Monthly Archives: October 2011

Stop Blaming the Fed

Here’s an interesting point of agreement between the Tea Party and the Occupy movement – both sides want to end the Fed.  The left hates banks and the right hates government intervention, but neither side can present a realistic alternative.  Returning to the gold standard is a fantasy.  As long as we have a fiat currency, we need a central bank to manage it.  England has one, and so do China and Europe.

The Fed’s only job is to manage the money supply, with attention to exchange rates, inflation, and unemployment.  That’s difficult enough.  History will show that Chairman Bernanke averted a depression through correct application of quantitative easing.  Now he is forcing banks to lend, and reducing mortgage rates.  This is good monetary policy.  The problems have come from fiscal policy, for which Congress is responsible.

The movement’s main concern is that moneyed interests have corrupted our leaders in Washington.  That seems like a pretty good argument for keeping the Fed independent, and free from political interference.

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Filed under Finance

Demagogue This!

Demagogue is a good old word, going all the way back to classical Greek politics.  A demagogue is someone who appeals to the ignorance of a mob, and stokes their prejudice with easy answers.  Adolf Hitler was an ace demagogue, as was Julius Caesar.  In America, demagoguery has grown into an art form, and the word has become a verb – as in, “this is no time to demagogue.”

When Al Sharpton shows up, you know you are being demagogued.  It is then time to look around and see if you are part of an ignorant mob.  Regarding the Occupy Wall Street movement, only Herman Cain has had the fortitude to call bullshit.

Even President Obama has kowtowed, “Oh, I understand their frustration.”  The man whose policies contributed most to the economic dislocation of millions, Obama is only too glad to see young people marching against something – anything – but himself.

Leadership involves finding a parade and getting in front of it.

A true leader does not follow Naisbitt’s quip about finding a parade.  The President of the United States should not be seen climbing onto a bandwagon.  If the movement has credible aims, as did the civil rights movement, then that should lead to political action.  If not, the President must condemn it, and send them home.

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Filed under Civil Rights

Stop Blaming Banks

Before any reforms, there must be an accurate diagnosis of what caused the banking crisis.  It was the housing bubble, and there is plenty of blame to go around.

Long ago, Congress decided to promote home ownership (out of all proportion to home ownership in, say, Europe).  They made mortgage interest tax-deductible, which is basically a subsidy to mortgage lenders, and for good measure they created – not one, but two – taxpayer-backed mortgage lenders, FNMA and FRMC.  More recently, Congress started pressuring lenders to lower their credit standards and make mortgages available to ever-riskier borrowers.

Contrary to popular belief, banks are not in business to make bad loans and collect foreclosed property.  They lose a ton of money when that happens.  That’s why all the hassle about credit scores and loan-to-value ratios.  Mortgage originators, on the other hand, don’t care what happens after the sale closes.  The housing bubble produced many fast-buck brokers, but these are not the legendary fat cat bankers.  They are small-time crooks.

Most of the people now having problems with their mortgage payments are presumably honest people who have had some setback.  Many, however, were complicit in foisting bad loans onto the mortgage lenders.  They may have lied about their financial status, or accepted terms that they knew were untenable.  No one should have accepted negative amortization, for instance – borrowers or lenders.

When housing prices stopped going up, the dodgy loans became bad loans and the bad loans choked off the liquidity in the banking system.   Banks must borrow from other banks to survive and, after AIG failed, the interbank loans started to dry up.  Everyone knew that there was a huge exposure to bad debt but, because the mortgages had been securitized and resold, no one knew for sure who was holding it.

So, the bubble burst.  The cascading effect of counterparty risk and vanishing liquidity was exactly like a bank run – those depression-era photos of people lining up outside the banks, only to discover that their savings are gone.  The Federal Reserve had to step in and provide cash, and the FDIC did the hard work of unwinding hundred of banks that weren’t “too big to fail.”  To those that were, the Treasury made the infamous TARP loans.  Otherwise, the financial system would have collapsed – in America and probably around the world.

Avoiding “too big to fail,” in the future, is certainly a good policy goal.  So are bringing back Glass-Steagall, and making Sheila Bair the Treasury Secretary.  The mortgage interest deduction should be scrapped, and Ms. Bair should unwind FNMA and FRMC.  Punitive action against the banks, though – like Dodd-Frank – will simply push one more industry out of America and into China.

Reposted from Occupy Wall Street forum

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Filed under Justice

Occupy Congress

The most important and durable achievement of the movement would be the birth of one or more new political parties.  Americans have puzzled over the movement’s composition and goals.  In Europe, they would be easily recognized as Greens and Socialists.  This group never expected the Republicans to serve their agenda, and now they feel betrayed by the Democrats.  The obvious thing to do is to form a new party.  Two years ago, Jeremiah wrote that the biggest threat to American democracy was the phony dichotomy between Dems and Republicans.

The honest ones should come out of the closet and form a Socialist party.  Since they are ascendant, they can afford to be gracious and leave the “Democrat” brand to the Blue Dogs.

As a centrist, Jeremiah would not vote for the new party, but its existence might liberate him to vote for a reconstituted Democratic Party.  Right now, the protesters are certainly wondering how to effect a “revolution” without necessarily destroying the institutions of American democracy. A new party would do it.  Even if it wins only a few seats in Congress, it would change the system forever.

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Filed under Center Field