Archive for the 'Bad Economy' Category

Steve Forbes on the Crisis

December 23, 2009

In his December 10, 2009 Fact and Comment column, In-Credit-Able, in Forbes Magazine, Steve Forbes clearly communicated several points worth capturing.  Here’s on on the mortgage crisis:

Government-sponsored enterprises Fannie Mae ( FNM news people ) and Freddie Mac ( FRE news people), with their implicit government guarantees, were able to totally dominate the mortgage market. They could borrow cheaply and leverage up on a scale no private company could. When they went bingeing on subprime mortgages, they ended up twisting and then destroying the housing market. The private sector was quite capable of generating players that could have performed Fannie’s and Freddie’s roles. And because they wouldn’t have had Uncle Sam’s moral-hazard safety net, they would have been infinitely more cautious, even with the Fed creating floods of liquidity and the credit rating agencies forgetting their raison d’être. Yet Congress is determined to keep these beasts alive and under government sway. Washington is also taking over the student loan market.

This is not a well understood point.  Having the implicit guarantee of the government short-circuited the prudence that would take place in a free market.  All the bright bulbs that condemn free markets for causing the crisis, don’t seem very bright to me because they not only miss the true cause of the crisis, but they blame the very thing that could have prevented it.  Removing prudence from a free market through a government action will always end badly.

Here’s some clear thinking from Steve on health care:

The prospective government de facto takeover of health care will extend Washington’s reach into the credit markets. Health insurers will be reduced to federal vassals by being forced to offer policies at prices and terms dictated by Washington. As a reward they will have first call on the credit markets, with the same sort of implicit guarantees that once so benefited Fannie and Freddie.

It’s easy to forget, businesses like insurance companies are in business to make a profit for their shareholders.  If they don’t make a profit, there’s nothing forcing them to stay in business.


George Schultz on PBS

December 17, 2009

Frustrated with Tiger Woods banality on the major networks last night, I switched on PBS and caught a segment on the Lehrer News Hour with George Schultz discussing his belief that the financial crisis was due to the government creating a moral hazard with it’s ‘too big to fail’ bail-out nonsense.  He asks, if they’re too big to fail, why not make them smaller?  Great question.

I highly recommend watching the video.  Click here and it should be the first video listed on the left of the screen.

I nearly fell out of my chair.  Finally, some reason in media.  Good job Lehrer.  Getting warmer.

Moral hazard is the unintuitive lingo economists use to describe the idea that if someone or something is there to bail you out, you do things differently than you would if you didn’t have that backup.

If somebody knows they’ll be bailed out, they take excessive risks because they do it [take risks] on the taxpayers dollar.  The whole system is badly damaged when bailouts occur because it takes accountability out of the system and the market system depends on accountability, so we have to design a system so that anybody in it can fail.

The interviewer, who I hope was playing dumb for his audience (I think he was), asks Shultz if this is something he’s seen in the past or “is this a new phenomenon?”   This isn’t new.

This is everyday human behavior  that’s been around since the dawn of mankind.  If someone tells you they’ll pay for your retirement, you don’t save as much.  If you parents got you out of trouble when you were a kid, you got into more trouble.

Schultz explained two examples from the past to illustrate moral hazard.

First was a strike the longshoreman in 1968.  President Johnson enjoined the strike to prevent national emergency.  When Nixon took office and Schultz became his Secretary of Labor, another strike fired up, why not?  The President is going to help them get what we want to avoid a national emergency.

Schultz said Johnson was wrong and Nixon should stay out of it.  It would teach them “they have to take responsibility for their own actions,” kind of like the parent who finally learns they aren’t helping matters by soothing the temporary pain for the child who made a bad decision.  Nixon listened and the strikes died down.

Another example was with the failure Penn Central railroad.  The railroad grossly managed their affairs.  The Federal Reserve Chairman, Arthur Burns, wanted to give Penn Central a bailout to prevent a massive failure of the financial system.  Sound familiar?

In the end, he didn’t bail them out because they had retained Burns’ former law firm and a bailout would look too suspicious.  Penn Central failed.  There was no ripple effect.  The economy kept chugging.

While Schultz said a lot of good things in the interview, that wasn’t the part that fascinated me.  What fascinated me was that there was no yelling.  He wasn’t chastised for challenging today’s conventional wisdom that markets failed.  He was allowed to state his case and rationale in a calm manner and the interviewer tried to understand his points, rather than stuff him in the face with populist lay-ups.

I could imagine Matt Lauer conducting the same interview.  When Schultz said that staying out of the strikes would teach them they they need to take responsibility for their actions, I could envision Lauer cutting him off and asking him in his condescending tone something like, “but don’t you think the longshoremen need the muscle of the government behind them, because the companies have all the bargaining power?”  Or, “shouldn’t we have bailed out Penn Central?  X thousands lost their jobs.”

Then Lauer wouldn’t have given Schutlz a chance to explain that the end result of the actions that weren’t taken were far away better than what would have happened after the temporary soothing of the government action, much like the parent who finally decides its time for their kids to learn a lesson.

Tick, tick, tick

December 14, 2009

In an interview on 60 Minutes this evening, Obama blamed Wall Street bankers for the nation’s financial troubles.  If I remember correctly, the question was asked if banks are repaying TARP funds so they could pay their CEOs big bonuses.  To that, Obama said that he thinks that’s a motivation and that Wall Street still doesn’t get it that everyone is mad at them for causing the financial mess (paraphrased from memory).

What’s sad is that many American accept this explanation and we never hold government accountable for their role in the mess.

A true leader would own up to it.  Wall Street certainly played a role in the financial crisis, but they by no means acted alone.  This is where journalism needs to DO IT’S JOB!

Here are some great questions I would have loved to ask President Obama at that point:

1.  Do you think the government or government agencies had any role in the financial crisis or did Wall Street act alone?

2. Do you believe the Federal Reserve should have acted quicker to remove excess money supply after it seemed that the economy got back on track after 9/11?

3. You don’t believe that government put pressure on banks to make credit easier (i.e. lend to people they would normally consider high credit risks) in order to push this idea of expanding home ownership?

4. Didn’t the government provide implicit guarantees to subprime lending, again to expand home ownership, through Fannie Mae and Freddie Mac?

5. Wasn’t Fannie and Freddie one of the largest, if not largest, provider of these bad loans?  And weren’t they acting under direction from Congress?

6.  Weren’t regulations proposed in 2004 that would have reduced the risk of the housing crisis by making it tougher to get loans, but those regulations were rejected by Congress because they would have interfered with the goal of expanding home ownership?

6.  In order for us to better trust your leadership, shouldn’t we expect you to be honest about government’s role in the financial mess?  Rather, you seem to pretend that government has not blame and we should continue to blindly trust the government as you want to expand regulatory power even further.

7. Please tell me, how are the new financial regulatory powers that your administration is proposing different from those in 2004?  Why didn’t the current regulations not work to prevent the crisis?  Did anyone in government not even recognize that a crisis was about to happen?  If not, how can we trust those in government to recognize the next crisis?

8. What do you think about the people who borrowed well beyond their means?  Shouldn’t they have acted more prudently?  Shouldn’t we expect our citizens, who are provided thirteen years of education with a total valued at $150,000, to make responsible financial choices?  Shouldn’t we expect them to be able to read and understand a loan document and do their homework about the realities and responsibilities that come with home ownership?

9. What personal finance advice would you give Americans?

10.  Some say that people were motivated to borrow beyond their means because they felt that home prices were appreciating so rapidly that they could always sell the house and make a nice profit.  In other words, they were borrowing on future hopes rather than their realistic income.  Don’t you think that the government’s finances are reflecting that same behavior?  We are borrowing beyond our means with the hope that the economy will grow strong and pay for it.  Haven’t we learned our lesson here?  Don’t we know how this story is likely to end?

A Great Point

December 8, 2009

Thomas Sowell makes a great point in his column today, Jobs or Snow Jobs.

President Obama keeps talking about the jobs his administration is “creating” but there are more people unemployed now than before he took office. How can there be more unemployment after so many jobs have been “created”?

I suggest reading the whole column.  Here’s another nugget:

Minimum wage laws appear to give low-income workers something for nothing– and appearances are what count in politics. Realities can be left to others, so long as appearances get votes.

People with low skills or little experience usually get paid low wages. Passing a minimum wage law does not make them any more valuable. At a higher wage, it can just make them expendable. Raising the minimum wage in the midst of a recession was guaranteed to increase unemployment among the young– and it has.

Constant government experiments with new bright ideas is another common feature of Obama’s “change” and FDR’s New Deal. The uncertainty that this unpredictable experimentation generates makes employers reluctant to hire. Destroying some jobs while creating other jobs does not get you very far, except politically. But politically is what matters to politicians, even if their policies needlessly prolong a recession or depression.

Maybe we need to elect leaders that have the backbone to tell us the truth and inspire us to solve our own problems – rather than politicians that promise a free lunch and sweet nothings in exchange for your vote.

Dave Ramsey’s Mind Changer re: Cash for Clunkers

August 3, 2009

Dave Ramsey has a rare and great ability to make complex things simple.  We need more like him.  I think I heard him change, or at least solidify, Neil Cavuto’s thinking on the Cash for Clunkers program.

Neil seemed okay with the program and thought the fact that it ripped through $1 billion quickly was a sign that the economy might be turning.  Dave had a different take.  I’m paraphrasing what Dave said.

First, it’s a bad program because the government’s involved.  The government shouldn’t be taking from us to give to people buying cars.  Just give the money back to the people by reducing our taxes and letting us decide what to do with it.

Second, the government shouldn’t encourage people driving clunkers to buy cars they can’t afford.   Didn’t we just go through this mess with homes?  These people are driving clunkers for a reason.  They can’t afford new cars.  I drove a $200 clunker for years, then saved up and bought a $1,000 clunker, then a $2,000 clunker.  It wouldn’t have been a good idea for me to go from my $200 clunker to a $17,000 car.

Perhaps we haven’t learned our lesson yet, or maybe we learned the wrong lesson.  We should be encouraging responsible financial behavior rather than irresponsible behavior, for what?  Cars?

Walter Williams Hits A Home Run

June 10, 2009

In today’s column, Americans Love Government, Walter Williams hits a two triples and a home run with words.

Triple #1:

If the average American were asked his opinion of congressmen, among the more polite terms you’ll hear are thieves and crooks, liars and manipulators, hustlers and quacks. But what do the same people say when our nation faces a major problem? “Government ought to do something!” When people call for government to do something, it is as if they’ve been befallen by amnesia and forgotten just who is running government. It’s the very people whom they have labeled as thieves and crooks, liars and manipulators, hustlers and quacks.

Triple #2:

Many Americans want money they don’t personally own to be used for what they see as good causes such as handouts to farmers, poor people, college students, senior citizens and businesses. If they privately took someone’s earnings to give to a farmer, college student or senior citizen, they would be hunted down as thieves and carted off to jail. However, they get Congress to do the identical thing, through its taxing power, and they are seen as compassionate and caring.

Home Run:

The unspeakable horrors of Nazism, Stalinism and Maoism did not begin in the ’30s and ’40s with the men usually associated with those names. Those horrors were simply the end result of a long evolution of ideas leading to consolidation of power in central government in the name of “social justice.” In Germany, it led to the Enabling Act of 1933: Law to Remedy the Distress of the People and the Nation and, after all, who could be against a remedy to relieve distress? Decent but misguided Germans, who would have cringed at the thought of what Nazi Germany would become, succumbed to Hitler’s charisma.

Today’s Americans, enticed, perhaps enchanted, by charismatic speeches, are ceding so much power to Washington, and like yesteryear’s Germans are building the Trojan Horse for a future tyrant.

Daniel Hannan on Bailouts

June 5, 2009

Or maybe it’s Daniel Hannan on stimulus spending.  Either way, an excellent one-minute of video.


In order to pump money into the economy, you first have to suction that money out of the economy.  The one-sided way in which we discuss this reached a pinnacle at the recent G20 summit when leaders of the world boasted of having injected a trillion dollars into the world economy.  Where did it come from, if not, in the broader sense, from the world economy?  Saturn’s rings?

If we’re all better with state officials deciding how to spend our wealth, we would have lost the Cold War and we’d be holding this debate in Russian.

Matthew Lesko on Reason

June 4, 2009

Conservatives want everyone to succeed.

But conservative communication is much too academic and academic messages don’t stand up to the copy coming from left wing media. 

Maybe that’s changing with funny but true pieces like this and open source contests like this.

Thanks to Raoul Lufberry for the links.

How Are GM’s Shares Going to be Distributed?

June 1, 2009

This morning, I received this enjoyable e-mail from a friend who would like to be known as Raoul Lufberry (more on that name later).

So, to my complete shock I wake up this morning to find GM has filed for Chapter 11. I wasn’t aware there were enough people left in that organization to type out, copy, and mail an official document, much less one that should probably be spell checked.

Then I find out that both the governments of Canada and Ontario are both involved. I don’t know what the Canadian word for bankruptcy is, but I’m sure they’ve figured it out.  After all, when you head south in Detroit, you end up in Canada.  Now, both literally and figuratively.

But, what I really want to know is, when do I get my proxy materials.  I was just informed that I am now a proud shareholder in a company that I have avoided investing in for the entirety of my life, until this moment.  Somewhere Markowitz is rolling in his grave, but wait, he is only now figuratively dead.  Anyway, how are the shares going to be distributed?  I suggest a system where every individual tax filer receives shares based on their share of total IRS personal income tax receipts.  In this way, 1% of taxpayers would own more than 40% of the outstanding shares.  My guess is that there would be overlap with the 10% stake owned by the now-fleeced bondholders (who until this morning owned 54% of the company), so those in society with a profit motive could potentially have a majority of voting shares. This could be just the type of governance a turn-around situation like this could use.  And for this reason, it will never happen.

Maybe I could just have that headless chicken from South Park vote my shares.

To say the American people own GM is funny.  Owners usually have a say in how their business is run.   Thanks Raoul for making the truth entertaining.

Billionaires Do Something

May 27, 2009

This post at Cafe Hayek reminded me of a news story last week that reported on a power meeting of billionaires Bill Gates, Oprah Winfrey, Warren Buffett and Michael Bloomberg.  What they discussed wasn’t clear, but the reporters think the billionaires were exploring what they could do with their wealth to help charities in this rough economy.   I believe Diane Sawyer speculated that they were sharing “what worked.”

I’m not billionaire, but I do have thoughts on “what works”, especially with these four.

These four have created tremendous value for the people who choose the products their businesses produce, those employed by their businesses,  those who sell things to these folks and other shareholders of their businesses.

I love charities and if they want to support charity with the private property they’ve earned honestly by producing value through voluntary exchange, that’s their choice.

But, I think the biggest impact these four can have on the economy is to continue doing what they’ve done best: run their businesses well and encourage others to do the same.

I know that doesn’t produce highly visible, tear-jerking Extreme Home Makeover “MOVE THIS BUS!” experiences, but think about it.  Over the last 50 years what’s improved the standard of living for everybody the most?  Charitable organizations or private industry?