Let's learn from our mistakes and then repeat them anyways!

There were many causes of the current economic downturn, but one of the major causes was the fact that Fannie and Freddie (Frannie) grew from packaging traditional 20% down, 30 yr. mortgages to packaging more mortgages that were sub-prime and Alt-A. The government subsidies that Frannie received allowed them to become the biggest player in the mortgage backed security arena. I don't want to sound too naive, but government intervention into the mortgage business encouraged risking lending (to avoid 'red-lining') and led to a concentration of the mortgage market into two (unofficially) government backed companies.

So, a great lesson to learn from this is that by keeping rates artificially low ("below what the market will bear"), bubbles start to form. You've seen it with artificially low mortgage rates, artificially low Fed interest rates, artificially low rent prices (rent-control), and artificially low 'anything else'. Any manipulation in the market leads to some consequence down the road. Synergies cannot be created by an institution that does not face long-term incentives. The government does NOT face long-term incentives. They face elections, every 2/4/6 years. That is not sufficiently long-term. (Note: I am not advocating for longer terms!)

Not everybody agrees with me. Utopians, for example. Some people believe the government can fix the problems. Some people believe the government is one big synergistic entity. Despite what history has shown, Utopians hold out for this false sense of economies of scale. They say, "Let's give government more power, let's make government bigger; only then will government be able to see the whole picture and truly fix the problem." I present to you, the next step in the Utopian's journey: 

President Barack Obama is urging an end to government subsidies for student loan providers such as Sallie Mae and Citigroup Inc., with the government becoming the sole provider of federally backed college lending.

While at first I was hopeful to see the ending of government subsidies for student loans, I was heartbroken to see that power transfered to the Department of Education. I'm sure the people of the Department of Education are all well-meaning folk that want every American to have access to a college education, but sans competition to establish market rates for lending this is either a) a bubble in the making as credit is extended too cheaply to students; b) a burden on students who's rate's will be above a naturally established rate; or c) a giant transfer of wealth from the truly poor to the middle and upper-class. Remember, every inefficiently spent dollar towards promoting college education in one dollar taken from social programs that aid those in desperate poverty. But, then again, I guess the new Administration can just either go increase taxes (potentially, again) on the most efficient class or lower the threshold of the "classifiably rich" from $250,000 to (reportedly) $208,850 to an even lower (hypothetical) $175,000, to some amount that leads to socialism. (Note: I do not believe Obama is a socialist)

Then again, why exactly are we proposing that standard 4-year colleges and universities are the best path for every student. I don't expect it to happen anytime soon, but it has become one of those 'conventional wisdoms' that college is the best 'next-step' for every high schooler. If we really wanted to be innovative, let's look at trade schools, apprenticeships and other non-traditional forms of education. But that, my friends, in another talk for another day.

Mozart; K.493, Piano Quartet No. 2 in E-flat

As a classical music fan, I'll be spreading some of my favorite music to the blogosphere. Today is our first installment and it so happens to be a piece that my roommate is performing next month. I've been listening to him practice the last few days and it's a great piece. For those of you unfamiliar, a quartet typically consists of a piano, violin, viola and cello. This quartet is in three movements: 1) Allegro (fast) 2) Larghetto (slowish) 3) Allegreto (fastish). I'll post each movement and at the bottom I will outsource commentary to ClassicalArchives.com. Enjoy!

Allegro:

Larghetto:

Allegreto:

Outsourced Commentary: 

Mozart composed two piano quartets, a relatively rare genre during the Viennese Classical era. The E flat Quartet is the second, a work entered in the composer's thematic catalog on June 3, 1786. According to Mozart's earliest biographer Georg Nissen, he entered into an agreement with the Viennese publisher Hoffmeister for three piano quartets. Hoffmeister published the first, the Piano Quartet in G minor, K. 478, in either late 1785 or early 1786. A work of considerable complexity, K. 478 failed to appeal to the large amateur market at which such chamber music was generally directed. Poor sales resulted in Hoffmeister's abandoning the project, paying Mozart for the work he had published on condition that the second and third works not be composed. Why Mozart, who rarely composed without a purpose in mind, wrote a second work is not clear. Like the earlier work, it makes few concessions to the domestic amateur market, and the most likely explanation is that he composed it for use in his own concerts. It was probably the quartet played by Mozart in Prague early in 1787, the occasion on which the composer witnessed the triumphant success of Le nozze di Figaro in the Bohemian capital. Later that year, it was published in Vienna by Artaria as Op. 13, and the quartet also became one of Mozart's first works to be published in England when it appeared within a few months of its first appearance in Artaria's catalog. Like its companion, the E flat Quartet skillfully juxtaposes concerto-like writing for the piano with more integrated chamber textures. The overall mood of mellowness contrasts strongly with the dark drama of the G minor quartet. There are three movements, with a sonata-form Allegro followed by a Larghetto featuring a rapt dialogue between piano and strings. Exchange of material between piano and strings is also a feature of the high-spirited Allegretto that concludes the work. Both this work and the G minor quartet are among the peaks of Mozart's chamber music; they are works that far transcend the few models Mozart had available—works that in any case relied too much on a texture in which the strings merely accompanied the piano.

Irony?

Do Senators Frank, Kerry, et al. not see the irony in this:

Senator John Kerry said he would introduce a bill banning firms getting U.S. aid from paying for conferences and parties.

“I’m sick and tired of picking up the newspaper and reading about another idiotic abuse of taxpayer money while our country is on the brink,” Kerry said in a statement yesterday.

Northern Trust sponsored a golf tournament and they have received TARP money. So Witchhunter Kerry is on the prowl. I agree, TARP companies shouldn't necessarily be spending lavishly, but (as this WSJ opinion piece points out) Northern Trust is doing ok. But here's the IRONY:

Does Senator Kerry not realize that EVERY SINGLE ONE of his "conferences and parties" are AN IDIOTIC ABUSE OF TAXPAYER MONEY!! That's what government has become! It was that way in the Bush Admin, the Clinton Admin, the Bush Admin, the Reagan, the Carter, the Ford, the Nixon .... and of course the Obama. Here's the deal: I don't want Senator Kerry to be eating another sandwich that costs over $5 until 'our country is [off] the brink'. His 'company' is ONE GIANT FIRM GETTING U.S. AID (more appropriately, "TAKING U.S. AID"). Ug.

That Obama guy is talking as I write this blog...

9:01: Wow, processional crap is so annoying. "The gentleman from.... The gentlewoman from.... blah blah blah". I don't get it. P.S. Pelosi: ewwww. As a prominent health care advisor of mine says, "BOTOX!". I may lean towards a conservative libertarianism, but there's something I just don't trust about her. Same goes for Biden. And same goes for pretty much everyone else in that room. But what do I know....

9:04: I'm watching on CSPAN so I don't have to listen to Charlie Gibson and his thoughts. It's funny, CSPAN was the last channel I would ever watch as a kid; now it's like my 'go-to' channel. Michelle Obama just walked in. She looks good, per usual, but maybe a tad more disheveled than usual. Also, enter Hillary fresh off her China/Asia trip. From what I read, she did well, even though her Chinese isn't better than mine. (muahaha). Enter Geithner. I wonder if he bought that suit with unpaid tax money?

9:10: Enter POTUS Obama. Shaking hands...

9:15: Let's get it started.....

9:17: Let's get it started....again....it took him one minute to say 'crisis' (I'll keep a running tally); 'The only thing we have to fear, is fear mongering from our President and vagueness from his Treasury Secretary' or so said FDR....

9:18: First standing applause of speech. It gonna give me time to type. I would have loved to lived through FDR's fireside chats. Obama is a great speaker. Energizing and encouraging. After reading Amity Shlaes 'Forgotten Man' it's easy to see how a nation was galvanized by power of words and how that galvanization led to multiple terms of multiple broken policies.

9:20: Interestingly, he took on Oil and health care and education first. Didn't see that coming. I wouldn't necessarily point to those as the first cause of this 'crisis', but interesting strategy. This sounds eerily similar to his campaign speeches. I have a feeling this is going to be received well by the populous.

9:23: I love how Obama states what would have happened without action. As if he could know. He has no idea how the future would have turned out without this stimulus/porkulus package. That's hubris. The room is full of it.

9:24: See Greg Mankiw for Obama's great political wording of 'Save or Create' jobs, seriously, it's political gold...

9:25: Me! Me! I'm skeptical! Oh great, Good to know I can trust Biden. And while he has plagiarized speeches, at least he has never cheated the IRS (that we know of)

9:29: With the mortgages he must be talking about people with option ARM or adjustable rate, I hope. Otherwise, sinking home prices shouldn't matter to responsible homeowners. Houses are homes, not speculative investments. Prices will rise again. And if someone did have an adjustable rate, then why do they get a bail out?

9:31: John Thain just got attacked. 'No more fancy drapes!!!' ouch. Anyways, Obama must spend b/c without spending, we will be heading towards a Lost Decade? Hmmm, well, spending more could also translate to a 'lost decade'. Just ask Japan. Oh wait, lemme guess, they just didn't spent enough. More to come on this later, maybe in an epilogue

9:34: I am truly worried about the amount of hubris in this speech. It's tough though. On one hand, the 'people' need to feel assured that the President has the answers (even though I think this is idiotic to expect). But on the other hand, the 'market' needs to be reassured that the President is being realistic. Tough balance for the Prez.

9:35: I see this document as temporary Socialism. But maybe that's the way to go... We need to sacrifice for the State, give over our freedoms, and let Obama do the best thing for us. 1) Um, we don't have railroads spanning the nation b/c of the government. We have railroads b/c market mechanisms allow them to flourish. 2) I'm not so sure these public schools are something to brag about. They may have been strong before the latter half of the 20th century, but Obama's union lassies have done a good job of stripping the incentives active in public schooling and 3) and I didn't hear what he said about the G.I. bill or afterwards, I was typing. Apologies

9:38: I think Geithner has a crush on Obama. He looks smitten with the Prez.

9:39: ENERGY: I don't think that Obama realizes how markets work. I really do worry about this. 'Put Americans to work' 'MAKE renewables profitable'  oh, i love the visible hand of the government. And who said anything about walking away from the automobile. We've been walking towards autos everyday, they've just been Japanese autos. And they've earned it.

9:42: HEALTH: Pelosi is a tool. She is brilliant, but she is a tool. She's a cheerleader, I give her credit. P.S. I will have an epilogue post to these issues later.

9:46: EDUCATION: Sallie Mae is the next Freddie and Fannie; I don't know why we would promote that. I wonder if Obama will sack up and face the realities of teacher's unions. Um... I think my money is against that. Ok, I give him credit for talking to kids there. He's an idol to kids around our nation and throughout the world, so that was a great challenge to them. However, I don't want subsidized tuition!

9:49: Oh god, he's promoting paid 'volunteer work'.  And how will this be funded? What? Higher taxes? no way.

9:53: Eliminate all subsidies please. Eliminate all 'no-bid contracts' please. And while you're at it, please eliminate the 'union only' contracts please and the 'buy american' clauses. thanks.

9:54: Welcome to the 'Class Warfare' part of the speech. Time to attack the rich! Time to attack the people creating business! (p.s. Pelosi is standing up to clap again - she bothers me).

9:56: Medicare and Social Security time. Want to really think outside the box? Scrap 'em. Start over. Fund the outstanding obligations and start over. I dare you.

9:57: Could you imagine being handicapped in a wheelchair at this speech? It would be a huge 'f-you' with each and every standing ovation. 'Hey, look at me. I can stand. I'm going to do it repeatedly.' Why don't they just stay standing or just stay sitting, or just let Obama speak his piece. I would hate to go to one of these things.

10:05: When I watch Pelosi, I think that she thinks she owns Obama. And she may be right. She may just be ruthless enough to run over Obama, especially after all the political capital he has thrown away already. But I think he's making a good attempt to claw that political capital back. America is going to love this speech. It's been great. I look forward to the books that will come out in 50 years about the Obama-Pelosi struggle for power.

10:08: And now for the running of the metaphors...... Again another great speech. 

Crisis count: 11

P.S. I'm watching Jindal's speech. Bobby, get off the teleprompter!! From what I've seen and what I've heard, Jindal has got some spunk. But this rote and dull delivery is amplified by following up oratory-god-Obama. Jindal is hopefully new-Republican blood and not tied to the spending spree of the Bush administration, but I think he'd be better speaking off the cuff. I feel like I'm being forced to watch a Republican infomercial. "Hi, I'm Bobby. Republicans believe A, B and C. Send your check or money order to that big elephant. And if you call now, I'll throw in a free Slap-chop."

How's this for an idea....

Ok, I think drugs should be legal. I think that I think that all of them should be legal. In the words of Milton Friedman,

"I don't think the State has any more right to tell me what to put in my mouth then it has to tell me what can come out of my mouth. Those two are essentially the same thing—and they both are essential elements of freedom."

It's been documented how much money is wasted on the 'War on Drugs', the money that is wasted on prison inmates guilty of drug related offenses, and also, and more importantly, the lives lost trying to enforce this law. (Sorry, I'm not in the mood to go find the 'documents').

Anyways, here is the idea: Make drugs legal, but take away that right in jail. Think of the incentives put in play here. Drugs are legal: ok, great. But when you are in jail, drugs are no longer legal. That's a HUGE incentive to stay out of jail. 

In our current society, if I steal a TV with a gun, that's armed robbery. I am going to jail. Sure, I lose personal freedoms, but I couldn't legally get high outside of jail (and I can still manage to get high inside of jail). It might not be as easy to get illegally high inside of jail versus outside of it, but I can still do it.

On the flip side, if I can smoke some dope legally; I am going to think twice about stealing that TV with my gun. I don't want to do a shot in the can when it will be tremendously more difficult to score some drugs.

Stimulus Links of the Day

Arnold Kling

Mario Rizzo

Banking Fiasco Links of the Day

Naked Capitalism

Buiter: WSJ

More WSJ

Yet another idea

Stimulus Doctor

When one talks about treating a terminally ill patient, I can imagine three general options. 1) No treatment, the patient accepts the situation and decides that this is the best path; 2) Prolong life as long as possible through standard procedures, maybe you catch a lucky break, maybe the diagnosis was wrong, but prolong the situation; 3) Try some radical new procedure that may lead to a breakthrough in medicine, possibly curing the patient, but at least bringing new insights into medical technology.  I think Obama and Congress so far are attempting (2) and (3). They are trying (2) by prolonging the status quo, hoping for some insight or an opportunity to make the right decision. They are trying (3) to the extent that the Keynesian multiplier has a pretty dismal history of success, but maybe this time, it will work; maybe this time we have the right combination of tax cuts and spending spending, and we have the right sizes of tax cuts and spending.

Well, the problem with this strategy is that the patient is NOT TERMINALLY ILL. America's GDP is not going to spiral to zero and America is not going to cease to exist. I think it is important for Congress to realize that America is extremely resourceful and will figure things out. Not to make sweeping generalizations or anything, but Americans have turned into wimps. We expect things to always go our way and any bump in the road is cause for calamity. Are things bad now? Yes. Will they get worse? Yes. Is that natural? YES! Instead of pumping this patient full of crazy drugs and praying that it gets better, how about prescribing some Advil and get out of the way.

Sometimes it's very unlikely that you will find a common ground with someone else

Great article from the Onion. 

Yeah, it turns out that this is not a joke article. I think I just threw up in my mouth.

Steve Liesman is a Statist Hack

A follow up to the previous post. Rick Santelli is being challenged by his co-worker from CNBC about the proper path to take. Through this little debate, it become more and more obvious that Steve Liesman is a Statist hack.

Visit msnbc.com for Breaking News, World News, and News about the Economy

He claims the market can't fix this problem and Santelli rightly calls him out saying that the 'market' is in fact 'people' working through non-coerced cooperation. If people can't fix this problem, who can? Obama? Geithner? Stalin? Mao? Gimme a break. The Market Ticker makes a great point about viewing your house as an speculative investment or a shelter:

Another fact: For every American that has a house they can't afford there is another American that wants to own a house, but can't because prices are still too high. For those of us who look at our homes as shelter, not a speculative investment, we don't care what the price is on our abode - we want a place to live, not something to use as a means of "levering up" as some grand ATM that we can tap to pay off our credit cards (which we then charge up once more!) My residence more than tripled in price from 2000 to 2007, and now it has lost most of that appreciation - being worth somewhat more than it was when I bought it. So what? My home is not a speculative investment - if it was, I would have sold it when the Realtors came knocking on my door in 2005.

Listen, I understand that some people were lied to and some people legitimately are getting screwed by predatory lending and what not. But the whole of the 9 million being foreclosed upon do NOT fall into this category. A small percentage does. Sometimes shit hits the fan and you deal with it. I'm sorry you were lied to, I'm sorry your can't afford your house because you were lied to. But if you bought a home at $400,000 and it's worth $300,000 now, and you are underwater because you didn't put anything down, but you can still afford to make your payments, you shouldn't be getting bailed out. No principle reduction, no rate reductions unless the lender thinks it is in the best interest of both parties. If you buy stock at $40 and it goes down to $30, you don't get a redo. At least with your house, you can continue to live in it. You can't live in a stock. So be thankful that this investment is still giving you a roof over your head.

I don't want to come off as bitter and unwilling to help those in need. But to legislate every other American to FORCEFULLY bail you out sets a very dangerous precedent. And don't even get me started on the precedent of allowing judicial cramdowns. If you want, go after the banks and mortgage companies and ratings agencies that perpetuated this fraud. Do not go after your neighbors and fellow tax payers (and everyone's children). If anything, go after Canada. Stupid Canadians.

The Chicago Tea Party

Yesterday morning on CNBC, Rick Santelli went berserk about how the new administration has handled everything up to this point. Special interests are ruling the day and the voice of the average American is not being heard. Listen in:

Video of the Day

How Do You Find Your Passion and How Do You Pursue It? Randy Komisar. 5 minutes long

Thoughts on Bernanke's Speech....

The text of the speech can be found here (UPDATE: Video here, starts at 4:45). I'll post my thoughts in the order I heard him address them.

The Market Ticker has done a great job covering the liquidity swaps between the Fed and foreign governments, specifically addressing the risk to which the Fed has now exposed the US taxpayer. Bernanke says:

These so-called currency swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that they may lend to financial institutions in their own jurisdictions. The purpose of these swaps is to ease conditions in dollar funding markets globally. Improvements in global interbank markets, in turn, promote greater stability in other markets, such as money markets and foreign exchange markets ... In the case of the liquidity swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the funds, and the Fed receives an equivalent amount of foreign currency in exchange for the dollars it provides foreign central banks.

Well, what if any of these countries go the way of Iceland? We get stuck holding their paper and they get to hold onto American dollars? When shit really hits the fan, countries are going to look after their own people first, and be hesitant to repay America with the last remaining paper asset they have (the $$$ we lent to them before the swaps fell apart). As pretty are foreign currency can be (much prettier than our boring green bills), it might only be good for aesthetic purposes. America right now is the tallest pygmy.


The Fed's 'enhanced communications' announcement was give and take. I like the idea of redoing their website and making it more friendly and transparent (assuming their stick to the promise), but I'm not to big on this part:

To supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values (at a horizon of, for example, five to six years) of output growth, unemployment, and inflation, under the assumptions of appropriate monetary policy and the absence of new shocks to the economy. These longer-term projections will inform the public of the Committee participants' estimates of the rate of growth of output and the unemployment rate that appear to be sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors.

Ok, I appreciate the offer, but your projections haven't been too stellar lately. I don't expect people to predict the future and it's nice to have a map on where we may be going. But please don't tell me you have any idea what's coming next. The Executive Branch (i.e. Geithner) signaled that the Treasury has no idea what to do next. And extending your forecasts doesn't add any reassurance. Here's my extended forecast: People are resourceful; we will get out of this eventually; quit taking our money. Bernanke ended his speech with 'extraordinary times call for extraordinary measures'. I agree 100%. So how about doing something truely extraordinary: Quit promising to save us from ourselves. I'm not calling on anything radical like switching back to the gold standard, but how about some good ole American, buckle down when the going gets tough, entrepreneurial risk taking. Set the rules, get out of the way and let Americans help each other out voluntarily.

In the question section, Bernanke did make one great point. He said that we need to find some area to offset this spending. While I am biased towards tax cuts over spending stimulus, I recognize that tax cuts alone won't solve our problems. They need to be accompanied by long-term spending decreases. Whether it be from SS or Medicare/caid, HUD, Department of Education, the military, or whatever, America has overextending itself and we need to get back to Clinton-era surpluses. To me it's almost unfathomable that we had a budget surplus in my lifetime. I understand the theory behind deficit spending, but why let the government take exceptional risks with our money. My parents gave me a piggy bank when I was little and taught me to save; it's about time we give the government a piggy bank and force them to save. Afterall, it's our money.

Line of the Day

It belongs to Arnold Kling on being a libertarian today:

Think of it as a Thanksgiving meal. At the conservatives' table, I feel like an uninvited guest. At the liberals' table, I feel like the turkey.

Ouch.

Falcon has started blogging

Welcome to my world! I'm not sure if I'm coming early to this blogging game or late. I'm not sure if this is going to be a day by day thing or not. And I'm not sure what I will really be blogging on. You can count on some Economics, some Liberty, some policy, some China, some New York, some life, some food, some drink, some friends, some sports, some music, some stuff. Either way, I'd like to start off with some appreciation for the way things work....

I'm currently reading many books, one of which is Murray Rothbard's 'For A New Liberty'. In it he writes,

It so happens that the free-market economy, and the specialization and division of labor it implies, is by far the most productive form of economy known to man, and has been responsible for industrialization and for the modern economy on which civilization has been built. This is a fortunate result of the free market, but it is not, to the libertarian, the prime reason for his support of this system. That prime reason is moral and is rooted in the natural-rights defense of private property we have developed above. Even if a society of despotism and systematic invastion of rights could be shown to be more productive than what Adam Smith called "the system of natural liberty," the libertarian would support this system. Fortunately, as in so many other areas, the utilitarian and the moral, natural rights and general prosperity, go hand in hand.

That's cool. As you may know, I'm a big proponent of personal choice and liberty. I also so happen to be a big fan of prosperity. Life would be pretty interesting if liberty and prosperity were an "either/or" proposition. "You can be free, but you will be poor." Or, "you will be enslaved, but you'll have riches." Luckily, I believe (and apparently so does Rothbard), that the two go 'hand in hand'. How ever this world was designed and came to be, I think it's a beautiful thing that we can both be free and prosperous.

Enjoy your day and I hope you will continue to check in with me.