Fiatch

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Watch this May 17, 2002 address on housing by President George W. Bush.  It’s a chilling clip (hat tip Barry Ritholtz).

• “It makes sense to help people pay that down payment.“  — Mr. President, it clearly does not.
• “Single Family Affordable Housing Tax Credit” — Mr. President, it isn’t affordable, it isn’t creditworthy, and please stop with tax credits and other damaging interventions.  They are incredibly expensive and futile, and they harm even those whom you intend to help.
• “There’s a lot of fine print on these forms, and it bothers people and makes them nervous.” — Good grief.
• “The federal government obviously has to play a very important role, and we will.” — Good grief, ii.
• “After all the real estate industry benefits when people are encouraged to buy homes…“  — Nonsense, Mr. President.  Utter nonsense.  Stop encouraging.  Let the market allocate resources.  It is better at it than you and your colleagues can ever be.
• “How to create a sustained commitment by the private sector…“  — Well, for one, Mr. President, it would help if the real estate market were free of disruptions, distortions, and interventions by the “mighty muscle” of the government.
• “We want to make sure to expand the capital available.” Printing presses, go!
  
• “a more secure America” — Not by a damn sight.
  
• “I call it America’s Home Ownership Challenge.”  — Ironic, much?
• “We use the mighty muscle of the federal government to encourage people to own their own homes” — For what purpose will you use this muscle now?  What is your command, sir?
• “Each of us has a responsibility to put something greater than ourselves, to promote something greater than ourselves.” — I agree in principle, Mr. President, but can you not let me decide?  You seek to use this right principle to acquire more power for yourself so you can direct the activities of private individuals by your muscle and command.  That’s a bad idea, sir.  Look around and admit what you have created.

President Bush, a Republican, secured a $440 billion commitment from the GSEs, including Fannie Mae and Freddie Mac, to manipulate the housing market.  It took this Flood Projection Team but six years to drown the whole system.

Unsurprisingly and unfortunately, the levees didn’t hold, partially because other projects flooded out yet more stores of value which private citizens had built.  Subprime lending washed out and started a cascading series of issues.  We will not have our heads above water for years.

We do not have a two-party system.  It’s one party. They made this flood, and they are using it to accumulate even more power.

What store of value is safe?

What if the ideas of the Austrian economists are correct?  What happens next?

From “Mortgage Plan May Irk Those It Doesn’t Help” via the NYT:

An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.

If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.

“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

Crime does not pay, in the long run at least.  Once crime is officially sanctioned on a massive scale, systemic pressures rise ever higher.

“If the lunch truly is free, the demand for free lunches will be large,” said Paul McCulley, a managing director with the investment firm Pimco.

More than 10 million homeowners are underwater like Mr. Lawrence, and their ranks are swelling. In theory, Mr. McCulley points out, underwater homeowners benefit when a neighbor is bailed out instead of surrendering his house to foreclosure. With a foreclosure, the owner becomes the bank, which will care for the house minimally. When the bank finally manages to unload the house months later, the fire-sale price will establish a new floor for the remaining neighbors.

But the benefits of a bailout for his neighbors seem ephemeral to the 45-year-old Mr. Lawrence, especially because he figures the cost of helping them will come, one way or another, out of his pocket as a taxpayer. “I’m basically financing my own financial destruction,” he said.

“This is not about trying to create fairness,” said Michael H. Krimminger, special adviser for policy at the Federal Deposit Insurance Corporation, which is working with Treasury on the latest plan. “The goal is to keep people in their houses.”  Still, he acknowledged, “a lot of people are angry because they feel some people are getting something they don’t deserve.”

For how long will honest women and men fight this flood?  For how long will individuals willingly finance their own financial destruction?

“If all of our neighbors are getting bailed out despite their own bad decisions, arrogance or ignorance, and we’re asked to keep playing by the rules for the sake of the greater good, I don’t want to participate,” [ Jason Luker, a principal at Cardinal Group Investments in San Diego] said.

We encounter, not a lack of confidence or trust, but a crisis of trustworthiness.  Each intervention decreases trustworthiness by rewarding its opposite.

Peter Schiff, the president of Euro Pacific Capital in Darien, Conn., who prophesied doom before it became fashionable, says he thinks just about everyone who is underwater and has few other assets should stop paying.

“If the government says, ‘Prove that you can’t afford your house and we’ll redo your mortgage,’ then people are going to try to qualify,” Mr. Schiff said.

In that situation, those who will benefit the most are the ones who, unlike Mr. Lawrence, spent far beyond their means — who refinanced their houses and used the cash to buy toys and lavish vacations, or sometimes just to pay the bills.

“You put something down, you have something to lose,” Mr. Schiff said. “You put nothing down, you’ve got nothing to lose.”

Government disruptions into the market made this crisis, and they keep right on making it worse intervening ever deeper even as they incorrectly seek to blame the market itself.

Who would invest in housing against such massive arbitrary bureaucratic control?  What builds trust?  What destroys it?  What store of value is safe?

The Federal Housing Administration began Hope for Homeowners on Oct. 1, aimed at making as many as 400,000 mortgages affordable. Under the program, lenders will refinance loans to 90 percent of a house’s current value, automatically giving the owner 10 percent equity.

The loans will be insured by the government, which will take a share of any gain when the house is sold. If a sale occurs in the first year, the government takes it all. The second year, it takes 90 percent; and so on down a sliding scale. After five years, it takes half the gain.

To guard against fraud, an F.H.A. spokesman said, borrowers will have to certify they did not “intentionally” default.

Does the prior sentence inspire confidence?  Do you trust the integrity of this process?

[In conjunction with another such program,] “Countrywide says it will write down pay-option mortgages to as low as 95 percent of the current value of the home. The borrowers must either be in default or “reasonably likely” to default.

“I guess they are forcing me to deliberately stop paying to look worse than I am,” said one borrower with a Countrywide pay-option loan. “Crazy, don’t you think?”

The borrower, who lives in suburban Los Angeles, took nearly $200,000 in cash out of his house and then paid less than the monthly interest due on his new loan.

He now owes about $350,000 on a house that is worth only $150,000. He asked not to be identified for fear he would not get a modification, which could reduce his mortgage to $142,500.

Crazy, don’t you think?

Government is the flood, not the rescuer.  The government isn’t bailing out anything or anyone.

Certain individuals are bailing out other individuals.  Sometimes, this support is voluntary.  For example, friends and families help each other.  Neighbors assist neighbors.  Charities and churches and many other organizations do all that they can.

All too often, this support is involuntary.  The government takes from all stores of value that it can find.

Such disruptions do not help today, and they begin the project of creating the next crisis.

For how long will honest men and women continue bailing out this madness?  Can they?  Should they?  What happens to them if they stop?  What happens to them if they don’t?

[photo source]

Many claim that we suffer today from a lack of confidence or trust.  This is not the case.

Rather, we face a severe crisis of trustworthiness.  The world cries out for integrity.

For the next few moments, slow down.  Bring forth your best clear attention.  Pause each line for one heart beat as you descend these words and phrases.  Give your mind’s eye time to see these terms:

“United States”

“Treasury”

“Federal”

“Deposit”

“Insurance”

“$500 billion”

“guarantees”

“home”

“owners”

“affordable”

“loans”

“require”

“lenders”

“restructure”

“mortgage”

“ability”

“repay”

These same words flow through this paragraph from Bloomberg:

“The U.S. Treasury and the Federal Deposit Insurance Corp. are considering a program that may offer about $500 billion in guarantees for troubled mortgages to stem record foreclosures, people familiar with the matter said. The plan, which might put as many as 3 million homeowners into affordable loans, would require lenders to restructure mortgages based on a borrower’s ability to repay.”

Words fail.  In addition, we have failed words and the meanings underneath them and the principles they embody.

We have failed, and we are failing.  Not all is lost, but the consequences are coming.  They are coming, and they will arrive.

• What builds trust?  What destroys it?
• What store of value is safe?
• If the ideas of the Austrian school of economics are correct, what happens next?

Subscribe to Wealth Is Not The Problem for excellent posts like this:

Both presidential candidates are attacking the foundations of our prosperity.

Profit-seeking is not greed, but simply the means of directing resources to their most efficient uses in areas of greatest demand (and does so through voluntary exchange!!)

The wealth which is created through successful business ventures is not community property to be seized and “redistributed,” but the reward properly earned through the efficient production of the goods and services most highly desired by others. (This too is accomplished without coercion.)

The wealth created beyond that which is used for personal consumption is the wealth which is invested in growth and progress. This excess wealth is required for taking risks on the new and untried. Only from this surplus are we able to improve the length and quality of our lives and environment.

To take from the rich is to impoverish ourselves.

To tax Big Oil, or any other Big Business, is to hinder their ability to invest in our future.

To take wealth by force, even when that force is laundered through the ballot box, is to attack a fundamental requirement of civil society: the right to property honestly earned.

Taxing the rich is like eating our farmers’ seed corn.

At Wealth Is Not The Problem, also explore the right column underneath the image of flowers.  You will find many good resources.

[photo source]

Hat tip to Greg Mankiw

The dance off.

Buy for a nice price via the Ludwig von Mises Foundation.

Check Amazon’s “Look Inside” and this synopsis from Barnes and Noble:

Few topics are as timely as the growth of government. To understand why government has grown, Robert Higgs asserts, one must understand how it has grown. This book offers a coherent, multi-causal explanation, guided by a novel analytical framework firmly grounded in historical evidence.

More than a study of trends in governmental spending, taxation, and employment, Crisis and Leviathan is a thorough analysis of the actual occasions when and the specific means by which Big Government developed in the United States. More than an abstract account, it names names and highlights the actions of significant individuals.

The author examines how 20th-century national emergencies—mainly wars, depressions, and labor disturbances—have prompted federal officials to take over previously private rights and activities. When the crises passed, a residue of new governmental powers remained. Even more significantly, each great crisis and the subsequent governmental measures went hand in hand with reinforcing shifts in public beliefs and attitudes toward the government’s proper role in American life.

Integrating the contributions of scholars in diverse disciplines, including history, law, political philosophy, and the social sciences, Crisis and Leviathan makes compelling reading for all those who seek to understand the transformation of America’s political economy over the past century.

• Europe on the brink of currency crisis meltdown via Telegraph

• Governors Call for Rescue Package for States via the NYT

• At this rate the world’s financial architecture will have been remade before Nov 15th via Follow the Money

• Global financial markets are still at risk of collapse and turmoil will continue until at least the end of 2009, Peer Steinbrück, German finance minister, warned via the FT

• Consumers Feel the Next Crisis: It’s Credit Cards via the NYT

• Government to force banks to lend to small businesses via Telegraph

• Slowdown in Persian Gulf Reverberates in Middle East via the NYT

• Nations Seek Aid From Gulf, but May Come Up Dry via the WSJ

• A Rate of Zero Percent From the Fed? Some Analysts Say It Could Be Coming via the NYT

• A.I.G. Has Used Billions From the Fed but Hasn’t Said for What via the NYT

• Ukraine Reaches for I.M.F. Rescue Loan via the NYT

• Russia Tosses Life Preserver to One of Its Richest Men via the WSJ

• Russia begins to refuse credit cards in worsening global financial crisis via Telegraph

• Russia Seeks to Trade Oil for Loans From China via the NYT

• British Leader Calls for Larger I.M.F. Bailout Fund via the NYT

• Sources: Government prepares loan modification plan via Business Week

On rolls The Intervention Bubble.  Fiat currencies are backed only by government promises.  What builds trust?  What destroys it?  Whom do you trust?

“IMF Creates $100 Billion Fund to Aid Crisis Fight” via the WSJ

The International Monetary Fund will offer as much as $100 billion in a new kind of loan to countries that are battered by the financial crisis, making available new cash to help ease the world credit crisis.

The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, wouldn’t require countries to make the often severe changes in their policies that the IMF has demanded for decades.

That makes it potentially easier for crisis-hammered countries such as Mexico, Brazil and Korea to shore up cash reserves, their currency, and their ability to help ailing companies as shaken foreign investors withdraw.

Those countries have shunned the IMF because of the strings attached to the loans, which often force sharp budget cuts or interest-rate increases. The conditions are designed to help governments save money and pay for necessary imports, but they also often deepen an economic downturn, making the IMF deeply unpopular around the world.

This system has taken discipline avoidance to absurd extremes.  Don’t cut budgets.  Don’t raise interest rates.  Take this freshly printed money with no strings at all.

Now it essentially is dividing developing countries into an A-list of nations that qualify for loans without strings, and a B-list of everyone else.

Can anyone plausibly argue that no abuse and influence peddling will occur with such massive power hurriedly extended?

The new program, which will use up to about half the IMF’s resources, represents a big break from such requirements.

The IMF is cut in half.  Keep those presses running.

The two moves underscore deepening problems in developing nations, which have sent currencies plunging and blown holes in the balance sheets of healthy companies….

The IMF’s new program, called the Short Term Liquidity Facility, would be used largely to pad a country’s reserves, which could help the recipient defend its currency. But the funds could also be used to help recapitalize banks or cover import bills.

Currency defense: aka throwing worse money after bad.

This time, the IMF plans to streamline the approval process and keep the results quiet as a way to induce countries to participate. Prospective borrowers are also far less picky now in looking for funding.

This system flees transparency and accountability just as hurriedly as it runs from discipline.

What store of value is safe?

hat tip to The Austrian Economists

“Mr. Housing Bubble” from Wealth Is Not The Problem examines the untethered quality of today’s political macroeconomy, which makes vulnerable each household microeconomy:

At the end of the article, Westley brings up a point I have not seen elsewhere. Just why has home ownership taken on the importance it has? Because, without a gold standard to anchor the value of our money, people need something else to protect against the savings-destroying inflationary policy of the government.

Presidential candidates this year will wax ad nauseam that home ownership is the American Dream and that this dream is now too expensive for average Americans. What they won’t talk about is how government policies, and specifically monetary policies, help bring this situation about…Housing was the middle class’s best hedge against a growing government intent on expanding its scope and power by inflating the money supply.

The size of our government is not supportable and yet on it grows.  Ever-expanding public and private debts as well as inflationist, interventionist policy threaten households across the country.  What store of value is safe from this relentlessly rising force?  Talk about unsustainable development.

[photo source]