Does He Really Believe What He Says?

Obama’s speech to Congress Tuesday night might be the most economically illiterate speech ever delivered by a president. I was astonished by the smug certainty with which it was delivered. Did he really believe all that he was saying?

Or, perhaps he knows he is just playing a part? At the age of 76, on his deathbed, Caesar Augustus, the first emperor of the Roman Empire, asked those gathered around his bedside, “Did you like the performance?” Augustus was referring to his career.

After Obama’s speech I told my wife that I would have to write many blog posts to cover all that I found objectionable. But let’s just focus on one thing today, namely the blatant lie he spun about his housing plan:

It’s a plan that won’t help speculators or that neighbor down the street who bought a house he could never hope to afford, but it will help millions of Americans who are struggling with declining home values.

Of course, he cannot deliver on his plan because his goal is impossible. Ben Bernanke told the truth Wednesday before the House Financial Services Committee:

Some borrowers presumably knew what they were getting into, but from a public policy point of view, the large amount of foreclosures are detrimental not just to the borrower and lender but to the broader system. In many of these situations, we have to trade off the moral hazard issue against the greater good.

Similarly, the head of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair said earlier this month, “I think it’s just simply impractical to try to do a forensic analysis of each and every one of these delinquent loans.”

In other words, the taxpayer will be forced—for the “greater good”—to subsidize a neighbor who bought a $700,000 house when the neighbor could only afford a $200,000 house.

Am I exaggerating? Consider the case, reported by the New York Post, of Mohammed Khoda who bought a home in Queens, New York City, for $700,000. Khoda is apparently a hard working immigrant who runs a small business; from the business he takes home a yearly income of $45,000. He rents out an apartment in his house bringing his income to $78,000 a year.

Even in good times, Khoda couldn’t afford his mortgage; but now with sales down sharply at his store, his tenant not paying his rent, and his house needing repairs, Khoda is underwater. He hasn’t paid his mortgage in a year, and he is hoping to be bailed out by Obama’s plan.

We are told we need to bailout the Khodas of the world, as well as the banks that lent them the money, for our own good. What rubbish!  The National Association of Home Builders/Wells Fargo Housing Opportunity Index says that New York City has the least affordable housing in the United States. In contrast, a well- kept home—a 3-bedroom, 2-bath, brick, ranch home on a 1/3 acre—in a good neighborhood in Indianapolis sells for about $100,000. Without a bailout, the Khodas of the world will move and inject new and vital energy into cities like Indianapolis. The bankers that lent them the money, rather than getting taxpayer supported bonuses, will be forced to make real contributions to society.  With that, suffering taxpayers can keep their money.

If you read the history of Caesar Augustus, you realize that he was indeed playing the part of emperor in the only way Romans could understand. He was brutal, as was much of the world; and Romans gladly sacrificed their freedom for the huge public works projects that Augustus championed.

We are at the close of an era—an era which will be known for our collective ignorance of the basic laws of economics. Obama and the court sycophants who surround him—Barney Frank, Timothy Geithner, Ben Bernanke—are empowered by our own ignorance. How could they play their parts any other way?

The Long Season Ahead

An ad by jetBlue provides welcome humor for our times:

jetBlue’s ad continues:

We understand it’s not easy being a high flyer these days. The CFO is picking apart your expense reports. Congress is mad about your bonus. And you can’t even hop on a private jet to the Cayman Islands without freaking out the shareholders.

jetBlue is on the right track. They did, however, leave out a few categories of people who will also be less likely to take a private jet. One important category is sports stars—especially those who cheat and have a bad attitude.

In just over a month, the new Yankee Stadium will open. The Stadium will cost taxpayers, according to some analysts, an astonishing  $1.3 billion. This taxpayer expenditure has a direct effect on players’ salaries. Why? Think of it this way, if taxpayers bought a new home for you, would you spend more or less on other items? The next time a New Yorker complains about Alex Rodriguez’s salary, he should be reminded that he is paying part of it. Enjoy it Alex, the next set of contracts for superstars will not be as generous.

Baseball and basketball, Robert Prechter has observed, are bull market sports—their fortunes wax and wane with the stock market. With a depression, look for fewer tax funded stadiums to be built, fewer fans buying tickets, and falling salaries for players.  Just over five years ago, Prechter forecasted:

Professional baseball and basketball will suffer difficulties. New record performances by individuals will become rare. No team will have a “dynasty” during the bear market. Leagues will restructure. Attendance and viewership will fall. Salaries will decrease.

Back in the late 1990’s, before the use of steroids in baseball was revealed, Prechter observed of baseball:

You see tremendous dominance by a particular popular team, team expansions, major stars  and the breaking of old statistics-like the homerun record. This is a result of certain talented people feeding off the rise in social mood and providing nearly superhuman performance.

It is important to understand that the social mood that Prechter speaks of is not created by external events. Prechter founded the Socionomics Insititute to further our understanding of how the social mood helps to shape our world from the inside out.  The Institute observes,

Social mood fluctuates between polarities of primitive emotional states, such as confidence/fear, skepticism/credulity, optimism/pessimism, benevolence/malevolence, etc. These fluctuations are not effected by outside events, but move according to their own internal logic. They appear to arise in a dynamic that is endogenous to the social system.

The superhuman performances in baseball that Prechter spoke of were, of course, drug-induced; in parallel fashion, the housing bubble was Fed credit-induced. But both proximate causes, drug use and credit expansion, had an even larger cause behind them—manic ebullience in the social mood.  This social mood allowed for reckless behavior on the part of both sports and governmental figures. In other words, Barry Bonds, Alex Rodriguez, George Bush, Alan Greenspan, Ben Bernanke, Barack Obama—while they are responsible for their own actions—are manifestations of our own collective foolishness and recklessness.

The real heroes in baseball were hard-working and honorable players; the classy, former Yankee centerfielder, Bernie Williams comes to mind. The real heroes in politics are those who, like Ron Paul, articulate clearly developed principles and do not promise something for nothing.

It is a long summer ahead for both baseball players and politicians. Barack Obama’s popularity will fall, along with baseball attendance; the declining social mood will be behind both.

Here Are My Terms

Mortgage modification legislation is currently moving through Congress; the bill allows bankruptcy judges to reduce the principal as well as the interest rate on an outstanding loan.

Consider the case of a homeowner who, after their home purchase, experienced an initial strong upturn in the value of their house. Flush with equity and assured by experts that the value of their home would go up forever, they took out a home equity loan and spent the proceeds on clothing, jewelry, vacations and a new SUV. Now that housing values have gone south, they file for bankruptcy; and a judge reduces the principal on their home loan. What has been consumed already, via the equity loan, the homeowner keeps.

The rest of us pay the bill. Would you want to be a lender when these are the rules? To compensate for increased risk to lenders, interest rates of all kinds will go up; indeed the market for some types of loans may dry up completely. No matter, Congress will pass another fix for that.

Most importantly, a prime principle that built America—namely, that we honor the contracts we sign—will turned into a national game of how we can avoid honoring our contracts. As more people play that game, our principles will erode and the economic depression will deepen; we will all pay the price.

Since Congress and the President seem determined to do everything in their power to turn us into a third world country, let’s learn from a country like Bangladesh.

Dr. Muhammad Yunus is a Nobel laureate from Bangladesh. Dr. Yunus’s great genius was to figure out a system that would allow for poor but entrepreneurial minded Bangladeshis to borrow money and start a business. These loans are not collateralized; yet, over 98% of the time, these loans are paid back in full. How? Each applicant has to form a team with four other applicants, and they each have to cosign for each other’s debt. Given that, you can be sure that business plans are carefully scrutinized by the cosigners.

If Congress passes the proposed mortgage modification measure, I suggest we borrow a page from Dr. Yunus. I propose there be no reduction in principal until a household budget is submitted to and approved by four cosigners. That’s right, the cosigners would be on the hook if the homeowner defaulted again. Cosigners might consider imposing these terms to minimize the chances of a default:

1. No loan modifications granted for homes which are above 1500 sq. ft. If your home is larger, you need to downsize first.
2. No occupant of the home can own or lease a car valued above $10,000.
3. No occupant can own flat-screen televisions or subscribe to cable television.
4. No occupant can take a vacation away from their home.
5. No one can eat out.
6. No purchases of processed food would be permitted. This reduces the family’s food budget. It also lessens the chance of an illness which could interfere with paying back the loan.
7. Non-food purchases above $100 would have to be approved by the cosigners.

Pretty draconian? Very few would apply? That’s the idea. And yes, I would apply the same terms to everyone in Congress who votes for the mortgage modification bill. After all, they too are spending other people’s money and should be bound by the same terms.

Ghosts of America’s Past: Part 2

In his book Water Bears No Scars, David Reynolds writes:

Anyone who has spent years working in a garden or in the fields knows impermanence intimately. We see the cycle of seasons, the coming and going of insects, droughts, freezes, rot, the seeds that sprout or die, the life cycles of plants, the bountiful harvests and the lean. It is all change. There’s nothing that can be counted on with certainty to be exactly as it was last year.

Living in a rural area, I know the kind of change Reynolds speaks of—it is simply more palpable here than in the city. In January, I begin to notice the more direct rays of the sun; by August, the first hints of fall are seen in the forest. Unencumbered by city lights, the cycles of the moon are visible out my window. On the nights of a full moon, so bright is the light that you can almost take a hike safely in the forest. There is no escaping the fact that we control very little in life; in the city, there are in-training many “masters of the universe” who think otherwise.

It was in the summer of 2003 that we took our first hike to Bridal Veil Falls in the White Mountains of New Hampshire:

The forest was at the peak of its vibrancy, but already the days were getting shorter.

A week ago we returned for a snowshoe hike to the Falls. My children are now almost six years older—so many memories have come with those years—and although the forest has gone through seasonal cycles, in geological time, less than a second has passed.

Bridal Veil Falls in mid-winter.

It is too difficult in winter to approach Coppermine Brook and find the plaque that actress Bette Davis had placed on a rock in memory of her second husband. The story behind the plaque is that she deliberately got lost on the trail so that a local man, Arthur Farnsworth, would be sent to find her—already she was smitten by him. I remember it was a fun treasure hunt to find the plaque that summer:

“A Grateful One” is Bette Davis; “The Keeper of Stray Ladies” is her second husband; Peckett’s was a local resort.

Davis loved the local life in Sugar Hill, New Hampshire, and felt comfortable in a community without the pretense of Hollywood. The happiness that she found seemingly ended abruptly as Arthur died three-years after they were married.

All of us have known loss, some more than others. But most Americans alive today have known decades of uninterrupted, increasing prosperity. The normal cycles of economic life have been unknown to us; like a society that has somehow lengthened summer beyond its normal time, we have forgotten that winter is a normal part of life.

For decades it was as though giant grow-lights were placed on America’s gardens. Many thought that winter had been abolished by omniscient policy makers. Yet, the signs of change, the signs of rot, were there to see amidst the artificial boom.  Among those who were blind then, are those who still cannot see today. They think the answer is to get stronger bulbs on the grow-lights; as they do just that, they burn the incipient seeds of spring.

Part 1 of this series

Three Rich Crooks and the Taxpayers that Enabled Them

This is a story of three rich crooks—Bernard Madoff, Leon Panetta and Tom Daschle—and the taxpayers that involuntarily made them rich. It may be jarring to see a despised criminal, Madoff, mentioned in the same sentence with Panetta and Daschle—who have been lionized as great public servants. But, as we look beyond appearances, we see that all three earned their wealth in similar ways.

Today the Wall Street Journal disclosed that Leon Panetta, Obama’s nominee for Director of the Central Intelligence Agency, “has earned more than $700,000 in speaking and consulting fees since the beginning of 2008, with some of the payments coming from troubled banks and an investment firm that owns companies that do business with federal national security agencies.” Panetta was the former chief of staff for Bill Clinton.

No doubt, as with the case of Tom Daschle, we will soon hear from politicians and their enablers in the media that Panetta is above reproach, that he is the gold standard in integrity, and that we must not lose his expertise in these troubled times.

Before Daschle’s nomination was withdrawn for secretary of Health and Human Services, Senator Kent Conrad said of him, “I don’t know anyone more honorable, more decent, more honest and more qualified for this position.” But Kenneth Vogel writing in Politico observes:

Daschle made nearly $5.3 million in the last two years, records released Friday show, including $220,000 he received for giving speeches, many of them to outfits that stand to gain or lose millions of dollars from the work he would do once confirmed as secretary of Health and Human Services.

For instance, the Health Industry Distributors Association plunked down $14,000 to land the former Senate Democratic leader in March 2008. The association, which represents medical products distributors, boasts on its website that Daschle met with it after he was nominated to discuss “the impact an Obama administration will have on the industry.”

According to the New York Times, Daschle took “on an array of clients seeking influence with the government, including concerns involved in Indian gambling, ethanol, health care, telecommunications and federal contracting.”

Does anybody really believe that Panetta and Daschle were being paid for their brilliant insights and oratory? They were paid large sums for their access. I remember when such people were disparagingly called influence peddlers. Let me may make it simpler—influence peddlers are crooks.

As for Madoff, we learned yesterday from Harry Markopolos, a financial fraud investigator, that he had warned the Securities and Exchange Commission (SEC) for almost nine years that Bernard Madoff was perpetrating fraud. In Markopolos’s assessment, presented at a Congressional hearing, “the regulatory agency that oversees financial markets is inept, ‘financially illiterate,’ and far too cozy with the financial titans it is supposed to be regulating.”

Markopolos pointedly said, “The SEC is also captive to the industry it regulates and it is afraid of bringing big cases against the largest most powerful firms. Cleary the SEC was afraid of Mr. Madoff.” Because he was a very powerful man, the SEC refused to act and $50 billion was stolen from the public by Madoff. To add salt to the wounds, taxpayers were forced to spend billions to fund the SEC; yet the SEC refused to do its most basic job of preventing fraud.

Let me pose this question:  When you turn on your lamp at night, do you fear being electrocuted? Of course not! You trust Underwriters Laboratory and their UL symbol. Would UL certify faulty lamps because they were scared of the CEO of the company whose lamps they were testing? Of course they wouldn’t. They would be out of business at the first hint of any scandal. This is in stark contrast to the SEC. For the job they have already failed to do, the SEC will now argue that they need more money for fraud protection.

There are only two ways to make money. You can earn it honestly by providing a good or service that an individual or firm is willing to pay for. Or you can steal the money. There are many ways to steal money. Among them are being a street thug, being a white-collar criminal like Madoff, or utilizing legal theft which takes the form of the government coercing money out of unwilling taxpayers.

Let’s be clear, the organizations that paid Panetta and Daschle many millions of dollars paid them because it was a good investment. In return, those organizations expect the government to hand them far more money squeezed out of taxpayers. Panetta and Daschle would never have been hired otherwise.

What drove these three crooks to their crimes against the American people? One can only speculate: perhaps a sense that they were doing no wrong (Madoff probably expected to find some way to pay the money back and Panetta and Daschle thought that’s the way the system works), perhaps a sense of entitlement (for all of their hard work), or perhaps a strong dose of hubris (that they would never be caught).

You may think this is strong language I’m using. We are at a crucial point in American history and shock therapy is necessary. To be sure Daschle and Panetta are petty crooks in comparison to Madoff; but until the American public begins to understand that they were ripped off by all three, as well as the SEC, our problems will remain difficult to solve. In that way—if his story opens some eyes—Daschle may be the dedicated public servant that some claim him to be.

Destroying Our Way to Prosperity?

Last spring I sold my 1993 Toyota Camry with only 77,000 miles to CarMax for $1700. CarMax sold it to another dealer, who then sold it to an immigrant family in the Washington DC area. I know the sales chain, because we received a phone call from the immigrant family over a duplicate registration issue.

After the various markups, I imagine that for about $3000 the family purchased my reliable, scrupulously maintained, and very low-mileage car. For that family it may have been a blessing to be able to buy a reliable car for that sum of money. That’s what makes a marketplace—both parties in a voluntary transaction believe they will be made better off.

Would the country have been better off if I would have destroyed my Camry in exchange for a tax credit? Apparently some of our dedicated public servants in Congress think doing exactly that will stimulate the economy. CNNMoney reports that:

Under a bill introduced by Sen. Dianne Feinstein, D.-Calif., owners of older cars would get vouchers worth thousands of dollars toward the purchase of newer, more fuel-efficient vehicle. For the customer to get that cash, the car dealer would have to certify that the trade-in was getting scrapped and not resold. The car’s vehicle identification number (VIN) would be tracked to make sure it never shows up on a vehicle registration again.

I assume the family bought my Camry because they could not afford a new car. Perhaps they needed money for basics such as food or clothing and were satisfied with a used car. Or, perhaps they valued a private education for their children. Or, perhaps they were saving for a trip to their home country or a down payment on a house. Unfortunately, politicians like Feinstein think they know better how others should spend their money

Let’s make no mistake—destroying used cars harms the nation’s wealth and it makes us worse off. Feinstein may be chauffeured around in a limousine, but for some families the alternative to buying my used Camry is going without a car. Many of the Feinstein-type thinkers of the world are OK with this outcome too—they dream of a world where the masses are forced into public transportation and the roads are wide open for themselves. Sort of like the former Soviet Union or today’s North Korea where broad and empty boulevards whisk the Commissars around.

The idea that destruction can improve an economy was debunked in the 19^th Century by the French economist Frederic Bastiat in his classic essay “What is Seen and What is Not Seen.” The essay, first published in 1848, demonstrated how a “society loses the value of objects unnecessarily destroyed.” Bastiat wrote: “To break, to destroy, to dissipate is not to encourage national employment, or more briefly: Destruction is not profitable.”

Is it too much to expect our lawmakers to research, rediscover, and put to use knowledge that mankind had already developed by 1848? Apparently so—pathetic ignorance is not a disqualification for serving in Congress.