Jon's Political Ramblings in Syndication?

Without my knowledge, somebody appears to have syndicated content from my blog. Sweet! (HT to Vijay)

Is Deleveraging Bad for the Economy?

Great article (HT Vijay).

Ron Paul predicted Georgia Conflict Back in 2002

An interview in 2002.

The Russians now say ah ha, "What you're doing is nothing compared to what we want to do. We want to go into Georgia. Because you say there's terrorists and that the Iraqis are possible terrorists, that's why we want to go into Georgia and we want you to approve it." And that's why maybe they're looking to give in a little bit to us if we're willing to ignore what they do in Georgia.

British humor on school choice

Along the lines of my thought experiment (HT to Vijay).

Ron Paul predicted Fannie Mae and Freddie Mac disaster five years ago. We shouldn't be surprised though since this is just applying basic Austrian economics. Speech below (emphasis mine).

Ron Paul in the House Financial Services Committee, September 10, 2003

Mr. Chairman, thank you for holding this hearing on the Treasury Department’s views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Socialism in the USA

Great quotes in The Daily Reckoning today.

The "Consumer Economy" was Always a Mockery

But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins - gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.

...

The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year - during a period in which the companies lost almost $5.2 billion - not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn't wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.

What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism - run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.

U.S. Economy is Still Growing but GDP Growth Rates Are Mostly Fraud

There are only so many hours in the day...and only so many resources to work with. The real question is what is done with them. If they are used to produce things, to build factories, and to add to the nation's capital, people become wealthier. If they are squandered - using up capital instead of adding to it - people become poorer. GDP figures don't tell you want is really going on. But when an economy becomes too dependent on credit and consumer spending, GDP figures actually become perverse; they measure the rate at which the nation impoverishes itself.

Good ole fashioned Keynesian stuff!

Paul McCulley of PIMCO wrote a great article called The Paradox of Deleveraging. The reason I think it's great is because it's completely wrong, but in a way that makes me smile. It explains the broken Keynesian view of the economy and the recession. It prescribes what the Keynesian-minded central bankers must do to fix our problems. McCulley is mostly just talking his book as PIMCO has invested heavily in the prescriptions he favors. Of course, these are the same theories that Bernanke and Paulson subscribe to, so it's no surprise that this is what we have been getting and will continue to get. My favorite quote from the article: "Good ole fashioned Keynesian stuff!"

Here is a good rebuttal of McCulley's view. It is in line with the Austrian school of thought.

Personally, I don't worry as much as I used to about this stuff. When I initially learned about the Austrians, I worried so much about all these government policies that were obviously wrong. Bad policy created terrible asset bubbles and then prescribed the wrong medicine. Reading authors such as Hayek, Hazlitt, and Rothbard was a great revelation for me. I felt compelled to campaign for Ron Paul, the only person in Congress who truly understands these issues. We had some successes along the way, but we weren't able to convince the American people. They have not yet woken up and they are such easy victims for people like Bernanke and Paulson who are more than glad to privatize the profits and socialize the losses under the guise of saving the financial system. Just look at Fannie Mae and Freddie Mac. One cannot fathom a better bailout -- while the Treasury sends them money to keep them solvent through the front door, they can continue paying dividends to their investors out the backdoor. Well, the Democrats and Republicans just love them too much. No surprise though -- they donate handsomely to their campaigns and the politicans can support them under the cover of trying to keep housing affordable. Right, housing was so affordable when prices were increasing exponentially. Well, maybe after another 30% to 40% drop, it will finally become affordable. Of course Fannie and Freddie will be doing everything in their powers to stop that.

After the Paul campaign started winding down for me in January, I realized how much all this economic knowledge was useful for investing. This influenced my decision to short and buy Jan 09 PUTs (bets that the price will drop) on Fannie and Freddie in Febuary. I later closed most of these positions just before the bailout was announced. During this period, Fannie's stock went from $28.70 to $8.55 and Freddie from $26.61 to $6.83.

The principles of Austrian economics predicted how this asset bubble would play out (the asset prices would eventually drop and the most leveraged participants would become insolvent) and the principles of Keynesian economics predicted what the Federal government would do about it (bailouts for the GSEs and the banks). Anybody who says that Austrian economics isn't practical surely didn't consider its application for investing. Of course timing is also critical. Austrian economics predicts what will happen but it doesn't make claims about the timeline.

I'd much prefer that we had sound money based on gold and I could invest in productive companies that create value for the economy and provide dividends to their investors. But since this government has taken that option away from me and continues to erode the value of the dollar through inflation, my only alternative is to make money by exploiting these bad policies. My one big fear though is that the entire financial market self-destructs and the dollar crashes with it. I think there's around a 10% chance of that happening. In that event, we're all going to be poor. In that scenario, I just hope I have enough gold, water, and food to weather that storm and come out the other side with enough to invest in the new economy that emerges from the ashes.

Greenspan: a fool for the ages

Greenspan in 2005:

A national bubble is unlikely because the U.S. real estate market is composed of individual regions with different pricing trends, making a collapse that damages the overall economy unlikely, Greenspan said. Home purchases and sales also have high transaction costs, making it hard to speculate, and most people buy homes to live in, he said.

There is ``considerable unlikelihood of a major decline'' in prices because that's ``very rare'' in the U.S., Greenspan said.

``Even if there are declines in prices, the significant run- up to date has so increased equity in homes that only those who have purchased just before prices literally go down are going to have problems,'' he said.

Greenspan in 2008:

The former chairman of the Federal Reserve, Alan Greenspan, said falling home prices in America are "nowhere near the bottom" and the resulting market turmoil isn't showing signs of abating.

It's amazing that anybody listens to this fool. His policies of bailing out the banks after the Internet bubble crash were the single biggest contributor to creating the housing bubble. It's not just Greenspan that is at fault though. The entire system is broken and always will be as long as a private banking cartel sets the cost of money (interest rates) instead of letting the free market do it. Things can only get worse from here with Bernanke in charge who was a very influential figure in the banking system during the times of these disastrous policies.