Hsieh LTE on the Bailout

 Posted by on 3 October 2008 at 9:34 am  Activism, Economics, Finance, Politics
Oct 032008
 

The September 30, 2008 Denver Post did publish my LTE on the proposed bailout, but only in the online edition, not the print edition. (All of the LTE’s on this topic were online-only.)

It’s the second LTE on the page:

The current financial mess is not the fault of the free market, but rather of government interference in the free market. It’s clearly not in the interest of banks to loan money to people who can’t pay it back. The government created artificial incentives (such as the Community Reinvestment Act) that rewarded lenders for doing so, with the implied promise that taxpayers would pick up the tab if anything went wrong. The current mess is exactly the result one would expect.

To blame the free market for problems caused by government interference in the free market is like blaming one’s automobile accident on the car, rather than the fact that one was driving while yakking on a cellphone while looking at the onboard GPS system while reaching for a stick of gum in the glove compartment…

Paul Hsieh, Sedalia

For a longer discussion of this issue, see “The Long Road to Slack Lending Standards” by Steven Malanga. Here’s an excerpt:

Many defenders of the government’s efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren’t even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.

But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought. These justifications became the basis for a whole new set of values (or lack of values), as no-down payment loans and loans to people with poor credit history or to those who were already loaded up with debt became more common throughout the entire industry.

What happened in the mortgage industry is an example of how, in trying to eliminate discrimination from our society, we turned logic on its head. Instead of nobly trying to ensure equality of opportunity for everyone, many civil rights advocates tried to use the government to ensure equality of outcomes for everyone in the housing market. And so when faced with the idea that minorities weren’t getting approved for enough mortgages because they didn’t measure up as often to lending standards, the advocates told us that the standards must be discriminatory and needed to be junked. When lenders did that, we made heroes out of those who led the way, like Angelo Mozilo, before we made villains of them.

Now we all have to pay.

A deliberate policy of elevating “lack of value” above value sounds almost like something from Atlas Shrugged. The end results certainly looks like it…

1999 New York Times on Fannie Mae

 Posted by on 2 October 2008 at 11:06 pm  Economics, Politics
Oct 022008
 

Here are some excerpts from an interesting article in the September 30, 1999 edition of the New York Times on Fannie Mae’s new policies:

Fannie Mae Eases Credit To Aid Mortgage Lending

…”Fannie Mae has expanded home ownership for millions of families in the 1990′s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

…In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s. [Emphasis mine. -- PSH]

“From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

…Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

At least Fannie Mae’s directors had good intentions — shouldn’t that be what’s most important here?

Berton Braley on the Bailout

 Posted by on 2 October 2008 at 11:00 am  Economics, Finance, Poetry, Politics
Oct 022008
 

Berton Braley was a very popular early 20th century poet; his writings often extolled the virtues of capitalism, industry, success, and the like. Here’s a particularly apt poem, sent to me by Boaz Arad:

The Profits and Loss
By Berton Braley

From New Deal Ditties: or, Running in the Red with Roosevelt, 1936

When “planned economy” first began
It looked like a swell “idea” –
Until we learned it had no plan
And wasn’t economee.

For the taxes rise and the budget’s shot
And the New Deal costs are met
By spending money we haven’t got
For things that we never get.

The Billions roll in mighty stream,
A regular tidal flood,
With the net result that each spending scheme
Bogs down in a sea of mud.

When plans and programs go all to pot
Do the New Deal planners fret?
Why no, they think up a brand new lot
Of schemes to spend what we haven’t got
For things we will never get!

The House is scheduled to vote on this new bailout plan on Friday. It might well pass this time, in part due to all the special-interest pork added to the bill. (UGH!) Please tell your representative that you still oppose the bailout. You might wish to mention that your vote in November will be influenced by their vote tomorrow.

More Bailout-O-Rama

 Posted by on 1 October 2008 at 6:51 am  Activism, Economics, Finance, Politics
Oct 012008
 

The Senate has a new $700 billion bailout plan that they’re voting on today:

Top lawmakers said the Senate proposal, worked out after a day of behind the scenes maneuvering, would include tax breaks for businesses and alternative energy and higher government insurance for bank deposits.

We do need to speak up against this new bailout plan. The market crash after the defeat of the bill in the House caused some to think that a bailout would be a good idea:

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee, said the Senate decided to move quickly, citing signs of regret from some House members after the markets plunged in response to their initial vote.

“I think their will is coming back having heard from their constituents,” Mr. Dodd said.

Lawmakers said the stock market response to the rejection was a sobering experience that could enhance prospects for a revised plan. Some anxiety lifted on Tuesday, as the Dow Jones industrial average rose 485 points, regaining more than half of the 778 points it lost on Monday.

On the morning after the sell-off on Wall Street, Congressional offices reported a shift in angry calls from constituents, with some now demanding that lawmakers take some corrective action — a distinct change from the outpouring of public opposition that contributed to the defeat of the plan.

“I started hearing from a lot of people who lost money on their investments thanks to the big drop on Wall Street yesterday,” said Representative Steven C. LaTourette, Republican of Ohio, who voted against the plan.

So even if you already wrote or called your Senators, contact them again to tell them that you still oppose the bailout.

Also, the Ayn Rand Center has created a page of great resources on the bailout:

http://www.aynrand.org/site/PageServer?pagename=arc_financial_crisis

Feel free to make good use of it in your activism on this issue — not only by informing yourself but also by posting the link in comments on news articles, forwarding it to friends, including it in e-mails to representatives, and so on. Here’s ARC’s announcement:

The Ayn Rand Center Responds to the Financial Crisis
September 30, 2008

Americans are now facing an historic economic crisis. What was the cause? What is the cure? How do we prevent it from happening again?

While pundits and politicians blame the current housing and financial crisis on “greedy” businessmen and lax regulators, and are frantically urging the government to expand its control over our economic lives, the Ayn Rand Center for Individual Rights has launched a new Web page to defend a different view–that the actual cause of the crisis is government intervention, and the only cure, laissez-faire capitalism.

We invite you to check out our collection of essays, op-eds, lectures, and interviews arguing for a rational approach to this crisis–an approach you will not find anywhere else.

The Bailout Made Easy

 Posted by on 30 September 2008 at 5:03 pm  Economics, Finance, Politics
Sep 302008
 

The cover from this week’s edition of The Economist reduces the bailout to its essentials:

(Unfortunately, the article itself supports the bailout.)

In contrast, 8 years ago Howard Husock wrote the following about the Community Reinvestment Act in “The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities“:

…Even without a no-down-payment policy, the pressure on banks to make CRA-related loans may be leading to foreclosures. Though bankers generally cheerlead for CRA out of fear of being branded racists if they do not, the CEO of one midsize bank grumbles that 20 percent of his institution’s CRA-related mortgages, which required only $500 down payments, were delinquent in their very first year, and probably 7 percent will end in foreclosure. “The problem with CRA,” says an executive with a major national financial-services firm, “is that banks will simply throw money at things because they want that CRA rating.” From the banks’ point of view, CRA lending is simply a price of doing business—even if some of the mortgages must be written off.

…Looking into the future gives further cause for concern: “The bulk of these loans,” notes a Federal Reserve economist, “have been made during a period in which we have not experienced an economic downturn.” The Neighborhood Assistance Corporation of America’s own success stories make you wonder how much CRA-related carnage will result when the economy cools.

I think we’re finding out exactly how much right now…

Bush Vs. Ott On The Bailout

 Posted by on 30 September 2008 at 12:15 pm  Economics, Finance, Politics
Sep 302008
 

As one would expect, President Bush called for a massive financial bailout in his recent speech to America. So much for fiscally conservative Republicans.

I prefer this fictional Bush speech from satirist Scott Ott a lot better. Here are a few excerpts:

Bush: Congress Must Act to Save Stupid People

…”To sustain this shining city on a hill,” Mr. Bush said, “we need to rescue the ignorant, irresponsible folks — from Wall Street to Capitol Hill to Main Street — who got us to where we are today. We must guarantee that no American suffers the soft bigotry of being forced to live with the consequences of his bad decisions.”

…”If these giant companies fail, then America will be left with nothing but thousands of small to mid-sized financial firms that made prudent investment decisions during the past 15 years.”

…”It is a moral imperative that we guard the civil rights of these idiots,” he said. “If we fail, then we face the specter of free market capitalism run amok, and millions of Americans will feel the painful lash of personal responsibility across their backs.”

Correspondence on the Bailout

 Posted by on 29 September 2008 at 11:31 pm  Economics, Finance, Politics
Sep 292008
 

Objectivist historian John Lewis recently sent his representative a terse note against the bailout. His representative responded with the pro-bailout crap. And Dr. Lewis wrote a lengthy, informative, and very pointed reply. He has given me permission to reproduce the whole correspondence, but you might just want to skip down to his reply. Then you might want to forward it to your representatives in Washington.

Here’s the first letter:

From: John Lewis

Dear Speaker Pelosi and all US Representatives:

I oppose all bailouts of financial institutions by the US government.

Government regulation and meddling is solidly to blame for this crisis.

We must reduce government involvement in the economy now.

Sincerely;
Dr. John David Lewis
Visiting Associate Professor of Political Science, Duke University
Senior Reasearch Scholar, Social Philosophy and Policy Center

Here’s the reply from Representative David Price of North Carolina:

Date: September 29, 2008
From: Congressman David Price
To: Dr. John David Lewis
Subject: Reply from Congressman David Price

Dr. John Lewis

Durham, NC 27705

Dear Dr. Lewis:

Thank you for contacting me about our country’s financial crisis and the proposed recovery legislation. Today the House defeated this legislation, the Emergency Economic Stabilization Act, by a vote of 205 to 228, despite my support.

Like you, I do not have any interest in “bailing out” Wall Street firms and business leaders who have speculated recklessly, endangered our country’s consumers and homebuyers, and resisted regulation that would protect the public interest. My concern is for Main Street – for the people depending on a sound economy and the availability of credit to buy a house or car, to run their business and meet payroll, and to save for college and retirement.

Like it or not, we are all in this together, and the entire economy is threatened as we teeter on the edge of a 1929-style meltdown. Today Wachovia Bank, a North Carolina mainstay, collapsed. But this goes much deeper than bank failures. Last week, the City of Raleigh could not find a buyer for a $300 million bond, and Wake County cancelled its planned $472 million bond issue for school construction, Wake Tech, libraries, and open space acquisition. Both have AAA bond ratings.

Although President Bush lacks the credibility to be of much help, I take the dire warnings of economic analysts very seriously, particularly in light of everything that has happened in the last few weeks. But I could not support Secretary Paulson’s request for a blank check for $700 billion to purchase mortgage-backed securities and stabilize the markets.

I thus became part of the intensive discussions over the last ten days to rewrite the Treasury plan in several critical respects. The legislation which came before us today would:

o Provide strict independent oversight and accountability for all activities undertaken by the US Treasury

o Release the $700 billion in installments, with multiple reviews along the way

o Make certain that the entire $700 billion is recaptured by the Treasury and thus by the American taxpayer, by requiring that taxpayers share in any profits resulting from the government’s help and providing for assessment of the financial industry for any remaining losses

o Forbid “golden parachutes” and limit other compensation for executives of participating financial institutions.

o Require the government to work with participating institutions and loan servicers to help deserving homeowners negotiate reasonable repayment terms and stay in their homes

The defeat of the bill prolongs and perhaps deepens the crisis. Coordinating with the Senate, the House will need to return within days to try again. Perhaps the economic situation will then lead some members to reconsider. Perhaps the bill can be changed in ways that attract a majority; I certainly have a list of improvements I would like to see. But considering the members who voted “no,” I will want to scrutinize carefully any changes designed to attract them.

I am committed over the next few days to continue working to avert financial collapse and get the best possible deal for America ‘s taxpayers and homeowners. I welcome and share your concern about this situation and will be glad to hear from you at any time.

Sincerely,

DAVID PRICE

Member of Congress

Here’s Dr. Lewis’ stellar response:

Date: Monday, September 29, 2008
From: John Lewis
To: Congressman David Price of North Carolina
Subject: Reply from Congressman David Price

Dear Congressman Price;

Thank you for your frank and fast response. I should be clear. I am opposed to bailing out these firms. But what I am more opposed to is the entire political culture of regulation–including manipulation of interest rates, Sarbanes-Oxley, changes in accounting rules, the Community Reinvestment Act, and a scad of others–that has fostered this mess. Two weeks ago no politician in Washington knew this was coming. Suddenly, after several all-nighters, they have enough knowledge to grant a quarter of a trillion dollars to a government bureaucrat, to dole out as he sees fit–and to promise another half-trillion, should his actions make it worse.

Meanwhile, the country focuses on the allegedly evil CEOs, “speculators” (read “investors”), and loan initiators who were earlier damned for NOT making loan money available to high-risk borrowers. I remind you that the Community Reinvestment Act penalizes firms for not making such risky loans. Now, suddenly, those firms are villified for following the law. Well, that’s government–it faces no penalties, except a periodic popularity contest, and can contradict itself with impunity.

Most of all, I resent the politicians and punditrs who are claiming, contrary to evidence, that it is now “impossible to get a loan” on Main Street. It is impossible to borrow millions on Wall Street, but regional banks that made prudent investors are not in danger–unless the government further coerces them.

The government is not saving Main Street–it is nationalizing it. Is it not true that, with the takeover of Fannie Mae and Freddie Mac, the government now holds paper on tens of millions of American mortgages? What does granting American citizens “equity positions” and “profits” in companies seized by the government mean, except communism? Don’t we condemn Hugo Chavez for nationalizing oil companies?

I will also recall, as a student of economics, that the Great Depression was caused by a string of obnoxious legislation, and was then cruelly extended by massive government interference. Contrary to prevailing, but long-discredited, opinion, the government did not save us from that mess. It created, and prolonged, it. Twenty years earlier, JP Morgan ended the panic of 1908 in a few weeks–bankers in 1929 could not so act. Today, Morgan would have been jailed for the private pooling of assets he arranged. Is it not true that AIG was told by the Attorney General of New York that it would not be allowed to sell sound assets in order to save the holding company? Who is to blame for the collapse of a huge, and largely sound company, excpet those who forbhid its executives from acting?

You will forgive me if I have no respect for the likes of Senator Schumer, who started a run on a bank with his irresponsible statements and then claimed virtue for them, or Senator McCain, up to his neck in the Keating scandal, or Senator Dodd, whose reputation was on the rocks until this crisis saved him, or Senator Obama, who had not a clue at a White House meeting last week, and then went on-script before the press to cover his ignorance. You will please forgive me if promises of “oversight” by these PR men do not instill confidence.

I much more respect the CEOs who have spent their years in the business, and who face actual consequences for their errors. They do not have access to hundreds of billions of dollars of other people’s money–and they do not expect their stockholders to approve busines plans that cannot foretell whether they will lose three-quarters of a trillion dollars, or get some of it back in five or twenty years. They do not have their hands in the pocket of every person who produces in this country.

The truly brave politicians are those who recognize that the government is largely to blame for this mess, and should start emergency repeal of regulations now. Only this can allow responsible CEOs to start making decisions based on sound economics, rather than fear of breaking a law.

Sincerely;
John Lewis

Dr. John David Lewis
Visiting Associate Professor of Political Science, Duke University

Thank you, John!

Opposing the Bailout

 Posted by on 27 September 2008 at 2:00 pm  Activism, Economics, Finance
Sep 272008
 

If you want to let your elected officials know that you oppose the $700 billion Bush Bailout of Wall Street, you can use this website to send them an e-mail.

For example, Rob Abiera has sent the following excellent letter to his elected officials:

Dear *** SENATOR/REPRESENTATIVE XXX ***

I am writing as a constituent to ask you to oppose the Bush Administration’s request for $700 billion to bail out Wall Street. The healthiest thing for our economy would be to allow the market to work and let those firms deal privately with the consequences of their own actions. I don’t believe in accepting responsibility for other people’s actions and I have no desire to see my taxes used to help some Wall Street firms out of a situation which they created, not me. The answer to the current economic situation is not handouts to Wall Street tied to more regulations. The answer is to get the government OUT of the economy.

I’m sure that I disagree with Senator DeMint of South Carolina on other issues, but on this issue I have seen no better statement of the truth about this situation than his recent press release.

In this instance, Senator DeMint speaks for me, as well.

*** YOUR NAME ***
*** YOUR ADDRESS ***

Rob also included the text of Senator DeMint’s Press release.

I liked Rob’s letter a lot, and I’ve already sent similar e-mails to my own Senators and Representative.

BTW, Alex Epstein has a good piece on the bailout on the Fox News website, “The Bailout: Just a $700 Billion Hedge Fund?

Update from Diana:

I send the following letter to my representatives, plus various other politicians and officials:

Dear So-And-So,

I’m writing to tell you that I strongly oppose any bailout of Wall Street.

The current crisis was created by government controls and regulations. The only rational solution is to allow the market to correct itself by allowing full freedom of trade. The ban on shorting financial stocks should be lifted now: the markets cannot function properly without shorting. The government should not bail out any Wall Street firms — nor anyone else. Taxpayers should not be forced to pay for other people’s irresponsibility.

Then, to preserve economic health in the long run, all of the myriad anti-capitalist controls on the markets must be repealed. Fannie Mae and Freddie Mac should be totally privatized. The Community Reinvestment Act must be repealed.

Do not blame the current crisis on the free markets. Such crises are the inevitable product of a dangerous hybrid of capitalist markets and government controls. More government meddling will only exacerbate the problem. The only real solution is to move to a fully free market in which the government upholds and protects the rights to property and contract. Only then will every person be free to act on his own rational judgment in pursuit of his own wealth, security, and happiness. That’s what America should be all about.

I sent that to:

You need not write anything so lengthy and detailed as my letter. Just a single line saying that you oppose the bailout — and that you oppose government controls of the financial markets — would be fantastic.

The One Minute Case for Stock Shorting

 Posted by on 24 September 2008 at 3:27 pm  Economics
Sep 242008
 

Galileo Blogs gives a nice “One Minute Case For Stock Shorting“. He makes the case that, “Short selling is moral and should be permitted.”

More Americans (citizens and policy makers alike) need to read this.

U.S. Economic Freedom Index

 Posted by on 23 September 2008 at 10:30 am  Economics, Politics
Sep 232008
 

The Pacific Research Institute recently published the U.S. Economic Freedom Index: 2008 Report. It’s an analysis and ranking of the 50 United States by economic freedom. You can download the full PDF for free. (The annotated US map is also cool.)

Objectivist historian Eric Daniels contributed to the book. He wrote the first chapter, and contributed to the third.

Happily, Colorado is ranked #3! I pity all you poor bastards in New York, #50.

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