Bailout pork

USA Today article:

The relationship of catfish to economic stimulus might not instantly be obvious, but to the Catfish Farmers of America, it's perfectly plain that $50 million in government assistance would help avert a collapse of catfish farms that would spread further economic pain in already depressed Southern states.

The American Library Association says $100 million for libraries would help people get back to work, and the American Association of Port Authorities wants $6.8 billion for harbor maintenance as part of an economic plan. The National Retail Federation wants a series of tax-exempt shopping days. The Air Transport Association has a $4 billion wish list for runway construction and new avionics, and the National Automobile Dealers Association wants a "cash for clunkers" program that would help people trade in old, inefficient cars for new ones.

What's much less clear is how to spend all that money in ways that will actually help the economy, rather than fund nice but non-essential projects, or utterly wasteful ones that reward campaign contributors or help a powerful member of Congress build a bridge to nowhere. In ordinary times, the idea of bailing out the catfish industry would be laughable, and perhaps it still is, but if that's your livelihood, or the biggest employer in your town, suddenly it's not so funny. The problem is, just about every industry and special interest could make the same pitch.

And that, folks, is the fundamental problem with government choosing who lives and who dies.

Maybe there are simply too many catfish farmers producing more supply than the market demands, driving down prices across the board. Rather than propping up the whole industry with subsidies and bailouts, we need to let a few go out of business. This will reduce supply and cause the price to rise naturally until the remaining efficient producers are profitable.

The same can be said for all industries (and farmers).

It will certainly be painful for those impacted, but better for the nation as a whole.

Wow, just wow

WSJ article:

President-elect Obama has pledged a $1 trillion stimulus package. To put it in perspective, that sum would exceed, in inflation-adjusted dollars, government spending on the New Deal, the
savings-and-loan crisis and the Marshall Plan combined, according to Bianco Research.

USA Today article

This [stimulus package] is expected to carry a price tag of as much as $850 billion over two years. How much is that? Think of it this way: It's twice the $425 billion (adjusted for inflation) it took to build the 42,700-mile interstate highway system started in the 1950s, and more than the entire cost of the Vietnam War ($698 billion). It's huge.

So-called income inequality

This weekend I read an article in the AJC about so-called income inequality.

It had the typical AJC slant. For example:

• Is the middle class no longer being left behind?

In Georgia, the answer to those questions up to now has been no, according to data released earlier this year by the U.S. census.

While the typical Georgia family’s income hasn’t grown so far this decade, after accounting for inflation, the well-off got better-off.

The number of Georgia households making more than $200,000 a year jumped more than 70 percent between 2000 and 2007, while the number of households making less than $75,000 stayed relatively stagnant. Some of that trend was the result of wage inflation, since the income brackets were not adjusted for inflation since 2000.

That sure looks to me like like something got better! More and more Georgian households are earning more than $200k. Isn't that upward mobility? It doesn't say that those earning more than $200k made even more and everyone else lost. It says *more* are getting richer, and those who aren't getting richer are about the same.

It goes on in much the same vein for awhile, then reaches what the author presents almost as a snide toss-off comment:

Experts cite differing reasons for the growing gap, partly depending on where they fit on the political spectrum.

Republicans tend to call it a natural consequence of free markets and innovation, such as advances in technology, which drives up the incomes of some but also displaces other industries and workers.

This make sense to me, but I guess I'm on that end of the political spectrum the author is discounting. It is certainly a truism that, except for professional athletes and supermodels, those who make their living with their brains will earn more than those who make their living with their bodies. Remember, farriers and buggy-whip makers were in displaced industries.

I remember fairly recently a plant in metro-ATL was closed and some 300-400 workers lost their jobs. There was a sob story in the paper that highlighted the 27-year worker who cried "I don't know what I'm going to do now. This is all I know." (Something like that). This plant made cassette tapes. I wondered strongly at the time how many of those people honestly expected that the demand for cassette tapes would remain high enough to keep them employed? I wondered how many of them had CDs and digital answering machines? CDs were introduced in the 80's so they had something close to 20 years to contemplate the potential for cassette tapes to loose their luster, just like they surpssaed their vinyl bretheren (who surely faced similar problems). In fact, cassette tapes sales surpassed vinyl LP sales in 1982, and CD sales surpassed vinyl LP sales in 1988, and CDs surpassed cassettes in 1992.

Back to the article, and this is the most telling paragraph, the toss-off:

Others argue that the gap has been growing because the affluent have benefited from Bush administration tax breaks. Meanwhile, middle-class and poor Americans have seen their incomes fall behind the wealthy as employers cut health and pension benefits, and the government trims spending on education, health care and child care.

Reading this another way: "When the government allowed some people to keep more of what they earned, they got richer. Those who depend on the government got poorer when the government cut back." Typical.

Tragedy of American Compassion

This is a book I've been reading on and off (more like thumbing through and reading chunks, it's a bit of an academic slog). This quote has fascinated me:

Lyndon Johnson's economic advisors warned in 1964 that the poverty rate, in the absence of federal action, could be as high as 13 percent by 1980. After sixteen years of multi-billion dollar programs, the poverty rate at the end of that year was--13 percent.

It goes on to say:

Lack of mobility was not caused by lack of opportunity--the dramatic successes of immigrants from Asia and Cuba during [the time period] shows that. Those who adopted the traditional work-hard-and-rise pattern by staying out of the welfare system usually succeeded in rising--but native-born Americans who took advantage of the proffered liberality stayed put. Some welfare recipients even gave up jobs and educational opportunities in order to remain in the poor but secure spot that welfare payments afforded them.

My next car will *not* be a Chrysler/Dodge (or GM)

Since my college "beater" (mazda 323), all our cars have been Chrysler or Dodge. Over the years, we've had a Sebring, 2 Dodge Durangos and a Chrysler 300M parked in our garage. There was a Saturn in there somewhere, too. My parents drove Chrysler's for many years, and even my mother-in-law has also had two Durango's after she replaced her Chrysler Concorde.

This moring when I was driving to work (in my 300M) I heard Pres. Bush's presser where he gave the auto makers (Chrysler, GM) $13.4B in loans, basiclly requiring them to promise to try to do better. There's $4B more in the wings in case they need it too. There's a scary threat of calling the loan if they haven't made progress on their promises by 31 Mar 09. Does anyone think that's going to happen under an Obama/Pelosi/Reid troika?

I called Mrs. Percy to tell her what I just heard on the radio. We both said, talking over each other at the same time, "I guess we've bought our last Chrysler product, GM too for that matter."

Comparing GM against Toyota

Bailing out the Big 3 is a bad idea all around (as was the financial industry bailout--two wrongs will not make a right here). Here's a perfect example of why (from WSJ article):

But the $15 billion auto rescue plan failed in the Senate last week. As Minority Leader Mitch McConnell said, the American taxpayer should not be asked "to subsidize failure." The failure can be seen in the comparative financial data: both Toyota and GM, for example, made about 9.4 million vehicles last year. But as Investors Business Daily notes, Toyota made a profit of $1,874 per car, while GM lost $4,055 per car, or $38.7 billion, and almost all of those loses were due to its U.S. operations.

Consider also that GM lost billions in a failed partnership with Fiat, and ultimately paid Fiat $2B just to get out of the deal. GM also posted total net loss of $1.419B in 2004 and $2.697B in 2005, years in which the economy was not collapsing! According the the GM's annual report "The 2005 total net loss is primarily due to the impact of Delphi benefit guarantee charges offset by favorable income tax items." In other words, they lost billions of dollars on their Delphi parts manufacturing subsidiary as they had to rework the UAW's benefits package. Oh, and that seems related to the fact that Delphi was in Chapter 11 bankruptcy!

Yes, I've been too busy to update

I was sick for awhile and then had to catch up back at work.

Here's just a tidbit for the moment. Something about the Big 3 bailout failure last night:

The group came close to agreement, but it stalled over the UAW’s refusal to agree to wage cuts before their current contract expires in 2011. Republicans, in turn, balked at giving the automakers federal aid.

Reid called the bill’s collapse “a loss for the country,” adding: “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

It's now 1:35, and although the market was down earlier, it stands at DOW +12...oops, now back to DOW -9. If that's what Harry Reid "dreads" he's got a weak constitution. Maybe later in the day it gets scary?

Social Security privatization

In the AJC Vent today:

The only thing that could have made Bush more unpopular than he is now is if he’d prevailed in investing Social Security funds in the stock market.

This and comments like it have been common lately, and always they miss the point. They seem to assume that all Social Security money would have been in the stock market and all would be lost now.

This is of course wrong. The Bush plan called for a transition to a combination of a government-funded program and personal accounts through partial privatization of the system. A portion (about 1/4) of the mandated "contribution" or "premium" would have gone not into the Government's big pot-o-money with a promise that you'll get something back (probably, maybe if you're lucky) but rather into an account in your name. You'd have gotten a modicum of control over that money, as that portion could have been invested in various managed investment funds similar to the government employees' retirement plan in which the investor can choose between Treasury bills, public and private (corporate) bonds, and stock market funds. The rest of the normal SS taxes would continue to go into Government hands as normal.

The risk-averse could have simply had the money go into T-Bills and been just as "safe" as if there were no accounts. Younger, more savvy, and less risk-averse could place their monies in the stock market, just like anyone can when they fund an IRA or a 401(k). Yes, they could lose money; and yes, they could retire during a downturn where their account might be worth less that it had previously. These are risks that each indivual should be able to chose for themselves.

Wikipedia link says that the Heritage Foundation calculates that a 40-year-old male with an income just under $60,000, will contribute $284,360 in payroll taxes to the Social Security trust fund over his working life, and can expect to receive $2,208 per month in return under the current program and claims that the same 40-year-old male, investing the same $284,360 equally weighted into treasuries and high-grade corporate bonds over his working life, would own a PRA at retirement worth $904,982 which would pay an annuity of up to $7,372 per month (stocks could produce even larger returns, but with commensurate risks).

Aside from the high likelihood of increased rate of return, one big difference would be that the account is your money, not some IOUs the government's file cabinets. If you die, you could leave that money to your heirs. This could have a marked impact in the black community, since currently Social Security essentially transfers money from working black men and women (who die earlier) to older white women who live the longest.

Finally, consider this link explaining how three counties in Texas that provide private Social Security to its employees. USAToday also weighs in on this.

Of course, the SSA has a different view, one that stretches hard to discredit the Galveston plan, especially since they seem to base many of the negatives on what might happen in 2045 and what happens after you've been drawing on your retirement for more than 20 years (in earlier years benefits are higher, often much higher than SSA).

Perhaps most damning "[The Galveston plan does not] provide any redistribution from higher earners to lower earners."

Obama's Language

The left, as exemplified by Obama's own website use words to mean things very different from what I think they mean. Here's a quote:

Obama will ask the wealthiest 2% of families to give back a portion of the tax cuts they have received over the past eight years to ensure we are restoring fairness and returning to fiscal responsibility.

Let's consider that this single sentence uses at least three words differently from what I think they mean.

Let's first consider the phrase "Obama will ask..." This is odd in two different ways. First, assuming this sentence implies a change in the tax code, no one will be asked to do anything. They will comply or face fines and/or imprisonment. Second, if there is to be a change in the tax code, President Obama will not be rendering the bill--his role in legislation of this nature is to sign or veto bills (understanding of course that Harry Reid and Nancy Pelosi will be Obama's puppets in Congress, and that Obama's staff may very well draft the bill; the incestuous nature of executive and legislative branches being controlled by the same party is exposed here as evil, whether it be Democrats or Republicans in charge).

Next, the phrase "give back". This is a favorite phrase among the so-called progressives. When I donate to charity, I am giving. I am not giving back. Giving back implies that I was previously given the thing in question. A fiance' may give back an engagement ring, but my income was earned through hours of hard work and so having a portion of my income forcibly taken from me is definitely not the same as giving something back. Now, I'm not trying to discount someone who feels that they have truly received something, say from their community, and feel that giving something to that community for them represents "giving back". Indeed, I feel that my donations to Clemson University are in a way "giving back", since I attended Clemson on a full scholarship (Alumni Frank J. Jervey Scholarship). But paying taxes is in no way giving back, unless you believe that the government gave me my income in the first place [* more on that later].

Finally, we are told that raising taxes will "restore fairness". All I can say is that I have commented before on the very twisted meaning of the word fair that liberals seem to have when it comes to paying taxes. See Because they can afford it parts I and II. The top 1% pays 39.89% of income taxes collected and 41% of the US population will be outside the federal income tax system, essentially free-loading on on other half becuase they have zero or negative tax liability or do not even file a return.

* Federal budget law defines "tax expenditures" as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." Thus it seems that any income that the government lets you keep, the government considers to be a tax expenditure--they start with assuming they have 100% of your income, then count what they let you keep as something they "spent" (gave to you!).

Fast-food ad ban called for

An article in the AJC this week prompted me to write a letter to the editor. Here's the gist of the article:

A little less “I’m Lovin’ It” could put a significant dent in the problem of childhood obesity, suggests a new study that attempts to measure the effect of TV fast-food ads. A ban on such ads would reduce the number of obese young children by 18 percent and obese older kids by 14 percent, researchers found.

My response was:

Kids are not obese because of fast-food ads. There are zero calories in a TV or radio ad, and unless you eat the paper it's printed on, there are no calories in a newspaper or magazine ad. The calories come from actually eating fast food, and we all understand that young children (who have no money or transportation) are being fed fast food by their parents. The fault, therefore lies entirely on the parents who choose to feed their kids obesity-inducing amounts of fast food and chips, cookies, and unhealthy food at home.

Update: got a call today from AJC verifying permission to run my letter. Looks like I'm published again!

And the pigs come back to the trough, again

House Speaker Nancy Pelosi was meeting with the chief executives of Detroit’s automakers to hear their expected plea for an additional $25 billion in federal loans for future health care payments for retirees.

Those who forget history...doomed

In light of all the largesse being doled out to financial and automotive industries--the bailouts--here's an oldie for you.

Remember the bailout of Chrysler and how that worked out for us? Read this paper. Brief summary:

• Chrysler used the federal government to go bankrupt without actually declaring bankruptcy. They reorganized debt, wrote off debt at 30 cents on the dollar because the Act forced their creditors to do so.
• The bailout simply allowed Chrysler to continue bad management practices. To a degree, the rest of Detroit also continued down the same path thinking that they could get a bailout too if it came to it. If Chrysler had failed, maybe Ford & GM would have realized they had a stinking mess on their hands.
• Chrysler repeated tried to renege on their obligations. When the warrants they issued actually became quite valuable, they protested that paying off the warrants amounted to usury. The asked the government to reduce their interest rate from 1% to 0.5%.
• Salaries for top management were adjusted downward as a part of the deal. But as soon as the 2 year term was over, top executives got retroactive raises, despite the $0.5B loss that year.
• Losses accrued during the Act's period were carried forward, meaning Chrysler's tax bill was basically zero for several more years (during which they had record profits).
• Union's forced concessions were nearly totally restored by 1982.

The Conclusions section speaks for itself:

When the loan guarantee program was being considered by Congress, Chrysler's unions and top management constituted the "visible" constituency, pleading its case in Washington and begging to be pulled back from the jaws of bankruptcy. Unrepresented and unheard was a huge "invisible" constituency. They included:

• Current and future laid-off Ford and General Motors workers, who never understood that their tax dollars were being used to destroy their own jobs in order to save jobs at Chrysler

• Small businessmen and private individuals, who never understood that the Chrysler bail-out would squeeze $1.2 billion out of the credit market, making it difficult and more costly for them to raise business capital or finance a mortgage on a new house, all of which would have created new jobs

• Over 60,000 now laid-off Chrysler workers, who expected the bailout to save their jobs

• American car buyers, who never understood that Ford and General Motors would have taken over much of a bankrupt Chrysler's market and produced cars more efficiently, reducing the cost of domestic automobiles.

The problem with the Chrysler bail-out—in fact, the problem with all "industrial policy"—is that it is necessarily political in nature; the loudest interest groups get the greatest reward, while the scattered and fragmented "invisible constituency" is largely ignored. But a free market is a tangled web of infinite and subtle interaction, in which the full impact of intervention is not always recognized until too late. In the case of the Chrysler bail-out, a big chunk of taxpayer money was committed to a shaky and inappropriate venture. Every American became an involuntary and uncompensated partner in a company whose future is still in doubt. The precedent established is extremely dangerous. On top of this, the bail-out even failed in its purpose.

Police not interested in drunk driver

A personal experience Halloween night.

At about 3AM, we were awakened by some loud noise outside our house. As I wandered around the house to see if there was a break-in attempt or something, I heard a very loud grinding sound in the street. Worried that the noise we heard had been someone trying to steal our utility trailer I ran out the front door and around the side of the house where the trailer was parked. It was still there but I could hear the grinding noise headed up the street. I quickly checked some other things like the gas grill on the back deck, etc. All still present, and I could still hear the noise so I went out to the street.

I could see grooves in the road at the entrance to our neighborhood, where clearly a car dragging something heavy had turned around. I realized that there had to have been some sort of accident and that they had driven away. I figured drunk driver, and was worried as to whether there may be anyone hurt. So I got some pants on and got in my car and drove up the road. I never saw any other evidence, just the grooves in the road. So I decided to follow them in case this idiot did some more stupid things.

The grooves weaved all over the road, in a very circuitous route through neighborhoods and even out onto Roswell Rd (120) for a short stint. Eventually I tracked the grooves all the way to Bonnie Glenn apartments on Power's Ferry Rd where I found a dark 4-door Honda on two tires--the passenger side tires were gone and the rims where ground down to the axle. I took down the license plate number and came home, not wanting to get in any sort of confrontation.

Mrs. Percy dialed the non-emergency number for the police and we described what we had seen, heard and discovered. The police operator repeatedly said that there's nothing to be done since there was no damage to our property (or any property that I had seen) and the car was now parked. I at least made sure to give them the license number and location in case this car might have been involved in a hit-and-run before they drove up in our our neighborhood.

After golf Saturday morning (played horribly again), I decided to go back up the road to see if I could find out how all this started. I walked about 3/4 mile up Old Canton following the grooves backwards hoping to find the origin. What I discovered was that the car had apparently been going north on Old Canton, had tried to turn left into a neighborhood about 100 yds north of Robinson, missed the turn, drove up onto the sidewalk, took out a bush and probably hit a phone pole but not hard enough to do any significant front-end damage.

They backed out of that mess, got back on Old Canton southbound, and quickly managed to run up onto the sidewalk again. The twin rubber stripes on the curb indicated to me that this was where they lost their tires. Now up on the sidewalk, they stay up there for a bit, narrowly avoid a mailbox, then swerved back onto Old Canton Rd using a driveway as a launching point. About 100 more yds south on Old Canton, their tires must have gone down entirely because there's some indicatation that they pulled off the road again. It looks like that's where they got out to check the damage. They had to back-and-forth to get out of the grass and back on the road. Shortly thereafter they tried to do a U-turn using the extra width our neighbohood entrance provided. Of course, they missed, tore up the curb and did more damage to their front rim and narrowly missed hitting a sign pole.

They back off the curb, completed their U-turn and drove off north again, where I tracked them as I described above.

I was glad to find that no other vehicles, people, or even animals seemed to have been involved. But I was disappointed that the police were not more interested, but I guess that there's no way to prove who was actually driving the car and unless there had been someone else involved then there's nothing much to be done. And the idiot has done about $1000 damage to his car and I doubt the insurance company will be paying anything.

Other bailouts continue

Non-banks like GMAC are trying to requalify their organization as a true bank so that they can get in line for the "free money".

Also a plan for credit-card companies to get taxpayer money to cover credit card balances of people in default.

Automakers want their $25B handout to be sweetened by having taxpayers cover bad car loans.

Student loans had already been targeted for bailout. But that got expanded.

Next up on bailout, subsidies list

Apparently lobstering is not a good business to be in right now. Don't be surprised if we find an earmark coming up soon to qualify lobster fishermen as farmers so they can get those subsidies and welfare payments. Of course, the real problem is that there's too many lobstermen (or farmers) producing more product that the market will buy even at steeply discounted prices.

Tipping point

Usually I find him to be a right-wing blowhard, and often when I do agree with his position I find his logic supporting that position to be questionable. But today Jim Wooten's column had an interesting slant on the tipping point represented by this election.

Consider

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy..." Attributed to various people.

While the source of the quote is questionable, there it is nonetheless.

That tipping point: 220 million eligible voters. 89 million pay no income taxes, and another 65 million pay only 3% of income taxes collected. Obama wants to add millions more to the no-taxes column. More than half of the voters are not paying into the pot of money from which they will control the outflow.

More from that article:

Bob Irvin of Atlanta, a management consultant and former Republican minority leader of the Georgia House, observes that Obama “is trying to convince voters that his new taxes will only hit” those at the top.

“But do the rough math for yourself,” he continues. “Suppose he took a hundred million dollars a year from every Fortune 500 CEO. That’s $50 billion. If you add $100,000 from each of the top 1 percent, that’s 3 million people times $100,000 and that totals $300 billion.”

Continues Irvin: “You’re still less than halfway to the annual amount he proposes to increase spending, which is $800 billion a year. To get there, he’ll have to raise taxes on everybody else an average of $1,500 a year,” including illegal immigrants and those who pay no taxes now.

Note that that $1500 is from every man, woman, and child. And the math here is correct, the $800B figure is commonly quoted for Obama's plans and ($800B - 500 * $100M - $100K * 3,000,000) = $450B. And if the population is 300 million people, $450B / 3ooM = $1500.

Another take on that is this. The expected tax increase for the top 0.1% (income more than $2.87M) under Obama's plan is $701,885, and the expected tax increase on next 1% (income between $603,403 and $2.87M) is $115,974. Now, it seems to me that if I had that kind of income, I could afford to pay accountants and layers to help me structure my finances to minimize my tax load. It certainly seems like a decent trade for me to pay $500k to avoid having to pay an additional $700k in taxes. Or maybe I could spend $100k to reduce my tax load by $500k or for the next group, it seems that if I can spend $50k to avoid paying %100k in additional taxes, then I'd probably do it.

So I have to wonder what Obama is going to do when all those people decide to *not* pay those taxes. Or what the charities these people have been contributing to find themselves short hundreds of thousands of dollars in contributions?

Health care is not a right

Nor is housing, food, or any number of other things socialist nanny/welfare states try to say are fundamental human rights.

To me, it is a self-evident truth that your rights do not trump mine. If the only way you can afford food, shelter, clothing or health care is to force your fellow citizens to pay for them, then you have essentially decided that it is worth enslaving others to meet your needs.

Here's how we can see that health-care is not a right. Imagine that tomorrow every doctor, nurse, P.A., EMT, etc.--every health-care provider--decided to quit their jobs and refused to practice medicine. How then will you exercise your health-care "rights"? Many people will say that doctors will have to be forced to provide care. And those people have just espoused a form of slavery--forced labor is a form of slavery.

Forcing others to pay for your health-care is only somewhat removed from that far-fetched scenario. Each dollar removed from someone to pay for your health care is a dollar they worked to earn. A portion of their alloted time on this Earth was confiscated from them for your benefit.

While I'm on health-care here's some things to consider:

• About 10% of all health-care spending in the USA is obesity-related.
• Between 10 and 15% of all health-care spending in the USA is smoking-related.
• Health-care costs in the USA averaged $6,280 per person in 2004.
• Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount. Among this group, annual medical expenses (exclusive of health insurance premiums) equaled or exceeded $11,487 per person.
• In contrast, the 50 percent of the population with the lowest expenses accounted for only 3 percent of overall U.S. medical spending, with annual medical spending below $664 per person. Thus, those in the top 5 percent spent, on average, more than 17 times as much per person as those in the bottom 50 percent of spenders.
• The elderly (age 65 and over) made up around 13 percent of the U.S. population in 2002, but they consumed 36 percent of total U.S. personal health care expenses.
  
• A new study from the Mayo Clinic reports that intensive care accounts for 30 to 40 percent of hospital spending, with the majority of care given to elderly patients with chronic conditions.

Even if you think health-care should be provided by the government, do you think every person in the US (notice I didn't say citizen) should have unlimited benefits? Consider this article:

Ana Puente was an infant with a liver disorder when her aunt brought her illegally to the U.S. to seek medical care. She underwent two liver transplants at UCLA Medical Center as a child in 1989 and a third in 1998, each paid for by the state.

But when Puente turned 21 last June, she aged out of her state-funded health insurance and was unable to continue treatment at UCLA.

This year, her liver began failing again and she was hospitalized at County-USC Medical Center. In her Medi-Cal application, a USC doctor wrote, "Her current clinical course is irreversible, progressive and will lead to death without another liver transplant." The application was denied.

The county gave her medication but does not have the resources to perform transplants.

Late last month Puente learned of another, little-known option for patients with certain healthcare needs. If she notified U.S. Citizenship and Immigration Services that she was in the country illegally, state health officials might grant her full Medi-Cal coverage. Puente did so, her benefits were restored and she is now awaiting a fourth transplant at UCLA.

The average cost of a liver transplant and first-year follow-up is nearly $490,000, and anti-rejection medications can run more than $30,000 annually, according to the United Network for Organ Sharing, which oversees transplantation nationwide.

What does Ana say about her situation?

"It doesn't matter if I'm undocumented," she said. "They should take care of me at UCLA for the rest of my life because I've been there since I was a baby."

Stupid vent in AJC today

"McCain is a maverick? Oh, come on. All he does is push tax cuts, tax cuts and more tax cuts. That is the same old tired idea the Republicans have flogged for years, and what did it get us? Gigantic budget deficit, crumbling infrastructure and a deep recession."

Please. The reason we have a huge deficit is spending. Prior to the recent downturn, tax revenues were at an all-time high in real dollars, and tax revenue increases rose sharply after the Bush tax cuts. Especially helpful were capital gains cuts and corporate tax rate cuts.

And we're *still* not in a recession, despite what people think. The economy grew in the first two quarters, and may have shrunk ever-so-slightly in the 3rd quarter. A recession is 2 consecutive quarters of negative growth. The recession of the early 80s saw 13.5% inflation and 10.8% unemployment. Right now we have 5-point-something for unemployment and inflation. Anyone who says we are in a "deep recession" is just plain wrong. We could certainly be headed for one, and next year we might find out that we were indeed in a recession (once 4th quarter numbers are out).

Great Vent in the AJC today

"My mid-40s son and his wife read no newspapers, no magazines; don’t watch or listen to any news (except “The Daily Show” and “SNL”); have two kids, a large adjustable-rate mortgage, credit card debt and zero savings. Needless to say, they’re just wild about Obama."

"Because they can afford it" part 2

This quote from the Tax Foundation was mentioned in the previous posting:

• The top-earning 25 percent of taxpayers (AGI over $64,702) earned 68.2 percent of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86.3 percent).

Another way of looking at that: Four guys go out for dinner, one guy is forced to pay for everyone's meal, while the other three agree to pay the tip. But they complain about it and would really prefer it next time if the first guy pay for most--if not all--of the tip next time, too.

They think it'd be fair, too, since he makes ten times what any one of them makes. And besides, his steak was better than theirs (probably because he stole the best steak from them while they were taking a smoke break).

"Because they can afford it"

Was discussing some of the tax plans being put forward by the candidates at lunch the other day, and one of the guys agreed with the notion that it was OK to demand more taxes on the rich "because they can afford it". Even after discussing the disparities in the current tax domain (2006 numbers from here and here) he still thought it was a good idea.

• lower 50% pays 2.99 % of income taxes collected
• top 1% pays 39.89% of income taxes collected (AGI > $388.806)
  
• top 10% pays 70.79% of income taxes collected (AGI > $108,904)
  
• lower 50% pays average tax rate of 3%
• top 1% pays average tax rate of 22.79%
• top 10% pays average tax rate of 18.86%
• top 1% earned 22.06% of cumulative AGI (but paid 39.89% of income taxes)
• top 10% earned 47.32% of cumulative AGI (but paid 70.79% of income taxes)
• 41% of the US population will be outside the federal income tax system, essentially free-loading on on other half
• 43.4 million tax returns, representing 91 million individuals will have zero or negative tax liability (out of 136 million tax returns)
• 15 million more households file no tax returns at all
• this is by far the highest these numbers have ever been, as a percentage, going back to 1950 (when it was 28%)
• the "Bush tax cuts" caused this number to jump form 26% to 32% to 41%
• The top-earning 25 percent of taxpayers (AGI over $64,702) earned 68.2 percent of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86.3 percent).
  
• The top 1 percent of taxpayers (AGI over $388,806) earned approximately 22.1 percent of the nation's income (as defined by AGI), yet paid 39.9 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.
  
  

In the face of these numbers, I find it hard to believe that anyone thinks somehow the rich are not paying their "fair share". And to think that anyone would support taking still more from the very people who provide jobs and capital makes even less sense to me.

The notion of "spreading the wealth" is one Marx would be pleased to hear about. It was Marx, after all, who popularized the notion of "From each according to his ability, to each according to his needs." Combined with "because they can afford it" and a skewed notion of "fair share" leads to a bad place.

The ultimate conclusion of this logic is a society where everyone "earns" the same amount of money no matter what their job is or even whether they work or not. Anyone who earns more than the equality line would be taxed for 100% of their income above the equality line. Anyone who earns less will be "given" money from the government to bring them up to equality line, even if their starting point is zero. Now, everyone has exactly their "fair share" of the national product, and the wealth was spread evenly. And those whose "earned" paid into the system more "because they could afford it".

We can see clearly what would happen in such a society. Those with abilities would quickly decide that their efforts are not worth anything more than anyone else's effort and they would abdicate. Soon, they will be forced to labor "for the collective good of society".

Ayn Rand's "Atlas Shrugged" explored this very topic. In that society, well, here's what Wikipedia says:

Looters and moochers

Rand's heroes must continually fight against the "Parasites", "looters", and "moochers" of the society surrounding them.

The looters are those who confiscate others' earnings "at the point of a gun" (figuratively speaking) —often because they are government officials, and thus their demands are backed by the threat of force. Some looters are following the policies of the government, such as the officials who confiscate one state's seed grain to feed the starving citizens of another state; others are exploiting those policies, such as the railroad regulator who illegally sells the railroad's supplies on the side. The common factor is that both use force to take property from the people who produced or earned it, and both are ultimately destructive.

The moochers are those who demand others' earnings because they claim to be needy and unable to earn themselves. Even as they beg for their help, however, they curse the people who make that help possible, because they hate the talented for having the talent they don't possess. Although the moochers seem benign at first glance, they are portrayed as more destructive than the looters—they destroy the productive through guilt and often motivate the "lawful" looting performed by governments.

Looting and mooching are seen at all levels of the world Atlas Shrugged portrays, from the looting officials Dagny Taggart must work around and the mooching brother Hank Rearden struggles with, to the looting of whole industries by companies like Associated Steel and the mooching demands for foreign aid by the starving countries of Europe.

Sanction of the victim

The Sanction of the victim is defined as "the willingness of the good to suffer at the hands of the evil, to accept the role of sacrificial victim for the 'sin' of creating values."

The entire story of Atlas Shrugged can be seen as an answer to the question, what would happen if this sanction were revoked? When Atlas shrugs, relieving himself of the burden of carrying the world, he is revoking his sanction.

The concept may be original in the thinking of Ayn Rand and is foundational to her moral theory. She holds that evil is a parasite on the good and can only exist if the good tolerates it. To quote from Galt's Speech, as presented in the novel: "Evil is impotent and has no power but that which we let it extort from us," and, "I saw that evil was impotent...and the only weapon of its triumph was the willingness of the good to serve it." Morality requires that we do not sanction our own victimhood, Rand claims. In adhering to this concept, Rand assigns virtue to the trait of rational self-interest. However, Rand contends that moral selfishness does not mean a license to do whatever one pleases, guided by whims. It means the exacting discipline of defining and pursuing one's rational self-interest. A code of rational self-interest rejects every form of human sacrifice, whether of oneself to others or of others to oneself.

Throughout Atlas Shrugged, numerous characters admit that there is something wrong with the world but they cannot put their finger on what it is. The concept they cannot grasp is the sanction of the victim. The first person to grasp the concept is John Galt, who vows to stop the motor of the world by getting the creators of the world to withhold their sanction.

The question "Who is John Galt?" is also answered towards the closing of the novel — John Galt is a man disgusted that non-productive members of society use laws and guilt to leech from the value created by productive members of society, and furthermore even exalt the qualities of the leeches over the workers and inventors. He made a pledge that he would never live his life for the sake of another man, nor ask another man to live for him, and founded an enclave, separate from the rest of the country, where he and other productive members of society have fled.

Here's a thought exercise. Everyone has someone they know who earns less than they do. Some friend who is always unemployed or underemployed and never has any money. You know that it's because they've made bad choices in their life. Now, what do you think if I told you it wasn't fair that you have more, and I'm going to take half of your income and hand it to that guy. If you think that's unfair, welcome to my point of view. If you think that's fair and think it's a good idea, why haven't you handed him your money voluntarily yet?

USA Today's pretty fair analysis of bailout causes

I hope this was a front-page article (hard to tell in on-line version) and every reader of that paper studied the article carefully. It rightfully points at two big problems, recognizes both parties role, but rightfully attributes "government" as the primary cause, although it does seem to focus more on the role of Gramm's hedge-fund amendment compared and blame Democrats for fighting Bush's and then McCain's attempts to reign in Fannie and Freddy. When mentioned as a cause, the CRA is dismissed. So maybe not so fair and balanced.

No single government decision sparked the crisis, but collectively the candidates had a point: Both parties in Congress played important roles in setting the stage for the ongoing financial meltdown.

...

"The crisis was caused by government," Gramm says. He cites the Community Reinvestment Act, which he says "forced banks to make subprime (mortgage) loans" to people who couldn't afford them.

Democrats, including Harkin, and many economic analysts dispute that. As for what he learned, Harkin says, "Don't pay attention to Wall Street when it comes to issues like this."

Bailout train wreck

Once again our good friend Bill has produced a must-read link. I have neighbor who stopped to chat while I was doing yard work and we got to talking about the bailout. He predictably ended up with some sort of "I blame Bush for this mess" comment. I stopped and explained to him about CRA, Fannie & Freddie, how Bush administration had tried to do *something* back in '03, and how as stupid a Bush might have been, at least this one thing you can't pin on him or his administration--the bailout program itself, sure, but not the mess the bailout is purported to clean up. At the end of the conversation, I told him to hang on a second, I have something for you to read -- I had printed this article out for myself since it was too long to read comfortably online, so I gave him my copy.

You might keep a copy on hand for just such an emergency.

It's a long journal article. Here's the official executive summary (emphasis mine):

Why did the mortgage market melt down so badly?
Why were there so many defaults when the econ-
omy was not particularly weak? Why were the se-
curities based upon these mortgages not considered
anywhere as risky as they actually turned out to be?
This report concludes that, in an attempt to in-
crease home ownership, particularly by minorities
and the less affluent, virtually every branch of the
government undertook an attack on underwriting
standards starting in the early 1990s. Regulators,
academic specialists, GSEs, and housing activists
universally praised the decline in mortgage-under-
writing standards as an “innovation” in mortgage
lending. This weakening of underwriting standards
succeeded in increasing home ownership and also
the price of housing, helping to lead to a housing
price bubble. The price bubble, along with relaxed
lending standards, allowed speculators to purchase
homes without putting their own money at risk.
The recent rise in foreclosures is not related em-
pirically to the distinction between subprime and
prime loans since both sustained the same percent-
age increase of foreclosures and at the same time.
Nor is it consistent with the “nasty subprime lend-
er” hypothesis currently considered to be the cause
of the mortgage meltdown. Instead, the important
factor is the distinction between adjustable-rate and
fixed-rate mortgages. This evidence is consistent
with speculators turning and running when hous-
ing prices stopped rising.

There are some more choice bits in there too, this is from the conclusions section:

The question that is being asked is the correct
question: how did it come about that our financial
system allowed such loans to be made, condoned
such loans, and even celebrated such loans? The
answers that are being given are not yet the correct
ones, however. The main answer that is being given,
that unscrupulous lenders were taking advantage of
poorly informed borrowers, does not fit the evidence
nor does it dig deep enough.
The “mortgage innovations” that are largely the
federal government’s responsibility are almost com-
pletely ignored. These “innovations,” heralded as
such by regulators, politicians, GSEs, and academ-
ics, are the true culprits responsible for the mortgage
meltdown. Without these innovations we would not
have seen prime mortgages made with zero down
payments, which is what happens when individuals
use a second mortgage to cover the down payment
of their first. Nor would we have seen “liar loans”
where the applicant was allowed to make up an in-
come number, unless the applicant was putting up
an enormous down payment, which was the perfect-
ly reasonable historical usage of no-doc loans (which
require minimal financial documentation).
The political housing establishment, by which I
mean the federal government and all the agencies
involved with regulating housing and mortgages,
is proud of its mortgage innovations because they
increased home ownership. The housing establish-
ment refuses, however, to take the blame for the flip
side of its focus on increasing home ownership—
first, the bubble in home prices caused by lowering
underwriting standards and then the bursting of the
bubble with the almost catastrophic consequences
to the economy as a whole and the financial diffi-
culties being faced by some of the very homeown-
ers the housing establishment claims to be trying to
benefit.

This Vent says it all

In the AJC Vent column (random one-liner musing from anonymous readers):

I am afraid that McCain won’t deliver on his election promises, but I’m more afraid that Obama will deliver on his.

I think this sums up my opinion too.

AJC's Jay Bookman Opined on Obama's Tax Plan

According to the headline: "McCain plan skewed toward affluent; Obama approach more balanced."

After launching the column by highlight McCain's flip-flop, Mr. Bookman proceeds to use analysis provided by the "nonpartisan Tax Policy Center" to repeat their conclusion that “Sen. McCain’s tax cuts would primarily benefit those with very high incomes. … Many fewer households at the bottom of the income distribution would get tax cuts.”

First of all, the Tax Policy Center is decidedly not non-partisan. It is a joint outcropping of the left-of-center Brookings Institution and the Urban Institute. The Brookings Institution's web site proclaims in progressive rhetoric that among their primary goals are to "foster the economic and social welfare, security and opportunity of all Americans" and to "secure a more open, safe, prosperous and cooperative international system". The Urban Institute was created by hthe Johnson administration to study the nation’s urban problems and evaluate the welfare state as embodied in more than 400 laws passed as part of the Great Society initiative and is still funded primarily by federal government contracts. I can hardly see either of these bodies as a bastion of impartiality.

To the rest of the comments, I say "Duh!" When you cut taxes, those benefiting the most, in absolute dollars, will be those who pay taxes. In an analysis of the 2006 IRS data, economists at the Tax Foundation determined that of the 136 million federal tax returns filed, roughly 43.4 million tax returns, representing 91 million individuals, will face a zero or negative tax liability.

A negative tax liability means that these people will not only be paying zero dollars in taxes, they will be receiving a bonus payment from the pockets of real taxpayers. Normally, this is through the Earn Income Tax Credit, which is an anti-poverty program that transfers between $2800 and $4800 from taxpayers to the working poor, provided they have children. However, nearly one-third of the more than $30B expended by this program is going to people who don't qualify (and many who have committed outright tax fraud by claiming it).

On top of that 43.4M filings, another 15 million households will not file a tax return. So roughly 121 million Americans—or 41 percent of the U.S. population—were completely outside the federal income tax system in 2006. And Mr. Obama wants to relieve millions more of their responsibility as citizens to help pay for the upkeep of the country, even in the smallest way. In fact, he wants to just give $1000 qualified families (many of which will now have negative tax liabilities). This is just wealth redistribution, and Karl Marx would be proud.

The Tax Foundation also pored over IRS data to discover that the lower half of tax filers (remember, this does not include the 15M who did not even bother to file) pay, collectively less than 3% of all collected income taxes. The evil, filthy rich, the top 1%? They paid over 40% of all collected income taxes, despite earning only 22% of the the income versus . That means that 1.35M filers paid more than 10 times the collective taxes collected from the 67.85M filers in the bottom 50%. The top 10% paid more than 47% of the total. What, exactly, then is their "fair share"?

Obama's plan will take an extra $788,959 per taxpayer in the top 0.1% (income over $2.8M). Two questions: what is that rich person not going to spending that money on, and do you really think that money will trickle down to the "working class" from the government that confiscates it?

We have a system of government and taxation wherein half the participants are, for want of a better term, free-loading on the system. The old saying is that "A government robbing Peter to pay Paul can count on the support of Paul."

Subprime videos on youtube

Our good friend Bill has pointed these out to me. Worth watching.

This first one is bunch of clips from CSPAN covering a 2004 hearing on Fannie & Freddie.

This one is actually a slideshow (with some bad language).

Ups and Downs

The news publication timeline being what it is, there ware a lot of letters-to-the-editors of the newspapers I read that cried about the 777 point market drop Monday. "Can't you people see we *need* this for working-class folks like me, I was really hurt by the market drop."

I light of Tuesday 500 point recovery, I wonder how many of them will be writing back to say "never mind"?

I also noticed this pattern this week:

• Monday, passage of the bailout bill appears imminent--market tanks by 777 points (largest single-day loss).
• Tuesday, the bill has been rejected by the House--market up over 500 points (3rd largest single-day gain).
• Wednesday, slow news day--market stable, down 19 points.
• Thursday, Senate passed a revised bill chock full of goodies on top of the $700B (and plenty of earmarks in in "must-pass" bill), currently down 250 points.

It looks to me like passage of the bill hurts the market more than non-passage. This bailout bill will further devalue to dollar, set a horrible precedent (like that hasn't happened already), and the earmarks will come to light far too late.

In 2 or 3 years, will taxpayers still be paying for this bailout and be expected to bail out the next big losers (maybe the auto industry will come back for more than the $25B already slipped to them this week while everyone was looking the other way).

Bailout blame: The Government

I still find myself too swamped to make my own comments. But I thought I'd point out this article by an Harvard economist who argues from the same position I laid out earlier.

The current mess would never have occurred in the absence of ill-conceived federal policies.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

Let's toss in a column by the ever-erudite Thomas Sowell, who also calls out Barney Frank and points out that the Bush administration tried, unsuccessfully, to reign in Fannie and Freddie.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

Something my mother sent me (funny)

I'm sure this is making the email rounds and I cannot attribute the original author.

Subject: A Little Irish Humor
Date: Wed, 24 Sep 2008 00:28:58 +0000
An e-mail from Ireland

An email from Ireland to all of their brethren in the States...a point to ponder despite your political affiliation:

'We, in Ireland, can't figure out why you people are even bothering to hold an election in the United States.

'On one side, you had a pants wearing female lawyer, married to another lawyer who can't seem to keep his pants on, who just lost a long and heated primary against a lawyer, who goes to the wrong church, who is married to yet another lawyer, who doesn't even like the country her husband wants to run!

Now...On the other side, you have a nice old war hero whose name starts with the appropriate 'Mc' terminology, married to a good looking younger woman who owns a beer distributorship!!

What on earth are ya lads thinkin over in the colonies!

Bailout blame?

You may have seen that Bob Barr has filed a lawsuit in Texas to keep Obama and McCain off the ballot there, since (he claims) they failed to follow Texas election law.

A blogger commenting on a article snidely remarked “With their [Libertarians] penchant for deregulation, I wonder how the markets would have reacted if they had been in charge for the last 8 years?”

I tried to overlook the partisan sneer on the Bush administration, but couldn't (even though it's not my Party). I point out that Democrats have been in charge of Congress for nearly two years and have done absolutely nothing that they could have done to rectify any problems they may have been concerned about. Similarly, President Clinton was supported by a Democrat-led Congress for six years of his term and did nothing. In fact, the current Administration tried to overhaul Fannie and Freddie in 2003 but was snubbed by powerful Democrats in Congress.

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

It's very interesting now to notice who immediately opposed the idea and especially to read the comments of Barney Frank against this oversight (emphasis mine):

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

I have said in an earlier posting that there is plenty of blame to go around., and I'm not trying to excuse any Republican involvement, I just can't stand it when someone knee-jerks a partisan comment.

This crisis was a long time brewing, but it was foreseen by many people, including Alan Greenspan and other Fed leaders, long ago. Congress knew about the problem and did nothing, mostly because Democrats fought regulation of Fannie & Freddie tooth and nail. I found a link to a Wall Street Journal chronology where the WSJ has focused on problems with Fannie Mae for a long time. Several of these articles name Mr. Frank as a ring-leader for changes that more than likely exacerbated the current crisis.

So determined are Barney Frank and Chuck Schumer to "do something" about subprime mortgages that they have come up with a proposal that is unnecessary, will do little to help distressed borrowers, and would increase the risk to taxpayers from Fannie Mae and Freddie Mac. Other than that, it's a fabulous idea.

One more note, in 1995 the Clinton Administration revamped the Community Redevelopment Act. Here's Wikipedia's entry on the law. It is interesting to note the name of the first company to take advantage of the changes the law wrought. It is also interesting to note that the Bush administration, as mentioned above, tried to insert some checks-and-balances into the system but Barney Frank and Democrats kept it from passing Congress.

In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions^[1] 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. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.^{[citation needed]}

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. ^[2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. ^{[3] [4]}

An article in Forbes puts it succinctly: The Government Did It.

The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to "promote homeownership," not to apply sound lending standards.

I never got around to answer the basic question, I got so sidetracked in pointing out the root of the problem can hardly be laid in the category of "failed Bush economic policies."

Some topical links

I don't want to miss the chance to at least get these out even if I can't take time right now for commenting on them:

"Obamanomics"

WSJ on high tax rates vs economic prosperity

Democrats doling out "free gas"

And $50B more "free money" from Dems:

More mortgage fraud arrests (again *against* not by the mortgage companies)

AJC series on bailouts 1 2 3

Bail out for automakers coming? USA today (For, against)

Chuck Norris,the Fair Tax, and the pursuit of good government

ADD kids can't drive, Mommy's whining about kid losing license

More bailouts: $55B here, $85B there...

and pretty soon you're spending more nationalizing companies than you are pursuing the war. according to USA Today, this year the federal government has provided $900B in "rescues and special loans".

This figure discounts the fact that now the US taxpayers are on the hook for about $4.5 trillion dollars after the government took over the liabilities of Freddie Mac and Fannie Mae. It only includes the expected expenditures to cover this years losses.

That includes the $30B we're on tap for in the bailout of Bear Stearns, where the government has loaned $30B to JP Morgan so they could buy out BS. The terms of the loan are way better than anything they could get anywhere except from the taxpayers.

The government skipped a chance to bail out Lehman brothers. Whew. But then 3 days later they basically nationalize a large insurance company buy "buying" 80% of the company for $85B dollars. In reality, what the government did was open a line of credit of $85B to the company, with 80% of the company as collateral. Of course, if the company continues downhill, the "loan" will not be paid back and the taxpayers are left owning 80% of a worthless company.


What caused this "sub-prime meltdown," which is claimed to be the root of all this market turmoil. Basically, mortgages were made to people who had no business borrowing that kind of money. The real question is why these loans were made in the first place?

It boils down to, I think, that it's easy to spend someone else's money. Banks were uneasy with easy credit and often turned down "subprime" borrowers. These are people who have a combination of factors like poor credit history, questionable income or job history, criminal records, or are borrowing more than they can comfortably repay. A subprime loan is more likely to be defaulted on by the borrower, and so carries higher interest rates.

It turns out that minorities are disproportionately represented in the subprime category. So the government, in 1988 ammended the Fair Housing Act to make it easier to claim discrimination. Since this opens banks up to what would usually be unfounded lawsuits just becuase they turned someone down for a loan (with good cause), the government at the same time offered to back these subprime loans. In other words, the goverment basically told banks "You have to give these loans out, pretty much to anyone who asks for one (especially if they're a protected minority). But don't worry, we'll buy those loans (through Freddie, Ginnie, Frannie), bundle them in lots and resell them. Of course, no one will really want to buy them since so many will default, so we'll sweeten the deal to the buyers by promising that taxpayers will make good on any losses." So the banks did what they needed to do, made the loans, and sold the paper to Fannie and friends.

And then...the banks turned around and bought the bundles right back from Fannie and friends! They weren't worthless, risky loans anymore, but had been converted into what amounted to Treasury Bonds.

But even Fannie and friends have some minimum standards, so not all these loans are in their hands. While all this was going on the Federal Reserve Bank had cut interest rates to the bone to stimulate the economy, while housing values were rapidly increasing. This allowed banks to justify making riskier loans by selling adjustable rate mortgages, 100% or even %110 financing, interest-only loans, etc. While these loans sometime make sense, they were also sometimes marketed to people as a way for them to get into a house when nothing else worked. That is, here's a loan that requires little or no down payment, minimum payments (at least in the short term), and if 3 or 5 years down the road you can't make payments (like the 3 or 5 year balloon payment, or if rates adjust upward sharply), the worst that is likely to happen is that you have to sell the house, pay back the loan, and pocket your profit -- the house will have appreciated by a lot in the meantime.

This had all the makings of a bubble waiting to burst. And it did. With inflation now becoming a problem, the Fed started to raise rates, which triggered ARMs to adjust rates upwards. With higher cost of borrowing, fewer people could get mortgages (and those high-risk loans dried up, since they didn't make much sens anymore). Fewer buyers means a downturn in housing values. Some people couldn't pay, and when they found out that their house was worth less than what they owed, badness ensued.

Now taxpayers are having to pick up the pieces of a problem that was, in large part, a direct result of the government interfering in the mortgage marketplace. Mortgages are essentially a commodity. The mortgage market simply needed regulation for real nondiscriminatory lending practices: banks must be able to demonstrate a risk-assessment based strictly on objective measures to justify a decision to grant or reject a loan or setting interest rates (as a commodity, there's not really much need to make subjective decisions) . They could require truthfulness and transparency, by regulating disclosure requirements (standard forms with standard content). Instead the government effectively became the nation's mortgage company.

It's not surprising that we're where we are.

Libertarian VP choice?

Mrs. Percy has suggested that Verne Troyer run with Bob Barr on the Libertarian ticket.

The posters could read "Barr and Mini-Barr".

Teacher shortage

On Sunday, the AJC ran a series of columns on a supposed "teacher shortage". I have not had a chance to read them all yet, but the first one I read was written by Jim Hubbard, who is the president of the Georgia Association of Educators.

The topic here is second-career teachers. These are people who have left a career to take up teaching. The basic tenor of the column was that 2nd career teachers may have experience doing something else, but they will not be able to be teachers unless they are re-educated themselves, as he puts it "these new teachers must be grounded in the preparation for the reality of our classrooms." This is necessary "no matter how well-versed they are in their real-life subject matter."

And I'm not sure what he means by these teachers will need to "slant pedagogy for more diverse learners." But if I had to guess I'd say he means don't actually expect anyone to learn from you, and certainly don't do anything so rash as to fail someone.

Of course, he also wants these new teachers to join the union.

Oh, and one last thing: "While we will never be in favor of any compensation package based solely on performance, we are very much open to the discussion and study of compensation models where performance could be a part of an overall package of educator pay."

A second column discusses a proposed pay change, where low-supply high-demand teachers like physics and calculus teachers would get paid more. Here's a few telling quotes:

“All teachers are special,” said Kelly Henson, executive secretary for the Georgia Professional Standards Commission, which presented the study to legislators. “We are not suggesting that differentiated pay only be extended to math and science teachers, but that is the right place to start.”

“You are slapping the other teachers in the face by saying you are not worth as much as science and math teachers,” said Barbara Wilson, co-president of the Gwinnett Association of Educators, who has a doctorate in language arts.

Once again, someone fails to understand that supply-and-demand applies to labor, and compounds the error by equating wages with value as a human-being.

Virtually any literate adult can teach a child how to read, to understand the parts of speech, and how to communicate. This is clearly evidenced by the number of children who learned to speak and read before they enter school. Far fewer people understand calculus or physics or chemistry well enough to effectively teach it to someone else. It should be plain then that the pool of "qualified" 3rd grade language arts teachers is much larger than the pool of qualified biology teachers. In fact, I would suspect that any math or science teacher at Ms. Wilson's school could effectively teach her class, while I was suspect that the opposite is not the case.

Small things I'd change if I was king

These are the small things, not grand policy ideas or anything.

My first things are consumer-oriented:

• No car commercial can feature "Professional drivers on closed course." I want a car that requires neither.
  
• Gasoline cannot be sold for per-gallon costs that include that stupid 9/10ths of a cent. $3.219 is not something you can make change for if I buy exactly one gallon of gas. Just sell it for $3.22 and be done with this ugly charade.
• Rebates are evil, but if as a producer you think you must use rebates there's some new rules. First, you may not advertise the after-rebate price. That TV is not $200 (after $100 rebate). It's $300 and a $100 rebate may apply. Second, the rebate redemption process must be sane: a form that human beings can fill out my name and address (not some 1" square I have to cut out from the box and microprint my life story onto), receipt, UPC. That's it. Then 4-6 weeks later you send a check. No tricks or gimmicks that allow you to disqualify 99.999% of all submissions.
• If your ISP or cell phone provider advertises "Unlimited" use, then they're not allowed to disconnect you for "excessive use".
  

Unionizing Illegals

I saw a few minutes of a movie called "Bread and Roses" on the IFC this morning while I was getting ready for work. Yes, I watch IFC. This movie, based on a true story, was about a guy trying to unionize illegal immigrants working as cleaning staff in L.A.

Indeed, I found an article about the main guy:

By 1995, Justice for Janitors, part of a nationwide effort led by the Service Employees International Union, had lifted wages for 7,000 L.A. County cleaners, many of them illegal immigrants, and won them paid vacation time and family health insurance. The janitors’ three-week strike in 2000 – the year the movie came out – pushed hourly pay to about $12 in downtown L.A.

Somehow it doesn't seem right that that illegal immigrants--people who have no right to work in this country and who are technically (administratively, at very least) criminals, many whom have committed multiple federal felonies just by being here--can turn around and use the laws of this country to agitate to improve the working conditions for jobs at which they should not even be working.

And they even went on strike. Did you know that in some cases striking workers are entitled to unemployment benefits after two weeks of strike time?

Next bailout?

USA Today reported today that "Unemployment trust funds are running low in many states, making a federal bailout likely to keep the funds solvent."

No big surprise, bailout of Freddie and Fannie

Congress and the Administration have teamed up to cover the losses of these mortgage behemoths. They essentially took them over as government operations, kinda like Hugo Chavez did for many industries in Venezuela.

Now, between the three of them (Fannie, Freddie, Ginnie), US taxpayers are on the hook for about half of the existing $12T in mortgage debt.

Oh, and by forcing the bail-out, the Government has driven the stock share prices of Fannie Mae down from $7 to about $1, Freddie Mac from about $5 to about $1. Given the market capitalization of these entities, this resulted in a net loss to the market of about $10.33B in one day. Of course, last October Fannie was trading at nearly $70 and Freddie was at about $65, so the majority of the meltdown was over (already lost $120B since last October).

What next?

We are also looking at bail-out for the auto industry ("too important to let fail").

The student loan industry is a mirror image of the mortgage industry and is likely to face a similar explosion. Government creates a perverse incentive (usually in the name of diversity) to loan money to people who cannot pay it back. As a government supported program, private lenders are willing to take more and more risk, pocketing the profits and turning to the Government to cover to losses.

9/11 gifts to victims families, Katrina support for 3+ years and still some have not bother to find a job or a place to live, unemployment benefits extended and re-extended (why bother to get a minimum wage job when you can collect 39 weeks of unemployment (soon to be extended another 13 weeks, so one year of unemployment payments). This list can go on and on.

Our Government is a classic enabler and we are all codependent. An enabler is a person who by their actions make it easier for an addict to continue their self-destructive behavior by rescuing the addict. The codependent party exhibits behavior that controls, makes excuses for, pities, and takes other actions to perpetuate the obviously needy party's condition, because of their desire to be needed and fear of doing anything that would change the relationship.

I forgot about Ginnie Mae

Not only is the federal government in the mortgage business with Fannie Mae and Freddie Mac, they have a sister, Ginnie May. All three "companies" do essentially the same thing: buy mortgages from banks (i.e., supply banks with money) and bundle the mortgages up into a security instrument that is then resold to investors. Their "value-add" is the backing, real or implied, of the US Government--read taxpayers--so that if the mortgages are not repaid, then the Government will cover the losses.

Since I cannot explain a good reason why the Government is in the mortgage business, I surely cannot explain why they created not one but three distinct entities with about 95% overlapping missions.

Ginnie Mae was split off of Fannie Mae when Fannie Mae was recharted in 1968.

Fannie & Freddie

The AJC (Atlanta Journal-Constitution) ran a series of columns & articles on Fannie Mae and Freddie Mac, but first, some questions:

Why is the federal government of the USA in the mortgage business? Some might argue that there is an inherent advantage in encouraging home-ownership. And that perhaps there might be a few people who need just a little help getting started, people for whom private mortgages appear to be unavailable. Even if you accept that, let's consider why they cannot get a private mortgage: bad credit, not enough income, criminal records all make it hard to get someone to lend you tens or hundreds of thousands of dollars. Why then should taxpayers be expected to lend these people money, and then politicians act shocked when they don't pay it back? You could argue about potential discrimination when other factors like the aforementioned are not relevant, but it seems to me that vigorous anti-discrimination regulation and enforcement of same would be a better role for government than setting up a public-cum-private bank like Fannie Mae.

And even if so far you still think Fannie may is a good idea, would you be as surprised as I was to find out that Fannie and Freddie, i.e. taxpayers, are holding the paper for 42% of mortgages in this country? Exposure measured in trillions of dollars, all set at the foot of taxpayers.

http://www.ajc.com/opinion/content/printedition/2008/08/31/fanfred.html

Fannie Mae and Freddie Mac, known as government-sponsored enterprises, have for decades played an important role in markets that bankroll American housing.

Fannie and Freddie, created to boost homeownership, own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding. They make money by buying home loans and mortgage securities, profiting on the difference between their borrowing cost and the yield on the debt.

They also guarantee and package loans as securities, charging a fee.

Fannie and Freddie have reported $14.9 billion in net losses for the past four quarters as loan delinquencies rose.

Fannie Mae Chief Executive Daniel Mudd announced a top management shake-up last week in a move to restore investor confidence.

Many investors and policy-makers are concerned that the companies do not have enough capital to withstand rising losses from homeowner defaults.

Last month, Congress authorized the Treasury Department to pump billions of dollars into the companies, if needed.

During the current housing crisis, Freddie and Fannie have been criticized for rewarding shareholders using private profits while relying on taxpayers to absorb losses.

Fannie Mae

In 1938, Fannie Mae was created during the presidency of Franklin D. Roosevelt. An inconsistent supply of mortgage financing at that time meant that millions of families could not buy homes, or were at risk of losing properties.

Congress “rechartered” Fannie in 1968 as a shareholder-owned company that funded its operations using private money from investors around the globe.

Freddie Mac

Chartered in 1970, Freddie Mac plays a similar role to Fannie Mae, undergirding what’s called the secondary mortgage market.

http://www.ajc.com/opinion/content/printedition/2008/08/31/housinged.html

Back in 2005, when the troubles of Fannie Mae and Freddie Mac weren’t yet commanding the front page so regularly, the government was already spending about $41 billion to subsidize housing directly.

More than triple that amount, or $147 billion, was foregone on indirect tax subsidies to homeowners. That chunk of change might have been used for any number of government projects: pounding percentages into fifth-graders’ heads, lowering the capital gains tax, declaring summer gas holidays. Phelps’ anti-house argument calls to mind the analysis of one of his Columbia colleagues, Michael Heller. Heller’s new book, “The Gridlock Economy,” posits that “too much ownership wrecks” the economy.

http://www.ajc.com/opinion/content/printedition/2008/08/31/fanned.html

As government-sponsored enterprises, Fannie and Freddie have long had one foot in the free market and the other firmly planted on Capitol Hill. To get their way through the years, both agencies have spent millions of dollars on campaign contributions, lobbyist fees and foundation grants unavailable to true government agencies. At the same time, the pair has been exempt from local and state taxes, giving them a financial advantage over truly private competitors. They also paid lower rates than their private competitors because investors assumed taxpayers would ultimately make good on their obligations, come what might.

In return, of course, Fannie and Freddie have played a valuable role in mortgage markets, buying home loans, repackaging them and selling the end products to investors. Millions of Americans likely would not own their homes today without assistance from those two agencies.

Even so, government should ask if there’s a better, more efficient way to undergird the market and deliver the same impact. Most likely, there is.

In analyzing the matter, Congress should start with the belief that the time may have come, as the Cato Institute urges, to start dismantling Fannie and Freddie as we have come to know them. That step would allow the private sector to gradually assume their role of risk-taking in the marketplace. At the very least, numbers need to be crunched and a spirited public debate should begin over the spreadsheet results and what they portend for Fannie and Freddie’s future.

Among the advocates for phasing out Fan and Fred is William Poole, a Cato Fellow and, until earlier this year, president of the Federal Reserve Bank of St. Louis. In a New York Times op-ed piece recently, Poole argued that “Fannie Mae and Freddie Mac are not essential to the mortgage market; if they were put out of business in an orderly fashion over five to 10 years, the market would pick up the business they abandon.”

http://www.ajc.com/opinion/content/printedition/2008/08/31/fannbox.html

The Housing and Economic Recovery Act of 2008 will provide crucial support for the housing market and … also establishes a series of landmark reforms that will put U.S. housing and mortgage finance on solid footing for the long term. Chief among these is the establishment of a new regulatory framework for the federally chartered housing enterprises that are at the center of the mortgage market: Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”

—- Daniel H. Mudd, president and chief executive officer, Fannie Mae


“Fannie and Freddie’s continued activity is central to the speed with which we emerge from this housing correction and remove the underlying financial-market and financial-institution uncertainty. The temporary liquidity and capital backstops included in this new [housing recovery] law are aimed at supporting the short- and longer-term stability of financial markets, not just these two enterprises.”

—- Treasury Secretary Henry Paulson, in a July 31 speech

“Congress and the president are congratulating themselves for bailing out Fannie and Freddie and imposing more regulatory control, with the excuse that they pose a threat to financial market stability. A better solution, however, is to make these and other government-sponsored enterprises play by the same rules as other businesses, and to end the distortions caused by federal subsidies.”

—- Daniel J. Mitchell, Senior Fellow, Cato Institute