Miscellany: 11/28/09

George Bush the Conservative (?)

One of my favorite economists, Thomas Sowell, has recently published a book, The Housing Boom and Bust, excerpts of which have recently been running exclusively at IBD/investors.com. In Friday's edition, Sowell reviews the fact that the former President himself pushed for subsidizing down payments for lower-income Americans and for low-rate/no-down-payment FHA terms. The housing market went from about 57% traditional down-payment, long-term, fixed-rate mortgages in 2001 to just over half that by the end of 2006; in the meanwhile, the favorite whipping boys of media conservatives (i.e., Freddie Mac and Fannie Mae) made the new gimmicky loans the focus of about 40% of their purchases (i.e., $1T) during 2004 to 2006. In the meanwhile, home-equity loans became the rage, putting additional risk into the market.

Question: what's in common when people don't have the vested interest in a down payment/equity in their house, if the banks know they can make loans (say, more profitable sub-prime loans) knowing government insurance will cover their depositors, or if investors can buy or sell financial instruments (e.g., derivatives) without the same types of margin requirements required, say, with certain stock market transactions? You end up with speculative, manic markets; there was something clearly wrong when housing prices were outpacing the ability of families to pay for them under traditional criteria. Much of that was due to an artificial surplus of buyers, fueled by gimmick loans, pushing up prices.

I can almost hear progressives question a principled conservative talking about a "free market" out of control. That's not a valid interpretation of what I'm saying; economy liberty requires an infrastructure underlying fair transactions, just like the prospective homeowner, in order to make a fair offer, needs to know whether undisclosed problems of a house (e.g., an unstable foundation, toxic health risks (e.g., asbestos, mold), etc.) distort the true costs of the home. The issue occurs when government fails to be consistent (say, across risk-based financial transactions), when it adds to the complexity and redundancy of multiple regulatory authorities which discourages accountability,  or when it introduces disruptive policies, upsetting the equilibrium of the market (e.g., easy money policy, nontraditional loans, sharp rises in deposit eligibility for government insurance, and political pressure on the secondary market to purchase nontraditional mortgage notes). In short, the government is the problem, not the solution. The first step of the solution is to reform government itself.

The bottom line is that the risks of the housing market were essentially passed on from homeowners, banks, and the secondary market to the federal government. Methinks the Democrats doth protesteth George W. Bush too much; how many progressives, in their wildest dreams, could have dared hope that a "conservative" President would push for no down payment house loans, a nearly 80% increase in education funding his first 5 years in office, the biggest expansion in Medicare entitlements in decades, the Department of Homeland Security, the largest increases in discretionary spending since LBJ, and the infamous TARP legislation?

Zuckerman: "Finding the Right Fix for 'Too Big to Fail'"

Mortimer Zuckerman, editor of US News and World Report, wrote an interesting Wall Street Journal op-ed this past Wednesday. (I subscribe to both publications.) I disagree with his implicit assertion that Glass-Steagall Act repeal in 1999 exacerbated the "too-big-to-fail" concept (although Mr. Zuckerman clearly distances himself later from those progressives whom want to reinstate the Depression-era act, which prohibited the concept of combining commercial banks and investment banks). Disallowing a "one-stop-shop" financial conglomerate hardly seems to be in the interest of global competitiveness and leadership in the financial services market. More to the point, the companies which failed during the economic tsunami were not relevant financial conglomerates; the failures were more focused companies that failed to prudently control for risk.

I am intrigued by Mort's suggestion that there was a failure of regulators to go beyond their piecemeal perspective and focus on the larger-scale correlated picture. I do agree that the kind of bailouts that occurred reflect a government cost which should be, on an ongoing basis, allocated in some commensurate way to relevant market participants, much like how the costs of FDIC insurance are passed on to banks.

I do think that there was a broad-based failure of the Fed and government regulators to proactively assess the risks of an asset bubble and address those concerns in a more timely manner; I mean, when I was seeing late-night infomercials advocating get-rich schemes of condo flippers and the like, I knew that was the result of easy money enabling market speculation, not people looking for a place to live and settle down.

I do think that the Fed has been more knowledgeable and effective than big government politicians and bureaucrats in dealing with major crises; does anyone really believe that politicians liked 20% interest rates under Reserve Chairman Paul Volcker, which essentially broke the back of inflation stemming from the 1970's?

However, I do think Zuckerman really has a more subtle agenda when he says "should Congress undermine the Fed"; I think it's really aimed at HR 1207 / S 604, Congressman Ron Paul's initiative to audit the Fed, which I support. (I don't think Mort is really opposed to auditing the Fed, but he is probably worried that the audit legislation is just the stalking horse for the real aim: to rein in the Fed's influence over monetary policy and its flexibility in responding to financial crises.) I do support the Fed's independence; my support for the Ron Paul legislation is simply consistent with the concept of the rule of law and the ideals of transparency, particularly when we are dealing with something as politically salient as sound monetary policy. However, I am opposed to politicizing monetary policy itself. We should not pick doctors based on a state of denial, on  what we want to hear about our health, and I think the Fed cannot afford to be seen as a tool of politicians refusing to accept responsibility for their fiscally irresponsible policies.

Political Cartoon

One of my favorite cartoonists, IBD's Michael Ramirez, turns the tables on the immigration debate, reminding us we were all once immigrants... What would Lou Dobbs say?

Christmas Musical Interlude: Jim Brickman's "The Gift"

The talented pianist features a duet between talented guest vocalists Collin Raye and Susan Ashton in a beautiful, nontraditional Christmas song that reminds us the best gift is not a train set or even a diamond bracelet...

THE GIFT (Jim Brickman)

Winter snow is falling down
Children laughing all around
Lights are turning on
like a fairy tale come true.

Sitting by the fire we made
You're the answer when i prayed
I would find someone
and baby I found you.

All I want is to hold you forever 
All I need is you more every day
You saved my heart
from being broken apart
You gave your love away
and I'm thankful every day
for the gift.

Watching as you softly sleep
What I'd give if I could keep
Just this moment
if only time stood still.

But the colors fade away
And the years will make us grey
But baby in my eyes
You'll still be beautiful.  
(My improvisation: "You'll always be beautiful.")

All I want is to hold you forever
All I need is you more every day
You saved my heart
from being broken apart
You gave your love away
And I'm thankful every day
for the gift.

(instrumental)

All I want is to hold you forever
All I need is you more every day
You saved my heart
from being broken apart
You gave your love away
I can't find the words to say
That I'm thankful every day
for the gift.