The best article I have read on the current financial meltdown was written, strangely enough, eight years ago. In City Journal's Winter 2000 edition Howard Husock presciently outlines how the Community Redevelopment Act's affirmative-action lending would mean disaster for the banking industry. It is a must read. Husock writes, "A no-down-payment policy reflects a belief that poor families should qualify for home ownership because they are poor, in contrast to the reality that some poor families are prepared to make the sacrifices necessary to own property, and some are not. Keeping their distance from those unable to save money is a crucial means by which upwardly mobile, self-sacrificing people establish and maintain the value of the homes they buy. If we empower those with bad habits, or those who have made bad decisions, to follow those with good habits to better neighborhoods--thanks to CRA's new emphasis on lending to low-income borrowers no matter where they buy their homes—those neighborhoods will not remain better for long." Harvard economist Jeffrey Miron echoes and updates these sentiments on CNN.com: "The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government." Framing free enterprise as the cause of the financial mess will mean more of the activist government that made the mess in the first place. This is why the debate over causes is so important.
A down-payment requirement, based on concern as to whether a borrower can make payments, is—when applied to low-income minority buyers—"patronizing and almost racist," Marks says.
That deserves a "wtF" with a capital "F."
Dan, I just read the CJ article from 2000.
All I can say is holy crap! And the fact that ACORN was mentioned even then. By change, did Obama work for ACORN at this time, the world needs to know!!
Be well,
Sponge
So did everyone notice what happened today beyond the House voting no to the reverse bank robbery?
The Fed decided to print $630 billion from thin air to flood the credit market with more liquidity AND the market crashed more in a single day than it ever has. I found this guy's commentary on this to be well argued:
The point is that this all doesn't add up. The Fed goes ahead and does what every elite and banker wanted the taxpayer to do ("minor" difference of 70 billion is all) of its own accord, and yet the Dow still plunges.
So why exactly was this bill supposed to save the economy from going through this recession? If the Fed's maneuver can't stop it then clearly something much more serious is afoot and our media and elites just refuse to treat the situation honestly.
Also, think about this that I noticed esp. as I live in Gotham near the epicenter of all this tumult. Namely, the market drops more in a single day than it ever has before and yet everyone in real life seems exceptionally calm and business as usual. Now, like in 1929 the crash doesn't all happen at once so clearly the next several days on Wall St. will be critically important to see if there is a general failure of banks. But still, this first drop just doesn't seem to have caused a panic like you would think "single worst drop in a day ever" would warrant.
Well said, Bruce.
Does anyone else feel like their are strong arm scare tactics involved. It is as if Wall Street is saying, "Bail us out or we can guarantee you another Great Depression."
I thought only whiny Dems used scare tactics.
Be well,
Sponge
Pardon the obvious pun, but did they pull that $700 billion number out of a certain Massachusetts Congressman’s a$$? After less than a week, our incompetent Congressional leadership agrees to, what appears to be, an arbitrary number based on zero study from the Treasury or the Fed!
Do they care why this happened in the first place or understand why they need the money to prop up a corrupted segment of the economy that they corrupted?
Make no mistake about it, this is a bail out. It’s a bail out to cover for the lackluster performance of an aloof, lazy and meddling government that works more for affirmative action / political correctness than fiscal common sense so that while collar crime in conjunction with Wall Street can continue.
So, what if the bail out? Won’t the bailees think that risk is a non factor and that another bail out is around the corner if they fail?
Let them fail and allow the market corrections implicit in capitalism begin.
What makes this decidedly even worse is that it brings back symptoms of BDS. GW can't even go out even pretending to look like a GOP'er, without giving support to the opposition and being on the wrong side of this issue. And, getting whacked in the rear by the Democrats and then saying: thank you sir, may I have another.
I don't understand these last two posts and the comments on them. You all seem to agree that the government caused this problem, yet you seem to oppose a government solution to the problem. The Community Redevelopment Act is certainly part of the problem but so are the Sarbanes-Oxley Act and many other parts of the Corporate Socialist structure that has been growing all these years as progressives have taken over our legislatures, courts, and bureaucracies.
This is not a "bailout" of financial institutions, they were just doing their job. It is a "bailout" of our bad politicians and bureaucrats. We elected them and acquieced in their schemes and now we have to pay the price. If we don't, they won't lose, we will. Frank and Dodd will continue to be reelected no matter what. But innocent working people will pay the price in layoffs and cutbacks. And their pension plans will be worth much less. The rich will, as always, suffer much less.
One point on the arbitrary size of the bailout and how it was calculated. You are President George Washington and you are riding to Western Pennsylvania to put down the Whiskey Rebellion. How many troops do you take. The answer is "too many." You don't sit and calculate what might be needed. You want an overwhelming show of force to deter any thought of resistance to your mission. The same is true in financial markets--you want an overwhelming number of dollars at your disposal to put down any thoughts of a panic. The more you have the more likely that none of them will ever really be needed.
So when does it stop? With the promise of more government largesse do businesses, or individuals for that matter, ever stop and think about the risks associated with bad financial behavior? How’s about some personal responsibility all around?
Let the offenders fail and the market correct itself through Free Capital Markets.
This is looking more and more like an election year political stunt. The Democrats started this mess, bailed it out to the tune of $300 billion this summer and now promise a sky is falling economic breakdown if more of OUR money is not thrown at the problem!?
I’ll take my changes with an economic system that’s proven to work and not a gaggle of incompetent career politicians who want to misuse more of my money.
Doc: I disagree. Just because X creates the problem doesn't mean that X can fix it. Just think of a two-year old making a mess. You seem to be assuming a competance in the government that it just doesn't have.
Bruce: It isn't equivalent. The Fed didn't just print fake money and give it to people who otherwise are unsound and cannot pay their loans. That is, however, more or less what the bailout would be.
Just because X creates the problem doesn't mean that X can fix it.
I'd go a step further and say that X's involvement is the problem. More involvement is just more problem. Government, stay out. Business and finance is an art and government can't even manage science.
X,
I don't see how what the Fed and Treasury have done of their own supposed powers is not roughly equivalent to the bailout that was rejected? They are actually just printing money and giving it to banks aren't they?
I grant that it isn't nearly as messed up as the bill that was rejected but extending credit lines and propping up AIG but infusing it with cash is along the same lines of how Fannie/Freddie et. al. are being proposed to be "saved" by the bill I think. As always my perceptions could be off-base but these actions seem pretty in tune with each other.
I think the beneficiaries in both cases will be the banks that speculated wildly on worthlessly inflated loans.
I guess where I am at is confusion over the need (rather, the utility) of government guarenteeing some liquidity for the sake of stability and of protecting sound institutions from failing due to lack of liquidity. It seems to me that the market -- i.e., people with money -- (rather than the government) could handle and reassess the bad assets if it has the short-term capital to do so. For example, an otherwise stable and financially sound family can go through capital crunches in which it needs to live with the help of credit for a few months. It is worthy of loans in the long run, and so usually has no problem getting them (credit cards, e.g.). So the government increasing liquidity through increased Fed lending is the means that government does this in order to make sure that large scale, otherwise sound, businesses have this line of credit in a general time of contraction/readjustment -- right?
Is this to take the Chicago over the Austrian school? I'm confused.
X,
I think I am right there with you on the confused front.
To attempt to address your and Doc McG’s concern: if credit/capital is so restricted through deflation then there simply will not be the cash reserves for banks to continue lending and this on such a wide scale that the recession will become a worldwide depression and be catastrophic. Hence, the actions taken by the fed are different than the proposed bailout and can be accepted where the bailout can’t. The Fed is acting as the “lender of last resort” as the saying goes. Is this a correct summation?
First, I do see the persuasiveness of this interpretation. I think it is definitely true that the great receding of available investment capital WILL cause a depression (the recession we are already in) and that ostensibly the infusion of reserves by the Fed could bolster the banking and lending industry at least temporarily, maybe allowing time for responsible changing of course.
My basic contention has been that I don’t believe the change of course will come at all. That instead this can only be a stop gap and that it thus prolongs the recession and turns it into a depression that can drag for years and years if our progressive elites have their way.
I think the argument against the fed fix boils down to which is more scary long-term: deflation or inflation? But the very terminology suggests the pecking order, deflation results from prior inflation. Deflation is a contraction of the money supply, of available capital and this occurs b/c it becomes clear that assets have less value than they were believed to have (that is prices were inflated). So when the Fed infuses this money to provide “liquidity” what are they doing? They are providing the gloss of worth to assets which are ill-liquid b/c they are in fact worthless. I see no other way to assess the situation. So isn’t this attempting to re-inflate prices, and if so how is that not a fool’s errand?
What’s more important is how this liquidity is supplied by the Fed. They do it by bond issuing to foreign banks and also simply printing money. They then exchange the money “temporarily” for the bad assets thus freeing up capital re-investment by providing reserves for banks to manage their debt. But both these measures devalue the dollar. It also further increases our countries indebtedness to foreign investors. And manipulation of the value of the dollar encourages bad investment b/c it simply makes prices that much more difficult to judge; how do you determine worth accurately if the measure (dollars) is so elastic and unstable? Lastly, it places the burden of correcting mal-investment on an already severely weakened dollar, which at some point is just going to collapse under the weight of its inflation.
I also have a problem with using the Fed to fix this in that it was a large contributing player by constantly lowering interest rates (making capital flee to foreign markets) and concomitantly helping expand easy credit allowing for irrational housing price inflation along with the problem of radically increased debt.
It seems to me that its infusion of credit to banks now only further exacerbates the problem of easy credit and inflation which just puts off the necessary deflation to correct prices and get rid of bad assets.
Bruce: Granted, granted. I agree with everything (except that all deflation is a response to inflation -- though most of it is).
The issue though is whether (1) a panic/crisis of capital is really possible here in which small-to-medium sized businesses, that are really sound and productive, are unable to, in the short term, pay their employees; and (2) whether such crises make otherwise bad policies justified in the short term.
I'm not sure about (1), but I am rather sure about (2). The problem, of course, is that once we are out of short term problems we never put in the fixes. Also, American politicians insist on viewing any economic unpleasantness as sickness -- frictional unemployment isn't sickness, recession isn't sickness, slow growth is not sickness. So, like a hypocondriac, they are always pumping the economy full of drugs they don't fully understand. Perhaps the better ana1ogy would be someone who refused to sleep and just kept drinking redbulls.
My point about the government needing to clean up the mess is twofold. First, since they made it, it is their (and since they are, still, in some sense our agents, it is also our) moral responsibility to clean up the mess. Second, in the absence of a bailout and other governmental action, they will continue to make the mess and the market will not be able to clean up fast enough to stay ahead of them.
The market has never been able to function well in the absence of governmental action that provides a stable money supply. In a modern economy available credit is part of the money supply. Any vision of the market functioning decently without stable and secure money and credit is historically and logically inaccurate. Though progressives underestimate the role of markets and overestimate the role of government in maintaining prosperity, government does play a vital role. Before stable governments there were markets--they were called bazaars. Modern markets require laws, courts, and systems of credit.
Deflation is not a result of inflation. It is solely the relationship between the money (including the relevant credit available) and the supply of goods to purchase. If we used only gold, then we would have inflation when there was a massive gold strike and we would have deflation when production of goods expanded but there was no more gold.
In modern economies deflation is a much more severe problem. For example, it is always easier to raise an employee's salary to adjust to inflation than to reduce it to adjust for deflation. The majority of economic relationships fit that pattern.
People talk about us being in a recession but we’re not. A recession is defined as two consecutive quarters of negative growth. The numbers aren't stellar but we haven’t had that. Yet.
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Doc, this doesn't make sense to me: "in the absence of a bailout and other governmental action, they will continue to make the mess and the market will not be able to clean up fast enough to stay ahead of them."
The question is whether they are capable of cleaning up the mess, or rather whether they are likely to do more damage than they are to do good. Besides, this is not a way to teach government a lesson or make them take responsibility for their mistakes. No, if anything, it simply amounts to an admission that government is competant and businessmen are not. I don't buy that.
And what is a "stable money supply"? What Congress thinks that means, evidently, is throwing money at problems.
Doc,
I agree about stable money supply and currency. We do not have that though and the Fed's policies have never stabilized our currency, rather by jettisoning the gold standard it has led to always steady inflation of the currency and thus destroyed any sense of actual value to the dollar.
I have to disagree about deflation being worse than inflation though in an absolute sense. I just don't think that is historically accurate. Although I readily grant that what actual humans suffer from most is the deflationary part of a business cycle (that is the actual job loss and misery b/c wages cannot be reduced rationally to align with prices like they can be raised). Deflation must be checked if at all possible because it really does destroy good business and lives. But Weimar seems about as clear as it comes that inflation is the real culprit exactly b/c it destroys a society's belief in its currency's value. On a side note maybe this is the specific point of disagreement btwn the two rival free market schools of economic thought? Deflation versus inflation?
It is the massive leveraging of our banks and the irrational credit expansion that sets up a deflationary fall. Now, to adjust to deflation wages and prices must drop and of course that is what modern societies find impossible to allow to occur.
The problem I have with the Fed correcting this is that it has kept stupidly putting interest rates lower which only makes capital flee our market rather than come back in to it. We are suffering from a contraction of credit available to cover debts incurred by banks.
I don’t know. I guess I can understand infusing capital to banks by the Fed through issuing bonds and printing money. But it is really all for naught since Congress refuses to understand it can’t keep spending money that doesn’t exist and the Fed itself has to stop causing inflation and bailing out Congress.
It seems to me that that this is a stirred up crisis propogandized to make us act in ways that are probably not prudent or necessary. People are saying this is painful and a cisis and we need to act -- but nothing has happens so far to prove that to me. To much like Iraqi WMD for my taste, except here we are further destroying our constitutional system instead of an evil foriegn dictatorial regime.
All revenue bills muse originate in the House!
Why don't we wait to see what happens to the loan industry?
I think you’re on to something there. But so many of our rules and laws are disregarded these days that you wonder what other chaos lurks around the corner. Can you say BHO?
The only ones wringing their hands about this were the crisis mongering pols and some pundits in finance (read: Wall Street) and the press. Right before the vote, a couple of hundred reputable economists got together and wrote a paper on why they felt there was no crisis and sent it to Congress. But, by that time, they already knew they had the votes and that this was a pork bill disguised as critical finance bail out legislation and was a done deal.
Now the deadbeats and mis-managers get their due.
For those who voted yes to this, a pox upon them.
