The Official Unemployment Rate falls to 7.8% but the U6 Unemployment Rate Holds Steady at 14.7%

Posted by PITHOCRATES - October 6th, 2012

Week in Review

The jobs report is out.  And the Left is trumpeting the great fall in the unemployment rate from 8.1% in August to 7.8% in September (see Table A-15. Alternative measures of labor underutilization posted 10/5/2012 on Bureau of Labor Statistics).  This is the official U3 unemployment rate.  That only counts people looking for full-time employment.  It doesn’t include those working part-time because they can’t find full-time work.  And it doesn’t include the people who just gave up looking for full-time work because there just isn’t any out there.  Which throws a little cold water on this 7.8% number.  For it doesn’t reflect a gain in new jobs.  It just reflects that they are counting fewer unemployed people.

A more accurate picture of the current employment climate is the U6 unemployment rate.  This number counts everyone who can’t find a full-time job for whatever reason.  Some have given up their search.  Some have retired early.  Some are living off of government benefits.  Some are working part-time jobs.  Some are working a couple of part-time jobs to make ends meet.  Interestingly, although the U3 rate fell 3 points the U6 rate held steady at 14.7%.  Which is puzzling.  For everyone included in the U3 rate is included in the U6 rate.  So if U3 fell U6 should have fallen, too.  For U3 and U6 generally rise and fall with each other.  As they have done in the past.  Such as in the years from 2006 to 2012 (pulled from the same Bureau of Labor Statistics website).

During the 2006 mid-term elections the Democrats were saying the economy was just terrible.  They hammered the economic numbers saying it was one of the worst economies ever.  Of course, the numbers say otherwise.  Whether you’re looking at the U3 rate or the U6 rate.  The economic numbers were very strong right until that sustained Keynesian monetary expansion forcing interest rates below market values and the government pressure on mortgage lenders to lend to people who could not afford a conventional mortgage blew up in their faces.  Beginning with President Clinton’s Policy Statement on Discrimination in Lending.  Which is why these lenders turned to the subprime mortgage.  Approving so many people for mortgages that housing prices soared.  Creating a huge housing bubble just waiting to be pricked by a rise in interest rates.  Which had to come.  As expansionary monetary policy eventually creates inflation.  And the only way to stop that is by raising interest rates.  Which was the time bomb ticking buried deep within those adjustable rate subprime mortgages.

Facilitated by the federal government and their GSEs Fannie Mae and Freddie Mac (who guaranteed and bought these toxic mortgages from the lenders they were pressuring to approve more toxic loans), subprime lending expanded.  As the GSEs sold these toxic mortgages to unsuspecting investors.  Which all blew up in the final months of 2008.  Creating the subprime mortgage crisis.  And the Great Recession.  The U3 rate rose as high as 10% in the fallout from this bad Keynesian expansionary monetary policy.  While the U6 rate soared as high as 17%.  Great Depression unemployment levels.  And neither has fallen much since these highs.  As the current numbers are closer to their highs than their previous lows.

Worse, the spread between U3 and U6 is far greater under President Obama then it was under George W. Bush.  Which tells us how poorly the U3 rate describes the current employment picture.  The greater the spread the more meaningless U3 is.  As it is simply not counting all the unemployed people in the economy.  The Left trumpets the 3 point fall in September but that only brings the U3 rate down to what the U6 rate was under Bush.  And the Left was calling the even lower U3 numbers under Bush some of the worst job numbers of all time.  So by their own standards President Obama is a far greater disaster to the economy than George W. Bush was.  For if it was horrible under Bush anything worse than Bush’s numbers must be more horrible.

When they passed the stimulus bill they promised they would have 5% unemployment by 2012.  Even the president said he would be a one-term president if this didn’t happen.  Despite all of their spending these numbers haven’t fallen much.  Despite their Summer Recovery pronouncements of 2010.  Their economic policies have all failed.  And there is a simple explanation for that.  Their policies were Keynesian policies.  And Keynesian policies have never worked.  Nor will they ever work.

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When Democrat Policies Fail and they Fall in the Polls they Scramble to Endorse Reaganomics

Posted by PITHOCRATES - October 5th, 2011

Democrats have Blamed every ill known to Mankind on Reaganomics

The Left hates Ronald Reagan.  Proclaimed the era of Reagan was over.  No more were these Reagan Republicans going to screw over the poor so the rich can live a better life.  Yes, they hated this man with a passion.  And everything he stood for.  This supply-sider of the Austrian School.  He and is unfunny Laffer Curve.  This cold-hearted tax cutter.  But now they love him.  Why?  Because he supported taxing the rich.

I’ll pause a moment for those of you who have fallen out of your chairs.  Ready?  Good.

You know Congressional Democrats are grasping at straws to promote their policies when they claim their archenemy would have supported them, too.  You know why they’re trying, though, don’t you?  If you listened to the protesters on Wall Street you should know.  With their control of public school teachers and college professors (both dependent on taxpayer money for generous pay and benefit packages), they can revise history.  And keep kids ignorant.  Hopefully keeping them oblivious of things they don’t want them to know.  Such as the true legacy of Ronald Reagan (see MILLER: Ripping off the Gipper by Emily Miller posted 10/4/2011 on The Washington Times).

Liberals are trying to twist Ronald Reagan’s words to muster support for raising taxes. House Minority Leader Nancy Pelosi’s press office sent a memo on Monday to congressional Republicans claiming they’d found evidence proving that President Reagan was the real inspiration for President Obama’s tax-the-rich “Buffett Rule.” The California Democrat posed the question: “What would Reagan do?”

The correct answer is: He would cut taxes. Mrs. Pelosi’s memo sends people over to the liberal Think Progress website, where a video montage interweaves clips of Mr. Obama and Reagan saying apparently similar things about tax rates. “We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” said the Gipper.

You’re supposed to think that’s just what Mr. Obama is doing, but the liberals edited out the context of the 40th president’s remarks. In a June 1985 speech at an Atlanta high school, he called for a total overhaul of the tax system. He wanted loopholes closed to lower the tax rates for everyone, for a net reduction in the tax burden. Congressional Republicans point out that’s precisely the opposite of what the Democrats are now trying to do.

You see, the Democrats can’t rely on telling the truth to pass their policies.  Because their policies only benefit those in government.  And those who live like parasites on the wealth creators.  Such as those protestors on Wall Street.  Who want the wealth of the wealth creators.  But want no part of capitalism which created that wealth.  And are too ignorant to understand that you can’t have one without the other.

Thank you public school teachers and college professors.

So they must lie.  Revise history.  To try and fool people into believing that their policies are just like Ronald Reagan’s.  And apparently hoping people don’t remember that Democrats have blamed every ill known to mankind on these very same policies.  ReaganomicsTrickledown economics.  The scourge of mankind.  But the majority of Americans apparently love the big lug so they’ll swallow back their bile and say, hey, we love him, too.  And hope that the grimace on their face doesn’t look as bad or as painful as it feels.

Fannie Mae and Freddie Mac created America’s Financial Mess, not Wall Street

So where did these Wall Street protests come from?  Where did the primary impetus come from?  Apparently Canada.  Thanks, Canada.  As if the corrupting influence of Terrance and Phillip wasn’t enough already.  So I guess we have to Blame Canada (Warning:  Blame Canada contains adult content) for this, too (see Occupy Toronto leaderless, unfocused but hopeful by Dana Flavelle posted 10/4/2011 on the Toronto Star).

The Wall Street protests were inspired by Canadian anti-consumer magazine Adbusters.

Editor in chief and co-founder Kalle Lasn said he’s been calling for this kind of protest movement for 20 years.

It’s finally happening because people are angry with the financial fraudsters on Wall Street who created America’s economic mess and largely went unpunished, he said in a telephone interview from Vancouver.

But that isn’t who created America’s financial mess.  It was government.  Specifically the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  If it wasn’t for them buying and/or guaranteeing risky subprime mortgages there would have been no subprime mortgage crisis.

That was government policy.  Putting as many people into houses as possible.  Even if they couldn’t afford them.  That wasn’t Wall Street.  Wall Street was merely an accessory after the fact.  Aiding and abetting Fannie Mae and Freddie Mac.  By selling those toxic subprime mortgages in collateralized debt obligations (CDOs).  Promoting them as high yield yet low risk.  Because they were backed by mortgages, historically the safest loans in all of America.  So investors bought these.  Not knowing how risky they were.  But you know who knew how risky they were?  The GSEs Fanny and Freddie.  Because they bought them.  And remember what the ‘G’ stands for in GSE.  Government.

If you removed government from this equation mortgage bankers would not have approved these risky subprime mortgages.  Because that risk would have been on their books.  But when government said ‘don’t worry  we’ll take that risk off of your books’ what did they have to lose in approving risky subprime mortgages?  Less harassment from the government for not approving mortgages for the poor and minorities who didn’t qualify?  Yeah, like they were going to miss that harassment.

If these protestors want to protest those responsible they should protest government.  Not Wall Street.

Damn Canadians.  If it’s not making our kids fart and curse they’re getting them to protest the wrong people.  (Editor’s note:  We like Canada and Canadians.  And mean them no disrespect.  We’re just having a little fun with the movie South Park: Bigger, Longer & Uncut.  In which incidents lead to war between Canada and the U.S.  A premise so ridiculous that it’s funny.  For Canada and the U.S. have been the best of friends.  And will always be the best of friends.)

The more Public Sector Union Employees paying Dues the more Money is collected for Democrat Coffers

Perhaps that’s the problem.  Too much government.  The federal government has grown into a behemoth.  On top of thousands and thousands of local governments throughout the country (see Infographic: Local government by the numbers by Mary Mahling and Carla Uriona posted 10/4/2011 on Stateline).

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

That’s a lot of government.  And there’s only one way to pay for a lot of government.  With a lot of taxes.

So we have government upon government upon government.  Surely with all that government we must be getting some value for all of these taxes.

More than two centuries of American democracy have resulted in a profusion of governments at the local level, not only cities and counties but villages and townships, park districts and sanitary districts and a host of others. To those trying desperately to bring a state’s budget into balance, many of these are useless anachronisms incapable of providing any service that could not be provided higher up the governmental chain. But to the tens of thousands of people who hold office in these local entities — and to millions of citizens who live within them — multiple local governments are a crucial piece of evidence that American democracy reaches down to the grassroots level.

Apparently not.  And don’t call me Shirley.

They just provide a lot of jobs for the unemployable.  By taxing the wealth creators.  And redistributing it to people whose job is a duplicate of one at another level of government.

They do serve a purpose, though.  Being totally funded by taxpayers, they have a vested interest to keep raising taxes on the taxpayers.  Which is, of course, helpful to Democrats.  So the more local governments the better.  The more public sector union employees paying dues the more money finds its way into Democrat coffers.

Any Attempt to Quantify Human Behavior will Ultimately Fail

And then you have academe.  And Keynesian economists.  Furthering the growth of government with their government-spending Keynesian economics (see Tis The Gift To Be Simple by Paul Krugman posted 10/5/2011 on The New York Times).

To be sure, IS-LM is an attempt to squeeze a dynamic economy into a static model, which is why people like me usually cross-check our conclusions with something intertemporal. But it’s actually a pretty darn sophisticated approach — as demonstrated by the fact that economists who dismiss or attack IS-LM as too simplistic or something almost always end up making assertions that are much more simplistic than IS-LM, if not falling into outright logical fallacies. In fact, I can’t think of a single exception to this rule: every attack on IS-LM I’ve ever seen (as opposed to suggestions that we should also look at more complex models) was followed by some kind of empirical or logical howler.

I have a criticism.  Any attempt to quantify human behavior will ultimately fail.  Because you can’t quantify human behavior.

Economics belong to the branch of science we call social sciences.  That is, it’s not real science.  Because the wildcard is that human behavior can always produce some unintended consequence to government action.  Such as Prohibition giving us organized crime.  Whereas the equations of science typically don’t.  We can use science to build bridges, buildings and airplanes.  And they work pretty much as planned.  Without any unintended consequences.

You can’t represent human behavior by mathematical formulas.  We know some behavioral responses.  Such as sex in advertising gets men’s attention.  But that’s a base primeval instinct.  There’s not a whole lot of thinking going on.  Not so in a complex economy.  Where there is a lot of thinking going on.  Keynesians like to think the economy is as simple as impulse buying at the point of sale checkout aisle.  Put more candy on display and you sell more candy.  Not so with buying a house.

Everyone will like to own a beautiful home.  But people won’t buy a house on impulse.  Not when there’s record unemployment.  And talk of a double-dip recession.  Because if you learned anything from the subprime mortgage crisis it’s this.  Too much debt is bad.  And there is no such thing as a guaranteed job.  Playing with interest rates won’t change that.  Only time will.  When enough time has passed to let people feel secure in their jobs again.  Then and only then will they consider taking on debt again.  No matter what the IS-LM model predicts.  Because you can’t quantify human behavior.

The Wall Street Protestors with Student Loan Debt Probably don’t have Science or Engineering Degrees

All government policy is social science.  It’s not an exact science.  That’s why strange things happen.  Unintended things.  Whenever government tries to influence behavior.  And when government tries they have a track record of failure.  Which is why they don’t run for reelection on the success of their policies.  They run on the success of someone else’s (Ronald Reagan’s) policies.  And say that their policies are the same.  And they are except with a few minor changes.  And by ‘few’ I mean they couldn’t be any more different.  So they lie.  Or they just demonize their opponents.

But our kids are blissfully ignorant.  Thanks to public school teachers.  And college professors.  Who care more about improving their taxpayer funded pay and benefits than education.  That’s why government grows.  And why we have degrees like women’s studies.  And poetry.  Degrees that offer no hope for employment in a capitalistic economy.  For what business that relies on pleasing their customers (like Apple does consistently) need people with these skills?

No.  They need people with science and engineering degrees.  You know, the hard ones.  So the kids who took the easy route in college must depend on teaching others their worthless knowledge.  Or get a government job.  Which has a lot to do with the anger of these protestors who have huge student loan debt.  And no job.  Because if they hate capitalism you can guess what their degrees are in.

(Editor’s note:  This was written before news of Steve Jobs’ passing broke.  Our condolences go out to his family.  We decided to leave the Apple reference in as a tribute to Steve Jobs.  He was one of America’s greatest entrepreneurs.  The world is a better place because of him.  For the gifts he gave us.  And the inspiration he gave to the next generation of great entrepreneurs.)

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LESSONS LEARNED #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 31st, 2011

Microsoft Learns the hard way to Lobby Congress

Microsoft was a rogue corporation.  A big, profitable, rogue corporation.  And it was in the government’s crosshairs.  With all of their going about their business.  Alone.  Without any federal assistance.  Who did these people think they were?  They didn’t spend a dime lobbying the federal government for anything.  As if they could just go on about their business competing in the free market.  Scoffing at the government’s business resources.  All those things they could bring to the table.  To make an unorganized market organized.  Make Microsoft better.  Make Microsoft’s products better.  All for a nominal fee.  Some campaign contributions.  A vacation junket or two.  A little monkey business with someone you’re not married to.  A Roman indulgence of intoxicating substances and flesh.  You know, lobbying stuff.  But no!  Not Microsoft.  Those holier than thou sons of bitches.  Who did they think they were?

Well, Microsoft went too far.  Pissed off the wrong people.  People with friends in Washington.  People with power.  And a justice department.  Empowered with antitrust legislation.  Big, nasty, legal teeth.  Their crime?  They gave away Internet Explorer free.  And that was unfair to their competitors.  But it was a sweet deal to the consumer.  None of them complained.  They were happy to get IE free.  It saved them money.  It was their competitors that were pissed.  Because they couldn’t sell something that Microsoft was giving away free.  So the Department of Justice (DOJ) sued Microsoft claiming they violated the Sherman Antitrust Act.  Which Congress passed in 1890 to protect consumers.  And here the DOJ was fighting a case.  And if the DOJ won, the consumer lost.  They would have to pay for IE or a web browser from one of Microsoft’s competitors.  Which just goes to prove that it is never a consumer that complains about ‘predatory’ pricing.  It’s always a competitor that can’t compete at the same price that runs to the DOJ crying for antitrust protection.

Microsoft learned a very important lesson.  When you sit on big piles of money you don’t dis the federal government.  You show them the proper respect and give them some of that money. For your own protection.  For if you don’t they will go after you.  Like they did with Microsoft.  Who is smarter now.  Today, Microsoft spends millions on lobbyists.  To pay tribute for the pleasure of being left alone to operate in the free market.

Money Corrupts, Big Piles of Money Corrupt Absolutely

Microsoft is not alone.  There are a lot of honest companies out there.  But, sadly, there are a lot that aren’t.  Especially if they have a friend in Washington.  Because Washington sits on great big piles of money courtesy of the tax payers.  And a select few spend that money.   Put these two together and it’s a recipe for corruption.  Because one person can skim a little off the top of a huge transaction that is all but impossible to see.  Unless you start living like a Rockefeller on a government salary, that is.

The Teapot Dome scandal was the biggest government scandal of its time.  It involved leases to oil reserves transferred from the Navy to the Department of the Interior.  These were strategic reserves for our navy in case we went to war.  Important to have.  Because you don’t want to run out of oil during a war.  Albert Fall was the Secretary of the Interior.  And it was his job to lease those oil reserves.  Which he did.  But they didn’t go to the low bidder.  They went to the one that made it most worth his while.  Ultimately it was all that ‘making it worth his while’ that did him in.  He became a very rich man.  Which was impossible on his salary.  So they caught him.

Congressmen profit as Shareholders in Crédit Mobilier

The Teapot Dome was a big scandal perpetrated by a few players.  The Crédit Mobilier scandal, on the other hand, had far greater tentacles.  And is a good example of how government partnering with business goes wrong.  It involved the Union Pacific Railroad.  A sham company they created called Crédit Mobilier.  And some 30 Congressmen. 

The railroad to the pacific was a risky proposition.  It would take a very long time to build.  It would go through some very difficult terrain and hostile Indian country.  And there were few shippers on the proposed road.  In other words, it would take a long time to earn any revenue on this line.  And it was possible that they would never complete it.  Or ship enough freight to operate it profitably.  So the government stepped in and partnered with the Union Pacific.  And the fraud began.

The trick was how to make this loser a winner.  Railroad profits weren’t the answer.  So how can a railroad company make a profit without running any trains?  Why, from construction, of course.  That’s where Crédit Mobilier came in.  They built the railroad.  Billed Union Pacific.  Who then billed the government.  And, surprise, surprise, construction costs went way over budget.  Because they were overbilling Union Pacific.  Who then overbilled the government.  But the government just kept on paying.  Why?  Because they had shares in the very profitable Crédit Mobilier.  You see, when you share in the obscene profits of a government contractor you have little incentive to see or stop the fraud.

Government Steps into the Mortgage Business and Gives us the Subprime Mortgage Crisis

For years the federal government implemented policies to increase home ownership.  In their models, this was the driver of all economic activity.  A lot of material and labor builds a house.  And a lot of material and labor builds the things that furnish a house.  Ergo, the more people who bought houses the greater the economic activity.  And that meant everyone.  Even the people who couldn’t qualify for a mortgage.  A lot of which were minorities.  So if a bank denied anyone a mortgage, it just reeked of racism.  So lenders had to find a way to make the unqualified qualified before the DOJ charged them with discrimination in lending.  So, in the mid 1990s, they figured out how to make the unqualified qualified.  Along with a little help from the government.

The subprime mortgage was the vehicle.  Adjustable Rate Mortgages (ARMS).  And No Income No Asset (NINA, aka, Ninja) loans.  Of course, these by themselves didn’t solve any problem.  Because no respectable lender would ever approve such risky mortgages.  This is where government came in.  Or, rather, the Government Sponsored Enterprise (GSE).  Better known to you and me as Fannie Mae and Freddie Mac.  Here’s how it worked.  The GSEs bought those risky loans from the lenders.  Then sold them to Wall Street.  Where investment bankers packaged them into Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO).  High risk loans became low-risk, high-yield securities.  The risk was transferred from the bank to the taxpayer and then to the investor.  And back to the taxpayers when they had to pay for the bailout of the subprime mortgage crisis.

The enabler for this great financial crisis was the government.  First ‘encouraging’ banks to loan to the unqualified.  And then by their partnership with the GSEs.  Encouraging more and more risky behavior because they were getting a piece of the action.  So they turned a blind eye.  Even when some warned the committees responsible for their oversight.  They laughed.  Said they were just mean racists trying to deny fair and affordable housing to minorities.  And they insisted that these GSEs were financially strong and healthy.  Up until the world learned they weren’t.

Crony Capitalism can be Smart Government if it Saves the Environment

There’s one reason why government partners with business.  Corruption.  Crony capitalism.  Either an unscrupulous business trying to buy favors for personal gain.  Or an unscrupulous politician trying to sell favors for personal gain.  And good luck if you run an honest business.  Because the buying and selling of favors simply becomes paying tribute to be left alone.

Both sides are guilty of this.  Though the Left says it’s the Right that is in the pocket of the corporations.  Which is funny.  Because the Left is just as guilty.  But when they do it, it serves a higher purpose. So it’s smart government.  Such as when one of the world’s largest corporations, GE, doesn’t pay any income taxes.  By using some creative accounting practices.  But they’re very cozy with the current administration.  So they get a pass.  And they’re eager to cash in on all that green legislation.  To help them sell their green products.  You see, that’s good for the environment.  So it’s okay that they don’t pay income taxes.  And, more importantly, they have lobbyists.  They know how to play the game.  And they play it well.

But when the Right wants to cut the corporate income tax to stimulate the economy to create jobs, that’s just corporate welfare.  They’ll fight that every day of the week.  But if a corporation’s lobbyists treat them well, they’ll make the incandescent light bulb illegal.  So that corporation can sell more of their compact fluorescent lamps.  But that’s not crony capitalism.  That’s just smart government.  Because it saves the environment.

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FUNDAMENTAL TRUTH #56: “It’s competition in the private sector that makes life better. Not government regulation.” -Old Pithy

Posted by PITHOCRATES - March 8th, 2011

Government caused the Greatest Recession since the Great Depression

You hear it all the time from the Left.  If it wasn’t for all those government regulations those on the Right bitch about we wouldn’t have safe food, safe medication, safe transportation, safe merchandise, fair prices, a clean environment, quality education, etc.  It’s rather amazing to hear people in government say this.  And people on the Left say this.  Because people are people.  And people regulate people.  So why are some people better than other people?  Just because they say they are?  I find that a bit specious.

Government caused the greatest recession since the Great Depression.  It was their economic policies that put people into houses they couldn’t afford.  It was Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac that enabled the approval of very risky mortgages by buying them from the lenders.  It was the GSEs that had Wall Street create vehicles to sell these risky mortgages as high yield, low risk investments (i.e., derivatives).  It was Congress that refused to stop this risky behavior of the GSEs because Congress members were getting sweetheart mortgage deals and campaign contributions.  And it was Congress that bailed out the GSEs with our tax dollars after their dirty politics crashed the economy.  If you go down the chain of events you see one constant behind every step in the process that gave us the Great Recession.  Government, government, government.  And yet we are to trust government people every time over the private sector people.

If you remove government from the mortgage picture, though, it’s a different story.  Instead of discrimination it was just poor credit and insufficient earnings that denied mortgages for some blacks, Hispanics, single mothers, etc.  And these people wouldn’t have been in houses they couldn’t afford.  Lenders would have had far fewer risky mortgages on their books.  The GSEs would have bought far fewer risky mortgages.   Wall Street wouldn’t have spread the subprime mortgage contagion worldwide by selling boatloads of their complex derivatives.  There would have been no Great Recession.  There would be no double digit unemployment (U6 – a truer unemployment rate than the ‘official’ U3) today.  And all of this by just removing government from the beginning of this process.  And yet we are to trust government people every time over the private sector people.

A Business must please the Consumer to Survive

Let’s look at another example.  Let’s take food.  The Left say that if it wasn’t government regulation our food would be unsafe.  So let’s imagine a world where there is no government regulation.  And only two meat packing plants.  A devious, archetypical corporate villain (as the Left believes runs all corporations) runs one plant.  Let’s call him Mr. Devious.  A true free market capitalist runs the other.  Mr. Devious reinvests no money into the plant.  Doesn’t even clean it.  Has a rat infestation.  Uses rat poison to control the rat infestation.  Doesn’t care.  And sends out tainted meat that kills hundreds of people.  The true free market capitalist keeps reinvesting in his plant.  Keeps it clean.  Has no rat infestation.  And strives to put out the best quality product.  It’s not tainted and people eat it without dying.

Now suppose you’re putting together your shopping list.  You have meat on your list.  And on the television news is a story about still more deaths that are traced back to Mr. Devious’ plant.  Now, in our imaginary world, there is no government.  No government inspectors to step in to inspect Mr. Devious’ plant.  He broke no law and did not fail to maintain any regulatory standards.  No one files any legal actions against Mr. Devious because he broke no law.  Now tell me, where are you going to go to buy your meat?  Well, if you’re sane, you’re going to make damn sure the meat you buy didn’t come from Mr. Devious’ plant. 

Even in a world that has no government regulation, a Mr. Devious cannot exist.  Because there’s competition.  And the last thing a true free market capitalist wants is bad publicity.  If consumers have an unfavorable view of your company they’ll shop elsewhere.  And if you’re killing people with the food you sell, you couldn’t make a more unfavorable view of your company in the eyes of consumers.  So they won’t be buying what you’re selling.  Ever.  But guess where they will be buying from?  That’s right.  The business that puts out the best quality.  And the best price, of course.  In other words, the one that best pleases the consumer.

Competition Makes Everything Better

Hey, you’re thinking, that makes sense.  So maybe the big corporate giants care about us.  If only for their greed.  Well, greed is a powerful motivator.  You see, a profit is an incentive to do good.  And pleasing consumers it the key to profitability.  So you do everything within your power to please as many consumers as possible.  Before another business pleases them better.  We call this tug of war in the market place competition.  And you win this game by pleasing consumers better than your competitors do.  Because competition makes everything better.

Now think about the things you hate to do.  Deal with the cable company.  A utility.  Getting your driver’s license renewed.  Getting a building permit.  Getting your tax assessment reduced because your house isn’t worth as much as your city says it is.  Filling out your income taxes.  Going through airport security.  Etc.  And what do all of these things have in common?  Little to no competition (although cable companies have competition today but making a change is a pain in the you know what).  There is little need to please consumers.  And it shows.  Customer service isn’t the greatest.  And the processes are often long, complex and exasperating.  Why?  Because they can be.  Where else are we going to go?

These things also have another thing in common.  Government heavily regulates them.  Or they’re simply government itself.  Government people.  Those people we are always to side with over the private sector.  And many of us do.  Despite our not liking to do any of the things we have to do with them.

Competition can even Clean the Environment

Okay, but what about the environment?  There’s no profit in spending more money to keep the environment clean.  Surely that’s something only government regulation can do.  Well, let me ask you something.  Where are you more likely to litter?  In your backyard?  Or in the National Mall after a rally?  The National Mall, yes?  Because we take care of what we own. 

Yes, there have been polluters in the past.  And, yes, government regulations have cleaned them up.  But back when they were polluting, few cared.  Because it was normal.  I mean, once upon a time, human feces used to cover our sidewalks and streets.  And that was normal.  It isn’t anymore.  So we don’t do it anymore.  This is more a process of civilization.  A company today that leeches toxic chemicals into the ground water that kills people who drink well water is going to get a lot of bad PR (public relations, i.e., favorable publicity).  And we know what bad PR does to private companies.  So they are going to try everything in their power to not leech toxic chemicals into the ground water so they can avoid the bad PR.  Before we knew the affect of some of these chemicals, though, some companies did unknowingly kill people.  Now that we know better, they handle their chemicals differently.  In a way that will help to keep consumers as customers.  Not push them away.

BP and Exxon both suffered in the eyes of the consumer after their spills.  And a lot of consumers refused to buy their gasoline anymore.  Not only that, the BP spill shut down all offshore oil drilling in US waters.   At great cost millions of dollars of equipment had to be shipped elsewhere where they could drill.  They would have made more profits without the spill and the bad PR.  So they have a very strong incentive to prevent these environmental disasters from happening.  And considering the amount of oil they pump up from these offshore wells, their environmental record is pretty good.

Companies even look at the little things that add up.  McDonalds used to sell their hamburgers in hard, foam cartons.  They don’t anymore.  Because they felt they could please more consumers by being more environmentally friendly.  Starbucks sells their hot coffee in paper cups to be environmentally friendly.  And the sleeves they use so you can hold those hot cups of coffee contain recycled material.  You can still use foam cups by law.  But they choose not to.  To please their consumers.  So they can keep them as customers.  And be more profitable.

Without Competition Little Changes

Corporations survive on profits.  Maintaining profitability means pleasing consumers.  When something bad happens they have a powerful incentive to act fast.  Before the problem spirals out of control causing bad PR.  Making consumers go elsewhere.  They will act faster than any government bureaucracy in identifying and correcting the problem.  To limit their damages.  Because the more damage they cause the harder it will be to regain the consumers’ confidence.  And lost consumer confidence equals fewer profits in the private sector.

It’s a little different with government.  Without competition little changes.  Fannie Mae and Freddie Mac are still here.  They may go away but there is talk about replacing them with something similar.  To make sure the same housing policies that caused the Great Recession will continue.  To make sure that some people who can’t afford a house can buy a house.  And if it all blows up again, they will just pass the cost onto the taxpayers.  Again.

And yet we are to trust government people every time over the private sector people.

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Fannie Mae and Freddie Mac Winding down after Costing us Dearly

Posted by PITHOCRATES - February 12th, 2011

The Subprime Mortgage Crisis

The housing market is still bad.  And hindering our economic recovery.  The Federal Reserve sees problems inherent in the system.  They don’t want to rehash the blame game for the housing collapse that triggered the worst recession since the Great Depression.  But they do (see Federal Reserve board member: U.S. investigation into mortgage servicing has found ‘widespread weakness’ by Ariana Eunjung Cha posted 2/11/2011 on The Washington Post).

While [Sarah] Bloom Raskin [Federal Reserve board of governors member] said in her speech that she did not want to dwell on how the industry came to such a crisis and instead focus on solutions, she did take some time to issue a harsh reprimand to mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies whose “selfish free-for-all,” she said, “ultimately led to an economic slide the effects of which are still visible in the boarded-up houses and sheriffs’ foreclosure notices posted all over America.”

Missing from this list is the government.  For it was their policies and threat of legal action that made lenders create all of those risky loans.  Those subprime mortgages.  That put people into houses.  Even if they couldn’t afford to buy a house.  And why did they do this you ask?

U.S. Economic Policy:  Put as many People into Homes as Possible

Well, I’ll tell you.  It’s pretty simple really.  The housing market drives our economy.  Good housing sales equate to a prosperous economy (see Home prices fell in almost half of U.S. cities in fourth quarter, Realtors say by Kathleen M. Howley, Bloomberg News, posted 2/12/2011 on The Washington Post).

Federal Reserve policymakers described the U.S. real estate market as “depressed” in a Jan. 26 statement after the end of a two-day meeting in Washington. The central bankers said declining home values continued to stymie the consumer spending that accounts for about three-quarters of the world’s largest economy.

Three-quarters of the economy.  That’s why government wants to put as many people as possible into houses.  Houses are built with lumber, brick, concrete, linoleum, ceramic tile, plastic plumbing pipe, garbage disposals, electrical wiring, light fixtures, carpeting, paint, ceiling fans, air conditioners, furnaces, etc.  Once we buy a house we have to furnish it.  Stoves, refrigerators, furniture, televisions, stereos, computers, washing machines, dryers, dishes, cutlery, curtains, blinds, beds, sheets, pillows, blankets, coffee makers, etc.  And that’s a lot of consumer spending.

Building and furnishing one house stimulates a lot of economic activity.  That’s why official government policy for decades has been to get as many people to become home owners as possible.  When they extended this to those who couldn’t afford to buy a home, though, we ended up with the subprime mortgage crisis.  And because of Fannie Mae and Freddie Mac, the problem of those subprime mortgages ricocheted throughout the world.

The most Expensive Government Rescue of the Financial Crisis

And speaking of Fannie and Freddie, just how much have their risky behavior cost the American taxpayer?  A lot.  And we’re still counting (see Fannie, Freddie bailout: $153 billion … and counting by Chris Isidore posted 2/11/2011 on CNNMoney).

When the dust settles, the federal bailout of Fannie Mae and Freddie Mac will be the most expensive government rescue of the financial crisis — it already stands at $153 billion and counting…

The Federal Housing Finance Agency, the government body that oversees the two mortgage giants, has estimated that losses through 2013 will require Treasury to pour another $68 billion to $210 billion into the firms on top of the money already used to prop-up the firms and the housing market.

That’s a lot of money.  But at least we may have learned our lesson about putting people into houses they can’t afford.

Friday the Obama administration unveiled its plan to slowly wind down Fannie and Freddie and have banks and the private sector provide the financing for home loans. But the administration plans call for some continued role for the government in promoting mortgage lending and home ownership.

Perhaps not.  Let us not forget what Fannie and Freddie were.  Government Sponsored Enterprises (GSE).  The government provided oversight for these GSEs.  They wrote the laws that they must operate under.  They encouraged them to buy more of those risky loans.  All in the name to put more people into houses.  Because the housing market drives consumer spending that makes up three-quarters of the economy.

The Greed of Fannie Mae and Freddie Mac

Even the Obama administration recognizes their role in the subprime mortgage crisis.  In a report that summarized some ideas about how to proceed post Fannie and Freddie, they clearly point a finger of blame in their direction (see Obama’s Plan: Fannie Mae and Freddie Mac Go, but What Replaces Them? by David C. John posted 2/11/2011 on Heritage’s The Foundry).

The report makes it very clear where the fault for Fannie and Freddie’s failure lies, saying that “as their combined market share declined—from nearly 70 percent of new originations in 2003 to 40 percent in 2006—Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits. Not only did they expand their guarantees to new and riskier products, but they also increased their holdings of some of these riskier mortgages on their own balance sheets” (page 7).

And yet the Federal Reserve blames mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies.  But if Fannie and Freddie weren’t buying these risky loans, no mortgage banker would have approved these risky loans.  Because no banker would want these on their balance sheets.  But if Fannie and Freddie were buying these, what did these bankers care?  They had zero risk.  It all went to Fannie and Freddie.  And then to the American taxpayer.

If Fannie and Freddie did not buy those risky loans, the problem ends before it begins.  This is an important point that many tend to gloss over.  And here we are.  While still bailing them out of their mess they’re already talking about a continued government role in the mortgage markets.

I guess we’ve learned little from subprime mortgage crisis.  Pity.  For it was an expensive lesson.

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