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OpenMarket: Banking and Finance

  • Bailouts Aggravate Economic Crisis

    October 16, 2008 1:53 PM

    In the Washington Post, Peter Schiff describes how politicians spawned the current financial crisis.  "Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets."  "Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more."

    "After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money."

    "Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors."

  • "One of The Great Success Stories of All Time"

    October 16, 2008 11:09 AM

    While conservatives are angry about a number of things at the moment, they should be at least as angry that the Congressional Democrats who helped stoke the mortgage crisis are getting away with blaming everyone else for it. Today, Senator Chris Dodd, the prime recipient of GSE lobbying funds and proud holder of a sweetheart mortgage from Countrywide, is holding hearings where the witnesses will blame everyone but Dodd, Barney Frank and their cronies. Republicans asked to invite witnesses but were barred from doing so. The Wall Street Journal has more:

    In February 2004, while Republican colleagues warned of the systemic risks posed by Fannie Mae and Freddie Mac, Mr. Dodd pronounced the mortgage market "one of the great success stories of all time." A year later, the Connecticut Democrat voted against a reform that would have limited the size of Fan and Fred's mortgage portfolios...At today's hearing, his mission is to weave a tale that somehow manages to avoid mentioning his own role in this debacle. That won't be easy, but Mr. Dodd has shrewdly selected a series of witnesses who, like him, contributed to the mess, and have every incentive to point fingers elsewhere.

    Read the whole thing for details of the ridiculous witnesses and a strong suggestion for who should be called. Meanwhile, in The Washington Post, Peter Schiff has a good outline of how government - and the actions of Bill Clinton - really did help cause this mess and is probably now making it worse:

  • Liberals Against Libertarians

    October 15, 2008 5:13 PM
    That liberals wish libertarians to go away is, perhaps, not surprising. But the issue is much more serious than even Jonah Goldberg realizes. McCain's championing of "getting the monied interests out of politics" and Obama's pledge to eliminate their influence both amount to an attempt to eliminate economic interest groups (and, indeed, interest groups that are in any way allied with economic interests - such as independent free market groups) from politics. But, politics is about interest group influences. If economic interest groups are eliminated, only ideological groups are left - right and left groups driven by cultural, ethnic, environmental or other religious values. Is that world likely to prove more tolerant, more compassionate, more "concerned?"

    My personal vision of the future is to find myself about to testify in Congress on some creative expansion of the state. As I'm about to testify, the chairman speaks up: "Mr. Smith, before you begin, I have a question I'd like you to answer. Are you now or have you ever been associated with the wealth producing sector of the United States?"

  • Unstoppable SuperState Stimulus, Part 2

    October 15, 2008 3:43 PM

    Today's Wall Street Journal highlighted a new $300 political stimulus campaign. Keynesian demand-management has re-conquered economics as surely as Fall 2008 has cemented Alexander Hamilton's dreams for centrally managed governed finance.

    Today's global consensus: free markets cannot clear without government intervention.

    This year's dual stimulus “packages” foster political ends unrelated to actual economic recovery. Innumerable special interests benefit from an interventionist, mixed economy—and when things go bad, fundamental free-market reforms fly further off the table.

    As George Mason University's Richard Wagner points out, unconstrained democracy has a built-in bias toward deficit finance, so demand-side, Keynesian policy prescriptions have permanent survival value. Since modern legislatures are at root wealth transfer institutions, it is suicidal for them to acknowledge the limitations of their actual contributions to the real economy. So they “stimulate.”

    Indeed, the political price is too high for election-bound lawmakers to entertain non-governmental recession recovery. As Friedrich Hayek pointed out, the politicians blamed during a bumpy transition to something closer to laissez-faire will be the ones who stop interest-group benefits or stop the inflation, not the ones who started those costly processes decades earlier. Thus the market's prospects are very gloomy.

  • The New U.S. Economy

    October 15, 2008 5:45 AM

    How do you find work as a financial wizard today?

    My friend and former colleague Radley Balko posts a video that captures the new economic reality in America.

  • It wasn't bailout that caused Monday's market surge -- 3 other factors

    October 14, 2008 2:07 PM

    Since the $700 billion bailout was first proposed, whatever the stock markets did, much of the press took that as a sign that the market wanted more government intervention. The markets sinking on Sept. 29, the day the House voted down the first bailout bill (although much of the sinking was before the bailout was defeated), was a sign that markets needed the bailout. Then, when it went up about 500 points the next day, it was somehow explained as anticipation of Congress passing a new bailout.

    The press was somewhat at a loss for words when the market tanked all last week, just after the bailout had been passed. But yesterday, when the Dow Jones Industrial Average zoomed up 900 points, the explanation was that the markets just loved the forthcoming global bailouts and partial nationalizations. Comedy Central's Stephen Colbert, as he so often does, cleverly mocked this conventional wisdom. On last night's Colbert Report, he reported on "Henry Paulson's plan to change his plan to whatever the Europeans are planning is working."

  • The international mark-to-market contagion -- sending global markets in a downward

    October 10, 2008 5:02 AM

    Bailouts. Global interest rate cuts. More bailouts. Global government liquidity injections into banks. Direct government buying of commercial paper. And even more types of bailouts.

    But nothing seems to stop the downward spiral of equity and credit markets throughout the world that have been accelerating this week. But there is one intervention the governments of the world haven't tried yet: Standing up to the high priests of the accounting profession and suspending requirements of mark-to-market accounting for illiquid assets.

    Markets are more connected across the world than ever before, but, more importantly, so are accounting rules. Over the past decade or so the U.S. Financial Accounting Standards Board (FASB) and the European International Accounting Standards Board (IASB) -- private professional organizations that basically have a monopoly on setting the accounting rules that government agencies adopt for regulations on the private sector -- have worked on a project of "convergence" of accounting standards. This wouldn't be so bad if it just amounted to mutual recognition of each others' rules. But it often has meant mandating a one-size-fits-all-rule throughout the world. And this has meant a disaster with the flawed mark-to-market rule.

  • Obama denigrates Delaware in debate

    October 8, 2008 2:13 PM

    Poor little Delaware. In every presidential election since 1992, she has been in the "blue" column voting for the Democratic candidate. She has long had a Democratic governor. Although she is represented at large by moderate GOP Rep. Michael Castle in the U.S. House, her Senate representation has been 100 percent Democrat since Tom Carper defeated the late Sen. William Roth in 2000.

    And of course, her other U.S. Senator, Joe Biden, is now the Democratic Party's vice presidential candidate. Yet this didn't prevent this bluest of blue states from getting a thrashing in Tuesday night's debate from none other than the Democratic Party front-runner, Barack Obama.

    In a strange, little-noticed tangent that Obama got onto in responding to a health care question and attacking opponent John McCain for being a deregulator in every policy area (would that this were only true!), Obama picked a bone with Delaware's incorporation laws. Claiming these laws shred consumer protections, Obama said: "Everybody goes to Delaware, because they've got very -- pretty loose laws when it comes to things like credit cards. And in that situation, what happens is, is that the protections you have, the consumer protections that you need, you're not going to have available to you." (The line is about halfway through the debate, just before it turned to foreign policy, and can be read at the transcript here.)

  • In Goldman Sachs We Trust?

    October 8, 2008 2:11 PM

    In the current issue of the Capital Research Center's newsletter Foundation Watch, Fred Lucas looks into the historically cozy relationship that finance giant Goldman Sachs has enjoyed with the highest levels of government, and the expanding influence the firm is poised to exert amid the present financial turmoil.

    In recent years the powerhouse bank Goldman Sachs has supplied Treasury secretaries to both Republican and Democratic administrations. A Goldman veteran serves as President Bush's chief of staff, while one runs the New York Stock Exchange and another lives in the New Jersey governor's mansion. Its politics skew left, and as the company's competitors on Wall Street go belly up, Goldman, a friend of Big Government, remains profitable and its infl uence grows.

    Lucas also cited our own Myron Ebell, referencing CEI's opposition to former Goldman Sachs chairman Henry Paulson's nomination as Treasury Secretary in 2006, due in part to his close connections to The Nature Conservancy.

    No conservative administration should consider appointing anyone who works for the Nature Conservancy to any position and certainly not to one carrying the high responsibilities of Treasury Secretary. The Nature Conservancy has served as the agent for turning millions of acres of productive private land into federally-owned land and has made huge profits doing so. The question that needs to be asked is, what will Mr. Paulson be able to do as Treasury Secretary to benefit the Nature Conservancy and its big corporate partners.

  • More Bailouts on the Way

    October 8, 2008 1:56 PM

    At last night's debate, Senator McCain floated a horrible idea: to have the government buy up bad mortgages and then write off part of the mortgage and reduce the interest rate so that delinquent borrowers can afford to keep living in their pricey homes.  During the debate, Senator Obama seemed to agree with this stupid idea, pointing with approval to the fact that the bailout bills he supported already permit this to a limited extent.   His only objection seemed to be that McCain was hogging credit for this awful proposal for himself.  However, Obama later raised concerns about the cost to taxpayers of McCain's proposal.

    Michelle Malkin explains why this is a terrible idea.

    Having the taxpayers buy up bad loans, and write part of them off, forces homeowners who bought small houses and lived within their means to effectively pay the mortgages of those who bought large houses and can't afford them.

    I and my family live in a 60-year-old, two-bedroom house with a tiny kitchen, peeling paint, creaky floors, obsolete plumbing that backs up, and ancient electrical outlets.  My wife hates the house.  I could have purchased a beautiful new four-bedroom house less than a mile away, but that would have prevented me from getting the 5 percent rate fixed-rate mortgage and affordable monthly payments that I ended up with. 

    I will now be forced to pay the mortgages of people with 5 bedroom houses, beautiful granite countertops, two-car garages, hot-tubs, and swimming pools, who are unable to afford their adjustable-rate mortgage now that interest rates have risen.

    They can't afford their mortgage, so the government thinks they need help, to rescue them from their recklessness.

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