The End of Illusion, Part Two

The Bush years will be remembered for the cruel triumph of realism over illusion.

One of the era's great illusions was spun by President Bush -- that the force of freedom was so irresistible, it would prevail in a place like Iraq even in the absence of law and order. Bush himself eventually realized his mistake. The second illusion -- fed by anyone who possibly could get rich from it -- is bursting now.

Wall Street is experiencing one of its most wrenching periods since traders began gathering around a tree there in the 1790s, beset by a terrible reckoning: No, interest rates can't be held at unsustainably low rates -- 1 percent in 2003 -- without stoking wasteful investments; no, housing prices won't always go up; no, home loans can't be extended to people with shaky credit histories on scandalously easy terms (no money down!) with the expectation that they'll be paid back; no, fancy financial instruments and computer models can't eliminate risk; no, firms can't exist on massive debt -- now-bankrupt Lehman Brothers had debts 35 times its capital -- without courting disaster.

It's a sign of how fragile the entire financial edifice had become that a decline in housing prices of about 20 percent could precipitate the current near-meltdown. It's easy to blame greed, as John McCain is doing at every opportunity, since it's a given. Greed is endemic to the human condition, even if it is most visible on Wall Street. Lehman Brothers CEO Dick Fuld made $22 million last year, leading his firm toward the abyss, while Wall Street doled out $23.9 billion in bonuses in 2006. But everyone else joined in the wide-ranging bonanza.

As financial guru Ric Edelman writes, "The insurers got rich selling policies with fat premiums, brokerages got rich selling new securities, lenders got rich selling more loans than ever, builders, real estate agents, title settlement companies, appraisers, inspectors -- everyone got rich from the ensuing real estate boom."

He could have included the politicians who enabled the irresponsible lending of Fannie Mae and Freddie Mac because they knew these "government-sponsored enterprises" -- since bailed out by the government at a potential cost of $200 billion to taxpayers -- would line their campaign coffers. Fannie and Freddie were the "patient zero" of the financial contagion, encouraging and blessing the "subprime" loans that were a toxin spread throughout the financial system. Many Republicans, including McCain, wanted Fannie and Freddie reformed. As a largely Democratic cash cow, it was protected by Democrats, enamored of its mission of extending homeownership to those who -- it turns out -- couldn't afford homes.

With the financial system teetering on collapse, the federal government has become the backstop. "Raw capitalism is dead," Treasury Secretary Hank Paulson has said. With Paulson and Fed Chairman Ben Bernanke deciding case by case which companies the federal government will save or not, he's not kidding. After letting Lehman die, they essentially took over $1 trillion insurance giant AIG, making the taxpayers instant stakeholders in its far-flung businesses from life insurance to aircraft leasing and a ski resort.

In this environment, it's hard to resist calls for more regulation. But it has to be intelligent and measured, an extremely difficult task when the market is constantly adapting and the next excess will come in a new form. A basically solvent company, AIG was rendered illiquid by so-called mark-to-market accounting rules that say assets must be marked down to their value in the current market, even if they are ultimately worth more. This was a reform adopted in response to the Enron scandal that has worsened the current crisis.

Winston Churchill famously said that democracy is the worst system except all the others. The same could be said of capitalism. There is no way to eliminate all the human failings -- greed, exuberance, shortsightedness, fear and ignorance -- that created the predicates of this crisis and are fueling it now. If we pretend there is, we only foster another illusion.

" There is no way to eliminate all the human failings -- greed, exuberance, shortsightedness, fear and ignorance -- that created the predicates of this crisis and are fueling it now."

There is a way but few will use it; jail those who did not take care of their departments i.e., the Bureaucrats that run this country and get rich from their charges...Barney Franks comes to mind as he is greatly responsible for the mess you see now. But-but-but Barney is the fox guarding the 'hen house' door and Pelosi will not let any special investigation near him...it would lead to and starting with the following...... During the Clinton years, Clinton said "stop the red lining on mortgages"....meaning don't look for collateral from poor folks just give them a mortgage whether they can afford it or not. Take a look at this again:(Subprime Mtg.) Amazingly true.

Welfare come in all sorts of guises but always for VOTES as welfare helps no one but the politician. The picture of welfare is still large in New Orleans.

“There is no way to eliminate all the human failings — greed, exuberance, shortsightedness, fear and ignorance — that created the predicates of this crisis and are fueling it now.”

And even in a capitalist system, it’s human behavior that really has to be regulated. No, people can’t babble about free markets and free trade and free this and free that and pretend there should be no restraints on what participants are allowed to do.

This crisis has at least two major elements: the Democrats push to loosen lending standards over the years, and, to a lesser extent, Republicans push to remove as many restraints on trading tactics and strategies as possible. We have a growing number saying that speculators absolutely caused the run-up of crude to almost $150, while others still claim they had nothing at all to do with it.

And they should fire everyone who ever thought this naked short selling should have been allowed.

The Bush Administration promoted the idea that everyone should own a home and is thus partly responsible for the sub-prime mortage mess:

http://www.hud.gov/news/release.cfm?content=pr04-006.cfm&CFID=11239796&CFTOKEN=90023221

HUD No. 04-006
Lemar Wooley
January 19, 2004

BUSH ADMINISTRATION ANNOUNCES NEW HUD “ZERO DOWN PAYMENT” MORTGAGE
Initiative Aimed at Removing Major Barrier to Homeownership
LAS VEGAS - As part of President Bush’s ongoing effort to help American families achieve the dream of homeownership, Federal Housing Commissioner John C. Weicher today announced that HUD is proposing to offer a “zero down payment” mortgage, the most significant initiative by the Federal Housing Administration in over a decade. This action would help remove the greatest barrier facing first-time homebuyers - the lack of funds for a down payment on a mortgage.

Speaking at the National Association of Home Builders’ annual convention, Commissioner Weicher indicated that the proposal, part of HUD’s Fiscal Year 2005 budget request, would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.

“Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities,” said HUD’s Acting Secretary Alphonso Jackson. “President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal.”

Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.

“This initiative would not only address a major hurdle to homeownership and allow many renters to afford their own home, it would help these families build wealth and become true stakeholders in their communities,” said Commissioner Weicher. “In addition, it would help spur the production of new housing in this country.”

One of the era’s great illusions was spun by President Bush — that the force of freedom was so irresistible, it would prevail in a place like Iraq even in the absence of law and order. Bush himself eventually realized his mistake.”

IMHO, that's a particularly dumb and disingenuous statement by the author. I cannot recall President Bush ever making that argument. Throughout our history, not even all Americans have wanted freedom and equality for all our people. Al Capone assassinating candidates in Chicago and the KKK terrorizing black voters in the South are two examples that come to mind. What Bush and others did promote was the idea that a free and democratic Iraq could serve as a beacon of hope to others in a region largely in the iron grip of vile dictatorships, and in the end I think he'll be proved right. Like most Americans, of course, the author is impatient and because everything’s not perfect after a few years of the effort, it's time to throw in the towel.

Rich, Rich, Rich . . .

Please get a hold of your hyperbole.

Government bailouts happen. We survive. This is no different.

Yes, they are a disappointment and cause of concern. And, yes, we should immediately go in to self-examination mode, first, to be on guard against creeping socialism, and second, to evaluate (as always) how we could do better in the future. (And the political history of this debacle shows, actually, that no matter who tried to reform or warn, in Washington NOTHING gets done until the crisis comes to the attention of the little guy.)

Look:

1971: Nixon gave about $250 million in various “rescue” provisions to Lockheed. He also created Amtrak out of Penn Central Railroad’s failure.

Carter? Remember Chrysler? In 1979 or so, the government bailed Chrysler out with $1.5 billion.

Then there was Ronald Reagan. The Reagan administration holds the record, I believe, for the largest bank bail-out in history. The FDIC spent about $4.5 billion in that rescue of Continental Illinois.

Remember the S&L crisis of the 1980s? Bush the Elder spent about $125 billion bailing out S & L’s (and still thousands failed subsequently).

Under Bill Clinton, late 1990’s, Long Term Capital Management was bailed out for about $4 billion. Clinton also arranged for almost $50 billion in loans and guarantees to prop up the Mexico peso.

After the September 11, 2001, terrorist attacks, the hard-hit airline industry got about $15 billion in various types of financial aid from the Bush administration. Basically, a bail-out to keep the airlines flying.

Presently, the Fed helped JP Morgan buy Bear Stearns through a $30 billion line of credit. Then the Bush administration took over Freddie Mac and Fannie Mae and bailed out AIG.

I agree this is not pretty and it is a cause for concern and reflection. But let’s get a grip at the same time.

“IMHO, that’s a particularly dumb and disingenuous statement by the author. I cannot recall President Bush ever making that argument.”

He’s been saying it for years:

http://www.whitehouse.gov/news/releases/2008/01/20080113-1.html

And you can Google and find plenty of examples:

http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=bush+people+want+freedom

And another one:

“I think two of the great ironies of history will be that there will be a Palestinian state and a democratic Iraq showing the way forward for people who desperately want to be free,”

The Palestinians and Iraqis might want freedom, but it’ll be very different from what Americans would call freedom.

http://www.nytimes.com/2005/01/28/politics/28prexy.html?_r=1&hp&oref=slogin

“One of the era’s great illusions was spun by President Bush — that the force of freedom was so irresistible, it would prevail in a place like Iraq even in the absence of law and order. Bush himself eventually realized his mistake.”

That WAS known as "Bush Doctrine" and has been wisely discarded. Bush has indicated he was influenced by "The Case for Democracy," by Natan Sharansky and Ron Dermer (published 2004).

The stupidity of the neocon book argues that "replacing dictatorships with democratic governments is both morally justified, since it leads to greater freedom for the citizens of such countries, and strategically wise, since democratic countries are more peaceful, and breed less terrorism, than dictatorial ones."

Duh.

That sap-happy neocon theory is what led the US over the cliff into the Iraq abyss. Later it was revealed that nincompoopneo (and WH functionary) Douglas Feith had actually manufactured fake documents on his home computer to dupe the president of the USA and its citizens into wasting young blood, and billions upon billions of US dollars into Mideast hellholes (and into the pockets of war profiteers).

One US general called Feith the dumbest man in history.

Feith's dumb*** involvement in US foreign-policy should have relegated pukeneos to the dustbin of history. No such luck. These con artists flim-flammed the Washington establishment and are doing a whizbang job at transferring massive amounts of US wealth to Mideast hellholes (and into war profiteers' pockets). Americans need to avoid the mistakes that allowed these nincompoops to achieve the status they did.

===============================================

FOLLOW UP In American intellectual circles---the ONLY opinion that counts---the nitwit neocon concept has been highly discredited........thank God.

However, the neocon garbage is still floating aorund in the form of the "National Greatness" thingy being promoted by Fox pundit Billy Kristol.

"National Greatness" entails a greater role for the federal government and more---much more--extensive military intervention throughout the world to "promote American values." Kristol is the only one with the list of countries the US should invade to achieve "national greatness" (sarc).

NOTE WELL: Kristol's "National Greatness" also requires religious cleansing of America-----not just ridding America of all religions---just Christianity.

“Capitalism rests on certain foundations, like sound money for instance, that were severely undermined. “

Capitalism is just stored wealth. It is human nature to engage in fads and ‘follow the market’ and a private money system is as prone to panics and credit cycles as a Fed-run one, which is why the Fed was created (a history of US financial markets from 1850-1910 would confirm this). US was the top growing economy from 1850-1929, with an astounding 7% GDP growth per annum, but it was done in boom and bust fashion.

The problem is when markets are exasperated by credit cycles. So who’s to blame for the boom and bust? Its part govt policy and part human nature (aka ‘greed’). Its wrong to tut tut and blame ‘greed’ without acknowledging that it is ‘greed’ which is what drives our whole prosperity thing - do people go to work out of a sense of charity or a sense of wanting to get ahead? Its also great 20/20 hindsight “oh how dare you be a real-estate investor who bought at the top and got foreclosed”. if people were doing unwise things, they themselves are the ones most burned by it. The banks, the investors, the foreclosed homeowners, etc.

So lets turn to Govt policies. Govts can create misallocation of resources by bad policies. THE BIGGEST MISTAKE WE MAKE IS SEEING A “PROBLEM” WITH THE MARKET, AND CREATE A GOVT INTERVENTION “CURE” THAT HAS MORE PROBLEMS THAN THE ORIGINAL PROBLEM. Most Govt bad policies are due to bandaid approaches to ‘problems’ that are not really solvable by Govt. Govt will NEVER solve the credit cycle problem, nor will it ever stop people from making investments that dont work out - unless it outlaws them altogether.

Instead, Govt interferes with the natural economy in a way that distorts and channels investment decisions. With the exception of regulations that improve market transparency and information flow, most Govt involvement has negative consequences by creating misallocations of investment and money.

One such misallocation is welfarism that takes from the productive and gives to the non-working. This disincentivizes work as a whole and retards economic effort.

Another is ‘industrial policy’ socialism that takes from healthy companies and gives to industrial organizations that cannot otherwise sustain themselves. This reduces the return on investment and squanders investment capital in poor-return activities.

A third misallocation is the misuse of credit. Govts can create excess money, feeding the unsoundness of money. What that does is create ‘bubbles’ and inflation. Both make people chase unsound investments or shun sound investments that are made untenable by an unsound money system.

A fourth misallocation is the destruction of effective investment, work and business via regulation. Regulation and rules add to compliance work, and stop companies from freely doing what they want. If those things are actually harmless, then the regulations themselves are harmful by stopping the natural economy.

Welfarism, Socialism, unsound money and regulation are the four horseman of economic collapse and misery.
And yet ...
- we need some regulation that keeps market players honest and stops truly bad behavior (fraud, etc)
- we need some management of money supply, and no such management would be perfect
- we dont need socialism or cradle-to-grave govt controls, but we do need a safety net for the ‘truly needy’

At times of crisis like this, the most important thing is to keep these 4 horsemen in the barn and not let them loose in a panic.

Fannie Mae fall in the socialism category. GSEs are Govt entities involved in a practice, mortgage lending, that could and should remain wholly private but regulated.

The Sarbanes-Oxley regulations played an unfortunate role in this crisis: It scared away IPOs and thereby channelled hot money into hard assets - commodities and real estate CMOS. It made illiquid assets dangerous to balance sheets, causing meltdowns in companies under stress.

Will we compound earlier mistakes with new ones? The loose money of 2003 fed this. But the loose money of 2003 was to dig out from the post-internet-bubble economy... Now we are throwing money around left and right to stop the bleeding here. Maybe it is shortterm necessary, but it is feeding laxity down the road.

I think you are correct, there is bit of strawman in how Bush’s views are characterized.

Bush’s 2nd inaugural has his real opinion on the matter:

“America’s vital interests and our deepest beliefs are now one. From the day of our Founding, we have proclaimed that every man and woman on this earth has rights, and dignity, and matchless value, because they bear the image of the Maker of Heaven and earth. Across the generations we have proclaimed the imperative of self-government, because no one is fit to be a master, and no one deserves to be a slave. Advancing these ideals is the mission that created our Nation. It is the honorable achievement of our fathers. Now it is the urgent requirement of our nation’s security, and the calling of our time.

So it is the policy of the United States to seek and support the growth of democratic movements and institutions in every nation and culture, with the ultimate goal of ending tyranny in our world.

This is not primarily the task of arms, though we will defend ourselves and our friends by force of arms when necessary. Freedom, by its nature, must be chosen, and defended by citizens, and sustained by the rule of law and the protection of minorities. And when the soul of a nation finally speaks, the institutions that arise may reflect customs and traditions very different from our own. America will not impose our own style of government on the unwilling. Our goal instead is to help others find their own voice, attain their own freedom, and make their own way.

The great objective of ending tyranny is the concentrated work of generations. The difficulty of the task is no excuse for avoiding it. America’s influence is not unlimited, but fortunately for the oppressed, America’s influence is considerable, and we will use it confidently in freedom’s cause.”

The point is: BUSH DECLARED THE GLOBAL ADVANCE OF LIBERTY WORTHWHILE TO OUR NATION. HE NEVER DECLARED IT TO BE EASY OR “IRRESISTIBLE”. And the idea that freedom would prevail without law is off-base from Bush’s many declarations that “rule of law” was a key component of the advance of freedom.

I think the excess optimism of the Bush administration in the early Iraqi occupation is unjustly used to paint a false broad brush of Bush policy. In the end, the paleo-cons will find that the so-called neocon Bush admin was not as ‘neo’ as they claim. The bush admin never wanted empire, or oil or to remake the entire world. THAT WAS ALWAYS A STRAWMAN. All Bush wanted to do was get that WMD-pursuer Saddam out of power and put Iraq in a better place so as to help win the war against the AQ terrorists.

They saw threats to our national security and tried to address them. And with iterations of effort, they succeeded.

“You and Bush are in 100% agreement on this:”

I seriously doubt that. Is it an expression of freedom that a majority of Iraqi Christians are now refugees? Is it freedom that Afghani women are still denied many places in society, such as singing and being on the radio? The examples go on and on.

I don’t consider what many in other cultures would call freedom to be freedom. Freedom must have a consistent definition, and it must mean individual freedom and individual rights if it means anything at all. And it definitely does not mean that in many parts of the world, including Afghanistan and Iraq.

When I freedom means something very different in other parts of the world, I actually mean it’s not freedom at all. To some it means the freedom to maintain government structures that oppress and deny rights to most citizens, and that’s a bastardization of freedom, not real freedom.

I’m not sure I agree with your apparently technical definition of a “bail out” and “government money.” Nevertheless, it may be true OTOH that I was using terms perhaps too loosely. Most of these actions are a combination of government actions such as loan guarantees, loan forgiveness, loan takeovers (which loans are still sold, but in a more controlled way than they might have been by individual lenders). So talking technically about “cash” and “spending” might not reflect the monetary value to the market of the government’s intervention.

It’s my understanding, for example, that the RTC ultimately made money on the S & L “bad paper” it took over.

The point is that the government has had to (or, at least, has concluded that it had to) act in the market, in various ways, to contain the economic reprecussions of various private sector situations. The larger point being that such government action is not the end of the world.

Again, yes, any time the government acts in the private sector in big way, it is cause for concern and reflection. But I suggest we keep a grip on reality, and history, as well.

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