched for cash might find borrowing for the purchase of a new car or appliance prudent while taking a vacation in Las Vegas wouldn't be, some government programs to combat recession make sense while others do not.

Three criteria are crucial for evaluating fiscal stimulus packages. First, does the program target the weakness in the economy that caused the recession, or is it largely peripheral? Second, are the funds going to be spent in a timely fashion? Third, does the program fundamentally strengthen the economy going forward into the expansion phase? A look at the economy's current circumstances suggests that a large fiscal stimulus is needed, but a badly designed one will, in the words of an old song, merely leave America "another day older and deeper in debt."

The cause of the current recession is buried in the balance sheet of the private economy, particularly the financial sector and the household sector. The government and the Federal Reserve have begun a number of programs to fix the balance sheet of the financial sector, some more effective than others.

The main challenge facing the new administration and Congress is how to handle the inevitable efforts of Americans to fight the effects of the financial crisis by saving. It would be foolish to stop this adjustment with government policy both because any efforts to do so would fail and because the restoration of a healthier household balance sheet is essential to the long-term recovery of the economy. Instead, the government must focus on how to ameliorate the effects that the resulting reduction in household spending will have on the economy.

The household saving rate is likely to rise by roughly 7 percentage points, from roughly one-half of one percent of disposable income to between 7 and 8 percent. The majority of this adjustment is likely to occur well before the end of 2009, with some further modest increase thereafter. Our estimate suggests a drop in consumer demand of roughly $500 billion in 2009 and a further drop of roughly half that figure in 2010. These frame the quantitative parameters for an appropriate fiscal stimulus.

The bulk of government spending programs that have been suggested involve transfers of federal resources to state and local governments. While any or all of these programs might qualify as meritorious in their own right, they collectively fail the tests of well targeted stimulus.

Note first that such spending programs do not directly address the household balance sheet problem. The history of such programs overwhelmingly suggests that states and localities will simply substitute federal funds for their own resources for the vast bulk of the money spent. As such, little net impact will be had on household balance sheets.

These programs also generally fail the test of timeliness. Consider the phrase "shovel ready" being used to describe many of these programs. By definition a shovel-ready project is one that state or local government has already spent a good deal of money developing and is likely to continue spending on. On the other hand, infrastructure projects that actually will produce net new spending are never shovel-ready. Most of the spending will end up occurring at the peak of the business cycle when it is not needed, not at the bottom.

By contrast, there are some ongoing federal spending programs that can be quickly ramped up during a recession. Most notable is defense procurement. There is wide agreement that we have run down our defense infrastructure substantially. Much of this can be remedied by simply increasing the pace of existing production programs. Think of it as "assembly line-ready" instead of shovel-ready. Defense spending also gets around the problem of federal dollars supplanting other spending, as only the federal government is involved.

The third test involves whether projects assist the economy in entering the expansion phase. In general, government spending programs divert resources from the private sector as it tries to expand. Some infrastructure projects genuinely assist the private sector by making it more efficient. One such project now being discussed is the creation of a national energy grid. This has been tried before, but failed to get through the legal roadblocks thrown in its path by environmental groups and private landowners. Thus, a project may be highly desirable, but not timely. It may be a good idea, but it is not stimulus.

The question to ask about any infrastructure project being sold as "stimulus" is why the project hasn't been done already. The most common answer is that the state and local political process didn't find that the benefits met the costs--a sure sign that the project is not likely to pay for itself during the expansion phase of the business cycle. Another test of the genuineness of the stimulus intent is whether the federal political process is willing to let go of its own political interests in an effort to maximize the stimulus effect. For example, will Congress waive the Davis-Bacon requirements that drive up costs and reduce the job creating benefits of infrastructure spending? Will they abandon earmarks?

The final argument made for federal funding of infrastructure spending by states is that it is needed to prevent or offset cuts that states will have to make in a weak economy. This argument essentially concedes the points made above, that such spending is really just a safety net for the public sector. It is at best job preserving, not job creating.

Permanent tax cuts offer a much better option. The incoming chairman of the Council of Economic Advisers, Christina Romer, has estimated that the macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet. Some relatively minor changes, like making the current 15 percent tax rate on dividends and capital gains permanent, would not only help household cash flow, but also put a floor under equity prices much as their introduction did in 2003. This would help protect against further wealth destruction and balance sheet deterioration.

But the centerpiece of any tax cut should be employment taxes: in particular, a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers. The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy. It also meets our three tests of effective stimulus.

First, the funds would flow directly to households through higher take-home pay and indirectly through a reduction in the cost of employment. Economic studies conclude that the benefits of a reduction in the employer portion of the payroll tax are ultimately received by employees. But the immediate effect would be an improvement in the cash flow of credit-starved businesses (as well as being a marginal incentive to keep employment up).

Second, the funds would be extremely timely, with the benefits hitting the economy with the first paycheck after the plan was implemented.

Third, by lowering the taxation of labor, the plan would help produce a higher-employment recovery than would otherwise be the case.

Since the tax cut should be permanent to have maximum effect, the biggest challenge would be how to make up for the lost revenue once the macroeconomic need for fiscal stimulus had passed. In the short run, effective fiscal stimulus requires that government revenue drop, thereby enriching the private sector, and with the Treasury making the Social Security trust fund whole by way of intergovernmental bookkeeping. Longer term, however, spending cuts or a new source of revenue would be needed.

Given the agenda of the incoming administration, the best source of such funds would be a greenhouse emissions tax. It would be a much more efficient way of achieving the desired environmental objectives of the administration than any of the regulatory or "cap and trade" ideas now being considered. Such programs have failed in Europe since they are so easily gamed. Unlike regulations or cap and trade, moreover, an emissions tax can be phased in and calibrated as macroeconomic conditions permitted, specifically as the unemployment rate declined.

The country would be getting the stimulus it needed in the short run. In the long run it would enjoy a permanent improvement in its tax system, with higher taxes on things it wants to discourage (pollution and oil imports) and lower taxes on things it wants to encourage, specifically employment. A greener America with higher employment is a lot better than simply being another day older and deeper in debt.

Lawrence B. Lindsey is a former governor of the Federal Reserve. His most recent book is What a President Should Know .  .  . but Most Learn Too Late.

 

[a_majoor]

Some common sense seems to be leaking back into the Congress:

http://voices.washingtonpost.com/the-trail/2008/12/29/mcconnell_puts_the_brakes_on_s.html

McConnell Puts the Brakes on Stimulus Plan

By Paul Kane
Senate Minority Leader Mitch McConnell (R-Ky.) voiced skepticism today about the emerging economic stimulus plan, applying a brake to Democratic plans to quickly pass up to $850 billion in spending and tax cuts soon after President-elect Barack Obama's Jan. 20 inauguration.

"As of right now, Americans are left with more questions than answers about this unprecedented government spending, and I believe the taxpayers deserve to know a lot more about where it will be spent before we consider passing it," McConnell said in a statement, which will be publicly issued later today.

Obama's advisers and congressional Democrats have been huddling in the Capitol trying to craft a massive stimulus plan that could cost anywhere from $675 billion to $850 billion, while some economists are pushing for a total package worth more than $1 trillion.

McConnell -- the most powerful Republican in Washington, based on the filibuster-proof level of 41 GOP Senate seats -- called for many congressional hearings on the stimulus plan and some undetermined safeguards to assure the money is being spent wisely.

Details are still emerging as key negotiators retreated for the holidays and they aren't likely to reconvene face-to-face meetings until later this week. House Speaker Nancy Pelosi and Senate Majority Leader Harry M. Reid (D-Nev.) have set a goal of passing the massive economic jolt as close as possible to Obama's swearing-in; House Democrats have considered passing the bill without it going through the committee process.

McConnell has the ability to dramatically slow the process or even block it, should all 41 Republicans come together in a filibuster.

McConnell specifically called for a weeklong cooling off period between when the bill is drafted and when it is voted on, allowing time to dissect it for signs of "fraud and waste."

Senate Democrats reiterated their contention that any quick passage of the legislation will require full acceptance by GOP leaders, who at this point have not been involved in negotiations.

"We want to pass it as quickly as possible. That will depend on whether we can get cooperation from Senate Republicans," said Jim Manley, spokesman for Reid.

Congress returns to start its 111th session on Jan. 6, two weeks before Obama takes office.

 

[a_majoor]

The political economy is set to shoulder out much of the market economy. How long will it take to recover from that?:

http://www.nytimes.com/2008/12/29/us/29bank.html?_r=1&hp=&pagewanted=all

Veterans of ’90s Bailout Hope for Profit in New One

By ERIC LIPTON and DAVID D. KIRKPATRICK
Published: December 28, 2008

WASHINGTON — A tight-knit group of former senior government officials who were central players in the savings and loan bailout of the 1990s are seeking to capitalize on the latest economic meltdown, enjoying a surge in new business in their work now as private lawyers, investors and lobbyists.

L. William Seidman, former chairman of the Resolution Trust Corporation, sees an “enormous market” in distressed assets.

Eugene Ludwig, former comptroller of the currency, says people are seeking his advice on “How do we contain the flames?”

With $700 billion in bailout money up for grabs, and billions of dollars worth of bad debt or failed bank assets most likely headed for sale or auction, these former officials are helping their clients get a piece of the bailout money or the chance to buy, at fire-sale prices, some of the bank assets taken over by the federal government.

“It is a good time to be me,” said John L. Douglas, a partner in Atlanta at the law firm Paul Hastings and a former lawyer for bank regulators who helped create the agency that administered the last federal bailout, the Resolution Trust Corporation.

Some of these former federal officials, like L. William Seidman, the first chairman of the R.T.C., are serving as advisers — sharing ideas with Treasury Secretary Henry M. Paulson Jr. and the transition team for President-elect Barack Obama — even while they are separately directing investors or banks on how to best profit from this advice.

“It is an enormous market,” said Mr. Seidman, who has already joined two such potential money-making efforts and is evaluating proposals to participate in a third. “I am enjoying this.”

David B. Iannarone, a former R.T.C. lawyer who is managing partner at a firm that handles defaulted commercial real estate loans, said, “The people who worked on this back in the early 1990s are back in vogue.”

The agency was set up by the government in 1989 to sell off what ultimately grew to $450 billion worth of real estate and other assets assembled from 747 collapsed savings banks.

What is obvious to former R.T.C. officials is that, like the last go around, a great deal of money will be made by a select group of investors and business operators, particularly those with government contacts. The former government officials said in interviews that much of what is motivating them is a desire to help the nation recover from this latest stumble. But they acknowledge they intend to be among the winners who emerge.

“Fortunes will be made here, no doubt about it,” said Gary J. Silversmith, one of more than a dozen former R.T.C. officials interviewed who now are involved in enterprises seeking to profit from bank bailouts.

The busiest money-making arena so far for these R.T.C. alumni is in helping distressed banks line up cash infusions from the Treasury, as they seek a piece of the bailout.

Robert L. Clarke, controller of the currency under the first President Bush and a former Resolution Trust board member, has been advising banks throughout the South on how to get their share of the bailout money.

“I have been absolutely inundated,” said Mr. Clarke, who now works at Bracewell & Giuliani, the law firm based in Houston affiliated with the former New York mayor and presidential candidate Rudolph W. Giuliani.

Mr. Clarke’s labor on behalf of his clients has included calling federal regulators to urge them to reconsider plans to reject applications for federal bailout money. He would not identify the banks, saying it might undermine public confidence in them.

But Mr. Clarke said his intervention, in at least some cases, has been successful.

Eugene Ludwig, the comptroller of the currency under President Bill Clinton during the final stages of the savings-and-loan cleanup, runs Promontory Financial Group, a banking consultant group whose clients include struggling banks.

“I must get an e-mail a day from people who I worked with back then about what to do about the current mess,” Mr. Ludwig said. “It is not so much capitalizing on it as really just, how do we contain the flames?”

Many of the former federal officials like Mr. Ludwig have stayed in the field, working as lawyers or contractors who buy up and resell seized bank properties. What is remarkable now is just how busy they are.

“It is a great time to be a banking lawyer,” said Thomas P. Vartanian, a partner in the Washington office of Fried Frank, who is the former general counsel to the Federal Savings and Loan Insurance Corporation, which led a bank bailout effort in the 1980s.

The planned sale by the F.D.I.C of the assets of IndyMac, the failed bank, has turned into an alumni event of sorts for veterans of the R.T.C. era, including John J. Oros, who was chairman of a financial industry council that advised bank regulators during the savings and loan crisis. Now he is a partner in J. C. Flowers, one of the private equity firms negotiating to buy part of IndyMac.

In the space of one weekend in September he explored buying out the troubled insurer A.I.G. and worked with Bank of America on an aborted acquisition of Lehman Brothers. Then he advised Bank of America on its last-minute switch to buy Merrill Lynch before Lehman’s collapse hammered Wall Street.

Although the financial meltdown is a disaster for the country, Mr. Oros said, “the opportunity going forward is unprecedented. It is fantastic. It is as if I had been training for this for the last 40 years of my career.”

The biggest profits will most likely be made, the former federal bank officials agreed, by those who figure out a way to benefit from what could turn into one of the greatest fire sales of bad debt and bank assets in American history.

Through September of this year, 25 banks had failed, compared with three in 2007. An additional 171 are on the Federal Deposit Insurance Corporation’s list of troubled banks, more than double the watch list at the end of last year.

As a result of these failures, and other related industry troubles, billions of dollars’ worth of real estate or at least mortgage-backed securities and other “illiquid” financial instruments will most likely need to be sold off at discounted prices to investors who stand to profit if they can sell the assets at a higher price once the economy recovers.

The question right now is just how this unloading of bad debt will take place.

So far, the federal government is relying on financial institutions to find a way on their own to sell off bad debts or assets they end up with as a result of foreclosures. But some financial industry players are arguing that a modern-day R.T.C. should be established, to help set prices for this bad debt, and speed the move toward a recovery.

The R.T.C. alumni are prepared to profit through either route.

Mr. Seidman, for example, has been hired as an adviser to SecondMarket, a company based in New York that early next year will start a virtual marketplace that intends to resell some of the trillions of dollars worth of distressed mortgage-backed securities, the financial instruments that helped fuel the surge in housing prices.

Mr. Seidman has already set up meetings between company executives and federal regulators, including at the F.D.I.C., said Barry E. Silbert, the company’s founder.

Mr. Silversmith, meanwhile, who during the savings and loan crisis helped arrange the sale of thrift assets, has teamed with Barry Fromm, the chief executive of Value Recovery Holding, one of the big government contractors who handled these sales. The two in recent weeks have held meetings with some of Mr. Silverstein’s former colleagues, including James Wigand, the deputy director in charge of the F.D.I.C. division that sells seized assets, to work on a plan to get ahold of some of the new wave of properties the federal government intends to put on the market as a result of recent bank failures.

Many of the investors who built legendary fortunes during the savings and loan crisis — like Sam Zell, the chief executive of the Tribune Company, and Joseph E. Robert Jr., the chief executive of J. E. Robert Companies — are also looking for ways to get back into or expand their distressed assets trade.

Mr. Zell, who has fared less well in his Tribune investment, recalled the instinct for capitalizing on the misfortune of others that earned him the sobriquet “the grave dancer” when he started buying up properties from failed savings and loans.

“When I started the first opportunity fund in 1988, I was the only one bidding — if they didn’t sell to me, they didn’t sell to anyone,” Mr. Zell recalled.

Now, he said, “The best opportunity right now is in the debt area, mortgages. We have been buying all along.”

R.T.C. experience is certainly no guarantee of success, the agency veterans acknowledge.

Peter Monroe, who was president of the R.T.C. oversight board from 1990 to 1993, has already bought about 300 distressed properties in Detroit, through a venture capital company he formed called Wilherst Oxford. Figuring out a way to profit from the investment — even though some of the houses cost him only a few hundred dollars — has proven to be a challenge.

“It is like a high-hurdle race: you can get going fast, but you have to jump over one hurdle after the other,” Mr. Monroe said. “It has turned out to be more complicated than even I expected.”

More Articles in US » A version of this article appeared in print on December 29, 2008, on page A1 of the New York edition.

 

[a_majoor]

Well, no one can say this was a surprise:

http://www.forbes.com/2008/12/31/housing-bubble-crash-oped-cx_bb_0102bartlett_print.html

Who Saw The Housing Bubble Coming?
Bruce Bartlett 01.02.09, 12:00 AM ET

The current economic crisis is raising many legitimate questions about the failure of economists and financial analysts to foresee the housing bubble and warn of its collapse.

There were, in fact, many warnings dating back more than seven years--but in the euphoria of rising home prices, no one listened. As time went by and no crash occurred, many of those doing the warning lost credibility or decided that perhaps they were wrong and moved on to other issues.

I first created a folder on the housing bubble back in 2001 and began collecting material on the subject. The very first piece I filed was an article from a September 2001 issue of Forbes called "What If Housing Crashed?" by Stephane Fitch and Brandon Copple. Read today, the article was remarkably prescient.

Federal Reserve Chairman Alan Greenspan first addressed the question of a housing bubble in testimony before the Joint Economic Committee on April 17, 2002. He dismissed the idea--or, for that matter, any comparison to the stock market, which had recently gone through a high-tech bubble--on the grounds that housing was different because of substantial transaction costs and more limited opportunities for speculation.

Greenspan also argued that there really wasn't a single national market for housing, but rather a collection of many local markets. Even if a bubble emerged in one market, he said, there was no reason to think it would spill over into other markets.

In June 2002, I filed a report by economist Ed Leamer of UCLA noting that the ratio of home prices to rent was rising rapidly and that this represented a kind of price to earnings ratio for the housing market.

Like the stock market's P/E ratio, when it rises rapidly above historical norms in a short period of time, it's is a good sign that there is a bubble--and that it could burst quickly.

But in March 2003, Greenspan continued to deny the possibility of a housing bubble. In a speech to the Independent Community Bankers of America he said that any comparison between the housing market and a stock market bubble was "rather a large stretch."

Greenspan repeated his view that one could not generalize about the national housing market from other possible bubbles in a few isolated markets. He went on to argue that there was no evidence of excess supply in newly constructed homes and that the rate of housing starts was consistent with the growth of incomes and population.

Despite Greenspan's assurances that there was nothing alarming, it was apparent that a number of local markets, especially in California, were experiencing bubble-like conditions, with prices rising to clearly unsustainable levels. UCLA's Leamer proclaimed that a bubble definitely existed in the Los Angeles and San Francisco real estate markets in a June 2, 2003 report.

In September, economists Karl Case and Robert Shiller presented a very detailed analysis of the housing market to the Brookings Institution's panel on economic activity.

While conceding that economic fundamentals were favorable to rising home prices, they also noted that there were elements of bubble psychology in the housing market. Case and Shiller pointed to an increase in the buying of real estate for investment purposes and high expectations of housing price increases.

They also observed an increasing sense of urgency and opportunity among home buyers, who were plunging into real estate for fear of being left behind as they perceived their friends and neighbors growing richer--classic signs of a bubble.

By 2004, concerns about a housing bubble were pervasive throughout the popular media. But responsible authorities continued to throw cold water on them.

For example, in February, the Federal Deposit Insurance Corporation denied the existence of a housing bubble. It noted that there had not been a decline in national housing prices since the Great Depression. Advances in the structure of mortgage finance since that time, the FDIC concluded, made any repeat very unlikely.

The first report I have pointing to the potentially disastrous effects of a collapse in housing on financial institutions came from economist Paul Kasriel of Northern Trust on July 30, 2004. He noted that 60% of banks' earning assets were mortgage-related--twice as much as was the case in 1986.

If the housing market were to go bust, Kasriel warned, the banking system would suffer significant damage. And since the banking system is the transmission mechanism between the Fed and the economy, any serious downturn in that sector could make monetary policy impotent, thus pulling down the entire economy.

That same day, however, I received a report from Bear Stearns economist David Malpass arguing that the housing market was healthy and that much of the rise in prices simply represented a "catch-up" because they had lagged behind the rise in equity prices since the mid-1990s.

The Bear Stearns report also noted that rising household formations, declining unemployment, low interest rates, a decline in the inventory of unsold homes and the 1997 cut in capital gains taxes on owner-occupied homes as other reasons for its continued optimism.

In September, the International Monetary Fund called attention to the highly synchronized movements in housing prices internationally in its World Economic Outlook.

This suggested that there was greater liquidity in the housing finance market than others had generally assumed. The IMF further noted that interest rates were unusually low and bound to rise at some point as central banks necessarily tightened monetary policy to fend off inflation.

Indeed, the interest rate increases that had already occurred in 2004 were expected to sharply reduce the growth of housing prices in 2005, the IMF predicted.

But in October, Greenspan was still saying that the housing market was nothing to be concerned about. In a speech to America's Community Bankers, he pointed out that the vast majority of homeowners lived in their own homes--so if they sold one, they would have to buy another.

Consequently, there was little possibility of a general downturn in housing prices. While Greenspan acknowledged that there had been some increase in home buying for investment purposes, this represented only a small portion of the overall housing market. And while there was evidence of a rise in debt service ratios, he nevertheless saw household balance sheets as being in good shape.

Greenspan's view was shared by economists at the Federal Reserve Bank of New York. In December, they directly addressed the housing bubble question. Their report's bottom line? There was no bubble; housing prices were rising due to positive fundamentals and not from expectations of rapid price appreciation. And even if fundamentals turned negative, there was little likelihood that prices would drop significantly.

I published my first column on the housing bubble on Dec. 15, 2004. In hindsight, I see that I was overly impressed by the views of Alan Greenspan and the New York Fed. But I did raise red flags about loans becoming too easy, the decline in down payments and the spread of adjustable rate mortgages.

I concluded it would be "unwise to buy a house in the expectation of future price increases like those we have seen." I advised every homeowner to get out of adjustable-rate mortgages and into a fixed-rate mortgage as soon as possible.

I'm ending my discussion of this issue in 2004, but throughout the years since, a number of analysts have emerged on both sides of the housing bubble question. So I do not claim to be comprehensive in my review. I just wanted to call attention to a few of the more prominent analyses that crossed my desk when the housing bubble first caught my attention.

There were many economists who did see it coming, but there were many others of equal or greater prominence and authority who repeatedly insisted that there was nothing to worry about. Under the circumstances, ordinary investors can hardly be faulted for taking actions that unwittingly fueled the bubble and are now having disastrous consequences for themselves and the nation.

Unfortunately, it is in the nature of economic and financial forecasting that being right too soon is insignificantly different from just being wrong. And forecasters that are wrong when most of their community is also wrong never suffer for it. The trick is to be right just a little bit sooner than everyone else--but only a little bit.

Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. This is the first installment of his new weekly column for Forbes.com.

 

[a_majoor]

The numbers keep growing. A $300 billion dollar tax cut will do wonders for the economy, but it will be canceled out by the tsunami of increased government spending and the huge inflationary pressures that government spending will bring. If there was a concurrent $3 - $400 billion dollar spending cut then we would really be making progress:

http://www.theglobeandmail.com/servlet/story/RTGAM.20090105.wobama0105/BNStory/International/home

Obama supports $300-billion tax-cut plan

PHILIP ELLIOTT

Associated Press

January 5, 2009 at 3:20 PM EST

WASHINGTON — President-elect Barack Obama declared the national economy was “bad and getting worse” Monday as he began crisis talks with congressional leaders on emergency action. He predicted lawmakers would approve hundreds of billions of dollars in new spending and tax cuts within two weeks of his taking office.

“The economy is very sick,” Mr. Obama said after meeting with Senate Democratic Leader Harry Reid. “The situation is getting worse. ... We have to act and act now to break the momentum of this recession.”

Mr. Obama, whose inauguration is two weeks from Tuesday on Jan. 20, said he expected quick approval of rescue legislation by the new Congress.

“I expect to be able to sign a bill shortly after taking office,” he said. Pressed on the timing, he said, “By the end of January or the first of February.”

Mr. Obama's proposal to stimulate the economy includes tax cuts of up to $300-billion, including $500 tax cuts for most workers and $1,000 for couples, as well as more than $100-billion for businesses, an Obama transition official said. The total value of the tax cuts would be significantly higher than had been signaled earlier. (interpolation: somehow this is evil and heartless when Prime Minister Harper or Finance Minister Jim Flarety proposes something along these lines).

New federal spending, also aimed at boosting the moribund economy, could push the overall package to the range of $800-billion or so.

Obama met earlier in the day with House Speaker Nancy Pelosi, as he set a tone of urgency for dealing with a financial situation that he described as “precarious.”

“The reason we are here today is because the people's business cannot wait,” Mr. Obama said as he arrived on Capitol Hill for talks with Ms. Pelosi. “The speaker and her staff have been extraordinarily helpful in working with our team so we can shape an economic recovery plan and start putting people back to work.”

The tax cuts for individuals and couples would be similar to the rebate checks sent out last year by the Bush administration and Congress in a bid at that time to boost the slowing economy. A key difference is that the tax cuts this time around may be awarded through withholding less from worker paychecks. That provision would cost about $140-150-billion over two years.

For businesses, the plan would allow firms incurring losses last year to take a credit against profits dating back five years instead of the two years currently allowed.

Another provision brought to the negotiations by the Obama team would award a one-year tax credit costing $40-50-billion to companies that hire new workers, and would provide other incentives for business investment in new equipment.

“We've got an extraordinary economic challenge ahead of us,” Mr. Obama said. “We're expecting a sobering job report at the end of the week.”

Of Ms. Pelosi, Mr. Obama said: “I can't think of a better partner in doing what is necessary in putting this economy back on track.”

Said Ms. Pelosi: “It is a great honor and personal privilege to welcome you to this office. Tomorrow we will swear in a new Congress and we will hit the ground running on the initiatives ... to ease the pain being felt by the American people.”

Mr. Obama had meetings scheduled later Monday with a broad array of House and Senate Democratic leaders and with a bipartisan group of key lawmakers. He had hoped to have Congress enact the recovery plan in time for him to sign when he takes office Jan. 20. But even his spokesman, Robert Gibbs, conceded that was “very, very unlikely.”

House Majority Leader Steny Hoyer of Maryland said Sunday he wants the House to approve the plan by the end of the month, sending it to the Senate in time for action before Congress leaves on its mid-February break.

Mr. Obama has insisted that bold and quick action is necessary if the nation is to rebound from the greatest economic crisis since the Great Depression. He has said repeatedly he wants a plan that will create 3 million new jobs. (interpolation. Multiply that by $50,000 to see how much money needs to be in the productive economy to create that many jobs)

“Economists from across the political spectrum agree that if we don't act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment and the American dream slipping further and further out of reach,” he said in his Saturday radio and YouTube address.

Mr. Obama arrived Sunday night in Washington — a place he largely has shunned since winning election — just hours after New Mexico Gov. Bill Richardson withdrew from consideration as commerce secretary amid a grand jury investigation into how some of his political donors won a lucrative state contract.

The Richardson withdrawal marked the first major hiccup in a smooth transition that saw Mr. Obama select his Cabinet in record time, largely because of the magnitude of the economic and national security challenges facing the new administration.

Obama aides have said the package Mr. Obama has dubbed the American Recovery and Reinvestment Plan could cost as much as $775-billion. The president-elect has refused to put a price tag to the plan.

Congressional aides briefed on the measure say it is likely to include some $200-billion to help revenue-starved states pay for health care programs for the poor and other operating costs. A large part of the new spending would go for infrastructure projects, blending old-fashioned road and bridge repairs with new programs to advance energy efficiency and rebuild health care information technology systems.

 

[a_majoor]

Ultimately, the United States will go this alone:

http://corner.nationalreview.com/post/?q=MjZjM2YyMTkxOTZiMDIyMzM4NWFiYTcxZjk2YTk5NzA=

Walker on the Deficit: "No one is going to bail out America"  [Stephen Spruiell]

Former U.S. comptroller David Walker has long been a leading advocate of fiscal sanity, and I called him today to get his take on the latest CBO budget-deficit projections ($1.2 trillion for next year, trillion-plus deficits for years to come). "If trillion-dollar deficit numbers for several years in a row don’t wake up Washington and America to the nature of our fiscal problems, then I don’t know what will," he says.

Walker says, "For the first time in the history of the U.S., the federal government owes more in liabilities [including unfunded commitments for Social Security and Medicare] than American households are worth." And that gap is widening, he says. "The fiscal hole is getting deeper, and household worth continues to decline."

Walker says, "We should not just engage in timely and targeted stimulus. We need to put a process in place that will enable elected officials to make a range of tough decisions that have been delayed for far too long." On entitlement spending, Walker says that Obama should consider something like the Cooper-Wolf plan, which calls for a commission on entitlement reform whose recommendations would be guaranteed hearings and a vote.

Walker, who currently works on these issues as the president of the Peter G. Peterson Foundation, says, "Deficits and debt levels are going to go up significantly in the short term, and there’s no way of avoiding that, so we’re not saying there shouldn’t be a stimulus. We’re saying that for the nation’s long-term fiscal health, we need to start treating the disease and not just the symptoms. The discussion should focus not just on how to revive the current economy, but on how to put our economy on a more sustainable path for the future."

Walker says he likes Obama's promises to do a baseline review of all government spending and look for places to cut back, but that "the real litmus test will be not what the words are, but what are the actions that are taken." He also objects to Obama's characterization of entitlement-spending reform as a "longer-range" problem. "We’re going to have to deal with entitlement programs," he says. "Those problems are not longer-range anymore."

He adds, "We need to realize that the same factors that led to the subprime crisis — too much debt, too little attention to cash flow, ineffective risk management, and waiting to do something until the crisis hits the door — those same factors exist for the federal government’s fiscal situation, with one big difference: No one is going to bail out America."

 

[tomahawk6]

If we dont get buried by trillion dollar stimulus bills eventually the economy can dig itself out. Too many ifs though. The democrats are talking cap and trade that wont help the economy at all. They are talking $175 per milk cow as a "methane" tax. With this bunch of lefties in charge we will need a world war to turn it around.

 

[a_majoor]

Where have we seen this before?

'Atlas Shrugged': From Fiction to Fact in 52 Years

By STEPHEN MOORE

Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.

Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?

These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.

The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."

When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."

In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.

The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."

Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:

Galt: "You want me to be Economic Dictator?"

Mr. Thompson: "Yes!"

"And you'll obey any order I give?"

"Implicitly!"

"Then start by abolishing all income taxes."

"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"

"Fire your government employees."

"Oh, no!"

Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."

Mr. Moore is senior economics writer for The Wall Street Journal editorial page.

 

[a_majoor]

Remember how Bob Rae promised Ontario could "spend it's way out of recession?" Well apparently issuing sub prime loans and "jumbo" mortgages is really the way to fix America's problems:

http://www.rep-am.com/articles/2009/01/13/opinion/391140.txt

Jumbo lending: lessons unlearned

Thanks to Sen. Christopher Dodd, Rep. Barney Frank and others, the lending industry spent years issuing mortgages to millions of Americans who had no hope of repaying. Sen. Dodd and Rep. Frank believe homeownership is a right unfettered by income or credit history, and over time, they were instrumental in forcing the industry to lend to some of the least creditworthy Americans.

As everyone knows, the results were disastrous. The housing bubble they helped create and inflate has burst, driving the economy into recession, the lending industry into chaos and millions of Americans into foreclosure, bankruptcy or both. (But at least Sen. Dodd got his millions in campaign cash from the financial industry and special rates on his mortgages from Countrywide Financial.)

Lesson learned? Don't be silly. In December, GMAC got $5 billion from the government's $17.9 billion bailout of the domestic auto industry, which Sen. Dodd supported, and immediately lowered its lending standards. No longer would buyers need a credit rating of 700 or higher. Now, people qualify with scores as low as 621, which is 2 points above "poor" and 102 points below America's median. As columnist George Will put it, GMAC is using taxpayers' dollars (more accurately, money borrowed against tax receipts far into the future) to issue subprime loans.

Meanwhile, lending fairness is rearing its ugly head on Capitol Hill again. Rates on conventional mortgages of up to $417,000 have fallen to about 5 percent, but remain at about 7 percent for amounts above that. The difference is primarily risk; those "jumbo mortgages" carry jumbo risks and thus jumbo rates.

A year ago, Sen. Dodd and Rep. Frank pushed through legislation that raised the jumbo threshold to $729,750 so more unqualified borrowers could get jumbo mortgages without paying jumbo rates. (The bill also allowed Fannie Mae and Freddie Mac to get into the jumbo-lending businesses when they already were overburdened with bad debt.) The feds wisely have restored the lower jumbo threshold, but the lending industry, which regularly greases Sen. Dodd and Rep. Frank, is whining anew about the unfairness of jumbo borrowers paying jumbo rates.

Enter Rep. Frank, who as head of the House Financial Services Committee promises to put into President-elect Obama's economic-stimulus bill a provision that returns the jumbo limit to the 2008 level, if not higher, to permit more jumbo borrowing at conventional rates. Sen. Dodd, chairman of the Senate Banking Committee, hasn't committed to the bill, but it's hard to imagine he would oppose it because he has been for many years a vocal proponent of lower rates for jumbo borrowers.

 

[a_majoor]

The fundamental problem isn't that the economy isn't being run correctly, the problem is some people seem to believe it can be run at all...

http://tcsdaily.com/article.aspx?id=011309A

The Economy is Not a Machine

By Max Borders : BIO| 13 Jan 2009

Beware. The fixers have come to Washington. "Fix" because this one little word, in a close race with "run," is now the most dangerous word in the English language. Fix and run, you see, are words that betray the false metaphor upon which most of today's economic vernacular is built: economy as machine.

    * A CNN headline reads: "Obama's priority: Fixing the economy."
    * Paul Krugman says that what's interesting about the Bush Administration "is that there's no sign that anybody's actually thinking about 'well, how do we run this economy?'"
    * Mark Ames of The Nation thinks hiring Larry Summers "to fix the economy makes as much sense as..."

With Google's help I could go on. But even in social studies we learned that FDR and a coven of interventionists -- channeling John Maynard Keynes -- messed with the monetary system and dropped largess from on high to fix the Depression. This was referred to as "priming the pump."

Whenever I hear such talk, I'm reminded of a passage by Larry Eliot of The Guardian that describes, quite literally, an economic model from postwar Britain:

    "A sensation when it was unveiled at the London School of Economics in 1949, the Phillips machine used hydraulics to model the workings of the British economy but now looks, at first glance, like the brainchild of a nutty professor...The prototype was an odd assortment of tanks, pipes, sluices and valves, with water pumped around the machine by a motor cannibalised from the windscreen wiper of a Lancaster bomber. Bits of filed-down Perspex and fishing line were used to channel the coloured dyes that mimicked the flow of income round the economy into consumer spending, taxes, investment and exports."

Keynes, the grand old man of the machine metaphor, would have been either delighted or angered by such a contraption—delighted by the idea that economic inputs and outputs could be rendered in tubing and Easter-egg dye, angered, perhaps, that the various inputs and outputs were not represented as faithfully as they could have been by a more enlightened designer.

Deus ex Machina?

But the whole idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that, if the right smart guys are at the rheostats, the economy can be ordered by intelligent design. But the economy is no mechanism. There is no mission control. Government cannot swoop down like a deus ex machina to explain the inexplicable and fix the unfixable. Why? Because the knowledge required to grasp each of the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes. This is what F. A. Hayek called the knowledge problem. Knowledge, Hayek reminded us, is not concentrated among a few central authorities but is dispersed around society. That's why bad unintended consequences follow government interventions like black swans.

A few economists have not succumbed to the "fix it" fixation. They know that society is not like a machine at all, but an ecosystem. Faster than you can say market fundamentalism, a Keynesian will scoff at this metaphor. But his favorite trope has helped to stagnate many an economy; making Rube Goldberg apparatuses out of means-ends networks, perversion out of productivity. As Czech President Vaclav Klaus wisely notes: "The market is indivisible; it cannot be an instrument at the hands of central planners."

Society as Ecosystem

So if not the machine metaphor, why an ecosystem? Economies, like ecosystems are complex adaptive systems. Nature, including the economy, can experience episodes of wild wobbles, fluxes and flows. But it almost always returns to a steadier state known as "ordered chaos." That is, when it's left alone. In clumsier but perhaps more familiar language—ecosystems tend towards equilibrium.

Both ecosystems and economies are distributed systems. In the former, billions of interdependent means-ends activities are a reflection of a billion preferences and choices. In the latter, species are dynamic and interwoven in a web of relationships. For both, the whole system is an ever-evolving cascade of change that is unfathomable to a single mind. Data snapshots may be useful for some things, but should not be intended as blueprints for government planners. Even sophisticated computer models will, like the old Philips machine, eventually fail. There are no oracles.

Once we come to discover not only that the economy is an ecosystem -- but that the laws of ecosystems are very different from the laws of machines -- we'll resist our urge to fix things from the top down. We'll realize that economic growth is a holistic process that happens by virtue of countless adjustments and adaptations within the system itself. That's why economic planning is, and always has been, a form of hubris.

Keynesians on the left are eager to dismiss Intelligent Design (ID) as the creationist afterthought to evolution, but just as eager to embrace its analog in economics. Disciples of Adam Smith know better. Darwin, after all, read Smith. As the late naturalist Stephen Jay Gould wrote, "the theory of natural selection is a creative transfer to biology of Adam Smith's basic argument for a rational economy: the balance and order of nature does not arise from a higher, external (divine) control, or from the existence of laws operating directly upon the whole, but from struggle among individuals for their own benefits."

Today, those working at the frontiers of complexity science are beginning to apply Darwin's insights to the social sciences, too. "[Economics in light of complexity] is based on the emergent behavior of systems rather than on the reductive study of them," writes theorist Stuart Kaufmann. "It defies conventional mathematical treatments because it is not prestatable and is nonalgorithmic. Not surprisingly, most economists have so far resisted these ideas. Yet there can be little doubt that learning to apply these lessons from biology to technology will usher in a remarkable era of innovation and growth." (Lest cries of 'social darwinism' go up, remember that we're only talking about the functional aspects of an economic order, not whether a safety net is justified.)

Kaufmann's insights echo those of Hayek and Ludwig von Mises—largely banished as they have been from the ivory towers by economists wishing to play god. Perhaps once these wayward "stimulus" experiments run their course -- like a fix passing from the body of an addict -- those who believe not in market fundamentalism, but in market fundamentals, will be vindicated.

Complexity and Rules

By fundamentals I mean rules. Only rules can be the product of human design. These are the simple rules that lower "transaction costs," which is a fancy way of saying help us trade with each other easily, minimizing conflict. We call these rules "institutions" (property rights, contract enforcement, and so on) -- not legislation meant to regulate failure away, but to protect people from force, theft and fraud. For these are the rules that bring market discipline in a system of prices, profit and loss.

Many continue to blame "greed" for our current state of affairs. But greed is rather more like gravity. When you fall, you can either blame Isaac Newton or the banana peel on the sidewalk. Profit motive is a good thing when it operates in an environment where bad bets are punished with losses and good investments are rewarded. Only government can distort that healthy profit-and-loss system, giving people incentives to make bad decisions. It is in such an environment that greed becomes dangerous.

With the rules right, however, greed can help our economy stabilize faster than government ever could. As the lubricant of our economic system, self-interest leads a billion market participants to redirect resources to projects that create value in our society—all in a kind of large-scale recalibration. When profit and loss bring discipline, we'll behave more "rationally" in this process. But if government continues to change the rules ad hoc to bias the market in favor of corporatism and irrational behavior, the balance between order and chaos will be lost. Invariably, the fixers will continue to descend upon the economy with bad metaphors.

Max Borders is executive editor at Free To Choose Network.

 

[a_majoor]

Relearning the lessons of history:

http://online.wsj.com/article/SB123215398370892313.html

Leave the New Deal in the History Books
Cut corporate taxes to zero and create real jobs.

By MARK LEVEY

When Barack Obama takes office on Tuesday, his first order of business will be a stimulus package estimated to be close to $1 trillion, including $300 million in tax cuts and the largest new government spending program for infrastructure since Franklin Delano Roosevelt. Sages nod that replicating aspects of FDR's New Deal will help pull the country out of a recession. But the experience under FDR largely provides a cautionary tale.

Mr. Obama's policy plans are driven by the conventional economic wisdom that the New Deal economic programs ended the Great Depression. Not so. In fact, thanks to New Deal policies and programs, the U.S. economy faltered for years longer than it might otherwise have done.

President Roosevelt came to office much as Barack Obama will, shouldering an economic crisis that began under his predecessor. In 1933, Roosevelt's first year, unemployment hit nearly 25%, as people lost jobs and homes in towns across the country. Believing that government played a key role in restarting growth, FDR, within his first 100 days as president, created an alphabet soup of new agencies that mandated actions or controlled public spending and impacted private capital flow within the U.S. economy.
The Opinion Journal Widget

At first, it seemed to be working. After four years of FDR's policies, joblessness declined to 14.3% -- still very high but heading in the right direction. Then things turned for worse again: By the fall of 1937, the U.S. entered a secondary depression and unemployment began to rise, reaching 19% in 1938.

By 1939 Roosevelt's own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. "We have tried spending money," Morgenthau wrote in his diary. "We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!"

The problem was that neither Roosevelt nor President Herbert Hoover before him grasped the essential nature of the crisis, which was not the stock-market crash, but global deflation. At the end of the roaring '20s, an overhang of intergovernmental war debt from World War I, coupled with falling commodity prices and a currency crisis, had started the decline. Weak credit structures and European banks hurt by wartime inflation worsened it. When the Austrian Creditanstalt Bank failed, it ignited a global banking crisis that slashed across the international financial system cutting down everything in its path. Deflation went into full howl.

The same perils are now confronting President-elect Barack Obama, as the risk of deflation casts a long shadow over the economy. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been correctly focused on shoring up financial institutions to prevent a collapse of the financial system, and stave off a severe decline in the general price level. If that were to occur, the unspoken fear has been that the U.S. and global economy could go into a deflationary death spiral that would cause the collapse of the international financial system.

As a short-term matter, the moves of the Fed and other central banks have been correct, but in the long term a return to growth will depend on dynamic job creation by American business -- not the U.S. government. Under a two-year plan designed to create three million to four million jobs, Mr. Obama's plan would have the federal government begin distributing funds for public-works projects carried out by the states. With government already spending 20% of GDP, federal government, not private enterprise, will become the growth industry.

The effect of these policies, like FDR's, will be to lengthen the pain.

Early on, Roosevelt's economic thinking was that laissez-faire competition drove prices and wages down, resulting in unemployment, which in turn collapsed demand for goods and services. To remedy this, his administration passed laws such as the National Industrial Recovery Act (NIRA) that encouraged business to collude and raise prices without fear of antitrust prosecution. The hope was that this would allow business to raise wages.

By the time NIRA was found unconstitutional a few years later, the damage had already been done. For example, the Department of the Interior complained that over two years it had received 260 bids from different steel companies that were identical to the penny and 50% higher than foreign bids. The policy had put chains on every normal free-market instinct and price feedback mechanism needed to restore economic growth. Roosevelt himself rued the decision in the late 1930s as a secondary depression was gripping the economy. "The disappearance of price competition," he said, "is one of the primary causes of the difficulties."

In addition to New Deal spending programs, a series of new taxes were introduced that crushed the innovation, risk taking, and growth plans of entrepreneurs, corporations and investors. From 1930 to 1940, the top marginal income-tax rate rose to 79% from 25% while the corporate income-tax rate doubled to 24% from 12%. In addition, Roosevelt tacked on an excess profits tax and undistributed profits tax. He imposed an excise tax on dividends. Even the new Social Security payroll tax added 2%.

As a result, the New Deal forced the allocation of money away from the private sector. As economist Henry Hazlitt wrote back in 1946, New Deal programs prevented the creation of the types of jobs which have the multiplier effect of successful businesses. Creating "work" prevented innovation and new jobs that would create other jobs.

The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.

The positive impact on corporate-credit markets, the stock market, the attractiveness of the U.S. to foreign investors, and the willingness to take business risk and create new jobs would be immediate. Capital-gains tax collections would rise. Capital flows would be in the hands of those who are driven to build businesses and permanent jobs efficiently instead of pushing that capital through a government pipeline with endless amounts of friction. If the U.S. is to lead the international economic community out of this crisis, this is the place to start.

Mr. Obama will come to office next week with plenty of political capital and the faith of a majority of Americans that he can help pull the country out of its economic woes. As he takes over the reins, his success will be judged not on rhetoric but on the numbers his policies can generate. The best thing he can do is leave the New Deal in the history books.

Mr. Levey is senior managing director at Lotsoff Capital Management in Chicago.