Monday, September 29, 2008
Why did it happen? Let's go back to 1999, when Fannie Mae, the nation's biggest underwriter of home mortgages, was under pressure by the Clinton administration to find a way to get more loans to "borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans." A pilot program was launched, which soon became general policy. Money flowed to people who couldn't afford to pay it back.Michael Arrington then quotes one Peter Wallison predicting a government bailout resulting from that policy that same year!
The next article, by Steve Chapman of the Chicago Tribune, ends up asking a similar question to the one I raised the other day: "Who will rescue the federal government?" Unlike myself, he presents the gory financial details behind this question.
Even the government admits this can't go on forever. A report from the Treasury Department says that without big increases in revenue, "Medicare, Medicaid and Social Security spending and the related deficit financing costs will far exceed the government's ability to pay."Huge spending cuts, confiscatory taxation, government theft by inflation, or federal bankruptcy, take your pick. Even the only moral or permanently viable answer, the first of these, will be painful, thanks to most Americans having become accustomed to some kind of government handouts.
When you spend more than you bring in, you have to borrow to cover the difference. In the next three decades, the government's official debt is on track to triple. But at some point, the Treasury predicts, "the world's financial markets would likely cease lending to the United States."
Then what? David Henderson, a research fellow at Stanford's Hoover Institution and editor of The Concise Encyclopedia of Economics, ticks off the options: We could close the budget gap by drastically cutting spending or raising taxes. The Federal Reserve could print a lot of money, reducing the real value of the debt and making it easier to pay off. Or the government could default -- in short, declare bankruptcy. [link dropped, bold added]
Now that we're in this situation, what ought we do about it? Through Instapundit and, again, HBL, we have "Key Points on 'Rescue' Plan From A Healthy Bank's Perspective" from John Allison, Chairman and CEO of BB&T. Among other things along the way, he traces the origin of the crisis even further back than Bill Clinton's big assist in 1999:
Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high. [bold added]As Yaron Brook recently put it so well, this is not a failure of capitalism, but of the "unfree market".
To make matters worse -- as if this bailout bill weren't already bad enough -- some earlier versions of this bill included massive outlays for ACORN, a left-wing advocacy group. That particular measure appears to be gone, but there's plenty more to hate about this bill:
In the interest of "transparency," there will be four layers of oversight, and judicial review of Treasury decisions -- something Hank Paulson tried (with good reason) to exclude in his initial draft. The ACORN subsidy is gone, but mortgage relief is in, through some yet-to-be-determined process of federal mortgage review. [bold added]Re-read John Allison's analysis of the origins of this crisis and recall that "bailout" and solution" are not synonyms.
Update: Just as I was about to head out the door, I noticed that David Veksler has posted on the economic crisis as well.
The key to understanding economic theory is to grasp that the same principles that apply to your personal finances, and perhaps to your interaction with your local grocer apply equally to the world at large, at all levels of economy activity. The key to understanding politics is to grasp that political success requires advocating policies which violate these basic economic principles - and then evading the consequences of their own policies - with the voters' eager participation in the delusion.This last sentence indicates why cultural change is the only possible long-term solution to the current crisis. If people do not generally re-gain at least the same level of appreciation of personal independence and freedom that they once had in America, the formula for political "success" will not change.
Bush's Statist Legacy, Updated
In barely over a month since I pointed to an eye-opening MacLean's article about the enormous growth in the size of the federal government under our current President, we have not only seen him accelerate our disastrous domestic policies (above), but have had him doing exactly the same thing in the meantime with respect to foreign policy.
On The Drudge Report, in a single day, I spotted the following collection of headlines. They practically do my job for me:
- "Israel Asked US for Green Light to Bomb Nuclear Sites in Iran"
- "US, Russia Reach Deal on New UN Iran Resolution"
- "Russia Offers Chavez Nuclear Help amid US Tensions"
Who needs McCain or Obama to take office when we still have George W. Bush until January?
Chavez Echoes the Ayn Rand Institute...
... regarding a fact, but not his evaluation of that fact.
As if recent world events haven't closely-enough resembled some hack attempting to re-write Atlas Shrugged in as grotesquely-exaggerated a manner possible, we have Hugo Chavez saying of the financial crisis, "I am sounding like Bush, more or less. What a novelty!" Sadly for us, the only novelty is that this is now so obvious, even Hugo Chavez can see it.
A press release from the Ayn Rand Institute indicated a year and a half ago that this has been the case:
"In announcing his commitment to achieving 'social justice' in Latin America," said Dr. Yaron Brook, executive director of the Ayn Rand Institute, "President Bush is following in the footsteps, not of Thomas Jefferson, but of Hugo Chavez."In addition to this being old news, this is not a good thing.
Furthermore, both Chavez and Vladimir Putin, who understand this on the level of cunning, see this and appear to be getting ready to use it.
Of course, if any leader really understood this, he would do, as Stephen Borque suggests in a letter he sent to his Congressmen, and "grab the free-market baton that the Republicans have long ago dropped."
Sadly, in a twist too ironic even for a good farce, Chavez and Putin seem closer to doing this than our own government!
Today: Added link to David Veksler to end of first section.