Former Senator Phil Gramm dispels with clarity and precision the liberal malarkey about deregulation being responsible for the credit crisis, and puts the blame where it belongs.

I believe that a strong case can be made that the financial crisis stemmed from a confluence of two factors. The first was the unintended consequences of a monetary policy, developed to combat inventory cycle recessions in the last half of the 20th century, that was not well suited to the speculative bubble recession of 2001. The second was the politicization of mortgage lending. …

In the inventory-cycle recessions experienced in the last half of the 20th century, involuntary build up of inventories produced retrenchment in the production chain. Workers were laid off and investment and consumption, including the housing sector, slumped.

In the 2001 recession, however, consumption and home building remained strong as investment collapsed. The Fed’s sharp, prolonged reduction in interest rates stimulated a housing market that was already booming — triggering six years of double-digit increases in housing prices during a period when the general inflation rate was low.

Buyers bought houses they couldn’t afford, believing they could refinance in the future and benefit from the ongoing appreciation. Lenders assumed that even if everything else went wrong, properties could still be sold for more than they cost and the loan could be repaid. This mentality permeated the market from the originator to the holder of securitized mortgages, from the rating agency to the financial regulator.

Meanwhile, mortgage lending was becoming increasingly politicized. Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market. …

The 1992 Housing Bill set quotas or “targets” that Fannie and Freddie were to achieve in meeting the housing needs of low- and moderate-income Americans. In 1995 HUD raised the primary quota for low- and moderate-income housing loans from the 30% set by Congress in 1992 to 40% in 1996 and to 42% in 1997.

By the time the housing market collapsed, Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. The second targeted families with incomes at or below 60% of area median income, set at 27% of their holdings. The third targeted geographic areas deemed to be underserved, set at 35%.

The results? In 1994, 4.5% of the mortgage market was subprime and 31% of those subprime loans were securitized. By 2006, 20.1% of the entire mortgage market was subprime and 81% of those loans were securitized. The Congressional Budget Office now estimates that GSE losses will cost $240 billion in fiscal year 2009. If this crisis proves nothing else, it proves you cannot help people by lending them more money than they can pay back.

Blinded by the experience of the postwar period, where aggregate housing prices had never declined on an annual basis, and using the last 20 years as a measure of the norm, rating agencies and regulators viewed securitized mortgages, even subprime and undocumented Alt-A mortgages, as embodying little risk. It was not that regulators were not empowered; it was that they were not alarmed.

With near universal approval of regulators world-wide, these securities were injected into the arteries of the world’s financial system. When the bubble burst, the financial system lost the indispensable ingredients of confidence and trust. We all know the rest of the story.

The principal alternative to the politicization of mortgage lending and bad monetary policy as causes of the financial crisis is deregulation. How deregulation caused the crisis has never been specifically explained. Nevertheless, two laws are most often blamed: the Gramm-Leach-Bliley (GLB) Act of 1999 and the Commodity Futures Modernization Act of 2000.

GLB repealed part of the Great Depression era Glass-Steagall Act, and allowed banks, securities companies and insurance companies to affiliate under a Financial Services Holding Company. It seems clear that if GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass-Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified.

Moreover, GLB didn’t deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB.

When no evidence was ever presented to link GLB to the financial crisis — and when former President Bill Clinton gave a spirited defense of this law, which he signed — proponents of the deregulation thesis turned to the Commodity Futures Modernization Act (CFMA), and specifically to credit default swaps.

Yet it is amazing how well the market for credit default swaps has functioned during the financial crisis. That market has never lost liquidity and the default rate has been low, given the general state of the underlying assets. In any case, the CFMA did not deregulate credit default swaps. All swaps were given legal certainty by clarifying that swaps were not futures, but remained subject to regulation just as before based on who issued the swap and the nature of the underlying contracts.

In reality the financial “deregulation” of the last two decades has been greatly exaggerated. As the housing crisis mounted, financial regulators had more power, larger budgets and more personnel than ever. And yet, with the notable exception of Mr. Greenspan’s warning about the risk posed by the massive mortgage holdings of Fannie and Freddie, regulators seemed unalarmed as the crisis grew. There is absolutely no evidence that if financial regulators had had more resources or more authority that anything would have been different.

A must read analysis.

Remember the “How to Catch a Lion in the Sahara Desert” science jokes which often used to be found on departmental bulletin back when my generation was young?

Examples:

The Hilbert (axiomatic) method

We place a locked cage onto a given point in the desert. After that we introduce the following logical system:

Axiom 1: The set of lions in the Sahara is not empty.
Axiom 2: If there exists a lion in the Sahara, then there exists a lion in the cage.
Procedure: If P is a theorem, and if the following is holds: “P implies Q”, then Q is a theorem.
Theorem 1: There exists a lion in the cage.

The geometrical inversion method

We place a spherical cage in the desert, enter it and lock it from inside. We then perform an inversion with respect to the cage. Then the lion is inside the cage, and we are outside.

The projective geometry method

Without loss of generality, we can view the desert as a plane surface. We project the surface onto a line and afterwards the line onto an interiour point of the cage. Thereby the lion is mapped onto that same point.

The Bolzano-Weierstraß method

Divide the desert by a line running from north to south. The lion is then either in the eastern or in the western part. Let’s assume it is in the eastern part. Divide this part by a line running from east to west. The lion is either in the northern or in the southern part. Let’s assume it is in the northern part. We can continue this process arbitrarily and thereby constructing with each step an increasingly narrow fence around the selected area. The diameter of the chosen partitions converges to zero so that the lion is caged into a fence of arbitrarily small diameter.

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This type of scientific approach to real world tasks has not completely gone out of style, it seems. The LA Times reports that Thomas W. Gillespie and John A. Agnew, two UCLA professors of geography, et alia, in an article in MIT’s International Review, have undertaken to pin down Osama bin Laden’s current hideout, using biogeographic theory. They may be wrong, but I think we should bomb the buildings they’ve identified just for luck.

While U.S. intelligence officials have spent more than seven years searching fruitlessly for Osama bin Laden, UCLA geographers say they have a good idea of where the terrorist leader was at the end of 2001 — and perhaps where he has been in the years since.

In a new study published online today by the MIT International Review, the geographers report that simple facts, publicly available satellite imagery and fundamental principles of geography place the mastermind behind the Sept. 11 attacks against the U.S. in one of three buildings in the northwest Pakistan town of Parachinar, in the Kurram tribal region near the border with Afghanistan

The researchers advocate that the U.S. investigate — but not bomb — the three buildings. …

The UCLA findings rely on two principles used in geography to predict the distribution of wildlife, primarily for the purposes of designing approaches to conservation. The first, known as distance-decay theory, holds that as one travels farther away from a precise location with a specific composition of species — or, in this case, a specific composition of cultural and physical factors —the probability of finding spots with that same specific composition decreases exponentially. The second, island biogeographic theory, holds that large and close islands have larger immigration rates and will support more species than smaller, more isolated islands.

Inspired by distance-decay theory, the seven-member team started by drawing concentric circles around Tora Bora on a satellite map of the area at a distance of 10 kilometers — or 6.1 miles — apart.

“The farther bin Laden moves from his last reported location into the more secular parts of Pakistan or into India, the greater the probability that he will be in an area with a different cultural composition, thereby increasing the probability of his being captured or eliminated,” Gillespie said.

Then, informed by island biogeographic theory, the researchers scoured the rings for “city islands” — or distinctly separate settlements of considerable size.

“Island biology theory predicts that he would find his way to the largest but least isolated city of that area,” said Gillespie, an authority on measuring and modeling biodiversity on Earth from space. “If you get stuck on an island, you would want it to be Hawaii rather than one with a single palm tree. It’s a matter of resources.”

The approach netted 26 cities within a 12.4-mile radius of Tora Bora on imagery from Landsat Enhanced Thematic Mapper Plus (ETM+), a global archive of satellite photos managed by NASA and the U.S. Geological Survey. With a 2.7-square-mile footprint, Parachinar turned out to be the largest and fourth-least isolated city, the team determined.

“Based on bin Laden’s last known location in Tora Bora, we estimate that he must have traveled 1.9 miles over a 13,000-foot-high pass into Kurram and then headed for the largest city, which turns out to be Parachinar,” said Agnew, who is the current president of the Association of American Geographers, the field’s leading scholarly organization.

The researchers ruled out cities on the Afghanistan side of the border because the country was occupied at the time by U.S. and international forces and has been particularly unstable ever since.

“The Pakistan side of the border is much better for hiding because of its ambiguous political status within the country and the formal absence of U.S. or NATO troops,” Agnew said.

Faced with the prospect of picking from more than 1,000 structures clearly portrayed in the satellite imagery of Parachinar, the team decided to come up with a short list of the criteria that bin Laden would need for housing, based on well-known information about him, including his height (between 6’4″ and 6’6″, depending on the source), his medical condition (apparently in need of regular dialysis and, therefore, electricity to run the machine) and several basic assumptions, such as a need for security, protection, privacy and overhead cover to shield him from being spotted by planes, helicopters and satellites.

So they looked for buildings that could house someone taller than 6’4″ and were surrounded by walls more than 9 feet tall (both as judged by mid-afternoon shadows depicted on the satellite imagery), and that had more than three rooms, space separating them from nearby structures, electricity and a thick tree canopy.

Only three structures fit the criteria. The buildings also appeared to be the best fortified and among the largest in Parachinar. Two are clearly residences, the study states. The third may be a prison. But whatever the third structure is, it has “one of the best maintained gardens in all of Parachinar,” the study says.

While the three structures meet all six of the criteria that the researchers believe would be required for lodging bin Laden, an additional 16 structures in Parachinar appear to meet five of the six criteria. If bin Laden is not in the first three structures, the U.S. military should investigate these other buildings, the study urges.

Russian border patrol picture

Russia’s border patrol sank a fleeing Chinese freighter in the Sea of Japan last Saturday in unexplained circumstances.

Reuters:

Seven Chinese sailors were missing after the “New Star” sank on Saturday in stormy seas off Vladivostok and after a Russian warship shot at least 500 rounds into it, the official China Daily newspaper said, quoting a Chinese-language paper which in turned quoted a Russian newspaper.

The “New Star” was held at the Russian port of Nakhodka earlier this month, suspected of involvement in smuggling, before it left without permission last week, the China Daily said.

“China has already made representations to the Russian side,” Chinese Foreign Ministry spokeswoman Jiang Yu told a news conference.

“We hope they continue with the search and rescue operations for the missing sailors and clarify the reason (for the incident) as soon as possible.”

China says three Chinese crew members were rescued and seven were missing.

In video footage of the incident broadcast on Russian television, the rattle of gunfire could be heard, with authorities there claiming the ship was given adequate warning.

“The ‘New Star’ captain was called by radio, border guard boats sent light signals, a special flag demanding to stop was raised and a warning shot was fired,” a prosecutor in Nakhodka, Alexander Selentsov, told Russia’s Interfax news agency.

Interfax also quoted a border guard captain as saying “the foreign vessel disregarded authorities’ demands and was fleeing to the Chinese economic zone at a full speed.”

Smuggling or spying? I couldn’t find a hint on any of the usual Intel sites.

William Veogeli, in the Wall Street Journal, contemplates liberalism as the politics of snobbery.

Our age has seen political disdain become seamlessly integrated into cultural disdain. The prominent novelist E.L. Doctorow showed the way in 1980 when he wrote that Ronald Reagan had grown up in “just the sorts of places [small towns in Illinois] responsible for one of the raging themes of American literature, the soul-murdering complacency of our provinces. . . . The best and brightest fled all our Galesburgs and Dixons, if they could, but the candidate was not among them.” Reagan did attend college, but not the kind that would have given him some exposure to the world outside the soul-murdering towns where he grew up, and to moral ideas calling into question his parents’ religion. Instead, wrote Mr. Doctorow, a “third-rate student at a fifth-rate college could learn from the stage, the debating platform, the gridiron and the fraternity party the styles of manliness and verbal sincerity that would stand him in good stead when the time came to make his mark in the world.” Achieving success in his first job out of college, as a radio announcer in Des Moines, Reagan made a number of local speaking engagements, “giving talks to fraternal lodges, boys’ clubs and the like, telling sports stories and deriving from them Y.M.C.A. sorts of morals.”

We see here all the basic elements, employed for the past 28 years, of liberal condescension. Every issue of The New Yorker, Vanity Fair or Rolling Stone makes clear that the policy positions of George W. Bush, Republicans and conservatives in general are wicked and stupid. The real problem, however, is that everything about these people—where they reside, what they believe, how they live, work, recreate, talk and think—is in irredeemably bad taste. To embark on a conversation with one of them, based on straight-faced openness to the possibility of learning something interesting or important, would be like choosing to vacation in Wichita instead of Tuscany.

Political parties have traditionally been coalitions held together by beliefs and interests. The modern Democratic Party may be the first in which the mortar is a shared sensibility. The cool kids disdain the dorks, and find it infuriating and baffling that they ever lose a class election to them.

Iowahawk‘s latest hilarious satire.

1 Whan in Februar, withe hise global warmynge

26 “Father, we do not like howe thynges are goin’

Read the whole thing.

Hat tip to Karen L. Myers.

CQ Politics reports the latest lobbying scandal, centered on the infamous John Murtha, but featuring the kind of bipartsanship otherwise missing from the current Congress.

More than 100 House members (42 Republicans and 62 Democrats – JDZ) secured earmarks in a major spending bill for clients of a single lobbying firm — The PMA Group — known for its close ties to John P. Murtha, the congressman in charge of Pentagon appropriations.

“It shows you how good they were,” said Keith Ashdown, chief investigator at the watchdog group Taxpayers for Common Sense. “The sheer coordination of that would take an army to finish.”

PMA’s offices have been raided, and the firm closed its political action committee last week amid reports that the FBI is investigating possibly illegal campaign contributions to Murtha and other lawmakers. …

In the spending bill managed by Murtha, the fiscal 2008 Defense appropriation, 104 House members got earmarks for projects sought by PMA clients, according to Congressional Quarterly’s analysis of a database constructed by Ashdown’s group.

Those House members, plus a handful of senators, combined to route nearly $300 million in public money to clients of PMA through that one law (PL 110-116). …

PMA’s founder, Paul Magliocchetti, is a former House Appropriations Committee aide who has a long-running relationship with Murtha, D-Pa., the chairman of the Defense Appropriations Subcommittee.

Murtha, who used to boast that his middle initial stands for “power,” carved out $38.1 million for PMA clients in the fiscal 2008 defense spending law, according to Taxpayers for Common Sense.

Indiana Rep. Peter J. Visclosky , who serves on Murtha’s subcommittee and additionally is chairman of the subcommittee that allocates money for the Pentagon’s nuclear programs, earmarked $23.8 million for PMA clients in the fiscal 2008 defense spending bill.

His former chief of staff, Richard Kaelin, lobbies for PMA, as does Melissa Koloszar, a former top aide to defense appropriator James P. Moran , D-Va.

Moran sponsored $10.8 million for PMA clients, and Rep. Norm Dicks , D-Wash., another member of the subcommittee, sponsored $12.1 million. …

Of the 104 lawmakers who lent their names to earmark requests for PMA clients in the fiscal 2008 Pentagon spending law, 91 have, since 2001, received campaign money linked to PMA, either from its political action committee or its employees.

The Telegraph reports one of those natural history curiosity stories, in this case featuring a literary twist.

A giant rat with one-inch-long teeth has been caught in the southern Chinese province of Fujian.

The rat, which weighed six pounds and had a 12-inch tail, was caught at the weekend in a residential area of Fuzhou, a city of six million people on China’s south coast.

The ratcatcher, who was only named as Mr Xian, said he swooped for the rodent after seeing a big crowd of people surrounding it on the street.

He told local Chinese newspapers that he thought the rat might be a valuable specimen, or a rare species, and had to muster up his courage before grabbing its tail and picking it up by the scruff of its neck.

“I did it, I caught a rat the size of a cat!” he shouted out afterwards, according to the reports. Mr Xian is believed to still be in possession of the animal, after stuffing into a bag and departing the scene.

The local forestry unit in the city identified the nightmarish creature as a bamboo rat from initial photographs, but said that it would need to examine the rat more closely before making a final identification.

Chinese bamboo rats rarely grow beyond ten inches and are found throughout southern China, northern Burma and Vietnam.

However, the Sumatra bamboo rat, usually found in the south-western Chinese province of Yunnan and in the Malay Peninsula can grow up to 30 inches long, including tail, and can weigh up to eight pounds.

A “Giant Rat of Sumatra” is mentioned in the Sherlock Holmes tale: The Adventure of a Sussex Vampire.

Armand de Borchgrave, in the Washington Times, shares some impressive figures from a recent Cyber Security conference.

Cyberwarfare is waged on a massive scale the world over. Ostensibly friendly nations zap each other’s electronic nerve cells frequently, and with reckless abandon. On a single day in 2008, the Pentagon was hit by would-be intruders 6 million times in 24-hour period. Before Sept. 11, 2001, the highest annual figure for cyber attacks against the Pentagon was 250,000.

Speaking not for attribution at a think tank meeting, a Pentagon “cyber warrior,” said it felt “like a perpetual hailstorm pelting an imaginary glass envelope around the Defense Department, but there is still no way of telling whether these were attempted intrusions by teenagers testing their hacking skills or the electronic warfare departments of China and Russia, that we know are constantly flexing their electronic muscles.”…

he Pentagon cybernaut did not disclose how many, if any, of the 6 million attempted intrusions were successful. Another Pentagon insider, speaking privately, said “an important internal e-mail system was taken down for two days.”

Speaking at the same think tank meeting, the chief security officer of a major New York-based financial house said they had been attacked 1 million times in a 24-hour period.

In another gesture of grovelling to superstitious natives, Britain’s Museums, Libraries and Archives Council (MLA) is advising libraries to treat the Mussulman’s Al-koran as a sacred object entitled to physical deference. The Koran must be placed above other books on the topmost shelf.

Doubtless anticipating some negative comment, the MLA’s wise men took care to advocate equality of treatment for the holy books of other religions, too. So the Christian Bible is to be placed on an out-of-reach top shelf, too, right beside the dictates of Mahound. “Blessed too is Diana of the Ephesians.”

Telegraph:

Muslims have complained that the Koran is often displayed on the lower shelves, which is deemed offensive as many believe the holy book should be placed above “commonplace things”.

Now officials at one library have recommended keeping all holy books, including the Bible, on the top shelves.

The move has come despite concern from Christian charities that this will put the Bible out of the reach and sight of many people.

Guidance published by the Museums, Libraries and Archives Council, a quango answering to Culture Secretary Andy Burnham, brought the situation to light.

It said Muslims in Leicester had moved copies of the Koran to the top shelves of libraries, because they believe it is an insult to display it in a low position.

A report into the issue said the city’s librarians consulted the Federation of Muslim Organisations and were advised that all religious texts should be kept on the top shelf to ensure equality.

The right European approach to the Koran may be seen in the Flemish Baroque church pulpit below.

Mattheus van Beveren, Mohammed, leaning on his Koran, Trodden upon by Angels Bearing the Pulpit, Liebefraukirke, Dendermonde, Flanders, late 17th century

Look who’s to the right of Congress and the White House!

Gateway Pundit relishes the irony.

Excessive intervention in economic activity and blind faith in the state’s omnipotence is another possible mistake. True, the state’s increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent… In the 20th century, the Soviet Union made the state’s role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.”

Tony Blankley looks at Barack Obama’s approach to governing, and finds it astonishingly passive and uninvolved. So far, Obama has seemed happy to preside as a sort of non-participant host to the orgy of looting and misrule by his party.

President Obama’s performance at the Gitmo executive order, provided brief but revealing insight into the president’s personal involvement in vital decision making. He had campaigned hard on closing Gitmo. His first public signing as president was that executive order to close it down. The central issue of Gitmo’s closing was and is: What do we do with the dangerous inmates? President Bush kept it open primarily because his administration couldn’t figure out an answer to that question.

Thus, it was breathtaking that at the signing ceremony, President Obama didn’t know how — or even whether — his executive order was dealing with this central quandary.

President Obama: “And we then provide, uh, the process whereby Guantanamo will be closed, uh, no later than one year from now. We will be, uh. … Is there a separate, uh, executive order, Greg, with respect to how we’re going to dispose of the detainees? Is that, uh, written?”

White House counsel Greg Craig: “We’ll set up a process.”

To be at the signing ceremony and not know what he was ordering done with the terrorist inmates is a level of ignorance about equivalent to being a groom at the altar in a wedding ceremony and asking who it is you are marrying.

Caroline Baum, at Bloomberg, expresses skepticism that treating printed dollars as pixie dust and sprinkling them on democrat pet projects and constituencies will really make the faltering economy fly.

Whoops! Somewhere a fairy just died.

It’s a jobs-creation program. No, it’s investment in our future.

It’s a tax-relief plan. Wait, it provides assistance to consumers hardest hit by the economic recession.

It’s legislation to jump-start the economy. No, it’s a recovery program. It’s a life raft for state and local governments. It’s a spending bill.

Which is it? Fiscal stimulus is all things to all people. In other words, it represents the triumph of faith over reason.

Read the whole thing.