U.S. to bail out Fannie Mae, Freddie Mac

[bombus]

Err, did you actually READ that link? Or just see the title, make a judgement and skim through without taking anything in?

 

Anyway, here's another, note the date it was written!

 

http://www.informationclearinghouse.info/article19817.htm

______________

Edited September 17, 2008 by bombus

[Mr Skeptic]

Certainly soundbite material. I would like to see the rest of that list of politicians soaking in Fannie Mae's and Freddie Mac's campaign money. I'm sure that's where the list of republicans starts, or else we'd be hearing about the top four recipients.

 

What a naive and partisan view. Oh, wait!

[iNow]

The comments below the numbers in your link, Mr Skeptic, debunk much of it. Also, as I understand it, several members of Fannie/Freddie lobbying are helping run McCain's campaign. Like 6 or something.

[bascule]

Hmm, John McCain received $70,100 from Geoffrey T. Boisi, Director of Freddie Mac

[Mr Skeptic]

Methinks that someone's sarcasm detector is broken. I was kidding about the spin on the reporting, particularly ParanoiA's guess as to what the fourth entry would be given how it was reported. However, thanks for pointing out the comments on the bottom; I had thought opensecrets.org to be fairly reliable. To be fair, they did say how they got the data. I don't know an easy way for them to account for people affiliated with multiple companies though.

[bob000555]

I find it interesting the republicans denounce everything that isn’t laissez-faire capitalism until it turns out that to save there own asses they need to start nationalizing things. A true economic conservative would say the we should let the free market run it’s course and flush the bad money from the market.

 

The free market is not easily restrained and nationalization is just delaying the inevitable… That’s one interrelation of it. Then agene the fact that Goldman Sachs continues to slide even though the government has demonstrated that if anything goes wrong they’ll get a bail-out, despite the fact that they beat expectations yet agene, despite the fact that as there competition is wiped out they become even more of the dominate player in the sector may demonstrate that the market has become irrationally bearish which is almost always a sign that its almost time for the trend to reverse. The same for JP Morgan and a few other best of breed financials.

[iNow]

Obama gave a nice talk on this yesterday entitled "Confronting an Economic Crisis." He showed that he has a good understanding of these matters, and showed IMO good leaderhip. Available in full (~38m) at the following:

 

[bombus]

McCain is part of the problem, Read this - particularly the bit about Phil Gramm (until very recently the senior economic advisor to John McCain in his presidential campaign)

 

http://www.informationclearinghouse.info/article20802.htm

[iNow]

Having a hard time figuring out what all this means? Having difficulty putting together the different pieces of this financial puzzle?

 

A good review for the uninitiated here:

 

http://freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/

 

As an economist, I am supposed to have something intelligent to say about the current financial crisis. To be honest, however, I haven’t got the foggiest idea what this all means. So I did what I always do when something related to banking arises: I knocked on the doors of my colleagues Doug Diamond and Anil Kashyap, and asked them for the answers. What they told me was so interesting and insightful that I begged them to write their explanations down for a broader audience. They were kind enough to take the time to do so. In what follows, they discuss what has happened in the financial sector in the last few days, why it happened, and what it means for everyday people.

[Pangloss]

Great article, thanks for passing that along. I definitely picked up a couple things from it.

 

Some points that really stuck out in my mind:

 

The last 10 days have been the most remarkable period of government intervention into the financial system since the Great Depression.

 

ABC News did a piece on that the other day adding up all the money that's been spent on bailouts, "bridge loans", new home loan mortgages for hardship cases and other interventions and it added up to almost a trillion dollars. Yikes.

 

In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market.

 

This one falls on mainly on Republicans, a few key Democrats, and K Street, IMO. What this basically suggests is that deregulation itself is not necessarily a bad thing. In fact we probably ought to discard the notion of "deregulation" altogether and adopt something more logical, like "right regulation", or "correct regulation" (ok, I'm a long way from the Tipping Point with those phrases, but you get the idea). Obama said something to that effect the other day and I thought it made the point well, but I can't seem to find it at the moment.

 

Anyway, this point from that article was particularly interesting:

 

A reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained.

 

My goodness, actual sensibility from at least ONE sector of the government! Bascule said something to the same effect the other day -- perhaps a rare moment of Bush administration approval on his part. It's not hard to imagine the serious hole we'd be falling into right now had it not been for these interventions. (But of course had there been correct oversight we wouldn't be in these straights to begin with.)

 

And of course the problems don't stop here.

 

A.I.G. was an insurance company, not a bank or a broker dealer, so the Fed had no special relationship with A.I.G. Presumably, if a very large airline or automaker had been involved in the C.D.S. market, the same reasoning that led to the rescue would apply.

 

Should the government intervene if it merely postpones an inevitable adjustment? Creditor runs can make adjustment too fast; blanket bailouts can make adjustment too slow. Has the Fed found the speed that is just right?

 

D*mn good questions.

[ParanoiA]

Sorry, for the ridiculously long post, but I've been chewing on this for a bit...feel free to ignore it, I really just needed to get this out of my head.

 

The housing crisis has created a strange current in my thinking. I’ve listened to regular folk. I’ve listened to the media. I’ve read the stories. I’ve researched the origination and evolution of the mortgage business cycle. And everywhere I look, rhetoric and political agenda trumps the truth of what happened.

 

CRA regulations, established in 1977 were a noble attempt to get lenders to take a chance on low to moderate income families. Without it, redlining can create this gulf between ownership and leasing in terms of real estate – helping to maintain ownership by investors, and keeping lower income folk capitulated to the investment class. In 1995 Clinton stepped up on the regulations; changed the assessment to be more performance based; helped to add more teeth and intensity to the CRA objective and the market responded with even more low and moderate income loans. Institutions were even judged by their loan practice particulars; the classic “personal review” by a bank assessor was even disparaged in favor of quantifiable verification alternatives – such as the infamous “credit score”. Another attempt at creating an objective criteria for loan qualification. Certainly good intentions. These changes in regulation were reviewed in 2002, with regulatory changes for 2005. In short, intermediate lenders weren’t subject to the three part test previously required – supposedly a compromise between lenders and “community groups”.

 

The CRA regulations, and their increased intensity post 1995, helped to create a flood of home buyers – a rise in demand. The rise in demand means a higher market value for the capital – our homes. The capital increased in value, which in turn created equity – that point is crucial. If I bought my house for a ninety grand a few years prior, then I put it up for sale for 105 grand, while it appraised for 120 grand due to the surge in demand, then the borrower already enjoys 15 grand in equity, before they even attempt to hassle me into taking a lower price. The bank also enjoys that equity in terms of security – it’s like a 15 thousand dollar down payment on the loan.

 

Everybody is happy, except one crucial flaw – the borrower can’t really pay it back, like they thought. Going solely by their credit score, and overlooking medical bills and debt to income ratios, they have made a highly risky loan. They think there’s enough of them that the laws of statistics will prevail – more will pay it back than will foreclose, but they were wrong. Enough folks foreclosed, defaulted, and etc that the market essentially lost its demand – that demand that drove the price of the capital up in the first place – it was fake demand; a willingness to demand, but a lack of resources to secure. So now home prices are falling since the demand just dropped in a flurry of loan defaults – instantly all of that equity that was enjoyed by the home buyers and loan institutions is erased as our capital tumbled in value. Hello, housing crisis.

 

Are lending institutions to blame? Why? They did what the CRA regulations wanted them to do. Are the borrowers to blame? I think so, since they know their income and their true ability to pay it back – but essentially, they too did what the CRA regulations wanted them to do. You could say, they simply took a chance – just like any business venture one might make in life. Is Fannie or Freddie to blame? Turning mortgage contracts into liquid for mortgage lenders is a service. How do you make loans to other people when all you have is monthly payments trickling in? You do it buy selling those paper contracts for currency – currency to make more loans to low to moderate income families.

 

This is business. Pure and simple. Everyone appears to have played their respective roles – the problem was with the structure of market; structure created by our government. You may or may not agree with my analysis of this housing crisis, and there are other dynamics to consider (such as the number of lenders that weren’t regulated by CRA at all, yet contributed to inflating the subprime loan market), but it’s all about business and economics – not “good guys” and “bad guys”, like we’re children reading comic books.

 

Biden got thrashed about his gaffe over the stock market crash occurring during Roosevelt’s term, but his sentiment was lost. His statement suggested a welcomed tone: indifference to the “princes of greed”. I have no idea what point he actually made on this, but hopefully he went on to point out that contempt for business and profit is silly when discussing business and profit. It’s not unhealthy profiteering that’s to blame. We understand the forces that drive capitalism; we understand the nature of man and the compliment capitalism provides – a system that isn’t built to be asymmetrical to this nature, but rather utilizes this nature and exploits it; it’s designed to accept that input.

 

So when markets crash, or business cycles poison the well, these are market problems, structural issues – not “rich people are greedy and caused this”. Of course greed is codified in profiteering, but we already knew that and designed the system for that input. If we forgot or misunderstood, that’s our fault – an argument from ignorance is not helpful here. The rich, the investors, the borrowers – everyone played their roles as they are to be played and is counterintuitive and counterproductive to behave as if they should be punished, or scorned for doing what we fully expect and count on them to do.

 

So this is what I find most perplexing in dealing with this issue. The contempt leveled at capitalism. Folks are using the word “rich” and “profit” as pejoratives. We all pursue profit everyday; we spend the majority of our lives pursuing profit and security. Most of us aren’t content with our level of success at this effort, yet we have replaced aspiration with envy. Rather than let the rich and successful inspire us, we instead label them greedy and rationalize taking their profits. We didn’t level a good principled argument before they made the profit, we only came up with it after they made the profit – and that’s what lawyers do. They look at opportunity X, and then look for loopholes to gain an advantage.

 

I believe that’s what we are doing as a country, despite our pop cultural plural agreement that lawyers are bad, we are behaving identically. We are fully engaged in class warfare now. Being rich is wicked, being poor is noble. How utterly stupid can an animal be?

 

We have managed to fool ourselves into believing that superior hunter and gatherers are bad. Or are we simply responding the threat of a highly successful few surrounded by the not-so-successful many? Is this our evolutionary, Darwinian response? Or are we just dumb as a box of rocks? I’m guessing the latter.

 

And in that context, we are not going to fix what happened in the housing crisis. We are going to dump on the rich investors and the poverty ridden borrowers, we are going to point fingers at Barney Frank and George Bush. We would never dream of clinically recognizing the unnatural force created in the intensity of these CRA regulations for the market to negotiate.

 

We’re going to do everything except fix what happened. I wish Biden was right. I wish Roosevelt really was president and really did go on TV in 1929 and talk about what happened, rather than scoring political points by slamming capitalists. It could have been the last time we ever rationally analyzed a market problem.

[Pangloss]

I agree that there's an aspect of this that we demanded these changes as a society, cheered them when they were made, took advantage of the debt culture, and then cried foul when it came back to haunt us. I read a thread on another board the other day that was all about how this happened because the lending institutions were forced by law to lend to people who couldn't pay. As if!

 

The thing is, I think there's enough of a gray area there that you can really say that there's room for both sides to be correct. You CAN produce a society in which hard-working people can buy a home and build a successful life for themselves, and not get swamped with debt they can't afford.

 

We just need to find the right balance between regulation and freedom.

[bascule]

Are lending institutions to blame?

 

Yes

 

Why?

 

They gave out excessive numbers of bad loans.

 

They did what the CRA regulations wanted them to do.

 

The CRA wanted them to make an incomprehensibly diverse smorgasbord of new loan products with punitive terms which were confusing to borrowers?

 

Are the borrowers to blame?

 

Yes, although the were the unwitting stooges, not the masterminds of this mess.

 

I think so, since they know their income and their true ability to pay it back – but essentially, they too did what the CRA regulations wanted them to do.

 

They were given deals too good to be true. They didn't stop to question it. Then they paid the price.

 

You're honestly blaming this on too much regulation?

 

Half of all subprime loans were made by independent mortgage companies like New Century Financial which were not regulated by CRA at all, and thus had no government obligation to offer credit to minorities. These companies made subprime loans at twice the rate of CRA banks. Also, the weakening of the CRA in 2004 was followed by an increase in subprime lending. If the CRA were really compelling lenders against their will to give out bad loans, wouldn't we have seen a decrease?

 

The degree to which the CRA impacted the subprime mortgage crisis is debatable, but I really don't see it as a major contributing factor. More I see the vast explosion of secondary lenders, at the behest of deregulation which expanded the potential loan products they could offer, as the impetus, and a massive explosion of subprime lending as the primary cause. This explosion in subprime loans wasn't the result of compulsion by draconian government regulations. The lenders brought it on themselves.

 

Here's an article on the subject:

 

http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis

[Realitycheck]

I read a thread on another board the other day that was all about how this happened because the lending institutions were forced by law to lend to people who couldn't pay.

 

Somewhere I read that they were encouraged to make these loans available, not exactly required by law. (Probably in another thread here.) You get what you pay for, usually, that's how it's supposed to be, but when you factor in all of the other dynamics - war, housing meltdown, job losses, etc. - things change. Fundamentals always rule.

[iNow]

Bill Clinton explained it fairly well in a way that is accessible to most last night here:

 

http://www.thedailyshow.com/video/index.jhtml?videoId=185197&title=bill-clinton-pt.-1

[Pangloss]

Okay, so we have right-wingers slinging mud about CRA causing the problem, and we have left-wingers slinging mud about how it's all about profit motive.

 

Anybody else see the real problem here?

[iNow]

Yes. Too many people not able to laugh at issues and who try to disregard everything as partisan. Also, not enough people making or listening to speeches like this done September 23 from Obama on the bailout:

 

[ParanoiA]

You're honestly blaming this on too much regulation?

 

Yes, because all forces are natural and expected. Regulations, present and absent, are designed to negotiate these forces within the context of a capitalistic economy. You're making a value judgement on forces that we depend on as well as shit on when we don't want to admit we designed the cage with a gap in the bars.

 

You can judge the lenders, the borrowers and etc - and I do too on a personal level - but the correction is not about punishment and discipline, it's about design correction. It's a structural problem with the framework of the market.

 

Half of all subprime loans were made by independent mortgage companies like New Century Financial which were not regulated by CRA at all, and thus had no government obligation to offer credit to minorities. These companies made subprime loans at twice the rate of CRA banks. Also, the weakening of the CRA in 2004 was followed by an increase in subprime lending. If the CRA were really compelling lenders against their will to give out bad loans, wouldn't we have seen a decrease?

 

I never said against their will. I just said that CRA regulations have been intensified over the past decade to catalyze more and more home ownership by low income individuals. This subprime loan culture has become popularized over the years by this intensity, in my opinion. Had the act not passed in 1977, we wouldn't be having this conversation. I also wouldn't be a homeowner, and the gap between the rich and poor would be even more prevalent. Try as you might, but I have no rotten words for those mixed up in this. I don't think anyone really did anything wrong in promoting the CRA regulations. And I still think we need them.

 

I don't blame them entirely, and I said as much in my long winded post. There are many dynamics to this, but in terms of regulatory correction, that's the most glaring to me.

 

The worst thing we could ever do is bail these companies out. This suggests consequences in the other markets of the economy besides just the financial one. Will the government let AT&T go out of business? Microsoft? Where is exactly is the line when government decides that some private industries are too important not to be saved by the government?

 

Even more sinister...what can we expect in the way of business practices from big companies once they all realize they are insured "implicitly" by the tax payers?

 

This appears to be our excuse for socialism. Blame the forces we fail to negotiate properly so we can get the green light to control them outright and own them. Brilliant...

 

Okay' date=' so we have right-wingers slinging mud about CRA causing the problem, and we have left-wingers slinging mud about how it's all about profit motive.

 

Anybody else see the real problem here?[/quote']

 

Yeah, we have tons of it and I'm sick of it. CRA is not a problem, but to pretend it hasn't contributed is just silly. The lenders running circles and inventing loan packages certainly wasn't pissing off the community groups that lobbied for CRA regulations to begin with - and continue to today. We need to quit it with the pendulum swinging all the way one way, then all the way the other.

 

You cannot say CRA is the sole failure. You cannot say that lenders are the sole failure. You cannot say that borrowers are the sole failure. You CAN say, that the framework we designed for them to work in, did not negotiate those forces successfully.

 

That's a failure in government, since we provide that framework. I also stand behind my previous regurgitations about regulatory conditioning - the psychology of sudden, chaotic liberation.

Edited September 24, 2008 by ParanoiA

[bascule]

I never said against their will. I just said that CRA regulations have been intensified over the past decade to catalyze more and more home ownership by low income individuals.

 

Actually, the provisions of CRA were relaxed in 2004 and 2005.

 

This subprime loan culture has become popularized over the years by this intensity, in my opinion.

 

It intensified after the CRA provisions were changed. One possible explanation is that secondary lenders started giving out more subprime loans when they felt there'd be less competition from banks.

 

Had the act not passed in 1977, we wouldn't be having this conversation.

 

I really don't think you can support that position. I think if CRA were never passed we'd still be in this mess.

 

The CRA regulation states that it is anticipated that banks can fulfill their CRA obligations with loans "on which the banks expect to make a profit." It's not as if the law was compelling banks to give out bad loans.

 

My main question to you would be: why did CRA only become a problem now, some 40 years after it was passed?

[ParanoiA]

I really don't think you can support that position. I think if CRA were never passed we'd still be in this mess.

 

The CRA regulation states that it is anticipated that banks can fulfill their CRA obligations with loans "on which the banks expect to make a profit." It's not as if the law was compelling banks to give out bad loans.

 

On the first point' date=' it's all academic anyway, but I'd point out the practice of redlining which apparently drove the push for CRA regulations in the first place. If they're making plenty of money on secured markets, why bother with nickle and diming a secondary mortgage market? I suppose you could make the case that profit would have manifested that market anyway, to which I'd have to question the necessity of CRA in the first place, and I'd point out that I have more faith the market would have evolved in a more balanced manner since there would be no "unnatural" push to create it.

 

Like I said, I believe CRA helped to create that culture of lending to risky borrowers - it's their agenda for crying out loud.

 

And you do realize that an independent mortgage company that isn't regulated by the CRA, is often a middle-man that arranges loans with banks - [i']like CRA regulated banks[/i]? It's a nice diversion, but it would be a better point if we could quantify the number of these loans that ended up being served by a CRA regulated bank.

 

CRA regulations produce an unnatural current in the market. It's akin to dropping off a major cattle population in the middle of Africa. It doesn't mean a collapse of the natural order of things, but you sure as hell wouldn't blame the Lions for eating them while the Gazelle population inflates. You're judging the Lion for being a lazy eater. I'm judging the act of dropping off the slow running prey into his environment.

 

My main question to you would be: why did CRA only become a problem now, some 40 years after it was passed?

 

I don't know that it's a problem, on its face. From what I can tell, it's implementation went pretty decent. I think Clinton intensified them for the benefit of the poor and that helped to create the saturation of demand. After that, it seemed to grow on its own, and like you mentioned, secondary lenders swooped right in. I'm sure the relax of regulation in 2004 helped it too - probably in answer to the demand that wasn't being met. I remember having to wait for long periods to process my loans, with the excuse that they were swamped.

 

But remember, we're not talking about a total absence of regulations. Rather, we're talking about a cherry picked removal of regulations. The whole housing market is regulated out the ying-yang, from the Fannie's and Freddie's, to the mom and pop mortgage brokers - to pick a few lines from 2004 and pretend like THAT's the cause, just seems silly to me. Again, just like the Healthcare market, we have another socialist bubble within a capitalist framework - and now we're getting close to eliminating the capitalist framework altogether.

 

You can't regulate the shit out of a market like that and pretend that what few "choices" they still have left is the reason for the debacle. Give me a break. No, when you regulate as heavy as we do, in the financial market, then you are automatically to accept a heavy burden of the blame. Way too many forces are being controlled by you. If you like to regulate, fine, but understand the regulation is not natural and so the consequences of your interference must be calculated correctly by you. And if they don't turn out like you wanted - then I say that's a failure of your understanding of those forces. You chose to regulate it, but you didn't understand it well enough to control it.

 

Now you want to blame the forces you failed to control successfully?

 

My question to you: What about those forces changed in the last 200 years, so much so, that regulation did not foresee?

Edited September 24, 2008 by ParanoiA

[Pangloss]

Yes. Too many people not able to laugh at issues and who try to disregard everything as partisan. Also, not enough people making or listening to speeches like this done September 23 from Obama on the bailout:

 

 

You're right, I declare everything to be partisan when clearly the problem is that not enough people are lining up to do as they're told. What was I thinking, showing two partisan sides offsetting one another? Ludicrous!

[bascule]

My question to you: What about those forces changed in the last 200 years, so much so, that regulation did not foresee?

 

The forces that changed and the unforeseen effect was that of subprime loans and secondary lenders. In the past the role of mortgage lending was relegated to banks. In the '80s that changed, to the point that S&Ls could give out mortgages. But at least S&Ls also balanced their losses with savings accounts. Also, the government created government-backed secondary lending agencies in the form of Fannie Mae and Freddie Mac.

 

Something changed remarkably at the start of this century. Secondary lenders, lenders who dealt only in debt, not even in savings or checking accounts, and only in mortgage debt started springing onto the scene. These lenders existed once at the behest of the government itself, but thanks to deregulation they started being private entities. I'm talking about corporations like New Century Financial, previously touted as "a new kind of blue chip", who began wholeheartedly exploring the subprime mortgage market. This was brand new virgin territory, previously verboten by government regulation, but with that out of the way, it's a frontier of unexplored opportunity!

 

Except later, that regulation was shown to be prudent. New Century Financial cratered. Toxic subprime debt soon started dragging down every part of the financial sector. This is debt that was previously banned by federal regulations. Now it would certainly seem like it was banned for good reason.

 

You yourself were a subprime mortgagor, were you not? Were you able to obtain such a loan before 2000ish? Do you think that loan worked out well for you? Would you recommend subprime loans to your friends?

[ParanoiA]

I'll take your post as a history lesson. Interesting.

 

You yourself were a subprime mortgagor, were you not? Were you able to obtain such a loan before 2000ish? Do you think that loan worked out well for you? Would you recommend subprime loans to your friends?

 

I'm still a subprime mortgagor, and it might hurt me yet. The adjustable rate hasn't kicked in yet. I never tried before 2000, but I'll take your word that I couldn't have achieved it. Although, I did hear about such loan terms in the late 90's when we bought our first house via HUD, and my mother warned me of adjustable rate mortgages, although I'm not sure if they were subprime or not.

 

So far the loan has worked out, but I can't claim victory until I sell my house and successfully dodge the adjustable rate that's going to attempt to nab my entire income. Of course, I knew that going into it and made a calculated risk.

 

My previous subprime loans worked out well for our house flipping venture. We sold those houses with tens of months still remaining before the premium payments would have kicked in. In terms of our business, they worked out ok. It took less money out of our profit than hard money lenders - most demanded a $5,000 loan fee right off the top, before you even get out of the room.

 

And I would recommend those loans on those terms. I would only recommend a subprime loan for anyone planning to risk - maybe they think they can get a better fixed rate in a couple of years, so they take a subprime and work on their house to build equity and then refinance before the adjustable rate kicks in...stuff like that.

 

But, as a mortgage to keep to term? No way. Not in a million years. I would never recommend such a thing, and I'd like to think if I was a loan officer, I would go out of my way to be sure the poverty stricken ignorant understand just how dangerous and stupid it is for them. If nothing else, for their kids' sake. And yes, I do personally hold that against lenders for not rising above supposed "business ethics". I've never really accepted the line "it's just business", when you know damn good and well you're screwing somebody. But that's just personal, and I could never justify legislating it.

[bascule]

JP Morgan acquires Washington Mutual:

 

http://money.cnn.com/2008/09/25/news/companies/JPM_WaMu/index.htm?postversion=2008092519&eref=rss_topstories

 

Uggghhh....

[ParanoiA]

Some interesting comments and theory from a financial expert serving on the Financial Services Committee, Dr. Ron Paul.

 

Dear Friends:

 

The financial meltdown the economists of the Austrian School predicted has arrived.

 

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

 

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

 

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

 

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

 

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

 

I provide this, not to seal up any particular points on the matter, but to get into the meat and potatoes of economics and this crisis. Obviously, I'm no expert on the matter, and I doubt there are many of us that can claim to be, other than maybe bascule. I'm betting we all have something to learn and to gain by understanding the fundamentals of the structure of our economy and how these structures earn merit, or contribute to business cycles. Dr. Paul argues on this level, and it's a level I don't really grasp.