Ambisinistrous

On Monday, Nancy Pelosi infamously blamed “right-wing ideology of anything goes, no supervision, no discipline, no regulation” for the financial pickle in which we find ourselves.

Well, here are Pelosi’s forces of “right-wing ideology.”

Apparently she’s talking about Democrats, and she can’t tell sinister from dexter. She’s equally clumsy on both sides.

Mona Charon points out that it’s as if nothing Democrats said in the past counts.

Now you could make the case that before 2008, well-intentioned people were simply unaware of what their agitation on behalf of non-credit-worthy borrowers could lead to. But now? With the whole financial world and possibly the world economy trembling and cracking like a cement building in an earthquake, Democrats continue to try to fund their friends at ACORN? And, unashamed, they then trot out to the TV cameras to declare “the party is over” for Wall Street (Nancy Pelosi)? The party should be over for the Democrats who brought us to this pass. If Obama wins, it means hiring an arsonist to fight a fire.

Well, as things have unfolded I don’t actually think you can make a case that these Democrats were well-intentioned. Half of them got sweetheart loans from Angelo Mozilo. Most of them got big campaign money from Fannie and Freddy. None of them were interested in talking about accounting practices that would have made Enron blush. They passed laws to force private enterprise to make bad loans, set up government run enterprises to “finance” those loans, and then refused to consider the possibility that anything could go wrong with that. Fannie Mae and Freddie Mac pushed bad paper at the instruction of these Democrats.

Thomas Sowell notes the essential fault: government manipulation of the market. Bailout Politics

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Jeff Jacoby: Frank’s fingerprints are all over the financial fiasco

Barney Frank’s talking points notwithstanding, mortgage lenders didn’t wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so – or else.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and “redlining” because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to “meet the credit needs” of “low-income, minority, and distressed neighborhoods.” Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this “subprime” lending by authorizing ever more “flexible” criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. “Lack of credit history should not be seen as a negative factor,” the Fed’s guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as “valid income sources” to qualify for a mortgage. Failure to comply could mean a lawsuit.

We got where we are because of Democrats. Getting out of it is going to be hard. John Berlau: Doing Something?

So a substantial indirect effect of the bailout will be higher prices for food and gasoline, and this will probably hit ordinary households sooner than many politicians expect. When speculators expect the dollar to fall or be volatile, they immediately try to hedge an unstable currency through buying commodity futures. Thus, last week saw a big spike in oil prices, which had been steadily declining over the last few months. Other commodities, notably gold, also shot up. Corn and wheat prices, already boosted because of ethanol mandates, will also likely shoot up in response to a falling dollar. An article in Stocks, Futures and Options Magazine entitled “New Rules in the Commodity Game” notes that the dollar is now a stronger day-to-day factor in corn futures trading than even weather conditions.

On top of this inflation, the bill might even worsen the very credit contraction it is trying to stop. This is because of its effects on financial firms that have to follow mark-to-market accounting rules. As I wrote earlier this month in the Wall Street Journal, the credit “contagion” has been spread in large part by these rules, adopted by the Securities and Exchange Commission and bank regulators in the last few years, and subject to a big expansion last November with Financial Accounting Standard 157.

Because the mark-to-market rules require writedowns of even performing loans based on the last sale of similar assets, good banks holding mortgages that haven’t been impaired often have to adjust their books based on another bank’s sale — even if they plan to hold their loans to maturity. And because the rules are tied to solvency requirements from the government’s bank regulators, banks lose “regulatory capital,” even if the loss is only on paper. Thus, in the scramble to conserve capital, financial firms have less money to lend.

But the bailout — in addition to putting taxpayers on the hook and massively increasing government’s role in the economy — would likely make mark-to-market and hence the credit crisis worse, according to experts who have reviewed Paulson’s plan. Paulson proposes a “reverse auction” approach by which government would choose a selling price to buy a financial firm’s mortgage-backed securities. But unless mark-to-market rules were changed, this sale would force other firms to write down their assets to this price, which could further constrain the amount of money they can lend.

An Associated Press story paraphrases American Enterprise Institute scholar Vincent Reinhart, a former Federal Reserve monetary affairs director, as saying that “if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules.” Similarly a Washington Post story by financial reporter Neil Irwin says that the purchase could force more regional banks to write their assets down. Thus, regional banks as well as big banks will be subject to credit constraints.

As of today, some accounts say the bills will include authority for the SEC to suspend mark-to-market. But the SEC and the banking agencies already have the authority to suspend it and use any accounting rules they wish. Since they have been resistant to doing so thus far, even in the midst of this crisis, putting in what amounts to at best Congressional “wishes” will likely not move these agencies. The only way Congress could make a meaningful change would be to require this suspension of rules, and lawmakers do not seem willing to do that yet.

Note, the “mark-to-market” rule was deregulated yesterday.

Finally, getting government out of getting out of this mess seems like a good idea. Jeffrey A. Miron: Commentary: Bankruptcy, not bailout, is the right answer

This bailout was a terrible idea. Here’s why.

The current mess would never have occurred in the absence of ill-conceived federal policies. [Regulations!] The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

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.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

Today, the Senate takes up a slightly tweaked version of the bailout. Frankly, it’s hard to see that passage of this bill will be better in the long term. But, since Obama is likely to be our next President and since the pain of a decades long government experiment in market manipulation won’t be over for a long while no matter what; we’re going to see more socialist intervention in the economy anyway. I don’t think it much matters whether we have a bailout or not. The damage will take as long to undo as it did to set up.

So, advice for Sarah Palin and John McCain:

1-Don’t accept the Democrat premise that we have free-market evil, “failure to regulate,” and degenerate into a me-too populist hissy-fit, as John McCain has already done. This was a failure to regulate government – not a failure of government regulation. It’s preponderantly the Democrats who have demonstrated failure in the first case. Unable to learn or be accountable, they will provide way too much in the second.

When “blame capitalism” frenzy seizes the Democrats, forcefully point out that it is precisely regulation that got us into this mess – mainly the Community Reinvestment Act requiring banks make bad loans or be fined, added to the cozy collusion with Fannie and Freddy of Democrats like Barney Frank and Chris Dodd. Be prepared to quote them extensively.

Further, make note that Angelo Mozilo and his ilk were not practicing capitalism, but were rent seeking corporatist welfare queens. Don’t fail to point out that their government sponsored analogs, Jim Johnson and Franklin Raines were even worse.

Be prepared to say Bear-Stearns, Lehman and AIG should have been allowed to fail – except maybe since the government led them into failure we should fix it and never get into such a position again. If we had had a free market, they never would have taken on the risk they did. They thought it was mitigated by F&F.

If Katy Couric wants to know what other regulation John McCain has suggested (aside from reining in F&F) to stop this “corporate greed,” tell her that’s the wrong question. The question is, “What will government do to reform itself after causing this abject failure?” In this case, I know McCain has actually made his own campaign theme difficult to execute by jumping on the bandwagon of “Wall Street Greed” (which is true, but irrelevant), but Sarah Palin could distinguish herself in debate by rejecting McCain’s goof and going after the statists who caused the problem.

Deregulation is – rescinding rules forcing banks to make bad loans. Deregulation is – never having set up Fannie and Freddy in the first place because of how statists will always prevert such entities. (Setting up F&F was regulation.)

2-While we’re on advice, stop letting the Dems get away with talking about a “tax-cut” for 95% of Americans. Ask Obama what a tax cut for 95% of Americans actually means. Two-thirds Correction Forty-one percent of Americans don’t even PAY taxes. Obama has to conflate welfare with tax-cuts to even make the claim. Ask him how much of an income tax refund should reasonably be given to people who haven’t paid any income tax. What is being refunded? He’ll natter about sales tax. Tell him that’s a problem for the States and covered under the 10th Amendment.

3-Palin especially should have this ready: If Biden says in tomorrow’s debate, as Obama did Friday, that the US has only 3% of the world’s oil reserves, call him on it. We have far more. We don’t know exactly how much more because the Democrats have prohibited offshore exploration studies for decades. Even so, ask Biden how much oil there is in either Colorado shale or in the Bakken Formation compared to Saudi Arabia. That oil isn’t even counted in US “reserves.” Mention his confusion on clean coal while you’re at it.

3 thoughts on “Ambisinistrous”

  1. Yes, rely on Sarah Palin to carry your libertarian agenda tonight. Good luck! :) Your “fact sheets” on tax proposals (only 5% of those targeted for a tax cut by Obama pay taxes) and on bank bailouts are so flawed, it’s amusing…Lehman was allowed to fail, AIG might still fail. Wall Street investment bank giants are dead on arrival already. The only institutions “bailed out” will probably your and my community banks– you know, the one that gives a you a small business loan when you need it as well as foreign institutions that hold a giant portion of our debt. But of course, you think, the world will continue to invest in US instruments even if they turn out as worthless as – say- Chechen junk bonds? You probably think we don;t need foreign investments to carry our one trillion dollar federal budget deficit, nor do we owe anyone pay back to restore the trust in our “this the greatest nation in the world’s” financial system. Let everything default and money will continue to flow our way..:)Yes, the poor minority homeowner wanna bes caused it all, along with the liberal political cronies who enabled them. How about your friend, Sen. John McCain’s economic advisor and longtime ally, Republican Sen. Phil Gramm?http://losangeles.injuryboard.com/miscellaneous/the-subprime-mess-and-phil-gramm-an-experiment-in-deregulation.aspx?googleid=242468” In 1999, former Senator Phil Gramm (who is, incidentally, Senator John McCain’s economic adviser and cochairs his presidential campaign) set out to completely gut the Glass-Steagall Act… allowing commercial banks, investment banks, and insurers to merge … Sen. Gramm was the driving force behind the Gramm-Leach-Bliley Act, as he had received over $4.6 million from the FIRE sector (Finance, Insurance and Real Estate donations) over the previous decade, and once the Act passed, an influx of “megamergers” took place among banks and insurance and securities companies, as if they had been eagerly awaiting the passage of Gramm’s Act. “Shortly after George W. Bush was elected president… Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision — lobbied for by Enron, a major campaign contributor to Gramm — that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm’s wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act…”The people who speculated with other people’s debts caused this crisis and they were from your side of the fence.Your experts say:”Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.” Hey, I hope you come through for us! Great idea to let everything bankrupt! That way, if AIG fails, and credit markets dry up, the municipal bonds insured by AIG and dependent on income from their investments will go to hell, too, taking with them the communities themselves. Then you Libertarians can sit there and live out your Libertarian utopia: No taxes, no infrastructure, no roads, police and schools– a return to caveman society. a dog-eat-dog world of survival of the fittest. I prefer a society in which we take responsibility for each other’s mistakes best as possible to help all of us out of this crisis with probably, positive returns in five yearsTo be fair, I will post your article and my comment on my blog, boycottrepublicans.com. I hope you do the same.Bettina

  2. Bettina,Thanks for your comment.I can’t see where I (or any of those quoted) claimed only 5% of those to whom Obama wants to give a tax cut actually pay taxes. What I said was 2/3’s didn’t pay taxes. That was a place holder from a draft and I neglected to change it. It’s 41% of Americans who don’t pay taxes, but will get a “refund” under Obama’s plan. http://www.taxfoundation.org/news/show/1410.htmlI am correcting the post.Actually, it’s far worse than that, Obama’s plan actually increases marginal tax rates at the low end of incomes: “As the chart shows, Obama’s give-and-take tax policy results in marginal tax rates of 34 percent to 39 percent in the $31,000 to $45,000 income range for this family. That’s an increase of 13 percentage points or more from the current rates. What accounts for the higher rates? First, Obama expands the maximum child and dependent care credit for families with one young child from $1,050 to $1,500 and phases down the credit over a longer income range, from $30,000 to $58,000. Throughout this income range, the credit is phasing out at a rate of $30 per $1,000 of income, thus raising the effective tax rate by 3 percentage points. Obama also makes certain credits refundable, which introduces a tax penalty of 10 percent or 15 percent, depending on the income bracket.http://www.american.com/archive/2008/august-08-08/the-folly-of-obama2019s-tax-planI don’t know, but now that I think about it, maybe he’s giving tax cuts to the people whose taxes he’s raising and that’s how he gets 95%.Yes, Lehman failed. Your point? So did Bear-Stearns, IndyMac, WaMu, Wachovia… If AIG fails it will be with the US government as an 81% owner. http://www.iht.com/articles/2008/09/17/business/17insure.phpI’m not going to bother to reply to inferential speculation about what I think. I will point out that much of our trillion dollar deficit is owed to the Chinese already, and they’ve threatened us with it.http://www.telegraph.co.uk/finance/markets/2813630/China-threatens-%27nuclear-option%27-of-dollar-sales.htmlSo to get the $700 billion, we’ll either borrow more from them or just print it. Which do you prefer?If 0 down, interest only, ARMs were such good idea for the “homeowner wanna bes,” we can certainly ask Dr. Phil’s question -”Hows that workin’ out for ya?”On the Glass-Steagall reform, I’ll let Bill Clinton, who signed it, respond:[When] asked … whether he regretted signing that legislation. Mr. Clinton’s reply: “No, because it wasn’t a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter.”But I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”http://online.wsj.com/article/SB122282635048992995.html?mod=googlenews_wsjThe people who speculated with other people’s money were first and foremost Fannie and Freddie as front-men for the Democrats in Congress. They wildly encouraged greed in Wall St. and no doubt Wall Street deserves to be punished – typically that would mean failure. These weren’t capitalists, they were corporatists, so they expect to be bailed out as Fannie and Freddie promised. As Barney Frank said, “I want to roll the dice a little bit more in this situation towards subsidized housing.” Snake-eyes, Barney.http://www.blogger.com/post-edit.g?blogID=10942892&postID=616839000600155077I’ll again skip over the parts where you tell me what I want, and go to the bottom line: It’s fine that you “prefer a society in which we take responsibility for each other’s mistakes best as possible to help,” it just isn’t relevant to your hope for positive returns now or in 5 years, much less are your intentions useful to people with marginal credit who could have gotten loans before Fannie and Freddy screwed things up and now won’t be able to – bailout or no bailout.Finally, you do realize that the $700 billion was a number picked out of a hat? No one has a clue whether it will even be effective in anything except devaluing the dollar.

  3. Another point about Obama's tax plan, which is similar to a lot of tax policy that has been bandied about, is that tax credits, as they are constructed here in the U.S. (and to a lesser extent, Canada) are a scam. Most people fall into the claim that credits are better than deductions because a credit is a “direct reduction of tax” versus a deduction being a reduction in taxable income. However, what nobody tells you, is that almost every credit that an individual can claim is useless under the tax system because they do not reduce AMT. A classic example is the community investment tax credit – a 35% tax credit for investments in certain “community projects”. I was involved in structuring a deal for this that would have involved businesses in Detroit, Chicago, Memphis, and Pittsburgh. Essentially, the individuals who were ponying up the money trying to make this deal happen ended up rejecting this, because the $2 million in tax credits would have no benefit for them, as any credits they took would be subject to AMT. The way AMT is structured, any household that is making over $70K would have to worry about a tax hike because the Obama credits will tax them possibly at a 28% rate.As for Bettina's comments above, the key thing about the Gramms, was Wendy's involvement in a decision not to have swaps subject to any regulatory oversight – no just energy trading. However, in their defense, swaps were just in their infancy and nobody really knew, though perhaps they should of. But throughout this century, we have learned that financial markets innovate and governments regulate retroactively.And to follow up on the above comments – history has shown us that small regulatory/tax changes start a cascade of events that can have catastrophic consequences. The S&L crisis had its genesis in a few arcane regulatory changes, and then was goosed by tax changes, and brought to a head by another tax change. This one had all the same earmarks – start off of regulatory changes, some tax changes, and market players take advantage of it to the hilt, and a herd mentality on risk management causes a feedback loop until the situation gets untenable.

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