Ticking Time Bomb Explodes, Public Is Shocked

[Garcia Bronco]

http://www.independent.org/blog/?p=186

Ticking Time Bomb Explodes, Public Is Shocked
By Robert Higgs on Sep 10, 2008 in Budget and Tax Policy, Economics, Elections, Healthcare, Housing, Politics, the State

The failure of Fannie Mae and Freddie Mac, setting in motion the biggest government bailout/takeover in U.S. history, brings a grim sense of fulfillment to competent economists. After all, what did people expect, that water would flow uphill forever?

This financial mega-mess is the same sort of event as the collapse of the USSR’s centrally planned economy, another economically unworkable Rube Goldberg apparatus that was kept going, more or less badly, for decades before it fell apart completely. Along the way, of course, famous (yet actually unsound) economists assured the world that everything was working out splendidly. As late as 1989, when the pillars were crumbling on all sides of the temple, Nobel Prize winner Paul A. Samuelson informed readers of his widely used textbook, “The Soviet economy is proof that . . . a socialist command economy can function and even thrive.”

In the future, we will see a similar breakdown of the U.S. government’s Social Security system, with its ill-fated pension system and its even more inauspicious Medicare system of financing health care for the elderly. These government schemes are fighting a losing battle against demographic realities, the laws of economics, and the rules of arithmetic. The question is not whether they will fail, but when—and then how the government that can no longer sustain them in their previous Ponzi-scheme form will alter them to salvage what little can be salvaged with minimal damage to the government itself.

Our political economy is rife with such catastrophes in waiting, yet the public always seems startled, and outraged, when the day of reckoning can no longer be deferred, and another apartment collapses in the state’s Hotel of Impossible Promises, loading onto the taxpayers more visibly the burden of sheltering the previous occupants.

Each of these time bombs has at least one element in common: it promises current benefits, often seemingly without cost; but if it must acknowledge a substantial cost, it places that burden somewhere in the distant future, where it will be borne by somebody else. From the standpoint of society in general, every such scheme is a species of eating the seed corn. It satisfies the public’s appetite to consume something for nothing right now, with no thought for the morrow. It represents the height of irresponsibility by permitting people to live higher today than they can truly afford, financing this profligacy by borrowing recklessly and by taxing politically weak and ill-organized people in order to shower benefits on politically strong and well-organized special interests.

Call it democracy in action or utterly corrupt governance; they are the same thing.

The architecture of the Hotel of Impossible Promises is not arcane. All competent economists understand these things. Ludwig von Mises explained as early as 1920 why a centrally planned economy could not work as a rational system of allocating resources. The reasons why Social Security, especially its Medicare component, and many other such government programs contain the seeds of their own destruction have been explained time and again. Are the politicians who construct these structures really such idiots that they cannot understand the logic of what they are doing?

Not at all. But they are not striving to create economically viable institutions that serve the general public interest; they are feathering their own electoral nests in the only way they can in the context of our political institutions. As H. L. Mencken explained back in 1940, the politicians “will all promise every man, woman and child in the country whatever he, she or it wants. They’ll all be roving the land looking for chances to make the rich poor, to remedy the irremediable, to succor the unsuccorable, to unscramble the unscrambleable, to dephlogisticate the undephlogisticable,” because they understand that “votes are collared under democracy, not by talking sense but by talking nonsense.”

And are members of the public so dense that they will fall for such promises? Yes. Moreover, they are greedy, impatient, and immoral, because the present benefits they hope to gain via politics, however unsustainable in the long run, come entirely at the expense of the taxpayers from whom the government extorts its revenues.

“Politics, under democracy,” Mencken wrote more than 80 years ago, “resolves itself into impossible alternatives. Whatever the label on the parties, or the war cries issuing from the demagogues who lead them, the practical choice is between the plutocracy on the one side and a rabble of preposterous impossibilists on the other.” And in a declaration even apter now than it was at the time, he concluded that what democracy “needs beyond everything is a party of liberty.”

The trouble is, however, that now, even more than then, the American people have little interest in liberty. Instead, they want the impossible: home ownership for those who cannot afford homes, credit for those who are not creditworthy, old-age pensions for those who have not saved, health care for those who make no attempt to keep themselves healthy, and college educations for those who lack the wit to finish high school. Moreover, they want it now, and they want somebody else to pay for it.

If you think that Fannie and Freddie’s bust is a big deal, just wait until Medicare comes crashing down. Then, the wailing and gnashing of teeth will be truly unbearable. As that day rapidly approaches, however, you’ll notice that the politicians are doing utterly nothing to forestall it.

[Rohirrim]

The trouble is, however, that now, even more than then, the American people have little interest in liberty. Instead, they want the impossible: home ownership for those who cannot afford homes, credit for those who are not creditworthy, old-age pensions for those who have not saved, health care for those who make no attempt to keep themselves healthy, and college educations for those who lack the wit to finish high school. Moreover, they want it now, and they want somebody else to pay for it.

How many times have I heard this argument? It's that same grouchy old man who has lived from the dawn of time yelling at kids to get off his lawn. You know how the old saying goes that patriotism is the last refuge of the scoundrel? Yeah, well "they" is the last refuge of the grumpy old judgemental codger. Who is this "they" he rails against? It's a very simple problem: An old woman shows up at the ER with no insurance. What are you going to do about it?

It's easy to sit on a hill and shout about liberty. This has nothing to with it. This is about people. People getting sick. People who are poor. People who have no home. This is why the Libertarians will never govern. They are more concerned about their esoteric definition of liberty than they are about the lives of their fellow human beings who are trying to survive on this planet.
Let's hear the Libertarian solution to these problems. I have no doubt that if we boil it all down it will come out like this: Push them out on the ice.

[W*GS]

Form an "Coalition to Prevent Little Old Ladies from Being Dumped in the Street" and ask for donations, Ro.

Put your effort and time where your never-ending mouth is.

[Rohirrim]

Form an "Coalition to Prevent Little Old Ladies from Being Dumped in the Street" and ask for donations, Ro.

Put your effort and time where your never-ending mouth is.

Why should I? My representatives in government have already come up with a working solution in SS, Medicare and Medicaid which I approve of and fund through my taxes. I don't mind helping the poor, the sick and the elderly. I'm doing well enough and it's the least I can do. Sorry you feel so put out by it and see it as an infringement on your right to be a stingy old bastard. Tough.

[Garcia Bronco]

The trouble is, however, that now, even more than then, the American people have little interest in liberty. Instead, they want the impossible: home ownership for those who cannot afford homes, credit for those who are not creditworthy, old-age pensions for those who have not saved, health care for those who make no attempt to keep themselves healthy, and college educations for those who lack the wit to finish high school. Moreover, they want it now, and they want somebody else to pay for it.

How many times have I heard this argument? It's that same grouchy old man who has lived from the dawn of time yelling at kids to get off his lawn. You know how the old saying goes that patriotism is the last refuge of the scoundrel? Yeah, well "they" is the last refuge of the grumpy old judgemental codger. Who is this "they" he rails against? It's a very simple problem: An old woman shows up at the ER with no insurance. What are you going to do about it?

It's easy to sit on a hill and shout about liberty. This has nothing to with it. This is about people. People getting sick. People who are poor. People who have no home. This is why the Libertarians will never govern. They are more concerned about their esoteric definition of liberty than they are about the lives of their fellow human beings who are trying to survive on this planet.
Let's hear the Libertarian solution to these problems. I have no doubt that if we boil it all down it will come out like this: Push them out on the ice.


"They" equals Americans. He's also right in that last paragraph that you quoted.

[Garcia Bronco]

Why should I? My representatives in government have already come up with a working solution in SS, Medicare and Medicaid which I approve of and fund through my taxes. I don't mind helping the poor, the sick and the elderly. I'm doing well enough and it's the least I can do. Sorry you feel so put out by it and see it as an infringement on your right to be a stingy old bastard. Tough.

You helping with your money and everybody elses isn't really helping anyone or everyone.

[Rohirrim]

"They" equals Americans. He's also right in that last paragraph that you quoted.

Well, then he's wrong because that's not what "they" want. In fact, I'm sure there would be a very broad argument among Americans on every one of the issues he singles out if taken up and presented one at a time. This is another of those Libertarian "throw **** down from the mountaintop" pieces they are so famous for. Really, try to pin a Libertarian down on any social issue and they get the shakes. In the end it always comes out the same; Survival of the fittest. Works great in nature. I'd like to think we humans have evolved beyond such simplistic ideals. Since Plato, we have argued about what is the best way for man to live in a society. What is the best government? It would be a shame if the only answer we could come up with after thousands of years is, "We should live like the animals."

[Rohirrim]

You helping with your money and everybody elses isn't really helping anyone or everyone.

It sure does help in the hospital where I'm working.

[enjolras]

Here is what got us into this (from http://www.msnbc.msn.com/id/27087088/):


More families are likely to be in that boat soon. Some 70 percent of families don't even consider a student's likely post-graduation income when deciding how much to borrow for college, says a study of 1,400 students and parents released last August by Sallie Mae, an educational lender. And 40 percent said they paid no attention to cost in searching for a college.

Almost half of American families with children in college didn't consider the COST of college when searching for a college?!?!? 70% didn't consider the ultimate salary a student would be making when taking out loans?

That's the problem in a nutshell. We, as a nation, are completely blind to cause and effect.

[Rohirrim]

Here is what got us into this (from http://www.msnbc.msn.com/id/27087088/):



Almost half of American families with children in college didn't consider the COST of college when searching for a college?!?!? 70% didn't consider the ultimate salary a student would be making when taking out loans?

That's the problem in a nutshell. We, as a nation, are completely blind to cause and effect.

Perhaps what we're talking about here is the need to ratchet back our expectations of society and government in general and come to grips with the idea that most of us cannot live the lives we have envisioned for ourselves or our children, and that the reality is that only a favored few can, and that the dialogue and mythology of our Western society is a lie.

[Spider]

Form an "Coalition to Prevent Little Old Ladies from Being Dumped in the Street" and ask for donations, Ro.

Put your effort and time where your never-ending mouth is.

Beats the hell out of your solution ........ if taxes bother you so much , maybe you need a better paying job

[Spider]

You helping with your money and everybody elses isn't really helping anyone or everyone.

time to get the dosage of your medication checked , you have never been to Mexico , if you had you would realize how stupid this comment was ........

[Garcia Bronco]

It sure does help in the hospital where I'm working.

With your own time and your own money, depending how you look at it.

[Spider]

im my most recent trip into Warez mexico , I was walking around and I saw a young woman , kind of attractive , she was no Jo Lo but she wasnt phyllis Diller either , she had a 2 year old boy , and she was selling her self as a prostitute to feed him ....... you could really see the bad decisions taking their toll , So I got to thinking of my wife and Kids back home , and how I wouldnt have to worry if something happened to me about their future . So I told Paul wait right here I will be back ..... I walked over and handed her 50.00 , she asked what did she have to do for it , I said feed your child , and seek help ,that is all I ask ......walked around some more went back on purpose to see what she was doing .......... She was buying food for her and her son ........ yeah it cost me 50.00 but seeing that kid eat and being happy was 50.00 well spent

[W*GS]

Why should I? My representatives in government have already come up with a working solution in SS, Medicare and Medicaid which I approve of and fund through my taxes.

The coming costs of SS, Medicare, and Medicaid will make the current round of government spending look like chump change. You are aware of that fact, aren't you?

I don't mind helping the poor, the sick and the elderly. I'm doing well enough and it's the least I can do. Sorry you feel so put out by it and see it as an infringement on your right to be a stingy old bastard. Tough.

You remind me of the pandhandler character from "Falling Down" - he tries to use a couple of lies to get a donation from the Michael Douglas character, and when they fail, he simply resorts to (paraphrasing) "Gimme your money!". And you have the gall to call me "stingy".

[W*GS]

Really, try to pin a Libertarian down on any social issue and they get the shakes. In the end it always comes out the same; Survival of the fittest.

You don't know a ****ing thing about libertarianism; quit passing off your ignorance as knowledge, dork.

[Spider]

Just like today , I am sitting here in a T/A/ truckstop and I only have 10.00 to my name , well for now ..today is payday , but i stopped to help a guy out that was broke down on 76, 12 miles outside of Akron ..ended up giving him a ride into akron , buying him a tire and giving him a ride back to his car ... young man just starting out , new job , facing some real hard times ......

[Rohirrim]

You don't know a ****ing thing about libertarianism; quit passing off your ignorance as knowledge, dork.

Another bad batch of Sterno, eh?

[W*GS]

Figures - that's the best you got.

[Rohirrim]

Figures - that's the best you got.

How else to respond to your deeply thought out, well-phrased argument?

[L.A. BRONCOS FAN]

Really, try to pin a Libertarian down on any social issue and they get the shakes. In the end it always comes out the same; Survival of the fittest.

Same thing holds true re: their economic philosophies.

We're seeing the disastrous results of those philosophies in our current crisis.

[L.A. BRONCOS FAN]

Since Plato, we have argued about what is the best way for man to live in a society. What is the best government? It would be a shame if the only answer we could come up with after thousands of years is, "We should live like the animals."

Funny - the Greeks figured out democracy c. 500 BC, but the knuckle draggers on the American far right still don't get it. ;)

[W*GS]

How else to respond to your deeply thought out, well-phrased argument?

Your crap doesn't deserve more than summary dismissal; you're so ****ing clueless about libertarianism it's not worth any effort.

[W*GS]

We're seeing the disastrous results of those philosophies in our current crisis.

Bull****. We're seeing the result of your ideas about State regulation and manipulation of the economy made manifest.

[Rohirrim]

Your crap doesn't deserve more than summary dismissal; you're so ****ing clueless about libertarianism it's not worth any effort.

I didn't realize you were so sensitive about your religion. I'll try to be more nuanced in the future. ;)

[L.A. BRONCOS FAN]

<center> http://www.bartcop.com/palin-pals.gif
</center>

[L.A. BRONCOS FAN]

<center> http://www.bartcop.com/greenspan_wanted_poster.jpg
</center>

[baja]

Well, then he's wrong because that's not what "they" want. In fact, I'm sure there would be a very broad argument among Americans on every one of the issues he singles out if taken up and presented one at a time. This is another of those Libertarian "throw **** down from the mountaintop" pieces they are so famous for. Really, try to pin a Libertarian down on any social issue and they get the shakes. In the end it always comes out the same; Survival of the fittest. Works great in nature. I'd like to think we humans have evolved beyond such simplistic ideals. Since Plato, we have argued about what is the best way for man to live in a society. What is the best government? It would be a shame if the only answer we could come up with after thousands of years is, "We should live like the animals."

I say kill everybody over the age of 5 and start over.

[W*GS]

Bascially, Ro, you're too smart to be repeating the same bull**** and calling it "libertarianism", just to make some debate point.

Quit taking the far-left's critique of libertarianism as an article of faith.

[kappys]

Bull****. We're seeing the result of your ideas about State regulation and manipulation of the economy made manifest.

No we are seeing the effects of deregulation of the economy in its full glory.

[W*GS]

No we are seeing the effects of deregulation of the economy in its full glory.

As long as there's FDIC to back up deposits, the Fed to manipulate the value of money, and a bejillion government agencies poking around in every nook and cranny of the economy, what is going on is not evidence of deregulation.

It's evidence of misregulation.

[kappys]

As long as there's FDIC to back up deposits, the Fed to manipulate the value of money, and a bejillion government agencies poking around in every nook and cranny of the economy, what is going on is not evidence of deregulation.

It's evidence of misregulation.

A reasonable argument. The question then is has deregulation ever really been present or worked? I just can't think of examples where economies have really grown by true free market principles.

[Garcia Bronco]

No we are seeing the effects of deregulation of the economy in its full glory.

That is incorrect. We are seeing the problems of government being involved to begin with. By the government's will, housing and lending practices for solvent borrowers were ignored because the governemnt said it would assume the loan. It's the constant problem of promising some saftey net that can never exist for all and putting the cost of that saftey net on another generation.

[kappys]

That is incorrect. We are seeing the problems of government being involved to begin with. By the government's will, housing and lending practices for solvent borrowers were ignored because the governemnt said it would assume the loan. It's the constant problem of promising some saftey net that can never exist for all and putting the cost of that saftey net on another generation.

The thing is prior to 1929 the market was largely without regulation. The effects of that are just as bad.

Like most things there exists a fine balance. But economies require capital investment by the government in order to grow - that we have invested it unwisely is true - but nonetheless it is needed.

[Rohirrim]

Bascially, Ro, you're too smart to be repeating the same bull**** and calling it "libertarianism", just to make some debate point.

Quit taking the far-left's critique of libertarianism as an article of faith.

Yeah, I'll take the advice of the guy who prefers name calling over arguing his case.

[L.A. BRONCOS FAN]

Yeah, I'll take the advice of the guy who prefers name calling over arguing his case.

At least W*GS is consistent with his man McCain in that respect. ;)

[W*GS]

Yeah, I'll take the advice of the guy who prefers name calling over arguing his case.

I've already pitched your "Grandma dies out on the frozen street" argument out there with Grandma, but you keep bringing up as if it's relevant.

Since you can't figure out how that "criticism" of libertarianism, isn't, then what hope is there of you coming up with something else?

[W*GS]

At least W*GS is consistent with his man McCain in that respect. ;)

How's your man Brian Moore doing getting on ballots?

Your vote alone would be a big chunk of his support.

[Rohirrim]

I've already pitched your "Grandma dies out on the frozen street" argument out there with Grandma, but you keep bringing up as if it's relevant.



When and where?

[L.A. BRONCOS FAN]

That is incorrect. We are seeing the problems of government being involved to begin with. By the government's will, housing and lending practices for solvent borrowers were ignored because the governemnt said it would assume the loan. It's the constant problem of promising some saftey net that can never exist for all and putting the cost of that saftey net on another generation.

:bs:

You're still repeating the same discredited lies and spin, I see. tsk tsk

Private sector loans, not Fannie or Freddie, triggered crisis

By David Goldstein and Kevin G. Hall | McClatchy Newspapers

WASHINGTON — As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.

About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.

Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.

Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.

Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, "it led to tremendous pressure on Fannie Mae and Freddie Mac — who in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."

Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems.

"Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

http://www.mcclatchydc.com/251/story/53802.html

[W*GS]

When and where?

http://www.orangemane.com/BB/showpost.php?p=2123706&postcount=3

[OrangeDoofus]

The failure of Fannie Mae and Freddie Mac, setting in motion the biggest government bailout/takeover in U.S. history...
Ha ha ha.

Seriously though, I'm grateful when people put tells like this line so early in their articles. Saves me a lot of time.