Thursday, April 29, 2010

POLITITIANS + GOVERNMENT + BUSINESS = GREED

From Cafe Hayek on 4/29/2009


My essay on the crisis, Gambling with Other People’s Money: How Perverted Incentives Created the Financial Crisis is now available online from the Mercatus Center and as a pdf. (In the online version, almost all of the footnoted articles and essays are available as links in the text if you want to go deeper.)

Here is the executive summary:

Beginning in the mid-1990s, home prices in many American cities began a decade-long climb that proved to be an irresistible opportunity for investors. Along the way, a lot of people made a great deal of money. But by the end of the first decade of the twenty-first century, too many of these investments turned out to be much riskier than many people had thought. Homeowners lost their houses, financial institutions imploded, and the entire financial system was in turmoil.

How did this happen? Whose fault was it? Some blame capitalism for being inherently unstable. Some blame Wall Street for its greed, hubris, and stupidity. But greed, hubris, and stupidity are always with us. What changed in recent years that created such a destructive set of decisions that culminated in the collapse of the housing market and the financial system?

In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.

There is a pleasing symmetry in the incentives facing homeowners, Fannie and Freddie, and the banks. All were highly leveraged and used other people’s money to take risks with a big upside and a truncated downside. That’s generally a good deal for risk takers. But it’s not so attractive for the “other people” who lent the money that financed those gambles. What made lenders so eager and willing to finance those risks?

That is the question I try to answer. Along the way I try to show how the incentives facing borrowers and lenders interacted with housing policy. Fannie and Freddie didn’t cause the crisis. But I argue that they were part of the problem.

I plan to blog here at the Cafe on the issues raised by the essay and on new information that comes to light. And in future posts I’ll add some caveats and confessions as to how I got to where I am in my understanding of these issues.

Wednesday, April 28, 2010

GLOBAL WARMING - DUH

A Canadian Journal reported on evidence of global warming in the artic. As the ice has melted researchers have found evidence of past human inhabitants of the artic. they found artifact from groups occupying the area 800 years ago, 1,000, 2,400 and 4,400. Their conclusion; manmade global warming has caused the unprecedented meltdown and we can see evidence of this in the fact that all these artifacts have been exposed. A crisis is upon us and we must act according to them.

But they ignore the real evidence and fail to ask even the most basic questions. If all manmade global warming is from the Industrial Age, the last 200 years, and that is what is destroying the artic; how is it that this same ground was exposed 800, 1,000, 2,400 and 4,400 years ago and warm enough for people to live there. Where was the manmade pollution then to cause global warming. Or, is the whole global warming meme bunk profiting polititians, academics and hucksters.

Sunday, April 25, 2010

TWO VIEWS



The liberal view that all wealth is stolen from the proletariat:

Here’s your “honest” man, Professor. Sen. Max Baucus explains it all:
…this is also an income shift. It’s a shift to leveling to help lower income, middle income Americans. Too often…in the last couple of years the maldistribution of income in America has gone up way too much. The wealthy are getting way, way too wealthy and the middle income class is left behind. Wages have not kept up with the increase in income of the highest income Americans. This legislation will have the effect of addressing that maldistribution of income in America because health care is now a right for all Americans…
But, hey, don’t you dare call these redistributionists socialists or Marxists. No, they’re merely fulfilling our Founders’ promise of the American Dream. Yes, they are. Yes, they can. Yes, they did.

A realistic view of where all the money went in the last decade:

Recent ABC News story on the relatively strong state of home mortgages in Texas contained this fascinating note about the late-2000’s real estate bubble:
One of Alan Greenspan’s lesser-known contributions to the annals of the credit crisis was a pair of studies he co-authored for the Fed, sizing up exactly how much Americans borrowed against their home equity in the bubble and what it was they were spending their new found (phantom) wealth on. Greenspan estimated that four-fifths of the trifold increase in American households’ mortgage debt between 1990 and 2006 resulted from “discretionary extraction of home equity.” Only one-fifth resulted from the purchase of new homes. In 2005 alone, U.S. homeowners extracted a half-trillion-plus dollars from their real estate via home-equity loans and cash-out refinances. Some $263 billion of the proceeds went to consumer spending and to pay off other debts.
In other words, a great deal of the borrowing among people who weren’t all that creditworthy in the first place was not only based on bubble real estate valuations, but the money borrowed didn’t even go towards actually buying houses. It just evaporated into buying more stuff, with overvalued low-equity homes as the only collateral.

IN OTHER WORDS THE 'POOR EXPLOITED MORTGAGE DEFUALTERS' WERE SUCKING THE MONEY OUT OF THEIR HOMES AND BUYING 'GOODIES' IN THE EXPECTATION THAT THE GOOD TIMES WILL NEVER END. NOW IT IS THE ' DUTY' OF RESPONSIBLE AMERICAN TO BAIL THEM OUT. AS OBAMA SAYS, IT'S ONLY FAIR.

Saturday, April 24, 2010

Capitalists and Socialism


Jonah Goldberg’s lastest contribution at National Review Online is well-worth reading – and quoting at length:

If by “capitalist” you mean someone who cares more about his own profit than yours; if you mean someone who cares more about providing for his family than providing for yours; if you mean someone who trusts that he is a better caretaker of his own interests and desires than a bureaucrat he’s never met, often in a city he’s never been to: then we are all capitalists. Because, by that standard, capitalism isn’t some far-off theory about the allocation of capital; it is a commonsense description of what motivates pretty much all human beings everywhere.

And that was one of the reasons why the hard socialism of the Soviet Union failed, and it is why the soft socialism of Western Europe is so anemic. At the end of the day, it is entirely natural for humans to work the system–any system–for their own betterment, whatever kind of system that may be. That’s why the black-market economy of the Soviet Union might have in fact been bigger than the official socialist economy. That is why devoted socialists worked the bureaucracy to get the best homes, get their kids into the best schools, and provide their families with the best food, clothes, and amenities they could. Just like people in capitalist countries.

It’s why labor unions demanded exemptions and “carve-outs” from Obamacare for their own health-care plans. And why very rich liberals still try their best to minimize their taxes.

The problem with socialism is socialism, because there are no socialists. Socialism is a system based upon an assumption about human nature that simply isn’t true. I can design a perfect canine community in which dogs never chase squirrels or groom their nether regions in an indelicate manner. But the moment I take that idea from the drawing board to the real world, I will discover that I cannot get dogs to behave against their nature–at least not without inflicting a terrible amount of punishment. Likewise, it’s easy to design a society that rewards each according to his need instead of his ability. The hard part is getting the crooked timber of humanity to yield to your vision.

And it’s also why the problem with capitalism is capitalists. Some people will always abuse the system and take things too far. Some will do it out of the hubris of intellect. Some will do it out of the venality of greed.

I bring all of this up because many in Washington seem convinced that the solution to the problem with capitalists is always less capitalism. To be sure, a free-market society is in some sense a government program. The government must prosecute criminality, enforce contracts, and demand that the rules be observed. Few lovers of free markets are so laissez-faire as to want to strip the government of its role as referee.

But few should want the ref to suit up and play the game.

Sunday, April 04, 2010

LEFTIES AND LOONIES

1. Why are you surprised? The important question to ask yourself is what kind of person is attracted to leftism. And the answer is a child. A child in a large body, but not a grownup. The world is incomprehensible and therefore maddening to someone who can't grow up. So what does he do? He throws excrement at the grownup world in a resentment filled tantrum.That's Alinsky in a nutshell. And Obama. Scratch Obama and there, just below the surface, is pure malevolence. Malevolence at what? At the productive. At those who make the world work. The adults. They must be punished. Simply for being adults. Simply for being adjusted. That's how horrible the Left is: an enraged child throwing shit at what it can't understand and can't be part of.

2. George Will at his finest:
Politics in a democracy is transactional: Politicians seek votes by promising to do things for voters, who seek promises in exchange for their votes. Because logrolling is how legislative coalitions are cobbled together in a continental nation, the auction by which reluctant House Democrats were purchased has been disillusioning only to sentimentalists with illusions about society’s stock of disinterestedness.
Besides, some of the transactions [that created Obamacare] were almost gorgeous: Government policy having helped make water scarce in California’s Central Valley, the party of expanding government secured two votes by increasing rations of the scarcity. Thus did one dependency lubricate legislation that establishes others.
Such legislation is a classic example of politicians’ heavy-handedness. Ignorant of the countless details that must be mastered to make the airline industry work even reasonably well – but intoxicated with crude fantasies of how it should work – politicians castrate pilots, gate agents, executives who specialize in making flight schedules, and myriad other airline specialists of their abilities to respond effectively to the vast array of ever-changing facts that must be reckoned with if each flight is to have a respectable chance of being safe and on-time.

3. As Thomas Sowell writes on page 17 of his latest book, Intellectuals and Society, “Why the transfer of decisions from those with personal experience and a stake in the outcome to those with neither can be expected to lead to better decisions is a question seldom asked, much less answered.”