The Great Depression of 2008

On issue after issue, every time I dig deeper and think for myself, I discover that government is the cause – not the cure, but if free markets are so great, then how have we come within days of another Great Depression? Is it really about free markets vs. regulation? Is it naked short sellers? How big a factor is consumer and business confidence? Do the media and politicians really understand economics? Could there be economic terrorism afoot?

I couldn’t stand it any longer. After a lengthy summer vacation, I had to resume my role as anonymous hero of the people. I had to separate the myth from the reality. I had to find out WTF is going on.

By the end of this article, you will know more than Obama and McCain, and the answers are not what you might think.

Conventional Wisdom

The conventional wisdom just doesn’t add up.

The conventional wisdom is that America has been in recession since late 2007, and that the cause is 20 years of Republican deregulation. Deregulation supposedly caused a recession by causing the prices for oil, steel, copper, etc. to soar, by allowing some greedy people to sell loans to some people who couldn’t afford them, and by allowing some people to more easily bet that stocks will go down (naked short sellers). We are to believe that the Republicans are either lying or incompetent when they said “the fundamentals of the economy are strong” as recently as September.

The conventional wisdom is identical to the claims by the Democrats and the mainstream media. Even the Republican Presidential candidates seem unable to offer an alternative explanation.

We can immediately see that some aspects of the conventional wisdom are wrong; whereas, other aspects will require detailed analysis. The wrong aspects of conventional wisdom that are immediately obvious are that there was no recesson. Instead of a long recession, there was a sudden crash. Also, the price of oil, steel, copper, etc. had already fallen substantially by the time the crash began.

As of October 2008, which is about a year after the recession supposedly began, there has been no recession. The overall economy as well as most businesses were doing just fine until a sudden global crash in September. In fact, in mid October, two recession sensitive companies: Intel and Google reported substantial growth that was better than expected. Whereas, a recession is negative growth, Intel reported 12% growth in profits, and Google reported 26% growth in profits after hiring 500 people!

The bigger picture is that there has been a housing bubble, which brought us out of the crash at the end of the Clinton administration. The housing bubble was followed by an economic decline limited to housing, banks, and a few consumers. There was no recession. Then we had a sudden crash in everything. Business sales and employment were strong until the crash and were moderately strong during the crash. The prices of oil, steel, etc. had already come down substantially and continued to fall during the crash and were thus not contributing to the crash.

Sure, about 20% of the poorest homeowners were screwed, and I will explain the real cause, but the bigger question – what is NOT obvious – is how such limited economic problems could suddenly place the entire world in a global depression?

By August 28^th, I had lost 3% of my savings, so how had I lost 53% of my savings by October 10^th?

The conventional wisdom is obviously a myth, so we are going to have to look at a lot of facts and think for ourselves.

Free Markets

The argument for deregulation, free markets, competition, etc. is that although problems (both internal and external) can occur at all levels and at all times, for each kind of problem, some competitors will have made the right decisions to survive while those who made the wrong decisions will fail. Failure makes room for new competitors. Also, competitors can learn from past mistakes. Therefore, while every kind of problem big and small can happen once, free markets continually adapt and improve, and thus a future recurrence of that problem is unlikely. Free markets are thus more likely to serve customers best.

Unlike businesses and private organizations, government is a monopoly that forbids competition and forces us to buy its services, and thus government is less accountable and less adaptable than businesses. Therefore, government can afford to be inefficient and can make the same mistakes over and over again. Government is thus more likely to cause a problem than to solve one.

This is a pretty good summary of the argument for free markets.

Liberal Fascists

The argument for regulation may have been best summarized by Mario Palmieri (“The Philosophy of Fascism”, 1936):

Economic initiative cannot be left to the arbitrary decisions of private individual interest. Open competition, if not wisely directed and restricted, actually destroys wealth instead of creating it. … The proper function of the State in the Fascist system is that of supervising, regulating, and arbitrating the relationships of capital and labor, employers and employees, individuals and associations, private interests and national interests … More important than the production of wealth is its right distribution. Distribution which must benefit in the best possible way all the classes of the nation, hence, the nation itself. Private wealth belongs not only to the individual, but, in a symbolic sense, to the State as well.

I used to think that regulation was the new form of socialism, but then I read this quote, and now I see that the Democrats are not really socialists – but are fascists. Then again, Nazi is short for National Socialists. Perhaps the Nazi’s saw fascism as a new kind of socialism, and I guess their race issues stemmed from nationalism – not from fascism. Therefore, we could accurately refer to the Democrats as socialists or as fascists – but let’s not get sidetracked.

American Capitalism

America does not really have free markets (a.k.a. capitalism). We have the second highest business taxes in the world, a ton of regulations, a load of frivolous lawsuits, the Federal Reserve, the IRS, Fannie Mae, Freddie Mac, the Securities Exchange Commission, etc.

The trend is not purely deregulation either. We now have Sarbanes Oxley, a resurgence of The Community Reinvestment Act, etc.

Of course, we do have some scary deregulation too. For example, we now have naked short sellers.

The Community Reinvestment Act

Everybody knows that banks gave loans to people who could not pay them back, and that this supposedly wouldn’t happen in a free market – which is true. However, we don’t have a free market.

The government instituted the community Reinvestment Act which ordered Fannie Mae to encourage banks to give loans to poor people and minorities regardless of credit worthiness – because that is fair, and socialism is fair if it is anything.

Freddie Mac was charged with converting these subprime loans into Mortgage Backed Securities.

Don’t take my word for it. Wikipedia says:

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities.^[6] The new rules went into effect January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to target to groups to collect a fee from the banks.

The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were "risky mortgages."

Economist Stan Liebowitz has claimed that banks were forced to loan to consumers who were not credit worthy with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." The chief executive of Countrywide Financial, the nation's largest mortgage lender, is said to have "bragged" that in order to approve minority applications, "lenders have had to stretch the rules a bit."

What did the Bush Administration do?

In 2003, the Bush Administration recommended that a new Department of the Treasury agency should supervise the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac. Congressional support was approximately split along Party lines and the proposal eventually failed.

What did Obama do? Obama worked with ACORN to train activists to pressure banks to make bad loans. Any bank that wants to expand or merge with another has to show it has complied with CRA – and approval can be held up by complaints filed by groups like ACORN. I got this fact from a very revealing article about Obama/ACORN at: Obama helps ACORN set up Homeowners for Failure.

Clearly, the CRA is an example of increasing regulation (and Democrats) contributing to the current financial crisis.

Fannie Mae

To better understand how the government (not Wall Street) is a major cause at the center of the subprime mess, it is helpful to first understand that Fannie Mae and Freddie Mac are basically and arm of the Democratic party.

Decide for yourself:

Fannie Mae and Freddie Mac have strategically given contributions to lawmakers currently sitting on committees that primarily regulate their industry: The House Financial Services Committee; the Senate Banking, Housing & Urban Affairs Committee; or the Senate Finance Committee. The others have seats on the powerful Appropriations or Ways & Means committees, are members of the congressional leadership or have run for president. The top four campaign contribution recipients from 1989-2008 were Christopher Dodd, John Kerry, Barack Obama, and Hillary Clinton – all Democrats.

Fannie Mae also donates millions of dollars every year to partisan organizations like Planned Parenthood, the ACLU, etc.

Apparently, Fannie Mae agrees with me: http://www.youtube.com/watch?v=usvG-s_Ssb0.

More specific to the subprime mess: Former Clinton administration official Franklin Raines (White House budget director) was placed in charge of Fannie Mae from 1999-2004. During which time he changed the rules so that he would collect bonuses based on the total amount of loans given out by Fannie Mae. Fannie Mae therefore gave out record numbers of subprime loans, and Franklin Raines collected 90 million dollars in bonuses.

Fannie Mae has been under investigation for accounting irregularities for years, but the Democrats keep protecting it. In January of 2007, veteran senator Barney Frank took over the House Financial Services Committee (and has been a committee member since 1981). Rather than fixing these problems, he has only defended Fannie Mae. He said on July 14^th, 2008 that although Fannie Mae had been a poor investment up until that time, their future prospects looked very good. All of this is relevant because he has been the most visible and vocal official on all the news channels, and yet he is blaming everyone else – not himself, not Democrats, and not government interference in the market.

Wikipedia says about Freddie Mae and Freddie Mac: “… the government provides considerable unpriced benefits to the enterprises... Government-sponsored enterprises are costly to the government and taxpayers... the benefit is currently worth $6.5 billion annually.” Thus we see that the Democrats have created their own cash cow at the expense of everyone else – Country Last.

Again we see that the problem is government, typical Democrats in Congress, and especially greedy Democrats; whereas, the mainstream media insists that the problem is entirely greedy businessmen, free markets, and Republican deregulation (which has made the markets maybe .1% more free). In the Vice Presidential debate, even Sarah Palin repeated the leftist fallacies!

Sarbanes-Oxley

Part of the Sarbanes-Oxley regulation (instituted to prevent another Enron) requires the use of Mark-to-Market accounting – even in cases such as those instruments created by government institution Freddie Mac known as Mortgage Backed Securities (perhaps an unintended consequence?). Therefore, MBSs are treated just like stock even though there are real houses with their own market values as collateral for them, and thus at the end of a day, if the market value of those MBSs (not the houses) is too low, then a bank may not have enough money to pay the margin call unless they sell enough assets at a huge loss. In July This happened to Merrill Lynch who had to sell 30.6 billion dollars worth of MBSs for 6 billion. The houses alone were worth 25 billion.

Again, we see that government intervention itself has contributed to the current economic crisis.

The Fed did It

As we all know, Alan Greenspan artificially lowered interest rates in a largely successful (although now temporary) attempt to bring us out of the great Clinton.com crash at the end of the Clinton administration, which of course continued into the Bush administration.

Low rates obviously contributed greatly to the housing bubble. Low rates also increased the supply of dollars through increased borrowing, which thus weakened the dollar.

Again, we see that government intervention itself has contributed to the current economic crisis, and guess what – they’re doing it again!

The Cities did it

Perhaps the other main contributor to the housing bubble (in addition to the Fed) is the rapidly growing trend of local government intervention known as Managed Growth. It takes many forms, but Managed Growth typically is where a city restricts permits for new houses and buys up land along its outskirts to prevent development there too.

Note that cities such as Atlanta, Houston, and Dallas did not employ managed growth and thus continued to have steady housing appreciation consistent with previous decades. Consequently, housing prices in these cities did not fall (except for a little bit very recently).

Again, we see that government intervention itself has contributed to the current economic crisis, and guess what – they’re still doing it!

It’s Confidence Stupid

By all accounts, the overall problem in the market that has suddenly turned the problems of a few banks and home owners into another Great Depression – is a loss of confidence.

Americans used to give goods and services to others in exchange for pieces of paper because they knew that the Constitution required the federal government to give them gold or silver in exchange for those same pieces of paper. If the government were still following the Constitutional mandate to back US currency with gold or silver, then the dollar could not weaken. It would be impossible. Again, we see that government interference (from way back) as contributed to the current economic crisis.

Now Americans give goods and services to others in exchange for pieces of paper only because they have 100% confidence that others will give them goods and services in exchange for those same pieces of paper.

Americans buy stocks because they have high confidence that others will eventually pay more for those same stocks as long as those companies perform at the expected level. It is only natural that overall those companies in the stock market will increase in value barring some external disaster such as a war, revolution, asteroid strike, terrorist act, etc.

Just a few months ago, most businesses were still having record profits, but if consumers and businesses lose confidence and fear a recession, then they will spend less and pay down debt – which will cause a recession!

Country Last

Maybe businesses need regulation to protect them from a drop in confidence. After all, hasn’t an asshole minority nearly caused another Great Depression by reducing American confidence, which thus allowed speculators, short sellers , etc. to further hurt the economy more than they ever could have alone, which then allowed the asshole minority to further reduce confidence – in a self reinforcing downward spiral?

The motivation of this asshole minority was political gain at the expense of the whole nation – Country Last.

Until recent edits, I had mentioned no names, and yet I would get excuses and defenses for Obama. Curious. I was not expecting that. Apparently, Obama’s fans knew or suspected his guilt before I did and promptly moved to defend him anyway! Of course, now we know that Obama is one of the most guilty among the Democrats and the leftist media who together comprise this asshole minority who would destroy their country to win an election.

Again we see that powerful external intervention (from outside the market) has contributed to the current economic crisis.

The War in Iraq

Holy Crap! I almost forgot the war in Iraq. Clearly, this war is hurting international and domestic confidence in America and the dollar.

Again, we see another example of how government has contributed to the current economic crisis.

Markets Succeed where Governments Fail

On June 3^rd 2008 (the final night of primaries) it was clear that Barack Obama would definitely be the Democratic Party nominee for President of the United States, so Mr. Obama made the following statement:

“I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last, best hope on Earth.”

Obama may have infinite faith his powers and in the powers of government, but it is now October and of course none of the boasts in Obama’s hyperbole have happened yet – at all.

What did happen was that Russia invaded Georgia, and Obama was utterly powerless to do anything about it. The US government was utterly powerless, and the European Union was just as powerless.

However, another force more powerful than the US Government, the European Union, and even more powerful than Barack Obama … forced Russia to promptly withdraw from Georgia.

In a nutshell, Putin had been acting aggressively, such as flying nuclear bombers to the edge of Alaskan airspace, then he invaded Georgia, and his agression caused foreign investors and businesses to flee Russia. Whereas, the governments of America and Europe failed to influence Russia in the least, market forces brought the conflict to a prompt end.

The conventional wisdom is that government solves problems created by markets, but we now see that markets solve problems created government – such as war.

Conclusion

I know it is hard to stop thinking about those naked short sellers, but the reality is that politicians, government, laws, regulation, etc. are the cause of the current economic crisis. The media and the Democrats call for more government, and no strong voice has countered them, but we now know that government is a problem masquerading as its own cure.

Neither political party has shown the slightest understanding of economics. The Democrats, the media, and Obama blame deregulation, and all John McCain can do is look guilty. I thought he was going to cry at the beginning of the first Presidential debate. PULEEEASE!

I know of precisely ONE politician who understands – Ron Paul.

You won’t hear any of THIS on MSNBC. Does that make Keith Olberman the – WORST PERSON IN THE WORLD? J

Let’s summarize:

The conventional wisdom is that Republicans, free-markets, and deregulation caused the current economic crisis; whereas, the reality is that Democrats, government, and regulation caused the current economic crisis.

1. Alan Greenspan helped cause a housing bubble when he lowered interest rates in a largely successful attempt to bring us out of the crash at the end of the Clinton administration.

2. Managed growth laws by local governments also contributed greatly to the housing bubble.

3. The Community Reinvestment Act caused a proliferation of subprime loans, which implicates Clinton, Obama, ACORN, Fannie Mae, and the whole Democratic Party.

4. The Democratic Party and most of the mainstream media have been working diligently to spread fear and reduce confidence, and fear causes recessionary behavior.

5. The new Sarbanes-Oxley regulations caused the new government mandated Mortgage Backed Securities to be valued at the market price (Mark-to-Market) at the end of each day, which caused banks to go under with little forewarning.

6. The war in Iraq has played a small role, but has reduced confidence in America and the dollar.

7. Markets solve problems, like the Russian invasion of Georgia, where governments are powerless.

The Future

Maybe once the people learn the reality, they will have a greater desire for freedom.

The promise of reality is freedom.