How Democrats and Republicans created the financial crisis

My mom alerts me to this article by Kevin Hassett, who blames the Democrats:

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a "world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. "We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: "It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

OK, that's pretty convincing. But what was Bush doing? He was cheerleading the bubble with his calls for an "ownership society," a phrase which he failed to mention last night in his explanation of the causes. I think on balance Democrats deserve more of the blame, because they fundamentally believe more in government intervention. However, too many Republicans, including Bush and McCain, don't understand the market, and so cannot defend it against the inevitable and relentless calls for government intervention.

Like Adam Smith, Russ Roberts keeps it simple

The turmoil in the housing market and the resulting financial crisis is just the latest example of political failure. Politicians wanted more home ownership than the market produces on its own, especially among low-income families. To encourage this politically popular goal, Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) were allowed to privatize their profits and socialize their losses. At the same time, Housing and Urban Development (HUD) required them to expand their commitment to affordable housing. Freddie and Fannie achieved this goal by buying bundles of subprime mortgages.
...

Both presidential candidates will promise a risk-free world with high returns. But peddling that fantasy is the cause of the current crisis. We treat our children this way--we do our best to insulate them from harm and still allow them to grow. I'd like politicians to treat me as an adult, paying the price for my recklessness and reaping a reward when I am prudent. Returning to that world, the world of markets, is the beginning of a return to stability.

Read the rest here in Forbes. So this is simple, right? Then why do most people not get it? Clearly that's more complex, but simply put I think we've produced a monster with our social democracy, and it thrives on the weaknesses of human nature, not just stupidity, but laziness, greed, and deceiptfulness.

Nationalists, Socialists, and Wall Street's just desserts

A friend asked me to comment on Meyerson's op-ed in today's WaPo:

Someone needs to invest in the United States of America. For the past decade and, in a broader sense, for the entire duration of the Reagan era, both government and Wall Street have opted not to. Should Barack Obama win, the era of neglectfulgovernment will probably come to an end. No matter who wins, Wall Street is vanishing before our eyes. And by the measure of their contribution to America's economic strength and well being, both Reagan-age government and Wall Street's investment banks plainly deserve to die.

Here's what I wrote him:

Meyerson here is quite right that investment has decreased in America, and increased in the rest of the world. But he seems to think this is a real bad thing, because we're Americans damn it and we deserve to be richer than everyone else? This guy is both nationalistic and socialistic, a wonderful combination of sentiments, which has been tried before, it's called National Socialism, aka Nazism.

A more fruitful question is why are investors bailing on America? I have some ideas, like out of control government no longer limited by the Constitution so that we're pretty much no longer such a special place. But I'd love to hear the candidates weigh in on this, rather than scapegoating.

The long goodbye

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

That's from the NY Times. Hope you're invested in other countries!

Bum strategy

George, a lanky man who pedals a bicycle around town and sleeps on a building roof, said paparazzi and parking valets can be a problem when he panhandles outside celebrity haunts. But being close to wealth can lead to $100 handouts, or finds such as gold jewelry, video cameras and an Armani suit.

He was so thrilled with the suit that he wore it panhandling until he noticed he wasn't doing too well.

"You have to have a certain look to get sympathy — dirty, kind of stupid, not aware," he said.

He also knows an opportunity when he sees one. For a couple months, he hung out in a vacant house, lounging by the pool drinking up the liquor he found in a cabinet until the owner walked in on him. He managed to flee.

"I was just using the facilities," George said. "I wasn't robbing no one."

Read the rest here.

National service as therapy

I'm watching CNN's national service forum. Obama and McCain seem to agree national service is the way to go. If you're feeling selfish, lazy, or pathetic, serve the nation. If you're otherwise just down in the dumps, serve the nation. If you want to be social and connect with others, serve the nation. If you want to be helpful and charitable, serve the nation. If you want to kick some aaaaaass, serve the nation. If you want to do something greater than yourself, you need to serve the nation, fool. (Mr. T for president!)

Interestingly, one of the interviewers (not Judy Woodruff) brought up Touqueville's observation that American's are crazy about voluntary associations. Then the interviewer asked if national service crowds out voluntary service. Obama: "No. Those are old arguments. ... Part of my job is to make government cool again." I guess Hitler, Stalin and Mao kinda gave it a bad name?

OK, Obama would say that's extreme, instead the problem is the special interests. I agree, so how the fuck are you going to keep special interests out of the national service racket?

So she's hot, and she gives a great speech

But Sarah Palin adds little more than stage presence to the ticket (Did you see the contrast when McCain walked on stage? He looked like he was in pain.) Of course, that's pretty much all that matters in politics. That and finding a good scape goat. For Republicans, there are the foreigners-cum-terrorists, and to a lesser extent the elites in the media, academia, and politics. For Democrats there are the Americans who are uneducated, religious, and xenophobic, i.e. Republicans, and of course business, profits, and capitalism generally.

I wish it were different, but just listen for the lines that get the biggest applause.

No wonder the stock market is down today.

News from my home state

Alabama is rolling out a creative but controversial program that will subject its 37,527 state employees to possibly humiliating at-work weigh-ins and fat tests. If they tip the scales, they'll be given a choice: slim down or pay up.

I don't know if creative is the word. They're simply more willing to face facts: it's the second fattest state in the union.

Read the rest here.

Driving, much worse than nose-picking

From today's Post:

Motorists continue to grumble about record high gas prices, but a new study suggests there is at least one benefit: Fewer traffic fatalities.

...

Nationwide, traffic deaths last dipped below 37,000 in 1961. The number peaked in 1972, at about 55,000, and in recent years has hovered near 42,000, Sivak said.

High gas prices have changed the habits of commuters across the country. People are using public transportation, scooters and motorcycles, and working from home.

Lon Anderson, spokesman for AAA Mid-Atlantic, said he experienced the changes firsthand during a recent drive to Richmond. Traffic moved at a mere 70 mph.

"I can't remember when somewhere around 70 miles per hour was the average speed of traffic on 95," Anderson said of the interstate. "There are certainly many drivers out there who have taken some steps to reduce the amount of gas they are burning. . . . That is one of the few good sides to very high gas prices: That if people drive less, we're going to save lives."

But that's pretty important, life that is. And driving kills us in a lot of ways, from air pollution to unwalkable cities. Plus there are the other negative externalities which maybe don't kill us but detract from the quality of life, e.g. the isolating and anti-social nature of driving. I'm wondering why we have to wait for gas prices to curb this behavior. What happened to social disapprobation? Why is nose-picking in public not OK but driving is just fine, so long as you don't nose-pick while driving?

I believe it is because too many are confused about freedom, and particularly the connection between political and social freedom. We are too often willing to fight for social freedom, i.e. freedom from disapprobation, even at the expense of political freedom. Yes, this is a conservative position. It means I support Al Gore's disapprobation of driving, yet not his calls for government enforced higher gas mileage standards. Too many conservatives are not willing to make the trade off.

And too many libertarians don't even believe there is a trade off. Just more or less freedom. In fact, we can never be totally free. Instead, political and social freedom are substitutes to a large extent. This is why the socially restrictive Victorian era coincided with the greatest political freedom we've known, and the socially free 1960's coincided with the high tide of Marxism/Statism/Socialism.

But that's not to say there is no progress, or that libertarians are completely off base. Sometimes society gets more of both social and political freedom, and it is worth striving for. And I believe in constitutional guarantees of political freedom, precisely because politics is the most effective means of social progress. That is, many of our most unjust social traditions, e.g. slavery, ultimately had to be overcome in the political sphere. It took an Abe Lincoln to orchestrate emancipation. It took a Gandi to break down the unjust traditions of Hinduism. And maybe it takes an Al Gore or Obama or McCain to point out the injustice of environmental degradation. All of this entails political force, less political freedom. Without political power as the focal point, it seems social progress is terribly slow.

The bottomline is we must acknowledge the trade off, but favor political freedom over social freedom through heavy reliance on constitutional guarantees. Nose-picking is optional.

Starting over in New Orleans, Mancur Olson style

When I asked Paul Vallas what made New Orleans such a promising place for educational reform, he told me that it was because he had no “institutional obstacles” — no school board, no collective bargaining agreement, a teachers’ union with very little power. “No one tells me how long my school day should be or my school year should be,” he said. “Nobody tells me who to hire or who not to hire. I can hire the most talented people. I can promote people based on merit and based on performance. I can dismiss people if they’re chronically nonattending or if they’re simply not performing.”

Read the rest from the NY Times.

Also, the EIA looks into who's paying the bills in Denver.

The Olympics sells much better than the Capitalism

I'm watching 2 Americans and 2 Belgians play beach volleyball in Chow Yong Park. Why are so many countries willing to fully embrace and compete in the Olympics, historically a Western institution and still slanted toward Western sports and athletes, and yet unwilling to embrace and compete in the historically Western institutions of free trade, property rights, and the rule of law? We in the West get the gold either way, i.e. through path dependence, but the rest of the world is learning how to play beach volleyball instead of how to avoid famine.

Maybe we should introduce experimental economics as an Olympic sport.

The Story of Stuff with Annie Leonard

Here it is. She claims to have 3 million viewers, so let's try to nip this in the bud.

This is a neatly packaged montage of all the familiar Marxist-Luddite gripes, and still without any real solutions proposed beyond "sustainable development, get involved, click around." This will always be the case because it is an intellectual fraud, most useful for rallying political movements, which in turn destroy millions of lives (USSR, Mao's China, Nazis).

As for her gripes, she is right to blame pollution and externalities, but what she fails to realize is that they are ultimately caused by a lack of property rights, not capitalism, profits, corporations, consumption, greed, etc. If we paid the full cost of disposing of our garbage, e.g. through a private dump rather than having goverment take it away magically, then we'd consume less and be more careful with our refuse.

Child labor is a bit more complicated, since we're talking about countries where child-slavery is still OK. Those countries have a lot of problems, chief among them is poverty. Capitalism can fix that. It worked in Europe, it can work anywhere. That's not to say that moral pressure from the world community isn't effective, especially in the short term, but ultimately we must let these countries get rich through capitalism and free trade. And remember that perhaps the most important thing we trade is ideas.

(Hat tip to Sammy, who also pointed me to this gem, a guy discussing the Georgia-Russia war with peanut butter on his face.)

Anthony Bourdain and Ted Nugent

...make great TV. No Reservations is the best travel show I can imagine, the only one I can stand. From Anthony's blog:

I didn't seek Ted out, by the way. I was summoned. He called a while back, said we should make television together - -and then told me exactly how. When the Nuge says jump? You ask only "How High?" and "How much ammo will I need?" In TedWorld, by the way, it all makes perfect sense.

Here they are discussing the negative externalities of obesity.

I can't wait for next week's Tokyo episode.

New book about Teach for America

Relentless Pursuit by Donna Foote. Here is what the Weekly Standard says about it:

The last few chapters are especially fascinating for policy enthusiasts as they offer a hopeful look at the changes taking place in public education. TFA teachers at Locke launched a special "academy" within the larger school that was showing promising results. An important component of the academy was an extra period that allowed teachers to spend time with students in subjects where they needed extra help. The TFA teachers persuaded Locke's principal to call a teachers' meeting to discuss making the extra period a schoolwide reform.

When the TFA teachers made impassioned pleas to their colleagues regarding the need for more class time, the teachers' union rep coldly retorted: "If you guys want to work 20 percent more, and not get paid 20 percent more, then vote for seven periods." The teachers voted down the proposal to extend the school day by a 72-to-36 vote. (Interestingly, Locke students supported the idea of a longer school day.)

But the story does not end there. After the 2005-06 school year, several TFA teachers left Locke to start two nearby "Green Dot" charter schools where bureaucracy and union work rules would not be an impediment to student achievement. These schools immediately proved so successful that Locke's principal, Frank Wells, saw the light and decided to join forces with Green Dot. After a protracted struggle with the union, Wells was able to convince a majority of Locke's tenured teachers to sign a petition that would allow the school to convert to charter status. Last year the Gates Foundation provided $8 million to fund Locke's transformation into 10 small Green Dot charter schools, and the new Green Dot Locke campus opened its doors last September--minus 22 incompetent teachers Wells had long sought to get rid of.

My sympathy makes me nonexpressive

Will Wilkinson summarizes The Theory of Moral Sentiments:

We are naturally sympathetic. Of course, our sympathy is rather limited and weak. But because we are sympathetic, we sympathize with the weakness of others’ sympathy. So, being sympathetic to the limits of others’ sympathy, we mute the expression of our own emotions, so that others will not be made uncomfortable or burdened by their failure to connect fully with what we really feel. And, likewise, we appreciate it when others do this for us. A sympathetic person doesn’t put other people out. Observing many instances of this pattern of praise for the sympathetic accommodation of weak sympathy (”thank you for not asking me to be that sad for you!”), we produce a general rule. And then we apply it to ourselves and come to disapprove of freely expressing unmuted emotion even when alone — even though we are actually having our emotions and not trying to sympathize with them. Our natural sympathy, wedded to the general weakness of sympathy, generates an individual conscience that demands that we be no more emotional than other people are ready to handle. Therefore, stoic self-command is awesome. “It’s OK! Just let it all out.” Nonsense! Why would you so rudely embarrass yourself with your own emotions?

I hope my girlfriend is reading this.