Tuesday, September 30, 2008
Easy money from the Federal Reserve. On January 3, 2001, the Federal Reserve cut the federal funds rate by fifty basis points, to 6.00%. They continued to do so until the rate hit a bottom of 1.00% on June 25, 2003. This also had an effect on mortgages. According to Freddie Mac, the average rate for a thirty-year fixed rate mortgage fell from a peak of 8.52% in May 2000 to a nadir of 5.23% in June 2003. As a result, households with less income could afford bigger and more expensive houses.
Community Reinvestment Act (CRA). This legislation, first passed in 1977, gave federal regulators the power to encourage banks to issue loans to high-risk households and small businesses. It was ramped up in the Clinton Administration, who along with groups like ACORN, jaw-boned banks into issuing riskier and riskier loans to poor households. Efforts by the Bush Administration to rein in CRA bureaucratic zealousness met with charges of racism and elitism by Congressional Democrats and left wing activist groups.
Mark-to-market accounting rules. This refers to an accounting practice that forces a balance sheet to value an asset at its current market price (that is, what it could be sold for at the time). The Federal Accounting Standards Board (FASB) issued Statement 157 on November 15, 2007, which required this accounting practice for all financial firms. Some securities holding devalued mortgages still retained underlying value, but could not be sold because there were no buyers. As a result, mark-to-market required the firms to value the securities at or near $0. If, however, the firms were allowed to value the assets at something closer to book value, their balance sheet positions would improve. Mark-to-market is an arbitrarily-restrictive accounting practice that should be scrapped for assets like securities which generate current income. Doing this alone would solve much of the problem. The SEC relies on FASB in an advisory role, but could overrule it in giving guidance to company accounting practices.
from Americans for Tax Reform
The worst case scenario: Credit markets freeze up within the next week and many businesses cannot meet their payrolls. Margin calls cannot be met and the NYSE shuts down for a week. Hardly anyone can get a mortgage so most home prices end up undefined rather than low. There is an emergency de facto nationalization of banks to keep the payments system moving. The Paulson plan is seen as a lost paradise. There is no one to buy up the busted hedge funds, so government and the taxpayer end up holding the bag. The quasi-nationalized banks are asked to serve political ends and it proves hard to recapitalize them in private hands. In the very worst case scenario, the Chinese bubble bursts too.
But credit markets remained frozen. Several closely watched measures of bank lending fear hit all-time highs, as firms continued to hoard funds.
The Dow Jones industrial average (INDU) added 485 points, according to early tallies, recovering some of the record 777 points lost the day before. If the gains hold, it would be the third-biggest one-day point advance for the indicator in its history.
The Standard & Poor's 500 (SPX) index rose 5% and the Nasdaq composite (COMP) gained about 5.3%.
read the CNN story
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken...
To call the housing and credit crisis a failure of the free market or the product of unregulated greed is to overlook the myriad government regulations, policies, and political pronouncements that have both reduced the "freedom" of this market and channeled self-interest in ways that have produced disastrous consequences, both intended and unintended. Let me briefly recap goverment's starring role in our little drama...
Complicating matters further was the 1994 renewal/revision of the Community Reinvestment Act of 1977. The CRA requires banks to to make a certain percentage of their loans within their local communities, especially when those communities are economically disadvantaged. In addition, Congress explicitly directed Fannie and Freddie to expand their lending to borrowers with marginal credit as a way of expanding homeownership. What all of these did together was to create an enormous profit and political incentives for banks and Fannie and Freddie to lend more to riskier low-income borrowers. However well-intentioned the attempts were to extend homeownership to more Americans, forcing banks to do so and artificially lowering the costs of doing so are a huge part of the problem we now find ourselves in...
The current mess is thus clearly shot through and through with government meddling with free markets, from the Fed-provided fuel to the CRA and land-use regulations to Fannie and Freddie creating an artificial market for risky mortgages in order to meet Congress's demands for more home-ownership opportunities for low-income families. Thanks to that intervention, many of those families have not only lost their homes, but also the savings they could have held onto for a few more years and perhaps used to acquire a less risky mortgage on a cheaper house. All of these interventions into the market created the incentive and the means for banks to profit by originating loans that never would have taken place in a genuinely free market...
Those of us who support free markets are not your enemies right now. The real problem here is the marriage of corporate and state power. That is the corporatism we both oppose. I ask of you only that you consider whether such corporatism isn't the real cause of this mess and that therefore you reconsider whether free markets are the cause and whether increased regulation is the solution.
read the entire letter
If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.
Indeed, analysts at the Heritage and Cato Institute, and commentators in The Wall Street Journal and on this very page, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled US$700-billion bailout package. Some of the same voices were calling for similar interventions following the burst of the dot-com bubble in 2001...
At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments...
But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal Number Five: government control of capital.
For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles...
As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors. With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels.
During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years...
As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...”
The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction.
read the entire essay
My thoughts: One of the best essays on the current crisis I have seen.
Here is the suggested Austrian solution:
Austrian Bailout Package--Part A
1. Suspend Basil II regulations (to at least 4/2/09)
2. Cancel FDIC insurance on all demand deposits after 1/1/09.
3. Increase FDIC premiums on short term time deposits of less than one year.
4. Make interest earned (starting 1/1/09) on bank time deposits and non-governmental, non-agency, and non-authority bonds tax free (not demand deposits and MMMF).
5. Convert Fannie Mae and Freddie Mac's status from conservatorship into receivership.
6. Convert AIG's status from government owned to receivership.
7. Cancel the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) at the end of the announced program (January 30, 2009).
8. Announce that the Federal Funds rate will be allowed to "float" at market rates starting January 30, 2009.
9. Announce that the Federal budget will be prorated beginning with the fiscal year starting 10/1/08 including all defense spending and transfer payments.
10. Restore constitutional monetary status to gold and silver to act as an alternative medium of exchange (no capital gains taxes).
Robert Murphy: The Great Bank Robbery of 2008
The Paulson Plan is a heist. It is a grand scheme in which the public will end up owing hundreds of billions of dollars to holders of new debt claims issued by the US Treasury. The plan won't "prop up" asset values and it won't provide any real stimulus to the economy.
Despite the dire warnings — coming from the same folks who brought you the Iraq invasion to remove WMD — there is no threat of a financial meltdown. If Goldman Sachs failed, the sun would still rise the next morning.
Far from providing stability and confidence, the Fed, Treasury, and SEC's recent moves have ensured that US capital markets will now function with the same efficiency as public education in this country. The Paulson Plan is one more step in the socialization of America, but it is also a great bank robbery.
read the entire essay
Thomas Sowell: Bailout Politics
1. Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis. Among the Congressional "leaders" invited to the White House to devise a bailout "solution" are the very people who have for years created the risks that have now come home to roost.
2. The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously. But the magic words "affordable housing" and the ugly word "redlining" led to politicians directing where loans and investments should go, with such things as the Community Reinvestment Act and various other coercions and threats.
3. If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out. It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.
read the entire essay
Lew Rockwell on the Failed Bailout
In any case, no matter how you look at it, the defeat of the bill is a victory for freedom. The defeat of the power elite is essential for liberty to thrive. For the free market to function, we need the government/corporate cabal to lose its capacity to get its way in every area of life. They need to feel fear. They need to lose security. They need to have a sense of uncertainty as to whether their every wish is our command. The House defeat of the bailout is a magnificent rebuke in that sense.
But does it mean that the economy is going to tank and we will all suffer? On the contrary, it could mean that we can begin an economic recovery from the Fed-generated bubble that should have and would have burst years ago but for artificial props by the Fed. If the stock prices of these troubled institutions can fall to where they need to be, they can be taken over, and their assets used productively and traded by the market. Once this deleveraging takes place, we will be ready for a new round of economic growth...
More great things happened after the bailout failed. Commodity prices including oil fell dramatically. This is a magnificent thing. Right now, consumers are not threatened by the possible failure of another paper-addicted investment-banking house. Consumers are threatened by ever-higher prices for all goods. If we are in a recession, especially if it lasts and lasts, low prices are precisely what we need to start economic recovery again.
It is not entirely clear why prices fall. It could be the worldwide economic slowdown. It could be that the markets are beginning to doubt the capacity of the Fed to actually achieve the hyperinflation that it wants, since banks have become quite risk averse. In any case, we need ever-lower prices on all things, including gas and groceries – and, yes, houses. This is the basis for economic recovery.
read the entire essay
Monday, September 29, 2008
This bailout was a terrible idea. Here's why.
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle....
The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.
Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.
read the entire essay
Stocks skidded Monday, with the Dow slumping nearly 778 points, in the biggest single-day point loss ever, after the House rejected the government's $700 billion bank bailout plan.
The day's loss knocked out approximately $1.2 trillion in market value, the firstpost-$1 trillion day ever, according to a drop in the Dow Jones Wilshire 5000, the broadest measure of the stock market.
The Dow Jones industrial average (INDU) lost 777.68, surpassing the 684.81 loss on Sept. 17, 2001 - the first trading day after the September 11 attacks. However the 7% decline does not rank among the top 10 percentage declines.
read the CNN story
The next steps were not immediately clear but supporters were scrambling to put it up for another vote.
What was supposed to be a 15-minute vote stretched past the half-hour mark as leadership scrambled for support. Investors who had been counting on the rescue plan sent the Dow Jones industrial average down as much as 700 points while watching the measure come up short of the necessary support, before rebounding slightly. The key stock reading was down more than 500 points.
The measure needs 218 votes for passage. Democrats voted 141 to 94 in favor of the plan, while Republicans voted 65 to 133 against. That left the measure with 206 votes for and 227 against.
read the CNN story
Stop the Bailout, Lew Rockwell, September 11, 2008.
The Government is Not Promoting Stability, Bob Murphy, September 22, 2008.
Day of Reckoning, Pat Buchanan, September 27, 2008.
Economic Depressions: Their Cause and Cure, Murray Rothbard.
Notes on the Fannie Mae/Freddie Mac Bailout, Bob Higgs, July 17, 2008.
Get Out of the Way, Anthony Gregory, July 18, 2008.
The Mises Institute’s Bailout Reader
The Impending End of the Housing Bubble, Bill Bonner, September 19, 2006.
Is the Housing Bubble Popping?, Mark Thornton, August 8, 2005.
Pop Goes the Bubble, Gary North, August 23, 2003.
The Land-Price Bubble, Doug French, June 10, 2003.
Anatomy of the Bank Run, Murray Rothbard.
More Bank Failures, Doug French, August 25, 2008.
Run for Your Money, Max Raskin, September 28, 2007.
War and Inflation, Lew Rockwell, June 9, 2008.
The Fed’s Failure, Michael Rozeff, September 17, 2008.
Why Not Abolish the Fed, Jacob Hornberger, February 5, 2008.
A Run on the State, Bill Huff, September 27, 2008.
Don’t Sell Short Selling Short, Gary Galles, April 7, 2007.
Ron Paul and Austrian Economics
The Austrian School and the Meltdown, Ron Paul, September 26, 2008.
The Creation of the Second Great Depression, Ron Paul, September 25, 2008.
Ron Paul Against the Bailout, Ron Paul, September 25, 2008.
We Told You So
Fannie and Freddie, Ron Paul, September 10, 2003.
‘Bull’ Market?, Mark Thornton, February 9, 2004.
We Told You So, Mark Thornton, March 24, 2007.
Falling Oil Prices: Told You So, Dom Armentano, September 10, 2008.
Ron Paul on the Panic of ’08, September 18, 2008.
Lew Rockwell on the Michael Reagan Show, September 26, 2008.
Robert Higgs on War and the Economy, September 25, 2008.
Steve Berger on Financial Markets, July 31, 2008.
Robert Higgs on the "Crisis," September 24, 2008.
Joe Salerno on the Broke Banks, July 23, 2008.
America's Great Depression, by Murray Rothbard
The Causes of the Economic Crisis, by Ludwig von Mises
The Politically Incorrect Guide to Capitalism, by Robert Murphy
Economics in One Lesson, by Henry Hazlitt
Prices and Production, by F.A. Hayek
The Mystery of Banking, by Murray Rothbard
The Case Against the Fed, by Murray Rothbard
How Capitalism Saved America, by Thomas DiLorenzo
The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.
Every election is a sort of advance auction sale of stolen goods.
H. L. Mencken
I suspect the bailout is a bad idea, on a variety of grounds...On the other hand, as distasteful as the bailout is, if (and that's a very, very, big if), as a practical matter (i.e., even if there are better alternatives, this is the best we are going to do in practice) the alternative is a complete meltdown of our financial system, friends of liberty are in a bind; the bailout is awful, but the current power grab by Washington is nothing compared to what we could expect if, say, commercial lending virtually ceased, and the stock markets fell an additional 50%. I suspect that this dynamic explains why opposition in the libertarian blogosphere is relatively muted; we bloggers don't know how big a threat there really is to our financial system, nor do we know whether, if the bailout fails, whatever winds up happening instead, including future legislative action, will actually be better.
My thoughts: We continue to hear "the alternative is a complete meltdown of our financial system". Why? Where is the proof? Where is the evidence? The market is attempting to make much needed corrections and the government is trying to prevent it. If the root cause of the problem is government intervention in the economy (and it is) then why is the solution more government intervention? To quote Walter Williams, "we don't look to arsonists to put out fires that they've created; neither should we look to Congress to solve the problems they've created."
Vote NO to the bailout. Stop the madness, and instead support real change in the governmental framework that has mucked up the financial system so that we eliminate (rather than intensify) the perverse incentives (e.g., moral hazard) and distorted information (e.g., risk analysis, and accounting practices) that GOVERNMENT INVOLVEMENT in the financial market has produced.
Let us be very clear --- our current problems are a function of government policies and mixed ownership forms. Government Sponsored Enterprises (GSE) are NOT market enterprises; Government jawboning and threats by powerful individuals (such as Senate Finance Committee Chair Barney Frank) for banks to lower mortgage requirements so that less qualified buyers could not receive a loan did move the mortgage industry away from pricing practices and risk assessment analysis that traditionally produced more prudent decision making; and the orgy of discretionary spending that has characterized the Bush Administration is NOT fiscal conservativism and free market ideology...
The divorce between rhetoric and reality among politicians with regard to the free enterprise system has been problematic since Reagan. At least prior to Reagan most politicians didn't claim they were unashamed defenders of the free enterprise system. Though I guess we should always remember that John Maynard Keynes is often portrayed as the "savior of the capitalist system", when in fact his ideas were a major justification for the expansion of the government's role in the economy...
Get government out of the financial industry, let businesses fail, let reallocation of resources and people take place, and lets build effective restraints on government so that we don't end up in this mess again...
We will get an even bigger orgy of spending backed by easy credit and imprudent and irresponsibility rather than wealth creation will characterize the US economy.
Government can throw money at this problem, but government planning cannot FIX this problem. Intentions do not equal results in economic policy, but that is what the administration is going with here. As my good friend Steve Horwitz so eloquently has put it "Ought presupposes can" in some many public policy discussions. But it doesn't. You have to demonstrate the "can" even if one for the sake of argument grants the "ought"...
read the full post
The Rescue Package Will Delay Recovery by Frank Shostak
In his testimony to the Congress on September 24, Fed Chairman Bernanke urged the legislators to quickly approve the bailout of the financial sector with a package of $700 billion. Bernanke echoed Treasury Secretary Paulson's view that the bailout expense, while hefty, is needed to remove from banks' balance sheets the mortgage-linked assets, which are paralyzing the flow of credit...
Conventional thinking presents economic adjustment — also labeled as "economic recession" — as something terrible, even the end of the world. In fact, economic adjustment is not menacing or terrible; from an economic point of view, it is nothing more than a time when scarce resources are reallocated in accordance with consumers' priorities...
If central bankers and government bureaucrats can fix things in difficult times, why not in good times too? Why not have a fully controlled economy and all the problems will be fixed forever? The collapse of the Soviet Union's centralized system is the best testimony one can have that controls don't work. A better way to fix economic problems is to allow entrepreneurs the freedom to allocate resources in accordance with society's priorities.
In this sense, the best rescue plan is to allow the market mechanism to operate freely. Allowing the market to do the job will result in some activities disappearing all together while some other activities will in fact be expanded...
Hence the rescue package cannot prevent so-called economic disruptions. If anything, government intervention would make these disruptions much worse. Again, a better alternative is to let the market do the job. The market's ability to make swift adjustments without much drama was vividly illustrated only a few weeks ago when the very large investment bank, Lehman Brothers, was allowed to go belly up. The world did not come to an end. Instead, this was a healthy development. A money loser was eliminated from the market. This freed up resources to promote growth...
Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts, the whole process would have taken much longer and would have been very costly in terms of real resources.
read the entire essay
SAVING the world is a thankless task. The only thing beyond dispute in the $700 billion plan of Hank Paulson, the treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, to stem the financial crisis is that everyone can find something in it to dislike. The left accuses it of ripping off taxpayers to save Wall Street, the right damns it as socialism; economists disparage its technicalities, political scientists its sweeping powers. The administration gave ground to Congress, George Bush delivered a televised appeal and Barack Obama and John McCain suspended the presidential campaign. Even so, as The Economist went to press, the differences remained. There was a chance that Congress would say no.
Spending a sum of money that could buy you a war in Iraq should not come easily; and the notion of any bail-out is deeply troubling to any self-respecting capitalist. Against that stand two overriding arguments. First this is a plan that could work (see article). And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out’s cost.
The purposes of this Act are—
(1) to immediately provide authority and facilities that the Secretary of the Treasury can use to
restore liquidity and stability to the financial system of the United States; and
(2) to ensure that such authority and such facilities are used in a manner that—
(A) protects home values, college funds, retirement accounts, and life savings;
(B) preserves homeownership and promotes jobs and economic growth;
(C) maximizes overall returns to the taxpayers of the United States; and
(D) provides public accountability for the exercise of such authority.
My thoughts: More government meddling and interfence that will delay the needed market corrections, enrich the well connected firms (Henry Paulson, former CEO of Goldman Sachs), waste hundreds of billions of taxpayer dollars, and create even more moral hazard. If the Congressmen are so sure that this socialistic bailout will "make money for the taxpayers" how about a pledge of resignation if it does not.
Sunday, September 28, 2008
read the article
1. Take responsibility for your own learning
9. Prepare for each class as though there would be a pop quiz
19. Establish a routine study time.
28. Begin studying at least three days before an exam.
64. Don't procrastinate.
read the entire list
Helpful web tools
50 dependable web resources
But Barron's analysis of the plan indicates that taxpayers and their proxy, the Treasury Department, will fare well in the bailout and should actually turn a profit over the years ahead. For one thing, the mortgages and mortgage securities that the government will be buying back from commercial and investment banks, credit unions, insurance companies and others aren't as toxic or wide-spread as commonly assumed. Treasury's purchases should not only help free up credit markets but boost the prices of securities that are backed by home loans. That, in turn, is likely to arrest the relentless loop of falling home prices spawning further mortgage defaults and foreclosures that, in turn, result in further declines in residential real-estate prices.
"Essentially this secondary effect would do much to lift housing out of its funk and actually improve the performance of the securities that Treasury ends up buying," says Jeffrey Gundlach, chief investment officer at major mortgage fund manager TCW. "Thus, I think that there's a good chance that the bailout plan will be a win-win for both the taxpayer and the financial system."
Although they are just playing the hand that Alan Greenspan dealt them, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been working overtime to discredit the capitalist economy. The $700 billion bailout of Wall Street, as well as other measures such as a ban on short-selling financial stocks, are a repudiation of the free market principles which the Bush Administration claims to champion. Besides forcing taxpayers to fund a massive dose of corporate welfare, the latest measures will make the financial crisis worse...
More generally, the government’s bailout will perpetuate the very incentives that caused the problem in the first place. A free market system is based on profit and loss. If corporate executives know that the government is always ready to step in and prevent an absolute meltdown, then those executives will take on too much risk. If the aggressive bets pay off, the private companies keep the profits. And if the aggressive bets blow up in their faces, then no worries—the taxpayers will eat the loss...
The free market is a superior economic system to central planning. This superiority demonstrates itself during normal times but especially during an economic crisis, when resources must be rearranged before regular growth can resume. By embracing massive corporate handouts and other socialist measures, the Bush Administration discredits capitalism and delays economic recovery.
read the entire essay
Mark Thornton on the Housing Bubble
1. The Federal Reserve cut interest rates to as low as 1% so that after inflation we had negative interest rates.
2. As a result, mortgage rates fell to an all time low.
3. Low rates caused borrowing and lending to explode, particularly in real estate. For example, commercial banks more than doubled the amount of real-estate loans they made.
4. All these low interest loans had to be extended to people with worse credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed.
click for the graphs
Saturday, September 27, 2008
Friday, September 26, 2008
Fannie Mae and Freddie Mac
Freddie Mac: A Mercantilist Enterprise, by Paul Cleveland, March 14, 2005
Fannie Mae: Another New Deal Monstrosity, by Karen De Coster, July 2, 2007
How Fannie and Freddie Made Me a Grumpy Economist, by Christopher Westley, July 21, 2008 Who Made the Fannie and Freddie Threat? By Frank Shostak, March 5, 2004
Are Fannie and Freddie Too Big to Fail? By Frank Shostak, September 17, 2008
Fannie Mae Distorts Markets, by Robert Blumen, June 17, 2002
The Housing Bubble
The Real Cost of a Full Bailout, by Don Rich, August 22, 2008
The Subprime Mortgage "Crisis" Will Fix Itself, by Steve Berger, May 30, 2007
Did the Fed Cause the Housing Bubble? By Robert Murphy, April 14, 2008
The Mortgage Market Mess, by Christopher Westley, May 17, 2007
Housing Bubble: Myth or Reality? By Frank Shostak, March 4, 2003
What's Behind the Financial Market Crisis? by Antony Mueller, September 18, 2008
Our Financial House of Cards, by George Reisman, March 25, 2008
Will Central Bankers Become Central Planners? by Robert Blumen, July 31, 2008
Inflation is a Policy that Cannot Last, by Thorsten Polleit, March 14, 2008
The Widening Safety Net, by Christopher Mayer, March 19, 2004
The Fed's New Tricks Are Creating Disaster, Frank Shostak, March 18, 2008
The Fed's War on the Middle Class, by Mark Thornton, June 4, 2008.
Austrian Economics and Financial Markets conference at The Venetian Hotel Resort Casino, Las Vegas, 02-18-2005
Community Reinvestment Act
The CRA Scam and its Defenders, by Thomas DiLorenzo, April 30, 2008
Regulatory Sneak Attack, by Thomas DiLorenzo, September 16, 1999
Short-Sale Restrictions Are an Exercise in Naked Power, by Robert Murphy, August 11, 2008
The Social Function of Futures Markets, by Robert Murphy, November 29, 2006
Don't Sell Short Selling Short, by Gary Galles, April 6, 2007
The Austrian Theory of the Business Cycle
The Idiocy of Wall Street, by Don Rich, September 24, 2008
The Fed is Culpable, by Hans F. Sennholz, November 11, 2002
Skyscrapers and Business Cycles, by Mark Thornton, August 23, 2008
Economic Outlook 2008: Darkening Clouds, Dominick Armentano, January 2, 2008
Business Cycle Primer, Llewellyn H. Rockwell, Jr. February 8, 2001
Economics Depressions: Their Cause and Cure, by Murray Rothbard
Who Predicted This?
The Financial Apocalyptics are Back, Robert Blumen, July 25, 2007
Sowing the Seeds of the Next Crisis, Thorsten Polleit, April 25, 2006
Credit Crisis: Precursor of Great Inflation, by Thorsten Polleit, February 7, 2008
Mr. Bailout, by Anton Mueller, September 30, 2004
America's Unsustainable Boom, by Stefan Karlsson, November 8, 2004
Who Predicted the Bubble? Who Predicted the Crash? By Mark Thornton, July 14, 2003
What To Do
Don't Bail Them Out, by Llewellyn H. Rockwell, Jr., September 10, 2008
How to Avoid Another Depression, by Mark Thornton, September 10, 2008
Taking Money Back, By Murray N. Rothbard, June 14, 2008
Beware the Alchemists, by Ludwig von Mises, February 3, 2006
Reflation in American History, by H.A. Scott Trask, October 31, 2003
Money and Freedom, by Joseph Salerno, February 2, 2002
The Case for a Genuine Gold Dollar, by Murray Rothbard
Books to Distribute
The Theory of Money and Credit, by Ludwig von Mises
America's Great Depression, by Murray Rothbard
The Mystery of Banking, by Murray Rothbard
Prices and Production, by F.A. Hayek
Causes of the Economic Crisis, by Ludwig von Mises
Austrian Theory of the Trade Cycle and Other Essays, Ludwig von Mises et al.
Understanding the Dollar Crisis, by Percy Greaves
The Case Against the Fed, by Murray Rothbard
Money, Bank Credit, and Economic Cycles, by Jesus Huerta de Soto
History of American Currency, by William Graham Sumner
Banking and the Business Cycle, by C.A. Phillips
Fiat Money Inflation in France, by Andrew Dickson White
from the Mises Institute
The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. ... Treasury is totally dominated by Wall St. investment bankers. They do not have knowledge of the commercial banking industry. Therefore they cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the entire financial system.
read the letter
Thursday, September 25, 2008
From left, Henry M. Paulson Jr., the Treasury secretary; Ben S. Bernanke, the Federal Reserve chairman; Christopher Cox, the Securities and Exchange Commission chairman; and James Lockhart III, the director of the Federal Housing Finance Agency.
A collection of free market and capitalist critiques of the current "financial crisis" and proposed bailout.
from Carpe Diem
Well here we are in September and bank credit continues to look very robust. As Robert Higgs points out consumer loans are up, commercial and industrial loans are up, even real estate loans are up. Overall, total bank credit is up with just a slight sign of leveling off in recent weeks. So where is the credit crunch?
from Marginal Revolution
The other, more fundamental flaw in the nation’s economy—consumption backed by debt instead of savings—also originated largely as a result of government policy. It has to do with deficits and debts that we were told did not matter, entitlements that we were told were fully funded, and borrowing guarantees that we were told were only a “last resort.” The funny thing about last resorts is that they always get the last laugh.
That malinvestments must now be liquidated merely reflects the mistakes made in the past, induced by bad government policy at the Fed and other credit-related agencies, such as Fannie and Freddie. Of course, some of the necessary adjustments will be painful for the parties directly involved. But the huge bailout now beingconcocted in Congress will only compound the errors of the past by keeping some malinvestments on life support, deferring the day that lenders must write off bad debts, and preventing the entire financial system from returning to a semblance of economic viability without ongoing subsidies and bailouts that impoverish the taxpayers and threaten the entire economy.
Of course, everyone engaged in this hysterical flailing will assert that the objective is only to save capitalism in a crisis. Such government saviors always make that claim, oblivious to its absurdity. Franklin D. Roosevelt and his gang claimed to be saving capitalism, too, but look at what was left of it when they had finished their work.
The focus on regulation, narrowly defined, distracts attention from all the ways that the government has made the financial and housing industries unstable through guarantees and other privileges. Those guarantees systematically transferred the risk of dubious mortgage lending from bankers to taxpayers. It’s a classic case of Baptists and bootleggers, Bruce Yandle’s term for when moralizers (promoting, for example, the “American dream through home-ownership for all”) and rent-seekers (the building, banking, and real-estate industries) implicitly team up to push government intervention.
Admittedly, we do need protection from recklessness. But oddly, the same people who condemn Wall Street for its irresponsibility support government bailouts -- even as they say bailouts are a necessary evil. When will these folks see that the promise of rescue encourages recklessness? The best way to discourage it is to make clear that no one is too big or important to fail. Market discipline is the best protector of the public. But that requires laissez faire-- no privileges whatever.
What now? First: no bailout! Cut the GSEs loose and let them do what other businesses do on hard times: renegotiate contracts and revalue assets. Will there be another Great Depression? Recall that what turned a recession into the Great Depression was the Federal Reserve’s deflation of the money supply. A bailout is not required to avoid that catastrophic mistake.
Failure of Social Engineering?
For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac -- who in turn pressured banks and other lenders -- to extend mortgages to people who were borrowing over their heads.
More than a negligible amount of the blame for the mortgage meltdown can be traced back to multiculturalism: government-mandated affirmative-action lending, demographic change, illegal immigration, and the mind-numbing effects of political correctness. The chickens have finally come home to roost.
The Mind-Numbing Effects of Political Correctness by Mark Perry
Sources for free market commentary:
Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.
The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers.
LA Times: May 31, 1999
“The state is the great fiction by which each of us seeks to live at the expense of all of us.” The 19th French economist Frederic Bastiat recognized something that seems to be eluding our wise men in Washington, and Wall Street.
If Bastiat were alive, I can guess his reaction to the bailout: First, we don't knowwhat we are doing, and we are as likely to do harm as help. The desperate hurry comes from electoral politics, and not from any real economic necessity.
Second, we aren't creating value. Government can't create value in financial markets. All we are doing is shifting costs from one group (Wall Street bankers, and mortgage sellers who took enormous and unsupportable risks) and transferring them to another group (taxpayers, who don't know any better)...
Deficits are future taxes. The bailout is simply a way of allowing irresponsible lenders to escape unharmed. If you have a mortgage, and can't pay, then you are responsible. If AIG has debts and can't pay, our leaders want to soak taxpayers for the bill.
The point is that you can't take money away from taxpayers who earned it, give it to the financiers who squandered it, and call that a good policy. There is no danger of another Depression, which was caused by a deflationary monetary policy. We are facing a temporary credit crunch, and it will sort itself out if we leave it alone. Things aren't so bad that a panicked bunch of politicians can't make it much, much worse...
from Mike Munger
1. Today's economy differs from that of the 1930's. Then, it may be that the financial sector may have contributed to the downturn elsewhere. Today, the financial sector is the downturn.read the full critique
2. The bailout blends finance with government. It is the Fannie Mae and Freddie Mac model, writ large. As we saw with Freddie and Fannie, when you blend finance with government, the firms have an incentive to manipulate the government and government has an incentive to meddle with the firms.
3. Trying to tweak the bailout to try to redistribute the pains and gains so that taxpayers come out better and shareholders/executives come out worse is beside the point. If you put lipstick on a pig, it's still a pig.
4. The housing market is out of balance, in part due to excess home borrowing. Until it is in balance, no one will know what mortgage securities are worth. Attempts to prop up home borrowing, by freezing foreclosures for example, are counterproductive.
Wednesday, September 24, 2008
Tuesday, September 23, 2008
Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.
Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.
The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.
The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.
Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.
read the essay
Monday, September 22, 2008
There is a term in political philosophy to describe a government takeover of a critical industry: That term is socialism. The government is telling us that capital and credit markets cannot, for several reasons, solve the current crisis on their own—only the federal government and its massive taxpayer base have the authority and the resources to solve it. That is state socialism: the philosophy preached by the founders of the Second International, by the radical wing of the American labor movement, through the formation of the Soviet Union and its satellites, and now by Henry Paulson...
The October contract surged in afternoon trading, reaching as high as $130.00 - a more than $25 gain. But it dropped back down to settle at $120.92 a barrel, up $16.37 from Friday's close.
The gain eclipsed the $10.75 spike in oil on June 6.read the CNN story
While he was hellbent on fighting terrorists on the other side of the planet...
He missed the domestic ones in Congress, in his party, and even in his administration.
These *financial bailouts* - or should I say, this *nationalization* of our banking industry is an unmitigated disaster. Soon it will make his blunders of No Child Left Behind, the War in Iraq, and Medicare's Prescription Drug Bill look like small potatoes.
The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also is aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns, Lehman Brothers and Merrill Lynch this year.
But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives.
read the CNN story
Sunday, September 21, 2008
First, let's focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it's the ceiling on the outstandings at any one time. It's a balance sheet number, not an expenditure limit.read the full critique
But here is the truly offensive section of an overreaching piece of legislation:Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
text of proposed bailout
This past week marks a decisive turn in the evolution of American capitalism.
Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression...
Also scrapped is the notion that government's role is to get out of the way, limiting itself to protecting consumers and small investors, setting the rules of the game and stepping in -- only rarely -- to cushion the economy from shocks like the 1987 stock-market crash or the 1998 collapse of hedge fund Long-Term Capital Management. Both of those episodes involved government jawboning and flooding the markets with money. In contrast to today, neither time did the U.S. take significant amounts of taxpayer money or anything approaching the nationalization of a major firm...
It is too early to say whether Mr. Bernanke and Mr. Paulson have made the right call and will bring the crisis to a close, despite global stock markets' ebullient reaction Friday. If the fear does subside, then talk will turn to writing new rules for a financial system that has changed more in the past six months than in the previous decade. The government has bailed out financial institutions -- and particularly their creditors -- and taxpayers will pick up the tab for many of the institutions' bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.read the WSJ article
President Bush asked Congress on Saturday for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis.
The legislative proposal is the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression...
The plan would allow the Treasury to buy up mortgage-related assets from American based companies and foreign firms with a big exposure to these illiquid assets. The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit...
The administration's proposal also requests that Congress authorize an increase to the nation's debt ceiling. Currently, it's set to rise to $10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009. But the proposal requests that limit be increased to $11.315 trillion to allow for the purchases of mortgage-backed assets....
"We're talking about hundreds of billions of dollars, but remember this is not an expenditure, this is money that is being used to purchase illiquid mortgage assets that are very difficult to value," Paulson said on NBC's "Meet the Press."
read the CNN article
The average price of unleaded regular dropped 2 cents to $3.757 a gallon, from $3.777 a gallon, according to the survey released by motorist group AAA...
Current prices are about 34% higher from a year earlier at this time. Still, prices are 54 cents, or 13%, down from the record high price of $4.114 a gallon set on July 17...
More than 30 refineries, which convert crude oil into usable gasoline, had shut down or were operating with reduced capacity in the Gulf region after the storms hit. The number has since fallen by more than half, restoring gasoline supply to retailers and easing consumer prices.
Many crude pipelines in Texas and Louisiana had also shuttered ahead of the hurricanes. Those are slowly coming back on line.
Lower oil prices have also helped lower the cost of retail gas. Crude has been moving lower since mid-July amid weakening demand, losing more than a third of its value since it reached a record of near $150 just two months ago.