Friday, December 12, 2008

Wisdom on Bailouts

Ron Paul recently spoke on the subject of bailouts:

We must remember that governments do not produce anything. Their only resources come from producers in the economy through such means as inflation and taxation. The government has an obligation to be good stewards of these resources. In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones.

By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed - the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.

Tuesday, December 9, 2008

Shooting in the Dark

Paul Krugman, a proponent of fiscal stimulus, recently published some of his thoughts on the subject:

Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future


we need a fiscal stimulus big enough to close a 7% output gap

These brief statements highlight a major problem with Keynesian economics, the assumption that there is one ideal "potential output", or worse, that the ideal level of output is that which is the greatest. What this fails to consider is that output based on debt is generally not good. To put it another way, growth based on debt and speculation is false growth. As we've seen recently, false economic growth eventually reverts, which can lead to quite severe crashes. So this leaves us with some questions: What sort of growth should we look to achieve? Is perpetual growth by any means possible the goal? Is contraction always bad, and if not, is there some magical level beyond which contraction becomes bad?

In the Keynesian view of the economy where consumer spending drives growth, merely stimulating consumer spending is the theoretical key to prosperity. But if this were so, why not take on unlimited amounts of debt, stimulating unlimited amounts of consumer spending in good times and bad? The fact that such a scenario would lead to disaster is not lost on Keynesians, which is why they instead look to achieve optimal growth, and stimulate spending if needed via the optimal amount of debt, whatever those things may be. If consumption can be stimulated just enough to increase output, but not so much that the cost of the stimulus outweighs the increase in production, then we've achieved something good. But how can we measure the result of our stimulus to know if it's been successful? How do we know if we've not simply created more false economic growth?

Keeping in mind that increased production based on consumption is the goal of fiscal stimulus, the success or failure of stimulus would clearly lie in what is or isn't consumed. This brings us to an important distinction, productive consumption versus nonproductive consumption. With productive consumption, a participant consumes based on what they produce. Their production not only enables them to maintain their well-being through consumption, their consumption sustains their ability to produce. Obviously not all consumption is productive though. While some economic participants are able to produce much more than they need to consume, which is clearly productive, other participants consume much more than they are able to produce, or they produce goods which are not useful for sustaining further economic production - this is clearly nonproductive. If the goal of fiscal stimulus is to grow production, we would certainly want to support the economic activities that produce the most useful production sustaining goods with the least amount of input. But herein lies the problem with stimulus policy, it makes no distinction between productive and nonproductive consumption, nor can it.

So what happens when we implement a fiscal stimulus? Realistically, it is impossible to measure and distinguish those economic activities which are productive from those which are nonproductive. Therefore, the result of stimulating consumption is a blanket subsidizing of both productive and nonproductive economic activities. Unfortunately, subsidizing those economic activities which are nonproductive results in false economic growth, which as always, will painfully revert at some point. Looking at recent history, we can clearly see that the growth of the housing and financial services sectors were beyond what was needed to sustain other economic participants. While their growth was measured as increased output, clearly it was false growth and has since receded.

Getting back to the original topic of implementing stimulus in order to achieve "potential output", two things are now clear: some portion of growth resulting from stimulated consumption will inevitably be false, and stimulating nonproductive activities is not only counter-productive, it is harmful to productive activities that are competing for the same resources.

Ultimately though, all that anyone is cares about is whether or not the end will justify the means. Do the benefits of fiscal stimulus outweigh the costs? Can we achieve potential output through fiscal stimulus, and more importantly, do we even know what an optimal output is? The problem with the calls for fiscal stimulus isn't the idea of stimulus itself, but with the fact that such calls fail to address the many inherent problems and questions raised here. For all of the very real costs that stimulus carries, we should hope for more from its proponents including Krugman. Anything less is shooting in the dark.

Sunday, November 2, 2008

Innocence and Freedom

Consider a recent argument in favor of a housing bailout:

I know many, many innocent people who just wanted to buy a home...Now the innocent people have houses worth $200,000 less than their 2005 purchase price.

The innocence of a homeowner relative the innocence of an uninvolved taxpayer is arguable. But innocence isn't the key issue pertaining to bailouts. They key issue is personal responsibility, an idea that is closely tied to freedom.

If someone bought an overpriced home, that was their decision, just as if someone decided to invest in beanie babies or NASCAR collector plates, that too is their decision. They, and nobody else, are responsible for the outcome. Forcing that responsibility onto someone else who had no involvement is a most clear violation of the other person's freedom.

Is it sad that people make bad economic choices? Of course. But what is most sad is the idea that anyone thinks it is ok to force the outcome of their bad decisions onto others. In the same way that we would not sentence one man for another man's freely executed crime, we should not burden one man with another man's freely made economic decisions.

As I've shown before, government economic policies such as subsidies, bailouts, stimulus and inflation are counter-productive, but even more important to recognize is that they are also counter to individual freedom.

Freedom to make bad decisions is inherent in the freedom to make good ones. If we are only free to make good decisions, we are not really free.

- Ron Paul

Wednesday, October 29, 2008

Rationalizing Theft

A writer for the NYT recently called for something to be done about housing:

Yes, there were lots of Americans who were not greedy or foolish during the housing bubble, and many resent the idea that their neighbors might get a bailout they don’t deserve. They need to get over themselves. If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.

It's interesting that certain parties should be protected from the harm brought on "through no fault of their own", but not others. In case you had trouble understanding this rationalization for a bailout, let me translate:

Wealth needs to be taken from party A (taxpayers) and given to party B (homeowners), because even though party B was foolish the outcome of their foolishness might hurt party C (other homeowners). And while party C might also have been foolish, though clearly not as foolish as party B, both parties are somehow more deserving of party A's wealth than party A itself. Allowing harm to come to parties B or C as a result of their foolishness is somehow worse than harming party A by stealing its wealth.

Since the government has nothing and produces nothing, all it can do is use its powers of coercion to redistribute wealth from one party to another with the hope that this redistribution will bring about the greatest overall benefit for society. This is the reason given for such intrusions, that the end will somehow justify the means. But how is it that the redistribution of capital from economic activities that are succeeding to those which have failed will some how bring about a better outcome? How do failing activities produce more wealth for society than those which are not? Perhaps it is important to look at who the activity is producing wealth for and for whom it is not.

A successful market economy depends on fairness and justice. These aren't just ideas that appeal to us as individuals, they are necessary in order for a market economy to function properly and to its full potential. A market economy that lacks fairness and discipline, where winners and losers are picked by the coercive power of the government, is an economy that disincentives participation, work ethic and innovation. It is the same problem that caused the failure of classical socialism - why work hard when the product of your labor may be taken away and given to someone else?

An economic system which allows for the forceful redistribution of wealth with the thought that it is for our own good, ultimately and ironically, disincentives economic productivity and brings about the very economic harm that it claims to protect us from, subsidizing activities that the economy cannot afford and that consumers do not want, violating freedoms all along the way.

Tuesday, October 28, 2008

Why did the gold standard fail?

If the classical gold standard worked so well, why did it break down? It broke down because governments were entrusted with the task of keeping their monetary promises, of seeing to it that pounds, dollars, francs, etc., were always redeemable in gold as they and their controlled banking system had pledged. It was not gold that failed; it was the folly of trusting government to keep its promises.

- Murray Rothbard

Saturday, September 27, 2008

Behind Closed Doors

From Marketwatch:

Pelosi said the exact timing of the House vote would depend on the outcome of closed-door meetings currently underway on Capitol Hill.

Freedom is won on the field and lost behind closed doors.

Saturday, September 20, 2008


I wonder what $700,000,000,000.00 could buy, you know, if we were to actually put it to some constructive use as opposed to, you know, handing it over to Wall Street.

One can only imagine.

Sunday, August 24, 2008

Quote of the day

We are little lost children who believe in fairy tales. We believe in Santa and the Tooth Fairy. But we don't believe in the Big Bad Wolf. That would be an impossible conspiracy or organized planning. We are in denial. We are part of the conspiracy of silence. There is no such thing as organized crime on the international level. The economy is just a series of random events and unpredictable black swans.

- The Guest

Monday, August 4, 2008

Boston Globe reader: On the Bailout

A letter to the editor from a Boston Globe reader:

I have an idea for a piece the Globe should write ('Inside Congress’s housing repair kit,' July 31): an analysis of two buyers who bought roughly the same house in the same neighborhood for the same price (say $500,000) at the peak of the market. The first buyer does things the right way: 20 percent down, documents income, fixed interest rate, mortgage = 28 percent of monthly income. The second puts nothing down, lies about his income, gets a negative amortization adjustable rate mortgage that resets so that he now pays 40 percent of his income. Home prices drop 20 percent since they bought.

The first guy has lost all his equity. The second guy gets to participate in Barney Frank’s and Chris Dodd’s great bailout plan. He negotiates his loan down to $360,000 and gets a lower fixed rate than the first guy since his new mortgage is subsidized by the Federal Housing Administration (read: the US taxpayer). He is rewarded for stupidity and lying.

Do I have this right? Is this still the USA we live in?

I have never in my life been more sickened by a piece of legislation than this one.

What more could I say.

Sunday, July 20, 2008

They didn't understand

The great housing crash is rolling on and lately there's a lot of talk about what happens next, the bailouts. There is a strong contingent of support for bailing out homeowners based on the fact that the government has already held no hesitation towards bailing out Wall Street players. So the argument goes, if they can be bailed out, why can't homeowners? A better question might be, why should anyone involved be bailed out?

Gretchen Morgenson at the New York Times was writing about the bailout controversy over the weekend and brought up that point above about Wall Streeters enjoying bailouts while homeowners have not (so far):

Borrowers who are in trouble on their mortgages have seen their government move slowly — or not all — to help them. But banks and the executives who ran them are quickly deemed worthy of taxpayer bailouts.
The message in this disconnect couldn’t be clearer. Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable.

This is a common premise coming from the pro-bailout crowd, roughly, that borrowers didn't understand their loans. As the basis for an invasive, socialist, taxpayer funded bailout, it is inadequate. Many homeowners clearly did understand their loans, yet they chose to take a gamble on a home purchase with the idea that their home's value would increase and net them a reward.

So how is it that such gambles should be subsidized by the hard-earned money of others who had no involvement whatsoever?

Freedom to make bad decisions is inherent in the freedom to make good ones. If we are only free to make good decisions, we are not really free.

- Ron Paul

Thursday, April 3, 2008

Quote of the day - Power Grab

Quote of the day

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Wednesday, March 26, 2008

I Can't Make This Stuff Up

As you may or may not be aware, Senator Clinton recently tapped former Fed chairman Greenspan to head a committee charged with finding a solution to the current housing crash. As hundreds of bloggers have pointed out (yet the mainstream media fails to grasp), it is stupifyingly outrageous to think that Greenspan, the very man who helped create the housing bubble, should be charged with finding a solution to it.

In light of this, The Philadelphia Daily News asked Senator Clinton why she would pick Greenspan to head up this effort. Her response:

"He has a calming influence still to this day on Wall Street - don’t ask me why because I never understand what he’s saying - but nevertheless people respond to that Delphic oracle approach. I think it would be wise to include him. And recently he’s come out, and very smartly so, that we have to deal with housing and maybe we need to have some kind of buyout mechanism for mortgages. So he’s moved on his understanding and depth of the problem - but you know you could pick three others. You just have to have some demonstrable involvement of presidential leadership."


This, to me, is kind of like saying we should put a mobster in charge of dealing with a crime problem. The only solution they're going to give you is the very thing that caused the problem in the first place (government intervention).

Friday, March 7, 2008

What is Freedom?

I see and hear a lot of misperceptions about what freedom is. For example, many think that consumer choice is freedom, but this goes without recognizing that those choices come at a price that is mostly unseen. Really, it seems that that most people don't at all understand what freedom really is. The Creed of Freedom defines it perfectly:


I believe that only individuals have rights, not the collective group; that these rights are intrinsic to each individual, not granted by the state; for if the state has the power to grant them, it also has the power to deny them, and that is incompatible with personal liberty.

I believe that a just government derives its power solely from the governed. Therefore, the state must never presume to do anything beyond what individual citizens also have the right to do. Otherwise, the state is a power unto itself and becomes the master instead of the servant of society.


I believe that one of the greatest threats to freedom is to allow any group, no matter its numeric superiority, to deny the rights of the minority; and that one of the primary functions of just government is to protect each individual from the greed and passion of the majority.


I believe that desirable social and economic objectives are better achieved by voluntary action than by coercion of law. I believe that social tranquility and brotherhood are better achieved by tolerance, persuasion, and the power of good example than by coercion of law. I believe that those in need are better served by charity, which is the giving of one's own money, than by welfare, which is the giving of other people's money through coercion of law.


I believe that all citizens should be equal under law, regardless of their national origin, race, religion, gender, education, economic status, life style, or political opinion. Likewise, no class should be given preferential treatment, regardless of the merit or popularity of its cause. To favor one class over another is not equality under law.


I believe that the proper role of government is negative, not positive; defensive, not aggressive. It is to protect, not to provide; for if the state is granted the power to provide for some, it must also be able to take from others, and once that power is granted, there are those who will seek it for their advantage. It always leads to legalized plunder and loss of freedom. If government is powerful enough to give us everything we want, it is also powerful enough to take from us everything we have. Therefore, the proper function of government is to protect the lives, liberty, and property of its citizens; nothing more. That government is best which governs least.

Thursday, March 6, 2008

Everything is just fine

My man Mish explains that everything is fine:

Other than overleverage, bad debts, sinking home prices, no jobs, shrinking wages, cash strapped US consumers, rising oil prices, a sinking US dollar, $500 trillion in derivatives not marked to market, rampant overcapacity, underfunded pension plans, looming boomer retirements, no funding for Medicaid, no funding for Medicare, and no Social Security trust fund, everything is just fine.

Quote of the day - Punishment for Prudence

"Our own tax dollars will be used to prevent us from getting a good deal on a house"


Tuesday, March 4, 2008

The Height of Hypocrisy

For anyone with a decent memory (or access to google) the housing bubble was a period littered with media stories shilling the glories of endless house appreciation from a calvacade of experts and industry insiders whose opinions were never met with opposition in print. The New York Times was at the forefront of this movement, giving itself over to almost daily shilling from the National Association of Realtors and experts like David Lereah who saw nothing but perpetual appreciation for housing with no consequences to speak of.

Now that housing is crashing, the New York Times sees it fit to join the "told you so" crowd, lashing out at experts, the very experts they chose to cite over and over in their articles, for having not foreseen the bubble. Let's tune in:

ONE great puzzle about the recent housing bubble is why even most experts didn’t recognize the bubble as it was forming...The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world.

It seems the height of hypocrisy that the NYT, an entity which repeatedly chose to cite individuals who had a vested interest in perpetuating the housing bubble over the contrarian experts who accurately predicted what was to happen, yet that the NYT is coming away from all of this criticizing the very experts they chose to showcase. In fact, even this week the Times is still going to the same losers for more expert advice. Is it any wonder what the outcome will be?

Furthermore, these people are being influenced by agencies like the National Association of Realtors, which is conducting a public-relations campaign intended to show that putting money into housing is a reliable way to build wealth. Under these circumstances, it’s easy to understand how even experts could come to believe that housing is a spectacular investment.

This is clearly the most offensive bit of the article since, as was mentioned before, anyone with a decent memory will vividly remember near daily quotes from experts at the NAR, published in the NYT, regarding the housing outlook (the NAR, for those not in the know, is infamous for inaccurately predicting outcomes and projecting overly optimistic economic outlooks).

The fundamental problem is that the information obtained by any individual — even one as well-placed as the chairman of the Federal Reserve — is bound to be incomplete.

It's not entirely clear what this statement is intended to mean, but I take it as an excuse for the Fed chairman having missed the housing bubble. When so many contrarian economists were sounding the alarm, there's no excuse for anyone to have not seen what was coming, particularly the Fed chairman. The idea that the Fed chairman has inadequate information is just ridiculous.

It is clear that just such an information cascade helped to create the housing bubble.

I couldn't agree more. The New York Times stands guilty.

There is a slight catch to all of this, that this article was written by Robert Shiller, one of the economists who actually did foresee the problems with housing. Unfortunately though, the New York Times having ran this piece can be seen as an obvious attempt to wash over their hypocrisy with Mr. Shiller's credibility. Fortunately for us, we're not so easily taken.

Friday, February 29, 2008

The Fed has my back

I despise the Fed as much as the next guy (or at least as much as the next guy should despise the Fed), so it was interesting to see today that the President of the St. Louis Federal Reserve bank has my back regarding moral hazards and GSEs:

I am more skeptical of the financial strength of the GSEs, and believe that we could see substantial problems in that sector.


I would put the GSEs at the top of my list of sources of potentially serious problems. If those problems were realized, they would be a direct result of moral hazard inherent in the current structure of the GSEs.

I'm actually a bit surprised to see a Fed bank President acknowledging any moral hazard. Apparently there's a limit to how far some people will go to ignore the obvious.

Thursday, February 28, 2008

The Captain is Drunk

Fannie Mae and Freddie Mac (government subsidized entities, GSEs) are posting billions in losses, facing insolvency, their portfolios are rapidly becoming worth less and less, a government bailout looms on the horizon, and what does the Office of Federal Housing Enterprise Oversight do? They raise loan limits for Fannie and Freddie, remove portfolio caps altogether and ease capital requirements.

As Mish is quick to point out, the mission of the GSEs is to make housing affordable, yet somehow instead of doing this they've been busy the last few years driving up home prices by buying risky loans, the results of which are now being felt by everyone. Now that the bubble has burst, instead of reversing course and getting back to their core mission of affordability, they decide to further support inflated home prices by raising the conforming limit to over $729,000. I defy anyone to explain to me how anything near $729,000 is affordable for the average American.

So, what the hell is going on you ask? Home prices are falling and banks and wall street are suffering greatly as a result. That's it. The mission of the GSEs now is to inflate home prices at all costs, quite a drift from their original mission of promoting affordability. Clearly the GSEs are headed on a course for disaster, but that doesn't matter. After all, what cost is it to them when they file for bankruptcy? The taxpayers will be picking up the bill.

The captain is drunk, the ship is heading for a reef and instead of turning away we're steering straight into disaster. The shipowners have an insurance policy they're hoping to collect on.