Funny Reagan Quote

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."
-- Ronald Reagan

Road to Sefdom: The Fed and the Henhouse

In an earlier post, I discussed Hayek's The Road to Serfdom. He observed how failures of government are used as excuses to grab more power:

Hayek further argued that the failure of central planning would be perceived by the public as an absence of sufficient power by the state to implement an otherwise good idea. Such a perception would lead the public to vote more power to the state, and would assist the rise to power of a “strong man” perceived to be capable of “getting the job done”.

We see another example of this now with the Treasury Department's proposal to make the Federal Reserve the chief regulatory authority on financial markets. So let's get this straight. The government is largely responsible for this credit collapse and the answer is that we need to give the government more power. The Federal Reserve bears most of the blame of any government agency and so we need to increase its responsibility. Mish does an excellent job making the case for this in his post The Fed and the Henhouse. Here's a taste from the post:

Let's Take a Look at "Timely"

• Housing is imploding.
• There are $500 Trillion in derivatives that no one can possibly understand the financial risks on.
• A huge portion of those derivatives are with JP Morgan (JPM).
• Bear Stearns stock went from $170 to $10 in a year in Shotgun Wedding between Bear Stearns and JP Morgan arranged by the Fed
• Questions Linger Over Lehman's Balance Sheet as Lehman Brothers (LEH) is leveraged 31.7 times.
• Citigroup (C) had to be bailed out by Abu Dhabi Deal Raises Questions About Citigroup's Health
• Merrill Lynch needed $6.6 Billion Bailout From Kuwait, Mizuho.
• Cost of Capital "Ratchets Up" at Citigroup and Merrill
• Morgan Stanley (MS) sold 9.9% of the firm to China after handing out huge bonuses.
• People are walking away from homes
• Businesses Are Advised To Walk Away from agreed upon deals.
• There is an open public debate on Moral Obligations Of Walking Away
• 1 in 10 of the entire state of Ohio is on food stamps.
• Florida, Ohio, and Michigan are in an economic depression.
• There is No market for Asset Backed Commercial Paper (ABCP)
• German Banks Fears Global Meltdown caused by US subprime debt
• There is a $1.1 Trillion HELOC Problem
• Unemployment is poised to soar.
• Commercial real estate is massively overbuilt and poised to plunge.
• Goldman Sachs (GS) is calling for another $460 billion in writedowns.
  
• The SEC Openly Invites Corporations To Lie.

Gee, that sure looks "timely" to me.

Who is to blame for the mess we are in?

And who is to blame? The Fed course, with help of Congress, and the SEC.

Congress passed legislation to create GSEs to foster affordable housing. Now the definition of "affordable" is over $700,000, and calls to reduce the role of the Fannie Mae are now calls to increase the role of Fannie Mae in the wake of the housing crisis. There were 300 some programs to create affordable housing and every program made the situation worse. All those programs really amounted to was handouts to the building industry and banks.

And if Congress would stop wasting money on needless programs the dollar would stop sinking. Of course the government is wasting trillions of dollars trying to be the world's policeman, a role we can no longer afford.

The SEC in its infinitely poor wisdom, decided to give government sponsorship to Moody's, Fitch, and the S&P and this led to extremely risky garbage being rated AAA. I talked about this problem in Time To Break Up The Credit Rating Cartel.

But the Fed deserves the brunt of the blame for micro-managing interest rates like some central planners from the Soviet Union. The Fed does not know how to set the correct price for money (interest rates) any more than it knows how to set the correct price for orange juice. Only free market forces can properly set prices so that economic distortions do not occur.

Unfortunately, every problem Greenspan faced was an excuse to cut interest rates. Even non-problems like the silly Y2K (year 2000) scare was an excuse to cut rates.

When the dotcom bubble collapsed, the Fed slashed interest rates to 1% to get the economy moving again. The housing bubble was the result. Greenspan added more fuel to the fire along the way by openly praising ARMs and derivatives.

Greenspan May 5th 2005: "Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth."

I compared Greenspan to Buffett in Who's Holding The Bag?

Buffett in stark contrast to Greenspan called the explosive use of derivatives an "investment time bomb".

It's perfectly clear now who was right. For those who have not pieced the story together properly, it was fear of a dominoes style chain reaction collapse of Credit Default Swaps starting with Bear Stearns that caused Bernanke to force a shotgun wedding between Bear Stearns and JP Morgan.

So what does the Treasury Department propose? The Orwellian answer of course is to give the Fed still more power to wreak havoc.

I couldn't say it better myself.

HBO: John Adams Miniseries

I started watching the HBO John Adams Miniseries last night. It is totally awesome. Thank you HBO for making this and reminding us about the ideas of liberty and freedom.

Washington Post Explains Leverage

For those who are wondering how the stock of a bank can fall from $60 to $2 in two business days, the Washington Post has an explanation in comic form.

The Rubber Room

This American Life has an amazing episode called Human Resources with a segment on the NYC public school system. When teachers in the NYC public school system break some serious rule or cross the wrong principal, they are assigned to a relocation center, affectionately known as the "Rubber Room." They are assigned there until they have a hearing. It is typical for hearings to take over a year to schedule. So these teachers are basically paid their full salary to come in for 40 hours each week to sit in a room and do absolutely nothing. At any one time, there are typically 700+ teachers assigned to these centers. And many have been there for years.

The stories of these teachers are incredible. One teacher accidentally said the word "shit" in a hallway to another teacher and was accused of "verbal abuse" of students and sent to the rubber room. Another teacher ended up there and was never told the reason why. The rubber room resembles a prison where the teachers segregate themselves by race and territorial fights break out over who has the rights to a certain chair or spot in the room. It's a pretty amazing commentary on the human condition.

Only the government could run a business where they pay tens of millions of dollars each year to employees to come in every day and do absolutely nothing. It a shameless waste of taxpayer money and it just is another small example of why government rarely gets anything right.

Offering $10,000 to Get Bad Teachers to Quit

Critics Hope to Teach Unions a Lesson

BOSTON (AP) — Critics who say unions block education reforms and make it virtually impossible to fire bad teachers will offer 10 instructors it deems the nation's worst $10,000 to quit their careers.

The Center for Union Facts, a Washington-based nonprofit, will launch a campaign Tuesday spending $1 million on ads and a billboard in New York's Times Square. It also says it's starting a Web site with data documenting how far unions go to protect bad teachers.

It's also inviting nominations for a contest to determine the nation's worst unionized teachers. The "winners" will be offered $10,000 each if they permanently resign or retire from any career in education — if they sign a release agreeing to have their name and the reasons for their selection published by the group.

Democracy?

The people don't rule according to Fred Reed.