Socialism and the End of the American Dream

The theory of "Looting" explains many of the financial crisis of the past and present. Perhaps too too many! This article introduces a white paper , "Looting". The authors argue that multiple financial crises can be explained by this phenomenon, including the belief that a financial institution and entangled "counterparty" is too big to fail. " .... an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations...."

We just passed the first anniversary of an important, if little noted, meeting where the plans for what would become the government's attempted bailout of the banking system were first hatched. One year ago, a group of venture capitalists, Silicon Valley executives and professors at the Stanford Institute for Economic Policy Research met to discuss the looming crisis in finance and debate a possible bailout. It was early for such talk. Bear Stearns had not yet collapsed. Hank Paulson was still deriding the notion of a bailout and knotting his brow about moral hazard. But the group gathered at Stanford, which included Larry Summers and Long-Term Capital Management veteran and Nobel laureate Myron Scholes, saw what was coming: the government would eventually spend a lot of tax payer money in an attempt to clean up the credit mess.

March 9 (Bloomberg) -- Back in the 1960s, Lyndon Johnson gave us the War on Poverty. In the 1970s, Richard Nixon launched the War on Drugs. Now that we have seen President Barack Obama's first-year legislative agenda, we know what kind of a war he intends to wage. It is no wonder that markets are imploding around us. Obama is giving us the War on Business. Imagine that some hypothetical enemy state spent years preparing a "Manchurian Candidate" to destroy the U.S. economy once elected. What policies might that leader pursue?

Meeting the characters in "House of Cards," it's not easy to conceive of people less deserving of federal assistance. In 1997, Bear Stearns helped pioneer the subprime mortgage-backed security by serving as co-underwriter on a $385 million offering. By the mid-2000s, Bear was the leading issuer of such securities and a leader in collateralized debt obligations, which offered even less transparency to investors. Bear was a vertically integrated manufacturer of mortgage chaos, making individual loans to home buyers, servicing the loans, bundling them into pools for investors, marketing the securities and also borrowing huge sums to finance internal hedge funds that held onto these dodgy assets. House of Cards By William D. Cohan (Doubleday, 468 pages, $27.95) Mr. Cohan describes the succession of government policies that encouraged Bear and others to invest so heavily in mortgage finance, from the Fed's easy money to Clinton-era changes to the Community Reinvestment Act requiring more loans to low-income borrowers. But the firm itself deserves the lion's share of the blame for its own collapse. Suggestions to sell some of its risky mortgage assets, or to raise capital, or to consider merger partners were brushed aside in the years and months leading up to the debacle. Paul Friedman, chief operating officer of Bear's fixed-income division, tells Mr. Cohan that "we did this to ourselves. . . . It's our fault for allowing it to get this far, and for not taking any steps to do anything about it."

Barack Obama won the presidency in large measure because he presented himself as a demarcation point. The old politics, he said, was based on "spin," misleading arguments, and an absence of candor. He'd "turn the page" on that style of politics. Last week's presentation of his budget shows that hope was a mirage.

President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown. Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.

Forbes argues that we should immediately reverse three Bush mistakes: suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling. He argues that these three changes in regulatory rules, enacted by Bush in 2007, are the primary reason for the financial meltdown. Particularly interesting is the argument that if these three rules had been in effect during the 1991-92 recession, there would have been a massive wave of bank failures rivaling that of the Great Depression.

They say California is a harbinger of the future. If so, we should all be thinking about possible safe havens. The article begins with a description of loan modification seminars attended by the same mortgage brokers whose predatory lending practices got us into this fix. At the seminars, these predators learn how to make even more money off of the exact same clients they pushed off the ledge. It's all about fees and high pressure churning techniques. With one very big difference: Obama is banking on tax payer funded "loan modifications" to help struggling homeowners. The ugly truth is that mortgage brokers are the real winners. Just like mortgage brokers, loan mod companies are under no obligation to act in borrowers' financial interests, short- or long-term. Under California's model contract, which brokers are encouraged to emulate in their dealings with borrowers, almost any change to a mortgage is an acceptable result, whether or not it saves a borrower money. And while the client has to accept the proposed deal in order for the company to get paid in full, the sales forces at these firms are veterans of pressure pitches to people in tough financial situations. Both Carlson and a spokesman for Mortgage Bailout Assistance indicate that their clients almost invariably take the offers they are given. The proverbial fox is helping the hens hold on to their coops, and not just in California. Seventeen states now have laws on the books effectively banning "foreclosure consultants," but most make an exception for mortgage brokers. As consumer complaints about fraudulent loan mod operations proliferate across the country, other government officials, including New York's City Council, are now following California's lead and exploring the creation of an official registry of mod brokers.

Nobel prize winning economist Joe Stiglitz has an important article in the Nation arguing for "A Bank Bailout That Works." Unfortunately, it won't be read by many people because it's in The Nation and it's thousands of words long. The six points are: Solvency not liquidity ..... TARP sucks .... Forget the Bad Bank .... Drop the insurance idea ...Public private partnerships won't work either ... We have enough bad banks - Let's start a good one! That's where we come in. We went ahead and read the entire thing so you don't have to. Here are the six things you need to know from Stiglitz's piece. Feel free to pretend you read it. We won't tell.

Tim Geithner and Ben Bernanke are still parroting Wall Street's take on the meltdown--that it's a "liquidity crisis," not a "solvency crisis."  The infamous Schiller Chart is a history of Home Values going back to 1890. The Cahrt graphically screams that housing values have to fall another 20% to 30% before they might begin to level out. That is, if the capitalist engine of America's wealth and prosperity is still in existence then.

Mortgage lenders absolutely hate borrowers who walk away from underwater mortgages, especially those who could actually afford to keep paying off their mortgages but just decide it isn't worth it. They hate them so much that the term-of-art for these borrowers is "ruthless." But the ethics of mortgage lenders don't have much to recommend them. We need to decide for ourselves whether or not there's a moral obligation to keep paying off a mortgage. For some it's practically a patriotic duty. For others it's a matter of being a good neighbor, since foreclosures could hurt their home values also. Still others say it's just a matter of being a moral person who keeps promises. Great comments to this story. Check out the predictions from MM_CA. They have a diigo highlight. At the time of my reading of this story, the DOW was down 200 pts to 6678.95. The Supreme Leader is busy conducting a healthcare summit, claiming that "fixing" (read "nationalizing") the healthcare system will result in so many jobs that the economy will turn around. The comments are well worth the time!

The best evidence that Obama's new mortgage scheme won't end well: look at the people who are the most excited about it. It's the same, smarmy mortgage guys that profited handsomely from the subprime crisis. In a great bit of deep dive reporting over at Salon -- hardly an outfit you'd expect to be critical of Obama -- Alyssa Katz, with help from The Nation Institute (also very liberal), shows how modifications are hardly the paragon of progressive idealism:

How could one company be worth bailing out for $180 billion? That's how much the US has contributed to AIG so far. So what is it about an insurance company that makes AIG so central to the financial system that they can't be allowed to fail at any cost? Great comments on this issue. Basically, AIG credit default swaps were being used as gambling chips. Originally intended as a means of providing banks with "regulation arbitrage", the CDS artificially lowered risk by insuring sub-prime securities, which were themselves thought to be tax-payer guaranteed, coutesy of Fannie and Freddie. The CDS however were also offered to those who did not hold bonds or securitized notes! Non holders could purchase CDS as a means of gambling on the rise or fall of real estate values in the USA. This leveraging lead to near $500 Trillion in insured CDS, many of which were held by China and European banks.

Incredible video, a must see even though it's an hour long! If you want to understand how we got to into this financial-crisis, and our options for getting out, this is a must listen too speech. John Allison-the longest-tenured CEO of a top-25 financial services company "BB&T"-argues that this crisis is a legacy of the government's anti-capitalist policies. Mr. Allison uses his unique inside view of the financial services industry to show how massive government intervention into the U.S. economy-from the creation of the Federal Reserve in 1913 to a reckless crusade to encourage home-ownership-laid the groundwork for an unsustainable real estate boom. And he shows how the government's response to the inevitable bust-a frenzied series of bailouts, nationalizations, and "stimulus" efforts-is only making things worse. Finally, Mr. Allison explains the underlying philosophical reasons for the crisis, and discusses the immediate and long-term solutions. He shows that capitalism, far from being the cause of today's crisis, is its only cure. This is an incredible historical study and commentary provided by the Ayn Rand Institute

Excellent study of how we got into this problem that the socialist are now using to kill forever the American Dream: "..... Forty years ago, depository institutions handled mortgage credit risk very differently than they do today. Back then, the depository institution, which was typically a savings and loan association, held mortgages that were underwritten by its own employees, given to borrowers and backed by homes in its own community. These were almost always 30-year, fixed-rate loans, with borrowers having made a significant down payment, often 20 percent of the price of the home. Call this approach to mortgage lending "Method A." Today, mortgage loans held by depository institutions are often in the form of securities. These securities are backed by loans originated in distant communities by unknown borrowers, underwritten by mortgage brokers or other personnel not employed by the depository institution. The loans are often not 30-year fixed-rate loans, and the borrowers have typically made down payments of 5 percent or less, including loans with no down payment at all. Call this approach to mortgage lending "Method B." If you compare the two methods using common sense, then Method B does not pass a simple sanity check. In fact, the current financial crisis consists of banks that are up to their necks in Method B......"

in many ways the last round of regulatory reform helped cause the disaster in AIG. How could AIG's destruction have been caused by banking regulation? Most people wil probably be surprised by the very idea. After all, they've been told that what really happened to AIG involved unregulated credit default swaps, insurance contracts on bonds that AIG sold across the world. They suspect AIG might have been caused by too little regulation. In fact, much of AIG's problem was caused by credit default swaps and regulation. After Hank Greenberg was ousted from AIG, the company began to get heavily involved in the credit default swap market. That market was growing in large part because of banking regulation.

"The government has already taken over the financial system," Roubini says, noting U.S. policymakers have committed $9 trillion to rescue the financial system and already spent $2 trillion. "So let's stop the delusion about 'no nationalization.'" Economist Nouriel Roubini explains why full nationalization (as opposed to partial) is the free-market friendly way forward. Includes video interview with Roubini as well as important links. Roubini, who has publicly advocated for temporary nationalization of insolvent banks, says fully nationalizing Citigroup and/or Bank of America would have a minimal effect on the Dow, which is a price-weighted average. More importantly, he believes full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac.

Excellent review of Japan's "Lost Decade" and the current Obama socialist folly of creating similar "Zombie Banks". Baker sites the evidence of ".... a mountain of toxic assets, housing market declines, a sharp economic recession, rising unemployment and increasing taxpayer exposure through guarantees, loans, and infusion of capital - strongly suggests that some American banks face a solvency problem and not merely a liquidity one...." He recommends the Nouriel Roubini plan, a harsh course of action but one that would get the job done. "......This approach is not pretty or easy. It will cost a lot of money, with the lion's share coming from US taxpayers, at least in the short to medium term. But the alternative - a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road - could truly be historic folly. Eventually our banks and economy will start to recover. When they do, we would be wise to avoid another Japanese mistake - raising taxes. To counter mounting debt created by government stimulus packages, Japan increased taxes in 1997. Consumption dropped and the country's economy collapsed. Our ad hoc approach to the banking crisis has helped financial institutions conceal losses, favoured shareholders over taxpayers, and protected senior bank managers from the consequences of their mistakes. Worst of all, it has crippled our credit system just at a time when the US and the world need to see it healthy.

".....There's a lot of talk about how the bailouts are creating moral hazard and rewarding bad behavior. But those are pretty abstract ideas, the kind of things people wonder whether or not we can afford to worry about while the economy is tanking. Sure we'll pay a long run price  for screwing up the market's discipline but in the long run we're all dead. So forget "moral hazard" and just look at Warren Buffett's description of what is happening to his home construction business, Clayton Homes. Clayton, which makes pre-fab homes, also has a lending business. Surprisingly, Clayton hasn't been crushed by the markets because it maintained high lending standards and doesn't have a balance sheet overflowing with defaulting loans..." And the solution is? Buffett is/was a successful capitalist. Yet he fully supported a socialist takeover of the government. Obama's campaign rhetoric was that of a hard core socialist declaring war on constitutional capitalism. And there was Buffett, standing at Obama's side, arguing that all capitalist should be supporting the systemic change Obama socialism promised to deliver. And now Buffett's complaining? What is it about socialism that attracted Buffett in the first place? Did he really think the socialists he worked to elect would pour tax payer debt money into the capitalists hands, and let the markets go their merry way? The socialist seeks to control the means of production, limit the rights of property ownership, and redistribute the wealth created by capitalist. Socialism does not have a wealth creation model. Redistribution of wealth and control over the means of production is something Buffett supported with both his money and his personal assurances to constitutional capitalist everywhere. Yet here we are. Exactly where Buffetts advice and pleas intended us to be. And now he's complaining? Buffett didn't like the belief in big government programs, big government spending and crisis interventionism of Bush's compasionat

Rove explains Obama's deceitfully clever use of the "strawman" argument. Excellent discussion of how a dangerous demagogue manages to position his extreme and radical views as "reasonable". Just paint your opponent as evil and uncaring without having to actually describe the who, what, where, when facts. ...."President Barack Obama reveres Abraham Lincoln. But among the glaring differences between the two men is that Lincoln offered careful, rigorous, sustained arguments to advance his aims and, when disagreeing with political opponents, rarely relied on the lazy rhetorical device of "straw men." ...... Mr. Obama, on the other hand, routinely ascribes to others views they don't espouse and says opposition to his policies is grounded in views no one really advocates.