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Capitol Ideas

Background to the Financial Crisis

By from the February 2012 issue

A key error of postwar finance, still uncorrected, was the persistent encouragement of debt.

When my parents bought a house in south-east England, in 1940, they paid all cash. It was the world of Foyle’s War, the British TV program seen on PBS. I’m not even sure that home mortgages existed at the time. Perhaps they did, but I don’t recall hearing about them until I came to America.

When I bought a condominium myself, in Washington, D.C., in 1983, my down payment was 50 percent of the purchase price. I could have paid less, but I didn’t have a 9-5 job (still don’t). So I brought with me to the money-lenders a letter from Ronald Reagan (written before he became president) saying how much he enjoyed my articles. And another from Jack Kemp. That impressed them, but the 50 percent down payment probably impressed them more.

For years, the assumption has been that if you need money you can always borrow it. You need more? Borrow more. Then things went totally out of control. You could borrow the full value of a house without showing that you had any means of repayment. Sometimes you could borrow more than the full value. Then the housing bubble burst.

A key error of postwar finance, still uncorrected, was the persistent encouragement of debt. It was assumed on Keynesian grounds that savings are actually harmful. They vanish into an unproductive “sump” and reduce consumption. Saving was duly discouraged—both taxed and inflated away. Meanwhile the interest we pay (on a home mortgage) became tax deductible.

The old Keynesian joke—”In the long run we are all dead”—became unofficial policy. Enjoy now, pay later. Borrow like there’s no tomorrow. Time horizons were extended to infinity. The virtue of prudence, built up over the ages, was cast aside. Debtors, for whom there were once prisons, became winners. Economic theory and traditional virtue became antagonists.

We talk today about rewriting the tax code. That is needed, but in our climate of deliberately aroused class resentment, changes that will encourage saving are unlikely. That would only help “the rich.” Home builders can be relied upon to preserve the mortgage interest deduction.

Governments had already learned that if they increase cash benefits without charging anyone, no one complains. Deficit finance was normalized. Making matters worse, ideologues in Europe thought they could “unify” the continent with a single currency. They promptly ignored their own deficit-limit rules (not to exceed 3 percent of GDP), and southern-tier countries like Greece assumed that EU membership meant that the good times would never end. The euro’s fixed exchange rates prevented local adjustments.

In the U.S., debt was further encouraged by Fannie Mae and Freddie Mac. They would buy loans from banks that had lent irresponsibly, and before you knew it the federal government was guaranteeing those loans. Non-obliging banks were threatened with lawsuits and penalties if their refusal to make new loans was deemed discriminatory. Barney Frank and Chris Dodd reminded us that we’re all entitled to buy a house. Claiming that an applicant didn’t have enough money to qualify was probably disguised racism.

Many of these bad loans are now insured by taxpayers and we are on the hook for more than $150 billion. If the “Occupy” people think that those responsible for this fiasco should be jailed, I am with them.

We now imagine that buying a house must be encouraged. But that, too, is recent. My father bought a house, but his father didn’t, although he could have afforded one. Before World War II there was very little inflation—perhaps none. Property rights were secure. Owners could “let” property without the fear that tenants would become immovable squatters.

The rise of inflation from (say) the 1960s to the end of the century then made owning a house a wise decision. The value of the house rose to protect the buyer against inflation. But that is no longer true—except in privileged enclaves like the nation’s capital (where house prices have fallen very little).

MEANWHILE, DEFICIT FINANCE prevails across the board. Payroll taxes are spent by Congress the minute the money arrives. The Social Security system is already paying out more than it takes in. “Revenues cannot keep up with the flood of baby boomers who are retiring at a rate of about 10,000 a day,” said a former administrator of Social Security.

The so-called “trust fund” now consists of about $2.6 trillion in non-marketable Treasury IOUs, kept in a filing cabinet in a government office in West Virginia. Social Security is “currently redeeming those securities to cover its cash shortfall,” wrote Allan Sloan of Fortune. But the Treasury “has to borrow money from investors to get cash to pay the trust fund so the trust fund can pay Social Security beneficiaries.” In other words, Sloan added, the financial position of the government as a whole “is no better than it would be if there were no Social Security trust fund.”

Which means there is no trust fund.

All this will be hard to reform. Recipients of government benefits have one vote each and they may already outnumber the taxpayers (also with one vote each). In 2009, Senator Cornyn of Texas said, 51 percent of households either paid no income tax or got money back from the government through the Earned Income Tax Credit. About 46 million Americans receive food stamps.

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About the Author

Tom Bethell is a senior editor of The American Spectator and author of The Politically Incorrect Guide to Science, The Noblest Triumph: Property and Prosperity Through the Ages, and most recently Questioning Einstein: Is Relativity Necessary? (2009).

Letter to the Editor View all comments (48) |

Kenny| 2.24.12 @ 6:54AM

Government debt is the foundation of the welfare state.

Without it and in massive amounts, government would be lean and mean --- and constitutional.

Indy| 2.24.12 @ 7:21AM

Government debt and consumer debt are at dangerous levels, see this chart from Sen. Sessions

http://www.budget.senate.gov/r.....cfm/charts

America's per capita debt is the highest in the world, thanks Barack, another historic first!

One thing that stands out to me as a lesson learned from grandparents and completely lost on our youth, my grandparents paid for consumer goods with cash, using credit was a huge no-no. We are losing so many who lived through the Great Depression, if you have relatives who went through it, talk to them, learn from them. It would be great to capture their experiences on video to share with others.

Boehner / McConnell would be wise to take up the issue of reforming Freddie / Fannie, Barack says he's done for the year now that he got his payroll tax extension which we have used up to fill up our gas tanks.

GOP leadership is weak, they have no courage to play offense. Is Freddie / Fannie to toxic a political football to run with? Put forward a serious proposal to reform (I really mean privatize) Freddie / Fannie and in doing so, educate voters on how Dodd-Frank did nothing to address a major driver of the housing collapse and educate voters on how much taxpayer money has been flushed away on these two entities.

Maxwell| 2.24.12 @ 8:51AM

Indy, my father was born in 1894 and always said if you cannot afford to pay cash you cannot afford. While I am almost 63 I still live by his words.

His other saying was always live below your income. Both are good guide lines by which to live.

Indy| 2.24.12 @ 10:33AM

You and I were blessed to receive such good guidance, the challenge is teaching others who have been raised to live paycheck to paycheck and / or rely on the government to help. I was once shocked to learn a recent college student say in an interview he had no idea how a mortgage works and he was complaining about his student loan burden. Perhaps he was taught to simply sign on the dotted line without understanding the financial commitment he was making, this is the generation we are dealing with, they live on credit and their understanding of basic economics / finance is poor at best.

Ryan| 2.24.12 @ 8:19AM

The article is one of the reasons that we may need to see some sort of gold standard (I favor a basket-of-metals approach for liquidity reasons) to at least compete with fiat money.

At any rate, government spending of borrowed or printed dollars needs to be drastically cut.

Louis Jenkins| 2.24.12 @ 8:22AM

Borrowing has become the norm rather than the exception. I even have trouble with my spouse making her understand that money doesn't grow on trees. We are accustomed to borrowing, and even the stores now have accounts inwhich you can borrow, take the product now, and worry about re-payment at a later date. I do not believe this is the proper way to do business, and have lived my life as such. If only our government had done the same. Since FDR, and even before, the government reaches into the pot of debt to finance its many projects, to the point that we are "Broke" as a nation. It will end sooner or later. Are you prepared for the sudden crash? If not there is still some time, but be assured, it will not last forever.

Mike Hawk| 2.24.12 @ 8:41AM

If your spouse is anything like my Ex, "What do you mean we are overdrawn, I still have checks!". Never could get any economic sense into her dense head.

Lee Ghume| 2.24.12 @ 9:58AM

Of course money does not grow on trees, you get it from the Magic Money Machine. Stop in at your bank, truck stop, grocery store, liquor store, convenience store, the things are everywhere. Just insert the card, punch in the numbers, and voila! Instant cash.

Jim Mulcahy| 2.24.12 @ 8:59AM

What rate of return does Mr. Bethell expect to earn on his savings if someone doesn't borrow it, i.e., go into debt? Or is everything supposed to be equity? The problem isn't debt but the various subsidies that favor one kind of debt, or investment if you like, over another. Mortgage interest is tax-deductible, interest on debt by corps. is, too. Dividends, which come out of after-tax income, are taxable to the recipient. The problem is a tax code that is an embarrassment to any sentient individual.

Howard| 2.24.12 @ 9:13AM

We are seeing inflation in certain items, i.e. gasoline. Egghead Ben has continued to debase the dollar, so the effects are seen in higher import prices. Also, the banks are no part of the Fed, in that their main job is buying up whatever bonds remaining after the Fed sucks up in the treasury auctions.
With most Americans retired, disabled, unemployed, students, or rich liberals, I think the good times will roll for Obama and crew.

Howard| 2.24.12 @ 9:14AM

I meant that the banks are effectively now part of the Fed.

Bob K.| 2.25.12 @ 9:13AM

If the economy continues to get worse heads will roll for Obama and crew!

2Anglico| 2.24.12 @ 9:35AM

NONE of these problems existed when we were on the gold standard. And for those who would nay-say that there were "panics" back then, those economic "panics" were because people "panicked" because the banks could not come up with enough dollar bills to redeem into gold. Imagine the panic tomorrow when you log into your "digital" account and find the government (the FED IS the government) has erased your "wealth"!!!!!
Somebody once said "the government is not the solution to the problem, government IS the problem!"

Moe Blotz| 2.24.12 @ 10:00AM

Most of the readers here at TAS can tell you the quote you cite is from Ronald Reagan.

Dixie Pixie| 2.24.12 @ 9:50AM

Gentlemen....The Federal Government has been grotesquely inflated far beyond the ability of the underling economic structure to pay for it.

Like all the hyper-inflated bubbles before it, it will burst.
When that happens, the wealth invested in the Federal Government will drop by one half and might go as low as 10% of current value.
Then the banks foreclose and the wolves move in to strip the more valuable assets at fire-sale prices.

That my be the point.
What Obama's puppet masters may have in mind is a classic “Over-Borrow, Strip and Burn” operation.
Borrow to the max, spend the money on themselves, crash the bond value, foreclose and sell the remaining assets to themselves at the lowest possible prices, walk away with all the valuables the Federal Government once had.

Frankly it looks bad what ever happens, but it will happen in the next presidential term.
An organization can not borrow 40% of all spending and bank that borrowing as income forever.
The current financial system will break under all that debt.
The Federal Bubble will burst!

Von Mises Jr.| 2.24.12 @ 10:53AM

Dixie, you are spot on. The Greek bailout the other day was a redux of the Chrysler bailout. Greek bond holders, like the Chrysler bond holders before them got thirty cents ($0.30) on the dollar. It was a grand redistribution of wealth from investors to government entitlements.

As for the fire sale, you are mostly right, in my opinion. Call me crazy, but Fannie Mae, Freddie Mac, HUD and GMAC (Chrysler bailout) are all GSE's, Departments of government or nationalized. They already own almost all mortgages in the country. They get them free with every default.
Worse yet, if you own or can pay off your house, the government has to approve the buyers loan. Long-term, why would they sell a house to someone that they already own or eventually will, that they can rent to them. It is a scheme to destroy property rights and it is called Agneda21 and other obscure names like "Sustainable development" and "Smart Growth."
"We're back in the USSR, we don't know how lucky we are, boy. Back in the USSR."

Dixie Pixie| 2.24.12 @ 10:05PM

Greetings Von.
Funny you should mention the USSR.

Is I understand it, the Agenda-21 postulates the human race herded into human “Islands” surrounded by vast “Green Belts” where no human activity is allowed.
The people in such reservations would live a life identical to european medieval villager.
The Green governmental bureaucrats would then be the aristocratic class enforcing such a civilization.
The best analog to such a life, is “Aeon Flux” the movie not the “Liquid TV” version.

My projection is the reverse of Agenda-21, as I suggest the path America will take is a Governmental financial implosion much like Argentina or the USSR.
Agenda-21 requires an all powerful Green government able to enforce its no-humans, no technology lifestyle.
That will be impossible to implement when the Federal Government can no longer pay its employees.

What is not understood by any Socialist, is the underlying equations that define Socialism are deeply dampening in function, so any economy based on Socialism will always regress to zero.
For example, for any system to achieve a stable state the mass / energy inputs must equal all losses in that system.
If the inputs are less that the losses, or the losses rise above the level of inputs, then the the system will collapse to zero.

What Obama is doing is restricting the energy / financial inputs into the American economic system while increasing the system losses by piling on more government.
Dampening the formation of new business while forcing more businesses out, only increases the rate of collapse.

The effects are multiplicative and interacting so the inflection point will not be noticed until the rate of collapse grows exponentially.
Argentina took decades to collapse, the USSR years, the USA could collapse in months and in the worse case, in a single day.

After that, your guess is as good as mine Von Mises Jr.

Von Mises Jr.| 2.25.12 @ 7:07AM

Dixie, excellent points and well stated, my friend. Perhaps it is all part of the same phenomenon. I am convinced that the combination of QEInfinity, trillion dollar deficits in perpetuity, and a private sector in lock down will lead to a financial and monetary collapse if Obama is re-elected.
But if you listen to the concepts of Cloward Piven, they must take the system down to re-build a socialist Utopia. In the meantime, Agenda21 codifies the usurpation of land rights that facilitates their grand plan of herding people.
I have been reading Burke, Tocqueville, Le Bon and other history on serfdom, the effects of the Industrial Revolution and Enlightenment Philosophy to understand revolutions; and I share your conclusion that this is the culmination for the socialist of the "Age of Reason" where they re-establish the medieval caste system with them as the nobles, and we are stuck in serf-mode with our progeny paying quitrents, tallies and we will be broken on the wheel for insolence.
As for energy, AT had a chart months ago showing that 98.5% of all oil is from state owned production. Russia, Saudi Arabia, Iran, Venezuela, Brazil, and other totalitarian regimes finance their statism with oil revenue. If you read Von Mises "Socialism," it concludes that One World Communist Government cannot calculate prices, so revenue is a nebulous concept. But it would still be their lifeblood along with nationalizing other commodities. And it may sound nuts, but think of what the average moron believes today:
Riddle me this- If socialist regimes throughout the world finance their statism with oil revenues, do we have the only leftist in the world who hate oil?
Of course not, our communists are just like everyone elses. They all hate liberty, free markets and capitalism. If Obozo and the Wicked Witch of the Bay Area nationalized XOM, COP, CVX....they would drill like banshees.

W| 2.24.12 @ 9:52AM

The premise is that spending will stimulate the economy by increasing the demand for goods and services. There is nothing wrong with borrowing to buy a house and auto and other big ticket items provided you have sufficient income to make the payments. The problem is the government, again, interfered with the market by requiring banks to give home loans to persons who were bad credit risks. Having created the crisis, the government, again, interfered with the market by issuing more rules and regulations affecting foreclosures and loan requirements.

Paul Kotik| 2.24.12 @ 10:17AM

Chronic inflation - that is, inflation as monetary policy - has certainly been one of the ways government has distorted markets and jacked up the perceived value of homeowning.

The mortgage interest deduction is another. The Treasury pays people to invest in real estate rather than in , say, stocks and bonds.

Absent these two riggings of the the markets, home ownership is by no means a universally rational investment. Owning one's residence means one is in the landlording business, with all that entails. Not everybody is suited to working in the landlording business. There's no business everybody's suited to.

I, for example, would definitely prefer to rent rather than to own if it were a level financial playing field. I'm not interested in house'n'garden styling, in interior decoration, in maintenance, insurance, property taxes or permanence. I'd like to be able to change my residence on relatively short notice with a minimum of trouble, risk, and expense.

Other people have other desires, preferences and requirements. For some, home ownership is better even if there aren't government-sponsored financial advantages to it.

In a free market, our various and diverse preferences would find free expression on the offer side of the market. Now, they don't: we've been playing on a field tilted by social engineers toward one type of housing solution.

And the bill, the bill for distorting markets, has come due. It always does.

David T| 2.24.12 @ 10:20AM

Mr. Bethell--I'm at a loss to understand why you agree with Krugman that government austerity will stymie economic growth.

Ron| 2.24.12 @ 12:42PM

I was smart enough to move to cash and only a debit card a long time ago...Sure, it means vacations are few and far between (and unlike my younger co-workers, most are under 30 who go on their credit cards and go often, at least 2x a year), but my wife has only her student loan to pay for. My car is an older V8 Crown Vic LX, but bought for $5K cash...No car payments to worry about, my daughter is working and paying her way through college as well...When i plunk down good money to support my shooting and hunting habits, whatever I buy, is mine. I do not buy anything I cannot pay cash for. And yes, we have a nice 42 inch flat screen, paid for in cash, PCs and laptops, clothes, food on the table, and preps for emergencies, plus PMs, and money in the bank. I send my son to football camp in the summer and pay cash for the airline ticket and his expenses. Why? because we live within our means, pay our bills spot on, and do not use credit.

I have a good life, a little sparse on vacations, but when I go, I enjoy them even more.

Don| 2.24.12 @ 12:52PM

If these long term bonds (10-30 yrs) are so attractive why isn't the govt selling them in much greater numbers so as to lock in the debt at 2-3.5%? Why are they selling mostly short term debt that has to be rolled over every couple years? Is it because if they pushed those 10-30 yr bonds few would be dumb enough to buy them and so expose the true financial calamity we're headed for? I'd wager if they really pushed those bonds today the yields would shoot up fast.

Fiscal| 2.24.12 @ 1:04PM

The author seems to have a fundamental misunderstanding of consumer debt -- it is a business issue, not a government issue. Government operates at the margins -- not at the center. Companies have a fiduciary responsibility to their shareholders to make profits. They do not have a moral responsibility other than to follow the law. Housing has almost always had the trait of increasing in value. As financial companies became more computerized and actuaries had access to modeling programs, it became rather clear that even if a house was foreclosed, the lender would not lose much money because it could be resold at an equal or higher price. With foreclosure risk limited, it made sense to those computer programs that they should make as many loans as possible for upfront fees because there was little or no downside risk even in an interest only loan. If the borrower had poor credit, then all the better since interest rates, and profits, would be higher. Then, with the advent of securitization in the 80's, the lenders had even less risk because they no longer held the loans. Then this exploded with derivatives because they were unregulated. Computer power had grown in the 90's and the creation of derivatives by PhD mathematicians became possible on a large scale. Since there was no regulation for the originators to maintain capital requirements as in the past, you achieved leverage rates in the ballpark of 40. AIG had leverage of 1 to 80.

This was the major cause of the problem -- not the CRA, not Fannie and Freddie, not government. When housing values started to decline, then the computer model used was no longer relevant. Because of the very high leverage, an extremely small change in the loss ratio became a huge fiscal nightmare.

Political blogs on both the right and left want to blame government, but if you understand the industry basics, you'd know that government only operated on the fringes.

aware| 2.25.12 @ 8:30AM

You could have made this spurious argument before '08, and probably convinced more than a few dupes, but not now. The State made implicit guarantees to backstop entire markets, including and especially mortgages. In Sept. of '08 those guarantees became explicit.

And the State sets interest rates not market forces. It also induces behavior through tax policy with "incentives". You ignore this overarching theme with your "margins" thesis.

"when housing values started to decline..." You seem to think this "just happened" when in fact the values were artificially inflated precisely because of the State's intervention in the housing market. Credit and monetary expansion directly caused this, as it does all false "booms" and these are the exclusive domain of the State through its private banking cartel the Federal Reserve. The bust is reality attempting to find truth on valuation, something yet to be discovered in housing.

If the State only operates on the "fringe" why do the financial and banking industries spend billions in lobbying efforts? The "unregulated" derivatives you blame were a direct result of these lobbying efforts. A guy throwing money from a balcony and people rush to grab the thrown money. You are blaming those receiving while ignoring the guy doing the throwing.

You are focusing on the economic but are oblivious to the political. It is impossible to understand economics without understanding the political in a State dominated system of corporatism.

It is quite simple really. In this kind of system the State is the enforcement arm that stifles competition through regulation and tax policy that corrals captive markets for favored cartels of insider big businesses. The cartels become back door tax collectors for the State by passing on the costs of said regulations to the captive markets of hapless consumers.

The State claims lawlessness on the part of the cartels to justify its domination and the cartels claim heavy handed State taxes and regulations to justify high prices paid by the hapless consumers. Both pretend adversarial roles to keep us in the dark to the fact that they are full and equal partners. This is fascism, or crony capitalism. Or as Mussolini put it, the truest form of fascism, corporatism.

There is no place the State "operates on the fringe". It is the very center without which nothing else in this fraud system can be.

Bob K.| 2.25.12 @ 9:26AM

Well said! And about as well said as it could be too!

As for Fiscal: So much for the use of computers to analyze the affect of human nature on economic theory! GIGO.

Synonymous | 2.24.12 @ 1:23PM

The hidden tax, inflation, is constantly at work.

Yesterday, in the free book bin at the library old-book store, I found a paperback from when I was a mere duped twenty year old---

“Europe on $5 a Day?”, the 1961-1962 edition, by Arthur Frommer. Ah, the memories of youth!

These days, you’d be lucky to get a cup of coffee for that amount.

The author is totally correct about how debt has infected and practically ruined society. Prudent borrowing is certainly okay, but, wow---

Well, gold is back up to almost $1,800 an ounce. Rather, the dollar is falling again, and is now worth almost only one divided by eighteen hundred dollar bills.

How high would 1,800 pieces of paper be? I’m picturing six books that are 300 pages long.

Buy gold and other REAL assets with your extra pieces of paper caller dollars. Indeed, cover your financial ass!

Fiscal| 2.24.12 @ 2:00PM

While excessive inflation is always a problem, a small level of inflation is helpful as it mitigates recession risk. The individual risk is significant when incomes don't rise at the same rate as inflation as we have seen for the middle class over the last decade since their incomes have actually decreased. People on fixed incomes, obviously, have the greatest risk.

Gold is simply a commodity -- not really a standard. You can counter inflation through a number of market means -- even by putting your dollars in a broad market index. Gold has had a history also of precipitous value drops.

Interestingly enough, a bit of inflation is good for a debtor nation like us because it reduces the amount of principal in real dollars. China hates inflation for that very reason. Right now, because of our high debt, I'd like to see a bit more of inflation. But we need to take advantage of that since long term, as you correctly state, it is harmful to society.

Synonymous | 2.24.12 @ 2:35PM

There’s a good debate going on about Santorum’s idea to not tax manufacturers. It brings to mind the whole “industrial policy” issue.

A true conservative SHOULD be willing to let the MARKET---to wit, all free people, one by one---decide where to invest their money, not some bureaucrats in DC.

Just so, the whole concept of a “monetary policy” is rife with anti-free market aspects. Why should a “Fed Chief” a la an apparatchik, a member of the DC nomenklatura, have the power to fiddle with the value of money?

Reagan had the right attitude---trust, but verify.

The still free humans who are awake get to express their own DISTRUST of the anti-market “money policy” being foisted on us all, and they VERIFY on a daily basis what real money is by buying and selling gold, silver, and other REAL commodities.

It ain’t pretty.

Yup. Industrial policy, monetary policy?

Both anti-free market.

Fiscal| 2.24.12 @ 3:57PM

Actually, I've always supported getting rid of all corporate tax in favor of a consumption tax for a great number of reasons.

People also seem to misunderstand regulation. Markets do not behave well on their own as bad conduct begets rewards. Look at how many times Trump went bankrupt with several ventures and stuck the bill on banks and other investors. Regulation that forces good behavior actually helps markets work correctly. For example, if we had forced mortgage originators to retain a significant portion of their risk, then they would not have made so many bad loans. We do force banks to maintain capital reserves through regulation. Leaving the derivatives market unregulated complete is a huge mistake.

On the other hand, regulation that picks winners and losers defeats market actions. There is a tendency, however, among those that support free markets, to say the government should stay completely out of it. Much of our economic growth had come from government investments in infrastructure and basic scientific research that individual companies would not do for economic reasons. Government was the source for things like the internet, the highway system, transportation infrastructure, and even Teflon. I'd favor our government supporting basic research. What I don't support is seed money to private companies like Solyndra like Obama did or tax benefits to hedge funds, financial companies, and oil companies like the Republicans did. Both are wrong.

aware| 2.25.12 @ 8:57AM

I can never understand those like you who know men do bad things except when they are ensconced in the role of "government overseer". Captive markets are as simple as capturing the "regulators".

I would point out that the "market" knew what crap the derivatives scam is. It was on its way to making paupers out of those responsible for it, as well as those caught up in it. The Too Big To Fails were about to be consigned to the ash heap of history.

But suddenly a miracle happened, the State overruled the verdict of the market(again) and bailed the whole rotten bunch out. Even now it is doing everything in its power to get the rigged roulette wheel rolling again. What do you think the purpose of ZIRP is? How do you think Dow 13 grand has been achieved?

Your logic means nothing in a corrupt sea of lies and manipulation we now find ourselves in. This is Zombieland where the dead walk among us propped up with voodoo money conjured out of the formless netherworld of central banks by high priests of Black Arts like Greenspan and Bernanke.

I know it is hard for you to believe but calamity is not inadvertent "mistakes" by well intentioned but misguided overseers. It is the deliberate result of evil people with evil intent motivated by their desire to control. Even if it means ruling an ash pile rather than serving in the Republic.

BackToBasics| 2.26.12 @ 4:37PM

aware, I understand your points and agree that there evil people at the top who are pushing regulations in government and finance solely for the purpose of enriching ans empowering themselves to the detriment of the rest of society and the world really. I have only a rudimentary understanding of derivatives but it seems they are instruments that by law, are designed to maximize the creation of credit almost out of thin air. I'm sure there's more to it than that but I instinctively undertsand that they are dangerous financial leverages in the hands of evil people.

Yet whether rich or poor, powerful or not, in the right positions or not, any group of people have a tendency to greed if not held in check by law, self or religion. I think Fiscal is arguing for a balanced approach between government, investment and commercial banks, and the marketplace for example when he says, "if we had forced mortgage originators to retain a significant portion of their risk, then they would not have made so many bad loans" and "Leaving the derivatives market unregulated completely is a huge mistake."

Taking up the first quote, if so many loans had not been made, there would have been fewer loans made and the housing bubble may have been mitigated or not occurred at all.

I think you both make good points and you are more direct, and correctly so, in pointing out just how bad things are getting and they will get worse yet, but I do not see Fiscal's points as a lopsided affair that doesn't take the evil into account.

aware| 2.27.12 @ 6:20AM

"Government" is the star of this drama. You and Fiscal completely underestimate the level of pure corruption involved. If the "people" are incompetent at managing themselves, why are these same people suddenly not only competent at managing themselves but managing others as well when they become government "regulators"?

BackToBasics| 2.27.12 @ 4:52PM

I know that evil is rising in government and by extension, financial markets and banking. I know that they want total control of the population. I expect imprisonment of many Christians and conservatives within months after a crisis or created crisis causes martial law to be imposed.

The new financial instruments such as derivatives and hedge funds that were created I believe only in the 1980's and were set up to have huge impacts and control really on much of the equity markets and in finance should be outlawed. But government would be the "star" in rolling this back as well. How else can we stop the onslaught except through violent revolution? I do not want to see that happen either because the human ugliness at ALL levels of the pouulation will be unleashed then; although that may be in our future as well. We still have time to make the arguments that changes are better made through the rule of law. And, of course this will not happen under a Democrat-controlled government.

Bob Grant| 2.25.12 @ 9:54AM

" Why should a “Fed Chief” a la an apparatchik, a member of the DC nomenklatura, have the power to fiddle with the value of money? "

The original objective of the Fed seemed like a good idea: to create an elastic currency which would help maintain maximum employment and stable prices at moderate interest rates.

Sort of like a piano tuner making MINUTE adjustments to the "piano" every so often.

It seems to have changed over the years into this big government entity that is accountable to very few.

cicero| 2.24.12 @ 4:26PM

Fiscal is exactly correct. The problem that does rest at the feet of government, however, is that the government decided to bail out the BANKERS when their little roulette game collapsed. Once Congress repealed Glass Steagal in the late 90s, and no longer held the banks to making money by loaning at interest, but allowed them to invest (gamble) in the markets, and compounded the error by changing accoutning practices from Standard Accounting Principles to Mark to Market, the scene was poised for collapse. But that is too long of a discussion.
What made America the greatest economic powerhouse the world has ever seen was not our ability to produce, but our ability to consume. When we gave the working man the ability to enter the consumer debt market, he was able to purchase what he could enjoy now with money he could borrow at reasonable rates, and pay off during the life of the use. That is not such a bad thing. Afted all, the Chinese are production dynamoes. However, 80% of the Chinese population lives in poverty. That 80% has no ability to consume. As a result, they have no domestic markets. In America, we have a huge domestic market because our the vast majority of our people can borrow what they needd to consume, and again, pay off the borrowed money during the life of the consumption . To yearn for the good old days gone bye, when the average man could not but a house or a car or anything else until he could pay for it cash, is a false memory of prosperity.

Fiscal| 2.24.12 @ 4:45PM

Cicero, we must be joined at the him on this one. You certainly make excellent points. That's the reason I support a consumption tax over a corporate income tax. I'm sure you could easily figure out that it would be a net positive in the balance of payments.

What bothers me, is the economic illiteracy of both Republicans and Democrats on these issues. Republicans actually believe that tax cuts can stimulate GDP and Democrats actually believe that spending will offer payback. They base this, not on knowledge, but on their definition of "common sense". Republicans have sold the idea the if you have more money in your pocket, you'll spend it and the economy will get better. And companies will spend more on creating jobs. In reality, you pay off bills and companies spend it in other countries and take more profits.

Ryan| 2.27.12 @ 8:49AM

No, it isn't. Buying on debt is a house of cards always destined to fail. It's what we are seeing now with massive government debt and massive consumer debt.

When we encourage consumerism, we encourage materialism rather than saving and thrift. We encourage the idea that I don't have to be diligent in my work, that I don't delay gratification. It's a morally bankrupt idea.

There's a Biblical argument against your position as well - the Bible supports saving, rather than spending, describing debtors as "slaves" to lenders.

cicero| 2.24.12 @ 6:26PM

The real problem is that our government is afraid to let the market place work. If the government had done absolutely nothing, the whole mess would have been over in about 2 weeks. The landslide began with the big baankers playing chicken with one another. Go back to about March, 2008, when Bear Stearns tried to borrow overnight money to shore up their short term cap requirements. Chase (read Jamie Diamond) for whatever reason ( rumor has it that there was a rumor floated that Bear was in trouble), decided not to loan them money secured by Bears mortgage backed derivatives. All at once, Bear stock went from $157.00 per share to $2.00. The government then stepped in and "convinced" Chase to buy Bear for around $10.00 per share. Not a bad price for a company that had been evaluated by the street at the $157.00 mark. The world did not come to an end.
That worked so well, that the big boys did the same with Leyman Bros. Fuld refused to put any of his own millions into his own company to shore it up, and he panicked and filed for bankruptcy. Within a day of filing, Barclays bought all of the assets of Leyman at bargain basement prices. Not too bad so far, and the sky didn't even begin to fall. This was August, 2008.
When they got into September, 2008, everybody got into the game. All of the bank bigs, (see how close that word is to pigs?), and the hedge fund boys got into the game. They all went the same way at the same time. All of them bet against (refused to buy) the mortgage backed securities of anybody. With the Mark to Market accounting requirements, that made everybodies mortgage backed securities worth the same (no buyer, no value), which was zero. All at once, they were all holding huge amounts of worthless paper. Since Goldman was counterparty for AIG, which meant that it was guaranteeing the value of AIG's mortgage backed securities, Goldman stood to be pretty nearly wiped out. AIG could have survived, because all of its insurance divisions were still hugely profitable. Only its hedge fund division was in trouble because of the mortgage backed securities that had just been rendered worthless by Mark to Market. Note - 96% of the mortgages in the country were performing. Had they been valued according to Standard Accounting Principles, they would have been accounted for at their face value.
The bankers ran to Washington crying "The sky is falling!" All of the Presidents ecodnomic advisors, not wanting to see their classmen thrown to the wolves (their shareholders), picked up the hew and cry. Bush panicked, probably because he didn't fully understand what was reeally going on, and took their advice.
Recall, the reason for the bailout was so that credit would not dry up. Anyone of you guys out there to get a loan after the infusion of your tax dollars into the big banks? Why do you think the jig came up for G.M and Chrysler when it did? Nobody could get a car loan. Nobody could get a boat loan. Nobody could get a business loan.
Our hero, Barrack came into power in January, 2009. He started to throw money around with reckless abandont. Stimulus I. All that money went to the State pension funds, and to other favored personnel. The banks thought that happy days were here again. They announced that theey were now ready to pay themselves the bonuses that they had promised themselves. Obama blanched. He told them that they couldn't do that, because it would make him look like a jackass. He told them they had to pay back the TARP I money first.
In March, Congress quietly passed a bill changing the accounting standards back from Mark to Market to Standard Accounting Principles. At once, all of those mortgages that were valued at zero magically were valued at face. With the new balance sheets, the bigs went to the Fed window and borrowed at a ratio pof 9 to 1 against their new balance sheets, at 0 to 1/2% interest.
Did they loan money to the masses? Of course not. They bought T Bills that were carrying coupons of 3.75%. That is he real story. To try to pin this debacle on the working stiff who charged his wide screen t.v. on his Visa card is nonsense.

BackToBasics| 2.25.12 @ 12:27PM

Cicero, when you say that the crisis could have been over in 2 weeks do you mean it could have been over if the mark to market accounting rules had been changed back to standard accounting principles?

Did the big bankers and hedge fund managers stopped buying the mortgage backed securities was it for the reason that they hoped to buy other investment banks cheaply or was it because after Sterns and Lehman, they all realized that suddenly MB derivatives were now worth only pieces of paper with mark to market valuations and so they were frozen with fear over it?

I remember listening to probably 20 different interviews of analysts and a few politicians, some were panicked, about half, including Steve Forbes said to stop using mark to market accounting, others only said the sky was falling without government intervention. I had to look up mark to market myself as I had never heard of it before. I did not understand fully what what happening although I instinctively did not want to see a government bailout.

But bottom line, from what you mentioned and others like Forbes, it sounds like just changing the accounting principles back to standard would have righted the balance sheets and things would have worked out in quick order. Under it all, that 96% of mortgages were current during the crisis shows what either panic or greed can do.

BackToBasics| 2.25.12 @ 12:28PM

corr - When the big bankers....

Pat| 2.24.12 @ 7:49PM

This author should have gone the distance and described Social Security as welfare plain and simple. The charade both political parties are playing is to avoid the word “welfare” in a successful attempt to appease voters who now qualify, or will shortly qualify, for that senior citizen’s discount down at the local barber or beauty shop. In truth, neither party has a clue how to “reform” Social Security and the only feasible plan is to cut benefits when the crunch time comes or raise the age of benefit eligibility, or probably both. Because, in truth, how do you tell voters they’ve contributed all their working lives to a “Fund” which has no funds? The lie was this is not a welfare system for the non-productive, this is simply acting as your loyal financial trustee for 35 years of your SS contributions – you earned it, it’s not like the government is forcibly taking money from productive workers and giving it to you – except that’s exactly what it is.

The covenant between government and productive citizen was give us federal bureaucrats your money, or rather we’ll simply take your money, and Washington will arrange for your golden years to be worry free, at least financially. And breaking long standing covenants isn’t a wise political move regardless of which moral principles your party adheres to: Whether the principles of “fairness” guff the Obama regime peddles, the Compassionate Conservatism of former Republican movers and shakers or the stand on your own two feet of true Conservatives.

And no one can be blamed, another frustration that isn’t easy to live with. Most will blame that demon “demographics” as if cloaking the obvious in a fancy label somehow relieves politicians, past and present, from all blame. Of course money is just paper in the final analysis, our true economic wealth lies within our American people and our tangible assets - but that printed paper can become very important someday when you’re slowly pushing your cart through a local Walmart while favoring your arthritic knee.

We’ve aborted the unborn for decades and now we may soon have to retroactively abort the old geezers because we just can’t live up to the foolish promises we made to them. We’re not merely emulating Europe, we are Europe and they are us – pity.

POST American| 2.24.12 @ 10:14PM

---------------------FINAL WORD-----------------------

POST the dubious sinking of the
'Loose--'IT'---tania' , indeed, POST the
dubious beginings of WWI itself

POST the Bolsevik coup d'etat --er, we
meant 'revolution'

POST the engineered Ukranian genocide
--er, we meant 'famine'

POST the empowerment of Josef Stalin

POST the engineered 'Great Depression'

"The Federal Reserve has pumped
so many BILLIONS into [--NAZI--]
Germany that they dare NOT name
the TOTAL."
Rep. Charles McFadden
1935

-------The ANTI-Constitutional 'FED'
remains the KEY instrument of capstone
control, at least on a par with the seditious,
bottomlessly rich, TAX FREE, eugenics
and globalism mongering 'benny vilent'
-----------foundations and NGOs-------------.

-----------Time for SPRING cleaning boys!----------

---------------------------------HIGH TIME-------------

Bob K.| 2.25.12 @ 10:17AM

' "Capitalism," "private enterprise," "entrepreneurship," etc., etc.--these terms, carried over from the very different world of the nineteenth century, have become imprecise, sometimes to the extent of meaninglessness; shibboleths evoked and pronounced for political purposes. In the 1830's Tocqueville wrote that a "a new science of politics was necessary for a new world." The same goes for a new "science" --and vocabulary--of economics a century and a half later." '

From John Lukacs, "A New Republic-A History of the United States in the Twentieth Century." Copyrights 1984 and 2004. Section 3. "The Third Century" "Dictatress of the World." * (How the people of the United States suddenly found themselves the supreme rulers of the globe.) at page 419.

*"America does not go abroad in search of monsters to destroy.............beyond the power of extrication, in all the wars and interests and intrigue, of individual avarice , envy, and ambition...........She might become the dictatress of the world. She would be no longer the ruler of her own spirit."

From John Quincy Adams, Fourth of July Speech in 1921. He was President Monroe's Secretary of State at the time.

Bob K.| 2.25.12 @ 10:30AM

That would be, of course, 1821, not 1921.

Ryan| 2.27.12 @ 8:51AM

So...your point is...

POST American| 2.25.12 @ 10:34PM

----------------------FINAL WORD--------------------------

---TIME for Spring CLEANING. . .

MapsofWorld.com | 3.5.12 @ 3:17PM

Are BRIC nations the Future? Considering US downgrade & Euro Crisis, New Infographic, Your vote? http://bit.ly/01bric

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