The Great Depression of 2008

The Great Depression of 2008
Leeroy F. Dermit
Sep 27, 2008

http://www.leeroyfdermit.com/2008/09/
great-depression-of-2008.html

On issue after issue, every time I dig deeper and think for myself, I discover that government is the cause – not the cure, but if free markets are so great, then how have we come within days of another Great Depression? Is it really about free markets vs. regulation? Is it naked short sellers? How big a factor is consumer and business confidence? Do the media and politicians really understand economics? Could there be economic terrorism afoot?

Conventional Wisdom

The conventional wisdom just doesn’t add up.

The conventional wisdom is that America has been in recession since late 2007, and that the cause is 20 years of Republican deregulation. Deregulation supposedly caused a recession by causing the prices for oil, steel, copper, etc. to soar, by allowing some greedy people to sell loans to some people who couldn’t afford them, and by allowing some people to more easily bet that stocks will go down (naked short sellers).

By August 28th, I had lost 3% of my savings, so how had I lost 53% of my savings by October 10th?

The conventional wisdom is obviously a myth, so we are going to have to look at a lot of facts and think for ourselves.

Free Markets

The argument for deregulation, free markets, competition, etc. is that although problems (both internal and external) can occur at all levels and at all times, for each kind of problem, some competitors will have made the right decisions to survive while those who made the wrong decisions will fail. Failure makes room for new competitors. Also, competitors can learn from past mistakes. Therefore, while every kind of problem big and small can happen once, free markets continually adapt and improve, and thus a future recurrence of that problem is unlikely. Free markets are thus more likely to serve customers best.

Unlike businesses and private organizations, government is a monopoly that forbids competition and forces us to buy its services, and thus government is less accountable and less adaptable than businesses. Therefore, government can afford to be inefficient and can make the same mistakes over and over again. Government is thus more likely to cause a problem than to solve one.

This is a pretty good summary of the argument for free markets.

Liberal Fascists

The argument for regulation may have been best summarized by Mario Palmieri (“The Philosophy of Fascism”, 1936):

Economic initiative cannot be left to the arbitrary decisions of private individual interest. Open competition, if not wisely directed and restricted, actually destroys wealth instead of creating it.

I used to think that regulation was the new form of socialism, but then I read this quote, and now I see that the Democrats are not really socialists – but are fascists. Therefore, we could accurately refer to the Democrats as socialists or as fascists – but let’s not get sidetracked.

American Capitalism

America does not really have free markets (a.k.a. capitalism). We have the second highest business taxes in the world, a ton of regulations, a load of frivolous lawsuits, the Federal Reserve, the IRS, Fannie Mae, Freddie Mac, the Securities Exchange Commission, etc.

The trend is not purely deregulation either. We now have Sarbanes Oxley, a resurgence of The Community Reinvestment Act, etc.

Of course, we do have some scary deregulation too. For example, we now have naked short sellers.

The Community Reinvestment Act

Everybody knows that banks gave loans to people who could not pay them back, and that this supposedly wouldn’t happen in a free market – which is true. However, we don’t have a free market.

The government instituted the community Reinvestment Act which ordered Fannie Mae to encourage banks to give loans to poor people and minorities regardless of credit worthiness – because that is fair, and socialism is fair if it is anything.

Freddie Mac was charged with converting these subprime loans into Mortgage Backed Securities.

Don’t take my word for it. Wikipedia says:

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were "risky mortgages."

What did the Bush Administration do?

In 2003, the Bush Administration recommended that a new Department of the Treasury agency should supervise the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac. Congressional support was approximately split along Party lines and the proposal eventually failed.

What did Obama do? Obama worked with ACORN to train activists to pressure banks to make bad loans. Any bank that wants to expand or merge with another has to show it has complied with CRA – and approval can be held up by complaints filed by groups like ACORN. I got this fact from a very revealing article about Obama/ACORN at: Obama helps ACORN set up Homeowners for Failure.

Clearly, the CRA is an example of increasing regulation (and Democrats) contributing to the current financial crisis.

Fannie Mae

To better understand how the government (not Wall Street) is a major cause at the center of the subprime mess, it is helpful to first understand that Fannie Mae and Freddie Mac are basically an arm of the Democratic party.

Sarbanes-Oxley

Part of the Sarbanes-Oxley regulation (instituted to prevent another Enron) requires the use of Mark-to-Market accounting – even in cases such as those instruments created by government institution Freddie Mac known as Mortgage Backed Securities (perhaps an unintended consequence?). Therefore, MBSs are treated just like stock even though there are real houses with their own market values as collateral for them, and thus at the end of a day, if the market value of those MBSs (not the houses) is too low, then a bank may not have enough money to pay the margin call unless they sell enough assets at a huge loss. In July This happened to Merrill Lynch who had to sell 30.6 billion dollars worth of MBSs for 6 billion. The houses alone were worth 25 billion.

Again, we see that government intervention itself has contributed to the current economic crisis.

The Fed did It

As we all know, Alan Greenspan artificially lowered interest rates in a largely successful (although now temporary) attempt to bring us out of the great Clinton.com crash at the end of the Clinton administration, which of course continued into the Bush administration.

Low rates obviously contributed greatly to the housing bubble. Low rates also increased the supply of dollars through increased borrowing, which thus weakened the dollar.

Again, we see that government intervention itself has contributed to the current economic crisis, and guess what – they’re doing it again!

The Cities did it

Perhaps the other main contributor to the housing bubble (in addition to the Fed) is the rapidly growing trend of local government intervention known as Managed Growth. It takes many forms, but Managed Growth typically is where a city restricts permits for new houses and buys up land along its outskirts to prevent development there too.

Note that cities such as Atlanta, Houston, and Dallas did not employ managed growth and thus continued to have steady housing appreciation consistent with previous decades. Consequently, housing prices in these cities did not fall (except for a little bit very recently).

Again, we see that government intervention itself has contributed to the current economic crisis, and guess what – they’re still doing it!

It’s Confidence Stupid

By all accounts, the overall problem in the market that has suddenly turned the problems of a few banks and home owners into another Great Depression – is a loss of confidence.

Just a few months ago, most businesses were still having record profits, but if consumers and businesses lose confidence and fear a recession, then they will spend less and pay down debt – which will cause a recession!

Markets Succeed where Governments Fail

What did happen was that Russia invaded Georgia, and Obama was utterly powerless to do anything about it. The US government was utterly powerless, and the European Union was just as powerless.

However, another force more powerful than the US Government, the European Union, and even more powerful than Barack Obama … forced Russia to promptly withdraw from Georgia.

In a nutshell, Putin had been acting aggressively, such as flying nuclear bombers to the edge of Alaskan airspace, then he invaded Georgia, and his agression caused foreign investors and businesses to flee Russia. Whereas, the governments of America and Europe failed to influence Russia in the least, market forces brought the conflict to a prompt end.

The conventional wisdom is that government solves problems created by markets, but we now see that markets solve problems created government – such as war.

Conclusion

I know it is hard to stop thinking about those naked short sellers, but the reality is that politicians, government, laws, regulation, etc. are the cause of the current economic crisis. The media and the Democrats call for more government, and no strong voice has countered them, but we now know that government is a problem masquerading as its own cure.

Neither political party has shown the slightest understanding of economics. The Democrats, the media, and Obama blame deregulation, and all John McCain can do is look guilty. I thought he was going to cry at the beginning of the first Presidential debate. PULEEEASE!

I know of precisely ONE politician who understands – Ron Paul.

You won’t hear any of THIS on MSNBC. Does that make Keith Olberman the – WORST PERSON IN THE WORLD? J

Let’s summarize:

The conventional wisdom is that Republicans, free-markets, and deregulation caused the current economic crisis; whereas, the reality is that Democrats, government, and regulation caused the current economic crisis.

1. Alan Greenspan helped cause a housing bubble when he lowered interest rates in a largely successful attempt to bring us out of the crash at the end of the Clinton administration.

2. Managed growth laws by local governments also contributed greatly to the housing bubble.

3. The Community Reinvestment Act caused a proliferation of subprime loans, which implicates Clinton, Obama, ACORN, Fannie Mae, and the whole Democratic Party.

4. The Democratic Party and most of the mainstream media have been working diligently to spread fear and reduce confidence, and fear causes recessionary behavior.

5. The new Sarbanes-Oxley regulations caused the new government mandated Mortgage Backed Securities to be valued at the market price (Mark-to-Market) at the end of each day, which caused banks to go under with little forewarning.

6. The war in Iraq has played a small role, but has reduced confidence in America and the dollar.

7. Markets solve problems, like the Russian invasion of Georgia, where governments are powerless.

The Future

Maybe once the people learn the reality, they will have a greater desire for freedom.

The promise of reality is freedom.