A Titanium Ball falls from a Failed Satellite Launch atop a Soyuz-2 Rocket and Plummets through Man’s Roof

Posted by PITHOCRATES - December 31st, 2011

Week in Review

Man escapes death from being struck with by a piece of living history (see Man Miraculously Saves His Life As Satellite Fragment Crashes Into His House by Jesus Diaz posted 12/25/2011 on Gizmodo).

Andrei Krivorukov got a wonderful Christmas gift: his very own life. He saved it after a titanium ball from a Russian communication satellite crashed right into his house, escaping death by just a few feet.

The Russian satellite was a Meridian, which is used for civilian and military communications. It was destroyed when a Soyuz-2 rocket exploded in midair, just a few minutes after its launch from the Plesetsk Cosmodrome—a Russian spaceport, located 500 miles north of Moscow…

It’s a weird accident not only because of this Christmas miracle: the Soyuz has an excellent track record. It’s a tried-and-true vehicle with hundreds of successful missions since the 1960s, when it was designed by OKB-1 and manufactured at State Aviation Plant No. 1 in Samara, Russia. Its first flight was in 1966. The variant that launched today only has had one failure and one partial failure.

The Soyuz is tried and true.  From the days of putting the first man into space to shuttling people and supplies to the orbiting International Space Station.  It’s a true workhorse of the space program.  And the only one.  For the American Space Shuttle Program is now retired.  And it was shorter lived, more costly and suffered more failures than the Soyuz.  Never being able to live up to its initial design.  Not only to make space travel cheap but profitable.  Something it never did.  Being one of the most costly space systems of all time.

Yes, the Shuttle could retrieve satellites from space.  Something the Soyuz couldn’t do.  But it came at a cost.  And by cost I mean a big, heaping price tag.  It would have been cheaper and more cost effective to have continued with disposable booster systems.  Like the Soviets did.  And the Russians still are.  Sending new satellites in orbit to replace broken ones instead of trying to fix them.

Yes, the Shuttle was a magnificent piece of engineering.  But here we are.  Over 40 years have passed since Neil Armstrong first stepped onto the moon and we are still locked in Earth’s orbit.  One wonders where we might have gone had we not poured so much money into Space Shuttle.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , ,

The Iranians threaten to hold the World’s Economy to Ransom by Sealing the Strait of Hormuz

Posted by PITHOCRATES - December 31st, 2011

Week in Review

Iran is flexing their muscles in the Persian Gulf region.  Because America helped give them the elbow room to flex their muscles (see Iran to test-fire missiles escalating Strait of Hormuz tensions with US by Adrian Blomfield posted 12/30/2011 on The Telegraph).

Iran will escalate tensions in the Persian Gulf on Saturday by test-firing a barrage of long-range missiles just days after it threatened to hold the world’s economy to ransom by sealing the Strait of Hormuz, a vital energy waterway…

A ten-day naval exercise will culminate in a grandiose display of the Iranian regime’s ballistic arsenal. Senior navy officers boasted that ground-to-sea, surface-to-surface and surface-to-air missiles, some of which could theoretically be fitted with nuclear warheads, would be tested in the Gulf of Oman at the southern end of the Persian Gulf…

With the situation fast deteriorating, the United States announced on Thursday night that it had completed a deal to sell Saudi Arabia 84 F-15SA fighter jets.

Although the aircraft will not be delivered until 2015, the sale will be seen as evidence of Washington’s determination to shore up its Gulf allies, which are increasingly fretful about Iran’s growing military swagger.

Iran hates Israel.  And America.  They support Hezbollah and Hamas who both wish the destruction of Israel.  Our Gulf allies are worried about the rise of Iran in the area.  Even the ones who aren’t all that fond of Israel.  For an Israel they can tolerate.  But an ascendant Iran they cannot.

Al Qaeda funding for 9/11 came from the Wahhabi region of Saudi Arabia.  The Saudis, however, were reluctant to suppress this funding during the subsequent War on Terror.  For the Saudi royal family was right next to the Americans on the Wahhabi list of things they hate with a white hot burning passion.  If they cracked down on the Wahhabi they could very well start a civil war.  So their reluctance is understandable.  But with the American invasion of Iraq and the prospect of an American failure and an Iranian win, the Saudis quickly changed their minds.  And risked the civil war to prevent the worse evil.  An ascendant Iran.  And put a serious dent into al Qaeda funding.  The good friend and ally that the Saudis are.  Just like Hosni Mubarak was in Egypt.

When the American president told Hosni Mubarak that he had to leave power this did not go over well with our Saudi friends.  And rightly so.  Egypt, like them, helped to maintain peace in the region.  And they were united in their opposition to Iran.  The Saudis didn’t see an Arab Spring.  They saw an Islamist Spring.  With an ascendant Iran.  First the border between Egypt and Hamas-controlled Gaza was thrown open.  And then the Islamist parties showed well in their recent elections.  Good for Iran.  But not good for the United States or its allies in the region.  Hence the sale of the F-15s to the Saudis.

Now Iran is working on a nuclear capability.  The U.S. pulled out of Iraq for what some say were political reasons to shore up the president’s base in the coming 2012 election.  And now the Iranians are holding maneuvers and testing missiles that all can be put to use to “hold the world’s economy to ransom by sealing the Strait of Hormuz.”

American troops will probably then have to return to the Gulf.  And this time it will be blood for oil.  To prevent the second Great Depression.  Which it will be if the Iranians shut off that oil to the world’s economy.

Let’s hope America’s next president does a better job when it comes to foreign policy and American security.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , ,

The Free Market Economy gives us Great Televisions while Obamacare will give us Poor Health Care

Posted by PITHOCRATES - December 31st, 2011

Week in Review

The free market economy is giving us tremendous value in televisions.  Pity there are no market forces in our health care (see TV Prices Fall, Squeezing Most Makers and Sellers by ANDREW MARTIN, New York Times, posted 12/27/2011 on Yahoo! Finance).

Televisions have become so inexpensive that the profits have largely been squeezed out of them, a result of a huge increase in manufacturing capacity that has led to an oversupply and continued downward pressure on prices from low-cost manufacturers and online retailers…

To help reduce costs, manufacturers invested heavily in sophisticated new factories or retrofitted old ones that were capable of cranking out more televisions at lower cost. The problem is that the factories became operational about the time the recession hit, creating a glut of televisions and forcing prices down.

This is an excellent example of the role of prices in the free market economy.  Before the Great Recession these televisions were in high demand.  Prices were high.  So suppliers rushed to bring more to market.  With more features and better quality to outsell their competition.  As they did prices fell.  And kept falling.  Because supply grew so great that it surpassed demand.  So these televisions are now selling near cost.  Giving consumers incredible value.

These are market forces.  Providing state of the art quality at incredibly low prices.  Something government just can’t do.  And yet some are asking that government take over our health care system.  If they do, if Obamacare isn’t repealed, our health care won’t be anything like state of the art televisions.  It’ll just consume so much of our GDP that state of the art television will be unaffordable no matter how cheap they are.  Because there are no free market forces in state-run anything.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , ,

Scotland’s Pollution exceeds European Air Pollution Targets

Posted by PITHOCRATES - December 31st, 2011

Week in Review

Fine single malt isn’t the only thing Scotland is making these days (see City pollution ‘at danger levels’ in Scotland posted 12/26/2011 on the BBC News Scotland).

Dr Dan Barlow, head of policy at WWF Scotland, said: “It is totally unacceptable that Scotland has breached European air pollution targets for the second year in a row…

“This situation is a direct result of the failure of successive governments to produce a sensible strategy that adequately addresses air pollution and climate emissions from road traffic.”

The Scottish government said it had set out a vision to make the country’s roads as efficient as possible in its Infrastructure Investment Plan, while work was also under way to develop low carbon vehicle technology, promote “active travel choices” and encourage a shift towards public transport.

Perhaps the Scots know that all that global warming nonsense coming out of the University East Anglia was just that.  Nonsense.  And that it was just a way for big governments everywhere to strangle industrial economies.  By increasing the cost of business with low-carbon regulations.  And taxing them with carbon fees.  Which, incidentally, just also happens to help plug those nasty budget deficits that are all the rage in Europe these days.

Air pollution?  You know, about a hundred years ago their cities were thick with smoke and soot from steam engines burning coal.  And here we are.  Still alive.  And the glaciers are still there.  If the pollution from the Industrial Revolution didn’t kill us it’s likely no pollution can.  Besides, if the pollution was so bad would their single malt scotch still be so good?

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , ,

High Sin Taxes on Alcohol causes Death and Blindness from Drinking Fake Vodka

Posted by PITHOCRATES - December 31st, 2011

Week in Review

Britain’s tax policy on alcohol is killing poor people (see Fake vodka warning issued by council trading standard teams posted 12/30/2011 on BBC News UK).

Fake vodka recently seized had high levels of methanol, which can cause blindness, and industrial solvents…

The Local Government Association in England and Wales said fake vodka could cause death…

Mr Bettison went on: “Everyone wants a bargain, especially at this time of year, but surely the potential health risks far outweigh any financial savings. Purchasing it also does nothing to help legitimate businesses stay afloat.

Buying ‘bargain’ alcohol is not fair to legitimate businesses because legitimate businesses have to charge all those sin taxes that their customers ultimately have to pay.

Sin taxes punish the poor.  Either by leaving them poorer.  Or by killing them when they drink a ‘bargain’ vodka brand they can more readily afford.

www.PITHOCRATES.com

Share

Tags: , , , , , ,

England is Raising Taxes on Alcohol to pay for out of control NHS Costs

Posted by PITHOCRATES - December 31st, 2011

Week in Review

Sin is great.  For government.  Because they get to tax it (see David Cameron plans minimum alcohol price in England by Robert Winnett, and Rowena Mason posted 12/27/2011 on The Telegraph).

The Prime Minister has ordered officials to develop a scheme in England to stop the sale of alcohol at below 40p to 50p a unit in shops and supermarkets.

Ministers could copy Scottish proposals, which would ban the sale of alcohol below 45p a unit, or bring in a more sophisticated system of taxes based on the number of alcohol units contained in the drink.

Both options would cost drinkers an estimated extra £700 million a year, with any extra tax revenue potentially going to the NHS…

A recent official study found that setting a minimum price of 30p per unit would prevent 300 deaths a year, 40p about 1,000 deaths, and 50p more than 2,000 premature deaths…

Figures published earlier this month showed that twice as many people were being treated in hospital because of alcohol misuse compared with 10 years ago.

Alcohol is linked to more than one million admissions to hospital each year, about 13,000 new cases of cancer and one in four deaths of people aged 15 to 24.

This is the problem when other people pay for your health care.  Your personal life becomes other people’s business.  Because they’re paying your way.  With higher taxes.  In this case, higher sin taxes.

If this is all about the cost then they should look at this from a more pragmatic point of view.  And cut taxes.  For according to their studies this will kill thousands of people prematurely.  Before they can become a burden on the National Health Service (NHS).

Of course, they won’t.  Because it’s not about preventing deaths or keeping people out of hospital.  It’s about the tax revenue.  And out of control NHS costs.  Which no amount of sobriety can fix.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , ,

FT98: “The difference between a right and an entitlement is that other people don’t have to pay for a right.” -Old Pithy

Posted by PITHOCRATES - December 30th, 2011

Fundamental Truth

Our Rights are Free to Enjoy because no one must Suffer any Burden for us to Enjoy these Rights

The Roman Empire fell because of high taxes.  The Americans declared their independence from the British Empire because of high taxes.  The French Revolution erupted over high taxes.  Warren Harding won the 1920 presidential election because of high taxes.  Ronald Reagan won the 1980 presidential election because of high taxes.  Both Harding and Reagan were tax cutters.  The moral of this story?  People don’t like paying taxes.  Never have.  And never will.

The Bill of Rights contains the first 10 amendments to the U.S. Constitution.  Some of these rights include the freedom of religion and the freedom of speech (First Amendment).  The right to keep and bear arms (Second Amendment).  Protection from quartering troops in our homes (Third Amendment).  Protection from unreasonable search and seizure (Fourth Amendment).  See a trend?

Our rights are free to enjoy.  That is, when we enjoy our rights it doesn’t cost anyone else.  When people speak their mind there isn’t an associated cost that goes with it that we must fund with taxes.  For people to be free to own a gun and keep it in their house there isn’t an associated tax to pay for that right.  There isn’t a line item in the federal budget to prevent soldiers from moving into my house during times of peace.  No.  These rights are free.  No one must suffer any burden for us to enjoy these rights.

A Right is not a License to Compel Others to do something Against their Will

Rights are God-given.  Meaning that no person may deny these rights to anyone.  We want these rights.  We enjoy these rights.  And the fact that they don’t cost anything to have and enjoy is especially nice.  Because as noted earlier people don’t like paying taxes.  They never have.  And never will.

But we do pay taxes.  For those things that are necessary and Constitutional.  Such as a strong military to protect and defend our country from enemies foreign and domestic.  We don’t enjoy paying these taxes.  But we do enjoy being safe and free from oppression.  So we can enjoy our Constitutional rights.

Now, when is a right not a right?  When it’s not guaranteed in our Constitution and/or there is a cost that others must bear.  For instance, I can’t go to an electronics store and take a large plasma TV and tell the clerk that it’s my right to have that TV.  Because it’s not a right.  (Or an entitlement.  Yet.)  Why?  For one it’s not in the Constitution.  And it’s not just because we didn’t invent them yet.  Even if they were around at the time of the framing of the Constitution the Founding Fathers would not have included them.  Because they have a cost.  For someone to have one as a right someone else must pay for it.  And if someone else must be compelled to provide something for you then it is not a right.  Because a right is not a license to compel others to do something against their will.  There’s another name for that.  Slavery.

Health Care, Pensions, Food, etc., are not Rights because they have Costs

So if you agree with me so far (and it would be hard not to if you’re being honest), then you must agree that housing, health care, pensions, food, etc., are not rights either.  Because they have costs.  And the only way for others to have these without paying for them is to compel others to pay for them against their will.  Which is, of course, slavery.  Something else that is forbidden by a Constitutional amendment.  The Thirteenth Amendment.

So providing these things to the poor is not and should not be required.  But it would be nice.  And it should be voluntary.  Like it was.  Once upon a time.  Before there were entitlements.  We called it charity.  And it worked.  Well.  Our ancestors, those beautiful rugged individualists, would laugh at us today for how we’ve made a mess of things.  Be disgusted to see how soft we’ve become.  And then probably spit on us with contempt.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , ,

Manorialism and Serfdom

Posted by PITHOCRATES - December 29th, 2011

Politics 101

High Taxes and a Declining Birthrate marked the Beginning of the End of the Roman Empire

Serfdom dates back to European Manorialism.  But it was born in the decline of the Roman Empire.  When the Romans stopped pushing their borders out they lost a key source of revenue for their empire.  The spoils of war.  This coincided with the rise of their welfare state.  An ever larger bureaucracy to manage the breadth of empire.  And a loss of Roman identity and pride.  Taxes were rising.  And they were debasing their coin.  To monetize their debt.  People tried their best to evade taxes.  And had no desire to serve in the mighty Roman Legions securing the empire’s borders.  Which turned out to be quite the problem for the Romans.

The Romans had to hire soldiers to defend their borders.  A very costly endeavor.  Which added greatly to the cost of empire.  Hence the high taxes.  And debasing of their silver coins with lead.  But only the silver coins.  Not their gold.  Because they needed those to have value.  As they used them to pay for their hired soldiers.  And that’s one thing you don’t want to do to a hired army.  Anger them by paying them with worthless lead.  Because they could attack you as easily as protect you.

Soon being a Roman wasn’t fun anymore.  Taxes were so high people were working more for the Roman government than their families.  And inflation was making daily life difficult.  The people’s money was becoming worthless.  Which raised prices.  Soon the Romans were taking tax payments in kind.  Instead of money they took wheat, wine, clothing, etc.  Whatever a person made a large portion of what they made went to the Roman government.  It became so bad people were quitting to do something else.  A lot of them.  So many that it was cutting into what the Romans were collecting.  That and a declining birthrate marked the beginning of the end of the Roman Empire.  Large armies.  A growing bureaucracy.  And a declining tax base.  Not a formula for fiscal stability.  So they said enough.  No more quitting and moving on.  Whatever your father was you’ll be.  You have no choice.  You’ll do as he did until the day you die.

The Lord of the Manor owned Great Tracts of Land that Needed Laborers, Peasants had Labor to Offer but no Land

It was the rural part of this Roman directive that shaped future history.  Especially in Europe.  When the Roman Empire collapsed civilization went backwards.  To a rural, agrarian way of life.  A rural self-sufficiency.  Where people either owned land.  Or worked on land owned by others.  And that Roman idea to prevent people from quitting and moving on?  That became serfdom.  Where people who worked the land were bound to the land.  And not allowed to leave or look for a new job.  And if the lord sold the land the people bound to the land went with the land.  Not the lord.

This is Manorialism.  As the Roman Empire disintegrated power shifted from a central government to manors.  The Lord of the Manor owned great tracts of land that needed laborers.  Peasants had labor to offer but no land.  So they made an agreement.  The Lord of the Manor would permit the peasant to live and work a small piece of his land.  In return the peasant would join other peasants and work the large landholdings of their lord.

A serf was little more than a slave.  But with a home and land to work to provide for his family.  Which was a lot in Medieval Europe and often meant the difference between life and death.  And he had something more.  Protection.  A set of laws to live by among his fellow serfs administrated by his lord and the manorial court.  And protection from outside threats.  Which was also part of the agreement.  The serfs agreed to fight alongside their fellow serfs in defense of their lord’s land.  Which was also their home.  And the source of all provision for their family.  So it was a very beneficial agreement for both lord and serf.

Serfdom was a Life of Subsistence and Prayer

The Lord of the Manor lived in a mansion.  The peasants lived in a little village.  Between the two was often a church.  Also in or near the village was the lord’s mill.  Operated by the serfs for both the lord’s harvest and their own.  Maybe even a bakery.  Surrounding these were the great tracts of land the serfs worked.  And forests where wild game was available to hunt.  And wood to burn.  But the forests were typically for the lord’s sole use.

So after the glory that was Greece and the grandeur that was Rome this was what civilization came to.  A life of subsistence.  Back-breaking work in the fields.  Eat what you grow.  Pray.  And try not to starve or freeze to death during the winter.  Not a life we would dream about today.  But one that worked for centuries.  And held Europe together during the Middle Ages.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , ,

Greek and Latin Books, the Printing Press, the Gutenberg Bible, Newspapers, Desktop Publishing, the Blogosphere and the Internet

Posted by PITHOCRATES - December 28th, 2011

Technology 101

Monks worked by Candlelight Painstakingly Copying by Hand the Great Books of Greek Knowledge

Alexander the Great spread Greek thinking and the Greek language throughout much of the known world.  From the Mediterranean to the Indus Valley.  Everywhere Alexander went he built new cities. Where that Greek thinking took hold.  Astronomy.  Geometry.  Architecture.  Engineering.  Philosophy.  Etc.  The Greeks impressed the Romans.  Even though they conquered them.  But the empire they built used that Greek thinking they so admired as its foundation.  They studied the Greeks.  Mastered their language.  Read their books.  And translated the Greek books into Latin.  The new universal language.

The Roman world was an advanced world.  And a Latin world.  The great minds throughout the Empire spoke and studied in Latin.  Which helped to diffuse this knowledge throughout the known world.  For you were never outside the Latin world.  The common people may not have spoken Latin.  Instead speaking the common language of their people (French, German, English, etc.).  But in their universities they all spoke Latin.  For educated men everywhere spoke Latin as their second language.  The language of knowledge.  Education.  And of the Church.  Where the masses were in Latin.  Until the Great Schism in 1054, that is.  When Greek replaced Latin in the Eastern Orthodox Church.  But Latin remained the language of the Catholic Church in the West.

It was the Church and their medieval monks that brought this knowledge forward through the Dark Ages.  For it wasn’t dark in their monasteries.  Where monks, the few people who could read and write, worked by candlelight painstakingly copying by hand the great books of Greek knowledge.  Making this knowledge available for the select few who could afford these works of art.  Which they were.  For each one was one of a kind.  Which made them rather costly.  And unavailable for the common people.  Including the Bible.  No, these belonged to the wealthy.  The universities.  And the Church.  Until a German goldsmith came along with a brilliant idea.

The Printing Press gave us Inexpensive Books, Newspapers, Censorship and Revolution

That idea was moveable typesetting.  Individual letters arranged to spell out lines of text.  Clamped together with other lines of text.  Placed into a press.  Smeared with ink.  Then pressed onto paper.  In this way Johannes Gutenberg published the first mass-produced book.  The Gutenberg Bible.  And knowledge would never be the same.

Printing spread.  As did the mass production of books.  Reading was no longer for the well-to-do or Church clerics.  Everyone was learning to read.  And they were reading books.  In their own language.  Which put an end to Latin.  Because the printing press made books so cheap they printed them in all sorts of languages.  Making knowledge more readily accessible to the common people.  Anyone who wished to learn to read could.  And did.  Thanks to Gutenberg.  And the printing press.

But not only books were printed.  Knowledge was taking shape in a new form.  Newspapers.  And this type of knowledge was powerful.  People throughout a kingdom knew what was happening in their kingdom.  And what was happening in other kingdoms.  And they more often questioned authority.  So much so that it ushered in a new government policy.  Censorship.  As governments tried to suppress unfavorable news.  Such as the British blockade of Boston Harbor.  Soon Boston’s problem was everyone’s problem as the news traveled throughout the American colonies.  Escalating what the British thought was a Boston problem into a revolution in America.  And later in France.  After the French read all about the American Revolution in their newspapers.

Desktop Publishing, the Blogosphere and the Internet has Revitalized the Free Press

With newspapers came newspaper advertising.  A great medium for advertisers to promote their goods.  And a cash cow for publishers.  Advertisers kept the price of newspapers low.  Making them affordable to the masses.  Giving publishers great power to control information.  Which they did.  Newspapers started out as tools of political parties.  Alexander Hamilton and Thomas Jefferson viciously attacked each other in print.  Through anonymous editorial content.  So using newspapers for political purposes is nothing new.  But in the age of advertising the stakes were much higher.

Newspapers soon assumed an air of neutrality.  They weren’t tabloid news anymore.  But journalism.  Reporting the facts so their readers can make their own conclusions.  And they were neutral for awhile.  But the captive audience of a large daily was just too much to pass up.  Papers could influence and shape opinion.  And many did.  With clear biases even though they denied it.  Frustrating their readers.  Who began to look for other sources of news.  And they found a big one.  So big that it is destroying the giants of print media.  Shrinking these newspapers’ circulation numbers.  And with them their advertising revenue.  So what was driving people away from the once storied titans of news?  The Internet.

The Internet has revolutionized the way we get information.  And has revitalized the free press.  We can get news from anywhere without it going through the editorial filter of a politically connected publisher.  Desktop publishing and the blogosphere allow anyone to write and publish at little to no cost.  Some blogging platforms are free thanks to online advertisers.  Now anyone can report, think, opine and publish.  Technology has made the costs of electronic publishing almost free.  Gone are the days when you needed mammoth printing presses, typesetters, copy editors, delivery trucks etc.  Today all you need is a computer.  Or a cellular device.  And an Internet connection.

People in the Middle of the News can Report the News in Real Time thanks to Micro-Blogging

Few newspapers today can afford to stay in business with their low circulation numbers and lost advertising revenue.  But people have never been more informed.  Sources of news and opinion are electronically everywhere.  For a fraction of the cost.   With some of that news being published within seconds of the news event happening.  From anywhere in the world.  Thanks to the Internet.  And micro-blogging platforms such as Twitter.  Even if the news arrives to us in a foreign language we can use an online translator to read it.  With some simple copy and paste commands.  News has never been more convenient.

People in the middle of the news can report the news in real time.  A process that started with the Greeks and the Romans.  Who diffused all that Greek knowledge.  That a lot of monks brought through the Dark Ages to the age of print.  Feeding our insatiable hunger for knowledge.  The printing press gave us inexpensive books.  In our common languages.  And the newspaper.  That eventually gave us desktop publishing.  The Internet.  And instantaneous knowledge.  All of this without having to learn Latin to boot.  Good for us because that is one thing the Internet can’t do well.  Translate Latin.  For that you need a person.  Or years of education.  And who has the time these days for that?  I mean, we can’t even wait for a daily newspaper these days to get our news.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The Great Housing Bubble and The Subprime Mortgage Crisis

Posted by PITHOCRATES - December 27th, 2011

History 101

Putting People into Houses trumped Sound Monetary Policy, a Sound Currency and good Lending Practices

Housing has for a long time been the key to economic prosperity.  Because to build a house you need a lot of economic activity.  Industries produce lumber, concrete, sheetrock, brick, shingles, door frames, doors, windows, glass, flooring, plumbing pipes, plumbing fixtures, sump pumps, furnaces, heating ducts, insulation, air conditioners, electrical wiring and fixtures, carpeting, tile, linoleum, etc.  The bigger the house the more of this stuff there is.  Once built people have to buy them (stimulating the mortgage banking industry) and then furnish them.  This triggers a monsoon of economic activity.  Drapes, shades, blinds, paint, washers, dryers, stoves, refrigerators, freezers, microwave ovens, toasters, blenders, food processers, plates, dishes, knives, silverware, ceiling fans, televisions, home theaters, sound systems, computers, cable and internet services, utilities, shelving, furniture, beds, cribs, art, etc.  And, of course, the exterior of the house creates further economic activity.

This is why one of the most important economic indicators is new housing starts.  For each new house we build we create a whirlwind of economic activity.  So much that it boggles the mind trying to think about it.  That’s why governments do whatever they can to stimulate this particular economic activity.  They encourage borrowing by allowing us to deduct the interest we pay on our mortgages.  They use monetary policy to keep interest rates as low as possible.  They’ve created federal programs to help veterans.  To help low income people.  And to remove risk from lenders to encourage more risky lending (as in Fannie Mae and Freddie Mac).  They’ve even used the power of government to force mortgage lenders to qualify the unqualified (Policy Statement on Discrimination in Lending).

You see, putting people into houses trumped everything else.  Sound monetary policy.  A sound currency.  Good lending practices.  Everything.  Because that was the key to a healthy economy.  A happy constituent.  And healthy tax revenue.  Not to mention you can score a lot of points with the poor and minorities by helping them into houses they can’t afford.  So this coordinated effort to put people into houses did two things.  Made money cheap and easy to borrow.  And created a boom in new housing starts.  Which resulted in a third thing.  A housing bubble.

Subprime Mortgages were for those who didn’t have Good Credit or Stable Employment with Reliable Income

Builders couldn’t build enough houses.  People were buying them faster than they built them.  And the houses they bought were getting bigger and bigger.  As they qualified for ever larger mortgages.  Poor people and people with bad credit could walk into a bank and get approved without documenting income.  House flippers could walk in day after day and get loans to buy houses.  Fix them up.  And put them back on the market.  Without using any of their own money. The market was soon flooded with new McMansions.  And refurbished smaller homes that people were moving out of.  Demand for homes was high.  And interest rates were low.  So the supply of homes swelled.  As did home prices.

Interest rates were low.  But they didn’t stay low.  All this coordinated effort to put as many people into homes as possible created a lot of artificial demand.  Heating up the economy.  Increasing prices higher than they had been.  Leading to inflationary worries.  So the Federal Reserve began to raise interest rates.  To temper that inflation.  Which didn’t sit well with those low income house owners.  Who got into their homes with the help of the Policy Statement on Discrimination in Lending.  Which forced lenders to get creative in qualifying the unqualified.  To avoid undo federal attention.  And legal actions against them.  So a lot of poor people had subprime mortgages.  As did all of those house flippers.  People who used little of their own money.  Who put little down.  And had little to lose.

What is a subprime mortgage?  In a word, risky.  It isn’t a 30-year fixed-rate mortgage at a good interest rate.  No, for those you need a good credit score and years of stable employment with reliable income.  And enough money saved up to put close to 20% down.  Subprime mortgages were for those who didn’t have a good credit score.  Years of stable employment with reliable income.  Or any savings.  These people didn’t get the ‘prime’ mortgages.  They got the expensive ones.  The ones with the higher interest rates.  And the higher monthly payments.  Why?  Because risk determined the interest rate.  And the higher the risk the higher the interest rate.

In their Effort to sustain Economic Activity the Government caused the Worst Recession since the Great Depression

But this posed a problem.  Because of the Policy Statement on Discrimination in Lending.  Making loans available to the unqualified was no good if the unqualified couldn’t afford them.  Enter the adjustable rate mortgage (ARM).  These mortgages had lower interest rates.  And lower monthly payments.  How you ask?  By making them adjustable.  A fixed-rate mortgage has to account for inflation.  And adjustable-rate mortgage doesn’t.  Because if there is inflation and the interest rates go up the ARM resets to a higher value.  Which is what happened right about the time housing prices peaked.

When the ARMs reset a lot of people couldn’t make their monthly payments anymore.  Having put little down and having made few monthly payments, these homeowners had little to lose by walking away from their homes.  And a lot of them did.  Including those house flippers.  And that was just the beginning.  With higher interest rates the new home market contracted.  Those artificially high house prices began to fall.  And when the ARMs reset they caused an avalanche of defaults and foreclosures.  The market was correcting.  There were far more houses for sale than there were buyers looking to buy.  Home values began to fall to reflect this real demand.  People who bought the biggest house they could afford because they thought real estate prices always went up soon discovered that wasn’t true.  People were making monthly payments on a mortgage that was greater than the value of their house.  Some walked away.  Some got out with short sales.  Where the lender agreed to eat the loss equity.

The housing market was imploding.  Thanks to a great real estate bubble created by the government.  In their quest to put as many people into houses as possible.  By making mortgages cheap and easy to get.  Relaxing lending standards.  And encouraging risky lending.  None of which would have happened had they left the housing market to market forces.  Where the market sets interest rates.  And housing prices.  The irony of the subprime mortgage crisis is that in their effort to sustain economic activity the government caused the worst recession since the Great Depression.  The Great Recession.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

« Previous Entries