Jun
12
Freakonomicsis not the only place to find some interesting real-world applied economics. One needs only to scan the blogosphere, where Cafe Hayek points out this from Bryan Caplan:
Textbooks may say that economics is about “incentives” or “trade-offs.” But you can publish papers in econ journals about the effect of birth weight on educational attainment. I don’t see any incentives or trade-offs there. Or take Emily Oster’s early researcharguing that hepatitis, not infanticide or selective abortion, explained a lot of Asia’s gender imbalance. Some economists asked, “How is this economics?” But if some economists argue that the gender imbalance is driven by incentives, how can you object if other economists say that the real explanation is medical? Or consider happiness research. Economists like Justin Wolfers are in the vanguard; but the connection to incentives or trade-offs is unclear.
You could deplore all this as a loss of focus. But I see massive progress. Economics has grown hard to define because we now focus primarily on real-world problems, not “literatures.” If we want to understand income determination, we don’t waste time with topological proofs. We still think about supply and demand, but we also think about policy, psychology, behavioral genetics, and much more. As a result, we come to understand the world, instead of solving unusually difficult homework problems.
Over at Coyoteblog, the following chart is featured, showing the end-of-regulation scores in the NBA, with an inordinate proclivity for ties:
It was found at Cheap Talk, with an explanation and videos. Warren found the link from The Sports Economist, where I found the post regarding the economics of sportsmanship interesting:
As an economist I’m intrigued by the widespread nature of sportsmanship standards. The exact threshold for good and bad sportsmanship differs across individuals and tends to be influenced by a variety of variables including the specific sport along with fan age, urban/rural, income, nationality, or ethnicity. Despite nuances across individuals, sportsmanship seems to be part of wider moral/ethical standards.
Finally, via Galley Slaves is this piece showing why Gotham City’s villians shouldn’t team up to kill Batman.
Exit question: Is the joker considered a negative externality?
Jun
11
Salaries, Caps, and Incentives
Filed Under Economics | Leave a Comment
Via Drudge, it appears Democrats both in the legislative and executive branches are eyeing government-imposed limits to executive pay, whether they are on the receiving end of government money or not. President Obama and many in his party hold to the fallacious notion that “excessive” executive compensation were a large component in the ongoing financial crisis.
Were there certain members of management in the financial sector that were rewarded lavishly for track records that were less than deserving? Of course. Then again, the same argument could be made for many a legislator…
But where such command-and-control policies such as executive pay caps go awry is their basis on the idea that the government can make decisions better than the people can regarding their own money. In this case, we’re talking about shareholders in the companies in question. In the end, CEO’s and their ilk are being paid with the shareholders’ money, and they decide (through elected boards of directors and more specifically compensation committees) how much their managers should be paid. To impose government controls on what management can be paid and how such matters should be decided is nothing less than the federal government telling the shareholders that they are too stupid to allocate their own money.
I am in no way advocating that those who drive their companies into financial ruin be rewarded. What I am advocating is that these people be shown the door by their employers, the shareholders who gained their equity and voting rights with their own hard-earned money, not the the Fed, the President, or Barney Frank.
An interesting spin on the issue is this story (also featured on the Drudge Report) of the suggestion of the feds capping union boss pay. Fat chance.
What I see as the more interesting undercurrent in this debate is the recognition by liberals that people do, in fact, alter their behavior when considering incentives. They realize that if CEO’s are rewarded for short-term results, they’ll get short-term plans. They follow the incentives. So how can the government crack down on pay for companies in financial trouble when the government was the one who rewarded bankrupt auto companies with huge taxpayer-financed takeovers?
If people respond to incentives, then what exactly are we rewarding with welfare?
If people will act in a way to gain money, will they not do the opposite when a behavior takes away money, as in taxation?
Cigarette taxes are meant to curtail smoking.
Carbon taxes are meant to curtail energy use and emissions.
Wouldn’t taxes on working, saving, investing, and employing have similar effects?
Perhaps the liberals believe government incentives somehow fall into another category. Perhaps raising taxes is good?
Then why wait to raise taxes? If its good, why not do it right away? If you’re not doing it now because its not good, are you promising that you will be doing something harmful to the economy in the future?
There seem to be a lot of inconsistencies with those currently in power as to whether people respond to incentives or not. But in the end, it is the American economy that will suffer for their ignorance.
Jun
2
GM Bankruptcy: Mission Accomplished
Filed Under Economics | 6 Comments
General Motors declared bankruptcy.
Let that sink in a little bit.
Words that would be considered ludicrous a decade or so ago yesterday became a reality, as GM filed for chapter 11. Congratulations to all of my American readers, who share ownership in a 60% stake in the automaker:
Monday, U.S. President Barack Obama defended government intervention in GM as the auto maker enters Chapter 11 bankruptcy, saying the actions are part of a “viable, achievable plan that will give this iconic company a chance to rise again.”
Under the plan, the government would own 60% of the new GM, but Mr. Obama said auto executives “will call the shots and make the decisions about turning this company around.” He said the government would refrain from playing a management role in all but the most critical areas. “Our goal is to help GM get back on its feet…and get out quickly,” he said.
Obama also described the government ownership, and therefore control, of the company as “unwelcome.”
But is this recession-era takeover really “unwelcome”? Or is Obama just refusing to let a good crisis go to waste?
When looked at critically, the GM bankruptcy and government takeover accomplishes many goals that make up the Obama agenda:
- Being able to dictate priorities in auto manufacturing will allow Obama to enforce his CAFE standards and help keep the “green” lobby
- As Rush pointed out (via The Other McCain), the restructuring deal put together by the Obamunists will put through plenty of protectionist measures that will do great economic harm, but keep in line with Obama’s positions on trade. RSM states later, “The sharp rise in long-term bond rates is only “puzzling” to people who know less about market economics than I do, and I’m a liberal arts major. But the list of people who know less than me, however, unfortunately includes the man Obama insisted must be in charge of the Treasury.”
- How does the UAW taking disproportionate ownership in GM play to the Obama agenda? Hmmm: “We’re ready to play offense for organized labor. It’s time we had a president who didn’t choke saying the word ‘union.’ A president who strengthens our unions by letting them do what they do best: organize our workers,” - Barack Obama, April 2nd, 2008
I’m sure there could be nothing more musical to the collective ears of Toyota, Honda, and Nissan than the fact that their largest American competitor is being run by a labor union and the federal government. But for what its worth, Moonbattery has a good idea for the next GM ad.
Update: Thanks to The Other McCain for featuring this post in the “headlines” section on their right-hand sidebar. Readers: Welcome to Zoominac!
May
21
18-21 Year Olds: Smart Enough To Vote, Too Stupid For Credit Cards
Filed Under Economics | 2 Comments
This week the Senate passed legislation restricting credit card companies in their abilities to levy fees and raise interest rates. Intended to protect those who are harmed by such actions, the bill will only serve to punish responsible borrowers and restrict lending lower-income credit-card users. The companies will simply not take on the risk if not allowed to manage it economically.
There was another stipulation of the bill that puzzled me:
… the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.
Essentially this is saying that people ages 18-21, while given the right to choose the Commander in Chief of the most powerful military in the world, are too stupid to read a credit card agreement. Such hypocricy is not uncommon on the left, who claim to be the voice of younger voters. Communism Now! interviewed Jesse Jackson about student loan debt. First he encouraged youths to get involved:
Students should begin rebelling and marching across the country. Students have accepted this as like normal. It’s normal, but it is not right. And it is a point of rebellion. So we’re urging students across America who want to reduce the rate and have more grants and less loans, let’s begin to have marches, use last year’s energy in the presidential campaign, demand a new deal.
President Obama wants students, in fact, to get a better deal. Were it not for his hit book, we’d have a president today with a student loan. His hit book allowed—he and Michelle both, a presidential—Harvard Law School graduates—were still owing on their loan until two years ago. So think about those who are in a less fortuitous circumstance. So I’m anxious to urge students around America, don’t just sit there and take that hit. Let’s fight back.
But then he underestimates the ability of these same people to take personal responsibility for their own finances:
Well, the students, you know, really are seduced into the loans. I was talking to students from Northwestern last week, and they’re just kind of signing off, you know, assuming when they get out of law school, they can kind of pay it back. But now, I mean, those jobs don’t exist, so they can’t pay it back. And they marry each other, which doubles the burden and their compounded interest, and so that’s a big piece of this.
That’s right, just “signing stuff.” They were “seduced.”
Whether it is college students or anyone else, when the government scorns personal responsibility, we all lose.
May
15
Fascism in America
Filed Under Economics | Leave a Comment
Powerline featured internal memos and documents showing the way the feds under Bush pressured private entities to accept TARP money:
The document is unambiguous: “We plan to announce the program tomorrow–and–that your nine firms will be the initial participants. … This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both. We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed. If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.” So the regulators’ independence had already been compromised.
Note that these “talking points” also document Treasury’s willingness to misrepresent the condition of some of the financial institutions to the American people: “We will state clearly that you are healthy institutions, participating in order to support the U.S. economy.” That was certainly not true as to Merrill Lynch. But shortly thereafter, when Bank of America realized that Merrill Lynch’s condition was deteriorating rapidly and tried to back out of its purchase of that company, Treasury bullied BoA into going through with the deal by threatening to fire the bank’s entire Board of Directors–a move that transferred tens of billions of dollars of wealth from BoA shareholders to Merrill Lynch shareholders.
Follow the link to see the documents in question.
The days of Bushpaulsonobamageithner will be a dark chapter in the book of liberty indeed.
H/t: Instapundit.
May
7
Thanks For Clarifying That
Filed Under Economics | Leave a Comment
The official website of the POTUS, whitehouse.gov has a blog up that details all the wonderful things that The One is doing to make our lives better. With Obama’s recent initiative to eliminate off-shore tax havens generating some feedback, the Obamablog sought to address it with a little Q&A in this post, including the following clarification:
kylekunkler: Ending deferral (when US already has 2nd highest corporate tax) will only hurt US MNCs and cost jobs! http://tinyurl.com/coofnd
Jason Furman: Kyle, you are correct that the United States has the second highest statutory tax rate in the world, the official rate published in the tax code. But the United States also has more loopholes and special tax preferences than many other countries. As a result, the United States has a much lower effective tax rate. If you look at corporate taxes as a share of GDP they are below those of most major economies. The result is a tax code that is complicated, inefficient and unfair. One of major causes of these problems is the way that we tax – or more often do not tax – the foreign earnings of American companies. The administration’s plan is intended as a major, first step in addressing this problem.
Oh, I get it. Thank you for clearing that up, Mr. Furman! While the United States is supposed to have the second highest rate (statutory), all the loopholes that Obama will get rid of are keeping the actual rate paid (effective) down. But no need to worry, Obama’s brilliant plan will get rid of all those loopholes and tax havens to make sure your fears are perfectly legitimate, Kyle. Thanks for asking!
The article that the questioner cites is actually a very interesting one from Bloomberg, explaining one of the tactics that businesses use to avoid paying taxes:
Once the assets were in the haven, the U.S. parent company borrowed from the subsidiary. The interest payments were deductible in the U.S. and tax-free in the haven, the GAO said.
So the administration’s plan is to simply make this practice illegal or at least more difficult. But my main objections to that logic are:
- Companies will now have even more incentive to move their operations overseas altogether, as opposed to just a portion.
- Other countries may see this as a quasi-protectionist measure and attempt to restrict international trade.
- Just like the old laws, any attempt at government restriction will be easily manipulated by powerful and wealthy elites, like large corporations. The new laws will only hurt those not powerful enough to gain access. Such is the problem with big government.
Just because the government tries to restrict actors in the economy, like multinational corporations, from acting in their own self-interest does not mean that they will stop trying. As we can see, even with complicated laws in place, the companies still found a way around it. Whether it be regulations, taxes, fees, or counterproductive subsidies, government action will always force the private sector to allocate more resources to compliance and evasion (as the Bloomberg article illustrated) than to more worthwhile activities. And people wonder why productivity of American workers has declined over the years! Individuals are still working just as hard (if not harder), but at tasks like creative accounting and compliance that don’t produce anything like an assembly worker does.
P.S.: And that’s still not addressing the hypocrisy of an administration full of tax cheats shaming those who used legal channels to avoid paying taxes.
Apr
24
Reaction to Tea Party Protests
Filed Under Economics | 2 Comments
Hello readers. Sorry I haven’t been around as much as I’d like, as I’ve had a lot going on and this time of year is ordinarily very busy for me. Last week the Tea Party protests were held all over the country, protesting the massive spending and fiscal policies of the federal government. As I worried earlier, my job prevented me from attending the local Tea Party in Tampa, but I was there in spirit. For those who couldn’t attend, Moonbattery gave a great roundup of protests.
For anyone paying attention, the truth about the Tea Party movement is this:
- The Tea Parties were organized at the grass roots level; only after it caught on did some larger groups become involved.
- The Tea Parties are in essence protesting spending and bailouts - not taxation (yet). Protesters realize that reckless spending will one day lead to either high taxation or high inflation, so it is best to protest it now. Many dismissed the Tea Parties by saying no one is paying higher taxes. No shit Sherlock. But how else will you pay for all this spending, hmm?
- The Tea Parties are not GOP events - they recognize that the first bailout was under President Bush and Treasury Secretary Paulson, and it continued under the Obama-Geithner administration. The Tea Parties protested big government in all its forms, regardless of whether there is an elephant or a donkey behind it.
- From all accounts, protestors were courteous, clean, and went out of their way to respect private property and pick up any mess made.
Many did not see the Tea Parties in a positive light, including Paul Begala who referred to tax day as “Patriot’s Day”:
Happy Patriots’ Day. April 15 is the one day a year when our country asks something of us — or at least the vast majority of us.
For those who wear a military uniform, those who serve the rest of us as policemen and firefighters and teachers and other public servants, every day is patriots’ day. They work hard for our country; many risk their lives — and some lose their lives.
But for the rest of us, the civilian majority, our government asks very little. Except for April 15. On this day, our government asks that we pay our fair share of taxes to keep our beloved country strong and safe.
…
This country has showered me with the blessings of liberty. So what do I owe my country in return? Paying my fair share of taxes, it seems, is the least I can do. Thanks to President Obama and the Democratic Congress, 95 percent of Americans will get a tax cut this year. No one — not even the wealthiest 1 percent — will have to pay higher income taxes until 2011.
So why are a bunch of Fox News clowns and right-wing cranks hosting “tea parties” all over the country? The Boston Tea Party, in case the clods at Fox didn’t know it, protested “taxation without representation.” Note the second word: without. The goofballs tossing tea bags today have representation. They voted in the election; they lost.
That a bunch of overpaid media millionaires would lead a faux-populist revolt is comical. They somehow held their populist instincts in check as George W. Bush and the Republicans cut taxes on the idle rich and put the screws to the working stiffs.
Bush’s tax policies were a godsend to the Paris Hilton class, but they sent the country on the road to bankruptcy and helped ruin the economy. But now that we the people have decided to set things right, now that we’ve hired Obama to fix the mess conservatives created, now they’re protesting?
Not only does Begala shamelessly subscribe to the lie that taxes are something “our government asks,” but he decries the organic grass roots movement as a creation of Fox News to help the Republican party. Does he not remember the anguish in the Conservative movement with the bailout bill in 2008? And again, THIS IS NOT ABOUT TAXES. It is about the spending that will lead to higher taxes down the road.
No matter the criticism, here’s to the Tea Party protesters who felt compelled to get out and fight for the future of their country. Job well done.
Mar
30
I was over at the Crapperty File at CNN looking for some blog bait, and one of Jackie Boy’s questions was “How would you change income tax laws?“ There’s no question that Cafferty himself is a statist moonbat, and his audience is usually a bunch of incoherent, class-warfare morons. However, the answers to this question were overwhelmingly not what I expected. While there were a plenty of responses such as this from Bob:
Changes that should be made include returning to a 39% top tax rate, having hedge fund managers’ compensation taxed as regular income instead of being taxed at the 15% capital gains rate, taxing adjusted gross income under $200,000 at a 10% rate and to top it off, remove the income “cap” on wages taxed for Social Security.
And this from Kenny:
Anything over $5 million a year, I would impose a 90% tax on. Simply put, if you can’t live on five million each and every year, you’re doing something so incredibly stupid you don’t deserve that kind of money anyway!
Many of the responses took a very level headed, equal-treatment tone. Libertarian Neal Boortz somehow managed to infiltrate this group quite a bit. Take this from Anna:
That’s an easy one. Set a percentage – say 10%. Set that percentage for EVERYONE. No loopholes. No deductions. Straight percentage. No matter what your income, everyone pays the same percentage. No one should complain. And the taxes can be collected on a rotating basis. Like getting a yearly inspection. That way, you always have money coming in.
… this from Stan:
I would create a Federal Sales Tax. The benefits are that it would be easy to administer, streamline the IRS, encourage savings, eliminate the underground economy, and be fair to all. Some will argue it penalizes the poor/lower income because they spend 100% of their economy out of necessity. However, the benefits far outweigh the downside.
Or this outright endorsement of the Fair Tax from Micehlle[sic]:
This is such a no-brainer to me. Do away with the IRS and implement the Fair Tax. This will tax people based upon what they spend, not what they make. If every American citizen had the money the IRS withholds from their paycheck, talk about an economic stimulus. Plus, this would significantly broaden the tax base as it will force people to stop living under the radar and pay their fair share.
If Geithner and many, many others in Washington can’t figure out the 67,000 pages of our Tax Code, how should any average Joe be expeceted[sic] to?
The Fair Tax was an official proposal by Libertarian radio host Neal Boortz and Georgia Congressman John Linder, and outlined in The Fair Tax Book. In a nutshell, the Fair Tax as proposed by Boortz and Linder would replace all federal taxes with a national sales tax of 23% of the final bill of sale, equivalent to a 30% conventional sales tax. The Fair Tax’s biggest advantages are that it treats everyone equally, is much easier to file and predict, and does not feature loopholes and deductions that politicians can use to control your behavior and help their buddies save money. It is a knife in the heart of class politics, and makes the cost of government very transparent in everyday life, as opposed to some figure on your paycheck stub, or an expense to be paid by “other people” or “the rich.”
What does such an outcry say about the American populace? First of all, we are not nearly as liberal as the past two elections would suggest. Call me crazy, but somehow Obama running on tax cuts and bombing Pakistan doesn’t suggest a liberal mandate to me.
Nor is the American public strictly conservative. What I do think are viable positions in American politics are a simplification of the tax code and equal liability. Sure, there are nuts out there that demand that everyone making over a certain amount is “too rich for their own good” or “too greedy,” but most people will be willing to have inequality in exchange for prosperity. The key for fiscal conservatives and libertarians is to show how harmful progressive taxation is on business and jobs. I think it is already clear that complicated tax rules favor the political elite and those that can afford the best lawyers.
Another winning point that fiscal conservatism needs to champion is America’s disgust with deficits. We have allowed the fallacious belief to persist that budget deficits are a result of tax cuts cutting federal revenue too short. As I have shown earlier with a nifty chart, revenue is not the problem. Spending is. However, the Republicans lost the ability to attack spending as an issue when they wasted money like sailors in port in the six years they were in power.
The national debt and federal budget deficit is a result of rampant spending that far outpaces a healthy revenue stream. The liberals know the best way to make higher taxes palatable for the average voter is to use deficit reduction as an excuse. The Democrat mantra is not tax-and-spend; it is spend-and-tax.
The fiscally conservative/libertarian/Republican agenda can win again if it can demonstrate to America that progressive income taxes don’t work and that spending and deficits are only excuses to confiscate more of our income. Success is staring us in the face.
Mar
19
On the Obama ‘Town Hall’ (Rally)
Filed Under Economics | 2 Comments
Yesterday, President Obama held a rally in California (he called it a town hall) to garner support for his budget. While a lot of topics were covered, I want to focus on one important part:
Let’s talk tax policy for a second, because, again, some on the other side have said, oh, Obama, he’s a tax-and-spend Democrat — tax and spend. Well, it turns out, yes. You know, what I’ve said is we should return to the tax rates that we had under Bill Clinton, which means — which means this: which means that for people who are making more than $250,000 a year, they would pay instead of 36 percent, they’d pay 39 percent. Like, a 3 percent increase on their tax rate.
Now, these folks can afford it. They were rich — they were rich back in the ’90s. It’s not like suddenly they’re going to have to go to the poor house. But what that does is it allows us to pay for health care reform for a lot of people who are out there working every day but are just one illness away from bankruptcy.
Now, that’s — I don’t think that’s unreasonable. I don’t think that’s socialism. I think that’s part of understanding that we’re all in this together and that if the middle class is working well, if working people are doing well, then everybody does well. (Applause.) Then they can buy products and services, and businesses will succeed. That’s the philosophy that we are pursuing in this budget; that’s why I need your support.
This is where The One shows that class-envy is at the center of his politics. “These folks can afford it,” he says. Is affordability the qualifier we look at when determining tax policy? If I happen to have an extra $10 at the end of the week, does that mean I have any less claim to it than if I needed it?
Then Obama tries to pass the fallacy that if we tax one individual and give to another, it will stimulate the economy. How does this make sense? If Jack is buying $500 worth of goods and Jill is buying $100 worth of goods, does that make any difference than if they were both buying $300 worth of goods? No. Progressives and Socialists care little about economic growth. They care about shared misery. In a capitalist society, some folks are more adept at finding new products and services, and get richer than others. If we try to ’spread the wealth around,’ these producers will have less capital and incentive to drive this innovation and prosperity. Is equality (if it could be achieved) worth sacrificing all of the benefits we reap from the innovations of the “rich”? Yes, Bill Gates is ridiculously wealthy, but aren’t our lives much better off because of the PC revolution (Mac fans can substitute Jobs for Gates and the iPod for PC)?
Mar
19
It’s Called A Correction
Filed Under Economics | 2 Comments
You can call the economic quagmire the world is in right now a “recession,” “downturn,” or even a “depression.” However, in the world of professional finance and economics, especially when dealing with stocks, a downfall is referred to as a “correction.” What is being corrected are the poor investments and behaviors of agents in the economy. When the government conspired to fuel an unsustainable housing bubble, that was incorrect. When banks made loans to people who couldn’t pay them back, that was incorrect. When these people took these loans to achieve the “American Dream” or whatever else kind of excuse they can think of to become the next Carlton Sheets, that was incorrect.
So naturally we should welcome a correction, correct? Not exactly. As Moonbattery reports:
Anyone who doubts that our current economic crisis was largely brought on by liberals forcing banks to apply Affirmative Action to mortgages under the deranged Community Reinvestment Act is referred to one small bank that resisted pressure to make bad loans, the East Bridgewater Savings Bank in Boston. From the Boston Business Journal, via Capital Commerce:
Bad or delinquent loans? Zero. Foreclosures? None. Money set aside in 2008 for anticipated loan losses? Nothing. … The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts. “We’re paranoid about credit quality,” [CEO Joseph] Petrucelli said.
Companies that make bad loans are showered by the government will $billions stolen from us, our children, and our grandchildren. Responsible banks that only make loans that might be repaid are treated very differently. The FDIC is crawling all over Petrucelli’s bank, accusing it of “not advertising and marketing its loan products enough” and giving it a “needs to improve rating” under the disastrous and still operative CRA.
For those unfamiliar, the CRA refers to the Community Reinvestment Act, signed by President Jimmy Carter in 1977. It gave the government authority to pressure banks to make loans in areas they otherwise would not, in the interest of ending perceived discrimination. As usual, the government solution to a problem turned out to be much worse than the problem in the first place. It also set a dangerous precedent for the federal government to make lending decisions based on lofty social goals instead of realities in the housing and credit markets. This led to some very incorrect lending practices.
As the above post shows, even when a correction is trying to take place through the free market, government is there to make sure this doesn’t happen. As I said here, the Obama administration would much rather repeat the mistakes of the past.
What about other efforts to stimulate the economy? From the Conspiracy to Keep You Poor and Stupid:
THAT WAS THE WHOLE POINT! Even the Wall Street Journal doesn’t get it:
Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks…After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.
But that’s what it means for a company to be “systemically important” — that it has obligations to third parties, the failure of which would set off a domino effect of continuing collapse. When it is said that these “funds” are “funneled,” that’s just provocative language for saying that AIG was able to pay its debts, which was the whole purpose of the bail-out.
So it turns out that not only is the free market not allowed to work out our obvious missteps, neither are government initiatives, which were poor ideas to begin with.
Mar
13
Earlier this week, increasingly oft-mentioned on Zoominac, liberal radio show Communism Now! hosted economist Ha-Joon Chang, who was promoting a lovely tome entitled Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.
While Chang and host Amy Goodman were disparaging the system built on voluntary choice and prosperity, the topic came up of what solution exists for government aid to banks. Chang’s response was chilling, but echoed a sentiment that is becoming increasingly and dangerously common. From the transcript (emphasis mine):
AMY GOODMAN: What do you think needs to be done right now?
HA-JOON CHANG: Well, I think one important thing that this country needs to do is basically to abandon this obsession with private ownership and go for nationalizing the banks.
Silly Americans and our stupid obsession with private ownership! Where do we get such silly ideas! Places where folks don’t share this obsession, like sub-Saharan Africa and Eastern Europe are doing so well!
Earlier in the conversation, Chang voiced his disapproval with some of Obama’s economic advisers:
Right. Well, no, I mean, I agree with this sentiment, but the people he put in charge of the economy, like Paul Volcker and Larry Summers, I mean, these are people who actually created this problem. You know, Volcker is, if you like, the godfather of monetarism in this country.
First off, I believe the title of “godfather of monetarism” should be bestowed on the late Milton Friedman. And while I’m not Paul Volcker cheerleader, his opposition to inflation, along with the Reagan tax agenda, saw one of the greatest economic turnarounds in American history in the early 1980’s.
Chang also voiced his support for American protectionist economic policy, citing its frequent use in the past. While protectionism has unfortunately shown its ugly and destructive face many times, the record of results is clear: It doesn’t work! I dabbled a bit in this subject here.
Folks, its important to know where liberal economic policy will lead us, and what we’re up against. If you’re not ready to “abandon this obsession with private ownership,” then you need to keep a close eye on the communists in our midst.
Mar
9
A Not So Looney Toon
Filed Under Economics | Leave a Comment
LibertarianRepublican featured the following video from 1948 about a salesman peddling a little “Ism” to some American groups:
As the video shows, this “Ism” could be socialism, communism, or just collectivism in general. This is one of the better and more straightforward videos explaining the difference between individualism and collectivism, and the supreme dangers of the latter. The main points of the video were:
- It is very hard to define “American.” Whether it is a teenager, a senior citizen, mothers, fathers, blacks, whites, and everything in between, an “American” can best be described at an individual level instead of as a member of a group.
- Someone seeking power, like the hat-wearing politician or the snake oil salesman, will often employ a strategy of lumping people in groups (labor, management, farmers) and prescribing collectivist solutions rather than allowing individual decisions. Such practices are especially effective in a time of duress.
- Visions of “utopia” will come at the cost of freedom, and any attempts to slow or stop utopian programs will be met with charges from interest groups of slowing progress (much like what happened with the bailout and stimulus bills).
Regarding capitalism specifically:
- “Capitalists,” “investors,” and “speculators” are very often regular, hard working people who use their hard earned savings to fund further growth.
- This capitalist-fueled growth provides jobs and prosperity for many new generations of people.
- Like in the case of Doakes Motors in the video, entrepreneurs, capitalists, workers, and consumers are all better off by having the freedom to voluntarily cooperate with each other motivated by their own self-interest.
- Society is better off collectively by allowing individuals to experiment and take on risk to develop new products and services for a profit. Socialism may say they support the masses, but what system is built on the premise that everyone, even a lowly mechanic like Joe Doakes (or Henry Ford, or Michael Dell, or Eli Whitney, or Oprah Winfrey) may be the next innovator who changes the world?
Nowadays, we can see how prophetic a cartoon like this is. As “John Q. Public” warned:
“When anybody preaches disunity, tries to pit one of us against the other, through class warfare, race hatred, or religious intolerance, you know that person seeks to rob us of our freedom and destroy our very lives.”
See anything like that here?
It is true that from 250 up – from 250 – 300 or so, so for that additional amount, you’d go from 36 to 39%, which is what it was under Bill Clinton. And the reason why we’re doing that is because 95% of small businesses make less than 250. So what I want to do is give them a tax cut. I want to give all these folks who are bus drivers, teachers, auto workers who make less, I want to give them a tax cut. And so what we’re doing is, we are saying that folks who make more than 250 that that marginal amount above 250 – they’re gonna be taxed at a 39 instead of a 36% rate.
Step 1: Divide the public (business owners vs. workers like bus drivers, teachers, auto workers). Step 2: Make promises (”tax cuts,” healthcare, “green jobs). Step 3: Go after the villians (entrepreneurs, the wealthy).
Feb
23
Because It Worked So Well Last Time…
Filed Under Economics | 2 Comments
This week President Obama introduced his plan to use the resources of the federal government to attempt to stabilize the housing markets and, hopefully, the economy at large. The plan uses two strategies: allow homeowners who are current but have negative equity to refinance into a lower-rate loan under Fannie Mae and Freddie Mac, and to use incentives to “encourage” mortgage holders to modify loans where the borrowers are already behind on their payments. Why did I put “encourage” in quotes, you ask?
But the administration is also wielding a big stick. It will work with Congress to amend bankruptcy laws to allow judges to modify mortgages, a step community advocates say is badly needed but that the financial industry abhors.
If lenders don’t do what the government “encourages,” they could be in for some nasty surprises.
In bankruptcy cases, President Obama favors judges having leeway to reduce or “cramdown” the principle of the mortgage or rewrite the terms unilaterally. This blatant disregard for the rule of law will not only void agreements made volutarily by the the lender and borrower, it will greatly discourage banks from wanting to enter the mortgage market if they know that a contract can be voided at the will of a bankruptcy judge. Then again, that may not be a problem when all of the banks are owned by the government.
When Communism Now! covered the plan, they were glad to see that the bankruptcy courts would now be extorting lenders. Said guest Josh Zinner (emphasis mine):
So many people are underwater. They owe more on their mortgage than their house is actually worth. And this plan right now would do little for them. In bankruptcy, what a judge could do is cram down the amount owed down to the value of the property, and then a judge would be able to modify the terms of the mortgage—reduce interest rates, freeze interest rates on adjustable mortgages, adjustable-rate mortgages, extend the terms of loans.
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The reason it’s critical is that right now there’s really no stick to mortgage servicers. There’s nothing to force them to do these modifications that are in everybody’s best interest, and they’re not doing them. If they’re facing an impending bankruptcy filing, that’s going to change dramatically, and it will cause them to do a lot more modifications within the parameters of the plan. So these changes are really critical for this plan to work.
Those on the left excuse such actions by being in ‘everybody’s best interest’. The CNN article quoted Obama in his speech in Arizona:
“In the end, all of us are paying a price for this home mortgage crisis,” Obama said. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit.”
The question I pose is, if such actions really are in “everybody’s best interest,” then why the hell aren’t they doing them in the first place?
First of all, I realize that banks cannot profitably foreclose on every loan that falls behind and that voluntary loan modification is indeed in their best interest. If banks are failing to do so in these cases, its probably because they know they can wait for a plan like the one listed above to pay off their poor lending decisions.
However, in many cases it is not in their best interest. Its important to remember that, save a select minority of cases, these mortgages were agreed to voluntarily by the lender and borrower, and that the lender is the one that paid for the house. Borrowers have no right to demand that the bank or anyone else pay for their decisions. Whether a mortgage modification is in the best interest of the lender is the decision of - the lender! Not a borrower, a judge, or a politician.
The first part of Obama’s plan will have Fannie Mae and Freddie Mac take on even more loans, that, by definition, are significant credit risks because the program targets loans that exceed the actual value of the home. Not only is this taking on a risk in gross dollar terms, but a homeowner will have less incentive to keep up payments on a home that has no or negative equity rather than in a home that they do have equity. As we have seen, over the last decade especially, is that not only are Freddie Mac and Fannie Mae inept at assessing credit worthiness, their sheer size makes any problems they have for the reasons stated above particularly harmful.
In an article entitled How US mortgage debt could cause a global financial crisis, Dan Denning states:
In the US, Fannie Mae (FNMA) and Freddie Mac are Government Sponsored Enterprises (GSEs) which buy residential mortgages and repackage them to sell on as mortgage-backed bonds.
Denning then reviewed statements from former Treasure Secretary Henry Paulson:
The large size of GSE mortgage portfolios (about US$1.5 trillion), coupled with the lack of market discipline at correctly pricing the risk of GSE debt, multiplied by the interconnectivity of the world’s financial institutions has led to a possibility ‘without precedent.’ Henry adds that ‘Financial markets across the board would likely become very illiquid and volatile as firms with significant losses attempted to unwind their positions.’
Paulson is later quoted as saying:
“Has it been so long that we have forgotten Fannie Mae’s significant financial troubles in the late 1970s and early 1980s? During this time period, Fannie Mae’s balance sheet looked a lot like a savings and loan. As interest rates rose, Fannie Mae’s cost of funds rose above the interest rate it was earning on its long-term, fixed-rate mortgages. Like many S&Ls, Fannie Mae became insolvent on a mark-to-market basis. It lost hundreds of millions of dollars.”
So the risks of Fannie Mae and Freddie Mac taking on loans that are inherently dangerous could have lare-scale effects throughout the American and global economy. But what is so interesting about the above article?
It was written in July of 2006.
The current conundrum we are in was not only foreseen and preventable, but directly attributable to the overleveraging of government sponsored enterprises (GSE’s) Freddie Mac and Fannie Mae. I thought the Obama administration was all about ‘change’ and not repeating the mistakes of the Bush administration. Please. Obama is Bush on steroids. In addition, having the government refinance such loans is just a ‘bailout’ for the ’speculators’ who own the mortgages. Didn’t Obama vow not to protect these evildoers?
The following well-circulated video from 2004 is an example of the kind of big-government, Democrat-Party-style policies that led to this mess.
Obama’s plan would only increase an unsustainable, government-fueled housing bubble.
I’ll close with Dan Denning’s last line, in response to Paulson’s remarking of the hundreds of millions of dollars lost by Fannie Mae in the 1980’s:
If the same thing happens today, you can replace ‘hundreds of millions’ with ‘trillions.’
Feb
10
Anatomy Of A Collapse
Filed Under Economics | Leave a Comment
From Newsbusters:
CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.
The Bush administration made many mistakes, but deregulation was not one of them.
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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.”
The above quotes are from an editorial by Scott S. Powell. You should read both pages completely. When Barack Obama is using fearmongering to crush dissent and warning Republicans to not bring “old,” “failed,” or “rejected” free market policies that “got us into this,” he is lying. And he knows it.
Feb
9
This video is from What You Ought To Know, and was posted at Coyoteblog. Watch the whole thing:
In a nutshell, the current financial crisis was caused by Republican cronyism and failure to keep the Democrat social engineering policies in check. A ‘bailout’ only exacerbates the problem by encouraging the behaviors that led to the crisis in the first place.
There are several other videos at the site, so I think I’ll check ‘em out.
