Saint-Domingue Slave Rebellion, Great Migration and 1967 Detroit Race Riot

Posted by PITHOCRATES - July 23rd, 2013

History 101

The Brutal Slave Rebellion on Saint-Domingue created Haiti and opened the Door to the American West

Haiti was born from a slave rebellion.  Inspired by the French Revolution, which was inspired by the American Revolution, the slaves on Saint-Domingue could taste the liberty in the air.  The slaves outnumbered the whites on the island.  And when they rose in rebellion in 1791 their white overlords were powerless to stop them.  The slaves massacred the white planters.  Those lucky enough to survive fled the island.  The French tried to reestablish control.  Then they went to war again against the British.  Which complicated matters.  And led to a British invasion of Saint-Domingue.

Toussaint Louverture, a former slave, and educated, eventually led the now former slaves to victory.  And won the peace.  He invited the planters back.  Replaced slave-labor with paid-labor.  Reestablished trade with Great Britain.  And the new United States.  While the French did away with slavery in their colonial possessions.  For a while.  During the convulsions going on in France following the French Revolution there were many changes in government.  And the government in 1802 lent a sympathetic ear to the former white planters who wanted their plantations back.  And their slaves.  Napoléon Bonaparte, interested in reestablishing New France in North America, sent a military force to take back Saint-Domingue.  Who captured and sent Toussaint Louverture back to France.  But things did not go well for the French.

Jean-Jacques Dessalines continued the fight in Louverture’s place.  A determined enemy, and Yellow Fever, were too much for the French.  They pulled out their remaining soldiers.  Gave up on Saint-Domingue.  And on New France in North America.  Causing another exodus from the island.  And if you ever wonder why New Orleans is so French this is why.  A lot of those fleeing Haiti settled in New Orleans.  Doubling the city’s population.  Needing money to continue the war against Great Britain Napoléon offered to sell the Louisiana Territory, the thick center part of the United States between Texas and Canada, to Thomas Jefferson.  And did.  So the brutal slave rebellion on Saint-Domingue not only created Haiti.  It gave the Americans the Mississippi River and its tributaries.  The Mississippi Valley.  The Great Plains.  And opened the door to the West.

The Great Migration brought some 6 Million Blacks from the Rural South to Northern Factories

But that brutal slave rebellion did something else.  It made the southern planters nervous.  Over half of the 40,000 white colonists were killed during that slave rebellion.  A fact that weighed heavily on the minds of the highly outnumbered white planter class in the South.  Who lived in fear of a similar slave rebellion happening in the United States.  Which lead to a more oppressive control over their slaves.  So they could snuff out any rebellion at the first sign of trouble.  And there was a reversal of policy.  The Founding Fathers had shelved the issue of slavery for 20 years to get the South to join the new nation.  Believing that the institution of slavery would die out on its own.  And in the following two decades some slave owners were freeing a slave or two.  But that all stopped following the revolution in Saint-Domingue.  When the life of a slave went from bad to worse.  For the last thing the white planter class needed was a Toussaint Louverture in their midst.

By the time of the American Civil War the slave population had grown much larger.  Which added another element to the Civil War.  Especially for the South.  The North was fighting for a noble purpose.  To free the slaves.  And fulfilling the declaration that all men were created equal in the Declaration of Independence.  But what then?  What happens after the North wins the Civil War?  And they free the slaves?  Where are the slaves going to go?  Back to Africa?  Even the ones who have no idea what or where Africa was?  Having been born and raised in the United States?  No.  They weren’t.  They were going to remain in the South.  Nothing would change in the North.  But life in the South would be changed into something that just didn’t exist.  A biracial society.  Worse, this was going to be a biracial society where the majority was once brutally oppressed by the minority.  Thanks in large part to the slave rebellion on Saint-Domingue.

With this backdrop the odds for a peaceful reconstruction were slim.  The South did not adjust well to the new reality.  There were fears.  Anger.  And the old prejudices.  While in the North life went on as it always did.  Predominantly white.  And industrializing.  Creating more and more factory jobs.  That drew immigrants to the industrial north.  As it drew southern blacks.  Leading up to the Great Migration.  From 1910-1930.  Pausing during the Great Depression and World War II.  And picking up again from 1940-1970.  When some 6 million blacks left the rural south.  And headed to the jobs in the big cities in the Northeast.  The Midwest.  And the West.  Working and living in the big cities.  Like Detroit.

The 1967 Detroit Race Riot accelerated the White Flight from the City which decimated the Tax Base

Detroit dominated following the post-war period.  It was an economic powerhouse.  Thanks to a booming automotive industry.  And a war-torn Europe and Asia.  Whose industrial capacity suffered greatly from Allied bombing.  Leaving the motor city the auto capital of the world.  And making Detroit one of the richest cities in the nation.  With their population peaking in 1950.  As people came to the city for those manufacturing jobs.  But the housing did not keep up with the growth in population.  Blacks and immigrants often faced discrimination.  Getting the worst jobs.  And the worst housing.  Things that changed in the Sixties.  Thanks in large part to a shift of the auto industry out of Detroit.

Following World War II Packard, Hudson, and Studebaker went out of business.  And the Big Three went on a building spree.  In the suburbs.  And a lot of white Detroiters followed them.  Relieving the housing pressure a little.  Allowing a black middle class to grow.  But the suburbs kept growing.  As businesses moved their jobs to the suburbs that were a little more business friendly.  With sprawling spaces for new factories.  And a brand new interstate highway system to easily ship material and parts from one to another.  The same interstate highway system that converged four expressways in the city of Detroit.  Destroying a lot of neighborhoods.  Which were predominantly black.

Many of those displaced people moved to the 12th Street area.  An area that become twice as crowded as the city average.  Unemployment was rising.  As was crime.  Including prostitution.  Where white johns were coming to the neighborhood to solicit black prostitutes.  A big complaint of the black community.  So the police cracked down on prostitution.  And a black prostitute ended up dead.  The people blamed the cops.  The cops blamed a pimp.  Tensions were rising.  Then on July 23, 1967, the police raided a blind pig.  An unlicensed after-hours bar.  On the corner of 12th Street and Clairmount.  Where a party of some 80 people were celebrating the return of two soldiers just back home from the Vietnam War.  The cops arrested them all.  While they were waiting for the paddy wagon to take them away a crowd formed outside.  Someone threw a bottle at a cop.  And thus began the 1967 Detroit race riot.  Which only accelerated the white flight from Detroit.  Caused an exodus of jobs, too.  As businesses fled the city.  Which just decimated the tax base.  Accelerating the urban decay.  Soon the black middle class followed the whites.  In pursuit of those jobs.  And to escape the dying city.  Which it did in 2013.  Die.  Figuratively.  By filing the largest municipal bankruptcy in U.S. history.

www.PITHOCRATES.com

Share

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

The British have included a little Subprime Mortgage Crisis in their 2013 Budget

Posted by PITHOCRATES - March 24th, 2013

Week in Review

Governments like people buying houses.  Because it is the biggest engine of economic activity.  Generated from  building houses.  And then furnishing them.  And they’ll do just about anything to encourage people to buy houses.  No matter the damage it can cause.  As we’ve recently learned.  But that hasn’t stopped government from making the same mistakes (see Budget 2013: The good, the bad and the ugly by Sam Bowman posted 3/20/2013 on Adam Smith Institute).

Bank guarantees to underpin £130bn of new mortgage lending for three years from 2014. Apparently the Treasury has not learned the lesson of 2008: injecting taxpayer money into the housing sector will simply inflate prices, distorting price signals and stoking the housing bubble that already seems to be growing in the housing sector. Houses are expensive because supply is restricted by the planning system. Instead of throwing money at the problem and driving prices up even more, the government should have the courage to liberalize planning to allow more development, including on green belt land.

Government ministers picking winners. Fiddling with tax breaks for specific industries is a mug’s game. There is no way the government can know which industries to promote, and these projects inevitably collapse into a mess of overcomplicated grant schemes and politics-driven bailouts of failing firms. Only consumers can pick winners.

Government spending is still rising. Despite all the talk of cuts, the government will still be spending £761bn this year, nearly £20bn more than last year. By leaving healthcare alone and failing to carry out the big structural reforms needed to reduce social security spending, the government  is not matching its rhetoric on spending with the action needed. We’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end to the borrowing in sight.

While those on the Left blame Wall Street and greedy banks for the subprime mortgage crisis the British press knows who was at fault.  The U.S. government.  They’re the ones who kept interest rates artificially low.  Creating a housing bubble.  It was Bill Clinton who pressured lenders to make bad loans (to fix discrimination in lending that was not there).  This is why banks turned to subprime lending.  And the adjustable rate mortgage (ARM).  To qualify the unqualified.  Which they only did because Fannie Mae and Freddie Mac guaranteed those loans.  Even buying them to get them off of the banks’ books.  So the U.S. government caused the subprime mortgage crisis.  Not Wall Street.  Or greedy bankers.

Land use restrictions have long kept housing prices high.  Rich people have used their influence with government to restrict new housing in some very nice areas.  You can’t build new housing in some of the most exclusive neighborhoods.  Which keeps housing availability low.  Housing prices high.  And the ‘undesirables’ out of these rich people’s neighborhoods.  Allowing the rich to stick with their own kind.

Friends of the government get special favors.  Solyndra gets government loans to produce something there is no market for.  They go bankrupt.  Yet the government continues to spend money to pick winners the market passes on.  Some things never change.  No matter where you are.

Wherever you look these days governments give examples of what not to do.  Yet no one ever heeds these warnings.  And they make the same mistakes over and over again.  No matter how bad those mistakes were.  And as far as mistakes go, few were as bad as all the bad policy decisions that led up to the subprime mortgage crisis.  Yet President Obama has already talked about doing more of the same.  As are the British.  Why?  Because of that insatiable desire governments have to spend.  It has toppled empires in the past.  And yet they still spend.  As they will always continue to spend.  Because spending gives them power.  Which trumps everything else.  Even the trust of the people.

www.PITHOCRATES.com

Share

Tags: , , , , , ,

Keynesian Economics and Liberal Democrat Policies increase the Cost of Raising Children

Posted by PITHOCRATES - December 30th, 2012

Week in Review

A generation or two ago people got married to raise a family.  The husband typically earned the money.  And the wife raised the family.  On a single salary.  A time when most children grew up in a two-parent household.  Where boys grew up playing with toy guns.  But never took a real one to school.  Today it’s a lot harder to raise a family on a single income (see Cost of Raising a Child Up to $235K—Before College by Chris Wadsworth, special to USA TODAY, posted 12/24/2012 on CNBC).

According to the latest statistics released by the U.S. Department of Agriculture, parents will spend an average of $235,000 to raise a child born in 2011 to the age of 17. (And that’s not taking into account any savings for college).

Housing, food, clothing, health care, child care, schooling … the list of compulsory expenses goes on and on. Discretionary spending such as family vacations, birthday gifts, music lessons and the like are mostly extra…

The greatest share of these expenses is housing, which is 30 percent of the total. It’s followed closely by child care and education at 18 percent and food at 16 percent…

“Our day care expense for just our older son was over $1,000 a month,” Sutton says. “If we had put our younger son in day care as well, it would have been about $2,200 a month. That was more than our mortgage payment.”

We hear this all of the time.  But we never really hear the why.  Why is it that it takes two incomes to raise a family these days?  Forcing parents to pay so much for day care that they could buy another house with that money.  Why that house expense is so expensive.  And why education and food costs so much.  So let’s look at the why.  And here’s why.  Keynesian economics.  And liberal Democrats.

Liberal Democrats champion Keynesian economics as it sanctions what they want to do most.  Tax, borrow, print and spend.  When Nixon decoupled the dollar from gold the great devaluing of the dollar began.  In 2012 it took $8.21 to buy what $1 would by in 1955.  A $15,000 house in 1955 would cost about $127,000 today.  So that’s part of the reason why housing is so expensive.  The other reason is that Keynesian monetary policy.  Where the Federal Reserve (America’s central bank) kept interest rates artificially low to encourage people to buy houses.  Which they did.  In droves.  Driving up the price of housing.  Creating housing bubbles.  The last one bursting into the subprime mortgage crisis.  Giving us the Great Recession.

But it’s just not the Federal Reserve devaluing the dollar.  Gasoline cost about $0.23/gallon in 1955.  If you adjust that for inflation it would bring it up to $1.89 today.  At the end of summer 2012 the average gasoline price was $3.72/gallon.  Which is a $1.83 premium over the inflation-adjusted price.  A 96.8% increase in price.  What caused this near doubling in price?  Well, the American Left has shut down a lot of oil drilling due to environmental issues.  Raising the cost of crude oil.  Which increased the cost of gasoline refined from that crude oil.  Further, new environmental regulations have increased the cost of refining.  Requiring a plethora of blends depending on the time of year.  Further increasing the price of gasoline.

Higher gasoline prices make everything more expensive wherever gasoline is used.  On the farm.  The transportation from the farm to the food processor.  Transportation from the food processor to the food wholesaler.  Transportation from the food wholesaler to the food retailer.  Transportation from the family home to the grocery store and back.  High gasoline prices raise prices everywhere.  And consume more of the family budget.

Education is the one industry no one every blames those in control of the industry for being greedy.  No one every blames our universities for their high tuition fees.  They blame the taxpayers who don’t approve higher taxes to subsidize the high cost of education.  Which is high due to very generous pay and benefit packages for teachers, professors, administrators and support personnel.  Much more generous than those found in the private sector.  Why do they get away with this when liberal Democrats attack business owners for being greedy?  Because business owners don’t have as their primary mission to produce Democrat voters.

So what is increasing the cost of raising children so much?  Liberal Democrat policies.  They depreciate the currency, inflate the cost of housing (and cause Great Recessions), add huge regulatory costs that increase prices throughout the supply chain and create and protect a privileged class.  Consuming more and more of the family budget.  Making it ever more costly to raise children.

www.PITHOCRATES.com

Share

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

Monetary Policy

Posted by PITHOCRATES - January 30th, 2012

Economics 101

Monetary Policy created the Housing Bubble and the Subprime Mortgage Crisis

Those suffering in the fallout of the Subprime Mortgage Crisis can thank monetary policy.  That tool used by the federal government that kept interest rates so low for so long.  Following the old Milton Friedman idea of a permanent level of inflation (but small and manageable) to stimulate constant economic growth.  Why?  Because when people are buying houses the economy is booming.  Because it takes a lot of economic activity to build them.  And even more to furnish them.  Which means jobs.  Lots and lots of jobs.

But there is a danger in making money too cheap to borrow.  A lot of people will borrow that cheap money.  Creating an artificial demand for ever more housing.  And not for your parent’s house.  But bigger and bigger houses.  The McMansions.  Houses 2-3 times the size of your parent’s house.  This demand ran up the price of these houses.  Which didn’t deter buyers.  Because mortgage rates were so low.  People who weren’t even considering buying a new house, let alone a McMansion, jumped in, too.  When the jumping was good.  To take advantage of those low mortgage rates.  There was so much house buying that builders got into it, too.  House flippers.  Who took advantage of those cheap ‘no questions asked’ (no documentation) mortgages (i.e., subprime) and bought houses.  Fixed them up.  And put them back on the market.

Good times indeed.  But they couldn’t last.  Because those houses weren’t the only thing getting expensive.  Price inflation was creeping into the other things we bought.  And all those houses at such inflated prices were creating a dangerous housing bubble.  So the Federal Reserve, America’s central bank, tapped the brakes.  To cool the economy down.  To reduce the growing inflation.  By raising interest rates.  Making mortgages not cheap anymore.  So people stopped buying houses.  Leaving a glut of unsold houses on the market.  Bursting that housing bubble.  And it got worse.  The higher interest rate increased the monthly payment on adjustable rate mortgages.  A large amount of all those subprime mortgages.  Causing many people to default on these mortgages.  Which caused the Subprime Mortgage Crisis.  And the Great Recession.

The Federal Reserve System conducts Monetary Policy by Changing both the Money Supply and Interest Rates

Money is a commodity.  And subject to the laws of supply and demand.  When money is in high demand (during times of inflation) the ‘price’ of money goes up.  When money is in low demand (during times of recession) the ‘price’ of money goes down.  The ‘price’ of money is interest.  The cost of borrowing money.  The higher the demand for loans the higher the interest rate.  The less the demand for loans the lower the interest rate.

So there is a relationship between money and interest rates.  Adjusting one can affect the other.  If the money supply is increased the interest rates will decrease.  Because there is more money to loan to the same amount of borrowers.  When the money supply is decreased interest rates will increase.  Because there will be less money to loan to the same amount of borrowers.  And it works the other way.  If the interest rates are lowered people respond by borrowing more money.  Increasing the amount of money in the economy buying things.  If interest rates are raised people respond by borrowing less money.   Reducing the amount of money in the economy buying things.  We call these changes in the money supply and interest rates monetary policy.  Made by the monetary authority.  In most cases the central bank of a nation.  In the United States that central bank is the Federal Reserve System (the Fed).

The Fed changes the amount of money in the economy and the interest rates to minimize the length of recessions, combat inflation and to reduce unemployment.  At least in theory.  And they have a variety of tools at their disposal.  They can change the amount of money in the economy through open market operations.  Basically buying (increasing the money supply) or selling (decreasing the money supply) treasury bills, government bonds, company bonds, foreign currencies, etc., on the open market.  They can also buy and sell these financial instruments to change interest rates.  Such as the Federal funds rate.  The interest rate banks pay when borrowing from each other.  Moving money between their accounts at the central bank.  Or the Fed can change the discount rate.  The rate banks pay to borrow from the central bank itself.  Often called the lender of last resort.  Or they can change the reserve requirement in fractional reserve banking.  Lowering it allows banks to loan more of their deposits.  Raising it requires banks to hold more of their deposits in reserve.  Not used much these days.  Open market operations being the monetary tool of choice.

There is more to Economic Activity than Monetary Policy

Fractional reserve banking multiplies these transactions.  Where banks create money out of thin air.  When the Fed increases the money supply a little this creates a lot of lendable funds.  As buyers borrow money from some banks and pay sellers.  Then sellers deposit that money in other banks.  And these banks hold a little of these deposits in reserve.  And loan the rest.  Borrowers create depositors as buyers meet sellers.  And complete economic transactions.  When the Fed reduces the money supply a little this process works in reverse.  Fractional reserve banking pulls a lot of money out of the economy.  Some treat these economic transactions, and the way to increase or decrease them, as simple math.  Always obeying their mathematical formulas.  We call these people Keynesian economists.  Named for the economist John Maynard Keynes.

Big interventionist governments embrace monetary policy.  Because they think they can easily manipulate the economy as they wish.  So they can tax and spend (Keynesian fiscal policy).  And when economic activity declines they can simply use monetary policy to restore it.  But there is one problem.  It doesn’t work.  If it did there would not have been a Subprime Mortgage Crisis.  Or any of the recessions we’ve had since the advent of central banking.  Including the Great Depression.  As well as the Great Recession.

There is more to economic activity than monetary policy.  Such as punishing fiscal policy (high taxes and stifling regulations).  Technological innovation.  Contracts.  Property rights.  Etc.  Any one of these can influence risk takers.  Business owners.  Entrepreneurs.  The job creators.  The people who create economic activity.  And no amount of monetary policy will change this.

www.PITHOCRATES.com

Share

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

The Great Housing Bubble and The Subprime Mortgage Crisis

Posted by PITHOCRATES - December 27th, 2011

History 101

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

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

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

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

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

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

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

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

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

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

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

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

www.PITHOCRATES.com

Share

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

Barney Frank caused or allowed the Subprime Mortgage Crisis

Posted by PITHOCRATES - December 3rd, 2011

Week in Review

The worst financial crisis since the Great Depression happened under Barney Frank’s watch.  As did one of the worst housing bubbles.  And what exactly were Barney Frank’s responsibilities during these crises (see Barney Frank’s retirement: What it means for House Financial Services panel by Felicia Sonmez posted 11/28/2011 on The Washington Post)?

The news that Rep. Barney Frank will retire at the end of his term in 2012 sets off an internal scramble among Democrats to succeed the longtime Massachusetts lawmaker as the ranking member on the Financial Services Committee.

Since 2003, Frank has served as the top Democrat on the powerful 61-member panel, the second-largest of the House’s 20 standing committees. (Armed Services is the largest, with 62 members.) The committee has broad oversight over the banking, housing, insurance and securities sectors as well as over federal monetary policy and international finance.

Oh.  He was responsible for the Congressional oversight for the banking, housing (as in Fannie Mae and Freddie Mac), insurance and securities sectors.  Big responsibility.  And he did a piss-poor job.  As demonstrated by the reckless mortgage lending of the banking industry facilitated by Fannie and Freddie that caused the housing bubble that led to the subprime mortgage crisis.  Wow.  Rarely can we trace so much destruction back to one man.  And his punishment for ruining the American economy and so many people’s retirement?  Not a thing.  In fact, the guy who was so bad at financial oversight co-wrote the Dodd-Frank financial regulation legislation for better oversight.  Unbelievable.

Someone can climb over your fence with a ladder, put it up to the deck of your above the ground pool, ignore the ‘do not dive’ sign and dive into the shallow end of the pool.  And if this trespasser beaks his neck guess who gets in trouble?  The pool owner.  Because he didn’t secure that ‘attractive nuisance’ enough to prevent that accident from happening.  But Barney gets off scot-free.  How fair is this?  Not very.  But that’s life.  In the U.S. House of Representatives.

www.PITHOCRATES.com

Share

Tags: , , , , , , ,

LESSONS LEARNED #87: “In a democracy you hold the keys to the treasury. So be careful of what you ask for.” -Old Pithy

Posted by PITHOCRATES - October 13th, 2011

Keynesian Spending gave us Double Digit Interests Rates, Double Digit Inflation Rates and Stagflation

LBJ was going to end poverty.  He declared war on it.  His soldiers?  Dollars.  Lots of them.  His battle plan?  The Great Society.  Tactics?  Just throw lots of money at a problem.  Hope that some of it actually hit its target.  And further hope that some of the money that did hit its target actually did something beneficial.  Just hope for the best.

And thus grew the welfare state.  The recipients liked it.  Because they were the recipients.  Government liked it.  Because the recipients liked it.  Who voted for them out of gratitude.  And dependency.  And the Keynesian economists liked it.  Because government spending was stimulus.  And they love stimulus.  These Keynesian economists.  So everybody kept asking for more.  As no one saw the harm in printing money to make people feel good.

The Keynesian said this was proof that a manageable amount of continuous inflation (printing money) would do away with the business cycle.  The boom and bust that had recurring good times.  And recurring recessions.  They said let’s just have a continuous boom.  When real demand fell just create artificial demand by having the government step in.  Let the government stimulate demand by printing money to spend.  And they did.  GDP went up.  Thus proving their theory.  Or so they thought.  Until they realized printing all that money had so weakened the dollar that interests rates soared.  To double digits.  As did prices.  Giving us double digit inflation rates.  And stagflation.  That’s why the economy sucked in the Seventies.  And why Jimmy Carter was a one term president.

Bad Monetary Policy gave us Cheap Money, the Housing Bubble and the Subprime Mortgage Crisis

After the dot-com bubble burst the economy went into recession.  So the government went to their patented recession cure-all.  Monetary policy.  Playing with interest rates.  I.e., printing money.  Because housing sales have always been the key to a growing economy.  Because building a house generates a lot of economic activity.  And furnishing a house generates even more economic activity.  So the best way to kick-start the economy was to get more people into houses.  The more the better.  Whether they could afford to or not.  Because no matter what happens, people always pay their mortgage.

So the government kept interest rates low.  Artificially low.  To encourage people to borrow money.  To buy housees.  And they did.  But not enough of them did.  Poor people weren’t buying.  Mortgage bankers were turning them down.  Because they couldn’t qualify for a mortgage.  So the government pressured them to approve people even if they didn’t qualify.  Fannie Mae and Freddie Mac guaranteed these risky mortgages.  Then bought them.  It worked.  Thanks to ARMs and no-doc mortgages, anyone could walk in off the street and get a cheap mortgage with little down.  The people liked it.  And asked for more.  Thus began the housing boom.

People were buying and selling houses like there was no tomorrow.  Investors were flipping homes.  People were moving up into McMansions.  Bidding the price of houses into the stratosphere.  Paying whatever the price was.  Because the money was so cheap to borrow.  Artificially low.  Which really inflated the price of these houses.  To unsustainable levels.  Until the bubble burst.  And these prices began to correct to reflect reality.  The Fed, waking up the next morning in a stupor, saw what they had done.  And desperately tried to fix things.  To limit the damage.  They raised interest rates.  ARMs reset.  And the great Subprime Mortgage Crisis began.  And thanks to Fannie and Freddie buying those risky mortgages, the contagion spread around the world.  To everyone who bought what they thought were safe investments backed by safe mortgages.  Because people always paid their mortgages.   But were, in fact, backed by the riskiest of all investments.  Defaulting subprime mortgages.

The Social Democracies’ Spending gave European Countries Staggering Debt and a Sovereign Debt Crisis

Karl Marx was a German.  But his theories quickly swept across the Rhine.  Soon there were communists everywhere in the West.    After World II, when communism became the new enemy, Western Europe favored something called social democracies.  Communism-light.  The social welfare state.  Cradle to the grave nanny state.  With generous state benefits.  National health care.  Pensions.  You name it.  And the state gave it.

People liked it.  Asked for more.  And their governments were glad to oblige.  They spent more and more money.  Rather, they spent more and more of the taxpayers’ money.  These social democracies had some of the highest tax rates.  Which was fine with the poor receiving these generous state benefits.  But it explains why anti-capitalists like John Lennon and Bono moved out of the UK.  To escape the high taxes on the wealth they created with free market capitalism.  So there was a capital flight out of these social democracies.  While at the same time their public sectors grew.  More and more people worked for the government.  Received government pay and benefits.  And generous pensions.  The people liked this.  And asked for more.  Except Lennon and Bono, of course.  And the other superrich who fled these social democracies.

As tax rates climb and capital flees, though, economic activity stagnates.  Which forces these countries to borrow.  And borrow some of them did.  Some of the smaller countries in the Eurozone (Greece) are so in debt that they can’t even roll over their existing debt.  They are in such a mess that no one wants to take a chance loaning them money.  Because no one thinks Greece will ever be able to repay whatever they borrow.  Of course, with the common currency (Euro), Greece’s problems are everyone’s problems.  So the richer countries in the Eurozone (Germany) are pouring money into the ECB to try and rescue Greece.  And save the Euro.  What we call the European sovereign debt crisis.  While the world waits with bated breath.  Because if they fail it could very well plunge the world into another severe recession.  Or worse.  Because the world needs the Eurozone.  To buy their exports.  So they can prop up their own sick economies.

Class Warfare pits the Rich against the Poor and Middle Class, the Taxpayers against the Public Sector

Many, if not all, of the great crises countries have…are…going through is because of bad monetary policy.  Using the power of the purse to make happy voters.  Whatever the cost.  For they were always sure they could avoid paying this cost.  That they could always keep pushing this cost off onto a future generation.  But the spending grew too great.  The debt grew too high.  And, before they knew it, that future generation was here.  And it’s us.

The people grew fat and lazy on these generous benefits.  And they never worried about the cost.  Because the cost was always someone else’s problem.  Until now.  Not only are they losing some of these generous benefits.  But they now have to pay for some of them.  The cost being so great that everyone has to pay their ‘fair’ share.  Which was fair when ‘everyone’ didn’t include them.  But it now includes them.  And they don’t like it one bit.  So they’ve taken to the streets throughout Europe.  Rioting here.  Protesting there.  And demanding that the rich (anyone who is not them) pay more in taxes so they can continue to live the good life.  All funded courtesy of the taxpayers.  Who aren’t.  Living the good life.

So class warfare escalates.  Pitting the rich against the poor and middle class.  And the taxpayers against the public sector.  Placing these countries on the brink of anarchy.  All because the people learned that they could vote themselves money.  And did.  They got everything they asked for.  Including something they didn’t bargain for.  The destruction of their countries.

www.PITHOCRATES.com

Share

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

Keynesian Governments play with Interest Rates giving us Asset Bubbles and Crises

Posted by PITHOCRATES - September 5th, 2011

Subprime Mortgage Lending – Qualifying the Unqualified

Housing has led the economy since World War II.  Home ownership.  The magical elixir.  So the government policy has been to put as many people into homes as possible.

They pushed mortgage lenders to approve mortgages.  And threatened them when they didn’t.  Especially to minorities in depressed inner cities.  Worse, activists were protesting.  Accusing them of redlining.  All this pressure forced the lenders to come up with ways to qualify the unqualified.  And the vehicle of choice was the subprime mortgage.

Adjustable Rate Mortgages (ARMs).  Interest only mortgagesNo-documentation mortgages.  Etc.  These were putting people into houses like never before.  Even if they couldn’t afford a house.  They got in at low interest rates.  Kept low by easy monetary policy.  To get as many people approved for these dirt-cheap mortgages as possible.

Bad Government Policy caused a Housing Boom, a Housing Bubble and a Crisis

But that’s not all the government did.  Via Fannie Mae and Freddie Mac, they guaranteed these subprime mortgages.  And bought them from the mortgage lenders.  Removing these highly risky mortgages from their balance sheets.  Removing all risk from the lender.  And passing it on to the taxpayer.  And as you would guess such a policy would do, the lenders approved more of these risky subprime mortgages.  And why not?  They made money.  And were insulated from all risk. 

Then Fannie and Freddie chopped and diced these risky subprime mortgages.  Created mortgage-backed securities (MBS).  And collateralized debt obligations (CDO).  And sold them on Wall Street.  They were high yield.  But super safe.  Because they were backed by historically the safest of all debt.  Mortgages.  Only these weren’t safe mortgages.  They were very risky subprime mortgages.  And why were they so risky?  Because when interest rates go up, so do their monthly payments.  Likely more than the home owner can pay.  And when those interest-only mortgages had to be refinanced, the new higher interest rates made the new mortgages more costly than the old.  More than a subprime borrower could afford.  Which meant one thing.  Default.

So all this bad government policy (to put as many people into homes as possible) caused a housing boom.  And a housing bubble.  The economy was overheating.  So the Federal Reserve tapped the monetary brakes.  By raising interest rates.  And all hell broke loose.

Government enabled Risky Subprime Mortgage Lending

The government’s housing policy gave us the subprime mortgage crisis.  And spread this contagion around the globe.  Thanks to Fannie and Freddie.  Enabling all that bad mortgage lending.  Giving us the Great Recession.  That appears more depression-like than recession.  Now the go-to government policy of boosting economic activity won’t work.  Because the housing market is in shambles.  And it will get worse before it gets better (see Uncle Sam is a reluctant landlord of foreclosed homes by Lorraine Woellert and Clea Benson, Bloomberg Businessweek, posted 9/5/2011 on MSNBC).

For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae, Freddie Mac and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market.

The U.S. taxpayer is the largest owner of foreclosed properties.  Because government enabled risky subprime mortgage lending.  They guaranteed or bought risky mortgages.  So risky that no mortgage lender would have approved them if they had to carry the risk on their own balance sheets.  Which makes the government incompetent.  Or devious.

The government caused this problem.  By putting as many people as possible into homes.  Whether they could afford it or not.  And now they have a big problem on their hands.  Or, rather, the taxpayers do.  For government’s problem is ultimately the taxpayers’ problem.  It is our money after all that they are playing with.

Since the 2008 financial collapse, the government has spent billions of dollars trying to extricate borrowers from high-cost loans, aid delinquent homeowners and stabilize neighborhoods. The results have been disappointing. The Obama Administration’s signature loan-modification program has helped about 657,000 homeowners — far short of its goal of 3 to 4 million. The program was a victim of its complexity and its inability to cope with overwhelming demand.

Yes, they’re good at creating BIG problems.  But not very good at fixing them.  To put it mildly.  And yet we keep turning to government for help.  Go figure.

Selling High-Risk Securities Masquerading as Safe High-Yield Investments 

And it’s not only the U.S that made a mess of their mortgage market.  Europe has her own subprime problems.  On top of their sovereign debt crisis.  As if they didn’t have enough to worry about already (see Europe banks slide to 29-month low on multiple headwinds by Simon Jessop, Reuters, posted 9/5/2011 on Yahoo! Finance).

European bank shares slid to a 29-month low on Monday, leading the broader market down on fresh sub-prime mortgage woes, fears of recession and yet more evidence of political disunity that could hamper efforts to solve the region’s debt crisis…

“The chances of a near-term recovery remain slim as euro zone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector,” Manoj Ladwa, senior trader at ETX Capital said.

Subprime mortgage woes.  And a debt crisis.  All caused by activist Keynesian governments.  Playing with interest rates.  To stimulate the economy with an artificial demand.  Which always ends the same way.  Asset bubbles.  And crises.  In Europe.  The U.S.  And everywhere where activist governments think they can outsmart the free market.

Royal Bank of Scotland…

… is among the worst-placed of European lenders facing a multi-billion-dollar U.S. regulatory lawsuit accusing them of misrepresenting the checks they made on mortgages before securitising them.

So Europe, too, has been dabbling in mortgage-backed securities (MBS).  And collateralized debt obligations (CDO).  Doesn’t look like things ended any better for the Europeans.  They sold high-risk securities masquerading as safe high-yield investments.  Because of those ‘safe’ mortgages underlying these investments.  That were anything but safe.

“The banks’ cost of funding goes up in tandem with the country’s cost of funding, and eventually they get denied access to the credit market.”

That relationship was once again thrown into focus on Monday as both Italian and Spanish 10-year yields rose to near 1-month highs. Peripheral euro zone sovereign CDS yields also rose, with French yields at a record high.

The financial crisis is not only hurting investors, it’s hurting countries.  By raising borrowing costs.  Which is a BIG problem for countries that like to spend beyond their means.  Because they have to borrow to pay today’s bills.  As well as borrow to pay yesterday’s bills. 

As bonds come due they have to borrow money to redeem them.  And all this new borrowing is at higher and higher interest rates.  So high that governments even have to borrow to pay the interest on the money they’ve borrowed.  And the interest on their debt becomes an ever growing line item on their budgets.  Which makes it harder to pay retirement benefits.  Health care benefits.  Education benefits (i.e., free college tuition).  Etc.  Eventually requiring budget cuts.  And austerity.  Which the people often respond to with riots.

Adding to growing concern over a return to recession in the developed world, data showed euro zone services sector growth eased for the fifth consecutive month in August.

Recent data showed a world economy growing at “near stall speed,” analysts at Societe Generale (Paris: FR0000130809 – news) said in a note, although they did not believe the world would return to recession as it needed a trigger, “which we believe will remain absent.”

“Taming burgeoning public debts on both sides of the Atlantic (Stuttgart: A0J3C9 – news) will take time and we forecast a prolonged period of low growth for both the US and Europe,” they add.

All this government spending is paid for (in part) with high taxes.  As the borrowing costs grow governments turn to raising tax rates.  Which puts the brakes on economic activity.  Which, in turn, reduces the amount of tax dollars collected by the government.  Making a bad problem worse.

You Never Want a Serious Crisis to go to Waste

This is Keynesian economics.  Keep interest rates low.  Depreciate your currency.  And keep on spending.  Their rationale is that governments can do anything they want.  For it’s their fiat money.  They can always print more.  And the resulting inflation will make yesterday’s debt easier to pay tomorrow.  We call it screwing our creditors.  I mean, monetizing the debt.

But debt has consequences.  The European sovereign debt crisis is a crisis because they can’t borrow any more money to continue their excessive government spending.  Standard and Poor’s just downgraded U.S. bonds because of excessive debt.  The tax and spend Keynesians say poppycock.  Keep spending.  And raise taxes.

But the responsible people say, “Wait a minute.”  For they see these crises as debt crises.  And they think ‘what if’ there wasn’t excessive debt.  Would there be a crisis then?  And the answer is, of course, no.  So they understand that too much debt is a bad thing.  And if it’s a bad thing, adding more of it will only make it more of a bad thing.  And unless you think a crisis is a good thing, you don’t want more of one.

But if you think a crisis is a good thing.  That “you never want a serious crisis to go to waste.”  Then you probably want more of a bad thing.  And you’re probably a Big Government Keynesian liberal Democrat.  Using that crisis to advance an agenda you couldn’t through the normal legislative process.

www.PITHOCRATES.com

Share

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