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Topic: Political Economics (Read 138182 times)
Re: Political Economics
Reply #100 on:
October 19, 2008, 08:40:08 AM »
So, my question would be, what policies should we adopt and what should we avoid to fix this current mess?
Re: Political Economics
Reply #101 on:
October 19, 2008, 10:56:11 AM »
What I infer from it is that precisely because the problem was caused by too much money and meddling the the Govt. in the market, it can't be fixed by too much money and meddling in the market for all the reasons that the Govt. shouldn't have been trying to manipulate the market (printing money, negative interest rates, the FMs, the CRA, Mark to Market Ruies, etc) to begin with.
In short, a clusterfcuk cometh.
Japan tried saving banks with bad loans with negative rates and they had (have?) a recession that has lasted a really, really long time. Are we about to be in the same boat? With His Glibness at the helm, the chances of following all the worst possible policies (taxes, printing money, the govt changing the terms of mortgage contracts, etc etc) become scarily possible.
The Road to Hell, as usual, paved with good intenions
Reply #102 on:
October 19, 2008, 11:10:18 AM »
And this is what government meddling can look like:
Building Flawed American Dreams
DavID STREITFELD and GRETCHEN MORGENSON
Published: October 18, 2008
SAN ANTONIO — A grandson of Mexican immigrants and a former mayor of this town, Henry G. Cisneros has spent years trying to make the dream of homeownership come true for low-income families. As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.
Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices.
And Mr. Cisneros became a developer himself. The Lago Vista development here in his hometown once stood as a testament to his life’s work. Joining with KB, he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He often made the trip from downtown to ask residents if they were happy.
“People bought here because of Cisneros,” says Celia Morales, a Lago Vista resident. “There was a feeling of, ‘He’s got our back.’ ”
But Mr. Cisneros rarely comes around anymore. Lago Vista, like many communities born in the housing boom, is now under stress. Scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records.
While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.”
They were lured by “unscrupulous participants — bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.” (What a weasel!)
The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats. Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.
He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too. (Hmmm, why would that be?
The Paydays During the Boom
After a sex scandal destroyed his promising political career and he left Washington, he eventually reinvented himself as a well-regarded advocate and builder of urban, working-class homes. He has financed the construction of more than 7,000 houses.
For the three years he was a director at KB Home, Mr. Cisneros received at least $70,000 in pay and more than $100,000 worth of stock. He also received $1.14 million in directors’ fees and stock grants during the six years he was a director at Countrywide. He made more than $5 million from Countrywide stock options, money he says he plowed into his company.
He says his development work provides an annual income of “several hundred thousand” dollars. All told, his paydays are modest relative to the windfalls some executives netted in the boom. Indeed, Mr. Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking and housing; it was unwavering belief.
It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance. (You fcuking moron!!! It was inevitable! It is precisely what happens when the government intervenes, and intervenes massively in the market!)
“You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.”
From people dizzily drawing home equity loans out of increasingly valuable houses to banks racking up huge fees, few wanted the party to end.
“I’m not sure you can regulate when we’re talking about an entire nation of 300 million people and this behavior becomes viral,” Mr. Cisneros says. (Well, duh! THIS IS PRECISELY WHY YOU SHOLD NOT START!)
Homeownership has deep roots in the American soul. But until recently getting a mortgage was a challenge for low-income families. Many of these families were minorities, which naturally made the subject of special interest to Mr. Cisneros, who, in 1993, became the first Hispanic head of the Department of Housing and Urban Development.
He had President Clinton’s ear, an easy charisma and a determination to increase a homeownership rate that had been stagnant for nearly three decades. Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all. “We were trying to be creative,” Mr. Cisneros recalls.
(Page 2 of 4)
Under Mr. Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove they had five years of stable income; three years sufficed.
And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.) (I'm shocked! Absolutely shocked!)
“Henry did everything he could for home builders while he was at HUD,” says Janet Ahmad, president of Homeowners for Better Building, an advocacy group in San Antonio, who has known Mr. Cisneros since he was a city councilor. “That laid the groundwork for where we are now.”
Mr. Cisneros, who says he has no recollection that appraisal rules were relaxed when he ran HUD, disputes that notion. “I look back at HUD and feel my hands were clean,” he says.
Lenders applauded two more changes HUD made on Mr. Cisneros’s watch: they no longer had to interview most government-insured borrowers face to face or maintain physical branch offices. The industry changed, too. Lenders sprang up to serve those whose poor credit history made them ineligible for lower-interest “prime” loans. Countrywide, which Angelo R. Mozilo co-founded in 1969, set up a subprime unit in 1996.
Mr. Cisneros met Mr. Mozilo while he was HUD secretary, when Countrywide signed a government pledge to use “proactive creative efforts” to extend homeownership to minorities and low-income Americans. He met Bruce E. Karatz, the chief executive of KB Home, when both were helping Los Angeles rebuild after the Northridge earthquake in 1994.
There were real gains during the Clinton years, as homeownership rose to 67.4 percent in 2000 from 64 percent in 1994. Hispanics and African-Americans were the biggest beneficiaries. But as the boom later gathered steam, and as the Bush administration continued the Clinton administration’s push to amplify homeownership, some of those gains turned out to be built on sand.
Mr. Cisneros left government in 1997 after revelations that he had lied to federal investigators about payments to a former mistress. In the following years, HUD continued to draw attention in the news media and among consumer advocates for an overly lenient posture toward the housing industry.
In 2000, Mr. Cisneros returned to San Antonio, where he formed American CityVista, a developer, in partnership with KB, and became a KB director. KB’s board also included James A. Johnson, a prominent Democrat and the former chief executive of Fannie Mae, the mortgage giant now being run by the government. Mr. Johnson did not return a phone call seeking comment.
It made for a cozy network. Fannie bought or backed many mortgages received by home buyers in the KB Home/American CityVista partnership. And Fannie’s biggest mortgage client was Countrywide, whose board Mr. Cisneros had joined in 2001.
Because American CityVista was privately held, Mr. Cisneros’s earnings are not disclosed. He held a 65 percent stake, and KB had the rest. In 2002, KB paid $1.24 million to American CityVista for “services rendered.”
‘A Little Too Ambitious’
One of American CityVista’s first projects, unveiled in late 2000, was Lago Vista — Spanish for “Lake View.” The location was unusual: San Antonio’s proud and insular South Side, a Hispanic area home to secondhand car dealers, light industry and pawnshops. Mr. Cisneros and KB pledged to transform an overgrown patch of land into a showcase. Homes were initially priced from $70,000 to about $95,000, and Mr. Cisneros promised that Lago Vista would be ringed with jogging paths and maple trees.
The paths were never built, and few trees provide shade from the Texas sun. The adjoining “lake” — at one point a run-off pit for an asphalt plant — is fenced off, a hazard to neighborhood children. The houses are gaily painted in pink, blue, yellow or tan, and most owners keep their yards green and tidy.
KB considers Lago Vista a “model community,” a spokeswoman said.
To get things rolling in Lago Vista, traditional bars to homeownership were lowered to the ground. Fannie Mae, CityVista and KB promoted a program allowing police officers, firefighters, teachers and others to get loans with nothing down and no closing costs.
KB marketed its developments in videos. In one from 2003, Mr. Karatz declared: “One of the greatest misconceptions today is people who sit back and think, ‘I can’t afford to buy.’ ” Mr. Cisneros appeared — identified as a former HUD director — saying the time was ripe to buy a home. Many agreed.
(Page 3 of 4)
Victor Ramirez and Lorraine Pulido-Ramirez bought a house in Lago Vista in 2002. “This was our first home. I had nothing to compare it to,” Mr. Ramirez says. “I was a student making $17,000 a year, my wife was between jobs. In retrospect, how in hell did we qualify?”
The majority of buyers in Lago Vista “were duped into believing it was easier than it was,” Mr. Ramirez says. “The attitude was, ‘Sign here, sign here, don’t read the fine print.’ ” He added that some fault lay with buyers: “We were definitely willing victims.” (The Ramirez family veered close to foreclosure, but the couple now have good jobs and can make their payments.)
KB and Mr. Cisneros eventually built more than a dozen developments, primarily in Texas. But the shine slowly came off Lago Vista.
“It started off fabulously,” Mr. Karatz recalled. Then sales slowed considerably. “It was probably, looking back, a little too ambitious to think that there would be sufficient local demand.”
And then the foreclosures started. “A lot of people got approved for big amounts,” says Patricia Flores, another Lago Vista homeowner. “They bit off more than they could chew.” Families split up under the strain of mortgage payments. One residence had so much marital turmoil that neighbors nicknamed it “The House of Broken Love.”
Some homes were taken over and sold at a loss by HUD, which had insured them. KB was also a mortgage lender, a business many home builders pursued because it was so profitable. At times, it was also problematic.
Officials at HUD uncovered problems with KB’s lending. In 2005, about two years after Mr. Cisneros left the KB board, the agency filed an administrative action against KB for approving loans based on overstated or improperly documented borrower income, and for charging excessive fees. Because HUD does not specify where improprieties take place, it is not clear if this occurred at Lago Vista.
KB Home paid $3.2 million to settle the HUD action without admitting liability or fault, one of the largest settlements collected by the agency’s mortgagee review board. Shortly afterward, KB sold its lending unit to Countrywide. Then they set up a joint venture: KB installed Countrywide sales representatives in its developments.
By 2007, almost three-quarters of the loans to KB buyers were made by the joint venture. In Lago Vista, residents secured loans from a spectrum of federal agencies and lenders.
During years of heady growth, and then during a deep financial slide, Countrywide became a lightning rod for criticism about excesses and abuses leading to the housing bust — which Countrywide routinely brushed off.
Mr. Cisneros says he was never aware of improprieties at KB or Countrywide, and worked with them because he was impressed by Mr. Karatz and Mr. Mozilo. Mr. Mozilo could not be reached for comment.
Still, Countrywide expanded subprime lending aggressively while Mr. Cisneros served on its board. In September 2004, according to documents provided by a former employee, lending audits in six of Countrywide’s largest regions showed about one in eight loans was “severely unsatisfactory” because of shoddy underwriting.
HUD required such audits and lenders were expected to address problems. Mr. Cisneros was a member of the Countrywide committee that oversaw compliance with legal and regulatory requirements. But he says he did not recall seeing or receiving the reports.
Nor, he says, was there ever a board vote about the wisdom of subprime lending.
“The irresistible temptation to engage in subprime was Countrywide’s fatal error,” he says. “I fault myself for not having seen it and, since it was not something I could change, having left.”
Mr. Cisneros left Countrywide’s board last year. At the time, he expressed “enormous confidence in the leadership.” In 2003, Mr. Cisneros ended his partnership with KB because, he says, he felt constrained working with just one builder. He formed a new company with the same mission, CityView, that has raised $725 million.
Mr. Karatz has a different recollection of why the partnership ended.
Page 4 of 4)
“It didn’t become an important part of KB’s business,” he says. “It was profitable but I don’t think as profitable in those initial years as Henry’s group wanted it to be.”
Troubles in Lago Vista
Today in Lago Vista, many are just trying to get by. Residents say crime has risen, and with association dues unpaid, they cannot hire security. Salvador Gutierrez, a truck driver, woke up recently to see four men stealing the tires off his pickup. Seventeen houses are for sale, but there are few buyers.
Hugo Martinez, who got a pair of Countrywide loans to buy a two-bedroom house with no down payment, recently lost his job with a car dealership. He has a lower-paying job as a mechanic and can’t refinance or sell his house.
“They make it easy when you buy,” Mr. Martinez says. “But after a while, the interest rate goes up. KB Home says they cannot help us at all.”
Five years ago, Carlo Lee and Patricia Reyes bought their first home, a three-bedroom house in Lago Vista. After Mrs. Reyes became ill last year and lost her job, they fell behind on their payments. Last month, Mr. Reyes was laid off from one of his jobs, assembling cabinets. He still works part time at a hospital, but unless the couple come up with missed payments and fees, they will lose their home.
“Everyone isn’t happy here in Lago Vista,” Mr. Reyes says. “Everyone has a lot of problems.”
Countrywide was bought recently at a fire-sale price by Bank of America. Mr. Cisneros describes Mr. Mozilo as “sick with stress — the final chapter of his life is the infamy that’s been brought on him, or that he brought on himself.”
Mr. Karatz was forced out of KB two years ago amid a compensation scandal. Last month, without admitting or denying the allegations, he settled government charges that he illegally backdated stock options worth $6 million.
For his part, Mr. Cisneros says he is proud of Lago Vista. “It is inaccurate to say that we put people into homes that they couldn’t afford,” he says. “No one was forcing people into homes.”
He also remains bullish on home building, despite the current carnage.
“We’re not selling cigarettes,” he says. “We’re not drawing people into casino gambling. We’re building the homes they’re going to raise their families in.”
Helicopter Bernanke at it again
Reply #103 on:
October 21, 2008, 07:04:19 AM »
The Carter years return , , ,
Ben Bernanke apparently wants four more years as Federal Reserve Chairman. At least that's a reasonable conclusion after Mr. Bernanke all but submitted his job application to Barack Obama yesterday by endorsing the Democratic version of fiscal "stimulus."
While the Fed chief said any stimulus should be "well targeted," even a general endorsement amounts to a political green light. Mr. Bernanke certainly knows that Mr. Obama and Democrats on Capitol Hill are talking about some $300 billion in new "stimulus" spending, while President Bush and Republicans are resisting. And by saying any help should "limit longer-term effects" on the federal deficit, he had to know he was reinforcing Democratic opposition to permanent tax cuts.
Mr. Bernanke could have begged off -- and would have been wiser to do so -- given how much the Fed has already made itself a political lightning rod with its many Wall Street interventions. He might also have thought twice about endorsing one party's policy preferences a mere two weeks before Election Day given his obligation to preserve the Fed's independence. We can remember when tougher Fed chairmen used to refrain from adjusting interest rates close to an election for fear of seeming to be political; they would never have dreamed of meddling in campaign tax and spending debates.
Perhaps Mr. Bernanke's blunderbuss political intrusion will win him more Democrat friends, and maybe even Mr. Obama's goodwill. To the rest of the world, he has harmed the Fed and made himself less credible.
Please add your comments to the Opinion Journal forum.
Reply #104 on:
October 24, 2008, 12:10:56 PM »
Isn't it refreshing for a high profile person to admit he made a mistake?
My opinion of Greenspan just went up ten fold. Just a little honesty. That's all it takes sometimes. We so rarely get that from people we vote to be our "leaders".
Compare that to most of the coward politicians, Frank, Dodd et al.
US SF hit AQ in Syria
Reply #105 on:
October 26, 2008, 11:50:17 PM »
October 26, 2008
US Special Forces Launch Rare Attack Inside Syria
By THE ASSOCIATED PRESS
Filed at 10:06 p.m. ET
DAMASCUS, Syria (AP) -- U.S. military helicopters launched an extremely rare attack Sunday on Syrian territory close to the border with Iraq, killing eight people in a strike the government in Damascus condemned as ''serious aggression.''
A U.S. military official said the raid by special forces targeted the network of al-Qaida-linked foreign fighters moving through Syria into Iraq. The Americans have been unable to shut the network down in the area struck because Syria was out of the military's reach.
''We are taking matters into our own hands,'' the official told The Associated Press in Washington, speaking on condition of anonymity because of the political sensitivity of cross-border raids.
The attack came just days after the commander of U.S. forces in western Iraq said American troops were redoubling efforts to secure the Syrian border, which he called an ''uncontrolled'' gateway for fighters entering Iraq.
A Syrian government statement said the helicopters attacked the Sukkariyeh Farm near the town of Abu Kamal, five miles inside the Syrian border. Four helicopters attacked a civilian building under construction shortly before sundown and fired on workers inside, the statement said.
The government said civilians were among the dead, including four children.
A resident of the nearby village of Hwijeh said some of the helicopters landed and troops exited the aircraft and fired on a building. He said the aircraft flew along the Euphrates River into the area of farms and several brick factories. The witness spoke on condition of anonymity because of the sensitivity of the information.
Another witness said four helicopters were used in the attack.
Since the invasion of Iraq in 2003, there have been some instances in which American troops crossed areas of the 370-mile Syria-Iraq border in pursuit of militants, or warplanes violated Syria's airspace. But Sunday's raid was the first conducted by aircraft and on such a large scale. In May 2005, Syria said American fire killed a border guard.
Syria's Foreign Ministry said it summoned the U.S. and Iraqi charges d'affaires to protest against the strike.
''Syria condemns this aggression and holds the American forces responsible for this aggression and all its repercussions. Syria also calls on the Iraqi government to shoulder its responsibilities and launch and immediate investigation into this serious violation and prevent the use of Iraqi territory for aggression against Syria,'' the government statement said.
Syrian state television late Sunday aired footage that showed blood stains on the floor of a site under construction, with wooden beams used to mold concrete strewn on the ground. Akram Hameed, one of the injured, told the television he was fishing in the Euphrates and saw four helicopters coming from the border area under a heavy blanket of fire.
''One of the helicopters landed in an agricultural area and eight members disembarked,'' the man in his 40s said. ''The firing lasted about 15 minutes and when I tried to leave the area on my motorcycle, I was hit by a bullet in the right arm about 20 meters (yards) away,'' he said.
The injured wife of the building's guard, in bed in hospital with a tube in her nose, told Syria TV that two helicopters landed and two remained in the air during the attack.
''I ran to bring my child who was going to his father and I was hit,'' she said. The TV did not identify her by name.
The area targeted is near the Iraqi border city of Qaim, which had been a major crossing point for fighters, weapons and money coming into Iraq to fuel the Sunni insurgency.
Iraqi travelers making their way home across the border reported hearing many explosions, said Qaim Mayor Farhan al-Mahalawi.
The foreign fighters network sends militants from North Africa and elsewhere in the Middle East to Syria, where elements of the Syrian military are in league with al-Qaida and loyalists of Saddam Hussein's Baath party, the U.S. military official said.
He said that while American forces have had considerable success, with Iraqi help, in shutting down the ''rat lines'' in Iraq, and with foreign government help in North Africa, the Syrian node has been out of reach.
''The one piece of the puzzle we have not been showing success on is the nexus in Syria,'' the official said.
On Thursday, U.S. Maj. Gen. John Kelly said Iraq's western borders with Saudi Arabia and Jordan were fairly tight as a result of good policing by security forces in those countries but that Syria was a ''different story.''
''The Syrian side is, I guess, uncontrolled by their side,'' Kelly said. ''We still have a certain level of foreign fighter movement.''
He added that the U.S. was helping construct a sand berm and ditches along the border.
''There hasn't been much, in the way of a physical barrier, along that border for years,'' Kelly said.
The White House in August approved similar special forces raids from Afghanistan across the border of Pakistan to target al-Qaida and Taliban operatives. At least one has been carried out.
The flow of foreign fighters into Iraq has been cut to an estimated 20 a month, a senior U.S. military intelligence official told the Associated Press in July. That's a 50 percent decline from six months ago, and just a fifth of the estimated 100 foreign fighters who were infiltrating Iraq a year ago, according to the official.
Ninety percent of the foreign fighters enter through Syria, according to U.S. intelligence. Foreigners are some of the most deadly fighters in Iraq, trained in bomb-making and with small-arms expertise and more likely to be willing suicide bombers than Iraqis.
Foreign fighters toting cash have been al-Qaida in Iraq's chief source of income. They contributed more than 70 percent of operating budgets in one sector in Iraq, according to documents captured in September 2007 on the Syrian border. Most of the fighters were conveyed through professional smuggling networks, according to the report.
Iraqi insurgents seized Qaim in April 2005, forcing U.S. Marines to recapture the town the following month in heavy fighting. The area became secure only after Sunni tribes in Anbar turned against al-Qaida in late 2006 and joined forces with the Americans.
Syrian Foreign Minister Walid al-Moallem accused the United States earlier this year of not giving his country the equipment needed to prevent foreign fighters from crossing into Iraq. He said Washington feared Syria could use such equipment against Israel.
Though Syria has long been viewed by the U.S. as a destabilizing country in the Middle East, in recent months, Damascus has been trying to change its image and end years of global seclusion.
Its president, Bashar Assad, has pursued indirect peace talks with Israel, mediated by Turkey, and says he wants direct talks next year. Syria also has agreed to establish diplomatic ties with Lebanon, a country it used to dominate both politically and militarily, and has worked harder at stemming the flow of militants into Iraq.
The U.S. military in Baghdad did not immediately respond to a request for comment after Sunday's raid.
The Evil of Two Lessers
Reply #106 on:
October 30, 2008, 01:55:02 AM »
The Markets Are Weak Because the Candidates Are Lousy
The good news is that an Obama victory is already priced in.By GEORGE NEWMANArticle
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A lot has been said about the causes of the drastic drops -- and extreme volatility -- in stock prices and the impending recession. Blame has been heaped on low interest rates and dubious mortgage practices, and on the subsequent collapse of real-estate prices and the freeze in financial markets. But one other major factor has largely escaped attention.
To state the obvious: The valuation of an individual stock reflects the collective expectation of investors about a company's future profits, dividends and appreciation, and the same is true of the market as a whole. These profits, in turn, are greatly influenced by government policy on taxes, spending, subsidies, environmental and other regulations, labor laws, and the corporate legal climate. Investors have heard enough from both candidates in the last month or two to conclude that prospects for a flourishing, competitive, growing and reasonably free economy in a McCain administration are bad, and in an Obama administration far worse. (In fact, the market's bearish behavior over the last couple of months pretty closely tracks Barack Obama's gains.)
If you don't believe me, please answer a few questions:
- Have you thought of what a gradual doubling (and indexation) of the minimum wage, sailing through a veto-proof and filibuster-proof Congress, would do to inflation, unemployment and corporate profits? The market now has.
- Have you thought of how easily a Labor Department headed by a militant union boss would push through a "Transparency in Labor Relations" law that does away with secret ballots in strike votes, and what this would do to industrial peace? The market now has.
- Have you thought of how a Treasury Secretary George Soros would engineer the double taxation of the multinationals' world-wide profits, and what this would mean for investors (to say nothing of full-scale industrial flight from the U.S.)? The market now has.
- Have you thought of how an Attorney General Charles J. Ogletree would champion a trillion-dollar reparations-for-slavery project (whittled down, to be fair, to a mere $800-billion, over-10-years compromise), and what this would do to the economy? The market now has.
- Have you thought of what the virtual outlawing of arbitration -- exposing all industries to the fate of asbestos producers -- would do to corporate liability and legal bills? The market now has.
- Have you thought of how a Health and Human Services Secretary Hillary Clinton would fix drug prices (generously allowing 10% over the cost of raw materials), and what this would do to the financial health of the pharmaceutical industry (not to mention the nondiscovery of lifesaving drugs)? The market now has.
- Have you thought of a Secretary of the newly established Department of Equal Opportunity for Women mandating "comparable worth" pay practices for every company doing any business with government at any level -- where any residual gap between the average pay of men and women is an eo ipso violation? Have you thought about what this would do to administrative and legal costs, hiring practices, productivity and wage bills? The market now has.
- Have you thought of what confiscatory "windfall profits" taxes on oil companies would do to exploration, supply and prices? The market now has.
- Have you thought of how the nationalization of health insurance, the mandated coverage of ever more -- and more exotic -- risks, the forced reimbursement for excluded events, and the diminished freedom to match premium to risk would affect the insurance industry? The market now has.
- Have you thought of Energy Czar Al Gore's five million new green jobs -- high-paying, unionized and subsidized -- to replace, at five times the cost, what we are now producing without those five million workers, and what this will do to our productivity, deficit and competitiveness? The market now has.
I could go on, but you get the point. Nothing reveals Mr. Obama's visceral hostility to business more than the constant urging of our best and brightest to desert the productive private sector ("greed") and go into public service like politics or community organizing (i.e., organizing people to press government for more handouts). Who in his ideal world would bake our bread, make our shoes and computers, and pilot our airplanes is not clear.
And if you think all this comes from an ardent John McCain fan, you couldn't be more wrong. The Arizona Senator has made some terrible mistakes, one of them trying to out-demagogue Mr. Obama to the economic illiterates. This kind of pandering never works. Such populists and other economic illiterates will always go for the genuine article.
Mr. McCain should have asked some simple questions -- pertinent, educational and easily understood by ordinary voters. Such as:
- If the rise in the price of oil from $70 to $140 was due to "greed" (the all-purpose explanation of the other side for every economic problem), was the fall from $140 to $70 due to a sudden outbreak of altruism?
- If a bank is guilty both for rejecting a mortgage ("redlining") and for approving it ("greed" -- see above), how might a bank president keep his business out of trouble with the law?
- If the financial turmoil of the last year or so was caused by inadequate regulation, which party has controlled both Houses of Congress and all of its financial committees and subcommittees (where such regulation would originate) in the last two years?
- If we bemoan the sending of $750 billion a year to our enemies for imported oil, which party has prevented domestic drilling for decades that would have made us more self-sufficient?
- You were unhappy with Congress, and in 2006 you cast your lot with those who, like Mr. Obama now, promised "change." Are you happy with the changes that have taken place in the last two years?
None of these questions have been asked loudly or often enough, while the other message -- everything is bad, it's all Bush's fault, and McCain=Bush -- has sunk in. So given his own penchant for business bashing, a McCain win would merely count as damage control.
The market is forward looking. If it is unhappy with a president, it does not wait almost eight years before the numbers reflect it. If it really anticipated good times under Mr. Obama, the market would have gained 40% in anticipation of the transition. By losing that much, it seems to be saying the opposite.
The silver lining in all this is that the market has already "discounted" an Obama win, so if that happens you won't wake up on Nov. 5 to find your remaining savings down the drain. If the unexpected happens, you may be in for a pleasant surprise.
Mr. Newman is an economist and retired business executive.
Will BO's policy cause long term growth in the economy
Reply #107 on:
October 31, 2008, 03:16:30 PM »
***"The point is, though, that -- and it’s not just charity, it’s not just that I want to help the middle class and working people who are trying to get in the middle class -- it’s that when we actually make sure that everybody’s got a shot – when young people can all go to college, when everybody’s got decent health care, when everybody’s got a little more money at the end of the month – then guess what? Everybody starts spending that money, they decide maybe I can afford a new car, maybe I can afford a computer for my child. They can buy the products and services that businesses are selling and everybody is better off. All boats rise. That’s what happened in the 1990s, that’s what we need to restore. And that’s what I’m gonna do as president of the United States of America***
I don't see how giving households a few extra bucks is going to stimulate long term growth. Other than a quick boost in spending as soon as the cash runs out paying off the mortgage, the bills, the cigaretters etc that we will be right back where we started.
His whole argument seems based on a fallicious argument to start with. But this is not really about "raising all boats" anyway. This is smoke and mirrors for what he really intends which is just to take others money to give to whomever he deems is appropriate.
Yea it is essentially "reparations". BO won't say it like it is. He'll pretend the country as a whole benefits. I don't see it.
Re: Political Economics
Reply #108 on:
November 07, 2008, 02:55:08 PM »
GAFFNEY: Treasury submits to Shariah
Tuesday, November 4, 2008
The U.S. Treasury Department is submitting to Shariah - the seditious religio-political-legal code authoritative Islam seeks to impose worldwide under a global theocracy.
As reported in this space last week, Deputy Secretary of the Treasury Robert Kimmitt set the stage with his recent visit to Saudi Arabia and other oil-rich Persian Gulf states. His stated purpose was to promote the recycling of petrodollars in the form of foreign investment here.
Evidently, the price demanded by his hosts is that the U.S. government get with the Islamist financial program. While in Riyadh, Mr. Kimmitt announced: "The U.S. government is currently studying the salient features of Islamic banking to ascertain how far it could be useful in fighting the ongoing world economic crisis."
"Islamic banking" is a euphemism for a practice better known as "Shariah-Compliant Finance (SFC)." And it turns out that this week the Treasury will be taking officials from various federal agencies literally to school on SFC.
The department is hosting a half-day course entitled "Islamic Finance 101" on Thursday at its headquarters building. Treasury's self-described "seminar for the policy community" is co-sponsored with the leading academic promoters of Shariah and SCF in the United States: Harvard University Law School's Project on Islamic Finance. At the very least, the U.S. government evidently hopes to emulate Harvard's success in securing immense amounts of Wahhabi money in exchange for conforming to the Islamists' agenda. Like Harvard, Treasury seems utterly disinterested in what Shariah actually is, and portends.
Unfortunately, such submission - the literal meaning of "Islam" - is not likely to remain confined long to the Treasury or its sister agencies. Thanks to the extraordinary authority conferred on Treasury since September, backed by the $700 billion Troubled Asset Relief Program (TARP), the department is now in a position to impose its embrace of Shariah on the U.S. financial sector. The nationalization of Fannie Mae and Freddie Mac, Treasury's purchase of - at last count - 17 banks and the ability to provide, or withhold, funds from its new slush-fund can translate into unprecedented coercive power.
Concerns in this regard are only heightened by the prominent role Assistant Treasury Secretary Neel Kashkari will be playing in "Islamic Finance 101." Mr. Kashkari, the official charged with administering the TARP fund, will provide welcoming remarks to participants. Presumably, in the process, he will convey the enthusiasm about Shariah-Compliant Finance that appears to be the current party line at Treasury.
As this enthusiasm for SCF ramps up in Washington officialdom, it is worth recalling a lesson from "across the pond." Earlier this year, the head of the Church of England, Archbishop of Canterbury Rowan Williams, provoked a brief but intense firestorm of controversy with his declaration that it was "unavoidable" that Shariah would be practiced in Britain. Largely unremarked was the reason he gave for such an ominous forecast: The U.K. had already accommodated itself to Shariah-Compliant Finance.
This statement provides an important insight for the incumbent U.S. administration and whomever succeeds it: Shariah-Compliant Finance serves as a leading edge of the spear for those seeking to insinuate Shariah into Western societies.
Regrettably, SCF is not the only instrument of the stealth jihad by which Shariah-promoting Islamists are seeking to achieve "parallel societies" here and elsewhere in the West. The British experience is instructive on this score, too. Her Majesty's government has allowed the establishment of at least five Shariah courts to hear (initially) family law cases. Polygamists in the U.K. can get welfare for each of their wives (as long as all the marriages beyond the first were performed overseas).
Thus far, we in this country may not have reached the point where evidence of this sort of creeping Shariah is so manifest. But Treasury's accommodation to SCF demonstrates that we are on the same trajectory - the one ordained and demanded by the promoters of Shariah, one to which we serially accommodate ourselves at our extreme peril.
After all, the object of Shariah is the supplanting of our government and Constitution, through violent means if possible and, until then, through stealthy ones. Islamists, having secured footholds via their parallel societies, inevitably use those to extend their influence over Muslims who have no more interest in living under authoritative Islam's Shariah than the rest of us do. Inexorably, it becomes the turn of non-Muslims to accommodate themselves to ever more intrusive demands from the Islamists. It is known as submission, or dhimmitude.
Soon - possibly as early as this Wednesday - the Treasury Department and the other federal agencies will be taking orders from representatives of Barack Obama or John McCain. It may be that the outgoing administration's determination to advance the Islamist agenda via "Islamic Finance 101," and what flows from it, may be the first, far-reaching policy decision inherited by the new president-elect. If he does not want to have his transition saddled with an implicit endorsement of submission to Shariah, the winner of the White House sweepstakes would be well-advised to pull the plug on Thursday's indoctrination program and the insidious industry it is meant to foist on the "policy community," our capital markets and our country.
Frank J. Gaffney, Jr. is president of the Center for Security Policy and a columnist for The Washington Times.
Sharia Finance coming to US?
Reply #109 on:
November 07, 2008, 02:59:18 PM »
Here's more on this: The U.S. Should Ban Shari’a Finance
By Rachel Ehrenfeld
The U.S. financial crisis is attributable, in part, to a lack of transparency. If the government adopts Shari’a-based financing, our financial system will be rendered even more opaque. Such a policy also entangles American finance with Islamic law in violation of the First Amendment’s Establishment Clause which mandates separation of State from Church or Mosque.
The Organization of the Islamic Conference (OIC) created by the Saudis in 1969 for the purpose of “liberating Jerusalem and Al-Aqsa from Zionist occupation” is leading the charge for global expansion of Shari’a-based financing. The OIC High Commissioner for the Boycott of Israel coordinates the efforts of OIC’s fifty-seven member states to economically isolate the Jewish state, a blacklisting policy first declared by the Arab League Council on December 2, 1945. The boycott is enforced via the Damascus-based Central Boycott Office.
Congress unanimously condemned Saudi Arabia on April 5, 2006, (H.Con.Res.370) for its continued enforcement of the boycott in violation of commitments it made to the World Trade Organization in 2005. The U.S. Commerce Department’s Bureau of Industry and Security reported a 20% increase in Arab boycott requests in 2006 from the previous year. In June 2006, the Saudi ambassador admitted his country still enforced the boycott, and the Saudis participated in the 2007 boycott conference in Syria.
Adopting Shari’a-based financing violates U.S. law which makes it illegal for American individuals or companies to cooperate with the Arab boycott, mandates reporting of boycott requests, and imposes civil and criminal penalties against violators.
Therefore, the American Center for Democracy and Dr. Rachel Ehrenfeld protest the Treasury Department's plan to subject America’s citizens and its financial industry to Islamic rule in violation of the Constitution and U.S. law.
Washington DC: Coalition to Stop Shariah Press Conference
By Jeffrey Immon November 6, 2008 TrackBacks (0)
November 6, 2008 - Washington DC: The Coalition to Stop Shariah held a press conference at the National Press Club to oppose actions by the U.S. Treasury Department today to hold a course titled "Islamic Finance 101" to "train" government employees on Sharia-Compliant Finance (SCF). The coalition, consisting of diverse groups with a shared interest in fighting Islamic supremacism, called for the U.S. Treasury Department to either cancel the training course this afternoon or to provide education on the full Islamic supremacist nature of Sharia.
Representative speakers for the coalition at the press conference included Frank Gaffney - Center for Security Policy, Robert Spencer - JihadWatch.org, Dan Pollak - Zionist Organization of America, Wendy Wright - Concerned Women for America, Faith J.H. McDonnell - The Institute on Research and Democracy, Kyle Scheindler of the Endowment for Middle East Truth (EMET), Jim Boulet of English First, and Warren Mendelson of the Unity Coalition for Israel.
Frank Gaffney described the Coalition to Stop Shariah as a group, assembled in just the past several days in reaction to the Treasury SCF training and other events, as an "interfaith, non-partisan group of individuals and organizations that have decided that this is the time to begin contesting seriously a seditious program that authoritative Islam describes as Sharia. We have come together to call attention to and to counter the insinuation of Sharia into our society and those of other freedom loving people through various means, both stealthy and nonviolent and through the use or threat of the use of force."
Frank Gaffney described the efforts to expand Sharia-Compliant Finance as a threat "aimed at the very heart of the American economy." He noted as efforts to combat Sharia have gained ground that the proponents of Sharia have renamed Sharia-Compliant Finance as "Islamic finance," "ethical finance," or "structured finance." Mr. Gaffney pointed to the efforts by the Center for Security Policy in studying Sharia-Compliant Finance that has resulted in a legal memorandum by David Yerushalmi titled "Shari'ah's Black Box: Civil Liability and Criminal: Exposure Surrounding Shari'ah-Compliant Finance." Senator Jon Kyl reviewed David Yerushalmi's report and Senator Kyl wrote SEC Chairman Chris Cox, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and Attorney General Michael Mukasey asking them to respond to this report.
Last Edit: November 07, 2008, 03:01:01 PM by Crafty_Dog
SCF part 2
Reply #110 on:
November 07, 2008, 03:04:27 PM »
To date, only SEC Chairman Cox and Fed Chairman Bernanke have responded, but Frank Gaffney stated that "it is instructive that neither Chairman Cox nor Chairman Bernanke has addressed the fundamental question which is what is Sharia and why is it a problem that we have people who are promoting Sharia which is a seditious conspiracy to bring about the overthrow of the United States government and for that matter those of other secular democracies around the world in favor of a global theocracy under Sharia."
Mr. Gaffney also recommended a publication distributed at the press conference entitled "Shariah, Law and 'Financial Jihad': How Should America Respond?" that was co-sponsored by The McCormick Foundation and The Center for Security Policy.
Regarding the U.S. Treasury Sharia-Compliant Finance training course, Frank Gaffney stated that "its purpose seems unmistakable in the complexion of the speakers all of whom it appears support Sharia-Compliant Finance, none of whom it appears is prepared to talk to these government official about what Sharia is and what constitutes as a result - the problems with a financial program designed to advance this seditious conspiracy." Mr. Gaffney also referenced comments by the United Kingdom's Archbishop of Canterbury stating that Sharia would need to be tolerated in the UK, which were based on existing support for Sharia-Compliant Finance in the UK.
Mr. Gaffney stated that "we are determined not to let that happen here, and we are challenging the Treasury Department in its efforts to promote Sharia and Sharia-Compliant Finance." He also noted that the Treasury trainers include advocates of Sharia-Compliant Finance and are benefiting from that industry. He called for the Department of Treasury to have another course on Sharia "where people are allowed to talk about what Sharia is, why it is seditious, and why its manifestations in the form of Sharia-Compliant Finance must be opposed, not supported, not abetted, not implemented, especially as seems entirely possible the purpose of the Treasury Department is to use its new found leverage in the financial markets to do that kind of promotion inside our financial industry which is now owned by the Federal Government or is being influenced by the $700 billion being dangled in front of the industry."
Robert Spencer, author of Stealth Jihad and leader of JihadWatch.org, told the press conference that there has been a history of those who have sought to integrate Sharia into America's political policies. He provided the example of Harvard University's Noah Feldman as "one of the leading proponents of Sharia finance and of the spread of Sharia norms in framing of the Iraqi constitution as well as the spread of the idea of the acceptability of Sharia in the west." Mr. Spencer pointed to Feldman's New York Times magazine column on Sharia, which has been widely distributed and reprinted around the world. Mr. Spencer points out that Noah Feldman never addresses how Sharia "treats women and non-Muslims and that is getting to the heart of what is problematic about it and indeed seditious about it in many ways."
Robert Spencer pointed out "the accommodation to the norms of Islamic law that goes under the name of Sharia cannot be separated from the accommodation of Islamic law in general. Sharia financial provisions are not in any sense within Islam juridically or in any other sense separate from or separable from the larger aggregate of Islamic laws." He continued "according to authoritative Islamic jurisprudence, the entirety of the provisions of Sharia that have been dictated by the Islamic holy book (the Qur'an), and Islamic traditions (the Sunna) and agreed upon by the principal scholars of all of the principal schools of Islamic law are all considered the laws of God himself, are not negotiable, are not subject to compromise or to mitigation." "Therefore in accepting the principle that Islamic law must be the subject of special accommodation in the financial sector, the Treasury Department has set a precedent that will allow for the assertion and the acceptance of the principle that Islamic law must be the subject of special accommodation in other sectors of American society as well. This is an extremely dangerous precedent to set for a large number of reasons. In its classic and authoritative formulations, formulations that have never been seriously challenged by modernist reforms and are extremely unlikely to be so challenged given the nature of their authority within Islamic theology and law, Sharia is at variance with numerous core principles of American society, including the principles of freedom of speech, freedom of conscience, and the equality of rights of all people before the law. Sharia institutionalizes discrimination against women and non-Muslims. It denies the right of the human person to make the choice to hear to what he has come to believe in good conscience is the truth. It muzzles its own critics and the critics of the Islamic religion and even forbids dispassionate analysis of how Islamic texts and teachings are being used by Islamic Jihadists to justify violence and Islamic supremacism, and to gain recruits for violent and supremacist Islamic groups."
Robert Spencer then referenced 20th century writer Sayyid Abul A'la Maududi (aka Mawdudi), whose writings have been collected in "Jihad in Islam". Mr. Spencer then quoted Maududi's comments that:
"Islam wishes to destroy all States and Governments anywhere on the face of the earth which are opposed to the ideology and programme of Islam regardless of the country or the Nation which rules it. The purpose of Islam is to set up a State on the basis of its own ideology and programme, regardless of which Nation assumes the role of the standard bearer of Islam or the rule of which nation is undermined in the process of the establishment of an ideological Islamic State."
"Islam does not intend to confine this revolution to a single State or a few countries; the aim of Islam is to bring about a universal revolution."
Robert Spencer indicated that such Sharia revolutionary thinking "strikes directly and explicitly, and not apologetically, against secular government or the idea of government where there is not establishment of a religion." He further addressed Sharia activist Maududi's commentary on the Qur'an that called for subjugation of Jews and Christians under Islamic law, and added that Maududi demanded that non-Muslims have absolutely no right to wield "the reins of power in any part of God's earth," and if they do then according to Maududi, "the believers" are responsible for dislodging them from such power using any means possible.
Robert Spencer stated that "this revolution has also come to the United States and is advancing here." He referenced the objective of International Muslim Brotherhood in undermining the United States, as has been previously stated in a Muslim Brotherhood memorandum, admitted in evidence during the first Holy Land Foundation terror finance trial, where the Muslim Brotherhood calls for "eliminating and destroying the Western civilization from within and 'sabotaging' its miserable house by their hands and the hands of the believers so that it is eliminated and Allah's religion is made victorious over all other religions." Robert Spencer also pointed out that this same Muslim Brotherhood memorandum also lists numerous Islamic groups, many of which are active in America today and viewed by many as "moderate," were to be involved in such infiltration of America. Many of these groups also support Sharia finance.
As an example of the challenge to America with such Islamic supremacist thinking, Robert Spencer also referenced ISNA Board member Ihsan Bagby who has stated: "we [Muslims] can never be full citizens of this country... because there is no way we can be fully committed to the institutions and ideologies of this country." Mr. Spencer stated that this type of thinking will only continue to grow with the accommodation to Sharia finance and Sharia norms. He views this as "the assumption that Islamic law is superior to American law and must one day supplant it." Mr. Spencer views that the U.S. Treasury Department's Sharia finance training, without providing the ideological background on what Sharia is and the threat it poses to human rights, will only "provide support for this kind of assumption." He stated that "Americans, both Muslim and non-Muslim, deserve better," and referenced that many Muslims came to America to escape the same Sharia that it now is finding once again America. He concluded that "Americans, Muslims and non-Muslims, who saw our nation brutally and gratuitously attacked on September 11, 2001 by adherence of the idea that Islamic law must be imposed over the entire world, they deserve better. Women deserve better. All free people deserve better." Mr. Spencer also called for the U.S Treasury to open an investigation into what Sharia means and intends to do, to provide full understanding to those being trained regarding Sharia Compliant-Finance. He also called for the U.S. Treasury to curb the spread of Sharia Compliant-Finance in our nation's financial institutions.
Dan Pollak of the Zionist Organization of America stated that his organization joins the coalition "to oppose the imposition of Sharia-Compliant financing on the American financial system." He stated that Sharia scholars "who determine where investments can be made in Sharia financing" have been united in condemning Israel and "all interactions with Israelis and Jews." Mr. Pollak pointed out that the U.S. Treasury Department should speak to the U.S. Department of Justice as it is "against U.S. law for any company to participate in the Arab-sponsored boycott of Israel." He further stated that the "division of a world where only Sharia is the guiding principle is actually the root of Arab-Israeli conflict," condemning the "intolerance of Sharia and the hatred it breeds."
Mr. Pollak implored that "our Constitutional guarantee of freedom of religion does not and should not allow for imposing Sharia on the U.S. financial system... the American people must become aware of the strategies of our enemies as well as their tactics." He further stated that "they mean to fundamentally change the paradigm of the West as a tolerant and liberal place to observe any religion without compulsion."
Faith McDonnell of The Institute on Religion & Democracy (IRD) also spoke out against Sharia-Compliant Finance. Within her organization, Ms. McDonnell is the Director, Religious Liberty Program and Church Alliance for a New Sudan. Faith McDonnell stated that "the Center for Security Policy has defined Shariah as 'authoritative Islam's theo-political-religious program for establishing a global theocracy.'" She indicated concerns that "such a theocracy does not come about through the use violent jihad alone. Islamists also use the less obvious forms of jihad, such as the economic jihad of Shariah-Compliant Finance."
From her organization's experience as advocates for religious liberty around the world, she stated that "the IRD has seen the devastating effects of Shariah on Muslims and non-Muslims alike. Particularly egregious has been the imposition of Shariah as well as the brutal backlash against those who resist, on Christians in Sudan, Nigeria, Pakistan, Egypt, Iraq, Somalia, and elsewhere. And we have seen the use of stealth jihad in these nations, as well." Ms. McDonnell stated that "we fear that Shariah-Compliant Finance is only an entry level course in a much broader program of Shariah, the end goal of which is to supplant modern constitutionalism with archaic and undemocratic Islamic theocracy."
Regarding her experience in the challenges in Sudan, Mr. McDonnell pointed to Sharia finance representing a new form of Jihad against freedom.
SFC part 3
Reply #111 on:
November 07, 2008, 03:05:44 PM »
She stated that:
"The Islamist government in Sudan was finally forced into a peace agreement in 2005 that stopped its genocidal jihad against the Christians, followers of traditional religions, and Muslims who resisted Shariah. Immediately they began a financial jihad, backed by the same Arab governments who backed the genocide. They are currently seducing Southern Sudanese desperate for education, healthcare, employment, and infrastructure with Islamic-financed schools, hospitals, roads, and mosques. Those who have been paying with their lives to resist the jihad of bombs and bullets are in danger of succumbing to the jihad of money."
She called for "those responsible within the United States government to examine the evidence that if they submit to Shariah-Compliant Finance at any level, they are putting the United States in far greater danger than an economic crisis."
Kyle Scheindler of the Endowment for Middle East Truth (EMET) also spoke against Sharia-Compliant Finance, opposing "this act of dhimmitude by the U.S. Treasury Department that is represented by the Islamic Finance 101 meeting," and due to the recent bailouts and acquisitions, "the U.S. Treasury has a responsibility to U.S. taxpayers greater than it has possessed at any time prior to Alexander Hamilton."
He stated that "it is supremely ironic that the Treasury Department government agency responsible for prosecuting charities which fund Islamic terrorism is now considering a financial system which will mandate banks and investment products donate to those charities. Those donations will be directed by Sharia advisory boards brimming with individuals who belong to organizations that are unindicted co-conspirators" in the Holy Land Foundation terror finance retrial.
Jim Boulet of English First also joined in the condemnation of Shariah-Compliant Finance, issuing a written statement that read "in multicultural America, no one wishes to draw lines between reasoned dissent and what is effectively an effort to overthrow the American way of life." He referenced the "The Basics of the Political System in Islam" as stating that "Islam is a 'total way of life.'" Mr. Boulet stated that this ideology recognized "no separation of church and state," and "once America's financial systems is intertwined with the Islamic system of finance, other demands can be expected, demands which will transform American society." He also challenged those supporting Sharia Compliant-Finance to consider the impacts on single women seeking to have financial independence.
Wendy Wright of Concerned Women for America also shared her concerns regarding Sharia-Compliant Finance. She stated that Sharia law's "intention is to control society," and expressed concerns that "accommodating Sharia through our financial system legitimizes a world view and life style that promotes the subjugation of women, the killing of infidels, the denial of human dignity, and the imposition of cruel and inhumane practices."
She challenged the representatives of the U.S. Treasury Department sponsoring the Sharia finance training to clarify what aspects of Sharia they seek to encourage in America society: "that husbands can use physical force against their wives, the early forced marriage of a girl as young as nine, that men can have multiple marriages and multiple wives, that men can have the right of custody of children and mothers have no rights of custody, that homosexuals should be stoned to death, that women accused of bringing dishonor to male relatives should be killed."
Wendy Wright stated that the "intellectuals at the Treasury Department need a shot of common sense. You can't play with fire and not get burned, and you can't accommodate Sharia without affecting society with its inhumane practices."
Warren Mendelson of the Unity Coalition for Israel also spoke to indicate his organization's support for the Coalition to Stop Shariah. He indicated that America's financial challenges leaves it vulnerable to "schemes being advanced to put our financial house in order with SCF which has the potential for far-reaching consequences more dangerous than we face today. We would make a grave mistake to adopt SCF. It is incumbent on all of us to gain a clear understanding of exactly what Sharia law means and how it will impact not only financial state of affairs but also the consequences that conflict with our Constitutional rights."
He further stated that Sharia "requries non-Muslims to live as dhimmis, second-class citizens... and be treated in a brutal and demeaning way... it mandates discrimination against women and non-Muslims, demands the murder of homosexuals, adulterers, and apostates, and requires violent jihad against all infidels, including Christians, Jews, Buddhists, and others." He continued that "Sharia law is seditious because it calls for the violent overthrow of governments like the United States and the replacement of democratic Constitutional law with its own bureaucratic code." He indicated that the nations practicing Sharia law today are "some of the most oppressive regimes in the world."
He pointed out that Sharia Compliant-Finance works by "returns on investments from companies that must be purified partially by donating a portion of their profits to charity. Charities that receive these donations are selected by Sharia experts who are members of an oversight board. There are allegations that some of the profits support major Muslim organizations suspected of having ties to terrorism." He further referenced the ongoing Holy Land Foundation retrial, as well as the Benevolence International Foundation "was closed in 2001 for allegedly supporting Islamic terrorism." He indicated that "some analysts are concerned that Islamic banking will open Western financial institutions to help further the broader Islamic agenda.. and pour in the billions and billions of petrodollars into the financial systems of the Western world."
Frank Gaffney also read a statement from coalition partner, Dr. Zuhdi Jasser, President of the American Islamic Forum for Democracy.
This statement included the following comments:
"Make no mistake, Sharia-Compliant Finance is neither about religion nor about God. It is about Islamist control and collectivization of Muslims against the West and free markets. SCF systems are nothing more than a ruse to give transnational Islamist movements and their controlling Muslim theocrats an economic power base. Attempts to appease requests by Islamists to provide so-called SCF are misguided. SCF provides sanction of a dangerous separatist economic system which incubates Islamist ideology among Muslims and keeps them apart from the general population. Islamist theocrats exploit Western deference to religious freedom in order to lay the foundations of a system which feigns religion in order to control the economic decisions of Muslims and non-Muslims alike. SCF allows governments and banks to empower Islamist theocrats who really only want to control Muslim economics rather than actually stimulate the open economic freedom of Muslims. This is the difference between theocracy and liberty, instead of lay citizens controlling their own economic transactions, the invisible hand becomes the hand of the Islamist cleric."
The Coalition to Stop Shariah also provided an expanded list of organizations that support their cause, which to date includes leaders of 25 organizations:
1. ACT for America - Brigitte Gabriel, President
2. American Center for Democracy - Rachel Ehrenfeld, President
3. American Islamic Forum for Democracy - Dr. Zuhdi Jasser, President
4. Center for Security Policy - Frank J. Gaffney, Jr., President
5. Christian Solidarity International - Father Keith Rodderick, Washington Representative
6. Committee on the Present Danger - Chet Nagle
7. Concerned Women for America - Wendy Wright, President
8. Endowment for Middle East Truth - Sarah Stern, President
9. English First - Jim Boulet, Jr. Executive Director
10. Family Security Matters - Carol Taber, founder
11. Florida Security Council - Tom Trento, President
12. Geostrategic Analysis - Peter Huessy
13. High Frontier - Hank Cooper, Chairman
14. Institute for the Study of Islam and Christianity - Patrick Sookhdeo, Director and Marshall Sana, Director of Communications
15. Institute on Religion & Democracy, Religious Liberty Program - Faith J. H. McDonnell, Director
16. Jewish Action Alliance
17. Jihadwatch.org, a project of the David Horowitz Freedom Center - Robert Spencer, renowned author and expert on Shariah law, Director
18. Let Freedom Ring - Colin Hanna, President
19. Society of Americans for National Existence - David Yerushalmi, President
20. Tradition, Property and Family - C. Preston Noelle III
21. Traditional Values Coalition - Andrea Lafferty, Executive Director
22. United American Committee
23. Unity Coalition for Israel - Esther Levens, President
24. Women United - Beth Gilinsky, President
25. Zionist Organization of America - Morton Klein, National President
In addition, the Anti-Jihad League of America supports the cause of this group in fighting Sharia and Islamic supremacism.
Re: Political Economics
Reply #112 on:
November 07, 2008, 03:12:49 PM »
Rachel Ehrenfeld is one of the unsung heroes of our time.
WSJ: Detroit Bailout?
Reply #113 on:
November 10, 2008, 10:34:05 AM »
Remember, the Sharia Compliant Finance theme is to be continued over at Sharia 101:
In the Washington mind, there are two kinds of private companies. There are successful if "greedy" corporations, which can always afford to pay more taxes and tolerate more regulation. And then there are the corporate supplicants that need a handout. As the Detroit auto makers are proving, you can go from being the first to the second in the blink of an election.
For decades, Congress has never had a second thought as it imposed tighter emissions standards on GM, Ford and Chrysler, denouncing them for making evil SUVs. Yet now that the companies are bleeding cash, and may be heading for bankruptcy, suddenly the shrinking Big Three are the latest candidates for a taxpayer bailout. One $25 billion loan facility has already been signed into law, and Senator Debbie Stabenow (D., Mich.) wants another $25 billion, this time with no strings attached.
Speaker Nancy Pelosi and Senate Majority Leader Harry Reid met last week with company and union officials, and they later sent a letter urging Treasury Secretary Henry Paulson to bestow cash from the Troubled Asset Relief Program (Tarp) on the companies. Barack Obama implied at his Friday press conference that he too favors some kind of taxpayer rescue of Detroit, though no doubt he'd like to have President Bush's signature on the check so he won't have to take full political responsibility.
We hope Messrs. Bush and Paulson just say no. The Tarp was intended to save the financial system from collapse, not to be a honey pot for any industry running short of cash. The financial panic has hit Detroit hard, but its problems go back decades and are far deeper than reduced access to credit among car buyers. As a political matter, the Bush Administration is also long past the point where it might get any credit for helping Detroit. But it will earn the scorn of taxpayers if it refuses to set some limits on access to the Tarp. If Democrats want to change the rules next year, let them do it on their own political dime.
A bailout might avoid any near-term bankruptcy filing, but it won't address Detroit's fundamental problems of making cars that Americans won't buy and labor contracts that are too rich and inflexible to make them competitive. As Paul Ingrassia notes nearby, Detroit's costs are far too high for their market share. While GM has spent billions of dollars on labor buyouts in recent years, they are still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.
Rest assured that the politicians don't want to do a thing about those labor contracts or mileage standards. In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin. In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.
A Detroit bailout would also be unfair to other companies that make cars in the U.S. Yes, those are "foreign" companies in the narrow sense that they are headquartered overseas. But then so was Chrysler before Daimler sold most of the car maker to Cerberus, the private equity fund. Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee. Unlike Michigan, these states didn't vote for Mr. Obama.
But the very success of this U.S. auto industry indicates that highly skilled American workers can profitably churn out cars without being organized by the UAW. A bailout for Chrysler would in essence be assisting rich Cerberus investors at the expense of middle-class nonunion auto workers. Is this the new "progressive" era we keep reading so much about?
The car makers say that bankruptcy is unthinkable and "not an option." And bankruptcy would certainly be expensive, not least for Washington itself, which could be responsible for 600,000 or so retiree pensions through the Pension Benefit Guaranty Corp. In that sense, the bailout is intended to rescue the politicians from having to honor that earlier irresponsible guarantee. But at least that guarantee would be finite. If Uncle Sam buys into Detroit, $50 billion would only be the start of the outlays as taxpayers were obliged to protect their earlier investment in uncompetitive companies.
* * *
If our politicians can't avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies.
As President-elect Barack Obama prepares to enter the White House, he must ponder what to do about the world's trouble spots: Iran, Iraq, North Korea, the Caucasus. And, oh yes, Detroit.
On Friday, General Motors and Ford announced more multibillion-dollar losses in the third quarter; closely held Chrysler doesn't publicly report results. When GM, which seems in the worst shape, was 45 minutes late releasing its results, rumors spread that a bankruptcy filing was imminent. It wasn't, but the company says it could run out of cash in the first half of next year. Make that the first quarter if the current cash bleed continues. GM is lobbying furiously for emergency federal assistance, with Ford and Chrysler close behind.
Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.
Associated PressIn return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.
That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.
These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.
But giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.
The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.
A few years ago the UAW even waged a spirited fight to protect the "right" of workers to smoke on the assembly line, something that simply isn't allowed at, say, Honda's U.S. factories. Aside from the obvious health risk, what about cigarette ashes falling onto those fine leather seats being bolted into the cars? Why was this even an issue?
When GM's bond ratings plunged into junk territory a couple years ago the auto maker sold 51% of its financing arm, GMAC, to Cerberus, a private-equity powerhouse. Then last summer Cerberus bought 80% of Chrysler from Daimler for just 25% of what the German company paid for the company a decade earlier. It looked like a great deal at the time, like buying a "fixer upper" house at a steep discount. Until, that is, you have to shell out big bucks to shore up the foundation, repair the leaky roof, etc.
Cerberus tried hard in recent weeks to sell Chrysler to GM, with government financial assistance. Controlling GMAC's lending to GM dealers and customers gave Cerberus enormous leverage at the negotiating table. Cerberus squeezed hard, say industry analysts and insiders, but the GM board balked. Last Friday the companies said the talks were off -- "for the moment," as the company's chief operating officer put it.
For the moment? How about, like, forever? Buying Chrysler would just give GM an excuse to delay the fundamental task of putting its house in order. Management would turn its energy to producing pretty PowerPoint slides with all the requisite buzzwords: synergies, transformation, downsizing, rightsizing and exercising. What's needed, instead, is exorcising.
A thorough housecleaning at GM is the only way to give the company a fresh start. GM is structured for its glory days of the 1960s, when it had half the U.S. car market -- not for the first decade of this century, when it has just over 20% of the market. General Motors simply cannot support eight domestic brands (Cadillac, Buick, Pontiac, Chevrolet, GMC, Saturn, Saab and Hummer) with adequate product-development and marketing dollars. Even the good vehicles the company develops (for example, the Cadillac CTS and Chevy Malibu) get lost in the wash.
Nevertheless, the current board of directors and management have stuck stubbornly to this structure. The lone exception was a dissident director, Jerome B. York, who resigned a couple years ago. He warned that without fundamental changes the "unthinkable" might happen to GM. Well, here we are.
Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.
That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.
As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.
Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."
Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.
Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.
Last Edit: November 10, 2008, 10:37:56 AM by Crafty_Dog
Re: Political Economics
Reply #114 on:
November 10, 2008, 06:04:14 PM »
October 01, 2008
The Long Road to Slack Lending Standards
By Steven Malanga
In the early 1990s I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting. One of the hottest sessions of the conference explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages. One newspaper, the Atlanta Journal-Constitution, had already won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and the Detroit Free Press, had also weighed in with their own analysis based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.
Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels, and higher loan defaults rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue?"mostly because newspaper reporters and editors in this pre-talk radio, pre-blogging era were determined to make it so. Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.
Eventually, the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study which concluded that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed. This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed’s conclusions showed serious deficiencies in the original work. One economist for the Federal Deposit Insurance Corp. who looked more deeply into the data, for instance, found that the difference in denial rates on loans for whites and minorities could be accounted for by such factors as higher rates of delinquencies on prior loans for minorities, or the inability of lenders to verify information provided to them by some minority applicants.
Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards in order to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled “Closing the Gap: A Guide to Equal Opportunity Lending”.
Quoting from a study which declared that “underwriting guidelines…may be unintentionally racially biased,” the Boston Fed then called for what amounted to undermining many of the lending criteria that banks had used for decades. It told banks they should consider junking the industry’s traditional debt-to-income ratio, which lenders used to determine whether an applicant’s income was sufficient to cover housing costs plus loan payments. It instructed banks that an applicant’s “lack of credit history should not be seen as a negative factor” in obtaining a mortgage, even though a mortgage is the biggest financial obligation most individuals will undertake in life. In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to “consider extenuating circumstances” that might still make the borrower creditworthy. When applicants didn’t have enough savings to make a down payment, the Boston Fed urged banks to allow loans from nonprofits or government assistance agencies to count toward a down payment, even though banks had traditionally disallowed such sources because applicants who have little of their own savings invested in a home are more likely to walk away from a loan when they have trouble paying.
Of course, the new federal standards couldn’t just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, in other words, these became the new standards in the industry. In 1999, the New York Times reported that Fannie Mae and Freddie Mac were easing credit requirements for mortgages it purchased from lenders, and as the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on the lending standards promoted by the government.
Meanwhile, those who raced to make these mortgages were lionized. Harvard University’s Joint Center for Housing Studies even invited Angelo Mozilo, CEO of the lender which made more loans purchased by Fannie and Freddie than anyone else, Countrywide Financial, to give its prestigious 2003 Dunlop Lecture on the subject of "The American Dream of Homeownership: From Cliché to Mission.” A brief, innocuous description of the event still exists online here.
Many defenders of the government’s efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren’t even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.
But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought. These justifications became the basis for a whole new set of values (or lack of values), as no-down payment loans and loans to people with poor credit history or to those who were already loaded up with debt became more common throughout the entire industry.
What happened in the mortgage industry is an example of how, in trying to eliminate discrimination from our society, we turned logic on its head. Instead of nobly trying to ensure equality of opportunity for everyone, many civil rights advocates tried to use the government to ensure equality of outcomes for everyone in the housing market. And so when faced with the idea that minorities weren’t getting approved for enough mortgages because they didn’t measure up as often to lending standards, the advocates told us that the standards must be discriminatory and needed to be junked. When lenders did that, we made heroes out of those who led the way, like Angelo Mozilo, before we made villains of them.
Now we all have to pay.
Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute
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at November 10, 2008 - 06:01:24 PM CST
Great Depression Myths
Reply #115 on:
November 11, 2008, 07:26:31 PM »
Five Myths About the Great Depression
Herbert Hoover was no proponent of laissez-faire.
By ANDREW B. WILSON
The current financial crisis has revived powerful misconceptions about the Great Depression. Those who misinterpret the past are all too likely to repeat the exact same mistakes that made the Great Depression so deep and devastating.
Here are five interrelated and durable myths about the 1929-39 Depression:
- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting. The truth is more illuminating. Far from a free-market idealist, Hoover was an ardent believer in government intervention to support incomes and employment. This is critical to understanding the origins of the Great Depression. Franklin Roosevelt didn't reverse course upon moving into the White House in 1933; he went further down the path that Hoover had blazed over the previous four years. That was the path to disaster.
Hoover, a one-time business whiz and a would-be all-purpose social problem-solver in the Lee Iacocca mold, was a bowling ball looking for pins to scatter. He was a government activist fixated on the idea of running the country as an energetic CEO might run a giant corporation. It was Hoover, not Roosevelt, who initiated the practice of piling up big deficits to support huge public-works projects. After declining or holding steady through most of the 1920s, federal spending soared between 1929 and 1932 -- increasing by more than 50%, the biggest increase in federal spending ever recorded during peacetime.
Public projects undertaken by Hoover included the San Francisco Bay Bridge, the Los Angeles Aqueduct, and Hoover Dam. The Republican president won plaudits from the American Federation of Labor for his industrial policy, which included jawboning business leaders to refrain from cutting wages as the economy fell. Referring to counteracting the business cycle and propping up wages, Hoover said: "No president before has ever believed that there was a government responsibility in such cases . . . we had to pioneer a new field." Though he did not coin the phrase, Hoover championed many of the basic ideas -- such as central planning and control of the economy -- that came to be known as the New Deal.
- The stock market crash in October 1929 precipitated the Great Depression. What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy -- beginning with the disastrous retreat into protectionism marked by the passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell, Smoot-Hawley doubled the effective tariff duties on a wide range of manufactures and agricultural products. It triggered the beggar-thy-neighbor policies of countervailing tariffs that caused the international economy to collapse. Some have argued that the increasing likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the stock-market collapse in the fall of 1929.
- Where the market had failed, the government stepped in to protect ordinary people. Hoover's disastrous agricultural policies involved the know-it-all Hoover acting as his own agriculture secretary and in fact writing the original Agricultural Marketing Act that evolved into Smoot-Hawley. While exports accounted for 7% of U.S. GDP in 1929, trade accounted for about one-third of U.S. farm income. The loss of export markets caused by Smoot-Hawley devastated the agricultural sector. Following in Hoover's footsteps, FDR concentrated on trying to raise farm income by such tactics as setting quotas on production and paying farmers to remove acreage from production -- even though this meant higher prices for hard-pressed consumers and had the effect of both lowering productivity and driving farmers off their land.
- Greed caused the stock market to overshoot and then crash. The real culprit here -- as in the housing bubble in our own time -- is the one identified by the economic historian Charles Kindleberger in the classic book "Manias, Panics, and Crashes": a speculative fever induced by excessively easy credit and broken by the inevitable return to more realistic valuations.
In the late 1920s, cheap and easy money fueled a tremendous increase in margin trading and a proliferation of "investment trusts" that offered little in the way of dividends or demonstrable earnings per share, but still promised phenomenal capital gains. "Speculation," as Kindleberger neatly defined it, "involves buying for resale rather than use in the case of commodities, and for resale rather than income in the case of financial assets."
The last thing Hoover wanted to do upon coming to office was to rein in the stock market boom by allowing interest rates to rise to a more normal level. The key to prosperity, in his view, lay not in sound money and rising productivity, but in letting the good times roll -- through government action aimed at maintaining high wages and high stock market valuations.
- Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight. To the contrary, the Hoover and Roosevelt administrations -- in disregarding market signals at every turn -- were jointly responsible for turning a panic into the worst depression of modern times. As late as 1938, after almost a decade of governmental "pump priming," almost one out of five workers remained unemployed. What the government gave with one hand, through increased spending, it took away with the other, through increased taxation. But that was not an even trade-off. As the root cause of a great deal of mismanagement and inefficiency, government was responsible for a lost decade of economic growth.
Hoover was destined to fill the role of the left's designated scapegoat. Despite that, the one place where he and FDR truly "triumphed" was in enlisting the support of leading writers and intellectuals for government planning and intervention. This had a lasting effect on the way that generations of people think about the Great Depression. The antienterprise spirit among thought leaders of this time (and later) extended to top business publications. "Do you still believe in Lazy-Fairies?" Business Week asked derisively in 1931. "To plan or not to plan is no longer the question. The real question is who is to do it?"
In his economic policies and his incessant governmental activism, Hoover differed far more sharply with his Republican predecessor than he did with his Democratic successor. Calvin Coolidge, president from 1923 to 1929, made no secret of his disdain for Hoover, who served as his secretary of commerce and won praise from such highly regarded liberals as John Maynard Keynes and Jean Monnet. "That man has offered me unsolicited advice for six years, all of it bad," Coolidge said. He mockingly referred to Hoover as "Wonder Boy."
With the vitality of U.S. and world economies at stake, it is essential that the decisions of the coming months are shaped by the right lessons -- not the myths -- of the Great Depression.
Mr. Wilson, a former Business Week bureau chief, is a writer based in St. Louis.
Re: Political Economics
Reply #116 on:
November 12, 2008, 12:04:53 AM »
There are not many people I regard as both bright enough and educated enough to appreciate the book "The Way the World Works" by Jude Wanniski.
In his later years JW was something of a crank and an anti-semite, but in his prime (editorial writer for the WSJ, author of TWTWW) he was something else. This bold book assays to reduce political economics to a series of principles/laws much as physics seeks to explain the physical world.
Anyway, the chapter on the causes of the Great Depression is simply brilliant. It overlaps quite a bit with the points in the piece that you post, but offers much more.
Re: Political Economics
Reply #117 on:
November 12, 2008, 07:29:41 AM »
On to my reading list it goes.
Re: Political Economics
Reply #118 on:
November 12, 2008, 10:48:17 PM »
Bringing an economic question over from 'The Way Forward" for discussion here:
Crafty wrote: "I think one of the key variables is how the Fed has printed too much money and has kept interest rates too low (ROI should be greater than inflation + taxes). Too much money at too low a price has been sloshing around the global system."
"Ok, why is this bad?" - Excellent question.
My 2 cents: Too much money chasing too few goods is inflation. When money grows faster than real goods and services, prices rise. That effect was clear in tech stocks and then in real estate.
For too long, IMO, the geniuses at the Fed have been thinking they can cushion us from the downside of every business cycle when in fact their miscalculations are largely the cause of the cycle.
Federal Reserve interest rates are just one of the tools they have to affect money supply. We live in an electronic time when the Fed does NOT have complete control over money nor do we even have an accurate way of measuring money supply. But when they see signs of a slowdown, down go the rates.
Interest rates need to be right-sized, not manipulated for short term effects. When they are too low, it distorts choices and it is eventually followed by corrective rates that are too high. Who saves money when the rates approach zero and how do you resist excessive borrowing? My only borrowing is an equity line now at 3.5%. As a real estate investor it is hard not to use the cheap money to overbuy at today's fire-sale prices. (okay, I bought 2 foreclosures this past summer). As we head into something like Jimmy Carter's second term (the Obama Presidency) it is possible that short term rates will be up by 10 or 20% in 4 years. Then what? More defaults for the over-leveraged among us seems very likely. What did that solve?
Monetary policy is supposed to be about protecting the value of our currency, making it stable and predictable. Long forgotten is another goal that interest rates also should be reasonable, stable and predictable as well.
This Fed is trying right now to solve problems unrelated to interest rates by lowering interest rates. Do ya think that might backfire (again)? I do.
Last Edit: November 12, 2008, 11:27:58 PM by DougMacG
Re: Political Economics
Reply #119 on:
November 12, 2008, 10:55:53 PM »
Re: Political Economics
Reply #120 on:
November 12, 2008, 11:58:47 PM »
Thank you Doug-- both for your answer and for posting here on this thread where the subject matter properly belongs.
FWIW I just posted a brief answer on the thread in question. If there are to be any rejoinders to it, please let them be here.
100 Billion Here & There & Soon You're Talkin' Real Money
Reply #121 on:
November 13, 2008, 08:02:41 AM »
Washington's $5 Trillion Tab
Elizabeth Moyer, 11.12.08, 5:15 PM ET
For all the fury over Treasury Secretary Henry Paulson's $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government's response to the credit crisis.
According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.
The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets.
The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.
The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group. It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG's residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps.
The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae and Freddie Mac, to the tune of $200 billion.
The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.
Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.
Paulson and Bernanke have tried any number of ways to stop the free fall in housing prices and unfreeze the credit markets, with limited success. Rates that banks charge each other for three-month loans have dropped to 2.1% over the corresponding Treasury security, from their high of 4.8% in October. But lending is contracting as banks brace for rising credit costs and corporate borrowers hunker down.
The Treasury has turned its focus from attempting to buy troubled assets from banks, which was the original intent of the October Emergency Economic Stabilization Act, to injecting capital in the form of preferred equity stakes.
It started out with $125 billion worth of investments in eight major U.S. banks and has since expanded the program to an increasingly broad range of financial and nonfinancial companies. And with just $60 billion left of its initial $350 billion authorization under the emergency act, the Treasury faces a growing number of companies--including Detroit's automakers--begging for assistance.
David Hendler, an analyst at CreditSights, says it looks as if government is left holding the bag, and of course that translates into everyone.
"The losses have to be taken, but no one wants to take them," Hendler said at a conference Wednesday, speaking about the banks and their handling of troubled assets. "It seems like the taxpayers are going to be taking a good portion of that."
Fat Pigs at a Shrinking Trough
Reply #122 on:
November 13, 2008, 09:01:16 AM »
So it's not like we don't have a model for what can happen with soak the rich tax schemes. . . .
Empire State Implosion
The financial meltdown and the welfare state.
The global credit panic has swept away many illusions, and we're about to find out if that includes those of the politicians who have feasted for years on Wall Street tax revenues. Ground Zero is New York, which has lived a tax-and-spend fantasy thanks to the long bull market and "progressive" tax rates. Reality is now biting.
The financial services industry employs between 2% and 3% of nongovernment workers in New York, the same as it did in the late 1970s. What's changed is the share of total wages in the state represented by Wall Street jobs, which had skyrocketed to nearly 20% last year from a little over 2% in 1977.
"This is 212,000 people making nearly $80 billion in wages and salaries last year," explained E.J. McMahon of the Manhattan Institute at a recent panel discussion on the financial crisis. "This is all taxed at the margin, so it plays an outsized role in the state's finances." This is also the dirty little secret of highly "progressive" tax rates: They make a state dependent on relatively few taxpayers.
The financial industry doubled its percentage of the national economy in the 1980s, and did so again between 1990 and 2006. As Wall Street wages have grown, so has New York's dependence on revenue from the personal income tax. In 1977 personal income taxes represented less than 45% of all state taxes. In 2007 they represented about 60%. And for the past 30 years, inflation-adjusted state spending has tracked closely with booms and busts on Wall Street. According to John Cape, a former state budget director, about 45,000 New York taxpayers provide the state "with anywhere from 20% to 30% of total income tax receipts."
New York City has also done little to decrease its addiction to revenue from a single industry. Mayor Michael Bloomberg missed the chance to use 9/11 as an opportunity for reform, and he's declined to challenge public unions over pay and benefits. Bigger and bigger budgets have been submitted and approved as though record Wall Street profits would never end. The financial industry is 14% of gross city product. In 2006, New York City received 50% of its personal income tax revenue from the top 1% of earners, many of whom work in finance.
During previous downturns Albany has resisted structural reforms. Instead of lessening the state's dependence on this narrow slice of the tax base, lawmakers have been content to wait for Wall Street to come roaring back. To cover the rising costs of debt payments, school aid, Medicaid, pensions and other budget drivers, they've raised taxes, sometimes temporarily but often permanently.
It would be a tragic mistake to view the current downturn as merely another cyclical blip. It may take Wall Street years to come back, and once it does it certainly won't look the same. Fewer big global banks are likely to emerge from the ashes; and while they will be better capitalized, they will also be more highly regulated. More reasonable leverage ratios mean less risk-taking and less profit even in good times. Bonus pools are likely to be anemic for some time.
New York's revenue coffers are set to take a hit. The only question is how big. The state budget deficit is already projected to be $1.5 billion in the current fiscal year, and Governor David Paterson estimates it could grow to $14 billion over the next two years if nothing is done.
To his credit, the Democratic Governor is trying to force Albany to confront its addictions. He's said that a tax hike -- even one targeting only the "rich" -- would be damaging. Mr. Paterson is urging labor unions to renegotiate contracts on behalf of public employees. And he's proposed trimming as much as $2 billion from this year's budget, including cuts to health care and education.
Naturally, union officials and hospital advocacy groups are balking at the Governor's requests and pushing for tax increases, but out-of-control education and Medicaid spending is what has fed the state's structural deficit. New York spends more money per pupil ($14,000) than any other state. Its only rivals are New Jersey and Connecticut and all three are at least 40% above the national average. The state's Medicaid costs of $2,260 per resident are twice the national average and equal to what Texas and Florida spend combined.
If New York wants to make sure a rejuvenated financial industry returns to Wall Street, it should be looking to reform its steeply progressive tax code. A leaner, more risk-averse and heavily regulated finance industry will be all the more sensitive to the high cost of doing business in New York. The Big Apple already imposes the highest personal income tax rate of any jurisdiction in the country (10.5%). And it's significantly higher than neighboring New Jersey (8.97%) and Connecticut (5%).
The financial industry has been having a painful reckoning with more realistic assessments of risk. New York's politicians need a similarly rude awakening.
Re: Political Economics
Reply #123 on:
November 13, 2008, 03:32:56 PM »
This is a looooooong article, but a great read. It covers everything from the Gold Standard to hedge funds and derivatives.
Not so long ago, the dollar stood for a sum of gold, and bankers knew the people they lent to.
The author charts the emergence of an abstract, even absurd world—call it Planet Finance—where mathematical models ignored both history and human nature, and value had no meaning.
by Niall Ferguson December 2008
This year we have lived through something more than a financial crisis. We have witnessed the death of a planet. Call it Planet Finance. Two years ago, in 2006, the measured economic output of the entire world was worth around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 percent larger. The total value of domestic and international bonds was $67.9 trillion, 40 percent larger. Planet Finance was beginning to dwarf Planet Earth.
Planet Finance seemed to spin faster, too. Every day $3.1 trillion changed hands on foreign-exchange markets. Every month $5.8 trillion changed hands on global stock markets. And all the time new financial life-forms were evolving. The total annual issuance of mortgage-backed securities, including fancy new “collateralized debt obligations” (C.D.O.’s), rose to more than $1 trillion. The volume of “derivatives”—contracts such as options and swaps—grew even faster, so that by the end of 2006 their notional value was just over $400 trillion. Before the 1980s, such things were virtually unknown. In the space of a few years their populations exploded. On Planet Finance, the securities outnumbered the people; the transactions outnumbered the relationships.
Illustration by Brad Holland
Read Niall Ferguson’s prescient article on today’s financial woes, Empire Falls (November 2006).
New institutions also proliferated. In 1990 there were just 610 hedge funds, with $38.9 billion under management. At the end of 2006 there were 9,462, with $1.5 trillion under management. Private-equity partnerships also went forth and multiplied. Banks, meanwhile, set up a host of “conduits” and “structured investment vehicles” (sivs—surely the most apt acronym in financial history) to keep potentially risky assets off their balance sheets. It was as if an entire shadow banking system had come into being.
Then, beginning in the summer of 2007, Planet Finance began to self-destruct in what the International Monetary Fund soon acknowledged to be “the largest financial shock since the Great Depression.” Did the crisis of 2007–8 happen because American companies had gotten worse at designing new products? Had the pace of technological innovation or productivity growth suddenly slackened? No. The proximate cause of the economic uncertainty of 2008 was financial: to be precise, a crunch in the credit markets triggered by mounting defaults on a hitherto obscure species of housing loan known euphemistically as “subprime mortgages.”
Central banks in the United States and Europe sought to alleviate the pressure on the banks with interest-rate cuts and offers of funds through special “term auction facilities.” Yet the market rates at which banks could borrow money, whether by issuing commercial paper, selling bonds, or borrowing from one another, failed to follow the lead of the official federal-funds rate. The banks had to turn not only to Western central banks for short-term assistance to rebuild their reserves but also to Asian and Middle Eastern sovereign-wealth funds for equity injections. When these sources proved insufficient, investors—and speculative short-sellers—began to lose faith.
Beginning with Bear Stearns, Wall Street’s investment banks entered a death spiral that ended with their being either taken over by a commercial bank (as Bear was, followed by Merrill Lynch) or driven into bankruptcy (as Lehman Brothers was). In September the two survivors—Goldman Sachs and Morgan Stanley—formally ceased to be investment banks, signaling the death of a business model that dated back to the Depression. Other institutions deemed “too big to fail” by the U.S. Treasury were effectively taken over by the government, including the mortgage lenders and guarantors Fannie Mae and Freddie Mac and the insurance giant American International Group (A.I.G.).
By September 18 the U.S. financial system was gripped by such panic that the Treasury had to abandon this ad hoc policy. Treasury Secretary Henry Paulson hastily devised a plan whereby the government would be authorized to buy “troubled” securities with up to $700 billion of taxpayers’ money—a figure apparently plucked from the air. When a modified version of the measure was rejected by Congress 11 days later, there was panic. When it was passed four days after that, there was more panic. Now it wasn’t just bank stocks that were tanking. The entire stock market seemed to be in free fall as fears mounted that the credit crunch was going to trigger a recession. Moreover, the crisis was now clearly global in scale. European banks were in much the same trouble as their American counterparts, while emerging-market stock markets were crashing. A week of frenetic improvisation by national governments culminated on the weekend of October 11–12, when the United States reluctantly followed the British government’s lead, buying equity stakes in banks rather than just their dodgy assets and offering unprecedented guarantees of banks’ debt and deposits.
Since these events coincided with the final phase of a U.S. presidential-election campaign, it was not surprising that some rather simplistic lessons were soon being touted by candidates and commentators. The crisis, some said, was the result of excessive deregulation of financial markets. Others sought to lay the blame on unscrupulous speculators: short-sellers, who borrowed the stocks of vulnerable banks and sold them in the expectation of further price declines. Still other suspects in the frame were negligent regulators and corrupt congressmen.
This hunt for scapegoats is futile. To understand the downfall of Planet Finance, you need to take several steps back and locate this crisis in the long run of financial history. Only then will you see that we have all played a part in this latest sorry example of what the Victorian journalist Charles Mackay described in his 1841 book, Extraordinary Popular Delusions and the Madness of Crowds.
As long as there have been banks, bond markets, and stock markets, there have been financial crises. Banks went bust in the days of the Medici. There were bond-market panics in the Venice of Shylock’s day. And the world’s first stock-market crash happened in 1720, when the Mississippi Company—the Enron of its day—blew up. According to economists Carmen Reinhart and Kenneth Rogoff, the financial history of the past 800 years is a litany of debt defaults, banking crises, currency crises, and inflationary spikes. Moreover, financial crises seldom happen without inflicting pain on the wider economy. Another recent paper, co-authored by Rogoff’s Harvard colleague Robert Barro, has identified 148 crises since 1870 in which a country experienced a cumulative decline in gross domestic product (G.D.P.) of at least 10 percent, implying a probability of financial disaster of around 3.6 percent per year.
If stock-market movements followed the normal-distribution, or bell, curve, like human heights, an annual drop of 10 percent or more would happen only once every 500 years, whereas in the case of the Dow Jones Industrial Average it has happened in 20 of the last 100 years. And stock-market plunges of 20 percent or more would be unheard of—rather like people a foot and a half tall—whereas in fact there have been eight such crashes in the past century.
The most famous financial crisis—the Wall Street Crash—is conventionally said to have begun on “Black Thursday,” October 24, 1929, when the Dow declined by 2 percent, though in fact the market had been slipping since early September and had suffered a sharp, 6 percent drop on October 23. On “Black Monday,” October 28, it plunged by 13 percent, and the next day by a further 12 percent. In the course of the next three years the U.S. stock market declined by a staggering 89 percent, reaching its nadir in July 1932. The index did not regain its 1929 peak until November 1954.
That helps put our current troubles into perspective. From its peak of 14,164, on October 9, 2007, to a dismal level of 8,579, exactly a year later, the Dow declined by 39 percent. By contrast, on a single day just over two decades ago—October 19, 1987—the index fell by 23 percent, one of only four days in history when the index has fallen by more than 10 percent in a single trading session.
This crisis, however, is about much more than just the stock market. It needs to be understood as a fundamental breakdown of the entire financial system, extending from the monetary-and-banking system through the bond market, the stock market, the insurance market, and the real-estate market. It affects not only established financial institutions such as investment banks but also relatively novel ones such as hedge funds. It is global in scope and unfathomable in scale.
Had it not been for the frantic efforts of the Federal Reserve and the Treasury, to say nothing of their counterparts in almost equally afflicted Europe, there would by now have been a repeat of that “great contraction” of credit and economic activity that was the prime mover of the Depression. Back then, the Fed and the Treasury did next to nothing to prevent bank failures from translating into a drastic contraction of credit and hence of business activity and employment. If the more openhanded monetary and fiscal authorities of today are ultimately successful in preventing a comparable slump of output, future historians may end up calling this “the Great Repression.” This is the Depression they are hoping to bottle up—a Depression in denial.
To understand why we have come so close to a rerun of the 1930s, we need to begin at the beginning, with banks and the money they make. From the Middle Ages until the mid-20th century, most banks made their money by maximizing the difference between the costs of their liabilities (payments to depositors) and the earnings on their assets (interest and commissions on loans). Some banks also made money by financing trade, discounting the commercial bills issued by merchants. Others issued and traded bonds and stocks, or dealt in commodities (especially precious metals). But the core business of banking was simple. It consisted, as the third Lord Rothschild pithily put it, “essentially of facilitating the movement of money from Point A, where it is, to Point B, where it is needed.”
The system evolved gradually. First came the invention of cashless intra-bank and inter-bank transactions, which allowed debts to be settled between account holders without having money physically change hands. Then came the idea of fractional-reserve banking, whereby banks kept only a small proportion of their existing deposits on hand to satisfy the needs of depositors (who seldom wanted all their money simultaneously), allowing the rest to be lent out profitably. That was followed by the rise of special public banks with monopolies on the issuing of banknotes and other powers and privileges: the first central banks.
With these innovations, money ceased to be understood as precious metal minted into coins. Now it was the sum total of specific liabilities (deposits and reserves) incurred by banks. Credit was the other side of banks’ balance sheets: the total of their assets; in other words, the loans they made. Some of this money might still consist of precious metal, though a rising proportion of that would be held in the central bank’s vault. Most would be made up of banknotes and coins recognized as “legal tender,” along with money that was visible only in current- and deposit-account statements.
Until the late 20th century, the system of bank money retained an anchor in the pre-modern conception of money in the form of the gold standard: fixed ratios between units of account and quantities of precious metal. As early as 1924, the English economist John Maynard Keynes dismissed the gold standard as a “barbarous relic,” but the last vestige of the system did not disappear until August 15, 1971—the day President Richard Nixon closed the so-called gold window, through which foreign central banks could still exchange dollars for gold. With that, the centuries-old link between money and precious metal was broken.
Though we tend to think of money today as being made of paper, in reality most of it now consists of bank deposits. If we measure the ratio of actual money to output in developed economies, it becomes clear that the trend since the 1970s has been for that ratio to rise from around 70 percent, before the closing of the gold window, to more than 100 percent by 2005. The corollary has been a parallel growth of credit on the other side of bank balance sheets. A significant component of that credit growth has been a surge of lending to consumers. Back in 1952, the ratio of household debt to disposable income was less than 40 percent in the United States. At its peak in 2007, it reached 133 percent, up from 90 percent a decade before. Today Americans carry a total of $2.56 trillion in consumer debt, up by more than a fifth since 2000.
Even more spectacular, however, has been the rising indebtedness of banks themselves. In 1980, bank indebtedness was equivalent to 21 percent of U.S. gross domestic product. In 2007 the figure was 116 percent. Another measure of this was the declining capital adequacy of banks. On the eve of “the Great Repression,” average bank capital in Europe was equivalent to less than 10 percent of assets; at the beginning of the 20th century, it was around 25 percent. It was not unusual for investment banks’ balance sheets to be as much as 20 or 30 times larger than their capital, thanks in large part to a 2004 rule change by the Securities and Exchange Commission that exempted the five largest of those banks from the regulation that had capped their debt-to-capital ratio at 12 to 1. The Age of Leverage had truly arrived for Planet Finance.
Credit and money, in other words, have for decades been growing more rapidly than underlying economic activity. Is it any wonder, then, that money has ceased to hold its value the way it did in the era of the gold standard? The motto “In God we trust” was added to the dollar bill in 1957. Since then its purchasing power, relative to the consumer price index, has declined by a staggering 87 percent. Average annual inflation during that period has been more than 4 percent. A man who decided to put his savings into gold in 1970 could have bought just over 27.8 ounces of the precious metal for $1,000. At the time of writing, with gold trading at $900 an ounce, he could have sold it for around $25,000.
Those few goldbugs who always doubted the soundness of fiat money—paper currency without a metal anchor—have in large measure been vindicated. But why were the rest of us so blinded by money illusion?
In the immediate aftermath of the death of gold as the anchor of the monetary system, the problem of inflation affected mainly retail prices and wages. Today, only around one out of seven countries has an inflation rate above 10 percent, and only one, Zimbabwe, is afflicted with hyperinflation. But back in 1979 at least 7 countries had an annual inflation rate above 50 percent, and more than 60 countries—including Britain and the United States—had inflation in double digits.
Inflation has come down since then, partly because many of the items we buy—from clothes to computers—have gotten cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Federal Reserve in 1979. Just as important, some of the structural drivers of inflation, such as powerful trade unions, have also been weakened.
By the 1980s, in any case, more and more people had grasped how to protect their wealth from inflation: by investing it in assets they expected to appreciate in line with, or ahead of, the cost of living. These assets could take multiple forms, from modern art to vintage wine, but the most popular proved to be stocks and real estate. Once it became clear that this formula worked, the Age of Leverage could begin. For it clearly made sense to borrow to the hilt to maximize your holdings of stocks and real estate if these promised to generate higher rates of return than the interest payments on your borrowings. Between 1990 and 2004, most American households did not see an appreciable improvement in their incomes. Adjusted for inflation, the median household income rose by about 6 percent. But people could raise their living standards by borrowing and investing in stocks and housing.
Nearly all of us did it. And the bankers were there to help. Not only could they borrow more cheaply from one another than we could borrow from them; increasingly they devised all kinds of new mortgages that looked more attractive to us (and promised to be more lucrative to them) than boring old 30-year fixed-rate deals. Moreover, the banks were just as ready to play the asset markets as we were. Proprietary trading soon became the most profitable arm of investment banking: buying and selling assets on the bank’s own account.
Illustration by Barry Blitt
Losing our shirt? The problem is that our banks are also losing theirs. Illustration by Barry Blitt.
There was, however, a catch. The Age of Leverage was also an age of bubbles, beginning with the dot-com bubble of the irrationally exuberant 1990s and ending with the real-estate mania of the exuberantly irrational 2000s. Why was this?
The future is in large measure uncertain, so our assessments of future asset prices are bound to vary. If we were all calculating machines, we would simultaneously process all the available information and come to the same conclusion. But we are human beings, and as such are prone to myopia and mood swings. When asset prices surge upward in sync, it is as if investors are gripped by a kind of collective euphoria. Conversely, when their “animal spirits” flip from greed to fear, the bubble that their earlier euphoria inflated can burst with amazing suddenness. Zoological imagery is an integral part of the culture of Planet Finance. Optimistic buyers are “bulls,” pessimistic sellers are “bears.” The real point, however, is that stock markets are mirrors of the human psyche. Like Homo sapiens, they can become depressed. They can even suffer complete breakdowns.
Re: Political Economics
Reply #124 on:
November 13, 2008, 03:33:30 PM »
This is no new insight. In the 400 years since the first shares were bought and sold on the Amsterdam Beurs, there has been a long succession of financial bubbles. Time and again, asset prices have soared to unsustainable heights only to crash downward again. So familiar is this pattern—described by the economic historian Charles Kindleberger—that it is possible to distill it into five stages:
(1) Displacement: Some change in economic circumstances creates new and profitable opportunities. (2) Euphoria, or overtrading: A feedback process sets in whereby expectation of rising profits leads to rapid growth in asset prices. (3) Mania, or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money. (4) Distress: The insiders discern that profits cannot possibly justify the now exorbitant price of the assets and begin to take profits by selling. (5) Revulsion, or discredit: As asset prices fall, the outsiders stampede for the exits, causing the bubble to burst.
The key point is that without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.
The bubbles of our time had their origins in the aftermath of the 1987 stock-market crash, when then novice Federal Reserve chairman Alan Greenspan boldly affirmed the Fed’s “readiness to serve as a source of liquidity to support the economic and financial system.” This sent a signal to the markets, particularly the New York banks: if things got really bad, he stood ready to bail them out. Thus was born the “Greenspan put”—the implicit option the Fed gave traders to be able to sell their stocks at today’s prices even in the event of a meltdown tomorrow.
Having contained a panic once, Greenspan thereafter had a dilemma lurking in the back of his mind: whether or not to act pre-emptively the next time—to prevent a panic altogether. This dilemma came to the fore as a classic stock-market bubble took shape in the mid-90s. The displacement in this case was the explosion of innovation by the technology and software industry as personal computers met the Internet. But, as in all of history’s bubbles, an accommodative monetary policy also played a role. From a peak of 6 percent in February 1995, the federal-funds target rate had been reduced to 5.25 percent by January 1996. It was then cut in steps, in the fall of 1998, down to 4.75 percent, and it remained at that level until June 1999, by which time the Dow had passed the 10,000 mark.
Why did the Fed allow euphoria to run loose in the 1990s? Partly because Greenspan and his colleagues underestimated the momentum of the technology bubble; as early as December 1995, with the Dow just past the 5,000 mark, members of the Fed’s Open Market Committee speculated that the market might be approaching its peak. Partly, also, because Greenspan came to the conclusion that it was not the Fed’s responsibility to worry about asset-price inflation, only consumer-price inflation, and this, he believed, was being reduced by a major improvement in productivity due precisely to the tech boom.
Greenspan could not postpone a stock-exchange crash indefinitely. After Silicon Valley’s dot-com bubble peaked, in March 2000, the U.S. stock market fell by almost half over the next two and a half years. It was not until May 2007 that investors in the Standard & Poor’s 500 had recouped their losses. But the Fed’s response to the sell-off—and the massive shot of liquidity it injected into the financial markets after the 9/11 terrorist attacks—prevented the “correction” from precipitating a depression. Not only were the 1930s averted; so too, it seemed, was a repeat of the Japanese experience after 1989, when a conscious effort by the central bank to prick an asset bubble had ended up triggering an 80 percent stock-market sell-off, a real-estate collapse, and a decade of economic stagnation.
What was not immediately obvious was that Greenspan’s easy-money policy was already generating another bubble—this time in the financial market that a majority of Americans have been encouraged for generations to play: the real-estate market.
The American Dream
Real estate is the English-speaking world’s favorite economic game. No other facet of financial life has such a hold on the popular imagination. The real-estate market is unique. Every adult, no matter how economically illiterate, has a view on its future prospects. Through the evergreen board game Monopoly, even children are taught how to climb the property ladder.
Once upon a time, people saved a portion of their earnings for the proverbial rainy day, stowing the cash in a mattress or a bank safe. The Age of Leverage, as we have seen, brought a growing reliance on borrowing to buy assets in the expectation of their future appreciation in value. For a majority of families, this meant a leveraged investment in a house. That strategy had one very obvious flaw. It represented a one-way, totally unhedged bet on a single asset.
To be sure, investing in housing paid off handsomely for more than half a century, up until 2006. Suppose you had put $100,000 into the U.S. property market back in the first quarter of 1987. According to the Case-Shiller national home-price index, you would have nearly tripled your money by the first quarter of 2007, to $299,000. On the other hand, if you had put the same money into the S&P 500, and had continued to re-invest the dividend income in that index, you would have ended up with $772,000 to play with—more than double what you would have made on bricks and mortar.
There is, obviously, an important difference between a house and a stock-market index. You cannot live in a stock-market index. For the sake of a fair comparison, allowance must therefore be made for the rent you save by owning your house (or the rent you can collect if you own a second property). A simple way to proceed is just to leave out both dividends and rents. In that case the difference is somewhat reduced. In the two decades after 1987, the S&P 500, excluding dividends, rose by a factor of just over six, meaning that an investment of $100,000 would be worth some $600,000. But that still comfortably beat housing.
There are three other considerations to bear in mind when trying to compare housing with other forms of assets. The first is depreciation. Stocks do not wear out and require new roofs; houses do. The second is liquidity. As assets, houses are a great deal more expensive to convert into cash than stocks. The third is volatility. Housing markets since World War II have been far less volatile than stock markets. Yet that is not to say that house prices have never deviated from a steady upward path. In Britain between 1989 and 1995, for example, the average house price fell by 18 percent, or, in inflation-adjusted terms, by more than a third—37 percent. In London, the real decline was closer to 47 percent. In Japan between 1990 and 2000, property prices fell by more than 60 percent.
The recent decline of property prices in the United States should therefore have come as less of a shock than it did. Between July 2006 and June 2008, the Case-Shiller index of home prices in 20 big American cities declined on average by 19 percent. In some of these cities—Phoenix, San Diego, Los Angeles, and Miami—the total decline was as much as a third. Seen in international perspective, those are not unprecedented figures. Seen in the context of the post-2000 bubble, prices have yet to return to their starting point. On average, house prices are still 50 percent higher than they were at the beginning of this process.
So why were we oblivious to the likely bursting of the real-estate bubble? The answer is that for generations we have been brainwashed into thinking that borrowing to buy a house is the only rational financial strategy to pursue. Think of Frank Capra’s classic 1946 movie, It’s a Wonderful Life, which tells the story of the family-owned Bailey Building & Loan, a small-town mortgage firm that George Bailey (played by James Stewart) struggles to keep afloat in the teeth of the Depression. “You know, George,” his father tells him, “I feel that in a small way we are doing something important. It’s satisfying a fundamental urge. It’s deep in the race for a man to want his own roof and walls and fireplace, and we’re helping him get those things in our shabby little office.” George gets the message, as he passionately explains to the villainous slumlord Potter after Bailey Sr.’s death: “[My father] never once thought of himself.… But he did help a few people get out of your slums, Mr. Potter. And what’s wrong with that? … Doesn’t it make them better citizens? Doesn’t it make them better customers?”
Re: Political Economics
Reply #125 on:
November 13, 2008, 03:33:56 PM »
There, in a nutshell, is one of the key concepts of the 20th century: the notion that property ownership enhances citizenship, and that therefore a property-owning democracy is more socially and politically stable than a democracy divided into an elite of landlords and a majority of property-less tenants. So deeply rooted is this idea in our political culture that it comes as a surprise to learn that it was invented just 70 years ago.
Fannie, Ginnie, and Freddie
Prior to the 1930s, only a minority of Americans owned their homes. During the Depression, however, the Roosevelt administration created a whole complex of institutions to change that. A Federal Home Loan Bank Board was set up in 1932 to encourage and oversee local mortgage lenders known as savings-and-loans (S&Ls)—mutual associations that took in deposits and lent to homebuyers. Under the New Deal, the Home Owners’ Loan Corporation stepped in to refinance mortgages on longer terms, up to 15 years. To reassure depositors, who had been traumatized by the thousands of bank failures of the previous three years, Roosevelt introduced federal deposit insurance. And by providing federally backed insurance for mortgage lenders, the Federal Housing Administration (F.H.A.) sought to encourage large (up to 80 percent of the purchase price), long (20- to 25-year), fully amortized, low-interest loans.
By standardizing the long-term mortgage and creating a national system of official inspection and valuation, the F.H.A. laid the foundation for a secondary market in mortgages. This market came to life in 1938, when a new Federal National Mortgage Association—nicknamed Fannie Mae—was authorized to issue bonds and use the proceeds to buy mortgages from the local S&Ls, which were restricted by regulation both in terms of geography (they could not lend to borrowers more than 50 miles from their offices) and in terms of the rates they could offer (the so-called Regulation Q, which imposed a low ceiling on interest paid on deposits). Because these changes tended to reduce the average monthly payment on a mortgage, the F.H.A. made home ownership viable for many more Americans than ever before. Indeed, it is not too much to say that the modern United States, with its seductively samey suburbs, was born with Fannie Mae. Between 1940 and 1960, the home-ownership rate soared from 43 to 62 percent.
These were not the only ways in which the federal government sought to encourage Americans to own their own homes. Mortgage-interest payments were always tax-deductible, from the inception of the federal income tax in 1913. As Ronald Reagan said when the rationality of this tax break was challenged, mortgage-interest relief was “part of the American dream.”
In 1968, to broaden the secondary-mortgage market still further, Fannie Mae was split in two—the Government National Mortgage Association (Ginnie Mae), which was to cater to poor borrowers, and a rechartered Fannie Mae, now a privately owned government-sponsored enterprise (G.S.E.). Two years later, to provide competition for Fannie Mae, the Federal Home Loan Mortgage Corporation (Freddie Mac) was set up. In addition, Fannie Mae was permitted to buy conventional as well as government-guaranteed mortgages. Later, with the Community Reinvestment Act of 1977, American banks found themselves under pressure for the first time to lend to poor, minority communities.
These changes presaged a more radical modification to the New Deal system. In the late 1970s, the savings-and-loan industry was hit first by double-digit inflation and then by sharply rising interest rates. This double punch was potentially lethal. The S&Ls were simultaneously losing money on long-term, fixed-rate mortgages, due to inflation, and hemorrhaging deposits to higher-interest money-market funds. The response in Washington from both the Carter and Reagan administrations was to try to salvage the S&Ls with tax breaks and deregulation. When the new legislation was passed, President Reagan declared, “All in all, I think we hit the jackpot.” Some people certainly did.
On the one hand, S&Ls could now invest in whatever they liked, not just local long-term mortgages. Commercial property, stocks, junk bonds—anything was allowed. They could even issue credit cards. On the other, they could now pay whatever interest rate they liked to depositors. Yet all their deposits were still effectively insured, with the maximum covered amount raised from $40,000 to $100,000, thanks to a government regulation two years earlier. And if ordinary deposits did not suffice, the S&Ls could raise money in the form of brokered deposits from middlemen. What happened next perfectly illustrated the great financial precept first enunciated by William Crawford, the commissioner of the California Department of Savings and Loan: “The best way to rob a bank is to own one.” Some S&Ls bet their depositors’ money on highly dubious real-estate developments. Many simply stole the money, as if deregulation meant that the law no longer applied to them at all.
When the ensuing bubble burst, nearly 300 S&Ls collapsed, while another 747 were closed or reorganized under the auspices of the Resolution Trust Corporation, established by Congress in 1989 to clear up the mess. The final cost of the crisis was $153 billion (around 3 percent of the 1989 G.D.P.), of which taxpayers had to pay $124 billion.
But even as the S&Ls were going belly-up, they offered another, very different group of American financial institutions a fast track to megabucks. To the bond traders at Salomon Brothers, the New York investment bank, the breakdown of the New Deal mortgage system was not a crisis but a wonderful opportunity. As profit-hungry as their language was profane, the self-styled “Big Swinging Dicks” at Salomon saw a way of exploiting the gyrating interest rates of the early 1980s.
The idea was to re-invent mortgages by bundling thousands of them together as the backing for new and alluring securities that could be sold as alternatives to traditional government and corporate bonds—in short, to convert mortgages into bonds. Once lumped together, the interest payments due on the mortgages could be subdivided into strips with different maturities and credit risks. The first issue of this new kind of mortgage-backed security (known as a “collateralized mortgage obligation”) occurred in June 1983. The dawn of securitization was a necessary prelude to the Age of Leverage.
Once again, however, it was the federal government that stood ready to pick up the tab in a crisis. For the majority of mortgages continued to enjoy an implicit guarantee from the government-sponsored trio of Fannie, Freddie, and Ginnie, meaning that bonds which used those mortgages as collateral could be represented as virtual government bonds and considered “investment grade.” Between 1980 and 2007, the volume of such G.S.E.-backed mortgage-backed securities grew from less than $200 billion to more than $4 trillion. In 1980 only 10 percent of the home-mortgage market was securitized; by 2007, 56 percent of it was.
These changes swept away the last vestiges of the business model depicted in It’s a Wonderful Life. Once there had been meaningful social ties between mortgage lenders and borrowers. James Stewart’s character knew both the depositors and the debtors. By contrast, in a securitized market the interest you paid on your mortgage ultimately went to someone who had no idea you existed. The full implications of this transition for ordinary homeowners would become apparent only 25 years later.
The Lessons of Detroit
In July 2007, I paid a visit to Detroit, because I had the feeling that what was happening there was the shape of things to come in the United States as a whole. In the space of 10 years, house prices in Detroit, which probably possesses the worst housing stock of any American city other than New Orleans, had risen by more than a third—not much compared with the nationwide bubble, but still hard to explain, given the city’s chronically depressed economic state. As I discovered, the explanation lay in fundamental changes in the rules of the housing game.
I arrived at the end of a borrowing spree. For several years agents and brokers selling subprime mortgages had been flooding Detroit with radio, television, and direct-mail advertisements, offering what sounded like attractive deals. In 2006, for example, subprime lenders pumped more than a billion dollars into 22 Detroit Zip Codes.
These were not the old 30-year fixed-rate mortgages invented in the New Deal. On the contrary, a high proportion were adjustable-rate mortgages—in other words, the interest rate could vary according to changes in short-term lending rates. Many were also interest-only mortgages, without amortization (repayment of principal), even when the principal represented 100 percent of the assessed value of the mortgaged property. And most had introductory “teaser” periods, whereby the initial interest payments—usually for the first two years—were kept artificially low, with the cost of the loan backloaded. All of these devices were intended to allow an immediate reduction in the debt-servicing costs of the borrower.
Re: Political Economics
Reply #126 on:
November 13, 2008, 03:34:25 PM »
In Detroit only a minority of these loans were going to first-time buyers. They were nearly all refinancing deals, which allowed borrowers to treat their homes as cash machines, converting their existing equity into cash and using the proceeds to pay off credit-card debts, carry out renovations, or buy new consumer durables. However, the combination of declining long-term interest rates and ever more alluring mortgage deals did attract new buyers into the housing market. By 2005, 69 percent of all U.S. householders were homeowners; 10 years earlier it had been 64 percent. About half of that increase could be attributed to the subprime-lending boom.
Significantly, a disproportionate number of subprime borrowers belonged to ethnic minorities. Indeed, I found myself wondering, as I drove around Detroit, if “subprime” was in fact a new financial euphemism for “black.” This was no idle supposition. According to a joint study by, among others, the Massachusetts Affordable Housing Alliance, 55 percent of black and Latino borrowers in Boston who had obtained loans for single-family homes in 2005 had been given subprime mortgages; the figure for white borrowers was just 13 percent. More than three-quarters of black and Latino borrowers from Washington Mutual were classed as subprime, whereas only 17 percent of white borrowers were. According to a report in The Wall Street Journal, minority ownership increased by 3.1 million between 2002 and 2007.
Here, surely, was the zenith of the property-owning democracy. It was an achievement that the Bush administration was proud of. “We want everybody in America to own their own home,” President George W. Bush had said in October 2002. Having challenged lenders to create 5.5 million new minority homeowners by the end of the decade, Bush signed the American Dream Downpayment Act in 2003, a measure designed to subsidize first-time house purchases in low-income groups. Between 2000 and 2006, the share of undocumented subprime contracts rose from 17 to 44 percent. Fannie Mae and Freddie Mac also came under pressure from the Department of Housing and Urban Development to support the subprime market. As Bush put it in December 2003, “It is in our national interest that more people own their own home.” Few people dissented.
As a business model, subprime lending worked beautifully—as long, that is, as interest rates stayed low, people kept their jobs, and real-estate prices continued to rise. Such conditions could not be relied upon to last, however, least of all in a city like Detroit. But that did not worry the subprime lenders. They simply followed the trail blazed by mainstream mortgage lenders in the 1980s. Having pocketed fat commissions on the signing of the original loan contracts, they hastily resold their loans in bulk to Wall Street banks. The banks, in turn, bundled the loans into high-yielding mortgage-backed securities and sold them to investors around the world, all eager for a few hundredths of a percentage point more of return on their capital. Repackaged as C.D.O.’s, these subprime securities could be transformed from risky loans to flaky borrowers into triple-A-rated investment-grade securities. All that was required was certification from one of the rating agencies that at least the top tier of these securities was unlikely to go into default.
The risk was spread across the globe, from American state pension funds to public-hospital networks in Australia, to town councils near the Arctic Circle. In Norway, for example, eight municipalities, including Rana and Hemnes, invested some $120 million of their taxpayers’ money in C.D.O.’s secured on American subprime mortgages.
In Detroit the rise of subprime mortgages had in fact coincided with a new slump in the inexorably declining automobile industry. That anticipated a wider American slowdown, an almost inevitable consequence of a tightening of monetary policy as the Federal Reserve belatedly raised short-term interest rates from 1 percent to 5.25 percent. As soon as the teaser rates expired and mortgages were reset at new and much higher interest rates, hundreds of Detroit households swiftly fell behind in their mortgage payments. The effect was to burst the real-estate bubble, causing house prices to start falling significantly for the first time since the early 1990s. And the further house prices fell, the more homeowners found themselves with “negative equity”—in other words, owing more money than their homes were worth.
The rest—the chain reaction as defaults in Detroit and elsewhere unleashed huge losses on C.D.O.’s in financial institutions all around the world—you know.
Drunk on Derivatives
Do you, however, know about the second-order effects of this crisis in the markets for derivatives? Do you in fact know what a derivative is? Once excoriated by Warren Buffett as “financial weapons of mass destruction,” derivatives are what make this crisis both unique and unfathomable in its ramifications. To understand what they are, you need, literally, to go back to the future.
For a farmer planting a crop, nothing is more crucial than the future price it will fetch after it has been harvested and taken to market. A futures contract allows him to protect himself by committing a merchant to buy his crop when it comes to market at a price agreed upon when the seeds are being planted. If the market price on the day of delivery is lower than expected, the farmer is protected.
The earliest forms of protection for farmers were known as forward contracts, which were simply bilateral agreements between seller and buyer. A true futures contract, however, is a standardized instrument issued by a futures exchange and hence tradable. With the development of a standard “to arrive” futures contract, along with a set of rules to enforce settlement and, finally, an effective clearinghouse, the first true futures market was born.
Because they are derived from the value of underlying assets, all futures contracts are forms of derivatives. Closely related, though distinct from futures, are the contracts known as options. In essence, the buyer of a “call” option has the right, but not the obligation, to buy an agreed-upon quantity of a particular commodity or financial asset from the seller (“writer”) of the option at a certain time (the expiration date) for a certain price (known as the “strike price”). Clearly, the buyer of a call option expects the price of the underlying instrument to rise in the future. When the price passes the agreed-upon strike price, the option is “in the money”—and so is the smart guy who bought it. A “put” option is just the opposite: the buyer has the right but not the obligation to sell an agreed-upon quantity of something to the seller of the option at an agreed-upon price.
A third kind of derivative is the interest-rate “swap,” which is effectively a bet between two parties on the future path of interest rates. A pure interest-rate swap allows two parties already receiving interest payments literally to swap them, allowing someone receiving a variable rate of interest to exchange it for a fixed rate, in case interest rates decline. A credit-default swap (C.D.S.), meanwhile, offers protection against a company’s defaulting on its bonds.
There was a time when derivatives were standardized instruments traded on exchanges such as the Chicago Board of Trade. Now, however, the vast proportion are custom-made and sold “over the counter” (O.T.C.), often by banks, which charge attractive commissions for their services, but also by insurance companies (notably A.I.G.). According to the Bank for International Settlements, the total notional amounts outstanding of O.T.C. derivative contracts—arranged on an ad hoc basis between two parties—reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.
But how exactly do you price a derivative? What precisely is an option worth? The answers to those questions required a revolution in financial theory. From an academic point of view, what this revolution achieved was highly impressive. But the events of the 1990s, as the rise of quantitative finance replaced preppies with quants (quantitative analysts) all along Wall Street, revealed a new truth: those whom the gods want to destroy they first teach math.
Re: Political Economics
Reply #127 on:
November 13, 2008, 03:34:51 PM »
Working closely with Fischer Black, of the consulting firm Arthur D. Little, M.I.T.’s Myron Scholes invented a groundbreaking new theory of pricing options, to which his colleague Robert Merton also contributed. (Scholes and Merton would share the 1997 Nobel Prize in economics.) They reasoned that a call option’s value depended on six variables: the current market price of the stock (S), the agreed future price at which the stock could be bought (L), the time until the expiration date of the option (t), the risk-free rate of return in the economy as a whole (r), the probability that the option will be exercised (N), and—the crucial variable—the expected volatility of the stock, i.e., the likely fluctuations of its price between the time of purchase and the expiration date (s).
Feeling a bit baffled? Can’t follow the algebra? That was just fine by the quants. To make money from this magic formula, they needed markets to be full of people who didn’t have a clue about how to price options but relied instead on their (seldom accurate) gut instincts. They also needed a great deal of computing power, a force which had been transforming the financial markets since the early 1980s. Their final requirement was a partner with some market savvy in order to make the leap from the faculty club to the trading floor. Black, who would soon be struck down by cancer, could not be that partner. But John Meriwether could. The former head of the bond-arbitrage group at Salomon Brothers, Meriwether had made his first fortune in the wake of the S&L meltdown of the late 1980s. The hedge fund he created with Scholes and Merton in 1994 was called Long-Term Capital Management.
In its brief, four-year life, Long-Term was the brightest star in the hedge-fund firmament, generating mind-blowing returns for its elite club of investors and even more money for its founders. Needless to say, the firm did more than just trade options, though selling puts on the stock market became such a big part of its business that it was nicknamed “the central bank of volatility” by banks buying insurance against a big stock-market sell-off. In fact, the partners were simultaneously pursuing multiple trading strategies, about 100 of them, with a total of 7,600 positions. This conformed to a second key rule of the new mathematical finance: the virtue of diversification, a principle that had been formalized by Harry M. Markowitz, of the Rand Corporation. Diversification was all about having a multitude of uncorrelated positions. One might go wrong, or even two. But thousands just could not go wrong simultaneously.
The mathematics were reassuring. According to the firm’s “Value at Risk” models, it would take a 10-s (in other words, 10-standard-deviation) event to cause the firm to lose all its capital in a single year. But the probability of such an event, according to the quants, was 1 in 10,24—or effectively zero. Indeed, the models said the most Long-Term was likely to lose in a single day was $45 million. For that reason, the partners felt no compunction about leveraging their trades. At the end of August 1997, the fund’s capital was $6.7 billion, but the debt-financed assets on its balance sheet amounted to $126 billion, a ratio of assets to capital of 19 to 1.
There is no need to rehearse here the story of Long-Term’s downfall, which was precipitated by a Russian debt default. Suffice it to say that on Friday, August 21, 1998, the firm lost $550 million—15 percent of its entire capital, and vastly more than its mathematical models had said was possible. The key point is to appreciate why the quants were so wrong.
The problem lay with the assumptions that underlie so much of mathematical finance. In order to construct their models, the quants had to postulate a planet where the inhabitants were omniscient and perfectly rational; where they instantly absorbed all new information and used it to maximize profits; where they never stopped trading; where markets were continuous, frictionless, and completely liquid. Financial markets on this planet followed a “random walk,” meaning that each day’s prices were quite unrelated to the previous day’s, but reflected no more and no less than all the relevant information currently available. The returns on this planet’s stock market were normally distributed along the bell curve, with most years clustered closely around the mean, and two-thirds of them within one standard deviation of the mean. On such a planet, a “six standard deviation” sell-off would be about as common as a person shorter than one foot in our world. It would happen only once in four million years of trading.
But Long-Term was not located on Planet Finance. It was based in Greenwich, Connecticut, on Planet Earth, a place inhabited by emotional human beings, always capable of flipping suddenly and en masse from greed to fear. In the case of Long-Term, the herding problem was acute, because many other firms had begun trying to copy Long-Term’s strategies in the hope of replicating its stellar performance. When things began to go wrong, there was a truly bovine stampede for the exits. The result was a massive, synchronized downturn in virtually all asset markets. Diversification was no defense in such a crisis. As one leading London hedge-fund manager later put it to Meriwether, “John, you were the correlation.”
There was, however, another reason why Long-Term failed. The quants’ Value at Risk models had implied that the loss the firm suffered in August 1998 was so unlikely that it ought never to have happened in the entire life of the universe. But that was because the models were working with just five years of data. If they had gone back even 11 years, they would have captured the 1987 stock-market crash. If they had gone back 80 years they would have captured the last great Russian default, after the 1917 revolution. Meriwether himself, born in 1947, ruefully observed, “If I had lived through the Depression, I would have been in a better position to understand events.” To put it bluntly, the Nobel Prize winners knew plenty of mathematics but not enough history.
One might assume that, after the catastrophic failure of L.T.C.M., quantitative hedge funds would have vanished from the financial scene, and derivatives such as options would be sold a good deal more circumspectly. Yet the very reverse happened. Far from declining, in the past 10 years hedge funds of every type have exploded in number and in the volume of assets they manage, with quantitative hedge funds such as Renaissance, Citadel, and D. E. Shaw emerging as leading players. The growth of derivatives has also been spectacular—and it has continued despite the onset of the credit crunch. Between December 2005 and December 2007, the notional amounts outstanding for all derivatives increased from $298 trillion to $596 trillion. Credit-default swaps quadrupled, from $14 trillion to $58 trillion.
An intimation of the problems likely to arise came in September, when the government takeover of Fannie and Freddie cast doubt on the status of derivative contracts protecting the holders of more than $1.4 trillion of their bonds against default. The consequences of the failure of Lehman Brothers were substantially greater, because the firm was the counter-party in so many derivative contracts.
The big question is whether those active in the market waited too long to set up some kind of clearing mechanism. If, as seems inevitable, there is an upsurge in corporate defaults as the U.S. slides into recession, the whole system could completely seize up.
The China Syndrome
Just 10 years ago, during the Asian crisis of 1997–98, it was conventional wisdom that financial crises were more likely to happen on the periphery of the world economy—in the so-called emerging markets of East Asia and Latin America. Yet the biggest threats to the global financial system in this new century have come not from the periphery but from the core. The explanation for this strange role reversal may in fact lie in the way emerging markets changed their behavior after 1998.
For many decades it was assumed that poor countries could become rich only by borrowing capital from wealthy countries. Recurrent debt crises and currency crises associated with sudden withdrawals of Western money led to a rethinking, inspired largely by the Chinese example.
When the Chinese wanted to attract foreign capital, they insisted that it take the form of direct investment. That meant that instead of borrowing from Western banks to finance its industrial development, as many emerging markets did, China got foreigners to build factories in Chinese enterprise zones—large, lumpy assets that could not easily be withdrawn in a crisis.
Re: Political Economics
Reply #128 on:
November 13, 2008, 03:36:26 PM »
The crucial point, though, is that the bulk of Chinese investment has been financed from China’s own savings. Cautious after years of instability and unused to the panoply of credit facilities we have in the West, Chinese households save a high proportion of their rising incomes, in marked contrast to Americans, who in recent years have saved almost none at all. Chinese corporations save an even larger proportion of their soaring profits. The remarkable thing is that a growing share of that savings surplus has ended up being lent to the United States. In effect, the People’s Republic of China has become banker to the United States of America.
The Chinese have not been acting out of altruism. Until very recently, the best way for China to employ its vast population was by exporting manufactured goods to the spendthrift U.S. consumer. To ensure that those exports were irresistibly cheap, China had to fight the tendency for its currency to strengthen against the dollar by buying literally billions of dollars on world markets. In 2006, Chinese holdings of dollars reached 700 billion. Other Asian and Middle Eastern economies adopted much the same strategy.
The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs. Above all, Asian savings kept down U.S. interest rates. But there was a catch. The more Asia was willing to lend to the United States, the more Americans were willing to borrow. The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge-fund population explosion. It was the underlying reason why private-equity partnerships were able to borrow money left, right, and center to finance leveraged buyouts. And it was the underlying reason why the U.S. mortgage market was so awash with cash by 2006 that you could get a 100 percent mortgage with no income, no job, and no assets.
Whether or not China is now sufficiently “decoupled” from the United States that it can insulate itself from our credit crunch remains to be seen. At the time of writing, however, it looks very doubtful.
Back to Reality
The modern financial system is the product of centuries of economic evolution. Banks transformed money from metal coins into accounts, allowing ever larger aggregations of borrowing and lending. From the Renaissance on, government bonds introduced the securitization of streams of interest payments. From the 17th century on, equity in corporations could be bought and sold in public stock markets. From the 18th century on, central banks slowly learned how to moderate or exacerbate the business cycle. From the 19th century on, insurance was supplemented by futures, the first derivatives. And from the 20th century on, households were encouraged by government to skew their portfolios in favor of real estate.
Illustration by Brad Holland
Read Niall Ferguson’s prescient article on today’s financial woes, Empire Falls (November 2006).
Economies that combined all these institutional innovations performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.
Yet money’s ascent has not been, and can never be, a smooth one. On the contrary, financial history is a roller-coaster ride of ups and downs, bubbles and busts, manias and panics, shocks and crashes. The excesses of the Age of Leverage—the deluge of paper money, the asset-price inflation, the explosion of consumer and bank debt, and the hypertrophic growth of derivatives—were bound sooner or later to produce a really big crisis.
It remains unclear whether this crisis will have economic and social effects as disastrous as those of the Great Depression, or whether the monetary and fiscal authorities will succeed in achieving a Great Repression, averting a 1930s-style “great contraction” of credit and output by transferring the as yet unquantifiable losses from banks to taxpayers.
Either way, Planet Finance has now returned to Planet Earth with a bang. The key figures of the Age of Leverage—the lax central bankers, the reckless investment bankers, the hubristic quants—are now feeling the full force of this planet’s gravity.
But what about the rest of us, the rank-and-file members of the deluded crowd? Well, we shall now have to question some of our most deeply rooted assumptions—not only about the benefits of paper money but also about the rationale of the property-owning democracy itself.
On Planet Finance it may have made sense to borrow billions of dollars to finance a massive speculation on the future prices of American houses, and then to erect on the back of this trade a vast inverted pyramid of incomprehensible securities and derivatives.
But back here on Planet Earth it suddenly seems like an extraordinary popular delusion.
Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University and a Senior Fellow of the Hoover Institution at Stanford, and the author of The War of the World: Twentieth-Century Conflict and the Descent of the West.
WSJ: Stable money is the key
Reply #129 on:
November 14, 2008, 10:44:43 AM »
I confess to having just skimmed that long read, but towards the end caught the idea about the role of the Chinese savings glut. This idea I find very interesting and will think about it.
A bit briefer is this from today's WSJ:
OPINION NOVEMBER 14, 2008 Stable Money Is the Key to Recovery
How the G-20 can rebuild the 'capitalism of the future.'By JUDY SHELTON
Tomorrow's "Summit on Financial Markets and the World Economy" in Washington will have a stellar cast. Leaders of the Group of 20 industrialized and emerging nations will be there, including Chinese President Hu Jintao, Brazilian President Luiz Inacio Lula da Silva, King Abdullah of Saudi Arabia and Russian President Dmitry Medvedev. French President Nicolas Sarkozy, who initiated the whole affair, in order, as he put it, "to build together the capitalism of the future," will be in attendance, along with the host, our own President George W. Bush, and the chiefs of the World Bank, the International Monetary Fund and the United Nations.
Martin KozlowskiOne thing is guaranteed: Most attendees will take the view that Wall Street greed and inadequate regulatory oversight by U.S. authorities caused the global financial crisis -- never mind that their own regulatory agencies missed the boat and that their own governments eagerly bought up Fannie Mae and Freddie Mac securities for the higher yield over Treasurys.
But whatever they agree to pursue, whether new transnational regulatory authority or globally mandated limits on executive remuneration, would only stultify prospects for economic recovery -- and completely miss the point.
At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence.
Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry. Entrepreneurs in countries with overvalued currencies are unable to attract the foreign investment that should logically flow in their direction, while scam artists in countries with undervalued currencies lure global financial resources into brackish puddles.
To speak of "overvalued" or "undervalued" currencies is to raise the question: Why can't we just have money that works -- a meaningful unit of account to provide accurate price signals to producers and consumers across the globe?
Consider this: The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) -- over 12 times the world's nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts.
In other words, some three-quarters of the massive derivatives market, which has wreaked the most havoc across global financial markets, derives its investment allure from the capricious monetary policies of central banks and the chaotic movements of currencies.
In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits. Meanwhile, price signals in the global marketplace are hopelessly distorted.
For his part, British Prime Minister Gordon Brown says his essential goal is "to root out the irresponsible and often undisclosed lending at the heart of our problems." But if anyone has demonstrated irresponsibility, it is not those who chased misleading price signals in pursuit of false profits -- but rather global authorities who have failed to provide an appropriate international monetary system to serve the needs of honest entrepreneurs in an open world economy.
When President Richard Nixon closed the gold window some 37 years ago, it marked the end of a golden age of robust trade and unprecedented global economic growth. The Bretton Woods system derived its strength from a commitment by the U.S. to redeem dollars for gold on demand.
True, the right of convertibility at a pre-established rate was granted only to foreign central banks, not to individual dollar holders; therein lies the distinction between the Bretton Woods gold exchange system and a classical gold standard. Under Bretton Woods, participating nations agreed to maintain their own currencies at a fixed exchange rate relative to the dollar.
Since the value of the dollar was fixed to gold at $35 per ounce of gold -- guaranteed by the redemption privilege -- it was as if all currencies were anchored to gold. It also meant all currencies were convertible into each other at fixed rates.
Paul Volcker, former Fed chairman, was at Camp David with Nixon on that fateful day, Aug. 15, when the system was ended. Mr. Volcker, serving as Treasury undersecretary for monetary affairs at the time, had misgivings; and he has since noted that the inflationary pressures which caused us to go off the gold standard in the first place have only worsened. Moreover, he suggests, floating rates undermine the fundamental tenets of comparative advantage.
"What can an exchange rate really mean," he wrote in "Changing Fortunes" (1992), "in terms of everything a textbook teaches about rational economic decision making, when it changes by 30% or more in the space of 12 months only to reverse itself? What kind of signals does that send about where a businessman should intelligently invest his capital for long-term profitability? In the grand scheme of economic life first described by Adam Smith, in which nations like individuals should concentrate on the things they do best, how can anyone decide which country produces what most efficiently when the prices change so fast? The answer, to me, must be that such large swings are a symptom of a system in disarray."
If we are to "build together the capitalism of the future," as Mr. Sarkozy puts it, the world needs sound money. Does that mean going back to a gold standard, or gold-based international monetary system? Perhaps so; it's hard to imagine a more universally accepted standard of value.
Gold has occupied a primary place in the world's monetary history and continues to be widely held as a reserve asset. The central banks of the G-20 nations hold two-thirds of official world gold reserves; include the gold reserves of the International Monetary Fund, the European Central Bank and the Bank for International Settlements, and the figure goes to nearly 80%, representing about 15% of all the gold ever mined.
Ironically, it was French President Charles de Gaulle who best made the case in the 1960s. Worried that the U.S. would be tempted to abuse its role as key currency issuer by exporting domestic inflation, he called for the return to a classical international gold standard. "Gold," he observed, "has no nationality."
Mr. Sarkozy might build on that legacy if he can look beyond the immediacy of the crisis and work toward a future global economy based on monetary integrity. This would indeed help to restore the values of democratic capitalism. And Mr. Volcker, an influential adviser to President-elect Barack Obama, could turn out to be a powerful ally in the pursuit of a new stable monetary order.
Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).
Re: Political Economics
Reply #130 on:
November 14, 2008, 01:25:53 PM »
I was originally for auto co. bailout but now that mayors are asking for money, and more and more companies coming forward and government can't even account for the billions already allocated for give aways I have changed my mine. No more bailouts. This has to stop.
If people who didn't belong in homes before may need to look for apartments and auto workers will need to retrain or their families will have to get health insurance from their own jobs or commerically than so be it.
Government cannot be trusted.
I didn't want my savings to go to zero but I took that risk and now must face the consequences.
What is worse is paying for a lifeline for everyone else deserving or not.
And we all know billions will get stolen.
Just my rambling thoughts.
How bad will this get?
Reply #131 on:
November 15, 2008, 08:51:12 AM »
Recession, Depression, TEOTWAWKI?
Where will we be a year from now?
Bailout the Detroit unions - forgettaboutit
Reply #132 on:
November 15, 2008, 11:59:49 AM »
I've come around to Charles' view. I now suspect the Dem push to bailout Detroit is a union ballout. That said. Let them declare bankruptcy and start over.
I am not in favor of tax money for this endless stream to industries that will make for ever bigger and bigger Democratic party machine government. The Dems talk """bipartisanship""". Now I realize why. Because they need this deal now before the Carmakers run out of cash. It can't wait till Jan 20.
Furthermore they can always blame the Reps if something goes wrong. Come Jan 20 """bipartisanship""" calls and phrases will no longer be heard.
****A lemon of a bailout
By Charles Krauthammer
| Finally, the outlines of a coherent debate on the federal bailout. This comes as welcome relief from a campaign season that gave us the House Republicans' know-nothing rejectionism, John McCain's mindless railing against "greed and corruption," and Barack Obama's detached enunciation of vacuous bailout "principles" that allowed him to be all things to all people.
Now clarity is emerging. The fault line is the auto industry bailout. The Democrats are pushing hard for it. The White House is resisting.
Underlying the policy differences is a philosophical divide. The Bush administration sees the $700 billion rescue as an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.
Treasury Secretary Henry Paulson is willing to stretch the meaning of "bank" by extending protection to such entities as American Express. But fundamentally, he sees government as saving institutions that deal in money, not other stuff.
Democrats have a larger canvas, with government intervening in other sectors of the economy to prevent the cascade effect of mass unemployment leading to more mortgage defaults and business failures (as consumer spending plummets), in turn dragging down more businesses and financial institutions, producing more unemployment, etc. — the death spiral of the 1930s.
President Bush is trying to move the Libor or the TED spread, which measure credit flows. The Democrats' index is the unemployment rate.
With almost 5 million workers supported by the auto industry, Democrats are pressing for a federal rescue. But the problems are obvious.
First, the arbitrariness. Where do you stop? Once you've gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?
The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?
Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as "job banks," a euphemism for paying vast numbers of employees not to work.
The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It's the ultimate in lemon socialism.
Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is "retool" Detroit to make cars for the coming green economy.
Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.
In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer. Will hybrids? One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them.
If you think we have economic troubles today, consider the effects of nationalizing an industry of this size, but now run by bureaucrats issuing production quotas to fit five-year plans to meet politically mandated fuel-efficiency standards — to lift us to the sunny uplands of the coming green utopia.
Republican minimalism — saving the credit-issuing utilities — certainly risks not doing enough. But the Democratic drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism.
In this crisis, we agree to suspend the invisible hand of Adam Smith — but not in order to be crushed by the heavy hand of government.***
Re: Political Economics
Reply #133 on:
November 16, 2008, 09:07:33 AM »
November 7, 2008
The Reagan Counterrevolution
In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution. His message resonated with voters, propelling him into the White House to implement an agenda of lowering marginal tax rates, reducing government spending and business regulations, restoring sound money, abolishing entire government departments, and basically allowing free market vibrancy to unshackle an economy burdened by big government. Though in practice much of the Reagan revolution never materialized, at least in theory his basic premise was sound.
In contrast, the country has now hitched its wagon to the views of Barack Obama. We don’t know much about what he truly believes about economics, but the little that we do know is not encouraging. Obama has repeatedly heaped the blame for the current crisis on the excesses of unregulated capitalism and the greed of the wealthy. For him, the free market is the problem and government is the solution.
The President-elect has promised to cage the destructive forces of capitalism, impose more regulation, raise marginal tax rates, increase government spending, and restore prosperity by redistributing wealth from those who earned it to those considered to be more deserving. Like most of his generation, Obama believes that economic growth results from consumer spending, primarily from the middle class. Any policy that keeps the consumers headed to the mall will be promoted.
Unfortunately, while Reagan had a hard time getting his full agenda through Congress, Obama will likely be much more successful. The effort to concentrate more power in Washington will be far more appealing to Congress then Reagan’s idea of restoring it to the people.
This sharp contrast in philosophy should not be taken lightly. Reagan looked to unleash the pent-up free market forces that had been smothered by a generation of Great Society reforms and uninterrupted Democratic control of Congress. Today, the public is looking for the Obama Administration to create the growth that the free market has apparently destroyed. The hope that our economy will grow as a result of government spending and micro-management is the most seminal shift in political philosophy since the New Deal.
Despite the absence of Reagan’s promised spending cuts, the economy generally did well during his presidency (The growth would have been more genuine if the cuts had been delivered). However, Obama’s policies will immediately make the current situation worse and the nation will suffer severely as a result. Rather than a sharp recession at the beginning of his term followed by a significant expansion (as occurred under Reagan), the recession that Obama inherits will be far worse when his first term ends.
What nearly all politicians on both sides of the aisle fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection. America’s borrow and spend economy, and the bloated service sector that evolved around it, must be allowed to topple, so that a more sustainable economy grounded in savings and production can rise in its place. Any government efforts to delay the adjustment and spare us the pain will backfire, turning this recession into an inflationary depression.
Of broader concern however is the sharp turn in ideology, and what it means for the future of our nation. If this is a permanent shift, then America will lose any resemblance to the economic titan it was in the 20th Century. Our standard of living will decline sharply, our economy will be ravaged by inflation, tens of millions will be unemployed, more individual liberties will be surrendered, and rugged individualism will be supplanted by the nanny state. In short, Latin America may extend north to the Canadian border.
However, if this shift proves temporary and Obama’s reign either ends in one term, or he summons the intelligence and courage to reverse course once the situation deteriorates, then perhaps one day there will be light at the end of a very long tunnel.
While all of us can certainly hope for the best, prudence suggests that we had better prepare for the worst. Not only does that mean divesting our portfolios of U.S. dollar denominated investments but preparing for the possibility of emigration. With economic conditions at home becoming increasingly intolerable, the call of freer economies and greater prosperity abroad may be too tempting to resist.
WSJ: Chapter 11 for GM
Reply #134 on:
November 17, 2008, 11:17:15 AM »
eneral Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.
APConsider the costs of tackling GM's problems with some kind of bailout plan. After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of "change," GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.
GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota's.
Foreign-owned manufacturers who build cars with American workers pay wages similar to GM's. But their expenses for benefits are a fraction of GM's. GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.
And therein lies the problem: The cost of terminating dealers is only a fraction of what it would cost to rebuild GM to become a company sized and marketed appropriately for its market share. Contracts would have to be bought out. The company would have to shed many of its fixed obligations. Some obligations will be impossible to cut by voluntary agreement. GM will run out of cash and out of time.
GM's solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it's doing a great job under difficult circumstances.
Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn't be easy but, unlike trying to bail out GM as it is, it wouldn't be impossible.
The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it'll be just as large and there will be less money to soften the blow and even more blame to go around. The PBGC will probably need money to guarantee GM's pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won't help executives much). Unemployment insurance will have to be extended and offered to many people, perhaps millions if you include dealers, suppliers and communities dependent on GM as it exists now. A GM bankruptcy will make addressing health-care coverage more urgent, which is probably a good thing. It would require job-retraining money and community assistance to affected localities.
But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won't be able to carry the weight of GM's past.
GM CEO Rick Wagoner says "bankruptcy is not an option." Critics of a bankruptcy say that GM won't be able to get the loans it will need to guarantee warranties, pay its operating losses while it restructures, and preserve customers' ability to finance purchases. While consumers buy tickets from bankrupt airlines, electronics from bankrupt retailers, and apartments from bankrupt builders, they say consumers won't buy cars from a bankrupt auto maker. But bankruptcy no longer means "liquidation" or "out of business" to a generation of consumers used to buying from firms in reorganization.
Today in Opinion Journal
REVIEW & OUTLOOK
Spitzer as VictimThe $639 Million LoopholeChina's News Concession
The Americas: Dodd's 'Democrat' Tightens His Grip
– Mary Anastasia O'GradyInformation Age: Markets Declare Truce in Copyright Wars
– L. Gordon Crovitz
Why Bankruptcy Is the Best Option for GM
– Michael E. LevineTo Prevent Bubbles, Restrain the Fed
– Gerald P. O'Driscoll Jr.Democrats Shouldn't Rush on Labor Legislation
– Ariella BernsteinGM would guarantee warranty support with a segregated fund if necessary. And debtor-in-possession (DIP) financing -- loans that provide the near-term cash for reorganizing companies -- is very safe, because the DIP lender has priority over all other claimants. In normal markets, it would certainly be available to a GM that has assets to sell, including a viable overseas business. Such financing is probably available even now.
In any event, it would be lined up before a filing, not after, so any problems wouldn't be a surprise. As a last resort, we could at least consider a public DIP loan to support a reorganizing GM with a good chance to survive -- as opposed to subsidizing a GM slowly deflating.
The fate of Daewoo -- the Korean auto maker that collapsed in 2000 after filing for bankruptcy, leaving about 500 dealers stranded in the U.S. -- is often cited as "proof" that a GM bankruptcy won't work. But Daewoo was headquartered in a part of the world where bankruptcy still carries a major stigma and usually means liquidation. Daewoo's experience is largely irrelevant to a major U.S. company undergoing a well-publicized positive transformation, almost certainly under new management.
GM as it is cannot survive without long-term government life support. If it gets that support, it can't change enough and won't change fast enough. Contrary to Mr. Wagoner's brave declaration, bankruptcy is an option. In fact, it's the only option that merits public support and actually has a chance at succeeding.
Mr. Levine, a former airline executive, is a distinguished research scholar and senior lecturer at NYU School of Law.
Reply #135 on:
November 18, 2008, 04:51:01 PM »
Scott Grannis writes:
A better bailout proposal
Grover Norquist has a brilliant suggestion for a much better way to spend $700 billion of taxpayers' money. In my view, this proposal would guarantee a quick recovery. And with Laffer-Curve effects taken into account, they might end up costing almost nothing:
Cut the corporate income tax rate from 35% to 15%, giving us one of the lowest corporate income tax rates in the developed world. We currently have the second-highest rate in the world (behind only Japan). This new 15% rate would give us the third-lowest rate in the world (ahead of only Ireland and Iceland). It would put us well below the Euro-zone average rate of 25%. Companies would be dying to set up shop in the United States. Estimated JCT cost: $170 billion
Eliminate the capital gains and dividends tax. These rates are currently 15%, but actually represent a double-tax on corporate profits. When combined with the new, lower 15% rate on corporate income, capital costs would be at their lowest levels in nearly a century. Tax something less, and get more of it. Estimated JCT cost: $35 billion
Cut the top personal income tax rate from 35% to a flat 15%. This would give the U.S. the lowest personal income tax rate in the developed world. Estimated JCT score: $235 billion
Kill the death tax. Almost nothing is more capital-killing for small businesses and family farms than the estate, gift, and generation-skipping transfer taxes. Estimated JCT score: $24 billion
Allow companies to fully-expense capital assets purchased the first year. Under current law, businesses and other taxpayers must usually “depreciate,” or slowly-deduct, capital asset purchases the first year. This capital-boosting proposal would allow taxpayers to deduct 100% of the purchase price from their taxes in year one. Estimated JCT score: $240 billion
Re: Political Economics, Scott Grannis - a different bailout proposal
Reply #136 on:
November 19, 2008, 10:32:14 AM »
Of course he is right, but given that this electorate has chosen the furthest left liberal and Pelosi-Reid supermajorities over the furthest center of conservatives by a clear margin, right in the face of stagnation/collapse, perhaps this serious proposal for pro-growth policies should be moved to the good humor thread.
Re: Political Economics
Reply #137 on:
November 19, 2008, 12:55:56 PM »
We're on the "Leaving Las Vegas" path to resolution to our "debtoholicism". Obama and congress can double up on the shots to "fix" the economy.
Re: Political Economics
Reply #138 on:
November 20, 2008, 02:31:54 PM »
Corporations versus the Market; or, Whip Conflation Now
by Roderick Long
November 10th, 2008
Defenders of the free market are often accused of being apologists for big business and shills for the corporate elite. Is this a fair charge?
No and yes. Emphatically no—because corporate power and the free market are actually antithetical; genuine competition is big business’s worst nightmare. But also, in all too many cases, yes —because although liberty and plutocracy cannot coexist, simultaneous advocacy of both is all too possible.
First, the no. Corporations tend to fear competition, because competition exerts downward pressure on prices and upward pressure on salaries; moreover, success on the market comes with no guarantee of permanency, depending as it does on outdoing other firms at correctly figuring out how best to satisfy forever-changing consumer preferences, and that kind of vulnerability to loss is no picnic. It is no surprise, then, that throughout U.S. history corporations have been overwhelmingly hostile to the free market. Indeed, most of the existing regulatory apparatus—including those regulations widely misperceived as restraints on corporate power—were vigorously supported, lobbied for, and in some cases even drafted by the corporate elite.
Corporate power depends crucially on government intervention in the marketplace. This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts, and other forms of corporate welfare; protectionist tariffs; explicit grants of monopoly privilege; and the seizing of private property for corporate use via eminent domain (as in Kelo v. New London). But these direct forms of pro-business intervention are supplemented by a swarm of indirect forms whose impact is arguably greater still.
As I have written elsewhere:
One especially useful service that the state can render the corporate elite is cartel enforcement. Price-fixing agreements are unstable on a free market, since while all parties to the agreement have a collective interest in seeing the agreement generally hold, each has an individual interest in breaking the agreement by underselling the other parties in order to win away their customers; and even if the cartel manages to maintain discipline over its own membership, the oligopolistic prices tend to attract new competitors into the market. Hence the advantage to business of state-enforced cartelisation. Often this is done directly, but there are indirect ways too, such as imposing uniform quality standards that relieve firms from having to compete in quality. (And when the quality standards are high, lower-quality but cheaper competitors are priced out of the market.)
The ability of colossal firms to exploit economies of scale is also limited in a free market, since beyond a certain point the benefits of size (e.g., reduced transaction costs) get outweighed by diseconomies of scale (e.g., calculational chaos stemming from absence of price feedback)—unless the state enables them to socialise these costs by immunising them from competition – e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.
Nor does the list end there. Tax breaks to favored corporations represent yet another non-obvious form of government intervention. There is of course nothing anti-market about tax breaks per se; quite the contrary. But when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.
Intellectual property laws also function to bolster the power of big business. Even those who accept the intellectual property as a legitimate form of private property can agree that the ever-expanding temporal horizon of copyright protection, along with disproportionately steep fines for violations (measures for which publishers, recording firms, software companies, and film studios have lobbied so effectively), are excessive from an incentival point of view, stand in tension with the express intent of the Constitution’s patents-and-copyrights clause, and have more to do with maximizing corporate profits than with securing a fair return to the original creators.
Government favoritism also underwrites environmental irresponsibility on the part of big business. Polluters often enjoy protection against lawsuits, for example, despite the pollution’s status as a violation of private property rights. When timber companies engage in logging on public lands, the access roads are generally tax-funded, thus reducing the cost of logging below its market rate; moreover, since the loggers do not own the forests they have little incentive to log sustainably.
In addition, inflationary monetary policies on the part of central banks also tend to benefit those businesses that receive the inflated money first in the form of loans and investments, when they are still facing the old, lower prices, while those to whom the new money trickles down later, only after they have already begun facing higher prices, systematically lose out.
And of course corporations have been frequent beneficiaries of U.S. military interventions abroad, from the United Fruit Company in 1950s Guatemala to Halliburton in Iraq today.
Vast corporate empires like Wal-Mart are often either hailed or condemned (depending on the speaker’s perspective) as products of the free market. But not only is Wal-Mart a direct beneficiary of (usually local) government intervention in the form of such measures as eminent domain and tax breaks, but it also reaps less obvious benefits from policies of wider application. The funding of public highways through tax revenues, for example, constitutes a de facto transportation subsidy, allowing Wal-Mart and similar chains to socialize the costs of shipping and so enabling them to compete more successfully against local businesses; the low prices we enjoy at Wal-Mart in our capacity as consumers are thus made possible in part by our having already indirectly subsidized Wal-Mart’s operating costs in our capacity as taxpayers.
Wal-Mart also keeps its costs low by paying low salaries; but what makes those low salaries possible is the absence of more lucrative alternatives for its employees—and that fact in turn owes much to government intervention. The existence of regulations, fees, licensure requirements, et cetera does not affect all market participants equally; it’s much easier for wealthy, well-established companies to jump through these hoops than it is for new firms just starting up. Hence such regulations both decrease the number of employers bidding for employees’ services (thus keeping salaries low) and make it harder for the less affluent to start enterprises of their own. Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf.
I don’t mean to suggest that Wal-Mart and similar firms owe their success solely to governmental privilege; genuine entrepreneurial talent has doubtless been involved as well. But given the enormous governmental contribution to that success, it’s doubtful that in the absence of government intervention such firms would be in anything like the position they are today.
In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles. Small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.
So where does this idea come from that advocates of free-market libertarianism must be carrying water for big business interests? Whence the pervasive conflation of corporatist plutocracy with libertarian laissez-faire? Who is responsible for promoting this confusion?
There are three different groups that must shoulder their share of the blame. (Note: in speaking of “blame” I am not necessarily saying that the “culprits” have deliberately promulgated what they knew to be a confusion; in most cases the failing is rather one of negligence, of inadequate attention to inconsistencies in their worldview. And as we’ll see, these three groups have systematically reinforced one another’s confusions.)
Culprit #1: the left. Across the spectrum from the squishiest mainstream liberal to the bomb-throwingest radical leftist, there is widespread (though not, it should be noted, universal) agreement that laissez-faire and corporate plutocracy are virtually synonymous. David Korten, for example, describes advocates of unrestricted markets, private property, and individual rights as “corporate libertarians” who champion a “globalized free market that leaves resource allocation decisions in the hands of giant corporations”—as though these giant corporations were creatures of the free market rather than of the state—while Noam Chomsky, though savvy enough to recognize that the corporate elite are terrified of genuine free markets, yet in the same breath will turn around and say that we must at all costs avoid free markets lest we unduly empower the corporate elite.
Culprit #2: the right. If libertarians’ left-wing opponents have conflated free markets with pro-business intervention, libertarians’ right-wing opponents have done all they can to foster precisely this confusion; for there is a widespread (though again not universal) tendency for conservatives to cloak corporatist policies in free-market rhetoric. This is how conservative politicians in their presumptuous Adam Smith neckties have managed to get themselves perceived—perhaps have even managed to perceive themselves—as proponents of tax cuts, spending cuts, and unhampered competition despite endlessly raising taxes, raising spending, and promoting “government-business partnerships.”
Consider the conservative virtue-term “privatization,” which has two distinct, indeed opposed, meanings. On the one hand, it can mean returning some service or industry from the monopolistic government sector to the competitive private sector—getting government out of it; this would be the libertarian meaning. On the other hand, it can mean “contracting out,” i.e., granting to some private firm a monopoly privilege in the provision some service previously provided by government directly. There is nothing free-market about privatization in this latter sense, since the monopoly power is merely transferred from one set of hands to another; this is corporatism, or pro-business intervention, not laissez-faire. (To be sure, there may be competition in the bidding for such monopoly contracts, but competition to establish a legal monopoly is no more genuine market competition than voting—one last time—to establish a dictator is genuine democracy.)
Of these two meanings, the corporatist meaning may actually be older, dating back to fascist economic policies in Nazi Germany; but it was the libertarian meaning that was primarily intended when the term (coined independently, as the reverse of “nationalization”) first achieved widespread usage in recent decades. Yet conservatives have largely co-opted the term, turning it once again toward the corporatist sense.
Similar concerns apply to that other conservative virtue-term, “deregulation.” From a libertarian standpoint, deregulating should mean the removal of governmental directives and interventions from the sphere of voluntary exchange. But when a private entity is granted special governmental privileges, “deregulating” it amounts instead to an increase, not a decrease, in governmental intrusion into the economy. To take an example not exactly at random, if assurances of a tax-funded bailout lead banks to make riskier loans than they otherwise would, then the banks are being made freer to take risks with the money of unconsenting taxpayers. When conservatives advocate this kind of deregulation they are wrapping redistribution and privilege in the language of economic freedom. When conservatives market their plutocratic schemes as free-market policies, can we really blame liberals and leftists for conflating the two? (Well, okay, yes we can. Still, it is a mitigating factor.)
Culprit #3: libertarians themselves. Alas, libertarians are not innocent here—which is why the answer to my opening question (as to whether it’s fair to charge libertarians with being apologists for big business) was no and yes rather than a simple no. If libertarians are accused of carrying water for corporate interests, that may be at least in part because, well, they so often sound like that’s just what they’re doing (though here, as above, there are plenty of honorable exceptions to this tendency). Consider libertarian icon Ayn Rand’s description of big business as a “persecuted minority,” or the way libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people. Or again, note the alacrity with which so many libertarians rush to defend Wal-Mart and the like as heroic exemplars of the free market. Among such libertarians, criticisms of corporate power are routinely dismissed as anti-market ideology. (Of course such dismissiveness gets reinforced by the fact that many critics of corporate power are in the grip of anti-market ideology.) Thus when left-wing analysts complain about “corporate libertarians” they are not merely confused; they’re responding to a genuine tendency even if they’ve to some extent misunderstood it.
Kevin Carson has coined the term “vulgar libertarianism” for the tendency to treat the case for the free market as though it justified various unlovely features of actually existing corporatist society. (I find it preferable to talk of vulgar libertarianism rather than of vulgar libertarians, because very few libertarians are consistently vulgar; vulgar libertarianism is a tendency that can show up to varying degrees in thinkers who have many strong anti-corporatist tendencies also.) Likewise, “vulgar liberalism” is Carson’s term for the corresponding tendency to treat the undesirability of those features of actually existing corporatist society as though they constituted an objection to the free market. Both tendencies conflate free markets with corporatism, but draw opposite morals; as Murray Rothbard notes, “Both left and right have been persistently misled by the notion that intervention by the government is ipso facto leftish and antibusiness.” And if many leftists tend to see dubious corporate advocacy in libertarian pronouncements even when it’s not there, so likewise many libertarians tend not to see dubious corporate advocacy in libertarian pronouncements even when it is there.
There is an obvious tendency for vulgar libertarianism and vulgar liberalism to reinforce each other, as each takes at face value the conflation of plutocracy with free markets assumed by the other. This conflation in turn tends to bolster the power of the political establishment by rendering genuine libertarianism invisible: Those who are attracted to free markets are lured into supporting plutocracy, thus helping to prop up statism’s right or corporatist wing; those who are repelled by plutocracy are lured into opposing free markets, thus helping to prop up statism’s left or social-democratic wing. But as these two wings have more in common than not, the political establishment wins either way. The perception that libertarians are shills for big business thus has two bad effects: First, it tends to make it harder to attract converts to libertarianism, and so hinders its success; second, those converts its does attract may end up reinforcing corporate power through their advocacy of a muddled version of the doctrine.
In the nineteenth century, it was far more common than it is today for libertarians to see themselves as opponents of big business. The long 20th-century alliance of libertarians with conservatives against the common enemy of state-socialism probably had much to do with reorienting libertarian thought toward the right; and the brief rapprochement between libertarians and the left during the 1960s foundered when the New Left imploded. As a result, libertarians have been ill-placed to combat left-wing and right-wing conflation of markets with privilege, because they have not been entirely free of the conflation themselves.
Happily, the left/libertarian coalition is now beginning to re-emerge; and with it is emerging a new emphasis on the distinction between free markets and prevailing corporatism. In addition, many libertarians are beginning to rethink the way they present their views, and in particular their use of terminology. Take, for example, the word “capitalism,” which libertarians during the past century have tended to apply to the system they favor. As I’ve argued elsewhere, this term is somewhat problematic; some use it to mean free markets, others to mean corporate privilege, and still others (perhaps the majority) to mean some confused amalgamation of the two:
By “capitalism” most people mean neither the free market simpliciter nor the prevailing neomercantilist system simpliciter. Rather, what most people mean by “capitalism” is this free-market system that currently prevails in the western world. In short, the term “capitalism” as generally used conceals an assumption that the prevailing system is a free market. And since the prevailing system is in fact one of government favoritism toward business, the ordinary use of the term carries with it the assumption that the free market is government favoritism toward business.
Hence clinging to the term “capitalism” may be one of the factors reinforcing the conflation of libertarianism with corporatist advocacy. In any case, if libertarianism advocacy is not to be misperceived—or worse yet, correctly perceived! —as pro-corporate apologetics, the antithetical relationship between free markets and corporate power must be continually highlighted.
Roderick Long is Associate Professor of Philosophy at Auburn University.
Re: Political Economics
Reply #139 on:
November 20, 2008, 04:53:13 PM »
Good read Mig.
Re: Political Economics
Reply #140 on:
November 20, 2008, 11:09:57 PM »
I agree, nice read. The professor correctly points out the problem with definitions and words. Words like liberal, conservative and capitalism have a wide range of meanings. The one who defines the issue early tends to win it. Watch how our reproductive issue advocate won't call her opponents pro-life, they are only anti-choice or anti women's rights.
A selection I appreciated from the piece: "...libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people."
He articulates a point I keep attempting to make - when we hear how free markets have failed, critics always point to the sectors that are the furthest from free, bungled up with endless, incompetent government meddling. They keep winning the argument that the 'market' is messed up, the result is then another left turn toward even greater government bungling, and the cycle continues.
It is very hard to articulate a positive, free market position when the key terms have been flipped upside down.
There are endless other examples, another is affordable housing which refers to housing in need of public subsidy, i.e. NOT affordable. Or the fairness doctrine which means losing your freedom of speech and having your rights handed over to a government oversight board. What's fair about that? And 'spreading the wealth'. Since when does receiving welfare make you wealthy???
Hard to win the argument if you first have to convince people that the words we use have no meaning.
Last Edit: November 20, 2008, 11:22:23 PM by DougMacG
Reply #141 on:
November 21, 2008, 07:22:20 AM »
Heck yes, Doug. For my part, I've concluded we could clean up all current fiscal messes by enacting a $5.00 "fair share" tax. Every time some demagogue utters the term "fair share," we charge 'em 5 bucks. Ought to handle the deficit in a couple months, and empty union slush funds, too boot.
How 'bout that Employee Free Choice Act, eh?
Re: Political Economics
Reply #142 on:
November 21, 2008, 09:11:02 AM »
I am not inclined to bailout the Big three. The one thing that does bother me is the loss of manufacturing industry. Could Detroit be consolidated and converted into a manufacturing force that will lead the world into making only fuel efficient cars akin to there bieng used to make tanks during WW2?
We are an economy of fast food and government employees.
I am not sure what this means. Pat brings up some good concerns though I do not hear any ideas about what should be doing about it now. Pat kind of strikes me as more finger pointing by the right. I suspect most Americans are kind of tired about this. We don't hear anything about solutions going forward. Until we start hearing about ideas to help us get out of our messes the Republicans will remain where they rightly find themselves.
Comments Who Killed Detroit?
by Patrick J. Buchanan
11/21/2008 Print This
Who killed the U.S. auto industry?
To hear the media tell it, arrogant corporate chiefs failed to foresee the demand for small, fuel-efficient cars and made gas-guzzling road-hog SUVs no one wanted, while the clever, far-sighted Japanese, Germans and Koreans prepared and built for the future.
I dissent. What killed Detroit was Washington, the government of the United States, politicians, journalists and muckrakers who have long harbored a deep animus against the manufacturing class that ran the smokestack industries that won World War II.
As far back as the 1950s, an intellectual elite that produces mostly methane had its knives out for the auto industry of which Ike's treasury secretary, ex-GM chief Charles Wilson, had boasted, "What's good for America is good for General Motors, and vice versa."
"Engine Charlie" was relentlessly mocked, even in Al Capp's L'il Abner cartoon strip, where a bloviating "General Bullmoose" had as his motto, "What's good for Bullmoose is good for America!"
How did Big Government do in the U.S. auto industry?
Washington imposed a minimum wage higher than the average wage in war-devastated Germany and Japan. The Feds ordered that U.S. plants be made the healthiest and safest worksites in the world, creating OSHA to see to it. It enacted civil rights laws to ensure the labor force reflected our diversity. Environmental laws came next, to ensure U.S. factories became the most pollution-free on earth.
It then clamped fuel efficiency standards on the entire U.S. car fleet.
Next, Washington imposed a corporate tax rate of 35 percent, raking off another 15 percent of autoworkers' wages in Social Security payroll taxes
State governments imposed income and sales taxes, and local governments property taxes to subsidize services and schools.
The United Auto Workers struck repeatedly to win the highest wages and most generous benefits on earth -- vacations, holidays, work breaks, health care, pensions -- for workers and their families, and retirees.
Now there is nothing wrong with making U.S. plants the cleanest and safest on earth or having U.S. autoworkers the highest-paid wage earners.
That is the dream, what we all wanted for America.
And under the 14th Amendment, GM, Ford and Chrysler had to obey the same U.S. laws and pay at the same tax rates. Outside the United States, however, there was and is no equality of standards or taxes.
Thus when America was thrust into the Global Economy, GM and Ford had to compete with cars made overseas in factories in postwar Japan and Germany, then Korea, where health and safety standards were much lower, wages were a fraction of those paid U.S. workers, and taxes were and are often forgiven on exports to the United States.
All three nations built "export-driven" economies.
The Beetle and early Japanese imports were made in factories where wages were far beneath U.S. wages and working conditions would have gotten U.S. auto executives sent to prison.
The competition was manifestly unfair, like forcing Secretariat to carry 100 pounds in his saddlebags in the Derby.
Japan, China and South Korea do not believe in free trade as we understand it. To us, they are our "trading partners." To them, the relationship is not like that of Evans & Novak or Fred Astaire and Ginger Rogers. It is not even like the Redskins and Cowboys. For the Cowboys only want to defeat the Redskins. They do not want to put their franchise out of business and end the competition -- as the Japanese did to our TV industry by dumping Sonys here until they killed it.
While we think the Global Economy is about what is best for the consumer, they think about what is best for the nation.
Like Alexander Hamilton, they understand that manufacturing is the key to national power. And they manipulate currencies, grant tax rebates to their exporters and thieve our technology to win. Last year, as trade expert Bill Hawkins writes, South Korea exported 700,000 cars to us, while importing 5,000 cars from us.
That's Asia's idea of free trade.
How has this Global Economy profited or prospered America?
In the 1950s, we made all our own toys, clothes, shoes, bikes, furniture, motorcycles, cars, cameras, telephones, TVs, etc. You name it. We made it.
Are we better off now that these things are made by foreigners? Are we better off now that we have ceased to be self-sufficient? Are we better off now that the real wages of our workers and median income of our families no longer grow as they once did? Are we better off now that manufacturing, for the first time in U.S. history, employs fewer workers than government?
We no longer build commercial ships. We have but one airplane company, and it outsources. China produces our computers. And if GM goes Chapter 11, America will soon be out of the auto business.
Our politicians and pundits may not understand what is going on. Historians will have no problem explaining the decline and fall of the Americans.
Mr. Buchanan is a nationally syndicated columnist and author of Churchill, Hitler, and "The Unnecessary War": How Britain Lost Its Empire and the West Lost the World, "The Death of the West,", "The Great Betrayal," "A Republic, Not an Empire" and "Where the Right Went Wrong."
Re: Political Economics
Reply #143 on:
November 21, 2008, 10:58:44 AM »
Don't the Japanese profitably make cars here in the US?
Re: Political Economics - Pat Buchanon on the auto bailout
Reply #144 on:
November 21, 2008, 11:34:30 AM »
"I am not inclined to bailout the Big three." - Me neither.
"The one thing that does bother me is the loss of manufacturing industry." - Yes, but do we want government picking winners and losers.
"Could Detroit be consolidated and converted into a manufacturing force that will lead the world into making only fuel efficient cars akin to there being used to make tanks during WW2?" - And there is the beauty of business failure and bankruptcy, allowing assets from failed firms to flow to their most productive and valuable use. (Why do the basic tenets of free enterprise sound like a foreign language in this political environment?)
"We are an economy of fast food and government employees." - NO. Architecture, engineering and open heart surgery are service industry jobs as well. As we became more prosperous and automated, manufacturing jobs dropped in importance. Conversely, as we lost manufacturing jobs, we gained in total jobs and prosperity. Interestingly, China has lost more manufacturing jobs than the US.
Pat kind of strikes me as more finger pointing by the right. - PB is often not on the right with his views; I think he has opposed all free trade agreements as he implies in this piece.
"We don't hear anything about solutions going forward." - Letting failing enterprises fail just doesn't sound pretty. If it is government's job to rescue these manufacturers, we should first do a full admission of how it was government's FAULT that they are failing, Pat points out most of those. The other impediment to ever outgrowing their problems is the big, fat hold of the union. If we do nothing right now, that problem corrects itself. Why are we so desperate to prevent a much needed correction?
"Until we start hearing about ideas to help us get out of our messes the Republicans will remain where they rightly find themselves." - There isn't a government 'solution' for every problem especially when a large part of the problem in the first place was too many government solutions.
Last Edit: November 21, 2008, 11:38:51 AM by DougMacG
Re: Political Economics
Reply #145 on:
November 21, 2008, 01:38:49 PM »
Until we start hearing about ideas to help us get out of our messes the Republicans will remain where they rightly find themselves."
Well I wasn't necessarily suggesting the government had to come up with *government* solutions.
But the main part of my initial premise is the rich keep getting richer and the rest stay in place. It is a problem when something to the effect of 1% of the people have 95% of the wealth.
The solution to this for me is unknown. But I recognize this as a problem. I guess you don't.
I don't complete laissez faire is possible with human nature the way it is.
Re: Political Economics
Reply #146 on:
November 21, 2008, 02:16:35 PM »
I'm new to this forum andlive about an hour outside Detroit.
The way to think about the big 3 is easy.Think band aid.Tear that sucker of quick so the pain is here and gone any bailout is going to prolong the agony like taking a band aid off slowly.OUCH! :-DBy allowing the big 3 to file chapter 11vs loan/bailout they do a couple things
1 they dump the union contracts (this allows them to lower overhead)(NO MORE JOB BANK)
2 they can get out of a lot of dealership contracts without being sued (GM alone has like 7000 vs 1000 for toyota)
3 they can become more market responsive to the cars the CONSUMER wants not the cars that Pelosie and Reed think we should drive (mini coffins on wheels)I mean seriously who wants to drive a car designed for the most part by the govt.
Reply #147 on:
November 21, 2008, 02:51:56 PM »
***I don't complete laissez faire is possible with human nature the way it is.***
correction, I don't think strict laissez faire is possible....
Re: Political Economics
Reply #148 on:
November 21, 2008, 06:36:55 PM »
"I wasn't necessarily suggesting the government had to come up with *government* solutions." - I know and I don't mean to imply I support total laissez faire. I think that you can get away with a carrying a small anchor on business such as paying about to 17-19% of income in taxes and reasonable regulation. But when government starts to micromanage businesses or place disproportionate burdens, I think creativity and innovation get quashed.
I especially oppose unequal treatment under the law (everyone should oppose it; it's in the constitution) and these bailouts are great examples. We help one business and not another. Same with nearly all types of public private partnerships.
The credit bailout gives me a rotten feeling too, but at least there we are talking about part of the public infrastructure, like bridges and airports.
Back to wealth disparity. I know that plenty of people share your concern. I think it is 5% that pay >50% of the taxes. I don't begrudge them for that. More important IMO is to look at the gains of any individual, family or class of taxpayer and see how they are improving their lives rather to compare with others in other circumstances. If the middle class is not showing enough upward mobility, that is more of a concern to me than who or how many make more or have more.
Re: Political Economics
Reply #149 on:
November 21, 2008, 08:11:46 PM »
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Thaddeus McCotter on the Auto loans /Bailout
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