I Think We Are Screwed.

Barry Ritholtz wrote a post at the Big Picture on Monday titled The Left Right Paradigm is Over: Its You vs. Corporations which resonated with me as I read an article in The Economist concerning the banking industry's opposition to Elizabeth Warren as head of the new Consumer Financial Protection Bureau.

Ms Warren faces two main criticisms: that she lacks experience of how the financial industry works, and that she is predisposed to seeing the big banks as devious. She has talked of “tricks and traps” in the fine print of contracts, of Wall Street as an “old boys’ club”, and of the middle class as having been served up to financial firms “as the turkey at the Thanksgiving dinner”.

Has it really come to this?  Are Wall Street lobbyists so powerful that they can veto the appointment of a regulator simply because she is not inclined to take its assertions at face value?  We are in this mess because the prevailing regulatory policy for the last thirty years has been to the financial industry's judgment.  Unfortunately, the industry has become so powerful that it will not be possible to appoint regulators who will do anything about it.

I cannot help but wonder where the Tea Party is?  Everyday I hear some wingnut on the right railing about the debt that the government has incurred in bailing out the banks.  How about a little outrage at the banks that have completely captured the regulators?

Fannie and Freddie Didn't Do It

Free market ideologues refuse to acknowledge that it was a lack of government regulation rather than too much government regulation that caused the sub-prime mortgage crisis.  Instead, they claim that government policy forced banks to make loans to borrowers who were not creditworthy.  Their primary boogie men are Fannie Mae and Freddie Mac, the government sponsored enterprises that facilitated mortgage lending to low and middle income Americans.  However, any rational analysis of the evidence will lead to the conclusion that Fannie and Freddie, however poorly they might have been run as businesses, were casualties of the crisis rather than its perpetrators.

As Professor Karl Smith of the University of North Carolina-Charlotte writes, "The proper question is not: What story is consistent with my general philosophy or worldview?  The proper questions is: What story is consistent with the facts?"

The wave of housing price increases was kicked off by changes in private label securitization. These changes left Fannie and Freddie with a smaller market share and lower absolute level of securitizations. Fannie and Freddie attempted to adjust their basic business practices to stay competitive in bubble markets and among aggressive borrowers.

These adjustment left Fannie and Freddie exposed to a large decline in housing prices. This is exactly what happened and Fannie and Freddie reaped enormous losses because of their exposure.

Had Fannie and Freddie stuck to their traditional role of guaranteeing low value traditional loans rather than trying to stay competitive in bubble areas their losses would have been substantially less.

In short, attempting to subsidize the American dream for low and moderate income families may be a fundamentally bad policy. However, it does not appear to be either the origin of the housing bubble or the source of Fannie and Freddie’s trouble.

 Reprinted at The Big Picture.

Quote of the Day

From my favorite financial blog, Barry Ritholtz's The Big Picture:

I am not a Democrat, because I have no idea what their economic policies are; And I am not a Republican, because I know precisely what their economic policies are.

Ritholtz's blog consistently provides objective analysis of how the economy got where it is and the prospects for getting somewhere else.  Anyone interested in cutting through partisan bullshit explanations for the financial crisis would be well-served to start with Causation Analysis: What “But Fors” Caused the Crisis?

13 Bankers

Yesterday on CNBC, economist Steve Liesman and blowhard Rick Santelli were discussing the current state of the economy and Santelli proclaimed "The question isn't how we got here.  The question is the best way to move forward."  Just as George Bush never wanted to play "the blame game" by looking at the screw ups that contributed to 911, Katrina, the War in Iraq, and the financial meltdown, Santelli doesn't care to consider why the economy is in the shape it is today.  The reason is simple, Santelli is an Ayn Rand loving libertarian who thinks that markets should be left free to work without government and he has no interest in discussing the fact that this ideology is precisely what led to the crisis in the first place. 

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak is an excellent book that I would recommend to anyone who wants to understand how we got to where we are.  Simon Johnson is a former chief economist with the International Monetary Fund.  In that role, he had the chance to observe third world oligarchies whose financial systems were looted by government insiders and their cronies.  Before the IMF would assist such countries it demanded real reforms in their banking systems and it required that the costs of those reforms fall upon those who had caused the problems, or at least upon some of those who had caused the problems. In the United States, however, the mega-banks that caused the financial crisis have for the most part emerged bigger and more powerful than ever.

Unlike the third world countries where oligarchies control government policy through corruption, the mega-banks built their power in large part by selling the laissez-faire ideology that less regulation is always better and that any financial innovation that succeeds in the market is necessarily good for the economy.  Of course the revolving door between Wall Street and the regulators combined with generous campaign contributions didn't hurt, but in large measure, Wall Street was allowed do run wild without government interference because the conventional wisdom on both sides of the aisle among Congressman, Senators, regulators, and Presidential administrations was that what was good for Wall Street was good for America.

Republican Strategist Wants to Push Down the Middle Class

Is it my imagination or are Republicans giving each other a lot more crap then they usually do? Tea Party candidates Christine O'Donnell and Sharon Angle have been getting flack from establishment Republicans and last Thursday on the Fox Business Channel, former GOP Senator Al D'Amato ripped into Republican strategist Jack Burkman for being a "nasty racist." The exchange came in a discussion of what to do about the Post Office after Burkman commented that "most of these guys working in the Post Office should be driving cabs, and I think we should stop importing labor from Nigeria and Ethiopia. That's the skill level." D'Amato called this "racist bullshit" and suggested that Burkman have his mouth washed out.


While I agree that Burkman is a racist, I was even more interested in what he had to say when the host offered him the last word on the subject:

If you want to have the debate, the reality is that many in the American quote-unquote middle, like postal workers, are really unskilled labor who should have been pushed down for market reasons but because of union and government pressures, we import labor at the bottom and we keep these people here. That’s a very true statement.

Burkman doesn't think that postal workers or tax drivers belong in the middle class.  They shouldn't aspire to jobs with which they can support their families or jobs that offer health care or jobs that offer the potential to retire in anything other than abject poverty.  They especially shouldn't expect to find such jobs mooching off the government.   The middle class and above should be reserved for people who contribute something valuable to society such as lobbyists like Burkman who petition the government for favors on behalf of wealthy clients. 

When I "googled" Burkman after watching this clip, I was mildly surprised not to find an interview in which he discussed the profound effect that Ayn Rand's Atlas Shrugged had on him as a teenager.  I suspect that he read the book and loved it.  I was interested to find him on a list of "Top Christian Activists" as a result of his lobbying efforts on behalf of The Family Research Council.  Apparently pushing people out of the middle class is in no way inconsistent with Christian family values.

God Will Make Some Magic

During a discussion of the Monica Lewinsky scandal on Politically Incorrect in 1998, current Delaware Senate candidate Christine O'Donnell insisted that people should tell the truth at all times and in all circumstances.  When asked by Eddie Izzard whether that applied during World War if Nazis were at your door asking whether you were hiding Jews in your house, she said it did.

I believe if I were in that situation, God would provide a way to do the right thing righteously. . . . I believe that!  You never have to practice deception. God always provides a way out.

No he doesn't.  Bad things happens all the time to people who are trying to do the right thing.  That doesn't mean there is no God.  Nor does it mean that the person to whom the bad thing happens won't be rewarded in the hereafter.   Nor does it mean that doing the right thing wasn't the best choice under the circumstances.  What it means is that rational human beings don't make decisions based on the assumption that God is going to come to the rescue if things go badly.  I suspect that part of the reason we went to war in Iraq was because George Bush was sure that God would make everything work out alright.  

I have no problem with religious people in politics if they have the attitude of the priest who prayed with a high school football team before the game.  One of the players asked him whether God would really help them win the game.  The priest replied, "He will if you block your man."  Religious faith is not a substitute for intelligence and competence.





If you like Sarah Palin, you are going to love Christine O'Donnell. She's prettier and her sentences generally have nouns and verbs in the right places. Unlike Palin who got flustered by softball questions from Katie Couric, O'Donnell regularly went on Bill Maher's show and maintained her composure when bantering with quick-witted intelligent people like Maher, Izzard, and Martin Mull.

The More Things Change

Ever wonder why Wyoming, Montana, and North and South Dakota get to elect 15% of the U.S. Senate even though they only have about 1% of the United States' population?   I suppose there is nothing shocking about the idea that Republicans pushed for the admission of these states to the Union late in the 19th Century as their pro-business policies had managed to dissipate the popular support the party of Lincoln had enjoyed in the years after the Civil War, but it wasn't something I knew until I read Wounded Knee: Party Politics and the Road to an American Massacre by Heather Cox Richardson.  Interestingly, while the disproportionate power of these sparsely populated states is most clearly felt in the Senate today, at the time they were admitted, the single Representative each state sent to Congress were even more highly prized by the Republicans.  In those days, Senators were not yet popularly elected and Republican control of the Senate was secure.  However, the House was much more evenly split and the extra Republican Congressmen made a big difference.

It was also interesting to see 19th Century Republican administration pursuing tax policies that favored the wealthy--in this case tariffs--while attempting to maintain popular support by whipping up fear that Americans were going to be attacked by members of an alien culture that in fact posed little threat. The Sioux Indians had been thoroughly subdued and the only reason there was unrest on the reservations was the governments failure to supply the food it had promised when it forced the Indians to give up their land. At the time of the Wounded Knee in December 1890, the results of the November mid-term election in South Dakota were still in doubt.  Thus, President Harrison's administration was eager to show that it was prepared to do whatever it took to protect white settlers in the state.  Simply treating the Sioux fairly would have been much more effective, but not nearly as impressive to voters as sending in the army.

The Worst Lie About 9/11

"The World Changed on 9/11."

The world did not change on 9/11/2001.  Everything that was part of the geopolitical landscape on 9/12/2001 had been there on 9/10/2001.  What happened on 9/11/2001 was that America's ignorance about the forces and factions at work in the world was exposed.

However, the answer to ignorance is understanding and the neoconservatives didn't want to learn anything that might deter them from their dream of reshaping the world.  So they sold the lie that everything had changed so that what was already known could be disregarded.

The Apologetics Study Bible

The Apologetics Study Bible:  Understand Why You Believe

The subtitle to this book strikes me as supremely ironic.  This study Bible cannot help anyone to understand why they believe.  If they believe because of the information and arguments in this book, then they must already understand them.  If they don’t already understand them, then they must have some other reason for believing which this book does not address.   The reasons for believing must be antecedent to the beliefs.

This is the logical flaw in all Christian apologetics.  Apologists purport to describe the reasons for belief but they can't because the beliefs come before the reasons.  A better subtitle might be Understand Why You Would Like to Think that You Believe.  Or perhaps  Understand Why You Would Like Others to Think that You Believe.