Saturday, February 21, 2009

Sowell: Housing Crisis Caused By Government

I am utterly disgusted with the braindead way that people will accept the premise that "we tried the free market with no regulation for the last 8 years and look where it got us." Obama, other Democrats, and so many in the media incessantly repeat some variation of this premise. Every conservative argument for free markets is met with a response that the free market was how we got into this mess, and the voters just voted for change. It makes me want to puke.

The voters voted for Obama and Democrats because the country and the economy had been talked down for 6 years, so Bush's numbers were really low, and we were in the middle of a financial crisis. Every similar situation in American history has resulted in the party that did not have the presidency winning the presidency. Simply put, a lot of ill-informed voters made a big mistake.

The most maddening part of all is that the financial crisis was caused by the housing bubble bursting, and the primary culprits responsible for the housing bubble were DEMOCRATS! Thomas Sowell has a great piece on this.

We truly have put the foxes in charge of the hen-house. The Democrats primarily caused the problem, and then won an election because the Republicans had the presidency when the consequences hit. It is as if the guard-dog let the fox slip by him and nab a hen, so the farmer puts the fox in charge of hen-house security because the guard-dog wasn't doing a very good job.

Krauthammer Hits Obama on Diplomacy Blunders

Krauthammer hits Obama pretty good on his foreign policy blunders so far.

All of Charles Krauthammer's articles are well-worth reading.

I don't agree with him 100% of the time, but he is one of the smartest guys around. Thomas Sowell is another.

Housing Price Decline Not Done Yet

Hat tip to Save The GOP where I found the above chart.

As you can see from the chart, from 1997 to 2007, we did not just have a housing bubble, but rather a housing spike. Prices spiked by over 80% and are only half-way back to historical levels. The spike was caused mostly by a combination of the following factors:
  • The growth of subprime loans and other poor lending/borrowing practices
  • The increase in flipping houses and other speculation, especially in certain markets
  • The expansion of Fannie Mae & Freddie Mac into the subprime market, fueled by primarily Democratic support for "affordable housing"
  • The increasing volume of foreign capital from the trade deficit that was used to invest in the US housing market
  • The "easy money" policies (i.e., low interest rates) by Alan Greenspan at the Federal Reserve during the early part of the decade

  • Throwing money at this problem at this point is a losing battle, and it is bad policy as well. Do we really want to attempt to spend enough taxpayer money to prop up the housing market well above its historical level? To do so would be to continue to allocate more dollars toward housing than is necessary, leaving less in everyone's pocket to spend on other needs/wants.

    A lot of people have been priced out of the market (especially under traditional lending standards like 20% down!), and a housing market correction back to more historical levels will allow many to buy their first house or upgrade to a better one at a lower cost.

    The faster the market is allowed to correct and stabilize at a more historical level, the faster people will have the confidence to jump back into the market and buy a house. No one wants to buy a house if they think its value is going to drop by another 30-50%. Once people see that prices have stabilized at what seems like a bargain price, they will start buying houses again. The longer we prevent this from happening, the longer there will be negative spillover effects throughout the rest of the economy.

    However, the housing correction is massive enough it has already caused the financial crisis. Too many banks had too many Mortgage-backed Securities (MBS's) which, with the falling housing prices and the complexity of how mortgages are packaged, sliced, and repackaged, no one knew the price of. Since banks were holding significant levels of MBS's, and other banks didn't know how much they were worth, there was a crisis of confidence and lending between banks ground to a halt, resulting in the frozen credit market. The government had to take action to thaw the market to avoid a severe economic shock.

    So the government must keep a close eye on the effects of the housing correction, and make sure it does not trigger a disaster, but otherwise the correction should be allowed to proceed.

    Once the correction has brought prices back down near historical levels, that is the point at which more government action might be justified in order to prevent an over-correction.

    Saturday, February 14, 2009

    Paul Ryan: Return to stagflation?

    Paul Ryan, Republican US House Representative from Wisconsin, is quickly becoming one of my favorites.

    He has an Op-Ed in the NY Times yesterday that is right on the money.

    Increased government spending is at best a short term boost to GDP at the larger expense of long term capital and investment. Government spending is very inefficient -- approximately 30% of every dollar that flows through Washington is wasted on administrative costs. I say wasted because all those administrative costs are completely avoided if people simply keep more of their own money and spend it directly. In addition, the government can only spend money after it taxes, borrows, or prints it. Lets take those one at a time:

    1. Higher tax rates hurt the economy by discouraging higher productivity. If you could work additional hours at your job, make extra effort to educate yourself more, or install automation or technology to increase your business' productivity, but half of every dollar of increased income is taken by the government, you may not make that extra effort or investment. If the government raises the tax rate by 3% or 5%, more and more extra effort or investement is not undertaken, and the productivity of the economy as a whole suffers. Additionally, more money flowing through Washington means more government power and instrusion on citizens' lives, a loss of freedom. What proponents of larger government spending really believe is that they know better than taxpayers what their money should be spent on.

    2. Borrowing money hurts the government's financial standing, and costs taxpayers hundreds of billions in interest annually. Borrowing is limited by how much money our citizens and other countries have to lend, and if we get so overburdened by debt that lenders lose confidence that lending to America is a safe investment, we are really in trouble. As Ryan points out in his Op-Ed, many other countries do not have the money to lend right now, so we may have trouble finding enough money to borrow to finance all this government spending. Anything that is borrowed today will have to be paid back by future generations which will be a significant drag on our economy at that time. The current rate of borrowing is completely unsustainable in the long term.

    3. Printing money will cause inflation. If there is more money to spend, prices are driven up in the same way having extra money passed out to bidders at an auction would result in higher bids for auction items. At the end of the day, bidders simply paid more for the same items, and each individual dollar was less valuable and had less purchasing power. Inflation really hits the elderly and others on fixed incomes, as well as those on tight budgets, and eats away at investment income. Owners of real assets, such as real estate or equipment, are better off after inflation because they can now sell their assets at a higher price. So inflation hurts low income earners worst and helps more wealthy owners of real assets. While I actually agree with the concept of pumping more money into the financial system to stabilize it last year by counteracting the credit crunch, I don't know if anyone has a grasp on whether we've printed too much, too little or about right so far. What I do know is that as soon as confidence rebuilds and money starts coming off the sidelines, we must aggressively slow down the rate of printing money or risk double-digit inflation.

    The lessons from the Japanese over the last 2 decades, and from the Stimulus checks sent out in 2001 and 2008, are that one time payouts to citizens only cause a small short-term increase in GDP from the short term spending, and hinder rather than help overall economic growth.

    These lessons are completely lost by President Obama and Democrats in Congress, who are much more interested in pushing through a Democratic wish-list of spending projects while they have the votes and enough political cover from Obama's recent election victory and non-stop fear-mongering.