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.

Obama’s election was a self-fueling political-cum-economic catastrophe. Markets began plummeting in early Fall from fear of an Obama victory, and that market decline made investors’ fears an inevitable reality. But, as Dick Morris explain, even after the election, economic turmoil and public panic is still an essential factor in promoting Obama’s radical agenda.

Why does Obama preach gloom and doom? Because he is so anxious to cram through every last spending bill, tax increase on the so-called rich, new government regulation, and expansion of healthcare entitlement that he must preserve the atmosphere of crisis as a political necessity. Only by keeping us in a state of panic can he induce us to vote for trillion-dollar deficits and spending packages that send our national debt soaring.

And then there is the matter of blame. The deeper the mess goes — and the further down his rhetoric drives it — the more imperative it becomes to lay off the blame on Bush. He must perpetually “discover” — to his shock — how deep the crisis that he inherited runs, stoking global fears in the process.

So, having inherited a recession, his words are creating a depression. He entered office amid a disaster and he is transforming it into a catastrophe, all to pass every last bit of government spending and move us a bit further to the left before his political capital dwindles.

But the jig will be up soon. The crash of the stock market in the days since he took power (indeed, from the moment he won the election) can increasingly be attributed to his own failure to lead us in the right direction, his failed policies in addressing the recession and his own spreading of panic and fear. The market collapse makes it evident that it is Obama who is the problem, where he should, instead, be the solution.

Hat tip to the News Junkie.

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.

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.

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.”

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.

The Capitol Hill offices of many congressmen and senators don’t even have a copy! If you need top get hold of a copy, Paul Bedard advises, ask a lobbyist.

We’re receiving E-mails from Capitol Hill staffers expressing frustration that they can’t get a copy of the stimulus bill agreed to last night at a price of $789 billion. What’s more, staffers are complaining about who does have a copy: K Street lobbyists. E-mails one key Democratic staffer: “K Street has the bill, or chunks of it, already, and the congressional offices don’t.

Moreover, the press is having problems reporting because a number of versions of the bill are floating around out there.

[T]he Hill is getting calls from the press (because it’s leaking out) asking us to confirm or talk about what we know—but we can’t do that because we haven’t seen the bill. Anyway, peeps up here are sort of a combo of confused and like, ‘Is this really happening?'” Reporters pressing for details, meanwhile, are getting different numbers from different offices, especially when seeking the details of specific programs.

Worse, there seem to be several different versions of what was agreed upon, with some officials circulating older versions of the package that seems to still be developing.

Isn’t it wonderful having democrats in charge of the federal purse? If you went down to the port, shanghai’d 525 drunken sailors and put them in charge of legislation, it would not be much different.

The democrat Porkulus is bad enough viewed simply as a colossal waste of money and burden on the productive portion of the economy, but additionally the many-hundred-page package (passed unread by the nation’s Solons) contains some deviously crafted provisions constituting a very large step toward federal takeover of American health care, as William Winkenwerder, Jr. and Grace-Marie Turner at National Review’s the Corner explain.

The health-related provisions take a sharp turn toward greater government control over our health sector, without any hearings or serious debate in Congress and without telling the American people what the changes would mean for their personal health care. This is the biggest land grab in the health sector ever attempted by the federal government, and it would be a major step toward thrusting full responsibility for health-care financing onto the American taxpayer—today and for decades to come.

For starters, the bill would create a 15-member federal health board, composed entirely of federal employees appointed by the president, charged with running “comparative effectiveness” research to assess which drugs and other medical treatments are most effective. The board’s decisions would determine what medical treatments the federal government would or would not pay for. The treatments some patients desperately need might not be on the list. House Appropriations Chairman David Obey (D., Wis.) explained that drugs and treatments “that are found to be less effective and in some cases, more expensive, will no longer be prescribed.”

The bill would also establish a $400 million slush fund, which the secretary of health and human services would use to give government, not doctors and patients, more control over health-care decisions.

There will be a substantial burden on employers: The bill would impose a back-door mandate for them to continue providing health insurance to workers long after those workers have left. PricewaterhouseCoopers says the ten-year cost of this provision would be up to $65 billion just for those workers currently eligible for COBRA (the current program through which people can participate in ex-employers’ health plans). The estimated costs would be even higher if many more workers retire early, as they likely will if they know they can continue their employment-based coverage indefinitely.

Tom Cheney in the New Yorker, February 9, 2008

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.

South Carolina Governor Mark Sanford articulates the Republican position on the democrat party Porkulus:

A problem that was created by building up of too much debt will not be solved with yet more debt,” Gov. Mark Sanford said Sunday, making a reference to the federal deficit spending that will likely finance the federal stimulus package.

“We’re moving precipitously close to what I would call a savior-based economy,” Sanford also said Sunday on CNN’s State of the Union.

The South Carolina Republican said such an economy is “what you see in Russia or Venezuela or Zimbabwe or places like that where it matters not how good your product is to the consumer but what your political connection is to those in power.”

“That is quite different than a market-based economy where some rise and some fall but there’s a consequence to making a stupid decision,” Sanford said after pointing to the powers granted to the Treasury Department and the Federal Reserve to help deal with the current economic crisis.

“A lot of people who’ve made some very stupid decisions are being bailed out by the population at large,” he added.

Instead of bailing out failing companies, Sanford told CNN’s John King that the government should let the economy work through the current challenges without intervention.

“We’re going to go through a process of deleveraging,” Sanford said. “And it will be painful. The question is: Do we apply a bunch of different band aids that lengthen and prolong this pain or do we take the band aid off? I believe very strongly: let’s get this thing over with, let’s not drag it on.”