Sent to my class list this morning in response to the contention that “government had to step in” because capitalism failed, because businessmen “made such a mess.”

Government created a credit crisis by arm-twisting lenders to make uncreditworthy loans while supplying securitization of the same. Government (at more than one level) additionally laid the groundwork for a housing bubble by forcing prices upward by making 30 year financing of home loans universal and easy to obtain and by creating regulatory environments that made building extremely expensive and nearly impossible in some of the housing markets featuring the greatest demand. Government lent people money to fuel bidding wars, while doing everything it could to keep new housing in short supply.

George W. Bush’s administration pursued simple-minded conventional policies attempting to placate the economy with characteristic timidity and inconsistency. Obama has taken the housing-bust induced recession as an excuse to throw funding at every democrat party special interest and constituency and to justify a power grab socializing large segments of the economy. Bush did not succeed in calming economic turmoil largely because he could not persuade the markets that he had not already lost the next election to a democrat party radical. Obama has, in a very short time in office, demonstrated that he isn’t simply a bloviating and benign big city machine crook, but is rather an extreme radical leftwing ideologue philosophically committed to every form of economic destruction. The economy is cratering as a result.

As we Baby Boomers start canceling our vacations at Gstaad and lining up to apply for jobs at supermarket checkout counters, Colby Cosh (the insolent little twit) consoles himself for the damage to his own portfolio with a little gloating at our expense.

For the children of the Baby Boomers, there is a special delight in watching the world economy shake itself to pieces like a two-dollar pram at this particular moment. Our elders, who bought prosperity and nice pensions at our expense and pulled the ripcords on their “Freedom 55” parachutes without leaving any behind in the passenger cabin, are getting it in the neck just when they thought a secure old age, with money for travel and expensive pastimes, was a safe bet. I’m willing to watch my meagre savings suffer from market turmoil in exchange for contemplating the dilemma of those who are now between 55 and 65.

These are people who started their working lives at a time when labour unions were strong, taxpayers outnumbered retirees nearly 10 to one, housing was as cheap as borscht and the basic personal exemption covered most of a living wage. They congratulated themselves on building an elaborate “social safety net” at the expense of their children. Their great numbers have allowed their preferences and superstitions to dominate culture and media. They’re the ones who burned through tonnes of pot and then launched a War on Drugs when they grew bored with it; they drove mighty-bowelled Mustangs and Thunderbirds in their youth, and only started worrying about the environment when they no longer needed a capacious backseat to fornicate in; they espoused and took full advantage of sexual liberation, but were safely hors de combat by the time AIDS reared its head. The first time I see one shopping for dog food, I doubt I’ll be able to suppress a laugh.

As for the younger crowd, it is a quite distinct pleasure to watch their panic and uncertainty. The actually existing danger is not too great, but no one born after about 1980 has much practical experience of severe recession. …

Hat tip to Karen L. Myers.

Obama’s primary campaign left Hillary feeling like Poland, and Obama’s presidential campaign left John McCain feeling like France. The political blitzkreig combining media support, misdirection, and image continued on, right over the Congressional Republican minority, with the passage of the unread Stimulus bill.

Paul Schlichta, at American Thinker, suggests Republicans need to go back to staff college and start studying the Campaign of 2008 in order to figure out how to defeat his next offensive.

The audacity and speed with which Obama railroaded the stimulus bill through Congress took Republicans by surprise. It shouldn’t have; it was a logical extension of his campaign tactics.

Like the spear-carrying soldiers of Ethiopia, overwhelmed by Mussolini’s tanks and poison gas in 1936, the Republicans simply don’t know what hit them in last year’s election. Some felt that they had conducted an old-fashioned 20th century campaign while Obama mounted the first truly information-age 21st century political blitzkrieg. Others blame the blatant media bias, the race issue, or the unprecedented scale of fund raising and spending.

The first month of Obama’s regime has provoked a similar bewilderment. A dazed Congress hastily authorized a huge document, filled with hidden booby traps like RAT, that none of them had actually read, let alone comprehended. Republicans are now cowering in corners, wondering what atrocity will come next

Anyone hoping to launch a successful counterattack must first analyze Obama’s campaign and assess the factors that contributed to its success.

Mr. Schlichta fails to remark that General Recession has played a major role in panicking the civilian population into supporting “liberation” by Mr. Obama. Unreasoning fear caused voters to plump for an alternative, any alternative to Republicans who were inevitably tarred with responsibility for alarming economic developments during the final months of the lame duck Bush regime.

Personally, I think General Recession is already mightily indignant over the socialist measures recently adopted, and I believe that he and Marshall Inflation will before long turn on Mr. Obama, waging scorched earth war on his economy. The suffering public will inevitably assign responsibility where it belongs: to democrats, and the Emperor Obama’s Army of supporters will begin getting a whole lot smaller.

President Obama comes down hard on people who purchased large houses they couldn’t really afford.

It’s a plan that won’t help speculators or that neighbor down the street who bought a house he could never hope to afford but it will help millions of Americans who are struggling with declining home values.”

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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.

Scott S. Powell, writing in Barron’s, exonerates George W. Bush for the mortgage crisis and blames instead a long-term trend featuring the intrusion of politics into the US economy.

Well, electing Obama will certainly fix that, won’t it?

The Bush administration made many mistakes, but deregulation was not one of them.

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it’s hard to imagine a scope that would be effective.

We are in this mess largely because critical thought and moral judgment have been subordinated to the politicization of our economy, resulting in regulatory gaps and excessive controls of the wrong kind.

Government regulations should be limited to those that increase and protect transparency and competition, protect public and private property, promote individual responsibility and enforce equal opportunity under the law. Even if the right laws and regulations could be found, they would prove insufficient to protect freedom and prosperity.

In his farewell address, George Washington said that religion and morality are essential to sustain democracy in America. He might well have added that virtue is just as indispensable to its economy. When the captains of banking and finance and their congressional overseers fail in moral judgment, the results are disastrous for everyone. As we are now witnessing in the real-estate, stock- and bond-market dislocations, once trust is lost, markets freeze and long-standing relationships break down, resulting in illiquidity, irrational pricing and severe losses.

Today’s problems have their roots in programs and financial instruments that shifted the locus of moral responsibility away from private individuals and institutions to wider circles that were understood to end with a government guarantee. Heads of the top banks and financial institutions could approve substandard home-mortgage underwriting — prone to increased default — because those loans could be securitized by Wall Street and sold off to investors or to government-sponsored enterprises (GSEs), with no likely recourse to the financial institution of origin.

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

The risk lurking in the GSE portfolios was acknowledged in the Bush administration’s first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were “a potential problem” because “financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity.” Fed Chairman Alan Greenspan issued repeated warnings that the GSEs “placed the total financial system of the future at substantial risk.” Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.

The collapse and government seizure of Fannie and Freddie in September 2008 ended the experiment in partial socialization of the U.S. housing sector. Before we try complete concentration of federal financial power, we should understand that power and political corruption abrogated moral judgment on every level.

The poor and middle class were encouraged to live beyond their means and buy houses they couldn’t afford; speculators were lured into excessive risk-taking; banks were rewarded for lowering their loan standards; and Wall Street found new windfall profits from securitizing and reselling bad loans in bulk. With the support of regulators, credit-rating agencies provided cover for the whole charade.

There is plenty of blame to go around on both sides of the political aisle. But the lesson should be clear that socializing failed businesses — whether in housing, health care or in Detroit — is not a long-term solution. Expanding government’s intrusion into the private sector doesn’t come without great risk. The renewing and self-correcting nature of the private sector is largely lost in the public sector, where accountability is impaired by obfuscation of responsibility, and where special interests benefit even when the public good is ill-served.

Hold on for the ride.

From Greg Mankiw via Bird Dog.

The Nation’s Katrina Vanden Huevel climbs onto the lap of the American taxpayer and pleads for an increase in Leviathan’s allowance.

Poverty is on the rise, record numbers of people are relying on food stamps and we’ve seen no relief for the foreclosure crisis. There are increasing rates of child abuse and domestic violence linked to this recession. State governments don’t have financial resources to cope at the exact moment when those resources are most needed. Nineteen states and the District of Columbia have lowered Medicaid payments or eliminated people from eligibility. The senior economist of the International Monetary Fund recently warned of another Great Depression

We don’t need a stimulus, we need a recovery. And that means investing $1 trillion over the next two years.

The Congressional Progressive Caucus (CPC) has proposed a plan to do just that–a detailed $1 trillion recovery plan to kick start the economy, invest in sustainable, long term growth and target individuals and communities that are most desperate for resources.

We’ve seen “progressive” economic plans work so often, after all.

Markets are basically emotionally hysterical mobs and herds. They typically run furiously in one direction, until the mood changes, then they run just as furiously in the opposite direction.

Suddenly, in 2008, a nation-wide real estate slump led to a natural enough increase in mortgage defaults, generally on the part of no-down payment, or low down payment, buyers with no equity stake worth preserving. Single-digit mortgage default increases were reported in screaming headlines as clear evidence of catastrophe, and before you knew it, the credit markets were in a panic, and great and famous financial institutions suddenly found themselves in serious trouble as securitized mortgage debt almost overnight became non-negotiable.

Market confidence, or the lack thereof, had a great deal to do with the tone and volume of negative reporting, which was, to say the least, extreme. There is a natural conflict between the media, which needs the most exciting, easiest-to-sell story it can produce, and the interests of truth and the investing public. This Fall, there was an even greater conflict of interest between accurate and sensible reporting and the desire of the overwhelmingly liberal journalist community to amplify economic bad news during a presidential election.

Breitbart reports an Opinion Research poll indicating the overwhelming majority of the public recognizes what the media has been doing very well.

Seventy-seven percent of Americans believe that the U.S. media is making the economic situation worse by projecting fear into people’s minds.

The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse. The poll was conducted via telephone, December 4 – 7.

José Guardia, quoting the Economist on Spain’s housing bust, demonstrates that some countries have it a lot worse.

The market is dropping fast. Property fairs tout discounts of as much as 60% on new-built homes, or even “buy one, get one free” offers. …

Loan-to-value ratios tend to be safely below 80%. And Spanish mortgages cannot be cancelled by dropping the house keys at the bank: security is provided by all of a borrower’s assets—and sometimes those of relatives as well. It is no surprise that most Spaniards do their utmost not to default.

Ouch! I’m not inclined to think myself that two-for-one deals will really get many houses sold. “Shall we sleep in 514 West Queen Isabella Boulevard or in 516 tonight, Dear?”

The Wall Street Journal reports on the theories of Igor Panarin, whose pessimistic view of the US economic crisis makes Russians very very happy. Dream on, Ivan.

For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument — that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. — very seriously. Now he’s found an eager audience: Russian state media.

In recent weeks, he’s been interviewed as much as twice a day about his predictions. “It’s a record,” says Prof. Panarin. “But I think the attention is going to grow even stronger.”

Prof. Panarin, 50 years old, is not a fringe figure. A former KGB analyst, he is dean of the Russian Foreign Ministry’s academy for future diplomats. He is invited to Kremlin receptions, lectures students, publishes books, and appears in the media as an expert on U.S.-Russia relations.

But it’s his bleak forecast for the U.S. that is music to the ears of the Kremlin, which in recent years has blamed Washington for everything from instability in the Middle East to the global financial crisis. Mr. Panarin’s views also fit neatly with the Kremlin’s narrative that Russia is returning to its rightful place on the world stage after the weakness of the 1990s, when many feared that the country would go economically and politically bankrupt and break into separate territories. ..

“There’s a 55-45% chance right now that disintegration will occur,” he says. “One could rejoice in that process,” he adds, poker-faced. “But if we’re talking reasonably, it’s not the best scenario — for Russia.” Though Russia would become more powerful on the global stage, he says, its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.

Mr. Panarin posits, in brief, that mass immigration, economic decline, and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces — with Alaska reverting to Russian control. …

He based the forecast on classified data supplied to him by FAPSI analysts, he says. He predicts that economic, financial and demographic trends will provoke a political and social crisis in the U.S. When the going gets tough, he says, wealthier states will withhold funds from the federal government and effectively secede from the union. Social unrest up to and including a civil war will follow. The U.S. will then split along ethnic lines, and foreign powers will move in.

California will form the nucleus of what he calls “The Californian Republic,” and will be part of China or under Chinese influence. Texas will be the heart of “The Texas Republic,” a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an “Atlantic America” that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls “The Central North American Republic.” Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.

“It would be reasonable for Russia to lay claim to Alaska; it was part of the Russian Empire for a long time.”

The poor chap is completely confused.

Obviously the Texas Republic, aka the Confederacy, would go right up to Virginia, and, if independent, would not be absorbed by Mexico, but would instead wind up annexing Mexico (and much of the Carribean).

The California Republic would merely be a narrow strip along the coast, buying water from the Republic of Montana which would own everything east of the Diablos, and would undoubtedly ultimately become a part of France, not China or Japan.

The Richter Scales update the old tune to fit contemporary gloom.

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