The mess continues...

My sister, Jodi, had a blog post dealing with the situation. She posted a video from Rachel Maddow talking about the mess...the following is my answer to her blog...

Who gave the six-year-olds all of the candy to begin with? Congress--by manipulating the credit market and encouraging sub-prime loans. There is plenty of blame to go around as my analysis of the mess shows.

Even Bill Clinton agrees with me...as he said on GMA this morning responding to a question about the changes to Fannie and Freddie in 1999, "Well...I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the Congress...to put some standards and tighten up a little on Fannie Mae and Freddie Mac."

The answer to the problem, however, is NOT to put taxpayers on the line with this bailout. As Rachel's piece mentions (very briefly, but...you know...consider the source)...very conservative members of Congress are balking at this. THIS PLAN IS NOT THE ANSWER...LET THE MARKET WORK IT OUT AND LET THE CHIPS FALL WHERE THEY WILL!!!

Remember (even with Ms. Maddow's snarky comment)...THE GOVERNMENT IS NOT THE SOLUTION TO THE PROBLEM...THE GOVERNMENT IS THE PROBLEM!!!

Oh, how I wish we had a leader in charge instead of a bunch of POPULISTS like Obama and McCain.

We should reform Sarbanes-Oxley, cut the capital gains tax to ZERO, (The natural influx of capital from that will take care of much of the fallout of this mess), and cut corporate taxes (currently the 2nd highest in the industrialized world). This would increase capital flow and alleviate the crisis in the credit market.

The Status of the Bailout Debate

My friend, DJ, has a great post on the bailout debate. If you are interested, it is a short read!

42 Days to Election Day--Finally, my analysis of the financial "crisis"

Well here we are at the end of September facing a proposed $700 Billion nationalization of the financial sector of our economy and likely with a gaggle of potential companies, industries, and individuals lining up with their hands out for the next big government giveaway...

How did we get here?

This is not an easy question...there are many policies, programs, and institutions with all sorts of culpability in this mess. One thing I can say, however, with certainty--THIS WAS NOT A FAILURE OF THE FREE MARKET!!! My friend, DJ McGuire, the free market was never tried! His post is worth reading (including several other of his posts related to this mess).

I believe the root of this problem goes back several decades, but can be diluted to a short phrase...AFFORDABLE HOUSING and Fannie Mae and Freddie Mac are the culprits along with several policies affecting their operations over the last 40 years. As Kevin Hasset posted on Bloomberg.com on 9/22, "Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened."

So, what are the policies which made Fannie and Freddie the liabilities they would become?

1. The creation of Fannie
   As part of FDR's New Deal, Fannie was created as a government agency in 1938 to provide liquidity to the mortgage market. As my friend, DJ McGuire, said in a well-researched post, Fannie was "set up to provide loans to banks that they themselves could loan out to homeowners. Since these were government loans created from a policy deliberately designed to make homes 'affordable,' the banks treated it like the free money it really was, and loaned it out like they were supposed to do. Thus did the government begin artificially inflating property demand."


2. The quasi-privatization of Fannie and the creation of Freddie
   In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, the Johnson Administration converted into a private corporation. To provide competition in the secondary mortgage market, and to end Fannie Mae's monopoly, Freddie Mac was created by the Democratic Congress as a private corporation in the Emergency Home Finance Act of 1970 created. The goal was to create a secondary market for conventional mortgages, as indicated in the Fannie Mae charter.
   Again, from DJ's post, "So now, there were two companies, both ostensibly private but with obvious government favors, government ties, and the implied government backing that came with them..." (emphasis added). It was this implied government backing that propped these entities up, with investors knowing that the government would never let them fail!


3. The Community Reinvestment Act
   The Community Reinvestment Act (CRA) was passed during the Carter Administration. It was passed in order to make sure that each banking institution was meeting the "credit needs of its entire community." It sounds harmless enough, but it was used to force lenders to begin to extend credit to less-than-creditworthy people in the name of "fairness" and "diversity."
   According to a commentary by Yaron Brook in Forbes, "The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?"


4. The Community Reinvestment Act Revised and Extended
   In 1995, the Clinton Administration further liberalized the CRA and the Reno Justice Department warned lenders against "redlining" and stated that the Adminstration would take strong action against any suspected instances of the practice. Again, seems harmless enough--even noble--but it was used to force more sub-prime mortgages onto the books. These revisions with an effective starting date of January 31, 1995, were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans (sub-prime). These changes were very controversial.
   According to Yaron Brook's article, "In a free market, lending large amounts of money to low-income, low-credit borrowers with no down payment would quickly prove disastrous. But the Federal Reserve Board's inflationary policy of artificially low interest rates made investing in subprime loans extraordinarily profitable. Subprime borrowers who would normally not be able to pay off their expensive houses could do so, thanks to payments that plummeted along with Fed rates. And the inflationary housing boom meant homeowners rarely defaulted; so long as housing prices went up, even the worst-credit borrowers could always sell or refinance." (emphasis added)
   
5. Sarbanes-Oxley (SOX)
   In an overreaction to a number of major corporate and accounting scandals from 2000 to 2002, President George W. Bush signed SOX into law, on July 30, 2002, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." Indeed--complete with the unintended consequences of these types of market-interfering legislation.
   SOX has crippled entrepreneurial start ups, driven public companies private, driven smart business people off public boards, and driven offerings from New York to London. Congressman and presidential candidate Ron Paul has been a vocal critic of SOX, specifically Section 404, citing, among other things, that "Financial analysts have identified Section 404 as the major reason why American corporations are hoarding cash instead of investing it in new ventures."(emphasis added).
   Taking such a large amount of capital out of the market has added to this current "crisis".


6. Refusal to heed warning signs
   In a commentary on Bloomberg.com, Kevin Hasset points out when the "turning point" happened in this mess.
   "Back in 2005, Fannie and Freddie were....enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004...the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even 'on the page' of allowable interpretations.
   "Then legislative momentum emerged for an attempt to create a 'world-class regulator' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
   "The clear gravity of the situation pushed the legislation forward.
   "What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
   "But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter."

Now, I realize that the preponderance of this focuses on the Democrats and what they did over the last four decades. However, I also blame the Bush Administration for not taking a much stronger position in this mess much earlier. Bush's SOX policy and the lack of pushing for the 2005 reform of Fannie and Freddy were also inexcusable! As mentioned in a Politico.com article by Jeanne Cummings, "One of the Bush administration’s signature goals has been promoting an 'ownership society.' To achieve that end, the administration promoted a series of programs designed to encourage consumers to buy homes, stocks and other goods that would convert them into free market advocates."

The Bush Administration has also been quick to bail out the actors in this mess...as I have quipped, we are nationalizing faster than Chavez and Venezuela! Unfortunately, we have a lack of true leadership in this country--and what passes for it often is a poorly disguised populism (as we can see from The One and McCain). The Administration should have said in no uncertain terms that Fannie and Freddie are private entities and not secured by the US government. If that meant the two of them had to go bankrupt, so be it and let their investors take the hit! That is what happens in the free market--entities must be free to FAIL!!!

There is a great article that captures much of my sentiment on all of this in the Washington Post, of all places. Here is a short excerpt (emphasis added):

"I've been financially responsible with my own money. Why should I now be responsible for the fact that you were not?" he said.
This may be a Main Street bailout backlash in the making. The details of the financial crisis are still hard for most people to follow -- what with talk of exotic "derivatives" known as "credit-default swaps" and so on -- but the central fact of the matter hasn't been lost on anyone in this Northern Virginia community: The taxpayers are on the hook for the bad judgment of others.
And they say they don't like it. They didn't break it, but now they've bought it. Political leaders and financial titans say the bailout is necessary to save the economy, but on the ground, in such places as Manassas Park, people think that the bailout will reward the wrong people. There's a sense that too many folks bought houses they couldn't really afford, banks urged them on, common sense went on vacation, and now the grown-ups have to clean up the mess.
"If I spent more money than I have, I don't deserve to have somebody bail me out," said John Owens, 45, a developer who lives on Eagle Court, where three houses have gone through foreclosure.
The anti-bailout sentiment appears to cut across class lines. You hear it from one end of Manassas Drive, the main drag through town, to the other -- from the small, Cape Cod-style homes built with G.I. Bill money after World War II to the muscle-bound houses newly risen along the golf course.
"I'm not overextended," Merkle said. "I didn't buy a large home that I can't afford. I'm not behind on any of my payments. I'm not sure I want the government to take my tax dollars and buy someone else's house for them."

Thank you for your patience and your attention...will get back to the election tomorrow!

Election update--43 days until Election Day!

My analysis of the financial mess is coming...I promise!

Here is the status of the race as of today (and over the weekend):

Electoral-vote.com has a good overview of several new polls over the weekend (a total of 34 state polls--15 released on Saturday, 11 on Sunday, and 8 today).

Iowa seems to no longer be in play...in several polls, The One has shown significant leads (+11, +7, +14). However, might we have some more states becoming swingers? Maine is within the margin of error (The One +4) and Washington has tightened (The One +6); however, The One has been consistently ahead in both, so unless the wheels are coming off (wishful thinking on my part), I do not see these really being in play. Indiana continues to surprise with McCain showing only a 2-3 point lead. Indiana has been a solidly red state, though, and McCain has been consistently ahead there, so again, I do not think it is really in play either. Missouri continues to track toward McCain, with the latest poll showing a McCain +4. Missouri, which has been a swing state over the last several cycles, has been fairly consistently in McCain's column as well--I no longer think it is in play either.

The polls in FL, MI, MN, OH, PA, and VA over the weekend continue to show that these are indeed the ones to watch this year (along with NM, CO, NV, and NH). I believe that like IN and MO, Florida and Virginia are not really in play this year. McCain has shown a consistent lead in both (although only by 1-2 points currently in FL and 2 points in VA--the smallest amount in a while) and the strength of the military in both states make me think that the margin will not be that close in November. Meanwhile in MN, while only showing a 1 point lead for The One in today's poll, is unlikely to switch to red this year (although I will keep hoping!).

That leaves the Lake Erie states--OH, PA and MI. In the polls released this weekend, The One shows a lead in each of the states with Ohio continuing to be the closest (and the one with the most electoral votes). Ohio polled for The One +2 in one polll and for McCain +6 in antoher. Pennsylvania increasingly seems to be tilting back to The One, with a +5 advantage in the latest poll, while Michigan showed The One ahead in three polls by +1, +2, and +9.

Current electoral prediction (270 needed to win):
Saturday--McCain 265, Obama 273
Sunday--McCain 265, Obama 273
Today--McCain 265, Obama 273

Watch an animated map of the electoral vote since June...

46 days to go--The Financial Meltdown...my thoughts

Sorry, folks...I am trying to write about this mess...but because of the difficulties involved, it is taking more time than I thought. I will try to have a synopsis this weekend!

As for the presidential race...Electoral-vote.com has a good overview of several new polls out yesterday and today (a total of 68 state polls--either The One was closer to the real number of States in the Union than any of us realized, or there are several States being polled more than once!). It seems that the State polls continue to become closer in several swing states--CO, NH, IA in particular. Can it be that OR could come into play?

Current electoral prediction:
Wednesday--McCain 257, Obama 247, 34 tied (PA and VA)
Yesterday--McCain 274, Obama 243 (270 needed to win), 21 tied (PA)
Today--McCain 265, Obama 252, 21 tied (PA)

New Mexico switched back and forth on Wednesday to Thursday,
Colorado switched back and forth yesterday and today.

Watch an animated map of the electoral vote since June...

48 Days Until Election--Barak Obama

It will come as no surprise to any that know me that I have serious problems with the junior Senator from Illinois. My main problem has everything to do with his liberal worldview and his seeming naivete.

First let me say that I doubt that any person elected to the office of President can damage our country beyond repair in four years, so I do not share the near despair about a possible election of The One that some of my conservative brethren seem to have. An Obama presidency will significantly damage our military, our ability to respond to real threats, push our economy over the brink, damage industry, increase unemployment, and move us too close to socialism; however, these things can be overcome with time. I also have the view that it took a Carter to get a Reagan, so Carter II (which The One's administration is likely to be) may have the unintended consequence of giving the conservative movement a needed boost and finally strengthen the Regan Revolution to ascend to power for a much longer period.

I worry about the lack of experience that The One has. He has not had any executive experience and he has held high elected office (US Senate) for only two years before he decided to begin a run for president. During his tenure he has not written any major legislation--not that I am complaining, his politics would make just about anything he would write dreadful. His record in the Illinois State House is spotty, as he would often not vote at all. But my main concern is his belief system--his liberal worldview is very much in line with the socialism of Europe.

He will raise taxes on businesses (by the way, businesses do NOT pay taxes, they pass them on as a cost of doing business--who do you think ends up paying these taxes?) putting strain on them in an economy that is barely hanging on...this will cause less employment and likely increase unemployment. He calls it taxing the "rich"-remember, many small businessmen report their taxes on their personal tax returns...the "rich" are the ones that employ people.

He will continue to oppose offshore drilling, drilling in ANWR, clean coal technology, and nuclear energy. All this will do is increase our dependence on foreign sources of oil. Let's be clear here, there are no viable alternatives to oil for our transportation infrastructure in the near future. There are areas where we can improve and should, but to ignore the reality that we MUST develop our own sources of crude production outside of the Gulf of Mexico--having 25% of our production concentrated in one area is a national security issue.

He wants to sieze the "excessive" profits of the oil companies. Does anyone believe that this will do anything but INCREASE the cost of this product to the consumer? Besides, making 9 to 10 cents of profit on every dollar of revenue is hardly "excessive". Coke, Pepsi, Anhieser Busch, Google, GE, etc., etc. all make MUCH MUCH more. How about siezing the "excessive" profits of trial lawyers, entertainers, movie studios, media outlets?

Abortion...he is wrong on this issue and I will leave it at that. His appointments to the Supreme Court would also be absolutely wrong, but since the most likely appointements will be to replace the liberals on the bench...it would be status quo. I would prefer more conservatives, but at least we will not lose there.

And finally, health care for all...can we trust the government, who cannot handle its duties that are already at its feet, to handle something as important as this??? Your new health care plan--brought to you by the same government who has bankrupted social security and could not handle Katrina.

There are so many other areas, but this is enough for now.

OK--Here We Go! 49 Days to Election Day

I am going to attempt daily blogging (except maybe the weekends) until the election. This election (like the three prior) is VERY IMPORTANT for so many reasons, and I feel I must get my thoughts down on virtual paper!

My friend, DJ McGuire in his latest post about the election has broken it into three main points. His blog is worth the read. I suggest that he is correct that the election is much closer than the conventional wisdom has been willing to mention (at least until lately) and that the election now seems to be trending toward McCain ever since the excellent selection of Governor Palin to be the VP candidate.

I have made no secret that I have not been a fan of the Republican presidential candidate. My longstanding view is that when conservatives do not have someone to vote for, the Republicans lose elections. Governor Palin gives us someone to vote for--perhaps McCain has snatched victory from the jaws of defeat! Over the next few days I will give my opinion on the candidates, the issues, and the current events swirling around the campaigns.

For this post, I will give my estimation of where we are currently...

I am a fan of Electoral-Vote.com and use this site to follow the election. The person who maintains this site is left-leaning, but he tends to give relatively good analysis. It has been this site that has helped me predict the last election.

As you should know, it is the Electoral College vote that counts, not the popular vote. There is a good chance that Senator Obama (who I will refer to as "The One") wins the popular vote by a greater margin than Mr. Gore in 2000, but loses the electoral vote.

I have the following 16 states solidly in The One's column: CA, CT, DC, DE, HI, IA, IL, MA, MD, ME, NJ, NY, OR, RI, VT, and WI. This is a total of 207 electoral votes.

I have the following 25 states solidly in Senator McCain's column: AL, AK, AR, AZ, FL, GA, ID, IN, KS, KY, LA, MO, MS, MT, NC, ND, NE, OK, SC, SD, TN, TX, UT, WV, and WY. This is a total of 227 electoral votes.

The nine swing states (at least as I see them now) are CO, MI, MN, NH, NM, NV, OH, PA, and VA. Right now, CO, MI, MN, NH, and PA are leaning toward The One (total of 61 EVs), and OH, NM, NV, and VA are leaning toward McCain (total of 43 EV's) . With leaning states in the respective columns, McCain leads 270 to 268. My opinion of the swing states is that CO, OH, PA, and NM are the most volitile and will be the ones to watch...

Interesting thought...if McCain takes PA and The One takes OH and all others stay in their respective columns, we get a 269-269 tie (there are several ways this could happen) and it is off to the House of Representatives where each state gets one vote for President (so the congressional delegations for each state vote...this could make for some interesting deal making) and to the Senate, where each Senator gets a vote for VP. Electoral-Vote.com had an analysis of this scenario on September 11 this year.