Catholics, Protestants, Church of England, the Kirk, Presbyterians, Puritans, Divine Right of Kings and Parliament

Posted by PITHOCRATES - May 1st, 2014

Politics 101

(Originally published January 26th, 2012)

English Catholics and Protestants were Fiercely Religious and willing to Kill or be Killed for their Faith

To understand the founding political structure of the United States you need to understand 17th century Britain.  The run up to the 17th century.  And the Protestant Reformation.  When Christianity split into Protestants and Catholics.  And their beliefs and practices.

Catholics are born with original sin.  Protestants aren’t.  All Catholics have a chance to go to Heaven.  God sorts out the Protestant’s going to Heaven before birth.  Doing good deeds can help Catholics make it to Heaven.  They won’t make any difference for Protestants.  Catholics burn away their sins in Purgatory.  Then comes Judgment Day.  Clean souls go to Heaven.  Unclean souls go to Hell.  Protestants go straight to Heaven or Hell when they die with no layover in Purgatory or judgment.  Catholics believe priests have special powers and the Pope is infallible.  Protestants don’t.  Catholics have saints, altar rails, candles, pictures, statues and stained glass windows.  Protestants don’t.  Catholics believe priests change the wine and bread at Communion into the actual body and blood of Christ.  Protestants think they just represent the body and blood of Christ.

These are some significant differences.  Especially in a time when everyone was fiercely religious.  And did everything in this life to prepare for the afterlife.  Even buy an indulgence from the Catholic Church to buy their way through Purgatory and into Heaven.  One of the pet peeves of Martin Luther that he included in his Ninety-Five Theses in 1517 Germany (which was then a collection of German princedoms).  This was serious stuff for the laypeople.  Who were willing to kill or be killed for their faith.  Which they did a lot of in Britain.

When Queen Elizabeth died King James VI of Scotland became King James I of England

King Henry the VIII hated Martin Luther.  Was a staunch defender of the faith.  But he wanted a divorce.  So he could marry a woman who would give him a son instead of more daughters.  But he needed the Pope to grant him this.  And the Pope refused.  Henry VIII also wanted to get the Catholic Church out of his affairs.  So he created an English church.  The Church of England.  With him as the guy in charge.  At first his church was going to be protestant.  Fully anti-Pope.  But he had Parliament pass the Act of Six Articles that made his Protestant Church very Catholic.  After Henry VIII died succeeding rulers pulled the Church back and forth between Protestantism and Catholicism.

Edward VI pulled it back to Protestantism.  Then that bread and wine issue came up again.  So they wrote a new prayer book that was deliberately vague.  Which caused the Catholics to riot.  When he died his sister, Queen Mary, took the throne.  An ardent Catholic.  Out went that new prayer book.  In came Catholicism.  And she arrested and burned Protestants at the stake.  Then she died.  And in came Queen Elizabeth.  A Protestant.  So the Church of England became Protestant again.  With a little Catholicism mixed in.  But it wasn’t Catholic enough.  So the Pope excommunicated her in 1570.  Angry, she oppressed the Catholics.  Yet the Protestants weren’t happy, either.  That little bit of Catholicism was just way too much for their liking.  Especially those hardcore Calvinist Protestants (the people we call Puritans even though at the time it was more a derogatory term).  Who Elizabeth then arrested and executed.

There was a Protestant uprising in Scotland and they, too, broke from the Catholic Church.  Without consulting their very important friend and ally.  Catholic France.  Which was home for an exiled Mary Queen of Scots.  A Catholic.  But she didn’t have the power to fight against the Protestants.  So she joined the fight against the Catholics.  But she had some Catholic baggage the Scottish couldn’t forgive and they forced her to abdicate anyway.  Her son, James VI, became king.  The Church of Scotland was Presbyterian (Calvinist Protestantism).  But Scotland had a lot of Catholics as well.  The Scottish Parliament made James the head of the Scottish Church.  The Kirk.  Which was a problem for the Presbyterians.  Because they said a king couldn’t be the head of their church.  When Elizabeth died James became King James I of England.  Changed the spelling of his name from ‘Stewart’ to ‘Stuart’.  And became the head of the Church of England.  Who the Presbyterians said was way too Catholic.

King James I believed in the Divine Right of Kings and Hated Parliament

When Mary Queen of Scots abdicated James VI was only a baby and raised by a Presbyterian handler.  His Regent.  Who ruled for James until he came of age.  Who must have been strict for James did not like the Scottish Presbyterians.  Who were very similar to English Puritans.  Elizabeth had oppressed Catholics and Puritans.  Who were now both looking for a little relief from King James I.  James met with some Puritans and Catholic bishops.  The bishops resented having to meet with Puritans.  And the Puritans wanted to do away with the bishops.  But James preferred Catholics over Puritans.  So he persecuted the Puritans.  Some of who embarked on a ship called the Mayflower and sailed to religious freedom in America.  Where they would allow anyone to practice any religion they chose.  As long as they chose Puritanism.

Now even though James preferred the Catholics there were a lot of Protestants in England.  And a strong anti-Catholic sentiment.  After all England’s two great enemies, Spain and France, were Catholic.  So he continued some Catholic oppression.  One Catholic took great offense to this and decided to do something about it.  Blow up Parliament.  And the king.  Robert Catesby planned the Gunpowder Plot.  But someone warned the government.  And they caught Guy Fawkes in the cellar surrounded by gun powder just before he could light the fuse.  They sentenced Fawkes and the other conspirators to death.

James was not a fan of Parliament, either.  It was different in Scotland.  There they did pretty much what he wanted.  But the English Parliament didn’t.  And this really bugged him.  For he believed in the Divine Right of Kings.  Parliament didn’t.  And they told him so.  Also, Parliament controlled the purse strings.  If he wanted money, and he did, he would have to work with Parliament.  Or find another means to pay for what he wanted.  He chose to find another means.  He forced people to loan him money.  And even sold a new hereditary title.  The baronet.  But it was never enough.  When he died the kingdom wasn’t as rich as Elizabeth left it for him.  Worse, he left a political mess for his successor.  King Charles I.  Who became the first king whose subjects put on trial.  And executed.  Following the English Civil War.  Which he, of course, lost.

The Radical New Ideas Sown in the 17th Century would have a Profound Impact on the American Founding Fathers

King Charles I ruled in 17th century Britain.  A momentous time of change.  In Britain.  The Old World.  And the New World.  A king would be tried for the first time by the people.  Religious scores would be settled far and wide.  Attempted, at least.  And new states would rise in the New World where they would live under the religion they chose.  Governed by representatives of the people.  Who governed at the consent of the people.  Radical new ideas.  That were sown in 17th century Britain.  And would have a profound impact on the American Founding Fathers.

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Obamacare is even less Consumer-Friendly than Cable/Television/Telephone Television

Posted by PITHOCRATES - April 17th, 2014

Week in Review

Currently there are no market forces in health care.  Which is why health care costs are so high.  When buyers and sellers meet they always agree on a price that makes them both feel like winners.  Just watch an episode of one of those pawn shop shows.  The seller wants a higher price.  The buyer wants to pay a lower price.  As they move towards each other they arrive at a price that makes them both happy.  The seller gets an amount of money he values more than the thing he’s selling.  And the buyer is getting something he values more than the money he’s paying for it.  Making them both feel like winners.

It’s not like this in health care.  Because there is a third party between the buyer and seller.  Either an insurance company.  Or the government.  Just like there is a third party between networks’ programming content and the consumer.  The cable/satellite/phone company (see Why Your Cable Bill Keeps Going Up by Evan Weiner posted 4/12/2014 on The Daily Beast).

The television networks and the television carriers, whether it’s through cable, satellite or phone lines, carriers seeming are always fighting these days over the cost of programming and what rights’ fees should be. The rights’ fee is what a television carrier pays for a networks programming. The carrier then passes that cost along to consumers and tacks on an additional fee because they too feel the need to be compensated for bringing the program into a home.

The injured party is the subscribers who have little course to affect the talks unless they decide to drop their provider for another, and there is no guarantee switching to another provider will end TV blackouts…

Thanks to the 1984 Cable TV Act, cable subscribers have really no say in what they want for their needs. The cable carrier was allowed to establish tiers of services. The consumer could take a local, basic tier alone or basic and basic extended but would have no choice in what they wanted to buy and were forced to take whatever the multiple system operative wants to give them or they opt out of having cable TV. The same apparently holds true for satellite TV and the phone companies.

Cable/satellite/telephone television is like Obamacare.  As consumers can’t keep the programming they liked and wanted to keep.  As it is for Obamacare.  Where people who had health insurance they liked and wanted to keep could not keep it.  Instead, a third party, the government, forced them to buy a tier of health insurance they did not want.  Only they do not have the option to opt out of Obamacare.  Because buying health insurance is mandatory.  Unlike cable/satellite/telephone television.  For as much as we may hate our cable/satellite/telephone companies at least we don’t have to buy from them under penalty of law.

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Hard Money versus Paper Money

Posted by PITHOCRATES - March 17th, 2014

Economics 101

(Originally published April 1st, 2013)

Money would have No Value if People with Talent didn’t Create things of Value

Money is a temporary storage of wealth.  We created it because of the high search costs of the barter system.  It took a lot of time for two people to find each other who each had what the other wanted.  And we started trading things to have things we couldn’t make efficiently for ourselves.  Someone may have been a superb potter but was a horrible farmer.  So, instead, the potter did what he did best.  And traded the pottery he made for the things he wanted that he was not good at making.  Or growing.  Before that we were self-sufficient.  Whatever you wanted you had to provide it yourself.

As we go back in time we learn why money is a temporary storage of wealth.  For it was the final piece in a growing and prosperous economy.  And at the beginning it was people with talent, each creating something of value.  Something of value that they could trade for something else of value.  It’s the creative talent of people that has value.  And we see that value in the goods and/or services they make or provide.  Money temporarily held that value.  So we could carry it with us easier to go to market to trade with other talented and creative people.  Who may not have wanted what we made or did.  But would gladly take our money.

So we took our goods to market.  People that wanted them traded for them.  They traded money for our goods.  Then we took that money and traded for what we wanted elsewhere in the market.  Trade grew.  With some people becoming professional traders.  By trading money for goods from distant lands.  Then trading these goods for money at the local market.  People who didn’t spend time creating anything.  But bought and sold the creative talent of others.  Who were able to do that because of money.  The creative talent came first.  Then the goods.  And then the money.  For money is a temporary storage of wealth.  Which has no value if no one is making anything of value.  Because if you can’t buy anything what good is having money?

There were no more Gold Certificates in Circulation than there was Gold in the Vault to Exchange them For

These early traders used a variety of things for money.  Pigs, tobacco, grain, oil, etc.  What we call commodity money.  Which was valuable by itself.  As people consumed these commodities.  Which is what gave them the ability to store value.  But because we could consume these they did not make the best money.  Also, they weren’t that portable.  And not easy to make change with.  Which is why we turned to specie.  Such as gold and silver.  Hard money.  It was durable.  Portable.  Divisible.  Fungible.  For example, all Spanish dollars were the same while all pigs weren’t.  One pig could weigh 30 pounds more than another.  So pigs weren’t fungible.  Or durable.  Portable.  And, though divisible, making change wasn’t easy.

So in time traders big and small turned to specie as the medium of exchange.  For all the reasons noted above.  If you worked hard to produce fine pottery you trusted in specie.  You would accept specie for your pottery goods.  Because you knew this hard money would hold its value.  And you could use it in the future to buy what you wanted.  No matter how long that may be.  Why?  Because the money supply remained relatively constant.  As it took a lot of work and great expense to mine and refine ore to make specie out of it.  So there was little inflation when using hard money.  Which meant if you saved for a rainy day that hard money would be there for you.

Gold and silver could be heavy to carry around.  Anyone struggling under the weight of their specie were targets for thieves.  Who wanted that money.  Without creating anything of value to bring to market.  So we found a way to improve a little on using gold and silver.  By locking our gold and silver in a vault.  And carrying around receipts for our gold and silver to use as money.  These gold certificates were promises to pay in gold.  People could continue to use them as money.  Or they could take these receipts back to the vault and exchange them for the gold inside.  These gold certificates were as good as gold.  And there were no more gold certificates in circulation than there was gold in the vault to exchange them for.

Governments Today use nothing but Paper Money because it gives them Privilege, Wealth and Power

Some saw advantages of expanding the money supply with paper currency.  Money that isn’t backed by gold or any other asset.  Money easy to print.  And easy to borrow.  Allowing rich people to borrow large sums of money to buy more assets.  And get richer.  Giving them more power.  And if you were the one printing and loaning that money it gave you great wealth and power.  So having a bank charter was a way to wealth and power.  You could make it easy for those who can help you to borrow money.  While making it difficult for those who oppose you to borrow money.  So there were those in business and in government that liked un-backed paper money.  Because a select few could borrow it cheaply and get rich and powerful.

While some liked these banks and that paper money there were others who bitterly opposed them.  Some who didn’t like to see so much power in so few hands.  And the hard money people.  Who wanted a money that held its value.  The common people.  People who couldn’t borrow large sums of cheap money.  But people who had to get by on less as the inflation from printing all those paper dollars raised prices.  Leaving them with less purchasing power.  Making it harder for them to get by.  Often having to turn to the hated banks to borrow money.  Again and again.  Such that the interest on their loans consumed even more of their limited funds.  Making life more tenuous.  And more bitter between the classes.  The rich who benefited from the cheap paper money.  And the common people who paid the price of all that inflation.

Rich people, on the other hand, loved that inflation.  It helped them make money.  When they bought something at a lower price and sold it at a higher price they made a lot of money.  The greater the inflation the greater the selling price.  And the more profit.  Also, the money they owed was easier to pay off with money that was worth less than when they borrowed it.  Allowing rich people to get even richer.  While the common people saw only higher prices.  And the value of their meager savings lose value.  So this cheap paper money fostered great class warfare.  The hard money people hated the paper money people.  Debtors hated creditors.  The middling classes hated the large landowners, merchants, manufacturers and, of course, the bankers.  And those who had talent to create things hated those who just made money with money.  The greater the inflation the greater the divide between the people.  And the greater wealth and power that select few acquired.  This is what paper money gave you.  Privilege.  Which is why most governments today use nothing but paper money.

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The Price of Gold falls as Responsible Monetary Policy appears Imminent

Posted by PITHOCRATES - December 14th, 2013

Week in Review

You can print paper dollars.  And create dollars electronically.  Which is why governments love fiat money.  Money that has no intrinsic value.  Just the government saying ‘let it have value’ gives it value.  Which is why they love it.  Because they can print it to spend when they have no further room to raise taxes.

But printing money creates inflation.  And devalues the dollar.  Which is why some like to buy gold.  Because you can’t print gold.  Or create it electronically.  So it holds its value.  Especially when the dollar doesn’t.  And the price of gold has been on the rise all during the Federal Reserve’s quantitative easing (i.e., ‘printing’ money).  The more the Fed ‘prints’ money the more they devalue the dollar.  And inflate the price of gold.  But once it looks like the Fed is going to taper back on their ‘printing of dollars’ gold investors stop buying gold (see Gold suffers biggest one-day loss since October by Myra P. Saefong and Sara Sjolin posted 12/12/2013 on Market Watch).

Gold futures took a hit on Thursday as concerns that the Federal Reserve could scale back its stimulus next week pulled prices down by more than $30 an ounce for their biggest one-day loss since October.

Investors stopped buying gold not because gold has lost value.  But because they think the dollar will stop losing its value.  For if the Fed stops their quantitative easing the devaluation of the dollar will halt.  As will the rise in the price of gold priced in dollars.  So it will no longer take more dollars to buy the same amount of gold that it once bought.  Like it did under the Fed’s quantitative easing.  And those who bet on a further irresponsible monetary policy that devalued the dollar want to unload some of their higher-priced gold before responsible monetary policy takes effect.

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The Politics of Liberal Economic Policies

Posted by PITHOCRATES - November 18th, 2013

Economics 101

What doesn’t Kill You Makes you Stronger

They say what doesn’t kill you makes you stronger.  And you can see that in military basic training.  There have been some good movies showing what military basic training is like.  Perhaps one of the best is Full Metal Jacket.  Where Gunnery Sergeant Hartman played by R. Lee Ermey wasn’t acting as much as reliving his days as a Marine Corps drill instructor.  Watching it you may come to hate Sergeant Hartman for he was pretty sadistic.  But they didn’t design basic training to be a pleasant experience.  They designed it to prepare recruits for the worst thing in the world.  War.

In the miniseries Band of Brothers we follow Easy Company, 2nd Battalion, 506th Parachute Infantry Regiment, 101st Airborne Division, from basic training through D-Day and to the end of the war.  Airborne training followed basic training.  And was harder.  Fewer people make it through airborne training than they do basic training.  Ranger training is even harder.  And fewer people make it through Ranger training.  But airborne units and Rangers get the more difficult missions in combat.  Because they can do more.  For their training is more difficult.  But it didn’t kill them.  So it made them stronger.

Perhaps the most difficult military training is the Navy’s SEAL program.  Where if they get a good class of recruits they may have 1 in 10 complete training.  For it is that hard.  In fact, some have died in training because they refused to give up.  That’s why you will find few tougher than a Navy SEAL.  They are tough.  And they never quit.  Which is why we give them the most difficult missions to complete.  Missions that others would find impossible.  Proving that the more brutal and difficult training is the stronger and more able we get.

During the 20th Century the American Left has tried to replace Rugged Individualism with the Nanny State

Those who founded this nation were tough people who worked hard and never gave up.  They provided their own housing, food, clothing, etc.  If they needed something they figured out how to provide it for themselves.  They worked long hours.  Survived brutal winters and hostile environments.  But they never gave up.  In fact, they raised families while doing all of this.  With no help from government.  As there were no government benefits.  Yet they survived.  Even prospered.  For what didn’t kill them only made them stronger.  These rugged individuals could do anything.  And did.  Which is why the United States is the leader of the free world.  And the world’s number one economy.  Because of that rugged individualism.

This is the way America was before the progressives came and softened us.  And made rugged individualism somehow a bad thing.  Beginning with Woodrow Wilson.  Then FDR.  LBJ.  And then President Obama.  A long line of American presidents who eschewed individualism.  And thought in collective terms.  When the Americans rejected socialism they gave us progressivism.  When we rejected communism they gave us liberalism.  The 20th century has been a tireless attempt for those on the left to replace rugged individualism with the nanny state.  With their brilliant selves in power.  Managing the economy.  And making life fair.  To undo the unfairness of laissez-faire capitalism.  To make the United States better.  And more according to their vision.  Just like the socialists did.  And the communists did.  Yet no socialist or communist state became the leader of the free world.  Or the world’s number one economy.

Those who lived in those socialist and communist utopias learned one thing.  It was better to live someplace else.  And their ultimate destination?  The United States.  Yet those on the left refused to believe that life was worse in those states where they put people first instead of profits.  Like that unfeeling and cruel laissez-faire capitalism did.  Which is why Wilson, FDR, LBJ and Obama worked tirelessly to move the United States in the direction of socialism and communism.  Because they cared for the people.  Or the power they got by making so many people dependent on government.

Someone receiving a Comfortable Level of Benefits will not be pushed to Leave their Comfort Zone

So is it about the power or that thing about helping people?  What is it exactly that progressives/liberals really want?  Well, we can look at the historical record to determine that.  By looking at a point in time when America really changed.  With the assassination of JFK.  JFK’s chances of reelection weren’t great.  Which is why he went to Texas.  As he needed LBJ to deliver Texas to the Democrats.  Instead of electoral victory, though, he fell to an assassin’s bullet.  The great outpouring of grief and love for their fallen president exceeded the love he got before the assassination.  The heightened emotions allowed LBJ to pass the many programs of the Great Society into law.  In the memory of JFK.  The greatest expansion of the federal government since FDR’s New Deal.  Making the welfare state the largest yet.  In an attempt to put people first.  Not profits.  In fact, LBJ declared a war on poverty.  By providing government assistance to lift everyone out of poverty.  And he championed civil rights.  LBJ was going to make the United States that utopia socialists and communists always dreamt about.  For everyone.  Blacks.  And whites.  Especially blacks.  Who were suffering great discrimination then.  But things would be different for them.  Starting in the Sixties everything was going to get better.  And how are blacks doing today?  Well, if you use employment as a measure, not good (see Table A-2. Employment status of the civilian population by race, sex, and age by the Bureau of Labor Statistics)

Unemplyment Rates by Race Age Sex Rev 2

The federal government has done a lot for blacks.  More than any other minority group.  Affirmative Action was to correct all past wrongs.  By making it easier to get into college.  And to get a job.  Yet we don’t see that when looking at the unemployment numbers.  In fact, the group the government does the least for—white men—is doing the best.  They don’t need any help because they won life’s lottery.  By being born white.  According to liberals.  So there’s no Affirmative Action for them.  Yet they have half the unemployment rate black men have.  While white women have half the unemployment rate black women have.  And white 16-19 year olds have half the unemployment rate black 16-19 year olds have.  Brilliant progressives/liberals have been trying to make life better for blacks for 50 some years now and have failed.  Despite this blacks have never been more loyal to them.  Which answers the question what the Democrats care more for.  The people?  Or the power the people give them.  By getting them dependent on government.  Who they tell over and over again that they would have nothing if it weren’t for them.  The Democrats.  For blacks just can’t make it on their own without help.  Even though after receiving all of that help blacks are suffering the greatest levels of unemployment.  Clearly something isn’t right here.  And it goes back to that thing that made America great.  Rugged individualism.

You know what the difference is between a white SEAL and a black SEAL?  Nothing.  Blacks have equality of opportunity in SEAL training.  And that’s all they need.  They don’t need special treatment.  And the Navy doesn’t tell them that they do.  All they need is the strength.  And the will.  Which will be there if you don’t keep telling people that they can’t succeed without the government’s help.  Because if you keep doing that they will come to believe that.  And they will keep voting Democrat.  Looking for help.  Whereas those who face adversity and overcome it grow stronger.  Because what doesn’t kill them makes them stronger.

Handing out government benefits will make people like you.  But it won’t get them a job.  For someone receiving a comfortable level of benefits will not be pushed to leave their comfort zone.  And while they languish in their comfort zone they will not gain work experience.  Allowing others to gain experience and move up in their careers.  Making them more employable.  While those with less experience and less education are less employable.  And that’s what Democrats do when they buy votes with government benefits.  Make people less employable.  And blacks have been especially useful to them.  As they can stoke the fires of racism to drive blacks even further to the Democrat Party.  By calling Republicans racists.  Because they want to take away their benefits.  Just because they hate black people.  Or so goes the Democrat line.  So they keep voting Democrat.  While losing their rugged individualism.  And suffering higher levels of unemployment than everyone else.

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

Posted by PITHOCRATES - October 16th, 2013

Technology 101

(Originally published December 28th, 2011)

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.

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Banking, Lending Standards, Dot-Com, Subprime Mortgage and Bill Clinton’s Recessions

Posted by PITHOCRATES - March 19th, 2013

History 101

Lending more made Banks more Profitable as long as they Maintained Good Lending Standards

Money is a commodity.  And like any commodity the laws of supply and demand affect it.  If a lot of people want to borrow money interest rates rise.  This helps to make sure the people who want to borrow money the most can.  As they are willing to pay the higher interest rates.  While those who don’t want the money bad enough to pay the higher interest rates will let someone else borrow that money.  If few people want to borrow money interest rates fall.  To entice those people back into the credit markets who had decided not to borrow money when interest rates were higher.

Okay, but who is out there who wants people to borrow their money?  And why do they want this?  The key to any advanced civilization and the path to a higher standard of living is a good banking system.  Because if ordinary people can borrow money ordinary people can buy a house.  Or start a business.  Not just the rich.  For a good banking system allows a thriving middle class.  As people earn money they pay their bills.  And put a little away in the bank.  When a lot of people do this all of those little amounts add up to a large sum.  Which converts small change into capital.  Allowing us to build factories, automobiles, airplanes, cell towers, etc.  Giving us the modern world.  As banks are the intermediary between left over disposable cash and investment capital.

Banks are businesses.  They provide a service for a fee.  And they make their money by loaning money to people who want to borrow it.  The more money they lend the more money they make.  They pay people to use their deposits.  By paying interest to people who deposit their money with them.  They then loan this money at a higher interest rate.  The difference between what they pay to depositors and what they collect from borrowers pays their bills.  Covers bad loans.  And gives them a little profit.   Which can be a lot of profit if they do a lot of lending.  However, the more they lend the more loans can go bad.  So they have to be very careful in qualifying those they lend money to.  Making sure they will have the ability to pay their interest payments.  And repay the loan.

With the Federal Reserve keeping Interest Rates low Investors Borrowed Money and Poured it into the Dot-Coms

Just as a good banking system is necessary for an advanced civilization, a higher standard of living and a thriving middle class so is good lending standards necessary for a good banking system.  And when banks follow good lending standards economic growth is more real and less of a bubble.  For when money is too easy to borrow some people may borrow it to make unwise investments.  Or malinvestments as those in the Austrian school of economics call it.  Like buying an expensive car they don’t need.  A house bigger than their needs.  Building more houses than there are people to buy them.  Or investing in an unproven business in the hopes that it will be the next Microsoft.

America became the number one economic power in the world because of a good banking system that maintained good lending standards.  Which provided investment capital for wise and prudent investments.  Then the Keynesians in government changed that.  By giving us the Federal Reserve System.  America’s central bank.  And bad monetary policy.  The Keynesians believe in an active government intervening in the private economy.  That can manipulate interest rates to create artificial economic activity.  By keeping interest rates artificially low.  To make it easier for anyone to borrow money.  No matter their ability to repay it.  Or how poor the investment they plan to make.

The Internet entered our lives in the Nineties.  Shortly after Bill Gates became a billionaire with his Microsoft.  And investors were looking for the next tech geek billionaire.  Hoping to get in on the next Microsoft.  So they poured money into dot-com companies.  Companies that had no profits.  And nothing to sell.  And with the Federal Reserve keeping interest rates artificially low investors borrowed money and poured even more into these dot-coms.  Classic malinvestments.  The stock prices for these companies that had no profits or anything to sell soared.  As investors everywhere were betting that they had found the next Microsoft.  The surging stock market made the Federal Reserve chief, Alan Greenspan, nervous.  Such overvalued stocks were likely to fall.  And fall hard.  It wasn’t so much a question of ‘if’ but of ‘when’.  He tried to warn investors to cool their profit lust.  Warning them of their irrational exuberance.  But they didn’t listen.  And once that investment capital ran out the dot-com bubble burst.  Putting all those newly graduated computer programmers out of a job.  And everyone else in all of those dot-com businesses.  Causing a painful recession in 2000.

Based on the Labor Force Participation Rate we are in one of the Worse and Longest Recession in U.S. History

Encouraging malinvestments in dot-coms was not the only mismanagement Bill Clinton did in the Nineties.  For he also destroyed the banking system.  With his Policy Statement on Discrimination in Lending.  Where he fixed nonexistent discriminatory lending practices by forcing banks to abandon good lending standards.  And to qualify the unqualified.  Putting a lot of people into houses they could not afford.  Their weapon of choice for the destruction of good lending practices?  Subprime lending.  And pressure from the Clinton Justice Department.  Warning banks to approve more loans in poor areas or else.  So if they wanted to stay in business they had to start making risky loans.  But the government helped them.  By having Fannie Mae and Freddie Mac buying those risky, toxic loans from those banks.  Getting them off the banks’ balance sheets so they would make more toxic subprime loans.  And as they did Fannie Mae and Freddie Mac passed these mortgages on to Wall Street.  Who chopped and diced them into new investment vehicles.  The collateralized debt obligation (CDO).  High-yield but low-risk investments.  Because they were backed by the safest investment in the world.  A stream of mortgage payments.  Of course what they failed to tell investors was that these were not conventional mortgages with 20% down payments.  But toxic subprime mortgages where the borrowers put little if anything down.  Making it easy for them to walk away from these mortgages.  Which they did.  Giving us the subprime mortgage crisis.  And the Great Recession.

So Bill Clinton and his Keynesian cohorts caused some of the greatest economic damage this nation had ever seen.  For Keynesian policies don’t create real economic activity.  They only create bubbles.  And bubbles eventually burst.  As those highly inflated asset prices (stocks, houses, etc.) have to come back down from the stratosphere.  The higher they rise the farther they fall.   And the more painful the recession.  For this government intrusion into the private economy caused a lot of malinvestments.  A tragic misuse of investment capital.  Directing it into investments it wouldn’t have gone into had it not been for the government’s interference with market forces.  And when the bubble can no longer be kept aloft market forces reenter the picture and begin clearing away the damage of those malinvestments.  Getting rid of the irrational exuberance.  Resetting asset prices to their true market value.  And in the process eliminating hundreds of thousands of jobs.  Jobs the market would have created elsewhere had it not been for the Keynesian interference.  We can see the extent of the damage of these two Clinton recessions if we graph the growth of gross domestic product (GDP) along with the labor force participation rate (the percentage of those who are able to work who are actually working).  As can be seen here (see Percent change from preceding period and Employment Situation Archived News Releases):

Labor Force Participation Rate and GDP Growth

The first Clinton recession caused a decline in the labor force participation rate (LFPR) that didn’t level out until after 2004.  Even though there were not two consecutive quarters of negative GDP growth during this time.  Usually what it takes to call an economic slump a recession.  But the falling LFPR clearly showed very bad economic times.  That began with the dot-com bubble bursting.  And was made worse after the terrorist attacks on 9/11.  Eventually George W. Bush pulled us out of that recession with tax cuts.  The much maligned Bush tax cuts.  Which not only caused a return to positive GDP growth.  But it arrested the decline of the LFPR.  But the good times did not last.  For the second Clinton recession was just around the corner.  The subprime mortgage crisis.  Created with President Clinton’s Policy Statement on Discrimination in Lending.  That unleashed real economic woe.  Woe so bad we call it the Great Recession.  The little brother of the Great Depression.

This recession not only had two consecutive quarters of negative GDP growth but five of six consecutive quarters showed negative growth.  And one of those quarters nearly reached a negative ten percent.  Which is when a recession becomes a depression.  This recession was so long and so painful because those artificially low interest rates and the pressure on bankers to lower their lending standards created a huge housing bubble.  Pushing housing prices so high that when the housing bubble burst those prices had a very long way to fall.  Worse, President Obama kept to the Keynesian policies that caused the recession.  Trying to spend the economy out of recession.  Instead of cutting taxes.  Like George W. Bush did to pull the economy out of the first Clinton recession.  Worse, anti-business policies and regulations stifled any recovery.  And then there was Obamacare.  The great job killer.  Which he helped pass into law instead of trying to end the Great Recession.  GDP growth eventually returned to positive growth.  And the official unemployment fell.  A little.  But the president’s policies did nothing to reverse one of the greatest declines in the LFPR.  More people than ever have disappeared from the labor force.  That will take a lot of time and a lot of new, real economic activity to bring them back into the labor force.  And no matter what the current GDP growth rate or the official unemployment rate are it doesn’t change the reality of the economy.  Based on the LFPR it is in one of the worse and longest recession in U.S. history.  And the worse recovery since the Great Depression.  Because of President Obama’s embrace of Keynesian policies.  Which do more to increase the size of government than help the economy.

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Labor Force Participation Rate

Posted by PITHOCRATES - March 11th, 2013

Economics 101

The Official U-3 Unemployment Rate doesn’t count Everyone who can’t find a Full-Time Job

The unemployment rate fell in February 2012.  Yet more people are out of the workforce than they were in January.  Odd.  For the two seem to contradict each other.  For how can the workforce shrink when the unemployment rate falls.  Easy.  It just depends on who you count.  The federal government has a few ways to count unemployed people.  Specifically, they have six ways.

U-1  Persons unemployed 15 weeks or longer, as a percent of the civilian labor force.

U-2  Job losers and persons who completed temporary jobs, as a percent of the civilian labor force.

U-3  Total unemployed, as a percent of the civilian labor force (official unemployment rate).

U-4  Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers.

U-5  Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

U-6  Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

As you can see they count more people at each of the six levels.  And the official U-3 unemployment rate doesn’t count a lot of people.  By the time you add in discouraged workers, the marginally attached and those working part-time because they can’t find a full-time job the unemployment rate increases.  With the U-6 number giving a truer picture of the employment picture.  Which currently stands at 14.3%.  And is a long way from the official 7.7%.  So even though the news reports are celebrating that the economy is improving because the unemployment rate fell from 7.9% to 7.7%, the U-6 unemployment rate stands at 14.3%.  Down from 14.4% in January 2012.  Which is pretty bad.  And little to celebrate about.

The U-6 Unemployment Rate counts all of the People who can’t find a Full-Time Job

To better understand these numbers we need to understand exactly who the people are that they are counting.  Who are the people that could be working.  Who are the people working.  And who are the people not working.  Which is all defined at Civilian Noninstitutional Population and Associated Rate and Ratio Measures for Model-Based Areas.  And summarized here:

The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.

Employment consists of all persons who, during the reference week (the calendar week including the twelfth day of the month), (a) did any work at all (at least 1 hour) as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, or (b) were not working but had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs.

Unemployment consists of all persons who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment some time during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

The civilian labor force consists of all persons classified as employed or unemployed as described above.

The labor force participation rate represents the proportion of the civilian noninstitutional population that is in the labor force.

The unemployment rate is the number of unemployed as a percent of the civilian labor force.

The civilian labor force, then, equals the total of employed and unemployed people.  But note who they count as unemployed.  Only people who were looking for work during a 4-week period.  And those on a layoff subject to recall.  (Who didn’t have to look for work during that 4-week period.)  Which excludes everyone who gave up looking for work not subject to recall who can’t find a job.  People who are living on their savings, their credit cards, their spouse’s income, their retirement nest egg or even moving back in with their parents.  Or are working a part-time job or two because they can’t find a full-time job.  The U-6 rate counts all of these people.  Which is why it’s almost twice the official unemployment rate.  And why it’s a much better indicator of the employment picture.

The most Accurate Read of the Employment Picture is the Labor Force Participation Rate

So you now can see how the official unemployment rate can fall even though fewer people are working.  They calculate the unemployment rate by dividing unemployment by the civilian labor force.  And the smaller unemployment is the smaller the unemployment rate is.  Which it is when you don’t count all of the people who can’t find a job.  Which brings us to the labor force participation rate.  Which they calculate by dividing the civilian labor force (the employed plus the unemployed) by the civilian noninstitutional population (the total of the civilian population that could be working).  Which, like the U-6 unemployment rate, provides a truer picture of the employment picture.

The U-3 and U-6 unemployment rates improved in February.  Showing an improving employment picture.  While the labor force participation rate fell from 63.6% to 63.5%.  Which means those not in the labor force increased.  Going from 89,008,000 to 89,304,000.  An increase of 296,000 people who disappeared from the labor force.  Which is greater than the 227,000 new jobs created.  So even though the unemployment rate fell there was a net loss in jobs.  Which means the economy got worse.  Not better.

Mark Twain said facts don’t lie but liars figure.  And this is what he meant.  The employment picture is not improving.  But the government reports the 227,000 new jobs and the falling unemployment rate as signs of an improving economy.  But the most accurate read of the employment picture, the labor force participation rate, shows the economy is getting worse.  As everyone who is struggling in the private sector already knows.  So someone is lying.  And it isn’t the facts.  It is those who want to hide the damage the government’s policies are doing to the economy.  So they can keep trying the same failed policies of the past.  Keynesian economic policies.  Favoring more government intervention into the private economy.  While dragging out the worst economic recovery since the Great Depression.  Another period of failed Keynesian economic policies.  For Keynesian policies are anti-business policies.  But pro-government growth policies.  Which is why liars figure.  And the labor force participation rate falls.

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Medicare Receipts, Medicare Outlays and the Medicare Deficit

Posted by PITHOCRATES - March 5th, 2013

History 101

The Seller is the Medical Provider and the Customer is the Insurer—not the Patient

Health care prices are out of control because there are no market forces in health care.  Buyers and sellers never meet.  As the consumer of health care services doesn’t pay for them.  And the provider of services neither bills nor collects from the recipient of those services.  Instead billings and payments go through a third party.  The insurer.  Or government.

The buyer is the insurer.  Not the patient.  Who is the recipient of what the buyer pays for.  Because the recipient is not paying the recipient does not care about prices.  Or the number of tests and procedures a doctor orders.  Because if you’re not paying what do you care how much anything costs or how many costly tests or procedures you have?  You don’t.

The seller is the medical provider.  The doctor, hospital, laboratory, nursing home, etc.  Their customer is the insurer.  Who pays their bills.  Not the recipient of their services.  The patient.  Because the patient is not paying medical providers can charge high prices without hurting their patient.  And they can order excessive tests and procedures without hurting their patient.  Financially, at least.  Which they often do because medical providers don’t get paid for all the services they provide.  Some people without insurance can’t pay their bills.  And insurers often refuse to pay or discount some of the bills they receive.  Also, the government is always reducing Medicare reimbursements.  Forcing medical providers to be more creative in getting paid for services rendered.

As Medicare Outlays and Receipts grew Further Apart the Medicare Deficit Soared

Medicare began in 1965.  Medical care for people 65 and older.  And like the private health care market there are no market forces in Medicare.  Worse, government bureaucrats run it.  Which throws open the doors to waste and inefficiencies.  And cost overruns.  Because private insurers have bottom lines to meet.  Government bureaucrats don’t.  All they have to do when they do a poor job managing something is to raise taxes.  Which they had to as Medicare ran a deficit in all but one year of its existence (see Table 2.4—COMPOSITION OF SOCIAL INSURANCE AND RETIREMENT RECEIPTS AND OF EXCISE TAXES: 1940–2017 and Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 at FISCAL YEAR 2013 HISTORICAL TABLES BUDGET OF THE U.S. GOVERNMENT).

Medicare Receipts Outlays Deficit 1970-2011

Medicare ran a $912 million surplus in 1974.  We made it zero to keep the Y-axis positive.  The difference in graphs is negligible and unnoticeable at the scale shown.  The right axis shows the Medicare payroll tax rate.  Medicare outlays and receipts are pulled from the above referenced source.  The Medicare deficit is calculated by subtracting Medicare Receipts from Medicare Outlays.  However, for simplicity we show that negative number as a positive value on the graph (the graph shows the magnitude only of the deficit).  The graphs are pretty flat during the Seventies so we drop them off in the following chart.

Medicare Receipts Outlays Deficit 1980-2011

The Medicare tax rate has been holding steady at 2.8% since 1986.  This tax rate has provided a growing rate of Medicare receipts.  But Medicare outlays have grown at a greater rate.  Outlays remained flat for a few years in the Nineties thanks to the Medicare Sustainable Growth Rate (SGR) included in the Balanced Budget Act of 1997.  Which basically discounted doctors’ Medicare billings.  Doctors provide the same services.  Only the government paid them less.  After some fierce opposition this provision (the doc fix) went away.  For it was either that or doctors would leave the Medicare program en masse instead of operating at a loss.  Leaving the government with a lot of seniors without any doctors.  So Medicare outlays resumed their upward growth.  With receipts growing at a lesser rate.  As outlays and receipts grew further apart the Medicare deficit soared.

Obamacare Spending will be out of Control because Medicare Spending is out of Control

The Medicare tax is a flat tax.  Which means the more you earn the more you pay.  Unlike Social Security that has a maximum taxable earnings amount.  The Social Security tax rate is 12.4% of the first $113,700 you earn.  Bringing the FICA tax (Social Security and Medicare) total to 15.3%.  When they passed the Social Security into law they promised that the Social Security tax would never exceed 3% of the first $3,000 you earn.  Just to give you an idea of how horrible the government’s projections were.  They have raised taxes far beyond what they promised and it still isn’t enough.  Medicare is running greater and greater deficits.  So Medicare is in trouble.  And with Obamacare pulling some $700 billion from Medicare things aren’t going to get any better any time soon.

Medicare is national health care.  And the government is running it very poorly.  The Medicare outlays in 2011 were $485.6 billion (or about 13.5% of all 2011 federal outlays).  And that was generated from treating only 12.8% of the population.  How bad will these numbers be if Obamacare evolves into a full-fledged national health care service?  If you divide the 2011 Medicare outlays by 12.8% you get $3.79 trillion.  This amount would be for 100% of the population receiving medical care as if they are 65 or older.  Currently those 65 and older consume about 35% of all health care spending.  So if we multiply $3.79 trillion by 65% (1-35%) we get $2.47 trillion (or about 68.4% of all 2011 federal outlays).  Which adjusts this amount as if everyone receiving health care is under 65.  As the amount of those 65 and over receiving health care will fall under Obamacare thanks to those unofficial death panels.  And they’re going to need those death panels.  Because with the government running Obamacare it will be an abject failure.

A crude guesstimate.  But it’s probably not that far off.  For national health care is very, very expensive.  And as we’ve learned from Medicare, it’s also very, very inefficient.  Because there are no market forces in health care.  Which is why Medicare spending is out of control.  And why Obamacare spending will be out of control.  Requiring massive new taxation.  Rationing.  And cost cutting.  As in death panels.  For letting people die instead of treating them will be the only way to bring down costs.  Unless they force health care providers to work without pay.  Another way to cut costs.  Compel health care providers to work against their will.  For why should anyone profit off the suffering of others?  Which may be the next dictate handed down in Obamacare.

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Housing Boom, Subprime Lending, ARMs, Housing Bubble, CDOs, Subprime Mortgage Crisis, Housing Inventories & Sales and Great Recession

Posted by PITHOCRATES - July 24th, 2012

History 101

Artificially Low Interest Rates and Federal Pressure to Qualify the Unqualified created a Housing Bubble

The federal government loves home sales.  Because they generate a lot of economic activity.  From the washing machines and refrigerators new homeowners buy to furnish them.  To the raw materials extracted from nature to make the concrete, bricks, wood, pipes, wires, shingles, glass, plastic, paints, carpeting, insulation, etc., to build them.  Enormous amounts of economic activity at every level throughout the stages of production.  It reduces down to a simple formula.  Make it easy for people to buy houses.  Enjoy a booming economy.  And how best to do that?  Make mortgages cheap.  By keeping interest rates cheap.  Artificially low.  To stimulate a housing boom.

This is Keynesian economics.  Government intervention into the private market.  By having the Federal Reserve keep interest rates lower than the market would have them.  To encourage more people to buy houses.  Then the Clinton administration took it up a notch with their Policy Statement on Discrimination in Lending.  Investor’s Business Daily reported (see Smoking-Gun Document Ties Policy To Housing Crisis by PAUL SPERRY posted 10/31/2011 on Investors.com) that this policy statement forced lenders basically to qualify the unqualified.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties…

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

There was no racial discrimination.  Just people who couldn’t qualify for a mortgage.  But that didn’t stop the Clinton administration.  So there were artificially low interest rates.  And federal pressure to qualify the unqualified.  To let those who can’t afford to buy a house buy a house.  Enter subprime lending.  A way lenders could approve the unqualified for a mortgage.  With adjustable rate mortgages (ARMs).  Interest only mortgages.  Zero down mortgages.  No documentation loans (say you earn whatever you want and we’ll enter it into the application without documenting it).  Anyone who wanted to have a house could have a house.  And a lot of people bought houses.  Even those with insufficient incomes to pay their mortgage payment if interest rates ever rose.

When the Housing Bubble Burst it Destroyed a lot of Economic Activity and a lot of Jobs

The economy was heating up.  There was a housing boom.  The boom turned into a housing bubble.  Housing prices soared demand was so high.  Builders couldn’t build them fast enough.  And people couldn’t buy a house big enough.  McMansions entered the lexicon.  Houses in excess of 3,000 square feet.  For a family of four.  Or smaller.  But then these artificially low interest rates began to heat up inflation.  And it was the Federal Reserve’s responsibility to keep that from happening.  So they raised interest rates.  Causing the interest rates on those ARMs to reset at a higher rate.  Making a lot of those monthly payments beyond the homeowners’ ability to pay.  Homeowners defaulted in droves.  Causing the subprime mortgage crisis.  And the Great Recession.

Facilitating this economic carnage was the secondary mortgage market.  Fannie Mae and Freddie Mac.  Who bought those very risky mortgages from the lenders.  Repackaged them into collateralized debt obligations (CDOs).  And sold them to unsuspecting investors.  Who thought they were buying high-yield safe investments.  Because they were backed by historically the safest investment.  A mortgage.  But that was before subprime lending.  For these subprime mortgages weren’t your father’s mortgage.  These mortgages were toxic.

So when the housing bubble burst it not only destroyed a lot of economic activity, and a lot of jobs, it wreaked financial destruction in people’s investment portfolios.  All because of a formula.  Make it easy for people to buy houses.  But when you play with the economy too much you don’t create economic growth.  You created bubbles.  And the bigger the bubble the longer and the more painful the recession will be when that bubble bursts.  As those artificially high house prices fall out of the stratosphere back to real market levels.

The Current Gulf between Housing Inventories and Sales is what made this Recession the Great Recession

If you look at the housing inventories and housing sales for the decade from 2001 to 2011 you can see how bad the recession was.  And will continue to be.  We took housing data from the United States Census Bureau.   Housing inventories from Table 7A.  And housing sales from Houses Sold.  The data shows housing units in inventory and sold.  We used 2001 as a base year, dividing each number by the 2001 base numbers.  Graphing the results shows how inventories and sales trended for this decade.

From 2001 to 2005 housing sales were rising at a greater rate than inventories.  Indicating demand for houses was greater than the supply of houses.  Causing house prices to rise.  Encouraging builders to build more houses.  Heating up the housing market.  Sending prices higher.  Creating the great housing bubble.  Then around 2005 the Federal Reserve began to raise interest rates to tamp out inflation.  And those ARMs began to reset at higher rates.  Causing housing sales to fall.  From about 2005 to 2008 inventories continued to rise while sales collapsed.  Leaving the available housing supply far outstripping demand.  Causing house prices to collapse.  Leaving people underwater in their mortgage (owing more than their house is worth).  Or living in paid-off houses that lost up to half their value.  Or more.

The gulf between inventories and sales is what made this recession the Great Recession.  And is why the Great Recession lingers on.  There are just so many more houses than people want to buy.  Killing new housing starts.  And all that economic activity that building a house generates.

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