Social Engineering as Economic Policy

What we are witnessing today is not a failure of the free market. It is the failure of social engineering as economic policy. And it’s a disaster of epic proportions.

Nobody’s disputing that this disaster was precipitated by irresponsible lending practices, or that Fannie Mae and Freddie Mac were at the root of the whole debacle, though the ramifications have now spread far beyond them. What people are arguing about is the interpretation of the events that led us here, what should have been done differently, and what should be done to contain the fallout now that the pyramid scheme has blown up.

Hard core free market proponents, like me, will say that Fannie Mae and Freddie Mac were a mistake from the beginning. The government should have kept its nose out of the home mortgage industry, and not attempted to manipulate the market to enable people who couldn’t afford houses to buy them. On the other hand, proponents of the “government is good” and “more is better” philosophy will say the problem was that there wasn’t enough government manipulation. (Could there ever be?)

But, curiously, in 2005, when Alan Greenspan told Congress that Fannie Mae and Freddie Mac were “placing the total financial system of the future at a substantial risk,” and the Senate Banking Committee proposed a reform bill requiring tighter regulation of those two entities, the Democrats opposed it, on a strict party line vote, crushing the bill before it got out of committee. Barack Obama, Hillary Clinton, and Christopher Dodd all voted against it. (John McCain, incidentally, was one of the co-sponsors of the bill.)

Huh? Democrats voting against more regulation? Republicans voting for it? One would expect Republicans to favor less regulation, as regulation is antithetical to a free market. But, in this case, it already wasn’t a free market. A free market has its own natural checks and balances. Once the government has removed or impaired any of those natural checks and balances, the market loses its equilibrium and bad things can happen. What the Republicans were attempting to accomplish by proposing tighter regulations on Fannie Mae and Freddie Mac was to artificially restore the natural constraint that had been removed by shifting the risk from the lenders to the taxpayers.

In a free market, the desire for profit is counterbalanced by the aversion to risk. If the risk incurred by an investment or loan outweighs the profit potential, it’s not in the investor’s/lender’s best interest to participate, so the transaction doesn’t occur. However, when the government removes the risk associated with a bad transaction, by assuming the risk itself, then the natural constraint of risk aversion that would apply in a truly free market is eliminated, and investors will take risks that would otherwise be unacceptable. That’s what happened in the case of Fannie Mae and Freddie Mac. The taxpayers assumed the risk, and Fannie Mae and Freddie Mac made unsound investments.

In today’s mortgage industry, mortgages are always packaged up and sold to aggregators, who sell them to bigger aggregators, with Fannie Mae and Freddie Mac at the top of the pyramid as the granddaddies of all aggregators. Because Fannie and Freddie had no risk aversion, lenders further down the chain were free to take risks they wouldn’t otherwise take, knowing the aggregators would buy up the high risk (subprime) mortgages anyway. This was intentional.

Affordable housing is a euphemism for making home loans available to people who would not qualify for a loan under a free market system. The reason someone would not qualify for a loan in the free market is because they present too high a risk. In other words, they can’t afford to pay off the loan. Fannie and Freddie represented a wide scale experiment in social engineering. It was an attempt to use federal policy to “level the playing field” so anybody could “afford” to buy a home whether they could actually afford to pay for the home or not.

When the Republicans wanted to tighten the reins on Fannie Mae and Freddie Mac, and preclude them from making excessively risky investments, it would have meant they could no longer fulfill the mission of making homes “affordable” to those who couldn’t afford them. That’s why the Democrats opposed the bill. And that’s why we’re where we are today.

The great experiment in social engineering has now failed. Dramatically. And, because the experiment was backed by the full faith and credit of the U.S. taxpayer, it is our money, and our future, that is getting called in as collateral for this grand social experiment.

Anybody who blames this failure on the free market is either dishonest or naive. It was liberal social policy masquerading as economic policy that got us into this mess. If you want to see more of the same in the future, there are plenty of Democrats still in Congress. And there’s one running for president, too.

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Goldilocks and the Republican Party

The Republican Party is steadily losing its base. Republican leadership is obviously concerned, and is attempting to solve the problem by leaning as far to the left as possible without turning blue. Presumably, this is because they figure, if the voters don’t want Republicans, they must want Democrats. So, if the country is leaning to the left, the party “leaders” figure they’d better lean with it. (How’s that for leadership?) However, I have a different theory. I believe the real reason the Republican Party is losing its base is because it’s lost its direction. It’s no longer the party of conservatives. It’s the party of confusion. The Republican Party is having an identity crisis.

I still support McCain, but I don’t think he’s doing the party any favors by his constant attempts to “reach across the aisle” and pander to the left. Nor is he doing his own campaign any favors. When he tried to become the Republican Al Gore, the liberals to whom he was trying to pander just laughed at him, while many conservatives who were starting to come around to grudgingly support him, stopped, shook their heads, and turned away again in disgust. McCain, like the rest of the Republican Party, cannot seem to keep his core base intact. When you have a solid base, you can afford to reach out and try to bring in those on the fringe of your constituency. But when your base is crumbling underneath you, it does you no good to reach for those who are beyond your reach anyway and firmly entrenched on the other side.

I picture McCain climbing a tree, reaching for an apple on the outermost branch, while the trunk bends and groans and finally splinters beneath the awkward distribution of weight. That’s what’s happening to the entire Republican Party. If it leans any further to the left, it’s going split its core right down the middle. And then what?

Wake up Republicans! Nobody wants a watered down Democrat. The Democrats want a full strength Democrat, and the Republicans want a real (and by that, I mean conservative) Republican. What do the independents want? Well, if there were a real Republican party, maybe there wouldn’t be so many independents, because a lot of those independents used to be Republicans. And, if there were a real Republican Party, maybe the Libertarians and Constitutionalists would even get behind it.

Why is the Republican Party losing its base? Because the old die-hard conservatives are getting disgusted and wandering away, and the new crop of young conservatives are looking for something to believe in, to get excited about, to make them feel a surge of pride in their country and their leadership. The Republican Party today isn’t offering that. They’re offering lukewarm oatmeal instead. So the idealists are turning to the Libertarian Party or the Constitution Party, or registering independent, or coming up with new parties, splintering into sects and diluting the conservative vote. All because the Republican Party has put them on hold while it desperately tries to reach out to voters who don’t even share its core values.

The Republican Party used to be the party of ideals, the party of principles; now it’s the party of compromise. — Not thoughtful compromise, reached through strategic negotiation, but seemingly random compromise with people who aren’t even paying attention. What has happened to the Republican Party? How did it come to this pass? And is it too late to take it back?

Lukewarm oatmeal doesn’t inspire people. It may appeal to Goldilocks, but Goldilocks doesn’t vote.

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Obama’s Unsavory Endorsements

Last month, Ahmed Yousef, a top Hamas adviser, said “we like Mr. Obama, and we hope that he will win the election.” When Senator McCain was asked what he thought about the endorsement, he said “I think it is very clear who Hamas wants to be the next President of the United States. I think that the people should understand that I will be Hamas’ worst nightmare. If Senator Obama is favored by Hamas, I think people can make judgments accordingly.”

Senator Obama’s campaign immediately rebuked Senator McCain for his remarks, saying “This type of politics of division and distraction, not only lead to a campaign not worthy of the American people, but also has failed to help our families for too long.” Excuse me? This seems to be a stock answer used by the Obama campaign whenever somebody points out something Senator Obama would prefer to ignore. What do our families have to do with Hamas endorsing Senator Obama? Or with Senator McCain acknowledging that fact? Senator McCain didn’t make it up. He didn’t take it out of context. He didn’t even bring up the issue. He was asked a question, and he answered it candidly. Is that out of bounds?

Obama supporters have pointed out that Obama didn’t solicit the endorsement and, just because Hamas endorses Obama doesn’t mean Obama endorses Hamas. In fact, Senator Obama was just as quick to disassociate himself from the Hamas endorsement as he was earlier to disassociate himself from the Farrakhan endorsement. But the nagging question remains, why do such people and organizations endorse him?

I wonder if it’s a coincidence that the man Obama claimed as his spiritual mentor for 20+ years published articles on the Pastor’s Page of his church’s newsletter by a Hamas leader (who had an indictment against him for coordinating and financing terrorist activities while living in Chicago in the 1980s). Of course, that Hamas connection is to the Rev. Jeremiah Wright, rather than directly to Obama. And Obama finally did repudiate the Rev. Jeremiah Wright when he went so public with his views that Obama could no longer pretend ignorance of them with any credibility.

And Obama did reject Farrakhan’s endorsement. In fact, Farrakhan’s endorsement came as a public embarrassment at a time when Senator Obama was trying to convince American Jews that the anti-Semitism expressed by his mentor didn’t reflect his own views, and that he does believe Israel has a right to exist, even after having publicly expressed sympathy with the Palestinian cause in the past.

The fact that Hamas endorses Senator Obama may be totally beyond his control, and even embarrassing to him, but the question it raises is why does Hamas endorse him? The obvious answer is because they have reason to believe that they, and their agenda, would fare better with his administration in power than with either a McCain or a Clinton administration. Whether he agrees with their “cause” or not, I think it’s as clear to Hamas as it is to me that McCain is going to be a lot tougher on terrorists than Obama would be. Obama thinks you can negotiate with them, and has stated his intention to do so. Negotiating with terrorists is like negotiating with extortionists. It’s common knowledge that it doesn’t work. But Senator Obama thinks he can pull it off.

I’m not suggesting that I believe Senator Obama actually sympathizes with terrorists. But I do believe that he has neither the experience nor the disposition to effectively fight and defeat them. And, through no intentional fault of his own, it appears our enemies would be very happy to see him elected. Is it a good thing that terrorists would feel better/safer with Obama as our Commander in Chief?

The question is not whether he reciprocally endorses them. The question is, intentions aside, is what’s best for Hamas what’s best for America? Personally, I don’t think so.

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Dishonest Anti-McCain Ad

What McCain actually said:

Questioner: President Bush has talked about our staying in Iraq for fifty years…

McCain: Maybe a hundred. Make it one hundred. We’ve been in South Korea, we’ve been in Japan for sixty years. We’ve been in South Korea for fifty years or so. That’d be fine with me as long as Americans are not being injured or harmed or wounded or killed. Then it’s fine with me. I would hope it would be fine with you if we maintain a presence in a very volatile part of the world where Al Qaeda is training, recruiting, equipping and motivating people every single day.

What the Democrats want you to believe McCain said:

Questioner: President Bush has talked about our staying in Iraq for fifty years…

McCain: Maybe a hundred. — That’d be fine with me.

The ad created by the Democratic National Committee splices two snippets of McCain’s response together, so all it shows McCain saying is “Maybe a hundred. — That’d be fine with me.” And then it shows footage of American soldiers being blown up by an IED in Iraq. Wow. Talk about taking something out of context. How could one possibly twist somebody’s words into the exact opposite of their intended meaning more blatantly and calculatedly than that? How much more disrespectful could they be to the American soldiers who lost their lives in that incident? Is that what they died for? So their tragic deaths could be shamelessly exploited for political gain in a crudely deceptive smear campaign against an American war hero? I know politics can be dirty, but I’m thoroughly disgusted that the Democrats would stoop so low.

When you point out the dishonesty of the ad, its defenders shrug innocently, like they can’t imagine what’s to be offended about, and insist that the quotes are accurate because McCain literally did say those words. If somebody were to say “I would have no problem killing anybody who went on a shooting spree in an elementary school,” and I quoted them as saying “I would have no problem killing anybody,” would my statement be true? Apparently, by Democrat standards, it would. (At least if the person accused of making that statement was a Republican.)

When someone takes three words out of a sound byte, cuts out the next 26 words, and splices the first three together with the beginning of the next sentence, omitting the remaining 75% of that sentence, can there be any question that the intent is to fabricate a deliberate misrepresentation? Couldn’t one create just about any sound byte one wanted to by finding three word snippets and splicing them together? But, like petulant children caught in a lie, the Democrats insist “Well, he did actually say those words.”

McCain is trying to run a clean campaign. But the Democrat party is already wallowing in the mud and sleaze of dirty, deliberately disingenuous distortions. I can only hope that their lack of integrity and decency backfires, and that independents who might have considered voting Democrat, and even Democrats themselves, will be repelled by the depths to which their party has sunk.

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Published in: on April 30, 2008 at 2:18 pm  Comments (55)  
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Sometimes Nothing is the Right Thing to Do

I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.
John McCain

Despite the fact that Senator McCain has said the economy isn’t his strong point, he has a lot stronger grasp of basic economic principles than anybody else running for president, not to mention a lot of other people in Washington who ought to know better.

In addition to the Bear Stearns bailout, since the beginning of the year, the Fed has loaned over $260 billion to banks that got into financial trouble by making bad mortgage loans. The Foreclosure Prevention Act of 2008 is on the horizon, and there’s another bill lined up behind it to extend an additional $300-400 billion in federally guaranteed (that means guaranteed by you and me) mortgages for people who overextended themselves to buy houses that were well beyond their means.

Senator Obama talks about “folks [being] tricked into purchasing loans they can’t afford.” Both Senators Obama and Clinton think we need to kick in a $30 billion dollar emergency housing fund (at taxpayer expense) to help bail out these poor victims, never mind that they’re victims of their own greed and irresponsibility. Senator Clinton also wants to freeze subprime mortgage rates and impose a 90 day moratorium on foreclosures for the poor dears. And, earlier this week, Senator Clinton suggested that perhaps the government should start buying up foreclosed homes. It’s not enough for the government to be in the healthcare business, now she wants to get it into the real estate business, too. (Is there any business Mrs. Clinton doesn’t think the government should be in?)

While Senators Clinton and Obama are leaping over one another trying to come up with more innovative and expensive ways for the government to manipulate the housing market, Senator McCain is quietly saying it isn’t the role of the government to bail out either the banks or the borrowers. The Democrats scoff. Democratic National Committee Chairman Howard Dean sneers that McCain is taking “the same hands-off approach that President Bush used to lead us into this crisis.”

What the Democrats fail to understand is the basic principles of economics. (But what else is new?) It was not a “hands off” policy that got us into this mess, but a “hands on” policy of lowering interest rates and expanding FHA, FNMA, and FHLMC financing to encourage unprecedented (and unwarranted) growth in the housing market. The government got us into this situation by meddling in the free market. It isn’t going to get us out by meddling more. What needs to happen is the market needs to find a balance where the demand meets the supply. The only way for that to happen is to let it occur naturally. Yes, it means housing prices will drop. They’re doing that anyway. Yes, it’s painful. But it has to happen.

Federal policies aimed at making it easier for first time home buyers to buy houses before they could actually afford those houses led to an artificially high demand, which artificially inflated prices. People (and financing companies) started playing fast and loose, speculating that the manic spiral in home prices would continue indefinitely. But it couldn’t. Supply increased to meet demand, interest rates went up, people who overextended themselves couldn’t meet their payments and started defaulting, demand fell off just as supply was peaking, and the market was oversaturated. Now it has to correct.

The laws of economics weren’t made up by economists, any more than the laws of physics were made up by physicists. These “laws” are based on observation and analysis of naturally occurring phenomena. They can’t be changed or wished away. Imbalances do occur but, over time, they correct themselves. The housing market is self-correcting now. It will eventually reach equilibrium. Any measures that attempt to forestall that will only postpone the inevitable. A problem deferred is not a problem solved.

The Democrats insist that the government can’t just stand by and do nothing. Something bad is happening. We must do something! Anything! They have no idea how to solve the problem, because the problem can’t be solved by more government meddling, and government meddling is the only thing they know how to do. But, since they can think of nothing more embarrassing than standing around doing nothing, they’re leaping over each other trying desperately to show us that they will do something. (Not nothing, like Senator McCain.) And what they’ll do is what they always do. When they see a problem, they throw money at it. Your money. My money. Everybody’s money. Unfortunately, that won’t solve the problem. Because, sometimes, nothing is the right thing to do.

The Democratic response, as usual, is like a parent with a spoiled child. They think it’s their job as parent to prevent their child from ever experiencing any pain, so they go to any lengths to shield it from the consequences of its own actions. But a child who never faces consequences never learns. Sometimes pain is necessary, especially when it’s a natural consequence of irrational behavior.

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Campaign Slogan for McCain


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Published in: on February 14, 2008 at 7:28 pm  Comments (3)  

Is “I Told You So” Worth the Price?

Romney has gracefully bowed out of the race, explaining that he doesn’t want to divide the party any longer and exhorting us all to unite behind McCain. I regret to see him go. Obviously, I would have preferred for him to be the nominee. (Once again, my record is intact. — Every time I settle on one of the remaining candidates, he’s the next one to drop out.) But it was already clear that McCain was going to win the nomination; so I think Romney did what he needed to do, and I think he did it well.

Nevertheless, a number of conservatives are still planning to vote for the Clintons or Obama. They say it’s because they anticipate the worst, and want the Democrats to take the blame. If you’re one of those people, I have to ask, what exactly is it you want them to take the blame for?

  • For raising taxes to redistribute more wealth from those who earn it to those who don’t?

    Great. They’ll get the blame. You’ll get the bill.
    Is it worth it?

  • For bringing the war back home and fighting the terrorists here instead of there?

    Maybe they’ll be blamed. Or maybe they won’t. They already maintain that the reason the terrorists hate us is because the darned Repbublicans insist on supporting our ally, Isreal, instead of letting the Islamic fanatics destroy it. So, when they bring the troops home, and the terrorists follow, they’ll still blame the Republicans. — Becaues it really is America’s fault that those poor misunderstood terrorists hate us, after all…

  • For universal healthcare?

    Some people will blame them, — like those of us who end up footing the bill for other people’s unhealthy habits, and those who will be compelled by law to buy something they don’t think they need. But others will think it’s great, — the ones who end up getting subsidized by the rest of us. (They vote too, you know.)

  • For more problems with illegal aliens?

    Obviously, the voters don’t really care, since all of the candidates left in the race support the same immigration legislation.

  • For packing the Supreme Court with liberal justices?

    Some people will like it; some people won’t.
    But we’ll all have to live with the consequences.
    Are you OK with that?

Even if the Demos do get the blame, the damage will be done and we’ll be paying the price for years, well beyond the next administration. Is it really worth the price? Conservatives sat out the last election, with the same justification, and all it got us was a Democrat-controlled Congress. What good will it do to turn over the Exectutive Branch as well?

Those who are planning to withhold their votes, or vote for a third party candidate, might as well be voting for the Clintons or Obama, because that’s exactly what the Democrats are counting on. The liberals/Democrats will all rally around whichever socialist wins their nomination. The conservatives/Republicans will be so fragmented that we won’t even present a challenge. That’s the real reason the Domocrats favor McCain. It’s not because they actually support him (he’s diametrically opposed to them on taxes and the war), but because he’s so hated by the conservatives that they know, if he wins the nomination, the Demos won’t have any opposition.

I can relate to the frustration of the people who just want to walk away from this election in disgust, and wash their hands of it. It’s hard to muster the will to fight for a candidate you don’t even believe in. But remember all the federal agencies and presidential appointments. It’s not just the president you’re voting for, it’s which party controls the whole executive branch. If you don’t vote for the Republican candidate, you’re playing right into the Demos’ agenda.

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Published in: on February 7, 2008 at 9:42 pm  Comments (6)  
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There are Worse Things than McCain — Really!

OK, McCain it is. I’m not happy. You’re probably not either. I don’t know who all these “Republicans” are who are voting for him in the primaries, because I’m not aware of one person who likes him. But, be that as it may, the RINOs have spoken and McCain is going to be the Republican candidate. What do we do now?

The pragmatists will weigh the pros and cons and decide which candidate will do less harm to the country. The petulants will go home and sulk, and either not vote at all or throw away their vote on a third party candidate. The punitives will actually cross over and give aid and comfort to the enemy in our country’s time of crisis, and cast their vote for the Democrats out of spite.

From a pragmatist perspective, what are the key issues? The economy, the war, immigration, healthcare, and Supreme Court appointments are probably the most important.

The economy is a big one, because there’s a fundamental philosophical difference in the way Republicans and Democrats address the problem. Republicans believe in fixing the economy by cutting taxes to stimulate growth. Democrats believe the way to fix the economy is by raising taxes and redistributing the wealth. Which do you prefer? 

  •  McCain’s plan is to extend the Bush tax cuts, create more tax cuts for middle class families, make the current low capital gains and dividends tax rates permanent, and require a 60% majority in Congress to raise taxes in the future. He’ll also cut government programs that don’t work, earmarks, subsidies, and pork barrel spending.
  • Mrs. Clinton’s plan is to eliminate the Bush tax cuts, raise capital gains and dividends taxes back to their previous levels, spend $10 billion dollars on extending and broadening unemployment entitlements, hand over $25 billion to low/no income families for “emergency energy assistance,” establish a $30 billion emergency housing fund, and put a five-year rate freeze on sub-prime mortgages.

The war is another big one. Would you rather we fight it over there or over here?

  • McCain fully supports doing whatever is necessary to prosecute the war to the finish. He has consistently supported it from the start, and was an early proponent of the increase in troops.
  • Mrs. Clinton and Obama both supported the Iraq spending bill that would have brought most of our troops home by next month. Mrs. Clinton has promised that, if elected, she’ll bring all the troops home within two years. Obama promises to do it in one. Then we can fight the terrorists on our own soil. That ought to be fun.

On immigration, it’s a wash. They all supported the same immigration bill. Yes, McCain was a sponsor of it, but it’s the one thing on which they all agree, so there’s no win here.

On healthcare, we all know what Mrs. Clinton’s plan is.

  • Mrs. Clinton wants to legislate that everybody has to buy health insurance. For those who can’t afford it, she’ll just take the money out the rest of our pockets to make up the difference.
  • McCain opposes mandatory universal healthcare coverage.

There are likely to be three Supreme Court Justice appointments during the next administration.

  • McCain is a strict constructionist.
  • Mrs. Clinton would pack the court with liberal judges who believe we all need to be protected from ourselves more than we do from criminals and, like children, we can’t be trusted with firearms. (It’s kind of hard to defend yourself in an emergency with a trigger lock on your gun, but Mrs. Clinton thinks it’s necessary so we don’t accidentally shoot ourselves.)

There’s another consideration for the pragmatists. The president appoints the heads of a lot of federal agencies. If we have a Republican (or even a RINO) in the White House, these federal agencies are going to be run by Republicans. If we elect the Clintons or Obama, they’ll be run by socialists. Remember, it’s not just the president you’re voting for, it’s the party, too. 

Question of the day: If McCain were to choose Fred Thompson as his running mate, would that change your mind?

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