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Do Not Go Gentle into the Post-American Era

Posted on 10 April 2011 by Editor

Originally posted 2009-12-30 22:28:10. Republished by Blog Post Promoter

by Margaret Goodwin
Government is Not Your Daddy
December 27, 2009

When the U.S. was a developing nation, we expended our efforts and capital in developing the infrastructure for industry. Our government provided incentives for the development and extraction of natural resources to be used as raw materials to build, not just products, but a thriving national economy. — And that’s exactly what China and other developing nations are doing today.

But, today, the U.S. is doing the opposite. Increasingly, over the past several decades, our government has been restricting the extraction of natural resources and dismantling the infrastructure for industry. Overregulation, combined with exorbitant and ever-increasing union demands, has succeeded in driving much of our industry offshore. If we want to recover our economy, we need to reverse that trend.

The recently published White House Plan to Revitalize Manufacturing, which focuses on federal funding for “green” technology R&D, is not likely to have a significant impact on our national productivity. This administration is thoroughly beholden to the unions and environmental lobbies. In true Chicago style, this administration has used the stimulus package to pay off political debts and, from every indication, will continue the trend of dismantling the economy in favor of political correctness and payback.

Every nation has a historical trajectory. This nation has apparently passed its apogee, and is now in decline. We no longer have the drive to overcome. We’ve become complacent and, instead of striving for ever greater industrial innovation and economic strength, we are focused myopically on the niceties that developing nations cannot afford to consider.

The problem is, there’s no such thing as stasis. A nation, a corporation, a species, an individual, must either advance or decline. That’s nature. And, as we sink into complacency, whining effetely about our declining economy, there will be others advancing to take our place as the dominant world power, industrially, economically, and (eventually) militarily. That’s a historical inevitability. The same pattern can be observed throughout nature and the history of civilizations. The only question is when.

At this point, we could still reverse that trend by, once again, becoming a developing nation ourselves — one can always develop further, if one is motivated to keep striving — but we, as a nation, lack that motivation. We’re apparently content to rest on our laurels as we sink into national senescence while other countries, like China, rise up on the international horizon. The world is always changing. It’s the nature of all things. The only question is, will we, as a nation, go gentle into that good night? Or will we rage, rage against the dying of the light?   (Apologies to Dylan Thomas.)

Unfortunately, I believe I know the answer to that rhetorical question. History is being written even as we go about our daily lives. You can see it in our relations with other nations, as we make concessions that cede our sovereignty in so many minor ways. Stepping back and observing from a historical perspective, we see a once-great nation, that no longer has the will to sustain its rank as the leader of the free world, stepping aside and leaving the field open to whoever will step up and take its place. Sadly, there’s no way to choose our successor. Once we step aside, we can only watch and hope for the best. And if we don’t like the way the world is shaping up in the post-American era, we will just have to suffer the consequences.

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Margaret Goodwin writes for the Government is Not Your Daddy blog.
Published with the author’s permission

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Why Are There No Lilting Sambas About the Junkie from Fuller Park?

Posted on 10 April 2011 by Editor

Originally posted 2009-10-01 21:33:22. Republished by Blog Post Promoter

The Municipality of São Sebastião do Rio de Ja...
Image via Wikipedia

by Scott Spiegel
September 30, 2009

For the measured consideration of the International Olympic Committee, I present 16 reasons to host the 2016 Summer Olympics in Rio de Janeiro instead of Chicago:

(1)    President Obama wants them in Chicago.  Really badly.  More important than his wanting them in Chicago is his decision to drop everything in the middle of a recession, a health care debate, and two wars to head to Copenhagen on separate jumbo jet junkets with his wife to make a special entreaty for his home city.  Obama has taken a stronger stand on the Windy City’s candidacy than he has on, say, any particular health care provision or whether to send more troops to Afghanistan.  Even more important than Obama’s not having his priorities straight is his obvious, calculated presumption that because the world loves him so much, it would be the diplomatic equivalent of kicking us out of the UN not to award Chicago the Olympics after his in-person plea.

(2)    Billions of dollars’ worth of building contracts and infrastructure development would be required in a city known for construction payback schemes, money laundering, insider dealing, gang activity, an overloaded transit system, and general public corruption, incompetence, inefficiency, and interruption of service.

(3)    Numerous Obama cronies own property near Washington Park, the proposed stadium site, and would profit from the games being held there.

(4)    No one actually wants to be in Chicago in the summer—or any time of the year, for that matter, except for about three hours in late spring.  Dozens of Chicago residents die heat-related deaths every summer, and they’re not even competing in decathlons.

(5)    Everyone wants to be in Rio, any time of the year.

(6)    In fact, everyone wants to visit South America, and Rio would be only the first city on the entire continent to have ever hosted the Games.

(7)    If the Olympics absolutely have to be in Chi-town, why not the Winter Olympics, a much smaller and less disruptive affair than the Summer Olympics, and one that suits the city’s climate?

(8)    Chicagoans have been clamoring since spring to not have the Olympics in their home city.  This is the first campaign I know of in which the best case for the games to be held in one city (Rio) is being made by residents of another city (Chicago).  Following the procedures of standard Chicago thug-style machine politics, the Chicago Olympic Committee recently ordered a local Fox affiliate not to rerun a segment airing interviews with numerous Chicagoans who told reporters to “Take it to Rio!” and to hold the event “Anywhere but here!”

(9)    The website “Chicagoans for Rio 2016” posts numerous fun and horrifying facts about the travails suffered by past Olympic host cities, such as the following: (a) Montreal took 30 years to pay off its Olympics-related debts from 1976; (b) 21 out of 22 stadiums and arenas built for the Athens games just five years ago are currently unused; and (c) Barcelona actually became a slightly less cool city for having once hosted the games.

(10)    An average of 5-10 or more crimes a day are reported in Washington Park alone, including assault, battery, burglary, motor vehicle theft, robbery, and sex offenses.  Chicago was the murder capital of the country in 2008 with 510 victims.  The Chicago Police Department doesn’t even publicly report the incidence of rape, which should tell you something.

(11)    The Chicago 2016 website advertises that it would host a “Blue-Green” event, meaning the following: “low-carbon Games” with energy-efficient technology, reduced water usage, recycling of 85% of tournament materials, and “sustainability.”  As an afterthought, “showers for athletes” was added to the budget for the games.

(12)    Chicago’s city deficit stands at almost a quarter of a billion dollars.  Beijing had an estimated $26 billion dollar overrun for its 2008 games.  Athens’ was $17 billion in 2004.  London estimates a $9 billion overrun in 2012.  Yet Chicago’s 2016 website boasts that its budget includes a piddly “$450 million contingency to cover unforeseen costs.”  Quick—complete this analogy: Chicago : Olympics :: Obama : _____.  (And I swore I wasn’t going to write about health care this week!)

(13)    Each host city tries to top the previous host city in sheer spectacle, bombast, and expense.  Beijing spent $42 billion in 2008.  Hmm… are there are any stimulus funds left over for “shovel-ready” projects like building unwanted stadiums in Chicago?

(14)    Rio de Janeiro means “River of January.”  Chicago derives from a Native American word for “wild onion.”

(15)    Chicagoans for Rio puts the two leading contender cities head-to-head in a number of categories, and the winner is clear every time: nicknames (The Marvelous City vs. The Second City), beaches (Copacabana, Ipanema vs. 63rd St., Calumet), histories (capital of the Portuguese empire vs. rail yard), statues (Christ standing vs. Lincoln sitting), signature events (naked people dancing vs. chubby people eating).

And most damningly:

(16)    Michelle Obama said in her Copenhagen speech this week that holding the Olympics in Chicago might inspire another child there to become the next… Barack Obama.

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Scott Spiegel is the editor of

Article has been published with permission


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Uncle Obama’s Extortion Racket

Posted on 10 April 2011 by Editor

Originally posted 2009-12-17 17:47:46. Republished by Blog Post Promoter


by Nancy Morgan
December 17, 2009

Uncle Obama has gotten ahold of your credit card. And he’s amassing charges on it that – you – not he – are liable for. You can call the fraud line, you can call the police, you can call any politician or government agency, and they will all tell you the same thing. Shut up and pay up.

Since misery loves company, you might feel better knowing that you’re not the only one being extorted. Uncle Obama and his buddies have the credit and debit cards of every man woman and child in America. And they’re charging up a bundle. So far, each of us has a $38,000 tab that we are personally liable for. And that’s just the tip of the iceberg, which by the way, isn’t melting.

Yesterday, Uncle Obama actually got the limit on your credit card increased. Yup. The House of Representatives voted to increase the overall debt limit, meaning the amount of money they can charge in your name has expanded. This, despite the fact that our national debt now exceeds the statutory debt limit that the Democrats approved last February as part of the cutely entitled Recovery Act. Which, by the way, didn’t work. But the intentions were good.

For the 7 million Americans without jobs, this is not good news. Not to worry. The media assures us folks that Uncle Obama is going to take care of everything.

Just look at all the things he’s doing for us. The House yesterday approved an additional $155 billion of our tax dollars for “shovel-ready” construction projects and money to avoid layoffs of teachers, police and other public employees. Of course the small print says that in order to get any of this money you better belong to a union or be employed by the federal government. If you’re Joe Blow or Suzy Homemaker you’re just plain out of luck.

Maybe you’ll sleep easier knowing that the one billion dollar charge on your credit card last Wednesday will go to preserving tropical forests overseas. Or that the $3 billion charge last month will help the Palestinians in their fight against Jewish ‘occupiers.’ Or that your hard earned money will soon be at work aborting babies in our nation’s capitol. After all, we must do our bit to save Mother Earth, and who are we to disagree with the experts who tell us that abortion is a kick ass way to do this?

Whatever you do, don’t worry your head about the charges that are in the works for your almost worthless credit card. The increased energy charges on all of our bills in the coming months will probably only amount to a few thousand dollars for each of us. And they are totally necessary to keep the earth from melting. There is a consensus on this, so just can your objections.

If you start to get overwhelmed, you can cheer yourself up by watching the excellent use Uncle Obama has made of your money. Tune in to GM’s latest edgy video of The Volt dancers as they whirl and cavort in some artists’ idea of how to promote automobiles that are environmentally friendly. And if you would rather eat than support politically connected fat cats at GM and a select group of sensitive artists, then you’re probably one of those flat earthers, totally unworthy of any of Obama’s largesse.

Still worrying? Just stop right now. Uncle Obama has provided a great opportunity for any hungry American with mouths to feed. All you have to do is snitch on your tax-cheating neighbor. New legislation stipulates that you’ll be able to appropriate a larger percentage of any taxes the government recovers based on your tip. But before you turn in your former boss or neighbor, check to make sure they aren’t one of the federal employees that owe a cool $3 billion in unpaid taxes. I think they’re exempt.

For all the diehards out there that still worry about running up bills you can’t pay, take heart. Uncle Obama has assured us that if we hurry up and agree to let the government take over health care, then we won’t go bankrupt. Just make sure you don’t get sick for 3 years till it kicks in.

For all the ‘deniers’ out there, just quit worrying about all the unauthorized charges Uncle Sam is making on your credit card. Sit back and relax. Take advantage of the 24/7 media coverage of how the great Tiger Woods has fallen. Schadenfreude is an excellent panacea. And if you’re in luck, the commercials will be louder than the network programming. Since Congress has just ruled this a no-no, you can call yourself a lawyer and make like the government. You can extort your way to unearned wealth.

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Nancy Morgan is a columnist and news editor for
She lives in South Carolina.
Article posted with the author’s permission

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Germany’s Exports Spell Doom for the Eurozone

Posted on 10 April 2011 by Editor

Originally posted 2010-08-23 12:17:49. Republished by Blog Post Promoter

ExportsGerman export growth – the fastest in 20 years – gave recent cause for celebration. Nonetheless, the eurozone will not survive.

Remember the eurozone’s big crisis? The one that everyone thought had blown over?

Well, it isn’t over. Like a multi-act play, it’s simply been in a period of "intermission." And the next act is going to be much, much worse than the first. In due time, the eurozone will disintegrate. And Germany will be the cause.

This may seem a strange assertion, because recently we’ve heard cheery news from Europe – and from Germany in particular. Just over a week ago, Germany reported its fastest economic growth in 20 years. At 2.2% quarter over quarter, that’s a blistering annualized growth rate of almost 9%.

We are used to emerging market powerhouses like China and India growing that fast… but staid old Deutschland? Wow.

As usual, though, the headlines don’t tell the whole story. The Panglossian optimists, ever determined to look on the sunny side of everything, have as usual gotten the key elements wrong. To understand why – and to explain why the eurozone is still headed for a crack-up – let’s begin with Greece.

Greece: Still Burning

Greece Financial Crisis Strike
Image courtesy of AU Herald Sun

When the Greek debt crisis hit the front pages earlier this year, the story was encapsulated in photographs. As fiscal austerity measures descended, riots broke out in the capital. "Firebombs in the streets of Athens" told the world what it need to know.

Since then, economic conditions on the ground in Greece have not improved. In fact they have grown far worse. And some believe it is only a matter of time before the whole of Greece, not just Athens, bursts into metaphorical flames of rage.

The German publication Spiegel Online openly questions whether Greece could be "Entering a Death Spiral." With brutal frankness, Spiegel writes:

The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

Menelaos Givalos, a faculty member with the University of Athens, foresees "extreme social consequences" when a new wave of Greek layoffs begins in September.

Nikos Meletis, a shipbuilder quoted by Spiegel, warns that "If you take away my family’s bread I’ll take you down – the government needs to know that."

"Things are starting to simmer here," Meletis adds. "And at some point they’re going to explode."

Implying, of course, that things haven’t exploded already… which they haven’t. At least not on the scale we could see sometime in the near future.

The economic pain in Greece compares to Great Depression levels. The IMF has forecasted 14.8% unemployment in Greece by 2012, but other forecasters see unemployment as high as 20%.

Worse still, as reported by a University of Piraeus study, Greek unemployment in some areas has risen as high as 70%. Think of that – seven out of 10 men (and women) without jobs. It is perhaps no wonder that, on walking through Athens, one can find streets where a quarter of the shops are closed.

These are the fruits of forced austerity, and the straitjacket of a rigid currency union that Greece cannot abide. At the 1896 Democratic National Convention in Chicago, William Jennings Bryan made political history in declaring "you shall not crucify mankind upon a cross of gold."

Greece is now being crucified on a cross of euros.

The Odd Silence of Schumer

Now, to pick up another thread before tying them together, let us turn back to Germany.

Until recently, Germany was known as the world’s largest exporter. The dragon wrested that crown earlier this year, on reports that Chinese exports overtook German ones in 2009.

So this begs an interesting question: Why isn’t Chuck Schumer angry with Germany?

Senator Schumer, as you likely know, is the protectionist politician from New York who loves to make sport of China bashing. The esteemed senator is one of the most strident voices in Washington, calling for China to give up its state-supported export policies so that other countries can compete… and muttering dark threats when China fails to comply.

And yet, as loudly as Senator Schumer champions the "lopsided China" cause, he says nothing about the Teutonic doppelganger.

It’s a head-scratcher because, when it comes to mercantilist export policies, China and Germany are bosom buddies. Consider the following (via stats compiled by Bloomberg):

  • Exports accounted for 41% of German GDP in 2009.
  • For Japan – a major exporter – that number was only 13%.
  • For the U.S. – also a major exporter – it was a mere 11%.
  • The IMF projects China’s 2010 GDP surplus at 6.5%.
  • Germany’s surplus is projected at 5.5%.

So, in other words, Germany is somewhere between three and four times as reliant on exports as Japan and the United States, no export slouches themselves. At the same time, Germany’s surplus – a measure of the import-export gap – is almost as big as China’s.

"Anybody who believes China is a problem has to believe Germany is a problem," says economist Joseph Stiglitz.

"Germany has got to work on its domestic demand," adds PIMCO portfolio manager Andrew Bosomworth. "Not everybody can export. Somebody has to import."

In one of life’s little ironies, Germany’s aggressive export policies serve to make neighbors like Greece poorer. This is because Greece (or whomever) has little to sell Germany in return… and so German surpluses become additional deficits for lesser eurozone trading partners.

So here is the bottom line: When it comes to mercantilist trade policies, there is very little daylight between China and Germany.

They both want to export a damn sight more than they import… both are dangerously dependent on exports for economic growth… and both arguably operate to the fiscal detriment of their counterparties, who are encouraged to spend without reciprocal goods purchased in return.

Says the defiant German Chancellor, Angela Merkel: "We won’t surrender our strengths just because our exports are purchased more than those of other countries. That would be the wrong European answer to the competitiveness of our continent."

A-ha! Competitiveness. That’s the word we were looking for. "Competitiveness" gets us closer to the heart of things – and the reason why the eurozone is still doomed.

"Not Even a Group"

Under former CEO Michael Eisner, the executive suite of the Walt Disney Company was famously dysfunctional. Upon seeking help to encourage more teamwork, one outside consultant famously reported: "the results of my research indicate that you guys are not a good team. You’re not a team at all. You’re not even a group."

That’s a fairly accurate way to assess the 16 common currency members of the eurozone. Collectively speaking, these countries are not a team. They aren’t even a group.

In one corner of the room you have Germany, fiercely cutting costs at home while pumping out exports abroad. In the opposite corner of the room you have the "Southern" European countries, who don’t export much of consequence and find themselves wallowing in debt.

Meanwhile, as the lesser members of the eurozone struggle and wheeze under the weight of an austerity regime they cannot handle, like a weak man straining under a loaded barbell, Germany is the red-faced drill instructor shouting "toughen up!"

As with overly ambitious exercise programs, severe austerity measures can be disastrous. And what could speak louder of the "separate ways" problem than Germany hitting 20-year highs of economic growth, even as the engine of that growth – unreciprocated exports – does its part in driving Greece further into depression.

The whole thing is lunacy. Currency union without political and economic union is unworkable, and the true politico-economic correlation between Germany and the PIGS is zero.

A Foolish Fantasy

The euro was always a currency built on dreams – fantasy made real, rather than an outgrowth of hard-edged objective assessment. The problems that terminally threaten the eurozone now were known well in advance, at least in theoretical terms. But it was always just "assumed" that such problems could be worked out.

The problems cannot be worked out. The euro experiment only lasted as long as it did because flush economic times allowed the weaker economies of Southern Europe to boost themselves up with cheap debt. The good vibrations lasted as long as the credit flowed freely.

But now, with tough times here again, we can see the truly irreconcilable differences between Germany and the others. The experiment will have to end.

Slovakia Says No

In a preview of what is to come, Slovakia last week voted to reject paying its allotted share of Greek bailout funds. "Slovakia’s politicians have questioned the fairness of calling on taxpayers in the euro area’s poorest state," The New York Times reported, "to aid wealthier countries that failed to control their debt."

It only makes sense, does it not? Why should dirt-poor Slovakia have to pay for richer Greece’s mistakes – especially given the bailout money will simply go down a rat hole? (Greece is still going to experience some form of default. That reality has only been delayed, not denied.)

In time, too, ordinary Germans will regain the willpower to say "nein." As George Soros has put it, Germany’s politicians may be comfortable acting as the "deep pocket" of Europe, but ordinary German citizens will not tolerate this forever – especially since German austerity measures are making life hard at home even as exports boom.

Then too there are the banks to think of – those wonderfully leveraged European banks – who only passed the joke of a "stress test" because sovereign defaults were not properly factored into the scenarios. If things get as bad as they easily could in the coming quarters, Europe’s banking system is still going to blow. When this happens, "every man for himself" will be the order of the day. And the U.S. dollar could skyrocket.

Let’s Call the Whole Thing Off

In reality, the best solution would be some kind of semi-orderly breakup of the eurozone, so that mercantilist Germany and the suffocating Southern European countries can go their separate ways. The noble idea of the euro, which never accounted for political and economic realities, should be gently consigned to the dustbin of history.

It won’t happen this way, though, because it is too late for orderly solutions, and Europe’s politicians would go through hell in such a scenario. In trying to fight the inevitable, they will get hell anyway.

The real problems of the eurozone were never actually solved, just papered over. Nor is mighty Germany’s heavy reliance on exports a sure thing in a wobbling global economy. As with China, the dangers of such a strategy could soon become clear.

Say what you will about the United States, but at least the dollar has a single country behind it (rather than 16 squabblers). As the old saying goes, "united we stand, divided we fall." The eurozone is a house divided, and the deep divisions of the 16 member countries – as made worse by Germany’s mercantilist export regime – will eventually tear it apart.

Article brought to you by Taipan Publishing Group.

Other Related Sources:

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  • Greek Crisis Refuses To Go Away
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    The Financial Crisis – Part 2: The Rest of the Story

    Posted on 10 April 2011 by Editor

    Originally posted 2009-10-15 15:40:28. Republished by Blog Post Promoter

    stockmarket460by Andrew Syrios
    June 2, 2009

    In the first part of my series on the financial crisis, we discovered that by loosening regulations on the housing industry, while simultaneously continuing to federally back deposits and bailout banks in case anything went wrong, the government created an ample playground for massive speculation. In this second part, we will look at why that speculation was focused in real estate, and where the money to fund such speculation came from in the first place.

    We’ll start with the question: “Why housing?” It starts with a redefinition of the American Dream. Whereas in years past, the American dream was best defined as prosperity can be found in liberty, it has become, in modern times, that home ownership is the key ingredient to achieving such a dream. As George Bush’s Secretary of Housing and Urban Development, Alphonso Jackson put bluntly, “The American dream is to own a home.”

    This paradigm dates back to the New Deal. Before the New Deal, owning a home was not as important as it is today, because housing prices were relatively stable and even declined over the years. However, during the Great Depression, political radicalism became common place. In 1928, the Communist and Socialist parties garnered a combined 300,000 votes. In 1932, they received almost a million. (1) In an effort to stabilize the mortgage industry, and hedge off political radicalism, FDR and his brain trust decided to push for home ownership in the United States. They believed a property-owning citizenry would have a greater stake in the Republic and be less prone to revolutionary ideas. This culminated in the creation of Fannie Mae (and later Freddie Mac and Ginnie Mae). Fannie Mae works by buying mortgages directly from banks, thus freeing up capital for banks to make more home loans, thus creating more homeowners and fewer renters. And as a result, as economic historian Niall Ferguson puts it, the “property-owning democracy” was born.

    However, as nice as owning your home sounds, it is a poor, long term investment financially speaking, unless one has other assets with which to compliment it. In general, buying real estate to use as rental properties is a good investment. On the other hand though, piling a large percentage of one’s income into a home that provides no return outside of appreciation, puts all of one’s proverbial eggs in one proverbial basket. If the local housing market depreciates, a major portion of one’s wealth is affected. Every finance professor stresses the importance of diversification. The idea is to hedge the risk of certain companies and industries against as many other companies and industries as possible. By spreading one’s nest egg so thinly, if one company fails or a particular industry has a rough year, the overall portfolio is relatively unaffected. This is why most unseasoned investors put their money in mutual funds, 401K’s and IRA’s. These instruments are designed specifically to hedge clients against risk by investing in a large number of stable companies across a vast array of industries.


    This concept was, unfortunately, completely forgotten with regards to housing. And as the trumpeters for home ownership grew louder and louder, Fannie Mae, Freddie Mac and Ginnie Mae jumped on every opportunity they could to increase the availability of credit to homeowners. Their primary method was a process called securitization. In short, these government supported entities (GSE’s) could slice and dice a whole array of mortgages into mortgage backed securities and sell them off in little chunks to other investors (these investors are all over the world, which is one of the main reasons this crisis, which originated in the United States, is being felt worldwide).

    A few attempts were made to regulate Fannie Mae and Freddie Mac, but Congressional Democrats, lead by Barney Frank and Chris Dodd (who received more campaign funds from Fannie Mae than any other politician), would have none of it. As Democratic Congresswoman Maxine Waters, last seen on this blog trying to establish a Soviet Commissar to nationalize the entire oil industry, put it in a 2004 congressional hearing:

    “[We’ve been] through nearly a dozen hearings, where frankly, we were trying to fix something that wasn’t broke. Mr. Chairman, we do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Mr. Frank Raines.” (2)

    Four years later the government had to nationalize both Freddie and Fannie. Good call Maxine. Regardless, as these GSE’s began slicing, dicing and selling mortgages off unimpeded, Wall Street decided to get their dirty hands in on the mess. With home prices rapidly increasing and an enormous influx of capital (to be discussed later), banks wanted to capitalize on this new financial instrument (the mortgage backed security). Fannie Mae and Freddie Mac started securitizing sub-prime and Alt-A mortgages in 1999, and major banks were particularly interested in going after this market as well. These borrowers usually had bad credit and little if anything to put down on a property. So Wall Street firms followed in Fannie Mae’s footsteps by piling large collections of these risky mortgages together and selling little pieces of them off to the general public. They thereby created a high yield investment vehicle that supposedly reduced risk by dividing the many mortgages up so thinly. Unfortunately, this only hedged against individual defaults or local downturns. It completely ignored the possibility that there was a systemic problem within the real estate market as a whole.

    In the words of Peter Schiff, who saw the crisis coming as early as 2002: “By creating a conflict of interest between the real estate market and mortgage market, securitization has corrupted an industry in which the availability and cost of credit are of central economic importance.” (3) Furthermore, the incredible complexity of these instruments made them almost impossible to value properly. To paraphrase Niall Ferguson, “instead of risk being transferred to those best able to bare it, risk was transferred to those least able to understand it.”

    Fannie, Freddie and Ginnie were not the only culprits, though. In the late 1990’s, the Clinton Administration put an extreme emphasis on increasing home ownership. Aside from giving the previously mentioned GSE’s more leeway, they also started vigorously enforcing everything they could find, or create, to increase home ownership. One of the most prominent was the Community Reinvestment Act, originally passed during the Carter Administration. The Community Reinvestment Act was originally passed with the intent to increase lending to minorities and end the discriminatory practice known as redlining (basically, banks wouldn’t lend to neighborhoods with large minority populations). Unfortunately, as these things often go, it went from one extreme to another, and the opposite of one crazy is still crazy. Instead of blacklisting minority applicants, in the 1990’s and 2000’s, banks were scared to death of lawsuits from declining mortgages to minorities or low-income folks, even if those particular people weren’t financially capable of meeting their mortgage obligations.

    Far left groups like ACORN were particularly active in finding cases of alleged discrimination that they could turn into extraordinarily expensive lawsuits. In one particular case, a bank was forced to make $2.1 billion dollars available to low income borrowers who would not have otherwise qualified. Andrew Cuomo, Bill Clinton’s Secretary of Housing and Development, even admitted, “…[it] will be a higher risk. And I’m sure there will be a higher default rate on those mortgages than on the rest of the portfolio.” (4) Wow, how compassionate of Mr. Cuomo. To paraphrase, in my own, sarcastic words, “We’re going to set poor people, who should be trying to save, up to fail by forcing other people to lend them money.”

    In the end, the common, “blame deregulation,” chants are rather ridiculous since just about every new policy enacted was to prop up housing, and almost explicitly NOT reign in the excesses throughout the industry. As economist, Tom Woods puts it:

    “We are supposed to place our hopes in regulators who would have to be courageous enough to stand up to against the entire political, academic and media establishments? What regulator would have done anything differently, or dared to tell the regime something other than what it obviously wanted to hear?” (5)

    So nearly every factor imaginable was pushing capital into the housing market. But where did all this money to put into real estate come from? Many haven’t even asked this question. The main reason, I believe, is that people do not properly understand real estate appreciation. Realtors and bankers often said during the run-up, “real estate prices always go up” and “think of your home as an investment.” In other words, think of a house like you would a stock. If the company becomes more profitable, the stock goes up in value. Real wealth has been created. No one will admit it, but the implied assumption was that when housing prices went up, wealth was being created. Somehow just about everyone, including myself, actually thought houses were becoming more “profitable” just by their mere existence.

    Houses do not become more “profitable” just by sitting there, though. They may become more valuable because of factors relating to supply and demand, but as houses get older and more worn down, they should actually depreciate. Real estate appreciation is accurately defined as anything that increases the value of a house. This could be adding an addition, remodeling the bathroom, putting in a swimming pool, etc. These types of activities add real wealth. When housing prices started to dart up around the turn of the century, no new wealth was being created. No, what we saw was nothing more than plain, old inflation.

    Inflation was thus misinterpreted as wealth, leading American consumers to borrow more and more, especially against their overvalued homes. Total mortgage debt in the United States is now around 12.5 trillion, up from $1.5 trillion in 1980! Total household debt was around 50% of GDP in 1980 and is over 100% today. (6) And the personal saving rate was around negative 1%, for most of the last decade. (7) Add this to the federal government’s enormous 10 trillion dollar debt and we discover that the United States was basically relying solely on debt to sustain its consumption; debt that could only be maintained through the equity American’s thought their homes had. U.S. citizens were literally refinancing their homes to buy consumer products. When those homes began to depreciate, the stage was set for a significant economic contraction.

    consumerdebtoutstanding2 Source: 
    householddebtgdp1 Source: 


    So where did this inflation come from? Well, it came from the extremely foolish policy of Alan Greenspan and the Federal Reserve. Tom Woods explains their missteps as follows:

    “The Fed… started the boom by increasing the money supply through the banking system with the aim and the effect of lowering interest rates in the wake of September 11, which came just over a year after the dot-com bust, then Fed chairman Alan Greenspan sought to re-ignitethe economy through a series of rate cuts, culminating in the extraordinary decision to lower the target federal funds rate (the rate at which banks lend to one another overnight, and which usually drives other interest rates) to 1 percent for a full year, from June 2003 until June 2004. In order to bring about this result, the supply of money was increased dramatically during those years, with more dollars being created between 2000 and 2007 than in the rest of the republic’s history.” (8)

    The Fed does not directly control interest rates or the supply of money, but through what are called open market operations, the Fed can have a substantial effect on these things. The most common method it uses is to buy up bonds with money it simply create out of thin air. This adds money into the economy which, through a process called fractional reserve banking, the Fed’s initial capital injection will increase 10 fold.* The Fed can also lower the discount rate (rate at which they loan directly to banks), or decrease bank’s reserve requirements to increase the money supply.

    Regardless of the methods the Fed used, what is clear is that the quantity of money rapidly increased throughout the ’90’s and into this decade. The Fed uses several indicators to track the total amount of money in the economy. One of these, known as M1, increased over 100% from 1990 to 2008. M3, a more accurate depiction of the money supply, which was discontinued in 2006 because of the difficulty measuring it, increased 150% from 1995 to 2005! (9)

    Source: Federal Reserve Bank of St. Louis

    Source: Federal Reserve Bank of St. Louis


    The Federal Reserve went way overboard in an attempt to stave off a severe recession in 2001. We still had one, but it was brief and mild. In essence, they delayed much of the pain we should have faced then until now. It should also be noted, that the 2001 recession was the only recession on record in which housing starts did not decline. This should have been a sure fire sign that something was amiss in the housing market. As Peter Schiff so fittingly put it, “George Bush, in one of his speeches, said that Wall Street got drunk… But what he doesn’t point out is where did they get the alcohol? Obviously, Greenspan poured the alcohol…” (10)

    To summarize, the Federal Reserve dramatically lowered interest rates, thereby increasing the quantity of money in the economy. That money had to go somewhere and due to a host of government policies and political pressure, this money primarily found its way into housing. The dangerous combination of loosened regulation and the moral hazard of deposit insurance, as well as an implicit bailout guarantee, made banks feel more and more comfortable making loans to less and less credit-worthy borrowers. With securitization, Fannie Mae, other GSE’s and banks were able to sell off their overvalued debt to unsuspecting investors, thereby infecting the entire economy. When adjustable rate mortgages began adjusting, the least credit-worthy borrowers began defaulting on their mortgages, causing home prices to fall. As home prices fell, homeowners lost their equity and could no longer refinance, thereby causing more foreclosures. As foreclosures spiked, investors and banks holding these mortgage backed securities, as well as insurance companies such as AIG who backed them, began taking massive losses. Massive losses on Wall Street meant firms had to lay-off workers. And without the ability to refinance, homeowners had less money to spend causing firms outside of finance to become less profitable and either go out of business or downsize. Thus, a mortgage meltdown turned into a financial crisis and culminated in a severe recession. Hopefully, we’ll learn the right lessons from the whole mess. Unfortunately, I kinda doubt it.


    *Fractional reserve banking is when a bank only has to keep a certain percentage of their deposits on hand and can loan out the rest. Typically, banks only have to keep 10% of deposits on hand and can lend out the other 90%. That 90% is then deposited in another bank, which loans out 90% of the original 90% and so on. Eventually, assuming a 10% reserve requirement, the initial deposit will increase by a multiple of 10. Mathematically it looks like this:

    X = Initial Deposit
    Y = Reserve Requirement

    X/Y = Total Amount of money added to the economy

    So for example, if you deposit $100 at a bank that has a 10% reserve requirement:
    $100/0.1 = $1000 will be the total amount of money eventually created.

    (1) “United States presidential election 1928″ and “United States presidential elcction 1932,”,,_1928 and,_1932
    (2) “Shocking Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis,” Retrieved May 31, 2008,
    (3) Peter Schiff, Crash Proof, Pg. 126, John Wiley & Sons, Inc., Copyright 2007
    (4) “EVIDENCE FOUND!!! Clinton administration’s “BANK AFFIRMATIVE ACTION” They forced banks to make BAD LOANS and ACORN and OBama’s tie to all of it!!!,” Retrieved May 31, 2008,
    (5) Thomas Woods, Meltdown, Pg. 29, Regnery Publishing, Inc., Copyright 2009
    (6) “Consumer Debt Outstanding” and “Household Debt% of GDP,”, both uploaded 2/28/2009, and
    (7) “Our Savings Rate Is (Still) Negative: Should We Worry,” My Money Blog, 2/4/07,
    (8) Thomas Woods, Meltdown, Pg. 26, Regnery Publishing, Inc., Copyright 2009
    (9) “Series: M1, M1 Money Stock” and “Series: M3, M3 Money Stock (DISCONTINUED SERIES),” Federal Reserve Bank of St. Louis, and
    (10) Peter Schiff, “Why the Meltdown Should Have Surprised No One,” The 2009 Henry Hazlitt Memorial Lecture, Retrieved May 31, 2008,


    Andrew Syrios writes for

    This is Part 2 of his two part series addressing the effect of regulation/de-regulation on the state of the current economy. While these articles were originally published in May and June, their relevance continues to be strong today.

    Articles have been published with the author’s permission.


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