Ruminations - 27oct2008

George Rebane

No matter how much they exaggerate, political cartoons do reveal values and perceptions of truth.  This morning our beloved Onion featured two revealing left-wing cartoons.  One showing Greenspan in the wreckage of “unregulated free markets” when any student of current events knows we have had no such thing.  The other showing McCain and Palin denying a destitute Uncle Sam cash by “redistributing wealth” through “tax cuts for the rich” and spending private money to buy a wardrobe for a candidate of middling means.  Only a socialist would consider tax cuts on lawful earnings as a government giveaway, no matter who the recipient is or how much of the tax burden they bear.

Bumper sticker.

‘Paradise Lost’ by Roger McGrath in the Nov08 issue of Chronicles details the careers of two California politicians – Mayor Gavin Newsom (SF) and Mayor Anthony Villaraigosa (LA) – who have ambitions to be our next governor.  McGrath cites chapter and verse of the background of these politicians.  Of particular interest is Villaraigosa’s support of “the liberation of Aztlan.”  You will not be disturbed by the MSM explaining to you the make up and workings of organizations such as MALDEF, La Raza, and MEChA.  (google these if interested; if not, then learn Spanish)  To Jimmy Carter is attributed, “Whatever starts in California unfortunately has an inclination to spread.”

No justice at Justice.  The Department of Justice is warned by letters from congressional Democrats, including Senator Obama, not to waste effort investigating voter fraud but, instead, concentrate on assuring “access” to polls.  You see, enforcing voting laws mandated by the Constitution is exclusionary and racist.  Well, with outfits like ACORN helping register voters, we most certainly will have a very inclusionary election.

The End of Prosperity by Arthur Laffer et.al. will soon hit the bookstores.  In today’s WSJ Laffer writes “Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book Fooled by Randomness."  (Taleb, of black swan fame, is familiar to RR readers)  With the socialist clean sweep in the offing, Laffer outlines the programs that will permanently convert our economy to that of a second class nation seeking to spread misery equally on all of its citizens.  He reminds us that historically our government has about a 30% overhead for redistribution of the taxes it collects. 

Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

And here in his own voice is Senator Obama's redistribution interview confirming that 1) not only is he for the redistribution of wealth, but also 2) that it is a given that redistribution by government is desireable, and 3) only the means to achieve it is the remaining question.

    

Comments

[Mike]

After listening to BO's socialist comments (on your you tube link) I will have an even tougher time falling to sleep at night. This may be the scariest Halloween ever!

[Wade]

Actually, George, I believe the market in mortgage-backed CDOs and credit default swaps was in fact unregulated. This is precisely why these instruments were so favored by financial institutions.

[George Rebane]

Wade, you are probably right on individual products/securities. But I am referring to the overall housing finance market as a sea in which beasts like Fannie and Freddie swam making and consuming specific products such as you cite. That market has been government mangled for decades. And as I have stated elsewhere, capitalists do tend to game whatever market or environment they find themselves in. Bottom line (for the techie), it's hard to control a complex system, especially one for which the transfer function is unknown.

[Mike]

A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money.
-G Gordon Liddy

[Mike]

The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
-Winston Churchill

The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.
-Mark Twain

In general, the art of government consists of taking as much money as possible from one

party of the citizens to give to the other.
-Voltaire (1764)

[Wade]

Let the record show I was right about something! At the risk of appearing to lack any social graces whatsoever, allow to me to seize that opening. To wit:

It's not just the individual products/securities that were unregulated but the trade in them (the construction of, buying and selling between banks & firms) was wholly unregulated. No oversight whatsoever. And, to reiterate, this was no small part of the attraction for financial institutions -- perfectly Randian, laissez-faire capitalism. This spawned rather quickly, to absolutely no one's surprise, save apparently Greenspan's, a pure Ponzi scheme many times greater than all American mortgages combined plus the sum value of the NYSE tossed in for good measure.

Ponzi schemes have two states: a)growth and b)catastrophic failure. When the trade in mortgage-backed securities slowed and halted, we went from a to b in abruptly short order. The fact that much of the US (and indeed, the world's) financial industry followed suit should be a pretty big hint that this was something more than just your garden variety asset bubble spiked with a few mortgage defaults. Blaming the meltdown on inner-city minority mortgages is akin to blaming a handful of counterfeit bills for the failure of the classical Ponzi scheme. It is either nonsensical or disingenuous. Eventual failure is in the very nature of the Ponzi scheme; there is no other possible end state.

Which brings us to the conservative obsession with Fannie and Freddie. True, in the mid-2000s they both eschewed their normal business model (purchasing mortgages directly from issuers) to speculate in derivatives, but that simply means they share the blame with all 5 American broker-dealers, AIG, WaMu, and many others. But once again, the US real estate bubble (with attendant levels of dodgy mortgages) was just the pretext -- in reality anything could have formed the impetus for this type of speculation, as long as a completely unregulated shadow market was allowed to flourish around it. When the secondary market is 4 times bigger than the asset pool on which it's based (itself already inflated to mature bubble status), there is no longer any meaningful connection whatsoever between the two. This is why McCain's plan to buy up bad mortgages will have no effect whatsoever on the overall crisis.

And, BTW, I sincerely hope that everyone wailing about "socialism" (because they just learned that different tax policies involve different configurations of wealth transfer) had the same level of venom trained on George W. Bush when he trumpeted not one but two record breaking Farm Bills. Or perhaps they'd like to denounce Red Alaska, with it's oil royalty sharing and simultaneous dependence on Federal welfare, er, tax revenue. Anyone? Bueller?

Just in case anyone's interested: The defining feature of "socialism" is not, in fact, the redistribution of wealth, but the public or government ownership of the means of production. This means you Mssrs. Bush, Bernanke, and Paulson.

[George Rebane]

Well, sumbich Wade, we agree almost all the way down the line. I do believe you recall that I too am no fan of corporate welfare. In any event, my exceptions to your excellent comment are not worth noting here. I do want to add to your "defining feature of socialism", that both its instigation and maintenance as a form of governance requires the redistribution of wealth on a continual basis. It may not be the defining feature, but it's the most destructive attribute of socialism. And that's where the problem comes with ignorance of the transfer function, individual gaming, and possibly worst of all, the weakening/elimination of the feedback links between performance and reward.

[Mike]

Wade, the vast majority of these leveraged securities passed through Freddie and Fannie... thus giving (if by assumption only) the seal of GSE approval as they left the back door. Are the almost countless regulatory agencies (tax payer funded BTW) manned by a bunch of fools, idiots or just son's of politicians? Do you accept that NONE of these agencies had a hint of the Ponzi Scheme?

One of the problems with our current system is the "on the fence between socialism and capitalism" or said another way "pseudo capitalism." This recent failure of our government regulatory skills should be evidence enough that we should NEVER call upon the government to solve anything within the field of economics.

The most surprising thing to this libertarian is the FACT that the republicans were shouting for more regulation and the liberals were dead set against it!

[Wade]

George -

If we define "socialism" as merely the redistribution of wealth, then I fail to see what all the hand wringing is about these days. By that definition, we are a socialist country, have been for a long time, and for good measure, so is every other country on the planet. Why get bent out of shape about it now? Barack Obama intends to tweak the socialism by a few percentage points in the highest bracket, that's all. Just going back to Reagan-era socialism rather than Bush-era socailism...

Mike -

What exactly do you mean by "the vast majority of these leveraged securities passed through Freddie and Fannie..."? Can you explain that?

The crucial point about the meltdown is exactly that there was NO regulation at all, not that the regulation failed. There wasn't any regulation of the mortgage-backed derivative, credit default swap market. None. It is beyond preposterous to understand this as a failure of regulation. The banks and financial institutions demanded this type of market, demanded that they be free of net capital rules, etc. They got what they wanted and promptly drove right off the cliff.

"More regulation" is a bit misleading. I know, you're trying to make Fannie / Freddie the entirety of the crisis, but that is simply not true. They are a part of it. In the larger picture, the Republicans were in no way whatsoever calling for more regulation. Just the opposite in fact.

[Mike]

Wade, The majority of the mortgages which were leveraged passed through Freddie and Fannie giving the end product the implied approval of several US gov regulatory bodies from HUD to Office of Thrift Supervision to Freddie/Fannie...

I don't think Freddie/Fannie are to blame for all the crisis... my point was the existence of countless (worthless) regulators gave an implied "approval" to investors here and abroad... the problem is this pseudo capitalism system.

I can't accept the fact that none of our regulatory agencies (Office of current regulator bodies Thrift Supervision, or Freddie/Fannie, or HUD, or Federal Reserve, or the Treasury, or the Houses Finance Committee, or FDIC, SEC, NASD, FINRA, ETC) even hinted at a problem with the now "toxic" investment vehicles. I must deem the aforementioned agencies worthless if they did not both see and act on what should have been a very visible problem. What exactly does our tax dollars buy us with these worthless agencies???

Review the links which shows several republicans screaming for more regulation.
http://www.youtube.com/watch?v=68D9XrqyrWo&feature=related
http://www.youtube.com/watch?v=pIgqfM5C8lY
http://www.youtube.com/watch?v=H9juJr8CSY4&feature=related

[Mike]

This pseudo capitalism with multiple government regulating agencies around each corner implies that these regulators are, well, regulating. The markets react and investors invested based on the implied approval of the now "toxic" investments by countless "regulators". Either regulate or dissolve; doing something in between the two options creates the playing field for assumptions, perception, emotions to exist in an environment when a simple yes or no would serve us all better.

[George Rebane]

Wade, I never used the word "merely", and the definition's highlight is the redistributon of wealth that eliminates the feedback mechanism. If you suggest that all countries are now more or less to same extent socialistic, then we are truly at different ends of the universe. I can explain why people (my family among them) risk life and limb to get here as opposed to any other country in the world. Your explanation for that should be illuminating.

[Scott Obermuller]

Oh my goodness, I'm late to the party. But I must point out that the "unregulated mortgage-backed derivatives" and other derided financial vehicles are not the problem. It was, believe it or not - wait for it - massive quantities of government mandated and backed mortgages handed out to millions of greedy fools by greedy fools that did precisely what they were bound to do. This all was started and caressed along by a well-intentioned, but inept and incompetent government hell-bent in handing out home ownership to everyone regardless of their ability to pay. If the banks and other home mortgage institutions had been left to continue business as they had for decades, none of this would have happened. Sorry - although there is blame for all and I mean ALL, the government must take the final blame as instigators and enablers.
The only regulation we need from the government is the usual set of standards and rules regarding fraud and perjury. The government itself, of course will always be exempt from these rules. Private industry will have to soldier on as best it can.