Monday, October 6, 2008

Biden & Katie's Restaurant

One more major slip-up for Biden in the VP-debate.

Quote: "Look, all you have to do is go down Union Street with me in Wilmington or go to Katie’s Restaurant or walk into Home Depot with me where I spend a lot of time and you ask anybody in there whether or not the economic and foreign policy of this administration has made them better off in the last eight years."

The problem is that there is no Katie's Restaurant in Wilmington. There was one by that name that closed 15 years ago!

Also, some guy tried calling around to all the local Home Depot's around Wilmington and could not find anyone who said they had ever seen Biden there.

It appears that Biden is again just making stuff up as he goes along, but saying it with such conviction that most people think he must be right. This example is not about an important issue, but what it does is makes you start taking everything Biden says with a grain of salt (if you didn't already).

Sunday, October 5, 2008

NY Times riding shotgun for Obama

The NY Times has finally come out with an article on Barack Obama's associations with the radical unrepentant terrorist William Ayers, and done a shoddy piece of journalism that basically concludes that these were just 2 people whose paths had crossed.

In reality, they had a close working relationship over a long period of time, with Obama chairing the board for the Chicago Annenberg Challenge, a program founded by Ayers to create a bunch of radical charter schools, Obama sending a lot of money toward Ayers and allies, Obama publicly endorsed Ayers radical book on juvenile crime, and Obama launching hit state senate campaign at a fundraiser at Ayers house.

The guy doing the most research into this is Stanley Kurtz. See his take on the NY Times article and follow links from there for much more information.

LA Times praises affordable housing policies in 1999

See this post at Hot Air for more great details on the cause of the financial crisis.

Why Paulson is buying assets

I have been thinking a lot about this $700 billion "bailout" or "rescue" package. One of the primary questions I have been trying to figure out is why Treasury Secretary Hank Paulson thinks he needs to use the money to purchase the troubled assets (Mortgage-backed securities, etc.).

If the problem is simply liquidity, meaning the banks have these assets but are unable in the short term to sell them quickly enough to keep enough cash on hand to meet their immediate obligations to creditors and investors, then why not just simply loan money to the banks to inject enough liquidity to keep otherwise stable institutions afloat?

The credit market, where the banks loan money to each other, has totally seized up. The reason is that banks have a total lack of confidence in the ability of other banks to repay the loans. One of the major reasons for this is the collapse of the market for MBS's, so the banks are uncertain how much value the assets at the other banks are worth.

Most of the assets have underlying value, even if the market has currently collapsed for them temporarily. Paulson wants to use the $700 billion to buy up a lot of these troubles assets. The more I think about it, I have realized that the reason he is going this route is because he is not just trying to inject liquidity. More importantly, he is trying to attack the causes of the confidence crisis. Once these troubled assets with uncertain value are taken off the balance sheets of banks, the banks will have much more confidence they know the real financial status of the other banks and will resume lending to each other.

The credit market did not sieze up because there wasn't enough money to be lent or not enough money needing to be borrowed. It siezed up because of uncertainty, and Paulson thinks he can remove enough uncertainty by unloading these troubled assets. It is the psychology of the market he it trying to fix. He has already tried injecting liquidity several times, and the dominos just kept falling.

The hardest part now is figuring how much to pay for these troubled assets. Pay too much and the taxpayers and therefore politicians of America will hate you forever when the government is unable to recoup their investment from the sale of these assets. Pay too little and the market price for these MBS's gets set too low and triggers a bunch more bank failures.

Politicians need to step back and let Paulson and other professionals use their best judgment in doing what they need to do to solve the financial crisis. The cost to everyone in the economy if the financial crisis worsens is much greater than the cost to the taxpayer if the government overpays some for these assets.

As an aside, I'll pass along another interesting feature of the current financial crisis. The only way the financial system is staying afloat at the moment is by money flowing through the governement. Banks that have money to lend are buying Treasury bills (which is why the interest rate on these bills is getting pushed down close to 0%). Treasury is then sending the money over the Federal Reserve, which acts as a lender of last resort to banks that need to borrow money. So at the moment, the government is borrowing and lending a higher volume of money than usual to act as a de facto intermediary for lending between banks.

Saturday, October 4, 2008

Heartbeat Away

There has been a lot of furor over whether Sarah Palin is ready to be a heartbeat away from the presidency. She has shown a lack of fluency in some national issues in recent interviews, and has a tendency to become almost incoherent trying to come up with an answer to some questions.

For instance, when Katie Couric asked her to name one Supreme Court decision other than Roe v. Wade that she disagreed with, Palin responded:

“Hmmm,” Ms. Palin, the Republican vice-presidential nominee, said after a brief silence. “Well, let’s see. There’s — of course in the great history of America there have been rulings that there’s never going to be absolute consensus by every American. And there are those issues, again, like Roe v. Wade, where I believe are best held on a state level and addressed there. So you know, going through the history of America, there would be others but — — .”

When she couldn't come up with a immediate answer, she should have just said something like, "I don't have one on the tip of my tongue, but in general, I would support appointing justices to the Supreme Court that do not legislate from the bench." What people like me want to know is if something happened to McCain and Palin became president, what kind of justice would she appoint to the Supreme Court if a vacancy arose. That is by far the most import decision relating to the Supreme Court a President makes. The incoherent rambling turns a weak answer into a substantial gaffe perfectly suited for ridicule.

In general, for a candidate like Palin who is a governor, lack of fluency in national issues is much less important to me than her ability to digest information and make good decisions.

On the other ticket, if one is worried about lack of fluency in issues, Joe Biden should raise more alarm. Here is a guy that has been in the Senate for 35 years, and a high-ranking member on the Judicial and Foreign Relations committees. And instead of making gaffes by incoherent rambling, Biden has a knack of making incredibly incorrect statements, but stating them with such conviction that he barely gets called on them.

For instance, this whopper in response to the financial crisis:

"When the stock market crashed, Franklin Roosevelt got on the television and didn't just talk about the princes of greed," Biden told Couric. "He said, 'Look, here's what happened.'"

Of course the stock market crashed in 1929 and FDR did not take office until 1933, and he wouldn't have gotten on TV because no one had a TV at the time. Further, FDR was very populist and did badmouth "greed", at one point even proposing a 100% tax on incomes over $25,000. (approx. $300,000 in today's dollars). So Biden was wrong on at least 3 points. Yet he made the statement with conviction like he knew what he was talking about.

In the VP debate this past Thursday, Biden made numerous remarkably inaccurate statements. Among them:

  • He repeated 3 times that we spend more in 3 weeks in Iraq than we have spent in Afghanistan since 2001. In reality, we have spent about $9 billion in Iraq in the last 3 weeks and over $177 billion in Afghanistan since 2001.
  • He said that along with France, we had kicked Hezbollah out of Lebanon, and that he had called for NATO troops. In reality, France and the US helped Lebanon pressure the Syrians out of Lebanon, Hezbollah had and maintains a strong presence in Lebanon, and there is absolutely no record of anyone calling for NATO troops. Further, there is about a 0.0% chance that NATO would have sent troops to Lebanon, something that a foreign policy expert shoud know.
  • He said is was "simply untrue" that Obama had said he would sit down with Iranian President Ahmadinejad. In reality, during the Democratic Primary YouTube debate in July 2007, a YouTube user asked if Obama would meet the leaders of Iran, Syria, Venezuela, Cuba, and North Korea without “precondition” during his first year in office. Obama replied, "I would. And the reason is this, that the notion that somehow not talking to countries is punishment to them -- which has been the guiding diplomatic principle of this administration -- is ridiculous." (APPLAUSE) Further, Hillary Clinton said she would not commit to meetings, Hillary's and Obama's campaigns exchanged dueling memos with Obama's campaign highlighting Obama's "new thinking", and Biden said "Absolutely positively no" to the question in August 2007. Obama even used to say on his website: "Obama is the only major candidate who supports tough, direct presidential diplomacy with Iran without preconditions." So Biden is not only incorrect, but he knows it because both Biden and Clinton were disagreeing about it last year.
  • Biden said, "Vice President Cheney has been the most dangerous vice president we’ve had probably in American history. The idea he doesn’t realize that Article I of the Constitution defines the role of the vice president of the United States, that’s the Executive Branch. He works in the Executive Branch. He should understand that. Everyone should understand that." In reality, Article I of the Constitution deals with the Legislative Branch and Article II deals with the Executive. The VP's role is defined in both Articles. In Article I, the VP is simply designated as the President of the Senate and votes to break a tie. The Constitution does not spell out what the President of the Senate's duties are, but the position definitely has both a legislative and executive role, even if recent VP's have done little on the legislative side other than to break a tie vote.

Remeber, Biden is supposed to be an expert on the Constitution and Foreign Policy, yet Palin was much more accurate during the debate.

Maybe Biden is the one we should worry about being a heartbeat away from the presidency.

Where is the defense of free markets?!

I am increasingly becoming frustrated with the absence of either McCain or Palin saying a single word in favor of free markets, especially during the first Presidential debate and Thursday's Vice-Presidential debate.

Barack Obama runs around saying the financial crisis has rendered the "final verdict" on the economic philosophy of the Bush Administration, a philosophy that McCain shares, that says that regulation is always bad and the free market should always be left alone. Bush & McCain said they wanted the market to run free, but instead they let it run wild.

This is utter nonsense!

The biggest single factor in the current financial crisis is the mess at Fannie Mae and Freddie Mac. These two Government Sponsored Enterprises (GSE's) hold over half the mortgages in the US.

The Bush Administration, John McCain, and other Republicans have tried to reign them in over the last 6 years and have been stopped at every turn mostly by Democrats.

The roots of the current crisis go back to the Community Reinvestment Act (CRA) in 1977. Back then, liberals were complaining about low rates of home ownership in minority neighborhoods. Because low-income neighborhoods can have a very distinct geographic area, you could sometimes draw a "red line" around entire neighborhoods where no one owned the home they lived in. Instead of assuming that this was because the people that lived in these neighborhoods did not have a sufficient income to put a required 10-20% down payment on a house, the Democrats blamed local mortgage lenders of "redlining."

The CRA required lenders to make sure they met "the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods." Despite the law's good intentions, the law's effect was to force lenders to make riskier loans, probably raising interest rates some in the process. But the main point here is that the CRA was the start of the move to lower lending standards in the name of "affordable housing."

In the late 80's and early 90's a series of minor changes gradually made CRA ratings more public and housing advocacy groups more power in demanding strict enforcment of the CRA. In 1995, the Clinton administration revamped the regulations regarding the CRA to give it, and housing advocacy groups, more teeth.

Fannie Mae and Freddie Mac were both created by Congress to help provide a secondary market for the mortgage industry. Local mortgage brokers and companies originate mortgage loans, and then sell a good portion of them to Fannie and Freddie. Fan and Fred then re-sell the loans to investors. In 1992, Congress passed a law that required Fannie Mae and Freddie Mac to "devote a portion of their lending to support affordable housing." Because these loans were more risky, Fan and Fred started bundling some solid loans with some risky ones into securities.

As early as 2002, even while President Bush was moving forward on an affordable housing initiative to increase minority home ownership through help with down payments and buyer education, the Bush administration began attempting to increase regulations on Fan and Fred. The two GSE's were getting so large and so leveraged that a failure of either one of them could cause major damage to the economy. Treasury Secretary John Snow was calling in 2003 for a "world-class regulator" for Fan and Fred. They were blocked by leading Democrats on the Banking committees in the House and Senate: Barney Frank, Chris Dodd, and Chuck Schumer.

Both Fan and Fred are shareholder owned and thus had incentive to grow like any publicly-owned company. But they were also chartered by Congress and therefore seen as having implicit government backing. With this special status they were able to obtain cheaper credit and use this advantage to dominate the secondary mortgage market.

Fannie Mae and Freddie Mac moved further and further into the sub-prime mortage market in the late 90's and early 2000's. In a series of House hearings in 2004 after an accounting scandal at Freddie Mac larger than Enron, Democrats continually defended Fannnie and Freddie, applauded their efforts toward affordable housing, and even threatened the regulator that they should be investigating him.

In 2005, the Senate Banking committee passed a bill on a party line vote -- all Republicans for and all Democrats against -- that would have set up a strong regulator for the GSE's. Later John McCain co-sponsored a bill to do the same, though it never got to a Senate floor vote over oppostion from almost all Democrats and a few Republicans. McCain said at the time:

"For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

"I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole."
Barack Obama didn't make a peep at the time.

By 2005 and 2006, a significant portion of the loans that the GSE's were buying were subprime loans. With the GSE's willing to take subprime loans off of any lenders hands, mortgage brokers had every incentive to make as much commission off of as many loans as possible. Fannie and Freddie were fueling the housing bubble.

When the bubble started to burst in 2007, forclosure rates started going up. Even with only 2% of the homes in the US in forclosure, Fannie and Freddie were both over-leveraged enough that they could not stay solvent. The government had to bail them out with $300 billion.

Worse yet, the entire financial system was poisoned with the GSE's mortgage-backed securites and MBS derivatives that started losing value and no one really knows how much they are all worth. The market dived on these MBS's and many financial firms, who in hindsight were also over-leveraged could not take the losses on these and went under.

Pretty soon the banks weren't sure what was on other banks' balance sheets and how much value they had, or who was going to go under next. Banks stopped overnight lending to each other, and voila, we have a crisis.

Now explain to me how the free market had anything to do with this crisis. The main players were the GSE's and goverment meddling with the market by demanding more affordable housing. Without the government screwing up the market, it is hard to see how a truly free market could have possibly led to the severity of a crisis we have right now.

I just wish McCain or Palin would stand up and say, "The current crisis is not a failure of free market principles or caused by deregulation. It was caused by the government's overzealous push for affordable housing through the Government Sponsered Enterprises of Fannie Mae and Freddie Mac. Democrats like Barney Frank and Chris Dodd have been at the heart of the problem. I am on record over 2 years ago in favor of tighter regulations on the GSE's. Barack Obama, as usual, just 'voted present.'"

How hard would that be to say?