Wednesday, July 21, 2010

Ignoring Reality While Killing the Economy

By Alan Caruba

The powers in Washington, D.C. seem to be living in a parallel universe from the one the rest of the nation occupies. Even worse is the way the Obama White House and Democrat controlled Congress appears to be hell-bent on destroying the economy before they can be voted out of office.

No Congress since the days of the Great Depression and the Roosevelt administration has been driven to pass legislation that is more injurious to the present and future of the nation. It began with the so-called Stimulus Act that is widely seen as a failure, followed by Obamacare, the government takeover of one sixth of the economy replete with the rationing of care that will literally kill some people.

On Wednesday the President signed "financial reform" legislation that will play havoc with the financial industry while expanding government regulation still further.

Let us examine the reality. Washington tells us that the unemployment rate is 9.5%. Raghavan Mayur, president of TechnoMetrica Market Intelligence has been closely following unemployment data. His survey in May revealed that 28% of a thousand households reported that at least one member was looking for a full-time job.

Mayur’s firm owns the TIPP polling unit, a polling partner for Investors’ Business Daily and Christian Science Monitor. The June poll revealed 27.8% of households experiencing unemployment and, in the second week of July, it showed 28.6%. That translates to an unemployment rate of more than 22%!

The so-called financial reform act is likely to be as great a power grab as Obamacare, but it totally ignores the root cause of the 2008 financial crisis, Fannie Mae and Freddie Mac, the two government sponsored “entities” whose collapse revealed that many of mortgages granted by banks and lending companies, and then purchased by Fannie and Freddie for bundling and resale were inherently unsound.

Why? Because the government had long been pressuring banks and mortgage lenders to issue mortgages to people who could not afford to borrow the price of a hamburger. They were called “Ninja” loans; no job, no assets.

The concept of the government getting involved in the housing market is based on the notion of “social justice” and the belief that everyone had a “right” to own their own home.

Social justice was the basis for Social Security when it was established in the 1930s and later for Medicare/Medicad. Both programs are insolvent.

Everything the FDR administration did prolonged the Great Depression for ten years until the advent of World War Two rescued the economy. The Obama administration is repeating the same mistakes.

In June, Bloomberg Business Week took a look at four scenarios regarding the cost of the bailout of Fannie Mae and Freddie Mac. Bear in mind that together they hold or guarantee 53% of the nation’s $10.7 trillion in residential mortgages. They operated as shareholder-owned corporations that financed home loans with the tacit support of the federal government.

In February the White House Office of Management & Budget estimated a bailout cost of $160 billion; a December report by Barclays Capital analysts put the figure at $230 billion based on a doubling of defaults and losses averaging 50% of each loan. According to a Congressional Budget Office estimate in August of last year, the figure was estimated to be $389 billion and Sean Egan, president of Egan-Jones Ratings estimated it would come in closer to $1 trillion.

Wall Street and the banks were being lambasted for having purchased the bundled securities Fannie and Freddie were selling them while the White House and Congress ignored these agencies. Well, not totally ignoring them. In October 2008 the government seized control of both. They are not, however, part of the new financial “reform” legislation.

Fannie Mae and the whole system in place since 1938 functioned on what can only be called a system of winks, nods and self-deception.

That mindset led to a 2004 scandal in which the Office of Federal Housing Enterprise Oversight revealed a pervasive misapplication of accounting standards. That, in turn, led to the resignation of Fannie Mae CEO, Franklin Raines. In a spooky sidebar, Raines owns the patent on the exchange system for the trading of carbon credits, the objective of the Cap-and-Trade Act under consideration in the Senate.

The debate about what to do with either or both will not even begin until next year. It is useful to keep in mind that the two legislators, Rep. Barney Frank and Sen. Chris Dodd, who have defended Fannie and Freddie for years, are the authors of the new financial reform bill. The foxes have been in the henhouse for a very long time.

Conservatives think that both Fannie Mae and Freddie Mac should be put out of business and that mortgage loans should be a fully private market enterprise. This alone would likely guarantee that a future financial meltdown regarding mortgage lending would be avoided. A trillion dollars or even several hundred billion dollars is too high a price to permit what has occurred to occur again.

When the new, expanded government reforms kick in, there is no telling what effect they will have on the economy, but they are unlikely to be good. Believing anything the government has to say these days is a very bad idea.

© Alan Caruba, 2010


Dave's Daily Day Dream said...

You write: "The Obama administration is repeating the same mistakes."

Are they mistakes, Alan, or are they carefully considered steps towards an end dreamt of by socialist traitors who continue to hate America first?

These people can't be this stupid. Why can't we connect the dots? What will it take?

Alan Caruba said...

Dave, by the time we connect the dots, the economy will have been effectively undermined. The whole financial system is held together with spit and duck-tape at this point.

The intention of the Obama administration to destroy it has been facilitated with a lot of very bad politics and economics.

Remember, right up to the end, the Russians believed Marxism would defeat Capitalism. The fact that the Chinese have embraced Capitalism economically, but held onto Communism politically shows how pragmatic they are. All it tooks was for Mao to die.

We tend to forget that Republicans went along with much of the social justice legislation. Bush even got a prescription drug benefit tagged onto Medicare at a time when everyone knew it was broke. They all have been playing this game.

Will the GOP learn from its mistakes? Will it repeal the Obama legislation? Somehow I do not think so. If it regain control of Congress or just the House, it will mostly nibble around the edges when what is needed is a scalpel to make deep cuts.

Carolyn said...

What really depresses me about all of everything, Mr. Caruba, is that people knew- BEFORE obama was elected, what kind of president he'd be. I was writing about it all on my blog before he was elected, and I'm nobody (well,in the broad sense of things) so if I knew, many others brighter and better educated than I knew as well.
All the "Joe the plumber" jokes, all about Fanny and Freddie, and the fact that even the NY Slimes had written back in 92 about Frank and Dodd blocking any attempts on regulations.
All about his associations with radicals of all sorts, and even in his own words from college about purposely finding the communists, socialists, those of other cultures to hang out with. A man IS who he associates with, and everyone knows he has associated with anti capitalists, anti American, pro communists, anti semitics, and on and on.
What depresses me, is that it's not that he and all the rest of them are doing it on purpose. Remember his words- America is great, help me change it- or something to that effect.
They want to tear it down and rebuild it in their way- the people under the thumb of their rulers. And, as you replied to Dave, by the time people figure it out, the country will be gone as we knew it, and a new awful dictatorship will be in it's place.
I don't hold out much hope in the GOP either. Seems to me, that they've always done the same things when they regain power-bow and scrape to the democrat minority. Some how they believe that people will notice how much better behaved they are, and that they don't go in for all that partisian stuff. Doesn't work, and just makes things worse. I remember Bush's attempts at placing judges, and barely any of them even got a hearing, some waiting over a year for even a yes or no vote. Same thing with other legislation. When the dems are in power, it's the minority republicans being bipartisan and playing politics. When the republicans are in power, they're the bullies. No win, either way and the GOP seems to play into it all the time.
I am scared for this Country Mr. Caruba- and for the generations of my son and granddaughters.

electron janitor said...


They should take a chainsaw to it.

KhabaLox said...

Alan, you wrote:
"The June poll revealed 27.8% of households experiencing unemployment and, in the second week of July, it showed 28.6%. That translates to an unemployment rate of more than 22%!"

I think we would agree that distilling the employment picture of a nation of 300 million people down to a single number is going to necessarily gloss over a lot of the details and nuance of the situation. For example, the "official" 9.5% figure you cited doesn't include people who are under-employed (i.e. people working part-time, but looking for full-time jobs) or people no longer looking for work.

Similarly, the poll numbers you cited of 27-28% overstates the problem, because it includes households with multiple workers where only one is unemployed. For example, both parents work full-time jobs, but one or more children is looking for full-time employment (recent HS or college grads, for example, who still live at home because they can't find a job).

One thing that is confusing me, and I hope you can clarify, is how the poll numbers you cited "translate to an unemployment rate of more than 22%." How does 28% become 22%? Shouldn't it be higher? When you say unemployment rate here, are you referring to households or individuals, and are you including under-employed and those no longer looking for jobs?

LarryOldtimer said...

Money borrowed and spent in the present is money that will be earned in the future by the present borrower that the present borrower will not be able to spend in the future, with the penalty of interest added.

Massive excessive lending in any present will hugely restrict and limit spending in the future.

In the past fairly recent years, massive excessive lending/borrowing occurred. Many were lent very large sums of money which they could obviously not have been expected to repay from foreseeable future earned income.

The future of that past is now. Money to spend by great numbers of would be consumers now is severely limited. Future earnings of income have already been obligated by excessive lending in the recent past for far too many otherwise would be consumers. Many are defaulting on large sums of debt.

Borrowed money is, in its effects, very much akin to narcotic drugs. In the "high" immediately after it is borrowed, in both lender and borrower, it is forgotten that it must need repayment with interest. Once that high wears off, realization takes place. It must need repayment. Borrowing even more again will temporarily induce elation, and forgetfulness that it too needs repayment, for both lender and borrower.

It takes self discipline to limit oneself to not borrowing more than makes sense to borrow, and for lenders to limit loans to only those who can be expected to repay from only foreseeable future earnings.

Large tax cuts for the individual would have given at least some breathing room for our economy, but still would have to have been accompanied by significant restrictions on lending for a significant period of time, to allow/require that large sums of debt be repaid, by the government as well as the individual.

Politicians have no fortitude for the economic discipline that would be required, nor do most of the voters who elect them to office.

Rearranging the money deck chairs or controlling their arrangement will not keep the economic ship from sinking.

As to the present situation, the intelligentsia of the world have been most unhappy with the fact that the "Great Experiment", as termed by Alexis de Tocqueville in 1831, proved to be a great success. Essentially common men deciding what was best for themselves, without need of any nobility or intelligentsia to decide for them, including what religion they decided to have themselves.

If common men and women are capable of deciding for themselves all these things, there is no need of intelligentsia. Of course intelligentsia are unhappy with the success of the "Great Experiment", and want to rid the world of it. All of them.

Dave's Daily Day Dream said...

You write,
" They all have been playing this game.

Will the GOP learn from its mistakes? Will it repeal the Obama legislation? Somehow I do not think so."

The question remains, "Why do they play the same game?" That's the question pundits refuse to resolve or even consider publicly. We have been brainwashed to the point of not even considering the obvious.

rockyvnvmc said...


ref; your comment 'Social justice was the basis for Social Security when it was established in the 1930s and later for Medicare/Medicad. Both programs are insolvent.'

Social Security wouldn't be insolvent if the congress hadn't been talked into moving the funds into the General Funds account, leaving IOU's behind, in the form of Treasury Notes , etc. Also, ditto if only those originally designated to be eligable for Social Security were the only people NOW eligable to collect from the fund.

Alan Caruba said...

@ KhabaLox:

The 22% figure you question appears I believe in quotes or relates back to the source that is cited. I did not calculate this figure, someone else did.

As for the "official" government figures, you're right. They are BS. It's probably more like 20% unemployed at this point.