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10/18/2010
THE ONLY VICTIMS IN THE FORECLOSURE MESS WILL BE TAXPAYERS

I took a stab at analyzing the latest economic meltdown for PJ Media; the foreclosure scandal and its many moving parts.

A sample:

In this respect, the two competing narratives involving the foreclosure mess may both be successful in demonizing pet targets like big banks or ACORN. But as far as reflecting the reality of the problem, both narratives come up considerably short.

On the left, it’s heartless, greedy banks foreclosing illegally on tearful, innocent homeowners, throwing children and grammas out in the street for no reason hardly at all. On the right, it’s sinister forces manipulating the system in order to allow deadbeat homeowners to remain in houses as a result of nothing more serious than a paperwork snafu, despite the fact that they should long ago have been foreclosed upon and evicted.

Compassion versus personal responsibility. Class warfare versus the politics of resentment. As political narratives, both succeed in playing to the emotions and preconceived notions of their respective partisans. But as commentaries on what is actually happening, they are wildly off base.

By any measure, we are facing an extremely serious crisis that not only affects foreclosures, but mortgage securities, the financial viability of banks that are still “too big to fail,” and, most importantly, the rule of law in America. Silly, pretentious attempts to gain political points in this crisis will only make it more difficult to act when the crunch comes.

Is a crunch coming? The uncertainty alone is already affecting the housing market, bank stocks, the credit markets, and the economy in general. And until a way can be found out of this mortgage quicksand, it is likely that those trends will continue, threatening to throw the economy back into recession and perhaps even initiating another financial meltdown similar to the one we experienced in September of 2008.

I have come to the conclusion - or let’s say I agree with a notion advanced by other conservatives - that the real path to the economic collapse we’ve been experiencing began when the financial services industry moved outside it’s traditional role of funding start ups and supplying a haven for money, and into a Las Vegas style, wild west format where nothing is out of bounds and “caveat emptor” are words to live by.

We can trace this curve back to the day that Wall Street’s big banks were granted permission to operate as consumer banks. Glass-Steagall may have been cumbersome, but it acted as a firewall against the manipulation of the financial system so many of these huge banks participated in.

Mortgage bonds, for instance:

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

In fact, the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.

Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.

I talked to one underwriting bank — not Citi — which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there’s language about how the underwriter had done an “underwriting guideline review”, although there’s nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator’s standards.

In any case, it’s clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool.

Note that this potential financial Armageddon is mostly unrelated to the foreclosure crisis but the exposure of the big banks and mortgage bond holders to massive lawsuits by investors is very real and could precipitate another meltdown - if the foreclosure crisis doesn’t cause one first.

I would say to my conservative brethren who pooh-pooh the idea of financial reform that the thought of many dozens of Bernie Madoffs out there getting away with fraud while having the potential to cause another crisis should alter your perception. This isn’t capitalism. It is an abuse of the system and cries out for regulation to fix it.

By: Rick Moran at 8:15 am | Permalink | Comments & Trackbacks (0)

8/6/2010
KUDOS TO KLEIN AND YGLESIAS FOR FANTASTIC POSITIVE SPIN ON SPECTACULARLY BAD JOBS NUMBERS

In baseball, there are times when no matter how good a hitter is, a pitcher paints the corner with three straight unhittable curve balls for strikes. It is at that point that the hitter tips his cap to the pitcher and walks dejectedly back to the dugout, secure in the knowledge that there was nothing he could do to beat the pitcher at that at bat.

I am in a similar mindset when reading Ezra Klein and Matthew Ygelsias this morning. The have taken spectacularly bad jobs numbers and put such a sweet spin on them that there really is nothing to do but tip your hat to the way they have made sweet potato pie out of horse manure.

Klein:

Another 143,000 census positions expired, contributing to a total public sector job loss of more than 200,000 jobs. But the private sector continued to recover, adding 71,000 jobs — its best performance since April, and its third-best number this year.

[...]

So you can look at the bottom line one of two ways: Either we lost 131,000 jobs, or if you ignore the census jobs, we gained about 10,000. The good news? The 71,000 jobs we did gain came from the right place, and the jobs we lost are job losses we can prevent if Congress finds the will and the votes.

You can also look at it as 71,000 jobs representing about half the total number of jobs that need to be created every single month just to keep pace with new people entering the work force in the private sector. The idea that the private sector is “recovering” is pure spin. If business is only creating half the jobs necessary to take up the slack in new hires, how in God’s name is it going to replace the 8 million jobs lost in this recession? The numbers show we are falling behind, that the recovery is worse than anemic, and that the policies of this president and his party are directly responsible for it.

Last year at this time - 8 months after Obama took office - discouraged workers who stopped looking for work stood at 368,000. Today, that number has climbed to 1.2 million. This did not happen on George Bush’s watch. It is a direct result of the Democrats taking their eye off the ball and pushing national health insurance at the expense of dealing with the jobs situation. While Democrats were arguing with themselves whether or not a public option was needed and how much they should screw over insurance companies, big pharma, and big medicine, the jobs picture went from bad, to worse, to catastrophic.

It was obvious by last summer that the stimulus bill - sold by the president as something that had to be passed immediately and without due consideration because it would help create jobs in the near future - was oversold and a gigantic waste of money at a time the Democratic congress was smashing every deficit record in history. Instead of dropping the health insurance chimera and turning their attention to Americans who were desperate for work, the Democrats pursued the illusion of national health insurance reform, thus condemning this nation to what the Administration is calling “Recovery Summer” - perhaps the most inapt characterization of economic conditions since Roosevelt made “Happy Days are Here Again” his party’s anthem when unemployment was at 25%.

And the idea that the $26 billion passed by the senate and awaiting action in the Democratic House will make things all better in the public sector is either ignorance on Klein’s part or disingenuousness. The 143,000 census jobs are not coming back no matter how many tens of billions you throw into the laps of Democratic interest groups.

As for the teachers, the question arises how long Uncle Sam is going to keep bailing out his nephews? It’s the same question asked of those who have already gotten 100 weeks or more of unemployment payments. There are people out there who are working two or three jobs just to make ends meet, despite being eligible for the extended unemployment benefits. They don’t want to do it. They find no pleasure in it. They would probably be incensed that I am using them as examples. The point is that there are alternatives out there besides Congress, in essence, giving some people an excuse not to take what job or jobs they can.

If Klein was brilliant in spinning the numbers, Yglesias throws up a strawman that would make Ray Bolger proud:

The losses came from the public sector. And they were foreseeable. And they were foreseen by the President of the United States and the Speaker of the House of Representatives and the Majority Leader of the United States Senate and the majority of House members and a majority of Senators. And the President of the United States and the Speaker of the House of Representatives and the Majority Leader of the United States Senate and the majority of House members and a majority of Senators voted for bills that would have prevented that. But because in the Senate a minority of members can get their way, action wasn’t taken. Consequently, we have a horrible jobs number. Which would be bad enough, but the way the American political system works, the minority party that prevented the majority from addressing the crisis will accrue massive political benefits as a result of the collapse.

Conservatives won’t admit it today, but what we’re looking at is a major breakdown of the logic of the American political system.

Of course they were foreseeable. Nearly 75% of the public sector job losses resulted from the end of the census taking process. Those jobs were not permanent, were not meant to be permanent, and were always going to end. To make the unbelievable claim that it is the GOP’s fault that the public sector lost 53,000 permanent jobs - many of which the result of state budget cuts outside of the education sector - is illogical.

Maybe Yglesias should start by repairing that “breakdown in logic” in his own head.

Both these prominent ex-members of Journolist appear not to have missed a beat in shilling for the White House.

UPDATE

Jesus Lord how did I miss this eye-popper from Benen:

For quite a while, Democrats have said the government needed to intervene to prevent the job losses we’re seeing now. Republicans refused. To be sure, the job market would need to be stronger in either case, but the GOP is entirely responsible for holding the job market’s head below water — and yet, they’re also the ones gloating. It’s maddening.

Um…no. “For quite a while” the Democrats have been saying that the stimulus would keep unemployment below 8% and that a million green jobs would be created, and that we had to save the jobs of state workers (and we have to do it again and probably again after that), and that unemployment benefits were good for the economy, and any month now, the Democrat’s policies would bear fruit and we’ll all live happily ever after.

And does Bennen realize people are laughing at him when he blames Republicans for this? With a spread of 59-41 in the senate and a 40 seat majority in the House, the problem is not GOP obstructionism but the rank incompetence of Democratic leaders who not only can’t convince one lousy RINO to jump to their side on anything, but can’t even keep their own caucus together. Reagan regularly convinced several dozen Democrats to vote for his policies. All Harry Reid has to do is to keep his hands from jumping ship and convince Olympia Snowe that the New York Times will give her favorable mention if she votes his way.

All last year we heard the same refrain from the Democrats; you have to give the stimulus time to work and then…you’ll see. Things will be right as rain. This despite the fact, as I mention above, Obama looked the American people in the eye and said the crisis was so dire that members of Congress shouldn’t have to read the bill, just vote yes on it so that jobs can be created immediately.

Now that the stim bill has proved to be a spectacular failure, the Democrats have switched their talking points, pretending they knew all along that the stim bill wasn’t enough and we need to spend more, and more again to get the economy rolling. Reminds me of Tom Wolfe’s description of a test pilot going down in The Right Stuff: “I’ve tried A! I’ve tried B! I’ve tried C! Tell me what else I can try!”

Try the truth. That would be novel.

By: Rick Moran at 11:23 am | Permalink | Comments & Trackbacks (2)

3/1/2010
RAIDERS OF THE LOST DERIVATIVES

The best article I’ve read to date on how we have become a bailout nation and why was published about 2 weeks ago in Rolling Stone. It was by the estimable Matt Taibbi and is entitled “Wall Street’s Bailout Hustle.”

I dare you to read it and not be grinding your teeth by the end of it.

Recognizing a certain class bias inherent in Taibbi’s explanations of what the Wall Street banks have wrought doesn’t diminish the impact of this horror story in the slightest. The bottom line, as Taibbi explains is that nothing has changed since September 2008. The same practices that got us into trouble then, have been resurrected and, if anything, are being used with even more gusto by the Wall Street Raiders who are now working hand and fist with the government to rob the taxpayers:

That’s why the biggest gift the bankers got in the bailout was not fiscal but psychological. “The most valuable part of the bailout,” says Rep. Sherman, “was the implicit guarantee that they’re Too Big to Fail.” Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. “It’s evidence,” says Rep. Kanjorski, “that they still don’t get it.”

More to the point, the fact that we haven’t done much of anything to change the rules and behavior of Wall Street shows that we still don’t get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.

Taibbi - sometimes to the detriment of his narrative - uses various plays by con-artists (a society of criminals unique in their vocabulary and history) and compares them to what J.P. Morgan and other Wall Street outfits did to get the trillions in Fed money that have made them so profitable today.

In essence:

A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

Beyond that, either the big banks haven’t learned a thing, or more likely, know a good thing when they see it:

The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they’re back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they’re rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.

That’s why this bonus business isn’t merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men.

Why we have been sanguine in the face of what Taibbi describes as these “old school hustles” is the result of the extraordinarily arcane nature of the cons being visited on the Fed and Congress by the banks.

To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don’t so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids’ playroom, knowing it and actually watching the whole scene from start to finish are two very different things.

Taibbi lists 7 of these con games that the gamblers at J.P. Morgan and other big banks have been running at our expense. Here is a too brief description of a few of them:

* “The Swoop and Squat.” How counterparties - including a French bank - played both sides in the AIG meltdown and forced it into bankruptcy. The big banks had been using AIG to “insure” the toxic mortgage backed securities, for which AIG received a substantial cut, but was unprepared when hundreds of billions in bad paper drowned it.

The “swoop and squat” is the well known insurance scam where your car is boxed in by 2 or 3 other cars and a deliberate “accident” ensues so that the scammers can collect:

This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors’ cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

When AIG was drowning, the banks hurried its collapse along:

So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the “Swoop and Squat” that ultimately crashed the firm.

Of course, Goldman demanded the government reimburse them for the full “value” of the $5.9 billion in collateral they ripped from AIG. If the insurance giant had gone through bankruptcy, Goldman would have received virtually nothing. Just one way that Goldman gamed the government and the Fed in gorging itself to bursting.

* “The Dollar Store.” In grifter parlance, this refers to something like what we saw in the movie “The Sting” where a lot of con artists set up a fake front to fool the mark. Goldman and Morgan Stanley applied for, and received in record time, a charter that redefined the kind of bank they were just 5 days after the AIG bailout:

By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.

Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of “free money” by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

Before reading this next bit from Taibbi on what the banks did with that new charter, I suggest you remove all sharp objects from within reach plus anything that might be used as a missile to hurl through your monitor:

When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008.

[...]

In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.

That’s right. They borrowed interest free money from the government and lent it back to us - with interest. This is one con game used by Taibbi that has a direct application to what occurred in the real world.

* The Rumanian Box. This is an age old scam invented by a guy named Lustig where the con man shows the mark a magical machine where you put a blank piece of paper in one end, turn a crank and out pops a $20 on the other end. Here’s how the banks used this concept and bilked the Fed:

The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he’s been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.

How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.

The big banks threatened to freeze lending even more unless the Feds came up with more goodies. The government didn’t disappoint:

The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion “real” dollars.

The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington’s demand for cash was so great post-Clusterfuck ‘08 that even the Chinese couldn’t buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.

And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.

The last con game Tabai uses to highlight what Wall Street has been up to is called “The Reload.” This refers to a mark who comes back for seconds.

It’s important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.

But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.

Why? Why haven’t we woken up to this outright robbery? Well for one thing, the financial services industry gives generously to both parties, thus allowing them virtual free reign to snooker the taxpayer. But even Obama’s new regulations - being watered down even further as I write this - will be inadequate. And the reason has to do with morals, not regulation:

Con artists have a word for the inability of their victims to accept that they’ve been scammed. They call it the “True Believer Syndrome.” That’s sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn’t so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn’t matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn’t going to work, no matter what we do. Sure, mugging old ladies is against the law, but it’s also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

My concern about Democrats and liberals bashing bankers has always been that they fail to adequately differentiate between the robber barons on Wall Street, and the friendly, smiling face of a loan officer we have dealt with at our neighborhood suburban bank. Those are the guys who suffer because of the indiscriminate class card played by the left. They have as much in common with the crooks at Goldman Sachs as my pet cat Aramas has with a saber tooth lion.

But I think the key here has been misplaced conservative support for these rogues who we see as the ultimate success stories in the free market. The problem, as Taibbi points out and as we should have realized long ago, is that these guys operate on another level of the playing field altogether. They can’t be effectively regulated by the government because they are so powerful both politically and as economic entities that drive the macro economy, that they, in effect, hold most of the cards. They are partners with the government. Or perhaps it would be more accurate to say that the government is partners with them. There is no competition except among the extremely small group of bankers to which they sometimes conspire with to realize their enormous profits.

Maybe tar and feathers isn’t such a bad idea after all.

By: Rick Moran at 11:36 am | Permalink | Comments & Trackbacks (0)

2/17/2010
WHY CONSERVATIVES SHOULD EMBRACE FINANCIAL REGULATION

The earthquake that shook the world’s financial system in September of 2008 opened many eyes to the fact that the largest companies on Wall Street had become heavily engaged in the extremely profitable but wholly unregulated derivatives market without a clue as to understanding the extraordinary damage their gambling could do to the economies of the industrialized countries if a financial shock came along.

There were some - in government and out - who sensed the trouble we were in but whose voices were drowned out in the speculative frenzy, the drive for ever larger profits, and the mania for secrecy upon which these firms traded. And the enablers in the Clinton Administration - including Larry Summers, Tim Geithner, and Robert Rubin - along with the anti-regulatory Fed Chief Alan Greenspan, worked hard during the 1990’s (as did their successors in the Bush administration) to keep the regulators at bay, discrediting them with Congress, and trying to bully them to toe the party line on keeping the derivatives market free of scrutiny by the government.

We paid for this shortsightedness with a meltdown of the financial industry that we are still feeling today and are likely to feel for years to come.

Those who continue to believe that the collapse of Lehman Brothers and subsequent tsunami that led to our current economic problems was the result of a few hundred thousand poor people who got loans they shouldn’t have received through the Community Reinvestment Act need to wake up and smell the coffee. The still unregulated derivatives market is worth $600 trillion today. That is not a misspelling. An unknown tens of trillions of that market - nobody can possibly know exactly - are in “toxic assets” still being carried on the books of big banks just waiting for the next shock to hit Wall Street to bring these great houses of finance to their knees again.

Yes, mismanagement of risk by Fannie and Freddie had something to do with the crisis, and the CRA had its own small role to play. But this crisis virtually begins and ends with the mind boggling way in which the largest financial service companies in the world fought tooth and nail to keep the government from finding out just what they were up to with these credit swaps.

I suppose I should mention that my understanding of all this is a mile wide and an inch deep. But the political explanations offered by both sides never satisfied my curiosity. The crisis was more than 2 decades in the making, and the idea that one side is more or less to blame for it is nonsense. Both Clinton and Bush, Democrats and Republicans in Congress have a lot to answer for and trying to place relative blame on a scale and weigh out who should be designated as the winner of the blame game is an exercise in futility.

No transparency, no record keeping, and little understanding by either the companies or the government of the systemic risk of these derivatives and credit swaps led directly to the collapse. But we can’t get rid of derivatives even if we wanted to, as business writer for the NY Times Timothy O’Brien points out:

But it’s really important to remember that there are a lot of good, practical uses for derivatives. In fact, the average person who’s a homeowner owns a derivative. It’s the insurance policy on their house, and it’s essentially a contract that you enter into with an insurer that pays you a certain amount of money if some kind of damage or calamity happens to your home. And you pay a little bit of money, or a lot of money depending on the size of your home, each year for that policy.

Wall Street has all sorts of contracts like this. Derivatives, in essence, are insurance policies that various players on Wall Street and in the business world enter into to protect themselves from unforeseen calamities, whether it’s wild interest-rate swings, changes in the values of currencies, someone’s debt going bad. …

And that’s a good thing. When people have protection from things they can’t control, it enables them to take sensible risks, which allows them to grow their business and allows more money to get created and creates jobs. These are all good things, as long as that’s what these things are being used for.

As you might have guessed, it was the other things derivatives were used for that sealed our fate:

The problem is, no one really knows exactly what derivatives are being used for because it all exists in a black box. They’re unregulated; the contracts aren’t traded on exchanges; they’re entered into between private parties. No one knows whether or not one company, let’s, for example, call them AIG, a big insurance company, has entered into so many of these contracts that if an unforeseen financial hurricane comes and hits the house known as Wall Street and suddenly AIG is required to make good on … so many of these policies that they don’t have enough money to do this, and they run into danger of going belly up. Which is exactly what happened at AIG.

And the lingering question is, if these transactions - if the derivatives market - had been regulated adequately, could we have avoided the worst of the meltdown? Joe Nocera, also of the Times:

The technical term for the kind of derivatives that really got us into trouble is bespoke derivatives. Bespoke means one of a kind. And these were complicated contracts that covered a particular, you know, one deal only. It couldn’t be replicated. It wasn’t like buying a share of IBM that is exactly the same as every other share of IBM. You bought a credit default swap; it would be built around a particular series of deals. It would have a particular set of terms. It would be one of a kind.

This is, by the way, why this stuff became so untradable. How do you trade a one-of-a-kind? There is no real market for them. It has a utility as a contract on a one-on-one basis. But there is no trading function. And that has been part of the whole problem. They don’t mark to market, i.e., because there is nothing to compare it to. What’s out there that you can compare this one thing to? So they mark to model. They come up with fancy, financial models every quarter. And they mark this thing to the model.

And for many years the model said they were worth more, worth more, worth more, so you mark them up. And then finally the model said: “Uh, you know what? Foreclosures are up. Subprime is down. We have got to start marking them down.” You start to blow up. But even though they are blowing up, you are still stuck with them. There is nothing you can do with them. You can’t trade them.

Bottom line:

So one of the big problems with the rise of credit derivatives is that Wall Street was terribly resistant to the idea of standardizing contracts and allowing them to be traded on an exchange, because it would hurt their profits.

The question now before us is what should be done about it? And for me and for many conservatives, the question becomes is there any regulatory regime that would be consistent with conservative principles?

It is a false assumption that regulation of markets is inherently un-conservative. Libertarians might take that position but since conservatives should value order above almost all else, sensible regulation of markets is a requirement for promoting a just and orderly society.

The size of companies like JP Morgan and Citigroup gives them an enormous advantage in the market already. And as I demonstrated above, these credit swaps take place in a totally unregulated, secret environment. Add the potential for harm to the community - harm that could be avoided or mitigated with a regulatory regime - and I think a solid, general case can be made for conservatives to support some kind of minimal regulation.

The problem as I see it, is that as with everything else President Obama wishes to do, he takes a good idea and ruins it by overkill. The president wants to transform the financial services industry. Conservatives want to rein it in. Obama wants to drastically reduce risk. Conservatives recognize the value of risk (as explained above) and want to minimize it without destroying its many advantages. The president wants to create a federal agency - the Consumer Financial Protection Agency - that some analysts believe would make credit extremely difficult to get for ordinary Americans. Conservatives believe that laws already on the books to protect consumers in this regard could be strengthened, but that a whole new agency is dangerous and unnecessary.

The differences then, are a matter of degree. Clearly, where there is no regulation or transparency, government must be there to create it so that not only is the economy protected, but that the derivatives market itself becomes less prone to the kind of exploitation that secrecy encourages.

Being supportive of a free market most decidedly does not mean that conservatives should oppose all regulation, or support less than adequate regulation, due to an ideological belief that such “interference” is an anathema to the functioning of the market. If the derivatives crisis showed anything, it is that our modern financial system is so complex that ordinary market forces that are supposed to correct imbalances are actually a danger to the economy as a whole. There may have been steps short of trillions in bail outs for firms “too big to fail.” We will never know because they weren’t tried. But even solutions like forced mergers of teetering banks, managed liquidations, guided bankruptcies, and the like would have required massive government intervention in the markets to achieve. And since the problem was worldwide, such measures may still have not been enough to keep the crisis from imperiling the world’s banking system.

A free market is only free if all benefit from its workings. When big companies can skew the market to gain advantages not available to others, or when they can game the system - backed by taxpayers - to take wild risks and place our economy in peril, it behooves conservatives to support reasonable steps by the government to rectify the situation.

Some of what the president proposes makes sense. Preventing big banks from both taking deposits and trading securities that benefit their own house - a small move back toward Glass-Steagell - is a good idea. Other ideas, like making the Fed the overseer of “systemic risk” and the creation of the CFPA smack of overreach. What eventually emerges from negotiations with Congress, with Wall Street, and the White House we can only hope will be adequate to address the problems without being so burdensome that they stifle economic activity.

By: Rick Moran at 10:28 am | Permalink | Comments & Trackbacks (11)

9/24/2009
GET READY FOR ‘HOUSING MELTDOWN: THE SEQUEL’

I don’t know about you but I sure am glad this recession has “bottomed out” and we’re beginning to see the “green shoots” of recovery - “just around the corner,” or “coming into focus,” or - my favorite - “the light at the end of the tunnel.”

Of course, even the administration admits this doesn’t mean squat if you’ve been laid off and can’t find a job. This will be another one of those “jobless recoveries” which is perhaps the most confusing term ever invented by political economists. How can there be “recovery” if the unemployment rate comes down slower than a three toed sloth making its way to the ground looking for breakfast? (Check it out: The cute little bugger takes a full minute to climb down about 15 feet. Anyway, I LIKE the analogy.)

I guess they mean that if you’re lucky enough to have a little cash, bargain basement stocks and other investment products are great buys and people can start “recovering” all that money they lost during the recession - except if you own a home.

No jobs but the rich get richer. Some recovery.

Speaking of homes, have I got good news for all you Cassandras out there. There are a staggering number of people who are about to lose their homes over the next year or two. Tim Cavanaugh of Hit and Run has enough bad news to keep our gloom and doom punditocracy busy for weeks:

• A record 7.58 percent of U.S. homeowners with mortgages were at least 30 days late on payments in August, says Equifax, up from 7.32 percent in July. Delinquencies are not only rising from month to month, but rising at a faster pace. More than 41 percent of subprime mortgages are delinquent. (That’s quite an increase from 2007, when I took heart from the fact that only 10 percent of subprime mortgages were in default. But, well, at least the glass is still more than half full, right?)

• About 1.2 million loans out there are in limbo: The borrower is in serious default yet the bank has not started the foreclosure process. Another 1.5 million are in early stages of the foreclosure process but the bank hasn’t yet taken possession of the home. Counting these and loans that are highly likely to end up in default, one analyst estimates three million to four million foreclosed homes will come on the market over the next few years. And don’t believe the freshwater economists when they tell you there’s no such thing as a free lunch: Some 217,000 Americans have not made a mortgage payment in one full calendar year, but their lenders have yet to begin the foreclosure process.

• Option ARM recasts (not resets, as Calculated Risk explains) are as much of a time bomb as ever, with nearly all borrowers in this class making only minimum payments and negatively amortizing their mortgages.

• Something called the National Consumer Law Center criticizes state mortgage-mediation schemes as well as the Obama Administration’s Home Affordable Modification Program, which at last count had managed to prevent 235,247 homes from coming onto the market. However, data from the Federal Reserve and the Office of the Comptroller of the Currency indicate that even when these programs succeed, about half of all the renegotiated loans end up back in default soon afterward.

The subprime loan mess is still with us. If anything, it’s worse. Those balloon payments attached to Adjustable Rate Mortgages will continue to wreak havoc on borrowers caught holding on to a house they can’t sell or borrow against. And Obama’s home mortgage program is worse than a dud - it is actually going to contribute to Meltdown II in a big way.

By the way, did it really cost $75 billion to bail out 235,000 consumers? I’ve got no head for math but that seems to be a huge amount of money to help such a relative few - especially since by my very rough calculations it works out to about $32,000 per consumer bailout. (If that’s wrong, I will use as an excuse that I slept through Sister Mary Conception’s class where we learned long division.) Speaking for myself, that would be equivalent to about 3 years worth of my mortgage payments. I’m sure it’s just because I’m an economic dunce and can’t figure it out but my impression was that the program was supposed to help borrowers who were in serious arrears with their loan to get their head back above water.

And what’s with this 50% failure rate? Somebody please convince me that we didn’t just pour $75 billion down a black hole?

Another thing apparent from those numbers is that some banks are in a really, really precarious position. Many of them may already have too many repossessed properties that have been foreclosed - else why the long delay in starting foreclosure proceedings? Unless we believe that bankers have developed a conscience and a soul to go along with it (just kidding Larry), this could indicate that for some banks at least, the bad paper is becoming very worrisome and rather than take another almost worthless property, they are allowing homeowners to slide in their mortgage payments.

Community focused banks may indeed be bending over backward with their customers, taking partial payments from borrowers until they get back on their feet. But I find it incredible that more than 200,000 people haven’t paid a dime on their mortgage in a year and still have a home. Eventually, I will bet you dollars to donuts that we, the taxpayer, end up bailing them out anyway.

Cavanaugh explains why Obama’s consumer mortgage program had it all wrong to begin with:

[T]he renegotiation has made things worse for everybody. The lender ends up with lower payments in the short term and then has to foreclose on a less-valuable property at some point in the future. The borrower gets no financial upside and (though he or she gets the use of a subsidized domicile for some period of time) is encouraged to stay in a losing situation when immediate foreclosure would have been a more merciful option. Prospective buyers get locked out as dumb lenders, deadbeat borrowers and the government all collude to keep the price of the house artificially inflated. And taxpayers have to spend $75 billion (the budget of HUD’s Making Home Affordable program) for the privilege of making it all happen. The best option for all concerned would be to get the deadbeat out of the house as quickly as possible, but nobody is doing that.

What precipitated the first crisis was an avalanche of foreclosures that caused the bottom to fall out of the new and resale home market. This made the mortgage backed securities and other instruments like derivatives held by the big banks and firms like AIG lose an enormous amount of value. Could history be repeating itself.

Cavanaugh concludes:

Put it all together, and throw in mainstream media outlets that as recently as June were calling for mortgage haircuts specifically to allow people to keep borrowing against their houses, and you’ve got the mother of all perfect storms mixed with the crack cocaine of third rails on steroids. The foreclosure wave may seem all tired and 2008, but it’s hotter than ever.

I’m no economist but it seems to me a possibility that another hair on fire, full blown crisis could come again. Home values are so depressed today that it would be a stretch to think their value could plummet much farther. But that many foreclosures might cause a lot of trouble for smaller banks, regional banks, and perhaps even Fannie Mae (FHA is already in trouble and may need a taxpayer bailout).

But then there is the 800 lb gorilla in the room; the commercial real estate market. The Wall Street Journal had an article back in December that predicted from 10-26% of all retail businesses going bankrupt. That’s an awful lot of empty store fronts, and malls. And the market is incredibly depressed for new office and industrial properties (see this video to get an idea of the problem).

I guess the point I’m trying to make is we are not out of the woods - not by a long shot.

UPDATE: LIKE I SAID - NO HEAD FOR MATH

John in the comments very gently points out that my math on how much each of the 235,000 consumers taking part in Obama’s home mortgage bailout received from the $75 billion program was not $32,000. I was only off by a factor of 10.

The correct number is $320,000.

Now will someone explain that to me? I know there’s a rational explanation - maybe the program is still ongoing and they haven’t given out that much money. Couldn’t find that info at the HUD website so if anyone has a clue, let me in on it.

By: Rick Moran at 10:23 am | Permalink | Comments & Trackbacks (19)

8/23/2009
HOW BIG SHOULD GOVERNMENT BE?

I have written previously that I believed the biggest contribution Ronald Reagan made to American conservatism was that he almost singlehandedly altered the civic conversation about government spending on social programs.

Prior to Reagan’s reasoned, and impassioned dialectic against big government, the debate over government programs began and ended with the question “How much more” should we be spending,” or “How big should this government program be” to accomplish its intended objective.

Democrats monetized this debate by increasing the number of zeroes in these program’s appropriations. Granted, this is something of an oversimplification but essentially, the center of gravity in Washington tilted toward more, more, and still more in the belief that “solving” the problem being addressed, and showing “compassion” for the poor was a matter of growing the size of government to meet the challenge.

Enter Ronald Reagan who championed the idea that “throwing money” at a problem wasn’t solving anything, and was making things worse. (There were other conservatives who gave Reagan his arguments - Buckley, Hayek, Mises, etc. But none had as big a bullhorn.) Over time, the civic conversation was altered to question not only the huge appropriations, but the necessity and the viability of these programs.

At bottom, of course, was Reagan’s contention that government was mis-spending tax dollars and threatening individual liberty by growing the size and scope of the federal government. It was an argument that plowed already fertile fields because from it’s founding, Americans have fiercely resisted centrally exercised power from Washington. From Andrew Jackson’s destruction of the Bank of America to the cheers of the common man, through Abe Lincoln’s draft, which set off riots in the north, through FDR’s overreach, and Bill Clinton’s attempt at nationalized health care, Americans have been more than suspicious of big government. There seems to be a genetic predisposition for Americans to resist government that they perceive as overstepping its limits.

Granted, those limits have expanded since Andy Jackson’s time. Most Americans have accepted a government that can feed them when they’re hungry, house them when they’re homeless, and generally be there with a “safety net” if misfortune befalls them. Social Security, Medicare, and other entitlements are sacred cows because they enjoy almost universal support by voters. This may be the death of us yet unless we can find a way to get their gargantuan costs under control.

But, as President Obama is finding, there are still lines in the sand that Americans are refusing to allow their government in Washington to cross. And Matt Welch of Reason Magazine, writing in the NY Post, nails why:

While the commentariat’s condescension is almost comical, the whole evil-or-stupid explanation misses the elephant in Obama’s room: Americans of all stripes, it turns out, aren’t very keen about the government barging into their lives.

An ABC/Washington Post poll from June showed people preferred “smaller government with fewer services” over “larger government with more services” by 54% to 41%, up from 50%-45% a year earlier (independents were even more pronounced, at 61%-35%). A Rasmussen poll from April showed that 77% of Americans preferred a “free market” economy over a “government managed” economy, up seven percentage points from just last December. A July CBS poll found that 52% of Americans think that Obama is trying to do “too much.”

After 11 months of federal bailouts and freakouts, Americans have become bone tired of panicky power grabs from Washington. It’s the big government, stupid.

The message of the various Tea Party protests, which predated this summer’s ahistorical media panic over town hall “lynch mobs,” has been pretty simple, says Matt Kibbe, president of FreedomWorks, the nonprofit that has helped organize the protests, told Reason magazine this spring. “It was: stop spending so much money, stop borrowing so much money, and stop bailing out people who were irresponsible.”

I applaud the attempt by Mr. Welch to alter the narrative that begins and ends with protestors being “racist,” fascist mobs,” “un-American,” or “retarded.” It won’t matter anyway. Polls also show that a majority of Americans support the protestors which means that the Krugman’s, Rich’s, Pelosi’s, Garafolo’s, and the rest of the left aren’t getting any traction with their “evil-or-stupid” incantations.

Regardless, it’s the resistance to government overstepping what Americans sense is a proper exercise of its power that has so many, so angry. While there is much more tolerance for big government today - even government that helps the middle class with programs like S-Chip, and home mortgage bailouts - there are still boundaries (sensed more than specifically spelled out) that a majority of Americans refuse to stand for.

This is the essence of American exceptionalism. We are a different people than Europeans, and any other society in the world. We were deliberately made so at our founding and continue to be to this day. What should be self evident, is lost on many liberals who equate American exceptionalism with a rude form of nationalism. Not so - demonstrably not so. There is no other society in the world that looks upon government with such a jaundiced eye when they perceive that government to be crossing a comfort barrier relating to how much power the central authority should wield.

At heart, America is a profoundly conservative country in that First Principles, a respect for our past, and supporting change only when that change can be folded into tradition, is believed and supported by a large majority. This doesn’t mean that the out of bounds hasn’t been moving left the last 100 years. We are also, at bottom, a practical people, and see real benefit to growing government when the occasion calls for it. This too, makes us an exceptional people in that despite all, the people still have a big say in how big a government they will accept.

Perhaps one day, Americans will accept a growth in government that will result in Washington running health care. But it is not today, nor do I see such a day arriving in my lifetime. Each generation of Americans defines the parameters of their liberty differently. It is our particular genius as we constantly re-invent ourselves to meet the challenges of a changing world.

Obama and the Democrats ignore this reality at their political peril.

By: Rick Moran at 10:23 am | Permalink | Comments & Trackbacks (34)

5/28/2009
DEALERGATE: STATISTICAL COINCIDENCE OR POLITICAL BIAS? (IMPORTANT UPDATE BELOW)

Doug Ross and Joey Smith are doing a helluva job in researching the data on the Chrysler dealer closings story. And in typical internet fashion, the story now has some legs and is being addressed by other outlets.

Notably, World Net Daily - sometimes not the most reliable of sources - has a piece of straightforward reporting where they scanned the 789 dealers being closed, matched the donations to presidential candidates, and discovered the following:

$450,000 donated to GOP presidential candidates; $7,970 to Sen. Hillary Clinton; $2,200 to John Edwards and $450 to Barack Obama.

What does this mean?

It could mean nothing. It is a given that a large percentage of dealers - small businessmen - are Republican to begin with. Liberal poll expert Nate Silver has done a great job in researching all donations made by auto dealers (or most anyway) and pegs the percentage at  8-1 Republican which matches up pretty well with what Doug and others have found. Nate was looking at donors to political campaigns from all car dealers and those figures shake out to be overwhelmingly GOP.

Therefore, it is probably useless to try and make a case based on the amount of monies donated to the two parties. What is needed is an analysis of which dealers were allowed to stay open and whether they benefited from GOP dealers that were being closed. Doug Ross came up with some interesting coincidences based on his analysis of one dealership group owned by prominent Democrats where their dealerships were all allowed to stay open while neutral or GOP donor dealerships were closed. He made this connection in three separate territories where the Democratic auto group - RLJ - operated.

This is compelling but still not enough evidence. It is, after all, only one dealer group. In the end, what is needed is solid information about who exactly made the individual decisions to close the dealers.

We know it wasn’t the bankruptcy judge. We also know that the criteria for closing announced by Chrysler is not being followed. In dozens of cases, profitable dealers are being closed for no apparent reason.

So if the judge and Chrysler had little or no say in who was being torpedoed, that leaves the White House auto task force shoving these decisions down Chrysler’s throat. So far, Chrysler has remained quiet. But eventually, they are going to have to say something in response to the building pressure put on them by dealers who think they are being treated unfairly and a media that may be getting more curious.

Mark Tapscott in the Washington Examiner picked up the story today:

Florida Rep. Vern Buchanan learned from a House colleague that his Venice, Florida, dealership is on the hit list. Buchanan also has a Nissan franchise paired with the Chrysler facility in Venice.

“It’s an outrage. It’s not about me. I’m going to be fine,” said Buchanan, the dealership’s majority owner. “You’re talking over 100,000 jobs. We’re supposed to be in the business of creating jobs, not killing jobs,” Buchanan told News 10, a local Florida television station.

Buchanan, who succeeded former Rep. Katharine Harris in 2006, reportedly learned of his dealership’s termination from Rep.Candace Miller, R-MI. Buchanan owns a total of 23 dealerships in Florida and North Carolina.

Also fueling the controversy is the fact the RLJ-McCarty-Landers chain of Arkansas and Missouri dealerships aren’t being closed, but many of their local competitors are being eliminated. Go here for a detailed look at this situation. McClarty is the former Clinton senior aide. The “J” is Robert Johnson, founder of the Black Entertainment Television, a heavy Democratic contributor.

A lawyer representing a group of  Chrysler dealers who are on the hit list deposed senior Chrysler executives and later told Reuters that he believes the closings have been forced on the company by the White House.

Another respected blogger, Megan McCardle , is dubious but willing to look at the question if compelling evidence is presented:

My operating assumption is that this story is a red herring.  Democratic and Republican dealers are unlikely to be found in the same place, and the rural counties that tend to be red are probably less profitable.  I would be less surprised to find out that the administration rescued specific donors from the hit list than to find that they deliberately closed Republican dealerships.

Still the administration should answer this; it gives the appearance of Chicago-style corruption that is going to further taint a Chrysler takeover which has already left a number of people in the business and finance community wondering how firm the rule of business law is these days.

McCardle mentions Silver’s analysis in an update and points out that it will be hard to prove bias based solely on donation patterns:

Nate Silver points out that most auto dealers are Republicans.  That doesn’t quite explain why so far only one Obama donor has been closed down, but it makes it difficult to definitely conclude bad faith.

Does this mean that all of this is just a statistical coincidence?

Given what we know about the Obama White House and its hyper-partisan ways (anyone who believes Rahm Emanuel isn’t a partisan bully doesn’t know anything about his service during the Clinton years). Given also that we have seen the bullying tactics, the threats, the blackmail, the arrogance of Obama’s people when dealing with the auto companies, one can combine those facts with the appearance of partisan bias in closing the dealerships and believe that it is entirely possible for this to be true. In other words, it is hardly a stretch of the imagination to think that this has been part of the plan.

But even if it isn’t, the closing of dealerships is a tragedy for the communities in which these dealers operate. Many of the dealers who are complaining that they are profitable and shouldn’t be closed are good community citizens. They sponsor boys and girls sports teams. They’re always there when the community needs help to put on events like parades and fireworks. They are Rotarians, Chamber of Commerce members, and volunteers whose loss will be keenly felt by the communities they serve.

I wouldn’t put it past Obama and his crew to compound this tragedy by making a lot of those closings unnecessary because they were based on the party affiliation of the dealer.

UPDATE: 5-29

Fox News performed a random survey of dealers who were closed and dealers allowed to remain open. It pretty much shuts the door on the subject:

A preliminary study by FOXNews.com found that the data do not support the charges. Among the dealerships set to close, 12 percent of a random 50 selected for review donated to Republicans and 8 percent to Democrats. Of the dealerships remaining open, 14 percent of a random 50 selected donated to Republicans and 10 percent to Democrats. In both samples, the average size of donations was similar for both parties.

According to the sample, one major factor in determining whether a dealership was closed or not was the size of the dealership, measured by the number of product lines carried (the four lines are Chrysler, Jeep, Dodge and Dodge Truck). The average store that will be closed in the FOXNews.com sample carries 2.5 of those product lines whereas the average store that will stay open carries 3.64.

A Chrysler representative said part of the decision on consolidating dealerships was to reduce overlap and have the remaining dealers sell all three company brands.

“It makes sense to have all three brands under one roof,” Chrysler spokeswoman Kathy Graham told FOXNews.com.

I will point out, 1) the statistical analysis would seem to indicate no foul play in the closings, and 2) Chrysler finally opened their mouths and said the first sensible thing about criteria used to close the dealers. Hence, the remote chance that this story would get some legs has all but disappeared.

Anyone who says this was not an issue worth looking into is politically naive and probably a partisan hack to boot. Of course the idea of politically motivated dealer closings was a possibility - especially with the bunch of arrogant cutthroats Obama has assembled in the auto task force. It would have been irresponsible not to check into this possibility. Who else was going to do it? The media? Only after blogs had been flogging the story for 3 days.

If I listed similar investigations by the opposition over the last 8 years that didn’t pan out either, I would run out of pixels on this site (the earpiece Bush wore in the debate, anyone?). Suffice it to say, the blogs did their job. Evidence was presented. Further digging revealed reasons to be skeptical as well as reasons to continue digging. And further analysis has pretty much laid the issue to rest.

One point; the possibility that there was interference on the part of the White House to keep politically connected dealerships open cannot be dismissed. But that would be impossible to prove and would not be a productive avenue to go down.

By: Rick Moran at 8:32 am | Permalink | Comments & Trackbacks (49)

4/1/2009
THE ILLUSION OF OPPORTUNITY

Patrick Ruffini wrote a post on his Next Right site yesterday where he sees a golden opportunity for the GOP to gain some political ground by running on an agenda that includes healthy cuts in the size of government. He believes the GOP is “galivinized” to make cutting government by a third - back to 2007 levels - the centerpiece of a revival even if, as he realistically points out, not much will change given the huge advantage currently enjoyed by liberals in Congress.

It’s an ambitious proposal and is predicated on the idea that people will reject the naked statism being advanced by President Obama and come home to the party of smaller government as a reaction to the bail-out culture as well as the heavy handed attempts by the Administration to gain outright control of companies like GM and AIG.

But will they? Obama still enjoys broad support among the American public and beyond that, you have to wonder how much people really care that government has instituted policies that are destroying the free market and limiting freedom. The small percentage who are paying any attention at all to what is happening in Washington will hear this by Obama and be satisfied:

Let me be clear: the United States government has no interest or intention of running GM. What we are interested in is giving GM an opportunity to finally make those much-needed changes that will let them emerge from this crisis a stronger and more competitive company.

If the lie is told often enough, people will believe it - especially when the media doesn’t think it’s their job to call Obama out for his prevarications. Have you seen any article (outside of the Wall Street Journal and a few reactionary newspapers) or any news broadcast beyond a few CNBC and Fox segments that even discusses the possibility that what Obama is doing is nothing short of a government takeover of GM? If you can fire one CEO, hire another, force bankruptcy, and guarantee warranties, not to mention deciding which “changes” GM should make in their business plan, that sounds an awful lot like “running GM” to me.

But the average voter doesn’t hear any of that. All they hear is the president standing up on national TV and solemnly proclaiming one thing while his Administration is blatantly doing exactly the opposite. The key to any good propaganda is to make the lie believable. And for the moment, the people trust the president to tell them the truth. Right now, people just aren’t that upset with what is going on save the minority of us who are paying a little closer attention to what’s going on in Washington. And don’t forget, there’s another minority of people paying attention who are supporting the President and urging him to do more. Liberal activists have only just begun to hold the president’s feet to the fire and before all is said and done, America could potentially be a place that you and I wouldn’t recognize from just two years ago.

Patrick makes this point in his post:

The end result of this agenda, the size of government at 2007 levels, may seem minimalist in any broad sweep of history, but it is galvanizing in a way it wasn’t before because of the sheer scope of what’s changed in six months. The yawning gap between where we are now and where we were two years ago gives conservatives an ambitious goal to reach for and a reason for being again, even if the end result is little change over time. And if we get a mandate to actually cut government significantly — and I think the public mood will shift there in a few years if not sooner — it might not be that much harder to cut it to below pre-Obama or pre-Bush levels because current levels are so out of whack that people would not be able to tell the difference between that and what the status quo was in the mid-2000s — only that it is change.

Unfortunately, history is not on Patrick’s side. The most conservative president in history couldn’t shrink the size of government. The most conservative Congress in history barely made a dent in the size of government during the 1990’s and then turned around and became the biggest spendthrift Congress in history. “Shrinking” the size of government to 2007 levels can’t be done simply because it is not 2007 anymore. A great tide washed over the country last November and when it ebbs, no one knows where we will be. But there is an historical certainty there will be no road back the way we came. As powerful as the Obama wave seems to be today, even he cannot erase all the contours of what Reagan built many years ago. Similarly, if, as many suspect, Obama’s victory was a transformational moment in history, the next wave of change cannot entirely undo what has been done by his Administration.

The game has changed. Nationalized health insurance is on the way, more top down solutions to education are being contemplated, wholesale changes to business and industry as a result of the green craze will be forced on the economy, the defense budget will be drastically cut, and that’s probably only the beginning. Patrick believes the voter will rebel against these changes. That remains to be seen. But what is certain is that they won’t turn to Republicans for the answers no matter how “galvanized” the GOP becomes.

For Patrick’s proposal to succeed, the word “Republican” will have to be rehabilitated with the voter. The damage done to the party during the Bush years - as Patrick rightly points out - will not be fixed by simply reiterating what the party’s message has been since LBJ’s presidency. It won’t be repaired by offering the same small government mantra no matter how much “big government” is screwing things up. Ruffini points to history to buttress his argument:

The Welfare State mentality of the ’60s that created the conditions for 1980 and 1994 systemically excused bad behavior at an individual level, creating millions of individual tragedies. Obamanomics systematically excuses bad behavior at the wholesale macroeconomic level, creating a vicious circle of irresponsibility with major consequences for every American.

If nothing else, the first 70 days of Obama — with an assist from the last 4 months of Bush — has left government economic policy so off-kilter that it may take a decade or more to fix. Remember that exhausted to-do list? Not a problem any more.

For the first time in decades, Republicans could run on a platform of cutting government by a third and not seem wild-eyed or mean-spirited. When we talk about the dangers of governments running private businesses, we will have contemporary object lessons to teach with, not bogeymen that are decades old or oceans away. When we talk about getting the government out of our lives, more people will nod their head knowing exactly what we mean, having just footed the bill for bailout after bailout, instead of yawning or dismissing it as a non-issue as they did in the prosperous, laissez-faire post-Reagan America.

All of that would be true if the GOP wasn’t totally and deeply discredited as a political party. The difference between 1980 and 1994 and the situation today is that in both those eras, Republicans were competitive across the country. Now, whole swaths of the United States are almost no-go zones for the GOP. Bereft of national leadership, having no counter-agenda that is accepted by the party regulars, and unable to escape the economic legacy of George Bush, Republicans have a lot of work to do in order to be taken seriously - even when they pledge to “shrink” the size of government.

And it isn’t just the map that is the problem. Vital segments of the voting public have decisively rejected the party including the 18-35 age group and Hispanics - two groups who are growing in number and becoming more politically savvy at a time when the Republican social agenda is receding in importance to voters and on issue after issue a decisive advantage accrues to the Democrats. Couple this with the thought that Congressional districts will be redrawn in 2010 with a probable increase in Democratic seats as a result and you have not only problems with party ID but systemic hurdles to overcome as well.

Patrick is not talking about an opportunity for the short term but it is hard to fathom at this point where the GOP can begin to close the gap. Ruffini is attempting to reduce the online activism gap but that too is a long term project. Can these problems be overcome by running on a platform “We are not socialists?” In the end, I think Patrick expects too much of the voter, projects our own anger on to them when I am convinced it will take more than what Obama has done so far to rile them up.

What Patrick has latched onto is an illusion of opportunity. The people aren’t ready. The party’s not ready. The elected representatives certainly aren’t ready for what he is proposing. And before we’re through, history will have a say as well. For that, no one can predict what the outcome of Obama’s assault on capitalism will be nor how well the GOP can respond given the limits imposed on them by their own stupidity and arrogance in the past.

By: Rick Moran at 8:11 am | Permalink | Comments & Trackbacks (18)

3/25/2009
OBAMA HASN’T SHEATHED HIS SWORD OF FEAR QUITE YET

With Democrats retreating on some of President Obama’s agenda items, the President went on TV last night to try and drum up some grass roots support for his budget and bail out policies.

It’s getting to be a tough sell - both for Congress and the American people. I thought the president did a good job of presenting his case, boiling down complex ideas and concepts into digestible chunks. He did less well in responding to some very pointed questions from the press on AIG, the mess at Treasury, and the building perception that he is taking the country somewhere it doesn’t want to go.

But all in all, I’d grade Obama’s performance a solid B-. And I’m sure, he’d take that grade and run given the dismal fortnight his Administration has endured.

It struck me watching our president last night(and was reinforced after reading the transcript), that President Obama knows about as much economics theory as I do - perhaps less. Ordinarily, this wouldn’t matter because my knowledge of the “dismal science” is slightly above that of a three toed sloth and trying to come to grips with what our government has been doing lately is something akin to watching the above mentioned sloth attempt to climb down from a tree; an extremely slow process with no guarantee I’ll ever make it.

Surely the president couldn’t have been serious when he said this:

Finally, the most critical part of our strategy is to ensure that we do not return to an economic cycle of bubble and bust in this country. We know that an economy built on reckless speculation, inflated home prices, and maxed-out credit cards does not create lasting wealth. It creates the illusion of prosperity, and it’s endangered us all.

The budget I submitted to Congress will build our economic recovery on a stronger foundation so that we don’t face another crisis like this 10 or 20 years from now.

We invest in the renewable sources of energy that will lead to new jobs, new businesses, and less dependence on foreign oil. We invest in our schools and our teachers, so that our children have the skills they need to compete with any workers in the world.

We invest in reform that will bring down the cost of health care for families, businesses and our government.

And in this budget, we have — we have to make the tough choices necessary to cut our deficit in half by the end of my first term, even under the most pessimistic estimates.

Returning to “an economic cycle of bubble and bust” is, I’m afraid, historically unavoidable. If you are going to have free markets, you are going to have periods of prosperity and periods where the markets “correct” imbalances. If Obama wishes to repeal the business cycle, he will need to throw the idea of free market capitalism under the bus - something he has shown great eagerness to do.

As for the rest, how renewable energy companies will avoid being caught in the business cycle he doesn’t deign to tell us. Presumably, these companies will be subject to the same market forces that all other start ups are which means most will fail while the precious few winners will thrive. And since no western country has yet figured out how to get the cost of health care under control without rationing, it’s no wonder that Obama didn’t mention it since most Americans would recoil at some of the practices found in nation’s as diverse as Canada and Japan.

But all this is beside the point. With most inside the beltway pundits having determined Obama’s “honeymoon” is over, the president’s ability to dominate the agenda and pretty much get almost everything he wants is slipping away. His personal popularity remains very high which counts for a lot (despite his supporters ignoring his request for the most part last weekend to sign up their neighbors for Obama’s army). The three million contributors to his campaign are still there, waiting to be activated to put pressure on Congress to enact his ambitious and ruinously expensive agenda. So far, they have been quiescent. It is way to soon to tell whether it’s because the Administration hasn’t made a supreme effort to motivate them or because they were a mirage all along. We shall see.

Even if the president can’t get his supporters off their duffs to lobby for him and even if his short lived honeymoon may be coming to an end, the president still has one weapon in his arsenal that he will apparently continue to use in order to get his budget passed.

And that weapon is fear:

At the end of the day, the best way to bring our deficit down in the long run is not with a budget that continues the very same policies that have led us to a narrow prosperity and massive debt. It’s with a budget that leads to broad economic growth by moving from an era of borrow and spend to one where we save and invest.

And that’s why clean energy jobs and businesses will do all across America. That’s what a highly skilled workforce can do all across America. That’s what an efficient health care system that controls costs and entitlements like Medicare and Medicaid will do.

That’s why this budget is inseparable from this recovery: because it is what lays the foundation for a secure and lasting prosperity.

The fact is, his budget does continue “the very same policies that have led us to a narrow prosperity.” It just shifts the wealth around a bit. To believe that this will lead to an era of “save and invest” is ludicrous. And if it does, our prosperity will be very narrow indeed. Will Obama’s budget change people’s attitudes about “maxing out their credit cards” and piling on debt? I would say that a psychiatrist is called for at the White House if our president believes that.

The “save and invest” model was excellent for the 1950’s and 60’s when America was the workshop of the world and manufacturing was such a huge component of our economy. The American brand was so dominant that people could afford to put something away every week at 2-3% in a savings account because economic growth wasn’t as dependent on spending. Dollars churned through the economy mostly in the same community they were invested.

But we don’t make much here anymore and markets are now global. The economy is based - for better or worse - on consumer spending. More savings and investment would be very good as well as the notion that Americans shouldn’t go into hock up to their eyeballs. But what Obama is calling for is a massive reordering of economic priorities. And since he can’t realistically expect his budget to do that, he is simply fear mongering when he tries and connect the budget to the recovery.

It’s the only weapon he has used since he took office to get what he wants. He successfully frightened Congress into passing his stim bill (which no one read). He has used the specter of economic collapse to bail out his friends in the UAW. And he has deliberately fostered the notion that everyone agrees with him that all of these steps are necessary to “save” the economy. Opposition to his policies are politically motivated and insincere with the GOP hoping for catastrophe.

It has been effective in the past so why not go to the well again on the budget? But his act may be wearing a little thin with Congress and the people themselves may be tiring of listening to their own president trying to scare them into making it his way or the highway.

One thing appears certain - he has a helluva fight on his hands with a budding coalition of Republicans and blue dog Democrats who may eschew Obama’s fear mongering for crafting a budget that they can be re-elected on in 2010. By then, all the fear mongering in the world by the president will not hide the damage he has done to the economy or the violence he has done to the free market.

By: Rick Moran at 8:25 am | Permalink | Comments & Trackbacks (20)

3/23/2009
IS OUR NATIONAL WILL ‘WILTING AWAY?’

An interesting discussion piece in today’s Washington Times by Big Hollywood’s Andrew Breitbart that tries and make the case that Americans today, compared to the “Greatest Generation” that fought World War II, are a bunch of weak willed wimps, enamored of wealth and privilege while being frightened of our own shadow. In short, we are a bunch of self-indulgent philistines who lack the capacity to deal with the numerous crisis in our midst.

We’ve all heard this rant before - as I’m sure the “Greatest Generation” heard it from their elders back in the 1930’s and the generation before them, and on backwards to the founding of the republic where as early as Washington’s administration, ministers were bemoaning the loss of the “revolutionary spirit” and the desire by a majority of the populace for “material possessions” rather than seeking spiritual uplift. I guess it goes without saying that the more things change, the more likely the previous generation sees a danger that American values are threatened.

The question: Is it truer today than it was in the past? Has something “gone out” of America in the last decade or two?

Breitbart cites 9/11 as clear evidence that something has:

Signs of our collective weakness emerged after 9/11 when only part of the American population took seriously that we were at war with an evil and motivated enemy determined to destroy our way of life. Since then, al Qaeda has refused to quit despite debilitating losses.

Clearly, our national will is wilting away.

Following the tragic lead of Europe, too many Americans no longer want to engage our external threats head-on. And on the domestic front, we are confronting the economic crisis of our lifetime with the same full-steam-ahead spending-spree mind-set that got us into the mess to begin with.

We say: Let’s create more government dependency, reward the incompetent and print more money.

That’s doubling down on stupidity.

We are a trust-fund nation (picture Tori Spelling in the Lifetime Channel role of her career) whose BMW has run out of gas in the middle of the Mojave Desert after a pointless 115-miles-per-hour joy ride. The credit cards are maxed out. We’re out of cell phone range. And dad, who just got taken by Uncle Bernie Madoff, wouldn’t take the call anyway.

I would say that Mr. Breitbart is off base. Much more than a “part” of the population wants to confront al-Qaeda. The question up for debate - and still being debated - is what is the best way to go about doing that? There are those of us who believe that we must hit them militarily and keep hitting them no matter where they hide. Many others believe that this strategy “creates more terrorists” and wants to see a more studied approach to the threat that would rely almost exclusively on intelligence and law enforcement actions to break up terrorist cells before they can strike.

Is one approach “wimpier” than the other? Is the law enforcement path less in tune with our values and national character? I have been struggling with this question since 9/11 and I still don’t have an answer as far as which path would keep us safer although the biggest drawback to the law enforcement/intelligence argument is that it isn’t proactive enough, that it presupposes we will be hit and that the response to terrorism should be grounded in bringing the perpetrators to “justice.” In the nuclear age, this is myopic in the extreme which is why I come down on attacking al-Qaeda and keeping them constantly off balance and unable to mount a serious attack.

But that’s not the question. Breitbart is positing the notion that people who oppose this kind of war lack intestinal fortitude and other qualities that made the World War II generation the “Greatest.” I reject that idea as silly - turning a political/policy argument into a litmus test for who better represents the “real America.” (Liberals and others who support the police/law enforcement approach are equally silly when they accuse those of us who support a more proactive approach as being “warmongers.”) Ideally, a combination of the two policies would probably work best although it is never that simple.

But the argument over how to confront terrorism after 9/11 is symptomatic of something much deeper and Breitbart continuously misses the boat when he lays out arguments like this in describing the Baby Boom generation:

We are a trust-fund nation (picture Tori Spelling in the Lifetime Channel role of her career) whose BMW has run out of gas in the middle of the Mojave Desert after a pointless 115-miles-per-hour joy ride. The credit cards are maxed out. We’re out of cell phone range. And dad, who just got taken by Uncle Bernie Madoff, wouldn’t take the call anyway.

The silent generation, which learned valuable lessons from the Depression and World War II, is not here to guide us through these difficult times. The narcissistic baby boomers, who probably think this song is about them, are now firmly in charge. And that’s the rub.

It’s a clever metaphor but hardly the point. Mr. Breitbart hasn’t been paying attention because what he is describing is nothing new. Since the mid 1980’s, Americans have been in hock up to their eyeballs and the economy has been wholly dependent on how willing consumers have been to pile on personal debt. There is nothing new in Americans buying more house than they need or can afford nor is there anything earth shattering in the extraordinary number of citizens who try and escape their bad personal financial decisions by declaring bankruptcy which has been on the rise for a quarter century. It’s not just the boomers who have become irresponsible but their children and now grandchildren.

We are coming up on the 64th anniversary of the end of World War II. In those 64 years America has seen the rise of democratic socialism in the form of a very large and intrusive welfare state that has destroyed the notion of “self reliance” and substituted dependency for the underclass. What of the rest of us? Are we, as Breitbart suggests, a “trust fund nation?” Andrew must lead a very sheltered life. I look around me and see my neighbors struggling - in good times and bad - to make their way through life, raising their children, finding happiness wherever they can, and still believing in an America that he and I would definitely recognize.

These and tens of millions of other families outside of Andrew’s Hollywood bubble have not abandoned the ideals of prudence, independence, self-reliance, and the American way of life. They have not given up on helping their neighbor. They refuse to yield on moral questions about which they feel passionately. They haven’t completely lost faith in our institutions although the last several years has tested that faith.

There is a small percentage of irresponsibles who do not share these values and have totally abandoned them. And yet Mr. Breitbart sees fit to lump the rest of us in with these profligates? Is it because so many voted for Obama?

When the going gets tough, the weak go on Leno.

I can’t get out of my head that the leader of the free world gave the British prime minister 25 films on DVD that don’t even work in U.K. machines.

I can’t wrap my head around the fact that the commander in chief tried (for a minute anyway) to require injured warriors to pay to have private insurers take care of their treatment.

I can’t believe the president would allow the likes of Nancy Pelosi and Harry Reid to dictate the terms of his budget - and Barney Frank and Christopher Dodd, the symbols of government kowtowing to Wall Street - to be spokesmen for his financial bailout.

And did President Obama really produce a YouTube video to appease President Mahmoud Ahmadinejad and the mullahs of Iran?

Yes, he did.

These aren’t beginner’s mistakes. These are his core incompetencies.

So because we voted an incompetent into office, this proves that our “national will is wilting away?” Pardon me if I am completely unimpressed.

What Mr. Breitbart is really railing against are our elites. Many of them have indeed become overly cynical, hypocritical, greedy, grasping and acquisitive. There has been a massive failure of leadership in America - both parties, the business world, in organized labor, the intelligentsia, and most especially, the political class that includes politicians, bureaucrats, big media, and the loosely defined gaggle of academic intellectuals, policy wonks, and think tankers who play such a large role in actually governing the country. To say that they have all let us down is an understatement. Be as partisan as you like but no one can escape blame for our current mess.

It seems our elites have got it in their head that once they reach a certain level of achievement in America, they have a license to rob, cheat, and steal everything that isn’t nailed down. This sense of entitlement is perhaps the most damaging aspect of modern America. And I would say to Mr. Breitbart that this is a cross-generational phenomenon and not confined to the boomers. The president of the United States is making the argument that it is “greed” that is to blame. Such simple minded idiocy we might expect from a sophomore in high school (or a liberal). Greed is a symptom of the much larger problem that we refuse to face; a loss of faith in our institutions and, more directly, in each other.

At bottom, we don’t know who we are anymore. The old verities - as comforting as an pair of old shoes - don’t describe what we have become the last 50 years; a modern, industrialized nation, wired from one end of the continent to the other, that has destroyed regional differences (which played such a huge role in our development) and united us as we have never been united before. What does “self reliance” mean when we depend so much on government for such mundane things as making sure we have clean water to drink or safe highways, or bridges that won’t collapse, or prevent us from buying products that might kill or injure our children? You can claim “self reliance” all you want but how meaningful is it when you can’t even turn on the faucet without the help of government?

We have yet to translate these American values into modern nomenclature. The values aren’t anachronistic, only the way we define them. This is something I have been preaching for many months as I have struggled to redefine conservatism for my own aggrandizement. I’m not sure how to go about doing it, only that it needs to be done. We are, most of us, looking at an America through a spyglass that is giving us a view of the past, not an America is it exists today. And the biggest rub is we wouldn’t know how to describe it even if we could see it. There are no touchstones, no signposts that can aid us in coming to grips with this brave new world.

The practical effect of this is it has unmoored so many and set adrift the idea of a shared American experience so that morals and values become meaningless. This leads to excesses in our culture, hedonism, a catering to our own pleasures, and a destructive selfishness that goes beyond simple minded ideas of “greed” and warps the fabric of our national polity.

All of this, for lack of leadership.

Breitbart believes he has the “answer:”

The last time I felt this hopeless was when the Democratic Party and its cohorts in the media sold us on the false premise that we lost the war in Iraq. In the process, they also sought to demonize the very man that led us out of our peril.

His name is Gen. David H. Petraeus.

Less than two months into the Obama presidency, which appears to be lost somewhere in the Mojave Desert, I have decided to try to soothe my anxieties by placing my hope in a political surge.

In the election of 2010, Republicans should run heroic veterans of Operation Iraqi Freedom who exhibited the will and fortitude to defeat the enemy and to rebuild a torn nation, even while too many of their fellow countrymen wrote them off.

And in 2012, the man President Obama’s staunchest allies called “General Betray Us” should come in with guns blazing and defeat the man whose only weapon to lead us to victory is a teleprompter.

Generals make lousy presidents, generally speaking and politically inexperienced generals have been disasters. The exception is Eisenhower who lived and breathed politics for 3 years as Supreme Allied Commander, working the miracle of keeping a coalition together that featured ultra-capitalist and ultra-marxist states, not to mention maintaining a good relationship with some of the prickliest, most outsized personalities in world history including FDR, Churchill, Stalin, and DeGaulle. Ike was born to be president and made a damn fine one.

But Petreaus? He may in fact be an improvement as far as leadership is concerned over the current occupant of the White House (whose interview on 60 Minutes was almost surreal in the way he giggled about economic disaster), but it is ridiculous to believe the good general is the answer to a prayer. General Petreaus would almost certainly be just as dependent on a teleprompter as President Obama given his extraordinary lack of experience in the political arena. And the fact that Obama depends on the device isn’t the problem; it’s that we were sold a bill of goods on how articulate he was without one. How Petreaus would be an improvement in that regard is immaterial to whether he could do a better job with the economy. Since we don’t have a clue what the General thinks on that issue, the whole idea of him running for president is moot.

None of this deals with the core problem I mentioned above - of an America that is in the midst of a gigantic upheaval of which we have yet to come to grips. I imagine time will be the balm that soothes our distress. This is generally true of all big historical changes. But in the meantime, we are apparently in for a very rough ride, being led by a president with his own ideas of what values and traditions are important in America. He will decide which are important enough to save and which should be tossed under the bus.

By: Rick Moran at 7:49 am | Permalink | Comments & Trackbacks (28)