Category ►►► Econ. 101

October 4, 2008

The Art of the Possible

Several long-time commenters to Big Lizards have decried the Paulson-Bernanke rescue package. The line of argument is that, instead of a massively statist approach (we certainly agree on the description), we should have allowed the "free market" to correct itself.

I agree, this would have been a very much better approach -- if we had a free market to begin with. But we don't; we have a mixed socialist-free market, and that is what we will have for the forseeable future. So in the real world, the claim of the naysayers is that "We should have allowed the socialist-statist-populist-quasi-free market to correct itself."

Perhaps they have confidence that such a bizarre hybrid is capable of self-correcting; I do not.

We all agree, I think, that the crisis of the frozen credit markets was created by ham-fisted government intervention; but this does not logically imply that the solution is for government to just back off and walk away. I have been using the following analogy; you can dispute whether the analogy is accurate, but at the very least, it will tell you why I, myself, believe we needed further government intervention (intelligently, this time) rather than just letting the entire economy go on autopilot in whatever direction it chooses:

If I am right that our current financial situation resembles my operating-room analogy, then it is certain that you cannot solve this crisis by backing away and allowing the (socialist-statist-populist-quasi-free) market to work a fathomless miracle in the next few months.

I believe my analogy is accurate; if you disagree, tell me why. But don't simply wave the magic wand of the "free market" when we have no free market in the first place.

I absolutely agree with y'all that if we had a freer market -- specifically, if GSEs like Fannie and Freddie had not agreed to buy up questionable mortgages (or MBSs) to relieve banks of their basic lending responsibilities; if the government had not forced banks to lend money to people who could not afford to pay the mortgage; if the SEC had not forced the stupid "mark to market" rule onto the banks -- we would not be in this situation in the first place.

But having gotten there, we cannot solve this crisis by just walking away. Once we resolve it, as I believe the rescue plan will do, then we can, we must, take steps to reintroduce market forces into the housing market: We must reward borrowers with good credit and keep out those seeking a mortgage on a house that they cannot afford.

It sounds harsh, but some people are so poor -- or so irresponsible -- that they're really fit for nothing but renting... and sometimes not even that.

But the remarketization of the mortgage industry is a long and gradual process; it will take many years. There is no royal road to fiscal sanity.

But that is a long-term issue that cannot be resolved in the same breath as fixing a credit crisis that threatens to bring the entire economy crashing down around our ears, destroying fools and wise men alike with undifferentiated abandon.

We're stuck with using government intervention to resolve the issue, and government intervention necessarily includes politics. But what kind of intervention?

Otto von Bismark shrewdly remarked that "Politics is the art of the possible." What he meant is that it's all well and good to come up with the perfect plan (from your perspective) to solve some crisis; but no plan is "perfect" that does not include garnering the necessary votes to be passed.

In this case, as in so many others, the best is enemy of good enough: No matter how beautiful, simple, and obvious is your plan, if you cannot get enough votes to pass it, it's completely useless.

While the Republicans have many wonderful plans that utilize the market much more effectively than this one, none of those plans will be passed by a Democratic Congress. To paraphrase a former secretary, we go to the vote with the Congress we have -- not the Congress we wish we had.

Ergo, our syllogism:

1. We must do something; we cannot simply walk away and hope for the best;
2. That "something" must include significant government intervention in and interference with the market; the situation is already too "fouled" up to allow us the luxury of avoiding interventionism;
3. Whatever that something is, it must be acceptable to at least a handful of Democrats in the House -- and to at least eleven Senate Democrats to avoid a filibuster.

The Democrats are not going to roll over for us; thus we cannot enact a significantly more market-based plan. The core of the Paulson-Bernanke plan is as good as they'll let us get, and we're by and large stuck with it. Our only option is to chip away at the garbage around the edges added by liberal Democrats.

I understand that the plan that Congress enacted and the president signed on Friday sticks in the craw of many of you; it gags in my own throat. But we live in a real world, not Fantasyland; there simply is no other plan that can actually pass the 110th Congress.

(And if you think we can just wait a few months until the new Congress is sworn in, I can almost guarantee you that you'll like the 111th even less than you like the 110th.)

This deal was quite literally the best we could get enacted into law... and it was much, much better than doing nothing. So we had no choice.

Face it, gentle readers... you cannot put your foot down when you're stretched over the barrel.

Hatched by Dafydd on this day, October 4, 2008, at the time of 10:09 PM | Comments (10) | TrackBack

October 1, 2008

While Washington Wilts, Soros Schemes

With the failure of the intricately worked-out compromise bill to rescue the frozen credit market, torpedoed on Monday by House Republicans and many House Democrats -- the former on ideological grounds, the latter because they didn't want to be left holding the baggage -- the hard Left is vulturing down from the trees to muscle into the hand.

George Soros, who I believe needs no introduction, now proposes his own version of a bailout -- a real bailout, not a "buy out" or rescue -- according to an article by Alexander Bolton in the Hill:

Soros has outlined his plan in an opinion editorial in the Financial Times and circulated a concept paper among decision-makers.

Specifically, the liberal philanthropist has proposed that government funds should be used to recapitalize the American banking system by purchasing equity in banks and investment firms.

Let's be clear: What Soros proposes is for Treasury to "recapitalize" the banks by buying about $500 billion of equity in them. From George Soros' opinion piece in the Financial Times:

This is how it would work. The Treasury secretary would rely on bank examiners rather than delegate implementation of Tarp to Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalised according to existing capital requirements. If managements could not raise equity from the private sector they could turn to Tarp.

Tarp would invest in preference shares with warrants attached. The preference shares would carry a low coupon (say 5 per cent) so that banks would find it profitable to continue lending, but shareholders would pay a heavy price because they would be diluted by the warrants; they would be given the right, however, to subscribe on Tarp’s terms. The rights would be tradeable and the secretary of the Treasury would be instructed to set the terms so that the rights would have a positive value.

Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.

This is precisely the breach in the wall of separation between bank and State I most fear -- on steroids. With half a trillion dollars of money to swing, we could probably buy a controlling interest in the top dozen or score financial institutions.

Soros does not say whether this equity interest would include voting rights; but in practice, the 800-pound gorilla doesn't need voting shares to bully the institution. For example, imagine the next Democrat in the White House (Barack H. Obama or someone later) issuing an executive order to divest all equities from banks that do business with Israel, as a way to pressure Israel to sign a suicidal agreement with Hezbollah.

No matter how much of the actual vote the private investors retain, the threat to dump 30% or 40% of the company's stock at fire-sale prices, thus tanking the rest of it, would likely be enough to "encourage" the BoD to obey orders.

I'm not entirely clear what Soros means by "warrants." Does he mean what amount to stock options, so that the Treasury can buy even more stock in the future at the same price, even if by then, the share price has risen? (That's at least one common financial use of the term "warrant.")

If so, this is a license to loot the financial institutions exactly the way that so many top executives do: By bargaining for a huge stock-op package, running the share price up by flakey (but temporary) accounting, and then quickly exercising the options and selling them in the same transaction -- before the funny CPA tricks become known and the stock plummets. After selling the stock ops high, the exec could even turn around and short a bunch more stock, knowing that the financial shenanigans are bound to come to light soon.

Soros made many of his billions in currency exchanges, which are highly manipulable by political lobbying; he is very experienced with pushing prices up when selling long and down when selling short; he is known as "the man who broke the Bank of England." Thus it's hardly surprising that he wants Treasury to implement the equity scheme he advocates; if it's implemented, he himself admits (in this very opinion piece) that he intends to profit massively.

As he put it, "Private investors, including me, are likely to jump at the opportunity." The opportunity to do what? To pull billions of dollars out of the banking industry... which appears to be just what he wants the feds to do, but on a much grander scale.

According to the Hill, he has already presented this scheme to Barack Obama, the man he has long supported for president, and to Rep. Jim Moran (D-VA, 95%), the earmark-loving, Murtha-supporting Democrat who famously blamed the "Jewish community" and the American Israel Public Affairs Committee for our invasion of Iraq:

Democratic Rep. Jim Moran (Va.) scheduled a meeting Tuesday afternoon with Robert Johnson, a former manager of the Soros Fund Management, to discuss the proposal.

Moran compared the proposal to Warren Buffet’s $5 billion investment in the investment firm Goldman Sachs Group in return for preferred stock and warrants to buy common stock at a discount. [There you go; evidently, my guess above is exactly what Soros means by "warrants."]

Soros has also contacted Sen. Barack Obama’s (D-Ill.) presidential campaign to share his views on the financial crisis and the best way to solve it.

Bolton in the Hill notes that Soros is determined to shift the House debate from the Paulson-Bernanke plan to the Soros scheme:

Soros, who is widely regarded as a financial wizard, could jumpstart congressional negotiations in a new direction, especially now that some strategists believe the Paulson-based plan that failed Monday will be difficult to revive.

One banking industry lobbyist said it would be very difficult politically for Republicans who voted against the package Monday to change their minds and vote for it a few days later. More than two thirds of the House Republican conference voted against the plan, which failed by a vote of 228-205.

Soros is also "widely regarded" as a leftist crank who has consistently predicted the collapse of Capitalism (even while he reaps billions from legal but morally questionable currency and stock manipulation). Besides his overt political support for the left, Soros created and heavily funds the Open Society Institute, a screamingly leftist grant-dispurser with more than $850 million; it funnels millions of dollars each year to such "nonpartisan" groups as NARAL, ACORN, La Raza, MoveOn.org, the Lynne Stewart Defense Committee, the Death Penalty Mobilization Fund, and the Death with Dignity National Center. (Evidently, Soros supports the death of the innocent, but never the guilty.) You can read a somewhat more complete list of groups funded by the OSI, thus by Soros, here.

Anything he proposes is going to be designed not only to push more socialism and Statism -- both of which directly benefit his personal financial portfolio -- but also designed to improve his future business prospects by electing a much more left-liberal Congress in November.

So now we have a race: The Senate may be about to vote for the Paulson-Bernanke bill with a couple of sweeteners -- some minor and temporary tax relief to pique the interest of a handful of Republicans, and even more low-cost housing mortgages for the poor, to drag in those liberal House Democrats who rejected the bill because it retains our generally capitalist economy.

But at the same time, the Soros scheme for the federal government to buy the banks (unadulterated liberal fascism, in case you missed the point) is making the rounds of influential Democrats, such as Jim Moran -- who has the ear, and perhaps the earmarks, of Squeaker of the House Nancy Pelosi (D-Haight-Ashbury, 93%).

Which side wins? I suppose it must depend upon whether Democrats want to run on fiscal responsibility -- say, by nominating Hillary Clinton -- or on a platform of massive but unspecified and decidedly liberal "change;" to more and more Statism; to curtailing freedom of speech; to criminally prosecuting political differences; to enact huge tax increases and even more gargantuan spending hikes; and to deprivatize and nationalize as much of the economy as possible. The party might signal the latter by nominating an anti-Hillary... say, somebody who has argued in favor of all these OSI-type ideas; somebody who has a background in street-level leftist organizing, deep friendships with anti-American revolutionaries and radicals, and a voting record to match.

The Democratic House has the power to pass whatever it wants, if Pelosi makes the vote a "party discipline vote" this time. It's entirely in her hands, though anything really bad probably wouldn't get through the Senate. Again, everything hinges on whether House Dems are more interested in solving the problem or exploiting it in the election.

Neither of these indicators comforts me.

Hatched by Dafydd on this day, October 1, 2008, at the time of 5:03 PM | Comments (8) | TrackBack

September 30, 2008

The Pearlstein Option Reconsidered

Clearly, we need a new proposal for the credit catastrophe... a proposal that is both workable and passable in the current 110th Congress (the 111th will almost certainly be worse). But allow me to start by looking at one that is obviously un-workable and un-passable.

Read this war statement by Rep. Michelle Bachmann (R-MN, 100%) "explaining" her Nay vote on the Paulson rescue plan; she first exults in her triumph, then enunciates her putatively new proposal. The statement was quoted rather approvingly by John Hinderaker as a good example of the "conservative case" that could be made against the plan:

Today marks an historic moment for America as a solid bipartisan majority of Congress rejected the fatally flawed Paulson Plan. Standing shoulder to shoulder with taxpayers, we declared that we can do better.

As I’ve stated previously, this plan was rushed, unworkable, and short-sighted. A majority of House Republicans have parted ways with President Bush on this plan and we demand that alternative proposals be put on the table. There is universal agreement that this plan was bad, but its supporters claimed it was the only option. There were alternatives available, but Speaker Pelosi and the Administration chose to ignore them and used every parliamentary trick in the book to stifle debate. Now, they will have to listen to the voices of American taxpayers who refuse to open their checkbooks to Wall Street to write a $700 billion check with no strings attached.

I support a plan that would have Wall Street bail itself out, not hardworking taxpayers, by requiring institutions to insure troublesome assets that are causing today’s credit crunch. It would suspend mark-to-market accounting, which forces companies to take losses on artificially devalued assets on an artificial timetable, to give investors more confidence.

The plan I support would break up Fannie Mae and Freddie Mac -- government sponsored enterprises that are at the heart of this crisis -- so that the encumbered taxpayer no longer backs them -- implicitly or explicitly -- and so that they do not artificially grow larger than the market will allow. We cannot pass legislation that sets America up for a Groundhog Day reprise of this mess and that means changing the problem at its core - the GSEs.

Furthermore, the plan I support suspends capital-punishing tax rates to bring more capital into the U.S. markets rather than our foreign competitors. And, the plan ensures the Federal Reserve’s attention is focused on long-term price stability rather than short term economic growth. Finally, it requires the US Treasury to write rules keeping executives who made the risky decisions from personally profiting from them with excessive compensation or golden parachutes all at the expense of taxpayers. We can't have a market that only condones risky behavior. The balance between risk and reward is an important part of the free market.

My colleagues and I stand ready and willing to negotiate with any parties on a plan that will help stabilize our financial markets and relieve the liquidity crisis without exposing taxpayers to a $700 billion bailout debacle.

What is wrong with this picture? Two things:

First of all, in the first blue-highlighted passage, she falsely -- even mendaciously -- caracatures the Paulson plan as a bid to "open [taxpayer] checkbooks to Wall Street to write a $700 billion check with no strings attached."

This is demagogy, pure and simple; it's as bad as Squeaker of the House Nancy Pelosi's (D-Haight-Ashbury, 93%) "history lesson" on the Bizarro-world origins of the crisis in the "unregulated, anything goes" economic policy of the Bush-McCain administration.

Bachmann knows better; she knows that nobody is writing a check to "Wall Street" (is that what Paulson scribbles on the "pay to the order of" line?); that we would in fact be buying securities that are underpinned, at their core, by real property; that the initial cost would be much less than $700 billion; and that the most likely outcome is that those securities would rise in value, so we would make back much of what we spent... and maybe even make a profit.

(We know that House Republicans understand this, else why would they have fought so hard to get a provision ensuring that all "profits" would go to pay down the federal debt?)

But apart from the libelous description of the rejected plan, there is another problem with Bachmann's statement: The centerpiece of Bachmann's own alternative is the same insurance-only option Democrats already rejected.

Why would the Democrats make an abrupt about-face and support it now? After deliberately (most now agree) killing the plan in the first place, does anybody honestly believe that they will now do everything in their power to give the Republicans a huge, huge victory -- right before the election?

The insurance option was never very well explained, and I for one cannot fathom how anyone could think that it, all by itself, would inject enough liquidity to unfreeze the credit market. For one reason, it requires massive insurance premiums to be paid on very, very insecure securities by the same firms that have no capital to pay anything. That's the whole problem... they have no liquidity, and they cannot borrow any money.

What are we supposed to do -- lend them the money to pay for the insurance premiums we charge them? Isn't that a lot closer to "opening taxpayer checkbooks to Wall Street" than the plan they rejected?

It is surreal to offer as a "plan" for resolving a congressional impasse the very provision the other side has already declared a deal-killer. It is absurdist to pretend that this time, everything will be different. Why -- does she think Democrats are now contrite? And it is breathtakingly hypocritical to reject a plan on the grounds that it constitutes writing a check to Wall Street... and then offer in its place a plan that constitutes writing a check to Wall Street.

If there were other new ideas in her "plan" besides the insurance option, something that Democrats had not already emphatically rejected, it might be a good basis to begin negotiation on a compromise. Here are the other ideas she proposes; see if any strikes you as either original or able to resolve the current crisis in any reasonable period of time (that is, before the axe rolls):

• Suspend (why not eliminate entirely?) "mark to market" accounting, which forces even those firms that have no intention of selling a security nevertheless to revalue it everytime some other panicked or desperate institution dumps it below the current price -- thus devaluing the reserves of even healthy financial institutions, holding them hostage to the sickest.

This is a good idea -- but not only was it already in the previous bill she voted against, it can only help somewhat... and almost by definition, only helps those institutions that are the healthiest anyway. We need a way to prevent hundreds of unhealthy firms from going belly-up right now.

• "Break up" Fannie and Freddie "so that the encumbered taxpayer no longer backs them -- implicitly or explicitly."

I have no idea what she means here: just remove their status as government sponsored enterprises (GSEs), so they become private institutions instead? Or forcibly dismantle them?

While that takes the taxpayer off the hook for propping them up, which is a worthy long-term reform, how does that make either more solvent right now? Wouldn't both Fannie Mae and Freddie Mac then immediately collapse, forcing them to flood the market with more than a trillion dollars (!) of currently toxic, illiquid instruments?

• Temporarily suspend the capital-gains tax.

Again, a wonderful idea for the long-term (but let's make it a permanent elimination)... but how does this help now? Does Rep. Bachmann actually think that those firms currently in danger of sinking under the waves are worried about being taxed on some huge capital gain? In fact, as we discussed earlier, suspending the tax removes the incentive for firms to write off bad debts for tax purposes, pushing them towards bankruptcy instead.

• Prevent "executives who made the risky decisions from personally profiting from them with excessive compensation or golden parachutes all at the expense of taxpayers."

An interesting argument to make from a congresswoman who goes on, two sentences later, to extol the "free market!" But again, the Democrats are foresquare behind this -- and it would have no short-term impact whatsoever on frozen credit.

• [Ensuring] the Federal Reserve’s attention is focused on long-term price stability rather than short term economic growth.

This isn't a proposal; it's a description of the result that Bachmann hopes will accrue from the other elements of the plan. Congress cannot order the Fed to focus on one thing or another and expect to be obeyed:

What we need is a plan that is both workable -- that is, it would actually help resolve the present credit crisis, not simply a grab-bag of great ideas for making the system better far in the future -- and also passable... something both conservatives and liberals can back. To propose something that is neither is the pinacle of irresponsibility (and electoral stupidity).

I believe several points are imperative; for workability:

1. Such a compromise plan must give a gigantic incentive for somebody with enough liquidity to take the toxics off the backs of the struggling financial institutions before they all collapse, taking the larger economy with them.
2. This "somebody" must be able to make them thoroughly transparent, to give the market a chance to revalue them, allowing subsequent sale.
3. Thus, Mr. Somebody must be able to compel compliance by the former owners in investigating the history of the security.

These three requirements narrow that "whoever" down to some branch of the administration or a proxy that holds the same powers, in my opinion; in other words, this program must be administered by the Treasury, FDIC, the SEC, some other regulatory body, or a corporation administered by one of the above and granted pass-through authority by Congress. Nobody else has the trust, the ready capital, and the regulatory power to make it work.

This doesn't mean that private capital cannot compete with the government for those securities... so long as, in the end, financial institutions are compelled to cooperate with some entity to detoxify their frozen assets and get the credit market moving again.

And for passability through Congress:

4. The plan cannot be something already rejected by one or the other side as a "deal killer." (Liberal Democrats cannot ram through a Pelosi dream-list -- at least not for four months -- because (a) the Senate would filibuster it, and (b) the president would veto it.)
5. Yet it must resolve the central problem stopping House conservatives like Michelle Bachmann from supporting it: putting taxpayers at risk for the huge price tag of what they have dubbed a giveaway to Wall Street.

In an earlier post here, we briefly mentioned an intriguing suggestion, the "Pearlstein Option":

There are some other proposals floating about. Steven Pearlstein in the Washington Post has a very interesting one... Treasury sets up a resolution corporation (as per Paulson-Bernanke); but then instead of buying the illiquid securities with cash, they swap them for preferred stock in the new resolution corporation itself:

My own suggestion would be to structure the rescue around a new government-owned corporation that would be capitalized, initially, with $100 billion in taxpayer funds. The company would use auctions or other mechanisms to buy the troubled securities from banks and other regulated institutions, but instead of paying for them in cash, the government would swap them for an equal number of preferred shares in the new company. (Preferred shares are something of a cross between a bond and common stock.) Those preferred shares would pay a government-guaranteed dividend and could be redeemed by the government at any time. But they could also be used by banks to augment the capital they are required to maintain by regulators.

The beauty of this arrangement is that, rather than protecting taxpayers by having the government take an ownership stake in hundreds of privately owned banks, it would be the banks that would own a stake of the government's rescue vehicle. The government would suffer the first $100 billion in losses from buying and selling the asset-backed securities, but any further losses would be borne by the other shareholders. And should the rescue effort actually wind up making a profit, then the banks would share in that as well.

I believe this could be the basis of a new compromise (sorry, more bullets incoming):

• It would remove the risk from taxpayers and put it back on Wall Street institutions who accept the preferred stock; the only money spent would be the initial capitalization of the resolution corporation, and perhaps some later recapitalization in the early phases (probably less than the $85 billion required by the takeover of AIG... let alone if, say, Bank of Amerca were to go under).
• Nevertheless, by allowing those institutions to count such preferred stock as reserves against whatever they have leveraged, it removes the pressure to sell, sell, sell to get their reserve-to-debt ratio down below the legal minimum.
• Since no significant taxpayer money would be going directly to failed financial institutions, there is no way that any rational voter could consider this a "bailout" of Wall Street.
• The resolution corporation (fully government-owned, not one of those pesky GSEs) would have the legal authority to compel cooperation by former security owners, thus allowing them to create a paper trail of each security. This will make it possible for the market to "reset" those securities by auctioning them off -- generally for much more than they paid for them.
• But because even a government-owned corporation is still a corporation, not the U.S. Treasury itself, other institutions should be allowed to bid against it to buy securities. This creates market forces at both ends, buying the illiquid asset and reselling it.
• Assuming all goes more or less as planned, the resolution corporation will make a profit... thus giving a big incentive to institutions to participate, since the value of their preferred shares in the resolution corporation will rise, giving them even more reserves.
• The Democrats evidently had no problem with allowing the federal insurance idea as an option, not the entire plan, since it was an option in the last bill; I presume this means they'll allow it as an option again.

I hope this idea is at least brought up; I'm sure that a sizeable minority of Republicans now regrets its Nay vote and are looking for an excuse to change it; and I further suspect the majority of conservative Naysayers is quite willing to consider voting Aye -- for a less statist, more free-market proposal such as the Pearlstein Option.

But whatever we do, we need to do something quick. This isn't just the "do something!" disease; we really are on the brink of catastrophe. You know I'm not given to Cassandra-like dire warnings of pending doom... but let's all remember that Cassandra was right, and Troy did indeed fall.

Like a blinking VCR clock, even a prophet of doom can be right once a day.

Hatched by Dafydd on this day, September 30, 2008, at the time of 3:24 PM | Comments (17) | TrackBack

September 29, 2008

For Those Who Still Think Republicans Can Win the Blame War...

You think so? You really think that the American people will somehow realize that it's all the fault of the Democrats -- which it is -- in time to vote for John S. McCain and Republicans in Congress?

Watch this... but watch it from the perspective of someone who doesn't already know the history behind the collapse of the mortgage market. This is the infamous pre-vote speech by Squeaker of the House Nancy Pelosi (D-Haight-Ashbury, 93%). But don't watch it saying, "Oh, such lies! We all know what really happened," because we don't "all know" what really happened; most people have not heard anything but the liberal, anti-free-market narrative.

I am particularly thinking of Hugh Hewitt.

If speeches like this one from the Squeaker is all that voters hear, imagine what they will think. And believe me, for at least the next few weeks, this is all they will hear: The vast majority of undecided voters still get their news from elite-media sources... not from blogs (which reach a tiny number of people), nor from talk radio (whose listeners are already for the most part in the Republican camp).

Make your mind a complete blank on things you have learned from Rush or Hugh or Michael Medved, everything you've read on Power Line or Instapundit or Patterico's or Wolf Howling -- or even here. Just watch and tell me: Does Pelosi come across on this video as a raving left-winger, a bomb-throwing radical, a poison-spewing harpy? Because honestly, I think she comes across as very reasonable and even-handed -- even as she fires lie after lie after vile, despicable lie into the heartland:

 

 

Democrats are 8-dan blackbelts at twisting the blame away from themselves and onto us; while we only visit the swamp occasionally, liberals live there 24-7. They're so good at flinging poo, they even do it among themselves, just for fun and practice.

The most likely response, of course, is that the House Democrats will put all the horrible socialist provisions, stripped out by the HRs, right back into the bill... and then they'll pass it in the House by attracting back the most radical of the 95 Democratic Dr. Nos.

And the American people will decide that they were right after all: The Democrats (and Barack H. Obama) are the party to trust on economics! And then, years and years down the line, Republicans may have the enormous satisfaction of saying "I told you so."

But nobody will be listening... because once again, Democrats will blame their own failures in this very bill on us.

Hatched by Dafydd on this day, September 29, 2008, at the time of 4:31 PM | Comments (16) | TrackBack

Did House Conservatives Just Hand the Election to Obama?

They invite John S. McCain to Washington D.C. to get them a better deal on the bailout. They accept his help in negotiating with the Senate. They strongly praise him when the deal is improved, and their own negotiator strongly implies that they will accept it -- or at least oppose it only narrowly, so that it will still pass with substantial Republican support.

Then on the vote, perhaps miffed at Squeaker of the House Nancy Pelosi (D-Haight-Ashbury, 93%), they betray McCain and instead vote against the rescue measure en masse, triggering a cascade failure that causes the bill to collapse, the stock market to record its biggest one-day drop in decades, and to plunge the entire country -- and world -- into financial chaos.

...And this leaves the American voter with the sour impression that:

1. John McCain is completely ineffectual even at managing his own party;
2. He is not the person to turn to on economic matters;
3. He is not ready to be president.

Hey, nice strategy, Mr. Conservative! Perhaps next, they can openly question whether McCain should be the nominee and call for him to be replaced by Mike Huckabee. Or Bob Barr. That would make everything much, much better.

The American people are now terrified that they'll lose everything... and when terrified to this extent, we have a disturbing tendency to turn to the man on the socialist horse, who promises (like Woodrow Wilson, like Benito Mussolini) that a massive government takeover will fix everything and comfort the masses -- by relieving them of all future responsibility.

There is now only one chance for McCain to turn this around: He must return to D.C. and somehow, someway, get enough of those ideology-plated "conservative" morons to change their votes -- it only takes a few, but they all should do it -- that a (slightly) modified version of the bill actually passes.

And this time, when Pelosi, who senses that she can goad and manipulate House Republicans as easily as the hysterical, chained-up dog in the yard next door, gives another insulting, gloating, triumphalist speech, the HRs have to swallow hard and just vote for the damned rescue anyway, even if it wounds their pride.

If they want to introduce more market-based incentives and regulations into the process later, they will have the best opportunity since the era of Newt Gingrich (during which they never bothered to do much about the issue). But for right now, not passing a rescue bill is not only a political catastrophe (for John McCain and even for congressional Republicans) but an economic disaster as well.

Whose fault is it? Certainly it's as much or more the fault of the Democrats as Republicans. But anybody who thinks the GOP is going to be able to convince the American voter that it's really Pelosi's fault (and by extension, Barack H. Obama's fault), that Republicans can persuade voters to punish Democrats, not Republicans, in November, is living in sin with Prince Nemo in Slumberland.

Logic and rationality fly out the window when voters panic, hysteria and demagogy rule the day. And Democrats are, if nothing else, masters of demagogy in a way that Republicans have never been able to match. If this election becomes a contest to see which party is the better at flinging poo, Republicans will be buried.

To put it in a nuthouse, if the HRs fold their arms and simply say "Nyet" over and over, then we will wake up on Guy Fawkes Day to President Barack Obama -- and a 60-vote, fillibuster-proof Democratic majority in the Senate.

I know there are some putative "conservatives" who call for exactly that; they believe that the Democrats will overreach, and in two years, they will recapture the House and Senate... "just like in 1994!"

But I have another date for them to bear in mind: I say the current political mood -- if they don't change their minds on this bailout -- is more akin to 1932 than 1994... and there certainly is no Gingrich waiting in the wings, as there was (and already very well known and trusted) in 1994.

The 1932 election was falsely sold as a choice between the "progressivism" of FDR and the "failed laissez-faire capitalism" of Herbert Hoover; in fact, Hoover had enacted virtually every "progressive" policy that Franklin Roosevelt later tried in response to the Great Depression, and neither version worked. Yet not only was the Democrat elected president for the first time in 16 years, but both houses of Congress went overwhelmingly Democratic... and they both stayed Democratic for fourteen long years, through seven congressional elections.

The Democrats continued to hold the White House for twenty years, until 1952; and the only reason Republicans won that year was that Eisenhower, who had never said what party he belonged to while on active duty, declared himself a Republican. Had he declared himself a Democrat, he still would have won; and the Democrats would have continued to hold the White House until 1968, which would have given them a 36-year run.

As of 1946, after fourteen years of a Democratic president and a thoroughly Democratic Senate, seven justices on the Supreme Court had been appointed by Franklin Roosevelt... and the other two (Justice H.H. Burton and Chief Justice Frederick Vinson) were appointed by Harry Truman. All nine justices were Democratic appointees.

Democrats controlled the Court until 1958, when Dwight David Eisenhower nominated his fifth justice, Potter Stewart, ending a twenty-year run of Democratic control of the Court, starting when the Warren Harding appointee George Sutherland retired, and Roosevelt nominated Stanley Reed to replace him.

This period includes one of the worst runs of judicial activism in our history. Yeah, that 1932 election sure worked out well for the Republicans... and so too would the election of Barack Obama, if it comes to that.

And it will come to that, if House Republicans don't get their minds out of the ideological clouds. Please, for the love of God, stop lecturing us on how the free market would have built a better boat, and start bailing out the water that's pouring through the hole in the hull. The time to rethink boat-building, which we desperately need to do, is when you're home safe in drydock... not when you're rounding the tip of Africa.

But here is a contrary scenario: Obama dithers, blaming Republicans; but McCain immediately flies back to D.C., and by mid-week, he is able to get HRs to agree to a modified version of the bill. The vote is held on, say, Thursday or Friday... and this time, it actually passes.

In which case, John McCain becomes the man on the white (and capitalist) horse who has saved everything... and he might -- might -- make this rescue work politically as well as economically.

So the ball is now in the court of the House Republicans. They have two choices:

• Continue to be obstructionists -- and prepare for a rerun of the horrific 1932 election;
• Become problem-solvers -- and help elect John McCain president... and hold their own or even pick up seats in the congressional races, if they can successfully don McCain's mantle as a principled but practical reformer.

Pick a hand, Mr. Conservative. Which shall it be?

Hatched by Dafydd on this day, September 29, 2008, at the time of 2:53 PM | Comments (13) | TrackBack

September 28, 2008

Done Deal - at Least, Very Likely Done

It appears that John S. McCain's intervention has borne fruit: All of the major players -- the White House, the Senate and House Democrats, the Senate Republicans, and now even the House Republicans (HRs) -- appear to have signed off on a credit-rescue deal tonight.

As we predicted, it is basically the original deal with some of the HRs' proposals rolled in... notably the insurance option, which would be one of the choices that Secretary Henry Paulson has at his disposal and is required to set up and at least attempt before buying the toxic assets on behalf of the government:

At the insistence of House Republicans, who threatened to sidetrack negotiations at midweek, the insurance provision was added as an alternative to having the government buy distressed securities. House Republicans say it will require less taxpayer spending for the bailout.

But the Treasury Department has said the insurance provision would not pump enough money into the financial sector to make credit sufficiently available. The department would decide how to structure the insurance provisions, said Sen. Kent Conrad, D-N.D., one of the negotiators.

This story doesn't quote any House Republicans directly; but I don't think they would stay silent if they were once again being rolled by the other players. Still, the AP story is cautious -- having been fooled once by Squeaker of the House Nancy Pelosi (D-Haight-Ashbury, 93%) and Senate Majority Leader Harry "Pinky" Reid (D-Caesar's Palace, 85%):

It was not immediately clear how many House Republicans might vote for the measure. With the election five weeks away, Democrats have said they would not push a plan that appeared sharply partisan in nature.

(That is, "Fool me once, shame on you; fool me 527 times in a row, and you can call me an Obamaton.")

The New York Times story did manage to corral Rep. Roy Blunt (R-MO, 96%), lead negotiator for the HRs, but he was in a "show-me" mood:

Representative Roy Blunt of Missouri, the chief negotiator for House Republicans, who have been among the most reluctant to support the plan, expressed some satisfaction but did not commit his members’ support.

“We need to look and see where we are on paper tomorrow,” Mr. Blunt said. “We have been talking about how we can make these things work in a way that our conference can come together.”

Some other concessions to the free market and conservative principles were obtained by Blunt, McCain, and the HRs:

• The salary and bonus caps would only apply to "fired executives of financial firms, and executives of firms that go bankrupt," as AP puts it, not to every executive at every company that sells distressed securities to the federal government, as Democrats originally demanded.
• The "equity interest" that the Democrats wanted in all firms that sell assets to the resolution corporation will be limited to only some of them, but I cannot discover the criteria that will determine which do and do not have to give up some stock to the Treasury-created corporation.
• The Democrats had demanded that 20% of any profits that the feds might make on the deal, as they auction off value-added securities in an improved market, be ploughed into affordable housing -- which is what got us into this mess in the first place; but the HRs appear to have killed that provision.
• Democrats also have given up on their scheme to allow bankruptcy judges to unilaterally alter the terms of first mortgages in bankruptcy proceedings; instead, the Treasury will have the authority to attempt to renegotiate mortgage terms if that would reduce the liability facing the government by reducing the risk of default or even foreclosure. That is, only when such renegotiation is good for the United States... not whenever it's advantageous to the over-extended borrower (buying a $400,000 dream house when he really could only afford a $200,000 fixer-upper).

But for the timely intervention of John McCain, no one would have talked to the House Republicans, and none of these concessions would have been made; therefore, the deal would never have gone through. McCain has kept in constant contact with the negotiators, relaying information back and forth, pushing for the necessary compromises, and selling the HRs on the plan.

Barack H. Obama, meanwhile, has also been "active," as the Times insists:

Early in the day, the two presidential nominees were active from the sidelines. Mr. McCain telephoned Congressional Republicans to sound them out, and Mr. Obama got regular updates by phone from Mr. Paulson and top lawmakers.

Evidently, the word "active" in Obama's case means standing anxiously by the phone, waiting for a call to bring him up to speed, so he won't look ridiculous.

Finally, I find this tidbit to be most illuminating:

While Congressional Republicans sent only their chief negotiators, Mr. Blunt and Senator Judd Gregg of New Hampshire, at least nine Democrats with competing priorities piled into the meeting, surprising the Republicans but apparently not unsettling them.

It fills my heart with patriotic joy to see the Democratic Party put aside its petty, internecine differences to resolve a true national crisis.

Hatched by Dafydd on this day, September 28, 2008, at the time of 4:04 AM | Comments (7) | TrackBack

September 26, 2008

The Roads Must Roll, Along With a Few Heads - slight UPDATE

Here is the bailout problem in a nutbag. There was indeed a deal before John S. McCain arrived... a completely bicameral deal between House Democrats -- and Senate Democrats. The deal also included (evidently) the White House; and the Senate Republican conference climbed aboard the bandwagon.

The outlines of the deal were that President George W. Bush gets the Paulson-Bernanke emergency rescue plan -- and the Democrats extort a number of their domestic welfare programs:

• Long-term extension of unemployment benefits, so that fewer people will go back to work;
• A "housing trust fund" that would funnel taxpayer money to ACORN and other radical groups;
• Salary caps on everyone who makes more money than members of Congress;
• A secret, back-door restoration of the ban on shale-oil development, which Majority Leader Harry "Pinky" Reid (D-Caesar's Palace, 85%) tried to sneak into the rescue bill;
• Fascistic government ownership of the banks, and so forth.

Of course, if you pore over the list above of participants in this deal, you will of course notice one missing piece: House Republicans. The House Republican conference is consistently more conservative, free-market, and even libertarian than any of the other four groups... and not surprisingly, they completely rejected this deal.

But nobody was speaking for the House Republicans; in fact, it appears that nobody was speaking to them, either. So despite the fact that McCain is a senator, not a representative, he nevertheless realized that without the House Republicans (HRs, from now on), no deal would ever be inked. Even though Democrats have a majority in the House (and no filibuster rule), they refused to pass legislation without the "cover" of a majority of the HRs along for the ride. (Which itself is a telling sign: The Democrats did not want to "own" the package.)

Thus, McCain thought it important enough to temporarily (for a few days) suspend his campaign, fly back to D.C. -- which is where his actual job is (and Barack H. Obama's too, by the way) -- and see if he could restart the dialog between the HRs and Everybody Else.

I believe every element of the House plan is worth some consideration in itself, and several would probably help the situation; but I do not believe that even all of them put together would actually resolve the illiquidity of the mortgage markets.

The core of their plan is to get the financial institutions to buy the toxic assets themselves by federally insuring them:

Under the alternative Republican plan, the government would set up an expanded insurance system, financed by the banks, that would rescue individual home mortgages. The government would not have to buy up the toxic mortgage-backed assets that are weighing down financial institutions.

They've also proposed a two-year suspension of the capital-gains tax -- which might actually be counterproductive in the short-term: These toxic assets are of course worth much less than the institutions paid for them; which means if they sell them, they would actually have a capital loss, not gain. Under the current system, they can claim a deduction for that loss; but if we suspend the cap-gains tax for two years, the financial institutions won't be able to deduct their losses.

In the long run, reducing or even eliminating capital-gains tax is a great idea. But it's not going to help in the present crisis.

In the end, I suspect the HRs will relent and compromise: They will accept the guts of the Paulson-Bernanke proposal in exchange for some significant trimming of the Democrats' grab-bag of socialist-populist goodies, particularly including the "equity stake" that the federal government would take in the affected institutions; my reading of the tea leaves tells me this is something that Senate Republicans love but of which House Republicans are very, very skeptical, for the same reasons I enunciated yesterday.

There is already some movement towards a compromise:

Cantor said that some of the "exotic sliced and diced" mortgage-backed securities at issue for the financial institutions are of such little value -- because the underlying mortgages are already in foreclosure -- that using the Republicans' preferred approach of federally insuring them is pointless. "So you've got to go with Paulson's model," Cantor said today, endorsing the federal purchase of those securities to clean up the books for financial firms in distress.

In exchange, Cantor said he is seeking some sort of assurance that that the Treasury secretary would be allowed to create an insurance program for the other mortgages, charging premiums to the firms holding securities tied to those mortgages.

There are some other proposals floating about. Steven Pearlstein in the Washington Post has a very interesting one... Treasury sets up a resolution corporation (as per Paulson-Bernanke); but then instead of buying the illiquid securities with cash, they swap them for preferred stock in the new resolution corporation itself:

My own suggestion would be to structure the rescue around a new government-owned corporation that would be capitalized, initially, with $100 billion in taxpayer funds. The company would use auctions or other mechanisms to buy the troubled securities from banks and other regulated institutions, but instead of paying for them in cash, the government would swap them for an equal number of preferred shares in the new company. (Preferred shares are something of a cross between a bond and common stock.) Those preferred shares would pay a government-guaranteed dividend and could be redeemed by the government at any time. But they could also be used by banks to augment the capital they are required to maintain by regulators.

The beauty of this arrangement is that, rather than protecting taxpayers by having the government take an ownership stake in hundreds of privately owned banks, it would be the banks that would own a stake of the government's rescue vehicle. The government would suffer the first $100 billion in losses from buying and selling the asset-backed securities, but any further losses would be borne by the other shareholders. And should the rescue effort actually wind up making a profit, then the banks would share in that as well.

I don't believe this would have happened without John McCain's presence: It took the support of a man so universally respected on the Republican side, even by those Republicans who frequently oppose him -- ironically, the very same House Republican conservatives whose cause he champions today -- to get the corrupt Democrats and the blowhard Senate Republicans to pay their House brethren any attention at all.

My guess is that many of the HRs' proposals (and several proposals of other critics, such as Pearlstein's "preferred shares" swap) will be rolled into the plan; much of the Democratic garbage will be stripped out; and the guts of the Paulson-Bernanke plan will be enacted with near universal support in both the House and Senate, to be signed by the president into law.

The liquidity crisis will be averted; companies will stop going under; the stock market will rebound (it hasn't dropped all that much, really); the Democrats will be exposed (well, by us, at least) as the venal rats who caused the problem in the first place; President Bush will seem a bit more presidential; John McCain will seem a lot more presidential.

The biggest loser will be, I think, Barack H. Obama, as more and more voters start to ask -- "Who is this guy anyway?"

And he'll lose tonight's debate, too.

UPDATE:

These two videos are making the rounds; they fit so perfectly here, I just have to include them.

First, here is the blunt Rep. Roy Blunt (R-MO, 96%), official negotiator for the HRs in the Big Blowout, discoursing on how helpful John S. McCain has been during the negotiations, appointing himself Speaker to Animals... that is, guardian angel for the House Republicans. Watch this one first...

 

 

Now, here is the "same" video -- as creatively edited by the Barack H. Obama campaign, or some surrogate. Notice a few very subtle excisions, almost too small even to notice:

 

 

Team Obama is pointing to the truncated video to claim that even Roy Blunt agrees that McCain has been nothing but a roadblock, toppling a done deal and plunging America into a dark night of the financial soul.

Want to know just how corrupt, mendacious, and dishonorable is the campaign by the One We Have Been Waiting For, campaigning by what we call "Chicago rules?" That's how.

If in fact they have nothing to do with this disgraceful knife-job on Blunt's praise, there is a simple way to show it: The campaign can denounce this bearing of false witness. Let's see if any such denunciation forthcomes.

Hatched by Dafydd on this day, September 26, 2008, at the time of 6:03 PM | Comments (7) | TrackBack

September 17, 2008

Sub-Prime Crisis On a Nutshell: Corrupt Democratic Mortgage Manipulation

The good: President George W. Bush; Sens. John McCain and Phil Gramm; Senate Republicans.

The bad: Presidents Jimmy Carter and Bill Clinton; Sens. Chris Dodd and Barack Obama; Congressional Democrats; the propagandistic "news" media.

The cowardly and flummoxed: House Republicans.

All else is dicta. (Dicta follows below.)

I hope you have all taken note that Barack H. Obama has been rising in the polls and is now ahead of John S. McCain on several major tracking polls. If McCain doesn't do something quick, we will head right back to where we were six months ago, in early March, with Obama consistently leading by 5% in the polls. Obama could win and Democrats take huge majorities in both House and Senate.

If you're wondering why this is happening now, it's unquestionably because McCain is losing again on the economy -- what with the whole ongoing, slow-motion collapse of the entire charade of "sub-prime mortgages"... which the Democrats, aided by the elite media, of course, have blamed entirely on President George W. Bush -- and on McCain. This allows the Democrats to campaign on fear, their favorite "issue."

Economic fear drove the huge sell-off on the stock markets today. Money panic drives people to the Democrats, who promise to "tax the ultra-wealthy" and give that money to everybody else. If McCain doesn't calm voters down immediately, he will lose.

At the end of this post, I suggest that McCain cut a new commercial with him speaking directly to the American people, himself. This is what I suggest he say:

For the rest of the story, please click the Slither On.

Where things stand

John McCain must speak directly to the American people about the economy, lest Obama and the Democrats get a chance to "define" McCain as an old, out of touch beltway boy. Voters can see that we're in the midst of a collapse in the mortgage market, as lender after lender (and now insurers, like American International Group) goes belly-up or must find a buyer; and folks want to hear what McCain himself has to say.

But perhaps the public doesn't understand -- as I didn't until this month -- just how much of that collapse was in fact orchestrated by the socialist hijinks of congressional Democrats (including Obama), by Bill Clinton, and by Jimmy Carter: Between them, they forced banks and S&Ls into the volatile and risky sub-prime market; and then the Democrats repeatedly prevented any attempt by congressional Republicans (and by President Bush) to oversee and regulate that market.

Why would they do this? First, because Democrats have long been getting huge campaign donations from banks and other mortgage lenders; in fact, the top two recipients of such money are Sens. Chris Dodd (D-CT, 95%) and Barack Obama. Both subsequently encouraged exactly the sort of loan speculation they now decry, an act that reeks of corruption. In addition, many former members of the Clinton administration, including Franklin Delano Raines, former Commerce Secretary William Daley, and Deputy Attorney General Jamie Gorelick (of "Gorelick's wall" infamy), ended up running Fannie and Freddie or lobbying for them... and incidentally raking off tens of millions of dollars for themselves.

But the real culprit in this collapse isn't just Democratic corruption; it's the leftist demand to increase minority home ownership by lending low-income borrowers more money than they qualify to borrow, with higher mortgage payments than they are able to pay. That is, offering mortgages that violate the most basic rules of banking, as a form of "housing welfare." That is the crux of this very real, but very specific crisis.

What caused the sub-prime mortgage crisis?

One of the most evil, anti-capitalist movies ever made is also one of the most beloved by audiences and critics (including supposedly capitalist critics and pundits such as Michael Medved and Hugh Hewitt): It's a Wonderful Life, directed by liberal fascist Frank Capra and starring conservative Jimmy Stewart.

In that movie, George Bailey (Stewart) is shown to be a great guy because he offers mortgages to people who cannot afford to pay them -- and then lets them slide on their payments without foreclosing. Such a wonderful life! (Well, not for the bank's investors; and not for the depositors, when the bank fails -- as it inevitably will do.) In a sense, then, Philip Van Doren Stern (author of the short story, "the Greatest Gift," that was the basis for the movie) invented the utopian idea of "sub-prime mortgages."

It's a Wonderful Life makes great theater but lousy economics, and the financial events of the past few months illustrate why.

The primary rules to prevent the collapse of banking are (1) not to lend money to unqualified borrowers -- you can't give a mortgage to someone who cannot possibly pay it -- and (2) to maintain a sufficiently high cash reserve that people who need to draw out all their money can do so -- the bank can't lend out all its depositors' money. But those rules make it more difficult for the poor (disproportionately minorities and Democrats) to obtain housing loans: They're restricted to much smaller mortgages for a smaller percentage of the total cost of the house; and because the bank can't lend out every penny, it must pick and choose to whom to lend.

This infuriates liberals, who believe the very purpose of a bank is to give the poor a chance to own their own home (even without pulling themselves out of poverty first). Thus, liberals have long championed a supposed "reform" that is actually an element of unbridled liberal fascism: That government should force private banks to make bad loans to Democratic constituents, under threat of massive fines from the SEC... or even loss of their license.

Democrats in Congress forced that act of semi-nationalization on the banks as long ago as 1977, where they pushed through Congress the anti-capitalist, Carter-era Community Reinvestment Act (CRA) of 1977. That was the year that was: Democrats in the 95th Congress, still surfing the tsunami of Watergate, enjoyed a 61% majority in the Senate and a 67% majority in the House; and in Jimmy Carter, they had the most left-liberal Democrat in office since FDR. It was the perfect storm of socialism.

The umpires strike back

In 1999, Republicans, who by then controlled the House and Senate, tried to do away with that horrible piece of utopianism. Sen. Phil Gramm, then chairman of the Senate Banking Committee, offered a sweeping deregulation of the financial industry (S. 900, later called the Financial Services Modernization Act, FSMA). It was true deregulation that left the financial institutions free to decide what activities to engage in and with whom, but left them accountable for their actions; and it explicitly removed the CRA mandate to offer mortgages to poor people who couldn't afford them.

Democrats voted en masse against this version of the FSMA, with only one Democrat -- Sen. Ernest F. Hollings -- voting for it. Nevetheless, it passed the Senate by 54-44; every single Republican voted for this clean version, including John McCain. But President Clinton threatened to veto the bill for that very reason: He wanted to strengthen the CRA, not gut it! Clinton wanted to make it even easier for low-income borrowers to get a mortgage... and even easier to find somebody else to make the payments (while the borrower kept the house) when the inevitable happened. So President Clinton made it clear that the bill, as passed by the Senate, would never become law:

Administration officials say the President would veto the Senate version because it would dilute requirements that banks make loans to minorities, farmers and others who have had little access to credit. The legislation also contains provisions that have been criticized by Treasury Secretary Robert E. Rubin because they reduce his department's oversight of banks.

But privately, some Democrats and Administration officials say that Mr. Clinton might agree to legislation if the objectionable provisions in the Senate measure were watered down or eliminated when the House and Senate negotiate a final bill in conference.

Alas, that is exactly what happened. Throwing gasoline to the winds, Senate Democrats insisted on retaining the It's a Wonderful Life provision, Jimmy Carter's CRA; the final version of the FSMA, passed in 1999, still compelled banks and S&Ls to issue sub-prime mortgages. The provision was inserted during the House-Senate conference, and no senator or representative ever got to vote for it... very similar to an earmark, except it was designed to protect Democratic votes (the poor and irresponsible being their natural constituency), rather than enrich some particular Democratic crony.

Shamefully, the Senate Republicans eventually agreed to this version, which passed 90-8. The only Republicans who did not vote for it were Richard Shelby (R-AL, %), who voted Nay, and John McCain, who did not vote.

I suspect McCain wanted to vote Nay, but he did not want to oppose his longtime friend and ally Phil Gramm -- who voted for this version, since it did contain most of the deregulation he wanted. Gramm and the other Republicans who went along probably thought the sub-prime lending was just a small "bone" they'd thrown to the Democrats.

But it was exactly this Democratic bone that led to the current collapse, the Law of Unintended Consequences in full cry.

President Bush tries to reform Freddie and Fannie

Fannie Mae (Federal National Mortgage Association) was part of Franklin Roosevelt's New Deal; founded in 1938, its purpose is to buy mortgages from banks and savings & loans to inject more liquidity (cash) into the mortgage market. In other words, it's a legal way for the government to pump more money into the banking industry... exactly the sort of government intervention in the market that is rightly dubbed "liberal fascism." It was turned into a quasi-private corporation in 1968, to get it off the government accounts due to its perennial shortfalls. (This sort of quasi-private company is called a "government sponsored enterprise," or GSE.)

Freddie Mac (Federal Home Loan Mortgage Corporation) is another GSE, this one founded in 1970; its purpose is to create the illusion of competition with Fannie Mae. Fannie and Freddie have been in near constant financial deep water for decades because of their very nature -- but especially after they became the primary avenues for implementing Jimmy Carter's vision of housing welfare, the CRA.

As of September 7th, 2008, both Fannie Mae and Freddie Mac were placed under conservatorship of the federal government, due to extraordinary mismanagement by the former members of the Clinton administration who have been running the two GSEs.

In 2003, Bush proposed a major reform of Freddie and Fannie. Specifically, he wanted regulation to be put under the Treasury Department, which would tighten the lending rules... again, trying to bring some capitalist rationality to Carter's CRA. But again, the Democrats threw themselves athwart fiscal sanity and cried "stop!" As the New York Times reported:

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Bear in mind that to Democrats, "affordable housing" is code for giving Democratic constituents mortgages that they cannot pay to buy houses they cannot afford -- with the proviso that when they default on their loans (as so many do), you, the American taxpayer, will pick up the tab so that other fellow can keep his house.

Bush's reform attempt went nowhere, due to lack of congressional support, primarily by Democrats but without much help from Republicans, either. (In this sense, it was very much like Bush's attempt to reform Social Security. Thanks, GOP Congress!)

Republicans' last shot at averting the looming disaster

Republicans, including John McCain, made one more valiant effort to stave off the implosion that he and others actually foresaw; in 2005, just three years ago, McCain joined as a co-sponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005.

The bill sought to shift authority over Fannie and Freddie from HUD -- which historically pushes lenders towards quasi-socialism and liberal fascism, including the It's a Wonderful Life provision -- to an independent agency, the Federal Housing Enterprise Regulatory Agency.

McCain spoke powerfully in its favor; but Democratic Sen. Chris Dodd killed it in the Senate Banking Committee, in which he was ranking minority member. (Thanks, Senate parliamentarians!)

Bottom line

Here are the "straight talk" bullet points you need to know about the sub-prime mortgage crisis:

• Starting three decades ago, Democrats have used every parliamentary trick in the book to construct exactly the system we have today, where banks are bullied into making bad loans to borrowers who cannot afford them; then they sell those bad loans to Freddie Mac or Fannie Mae; and when a borrower defaults, taxpayers pick up the bill for the defaulter's nice, new house. This amounts to housing welfare for Democrats;
• Republicans have tried repeatedly to kill that program, warning that such an anti-capitalist practice can only result in a complete, diastrous collapse;
• Democrats "denounced" those warnings as "exaggerated." Because of the arcane rules in the House of Representatives and especially in the Senate, Democrats have repeatedly managed to squash those attempts at real reform -- whether they were in the majority or the minority;
• Now that the warnings are proved prescient, and the collapse is underway and impossible to conceal any longer, Democrats point their fingers at President Bush, John McCain, and Republicans in general -- "Look what you made us do!"
• Democrats pretend that the collapse was caused by a lack of regulation and government control -- when it was actually caused by overregulation, amounting to quasi-nationalization of mortgage lenders, vigorously pushed by Democrats in 1977, 1999, 2003, and 2005 -- the It's a Wonderful Life provision;
• Democrats pretend that John McCain was pushing for complete deregulation of Fannie and Freddie, when in fact he was pushing for greater oversight -- but favored the rescinding of the particular Democratic provision that has now led to the collapse. Barack Obama and Joe Biden have consistently supported this provision -- and now blame McCain when its inevitable, predictable, and predicted consequences come crashing down upon us.

What's to be done, then?

Very simple: It's time for some straight talk from Mr. Straight Talk himself.

So far, McCain hasn't said anything stupid about this crisis. But he hasn't said anything smart, either. In fact, he has barely said anything at all.

John McCain needs to move and move quickly. He needs to jump out in front of this issue and not allow himself to become "Katrina-ed." McCain needs to cut a commercial; and taking a page from his opponent, he should simply talk straightforwardly to the camera and say something along the following lines:

I agree we should let John McCain be John McCain; but for God's sake, can't he be John McCain a little faster and louder, please?

Hatched by Dafydd on this day, September 17, 2008, at the time of 10:55 PM | Comments (11) | TrackBack

August 5, 2008

The American Genius

I find it fascinating that, in spite of the fact that the U.S. has endured the body blows of the terrorist attack in 2001 and the current high oil prices, our economy isn’t actually in the toilet. Instead, it's merely teetering on the edge, not yet fallen into recession.

Neither of these causative events can be laid at the doorstep of the Republicans, although the Democrats would sure like to try. While both parties have been in the pocket of the environmentalists for decades, so that we have gradually allowed domestic production of energy to erode, it is demonstrably the Democrats who preach a policy of salvation through deprivation, of virtue by doing with less.

And they oppose any solution that doesn’t require us to “sacrifice” our way of life. Oil? We can’t drill our way out. Nuclear? Too dangerous. Mega acres of coal? Too threatening to the environment. Natural gas? Ditto.

Instead they suggest two technologies that can only make a slight dent in our energy needs:

• Wind -- Even with all the hot air coming out of Washington, we will never have enough of that.
• Solar -- The technology for efficient solar is just as far away as it has been for decades.

There’s nothing more plentiful in the universe than energy, yet small minds and small politicians constantly talk about how we have to learn to do with less of it. That’s not the American genius. The American genius is finding ways to make the impossible happen. That’s what we’ve always done. That’s what we have to do again.

Hatched by Dave Ross on this day, August 5, 2008, at the time of 11:00 PM | Comments (6) | TrackBack

July 22, 2008

Bush Still the Straight-Talker... But Only Behind Closed Doors

Lately, many of President George W. Bush's public comments have been, well, rather "diplomatic" -- by which I mean cryptic, eliptical, and filled with so many multiple-entendres that it's hard to know what he really believes. A far cry from when he was first elected and when he ran for reelection, when we could rely on a candor rare in sitting or running presidents.

But it appears that you can still get the simple truth out of Bush... but only when he believes the cameras are not rolling:

Explaining the current economic downturn to a closed-door fundraiser last week, President Bush said, "Wall Street got drunk."

"There's no question about it," Bush said. "Wall Street got drunk, that's one of the reasons I asked you to turn off the TV cameras. It got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments."

 

 

I sure wish he would return to saying such things when he knows America is watching, as he used to do. This is as good and succinct a description of our self-made economic woes as I've ever seen.

For some reason, the Briefing Room piece implies this is some terrible faux pas on the president's part that will hurt him (and McCain) somehow:

Last week, Bush indicated that he fears YouTube moments such as this making it to the web.

After asking a room of 400 supporters gathered for a fundraiser in Tucson, Arizona to turn off any recording devices, Bush said, "I don't know a lot about technology, but I do know about YouTube."

But I think real Americans will be as impressed by his honest assessment as we are. Now if only he would go back to doing the same in his public pronunciamentos.

Hatched by Dafydd on this day, July 22, 2008, at the time of 11:04 PM | Comments (3) | TrackBack

June 19, 2008

Oogo Fever: After Big Oil, Can Big Food and Big Gun Be Far Behind?

Nothing much happened this week. Oh, yes, I almost forgot: A plurality of likely Democratic voters said the federal government should nationalize the entire oil industry. (By the end of next week, I expect George Will to join them, preening all the way.)

According to Rasmussen Reports:

A Rasmussen Reports national telephone survey found that 29% of voters favor nationalizing the oil industry. Just 47% are opposed and 24% are not sure.

The survey found that a plurality of Democrats (37%) believe the oil industry should be nationalized. Just 32% of voters in Barack Obama’s party disagree with that approach. Republicans oppose nationalizing the oil industry by a 66% to 16% margin [16% of Republicans think we should follow the lead of Oogo Chavez? Great leaping horny toads.] Unaffiliated voters are opposed by a 47% to 33% margin.

I blame public schools.

Meanwhile, marginal Democratic Rep. Maxine Waters (D-CA, 85%) called for "socializing" the oil industry on a House panel in May:

John Hoffmeister from Shell Oil: I can guarantee to the American people because of the inaction of the United States Congress ever increasing prices unless the demand comes down and the five dollars will look like a very low price in the years to come if we are prohibited from finding new reserves and new opportunities to increase supplies.

Rep. Maxine Waters: And, guess what this liberal will be all about? This liberal will be about socializing... uh, will be about, basically taking over and the government running all of your companies.

Then last Monday, another Democrat in Congress, this time a much bigger fish, has joined the call... at least to nationalize the nation's oil refineries. From a video clip shown during the "all-star" panel on Special Report With Brit Hume last night:

REP. MAURICE HINCHEY, (D) NEW YORK: Do we own refineries? No. The oil companies own refineries. Should the people of the United States own refineries? Maybe so. Frankly, I think that's a good idea.

Just in case the above seems vague, here is Hinchey (D-NY, 100%), who sits on the Appropriations Subcommittee on Interior, Environment, and Related Agencies and the Natural Resources Subcommittee on Energy and Mineral Resources, clarifying his position... this time on a video played on Neil Cavuto's show on Fox News:

If there’s any seriousness about what some of our Republican colleages are saying here in the House and elsewhere about improving the number of refineries, then maybe they’d be willing to have these refineries owned publicly, owned by the people of the United States, so that the people of the United States can determine how much of the product is refined and put out on the market. To me that sounds like a good idea.

The dirty, little secret is that Democrats really do believe that there's no connection between supply and price... because they sincerely believe in a secret oil-company Illuminati-like conspiracy to keep prices high. Thus, they "reason," it doesn't matter even if we triple or quadruple the world oil supply: Somehow, Big Oil will conspire to hide the oil and raise the price even more.

An article in yesterday's Investor's Business Daily makes the point:

Others have found a new culprit: speculation in oil markets.

Senate Majority Whip Dick Durbin, D-Ill., a close ally of Obama, held an Appropriations Committee hearing Tuesday into just that.

"Increasing evidence shows that the run-up in crude oil prices and gasoline is being driven by larger trader banks, pension and hedge funds. Speculation may have as much, if not more, to do with high gas prices than any Saudi sheik."

Well, yes: The oil futures market has a huge influence on the current price of oil and gasoline. But that doesn't mean it's all controlled via illegal manipulation by a cartel of speculators and oil companies... it just means that investors consider future supply when they decide how much they're willing to value a barrel of oil today.

When you combine a deeply conspiratorial mindset with a propensity to believe in State control over private control, it's no wonder that the Democratic mind tends to see Capitalism itself as a giant pyramid scheme: They don't trust markets, they don't trust the profit motive, they don't trust Big Tobacco, Big Oil, Big Food, Big Gun, or Big Garment. Heck, they don't even trust the very people they claim to speak for... which is why they must speak for them, of course.

Democrats as a collective (how apt) trust only one "big" on the planet: Big Government. What does that profound difference in worldview mean? Slither on to read more...

The further from the apex of power you look, the more blatant Democrats are about wanting a "progressivist" tyranny of the proletariat, guided by the invisible fist of the Party. Thus Maxine Waters, lower on the DNC totem pole, is willing to come out and say "This liberal will be about... basically taking over and the government running all of your companies;" but the much more powerful Maurice Hinchey only suggests nationalizing refineries, not the entire industry.

And even further down the progressivism food chain, 37% of Democratic voters answer Yes to the question, "Should the government nationalize all the oil companies and run them on a non-profit basis?", while they're evenly divided on the following question: "Suppose a major oil company discovered an alternative energy source that would dramatically reduce the price of gas and other energy sources. If that new energy source would make a lot of money for the oil company, should the company be allowed to keep those profits?"

They don't stop to ask themselves, if this "major oil company" isn't going to be allowed to keep the profits of their invention that would "dramatically reduce the price of gas and other energy sources," why would they bother inventing "an alternative energy source" in the first place?

When you begin shuffling down the Socialist superhighway, you are quickly faced by two reality-based questions that have bedeviled progressivists for more than a century:

• If you remove the profit motive, with what incentive do you replace it? Why should people work hard if they won't personally benefit? We're not angels in the forms of proles.
• Once you nationalize an industry, you also "own" the consequences: You can no longer blame the opposition, impersonal forces, or external enemies. What do you do if things get worse, not better?

To resolve the first question, many Democrats now call for a "Manhattan Project-like" crash program to completely substitute "alternative energy sources" for fossil fuels (geothermal cars, windmill-powered airplanes, whatever). They believe that virtually all great inventions and innovations come from government, not the private sector -- which merely hijacks what belongs to "the people" and exploits it to line their own pockets.

But the reality is that aside from very limited and special circumstances such as the pressures of world war, government almost never innovates anything anywhere. It can fund, it can organize, it can certainly help secure exploitation rights of the private developer. But it, itself, does little to bring new products onto the shelves.

Even enormously valuable federal projects, like the nuclear labs, NASA, and DARPA, generally work to demonstrate broad, fundamental engineering principles and concepts; they leave the process of actually making those concepts workable and bringing them to market to the private sector. (And even for basic research, private companies give the government stiff competition: Who has developed more useful inventions, DARPA or Bell Labs?)

The second question is more devastating to the progressivist theory: If the State "owns" energy produciton, in all senses of the verb, then when things begin going badly, everybody will necessarily blame the State. What does a progressivist lawmaker do then?

We see this Catch-22 playing out today: To placate the environmentalist lobby, Democrats have prevented us obtaining oil offshore, from shale, along the outer continental shelf (OCS), in the deep waters of the Gulf of Mexico and the Caribbean, and in ANWR. But now we have premium gas approaching $5 a gallon here in California.

For some unfathomable reason, voters are pointing the finger at the Democrats who actually caused the problem, rather than accepting the Democratic mantras that it's all the fault of the "failed policies of the Bush-McCain administration" and that "We can't drill our way out of an oil shortage."

Democrats are going to have to do something; something other than haul oil-company executives before congress and harangue them for three hours. But that "something" will probably be to double-down: They will pull drilling bills from the Congressional docket and not let them be voted; they will push an extension of the drilling ban through the House and will try to do so in the Senate (where Republicans will stop them by filibuster); and they will attach ludicrous environmentalist riders to bills that have nothing to do with energy or the economy.

Each of these somethings will be to the same effect: To drive up the price of gasoline higher and higher, because the anointed ones simply know better. They have the vision, and they deserve to rule.

Democrats clearly take their cue from the Marxist machinations of Venezuelan President Oogo Chavez, who nationalized the Venezuelan oil industry starting in May, 2006. So how well did that work out?

In fact, it appears to have been about as successful as Robert Mugabe nationalizing all the farmland in Zimbabwe (where in this case, "nationalizing" means butchering the white owners, their wives, and their children, seizing the land, and handing it over to tribal Mugabe supporters... remarkably similar, if rather more thuggish, than the mass land-snatch committed by the Sandinistas the last time they ran Nicaragua).

Chavez first ordered all oil companies operating in Venezuela to pay a huge chunk of their revenues to the government, unilaterally rewriting longstanding contracts... in the name of the People, naturally. Democrats defended this as "social justice;" real Americans saw it as State extortion.

When that didn't get Oogo enough cash, he went ahead and nationalized the entire industry... and then he fired all of the geologists, engineers, and other professionals at the State-run oil company, PDVSA (Petróleos de Venezuela, S.A.), and replaced them with Oogo cronies:

The Venezuelan government claims that between 2006 and 2012 it will reinvest $76 billion of its earnings to increase production, but analysts canvassed by the three reporters who wrote the story think that the figure comes closer to between $2 and $5 billion a year--a drastic short-fall. Moreover, many of PDVSA's activities are now unrelated to oil--it has hatched subsidiaries to distribute powdered milk, or to mill corn, or even to build boats. (Anyone who knows Venezuela can imagine the lush opportunities this offers for illicit enrichment by the agency officials or the military who work with them.) Meanwhile, as oil production falters, the state company has decided to take on more employees. When Chavez took office PDVSA had 48,000 workers. It now has nearly 75,000, and the president-dictator has announced plans to hire an additional 30,000 by the end of next year. (One cannot help recalling the case of the Argentine YPF, which was the only oil company in the world that lost money in the go-go 1970s!)

This kind of crony capitalism is pushing Venezuela to the edge. Under these circumstances it won't take much of a decline in oil prices to destabilize Chavez's regime.

Meanwhile, Venezuela is experiencing a collapse of its (national) health-care industry to respond to epidemics of infectious disease, a collapse of its food industry, and a sweeping crisis of confidence by its people -- even the poor -- in the Venezuelan strongman:

But for each minor policy shift or good economic statistic from the government, Mr. Chávez has stirred deeper anxiety by intensifying threats to expand state control of the economy and society. For instance, Mr. Chávez warned Monday that he would nationalize large food distributors caught hoarding groceries.

Pedro E. Piñate, an agricultural consultant in the city of Maracay, said: “We live in two countries, one inhabited by officials who think they can alter reality by sending soldiers to intimidate citizens. The other country is where the rest of us live in fear of being killed or kidnapped or of our businesses being seized.”

But how can these trivial setbacks dampen the enthusiastic support of Democrats who still think that Fidel Castro is the savior of Cuba, the Sandinistas were a revolution of poets, and who still wear their faded, tie-dyed Che t-shirts? They are far more apt to follow Oogo even farther down that road, because the alternative is for Democrats to admit that they have been wrong all this time -- and to spit in the face of the special-interest lobbyists that maintain them in power. (That is, they would have to commit political suicide.)

The Great Dictator has now begun to nationalize other industries and threatens to nationalize the entire economy. He even tried to give himself full dictatorial powers last December, via a new constitution -- including the power to remain president-for-life. How long before Democrats seize upon a weak-tea version of that "solution" to the second problem?

All it requires is to identify some sector of the economy, no matter how small, which is not yet under direct control of progressives... and nationalize that, too. When that fails, find another. And another. And yet another. Thus they can stave off complete collapse until the current crop of Reids, Pelosis, Obamas, and Murthas retire.

But Democrats are unwise to rely upon the unwisdom and lack of intelligence of the people; the people have a refreshing tendency to be smarter than the Left thinks them. For example, Oogo himself was resoundingly defeated in his attempt to become the Supreme Tyrant of South America six months ago... and now, per the New York Times article above, there is for the first time in years a very strong political opposition building in Venezuela for the regional elections this November, in response to Oogo's overreaching.

And I believe we're going to see the same dynamic here as well: The overreach by Barack H. Obama and the Don't-Drill, Windfall, Nationalizing Surrendercrats is at least as egregious, relatively speaking, as that by Chavez: We expect more sanity from our leaders than they do in South America. (For example, Chavez was overwhelmingly elected in 1998 even though, just six years earlier, he had attempted to seize power in a coup d'état.)

I believe Obama's risible pandering to every nutty theme and meme of the New Left will finally drag him down, ensuring John McCain's election; and I believe the Democrats will not do anywhere near as well as they hope in the Congressional elections. They might even lose some seats, which could mean losing one or both houses of Congress.

I never bet against the wisdom of the American people; but Democrats stake their party's entire future doing just that every two years. They filled a gut-shot straight on the river in 2006, but the odds are against them doing it twice in a row.

Hatched by Dafydd on this day, June 19, 2008, at the time of 6:16 PM | Comments (8) | TrackBack

June 6, 2008

"What's Bad for General Motors Is Good for the DNC!"

Over at Real Clear Politics, Tom Bevan speaks for nearly all pundits, spread across three parties unto the tenth generation, when he writes:

Of course, the worse the economy gets, the better it is politically for Obama...

This is Conventional Wisdom 101. But why? What is the connection?

CW 102 explains CW 101 by postulating the following syllogism:

1. Economy heads south;
2. Voters decide to blame the "party in charge" and punish them at the polls;
3. The elite media always declare that the party in charge is the Republican Party;
4. Thus, the voters will inevitably punish the GOP (and the country) in November by voting Democratic. It's elementary!

The truly sad thing is that Democrats actually do believe this; they believe what's bad for America is good for them, because they can play "pin the blame on the elephant" and parlay some terrible catastrophe -- an earthquake, an act of terrorism, an economic challenge -- into furthering their congressional careers.

But there's something kind of weird about this syllogism... for