More Socialism from Republicans

[eisely]

Nolesrule,

 

The free market also works very well in international trade. The idea you describe is a very old idea relating the flow of specie to price levels and direction of trade. If you really subscribe to this idea, and it does have some merit, the flow of cash to the other country will lead to inflation there and the trade imbalance will shift back to your country. This is a very simplistic view, but it does captures some basic concepts.

 

Before the use of paper money and modern banking systems, the idea that the flow of specie (commodity money, namely gold) would influence price levels and ultimately the balance of trade was a sound idea. Today central banks can to some extent reduce the impact of cash flows by soaking up the excess cash as yet another trade influencing policy.

 

International trade is based on specialization and the division of labor, concepts going back to Adam Smith, applied globally just as they apply in local or national economies.

 

The extra value created through specialization that leads to higher productivity is distributed through the market to the benefit of both sellers and buyers, absent restrictive trade practices and unfair subsidies. These latter two issues are real issues and the US has its own share of restrictions, notably quotas on imported sugar, that lead to trade inefficiencies. But the existence of barriers and subsidies only underline the point that markets will divide gains and it is a two way street.

[packsaddle]

Eisely, I'd be interested in reading your take on the events of these last few days including LEH, MER, and AIG. It's pretty much ended any chance I have of retirement anytime soon.

 

I'd also be interested in reading anyone's reasoning for support for privatizing Social Security as a way to 'fix' it.

[Gold Winger]

"The extra value created through specialization that leads to higher productivity is distributed through the market to the benefit of both sellers and buyers,"

 

Translation: Mo' money for the greedy capitalist and less money for the struggling proles.

 

 

[nolesrule]

But does that flow take population size, wages and price points into account? We are outsourcing programming to India and manufacturing to China, countries with populations 3-4 times that of the U.S. At the same time, they are not receiving nearly the same wages that their American counterparts would have received, and the goods and services produced are being sold in those countries for much less, so the return flow isn't there either. A copy of MS Windows that costs us $150 to buy might cost $30 over there. $20 DVDs are sold for $2-3 in China and its neighboring countries. So that means not only are we sending them money for jobs that used to be ours, but we are also subsidizing their consumer purchases.

 

So, when you take $35/hour jobs out of an economy of 300 million people and send them to a country of 1.2 billion people for $10/hour, how long does it take for the flow to reverse?

 

Division of labor is supposed to reduce costs, and those savings are supposed to be passed on to the consumer. That's not what's happening.

 

America's businesses have been corporatized, so rather than the savings being passed on to consumers, they are passed on to shareholders as dividends and awarded as massive bonuses to executives. Consumers no longer have the ability to negotiate price anymore on purchases beyond cars and house purchases, because big box retail stores (also corporatized) have put the mom and pop competitors out of business, funnelling the local economy's money to Bentonville, Arkansas (as an example) while paying their retail employees a non-living wage so that profits are not circulating back into the local economy.

[eisely]

Packsaddle,

 

I have not been following these events too closely this last week. This has been my busy season through September 15 and my weekend was largely devoted to scouting.

 

Both Lehman and Merrill Lynch profited from the misguided attempts to separate risk from investment in the recent years and have now paid the price. I do regret the loss of jobs of the lower ranked people in these organizations who did not profit as much in the good times and did not participate in the stupid decisions that resulted in the demise or loss of independence of the companies. I emphasize that the actions taken, or not taken, by the government are not bailouts since the shareholders stand to lose everything. If anybody put all their eggs in one of these baskets that is regrettable. Never put all your eggs into one basket, particularly when investing in equities. People with investment accounts with these organizations should be OK as those are fiduciary accounts, unless there is serious fraud involved, and I have not heard any suspicions of fraud.

 

AIG appears to be sound, but having a temporary cash flow problem. I saw a piece late today where the governor of New York has consented to AIG using certain assets as collateral for short term borrowing. I don't know why AIG in particular is having problems. I think one of their insurance companies was insuring mortgages and all the mortgage insurers are hurting. This is also the company that suffered after Elliot Spitzer attacked the top management and forced the CEO out on trumped up charges. Thank you Elliot.

 

Nolesrule,

 

Your post deserves a longer reply than I have time for right now.(This message has been edited by eisely)

[eisely]

This ediorial appeared on Monday September 15 in Investors Business Daily.

 

______________________________

 

Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the "trickle-down" economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend.

 

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

 

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

 

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

 

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

 

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

 

As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

 

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

 

Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses.

 

In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

 

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

 

At the same time, the Clinton administration was pushing Fannie and her brother Freddie Mac to buy more mortgages from low-income households.

 

The Clinton-era corruption, combined with unprecedented catering to affordable-housing lobbyists, resulted in today's nationalization of both Fannie and Freddie, a move that is expected to cost taxpayers tens of billions of dollars.

 

And the worst is far from over. By the time it is, we'll all be paying for Clinton's social experiment, one that Obama hopes to trump with a whole new round of meddling in the housing and jobs markets. In fact, the social experiment Obama has planned could dwarf both the Great Society and New Deal in size and scope.

 

There's a political root cause to this mess that we ignore at our peril. If we blame the wrong culprits, we'll learn the wrong lessons. And taxpayers will be on the hook for even larger bailouts down the road.

 

But the government-can-do-no-wrong crowd just doesn't get it. They won't acknowledge the law of unintended consequences from well-meaning, if misguided, acts.

 

Obama and Democrats on the Hill think even more regulation and more interference in the market will solve the problem their policies helped cause. For now, unarmed by the historic record, conventional wisdom is buying into their blame-business-first rhetoric and bigger-government solutions.

 

While government arguably has a role in helping low-income folks buy a home, Clinton went overboard by strong-arming lenders with tougher and tougher regulations, which only led to lenders taking on hundreds of billions in subprime bilge.

 

Market failure? Hardly. Once again, this crisis has government's fingerprints all over it.

 

[nolesrule]

Yeah, I know. I rambled a bit onto some different, but still relevant, side issues. I'm no economist, but I am good at math and I'm a small business owner that knows how to follow the money.

[Bob White]

More Socialism from Republicans?

 

We can track the Democrat involvement in Fannie Mae and Freddie Mac back to their very beginning. It was Democrat FDR that created these institutions and sheltered them from inspection from the SEC, It was Democrat LBJ that privitized them but without removing their immunity from taxation. So they became a private company that had no government oversight and yet had government granted freedom from taxation. Then came Clintons involvement that Eisley outlined. Followed by the Democrat controlled Senate that passed the the bial-out plan that they attached to a "Home Owners Relief" plan, to insure that it would not get vetoed.

 

Now the Democrat presidential candidate is courting votes by saying he will make sure that people who can't pay their mortages can keep their homes. That certainly doesn't seem to be raising any eybrows among dems, but it should.

 

Republican Socialism??? Hardly.

[BadenP]

Bob

Your understanding of the financial industry and its history is not only innaccurate it is simplistic, and full of misinformation Fannie Mae and Freddie Mac were created because the many small and medium sized banks that exsisted then could not handle the increasing financial burden of the onslaught of the number of home mortgages as the massive move to suburbia started to take place. This problem became worse after WWII with the returning vets using the GI bill to buy new homes. These little banks were going belly up right and left and needed help. There were more foreclosures going on then are today. So Fannie and Freddie were created as a way to strengthen the banking industry so all of them could compete on an equal playing field for the home mortgage business. This was not a Democratic or Republican issue as you were trying to make it, and Congress at the time also had to approve the creation of these agencies.

 

So Bob White please learn the facts first (This message has been edited by a staff member.)

[Beavah]

Yah, and now we've added AIG to the taxpayer-backed bailout, eh? Not even a bank, an insurance company! Though by all accounts, it was one that was expert at lobbying and influence-buyin'.

 

Eisely, I can't buy your notion that these massive interventions in the private sector aren't bailouts just because some of da equity holders lost their equity. Especially not given the executive multi-million dollar severances, or the dividends or profits equity holders made in those firms in years past. But da real issue is that it's a bailout of all those who lent money to such poorly run, insolvent firms, or who were counterparties in derivatives with such insolvent firms. Caveat emptor. If yeh buy an exotic mortgage-backed derivative from a crook thinkin' it's a great deal, yeh lose. Yeh don't expect the taxpayer to take on the crook's obligation just so you can get paid.

 

Socialized risk, privatized profits, pure and simple. Just a grand theft from da taxpayer and the nation.

 

I also love da folks runnin' around calling for more regulation who were da same ones in the Gingritch Congress who voted to dismantle the depression-era regulations on bankin', and have been in favor of decreasin' required bank reserves. I'm not fond of too much regulation of markets, mind. But when they eliminated those prudent regulations, the other parts of the depression-era package should have been eliminated at the same time, eh? Director immunity and deposit insurance backed by the taxpayer.

 

If yeh gamble, yeh gamble only with your own money.

 

Beavah

 

 

[evmori]

BadenP,

 

Fact to hardline partyliners aren't important! It how you can spin them to make you candidate look good & the other candidate look bad that's important! Duh!

[eisely]

Beavah,

 

I happen to agree that super generous severance packages for CEO's that take the company down are insane and unfair. There may be a way to attack these things and recover some of that money, but under existing law that would appear to be very difficult to do.

 

The federal government coming out of WWII did a great many things to increase home ownership. Fannie Mae is one of those earlier creations. I think Freddie Mac is a more recent arrival and I don't understand why we ever needed two frankensteins when one would do just fine.

 

The underlying justification for the existence of these two entities was that they could provide liquidity to the primary lenders by purchasing the mortgages funded initially by private sector lenders. There are a lot ways this could be done and it was never essential that any institution like these had to exist to perform this function. Purely private operations could have done it just as well and could still do it. I suspect that these institutions will be broken up and fully privatized.

 

The financial system as we understand it was brought under heavy regulation during the depression as a direct result of the market crash of 1929 and the bank failures subsequent to that. One of the ideas introduced at that time was government underwritten deposit insurance, and it was effective in stopping panic runs on banks. The major law was called the Glass Steagall Act that separated depository institutions from the function of underwriting securities which is what "investment banks" do. I never fully understood why investment banks were called investment banks because they did not accept deposits as a conventional bank does. Beginning as far back as the 70's there was a movement to de regulate the financial services industry and this has happened over time. Frankly, I think there was wisdom in keeping the depository institutions which are critical to the economy separate from these other risk taking activities. I think we may move back in that direction.

 

None of the candidates at the top of any party's ticket that I know of really knows what is going on or how to improve things. McCain's call for a commission is actually the right suggestion because you could get people who really did understand the industry to think about it seriously away from the hubbub of an active election campaign.

 

The action to lend funds to AIG is a bailout, but one that was far more justifiable than lifting a finger to save either Merrill Lynch or Lehman Bros. The reason is that all the insurance commitments of AIG would then be called into question with unpredictable consequences. I expect AIG to also be broken up as a result of all this. There is a good chance the government will actually make money off of this particular bailout when all the dust settles.

 

This mess was not created by George Bush or by any single president. These problems always originate in the legislature that makes the laws. The difficulty will be in getting the congress to acknowledge the mistakes it has made over the years. The president does not make these policies. The congress does.

 

(This message has been edited by eisely)

[Bob White]

BadenP

 

Your efforts to attack my posts simply to attack me personally are becoming more and more blatant. I never addressed why Fannie Mae or Freddie mack were created, only by whom.

 

There was nothing incorrect or innacurate in my post. If you can factually dispute anything I presented please show your evidence?

 

Do you deny they were created by a Democrat controlled Congress under a Democrat president in 1938?

 

Do you deny that the they were privatized under LBJ, a Democrat, also with a Democrat controlled congress.

 

Or that the bail out was passed now by a Democrat controlled congress from a plan endorsed by a Democrat controlled Senate Banking Committee?

 

You can shout Republican Socialism all you want, but the facts cannot be changed that this was a Democrat creation and every major problem with it came from the actions of a Democrat controlled congress.

 

Now perhaps you can base your response on the facts and not on your personal opinion of me...but I doubt it.

 

 

 

 

 

[evmori]

Knowing an organization was created but not understanding why the organization was created leads to misconceptions about the organization.

[Aquila calva]

We privatize profits; we socialize losses."

 

Listen to the whole explanation here:

 

 

http://www.npr.org/templates/story/story.php?storyId=94686428