Saturday, March 28, 2009

getting my groove back: my next post

Whew! That last post took a lot out of me. What was I thinking biting off the housing crisis? 70 years of government malfeasance there, and somehow I thought I'd knock it out in a single little essay. Not only did my "road to hell" post grow so long that I had to break it up into two parts (for my readers of small attention spans, you know who you are), it also involved some actual research, the gathering of information, fact checking, not to mention the construction of some fairly compelling imagery. (Loyal readers will be happy to learn that I haven't heard anything from McDonalds' lawyers. Yet.) So I approach my next post somewhat enervated, perhaps in need of topic less fact-intensive, more opinion related. (I never feel compelled to check my opinions for accuracy.) Or maybe what I need is an easy target....

I suppose I could address the Democrats and their plan to nationalize the economy. But while making fun of leftist principles is easy, it's too much like criticizing an obnoxious 6-year-old’s coloring. Even when the kid stomps his feet and threatens to hold his breath if we do not immediately hang his latest masterpiece on the refrigerator, it's just no fun to tell him he didn't stay inside the lines, or to point out that grass is not orange. Admittedly, ridicule is easier when there are college professors praising the artistry and genius of the latest page ripped from his coloring book, especially when the kid's pictures cover every wall, are clogging the plumbing, and create a fire hazard. All the while, the little brat is calling you a racist, or a sexist, or big dumb poopyhead because you can't tell whether the picture you're looking at is a stunted yellow flower or the sun wearing green pants.... I digress.

My point is this: when I hear an idea like Cap 'n' Trade, I feel like the joke has already been set-up and the punch line delivered. Emissions Trading enforced by a global, quasi-governmental, tax-imposing carbon-hunting bureaucracy that will ensure you put a cork in it until you pay someone else to license you to be his emitter-by-proxy. What can I add to that, other than LOL and an eyeroll smiley? (you probably didn't see it, but An Inconvenient Truth was actually narrated by a fat, flatulent, effeminate clown running in circles tooting a horn. Amusing, but I really don't recommend it.) In any event, to ridicule Cap 'n' Trade just seems too easy. And it's been done to death--brilliantly, I might add. (see my previous post, "Kyoto is cool.")

I must give the matter some thought.....

Monday, March 23, 2009

The road to hell is paved with good intentions . . . if by hell you mean total economic meltdown. Parts I & II.

Part I

I've had a lot of fun ridiculing social conservatives and leftists in my previous posts. In the spirit of fairness, I'd like to take a moment to tell a joke at the expense of all those hopeless political vagabonds who think like I do.

How many Libertarians does it take to screw in a light bulb? None. The market will take care of it.

Yeah, guys like me are always railing against the government. The government taxes me too much. The government destroyed health care. The government ruined education. The government spent too much money freeing a country that didn't really deserve it. I apologize to all my friends and acquaintances who have had to sit through one of my libertarian rants. I just can't help it. It’s like a super power: the uncanny ability to trace any societal malady back to some action of government. (I also have the power to extract sexual innuendo from any sentence containing a direct object, and it's by far the more useful of the two.) But sometimes they screw something up so thoroughly and so obviously (that's what she said), you don't need tights and a cape to see it. And, invariably, it begins with the best of intentions.

Take housing for instance. All government wanted was to allow more people to buy a home. (As you can see, I like to anthropomorphize government.) To that end, Fannie Mae was created as a part of the New Deal, and Freddie came along 1970. These untaxed “government sponsored entities” (GSE) paid their politically selected officers millions of dollars and made exorbitant political donations to the--mostly democrat--members of congress who were responsible for their continued funding and existence. Few cared that the reflexive quid pro quo created from this relationship encouraged rampant corruption (more on this later). What mattered to everyone is that government’s intentions were good: if a home buyer could show that he was able to afford a reasonable mortgage and could drop a 20% down payment, the government would ensure that his mortgage would be funded, using money government had taken from everyone else. (For purposes of this post only, when you mentally picture my anthropomorphized government, it should look like Grimace, the large purple mutant shake fiend from McDonald’s commercials; skipping through an idyllic McDonaldland, obliviously crushing the other denizens beneath his huge feet. Hereafter, you can go back to picturing government as a larger, more bloated version of Rosie O’Donnell.).

But what if you can’t convince your bank that you can afford to repay a home loan?

The Community Reinvestment Act (CRA) signed by President Jimmy Carter in 1977 forced banks to lend to borrowers who were not good credit risks. The CRA was a law perfectly crafted to advance the government's benevolent desire to make it easier to buy a home. Yet for almost 20 years the act wasn't really enforced. Why? It has been posited that executive-branch grunts tasked with CRA’s implementation simply chose not to do so, perhaps realizing how ill-advised it is to force banks to lend money to people who can’t pay the money back. But I think the reason is more likely that making loans to people who can’t repay them hadn’t been properly incentivized yet. In other words, there was no way to make a bad loan profitable, so lenders avoided doing so.

Hello President Clinton.

In an approach to loans described by then HUD Secretary Andrew Cuomo as race motivated “affirmative action,” the Clinton administration in the mid-nineties imposed high-risk minority loan quotas upon lending institutions. The Clinton administration then led the 800 pound GSE gorillas into the subprime mortgage market to “benefit lower income families” who otherwise could not obtain loans. Of course, the reason low-income folks used to have trouble getting a home loan was because there was a higher-than-acceptable probability that they could not pay it back. But now such loans had the imprimatur of the government treasury, and their value was therefore so far beyond question that they could be bundled--often with less-risky loans--to back securities traded on Wall Street. And the more such loans that could be handed out, the more of the mortgage backed securities could be produced. And all of a sudden there was money to be made on risky loans.

Around this time, the Clinton administration began to support lawsuits brought against lending institutions under the CRA. These lawsuits were settled for billions of dollars. But more importantly, lenders were terrorized by extortionist tactics of groups—like the infamous ACORN—seeking to prove that lenders were not complying with the CRA. And compliance with the CRA could be accomplished only one way: more risky loans.

Every externality was now driving lenders to make as many loans to as many poor credit risks as possible. But lenders weren’t feeling the deleterious effects of the bad loans. Why? Because everyone and anyone could get a home loan, causing demand for homes to shoot through the roof. Don’t believe me? Click below.

Look at the right side of the chart. From 1997 to 2007, there was such a steep increase in home values, it didn’t matter that one guy might default on his loan. Sure, the lender might be stuck foreclosing on a house, but he knows that someone else will buy the house tomorrow, when the damn thing will be worth thousands more. Besides, why would a mortgagee let his house get foreclosed when he can sell it himself for twice what he paid; or, rather, twice what the bank loaned him to pay for it?

This is when things really went crazy. When banks rely on housing prices in an eternal upswing, they can offer ridiculous things like no-down-payment loans, interest-only loans, adjustable rates, and loans to people with no income. Banks around this time would sooner have refused your kid a lollipop than turn down your loan application. And why would they? Let’s say I ask for a loan of 100,000 dollars to buy a 100,000 dollar house on whatever terms they were advertising that day. There is no need to check my income or credit history; if I default, the bank is left with a 100,000 dollar asset that will simply accrue value at an astronomical rate until they sell it again. And as long as every lender in town is looking to finance the next buyer, it can go on like that indefinitely. The lender can also rely on my built-in incentives not to default that arise out of the fact that my home will be worth more and more money as the years progress. And they get to count my subprime loan on their CRA compliance stat sheets.

This is approximately where we were when George W. Bush took his place on his father’s throne.

Part II

George W. Bush called his brand of governance “compassionate conservatism,” and, like the name implies, he had the best of intentions. That doesn’t make his administration an aberration, since most presidents take office with good intentions. LBJ intended to end poverty in America. Nixon wanted to keep the world safe for America. Carter wanted to keep the world safe from America. And even though Bill Clinton probably regarded the presidency as no more than a vehicle to having semi-consensual, quasi-sexual relations with some rather plain women, feminists are certain that his intentions were good. But Bush the Younger’s policy of using government resources to increase home ownership in poor and minority areas might seem peculiar because it seemed to stand in contrast to the principles of conservatism he championed. It was not.

If you have perused the rest of my blog you might remember that I once complained (well, more than once. if you read my blog, you know that I complain about something or other in every post. It’s sort of a theme.) that conservative principles only seem to remove government from your life if you work hard and raise a decent family. The Bush policy on low-income home loans was probably an extension of that principle, in that he believed owning a home ought to make poor folks settle down and work hard to stay out of foreclosure. Home ownership might even—-as the New York Times posited on December 20, 2008, without hint of sarcasm—-turn low income minorities into Republicans . . . . apparently because gaining a sense of responsibility and a willingness to work hard will make even the poor unfit for the Democrat party. (Don’t blame me for trafficking in these lurid stereotypes, blame those right-wingers at the New York Times.)

Whatever the reason, Bush wanted low income folks buying homes whether or not they could afford them. New housing developments rose with much fanfare--even personal visits from the president--in “blighted” areas, where home buyers of every income and race were eligible for taxpayer funded down-payments with adjustable rate mortgages. Unfortunately, incomes could not keep up with the astronomical rate at which housing prices were climbing. This--coupled with all the stupid policies preceding Bush that were still in place--led to more risky lending behavior in order to drive more sales, which pushed housing prices even higher, meaning even fewer people could afford new mortgages, causing more risky lending behavior, leading to higher housing prices, then fewer qualified buyers, followed by more risky loans, ad infinitum. Actually, not infinitum. More like about 11 years.

That's about when the adjustable rates went up, and some interest-only payments became bloated-interest-plus-principle payments. And then houses began to go into foreclosure. These were mostly the houses bought by people who couldn't afford them to begin with. If your income is high enough to take a real mortgage, why would you accept and ARM or an interest only mortgage? You might as well take a rent-to-own, or a payday-loan, or pawn something.

All of a sudden, there was an excess of homes on the market, and housing prices dropped. Without a large down payment, there was no stake to keep the more-recent buyers in their homes, especially the flippers and speculators. Many simply accepted foreclosure over making payments on a depreciated asset. Excess became glut, and the bottom fell out of the market. All those mortgage backed securities lost their value, Fannie and Freddie fell apart, and it's brother-can-you-spare-a-dime all over the place.

Bush apologists are quick to point out that he saw that Fannie and Freddie were ripe for disaster in 2002. They say he tried to do something about it several times, only to be rebuffed by the Democrats in the House of Representatives. And it's true that Barney Frank and the rest of the pimps on the House Financial Services Committee bear the blame for the collapse of the GSE's. Even the New York Times recognized Bush's prescience and lack of culpability in the hit piece it put together to blame everything else on him. But if Bush saw the underlying problem, why did his administration continue to push home ownership on anyone who could grip a pen?

"We absolutely wanted to increase homeownership,” Bush says. “But we never wanted lenders to make bad decisions.” Well if Fannie and Freddie were in the kind of shape his administration warned, then what other kind of decisions are there? None. Bush, like Clinton, pushed lenders over the edge. He can't say now that he didnt think they'd fall.

But I guess we shouldn't blame him. I mean, his intentions were good.

Friday, March 13, 2009

Sunday, March 8, 2009

Obama and the income tax

The time has come to talk about the policies of Barack Hussein Obama. It can be a tricky thing, criticizing our new president, and I feel like a scamp just typing his full name. Of course, we all know that since the inauguration the wall has fallen, and the name taboo is no more. Still, just uttering those magical syllables really had the Chief Justice rattled, didn’t it? Well, rattled or not, I will be choosing my words more carefully than John Roberts did. And I won’t allow Obama to interrupt me.

Now I don’t want this post to be a complete splenetic diatribe against the president. That sort of thing has been done before by people who have sharper pens and more animus against Obama than I do. Besides, no one wants to read page after page of personal invective. Personal attacks are cheap and classless, and they accomplish nothing. So I’ll confine them to the single paragraph that follows.

You see, I just don’t get the whole Obama mystique. What is the allure? When I look at him I see an empty suit pseudo-intellectual who somehow rose to prominence on a platform of reform in the most corrupt political machine since Tammany Hall, and he did it by . . . organizing the community? What the hell does that mean? To me it means that he became a senator despite having accomplished nothing more impressive in life than somehow getting into Harvard Law School with a GPA under 3.3. How far under 3.3? No one knows, because his transcripts are apparently documents of import to national security not fit for public consumption. (Maybe that’s what has embittered me. If only I could suppress my high school transcripts, maybe I could be president, too. . . I mean, if I were also over 35 years of age....shut up.) It’s clear that Obama has risen to prominence swaggering from one sinecure to another. Along the way the people who hold his strings have put some nice copy on his teleprompter, and he’s managed to read it pretty well. But he’s still just a socialist metro-sexual incapable of a creative thought, gift-wrapped by his handlers into an attractive package. And they did a fine job, too, except they probably should have taped the ears down a little better.

Okay, I'm done.

But my real problems with the President is his fantasy that he can pay for his socialist utopia—or, as he likes to call it, hope 'n' change—with an income tax on the rich. What he fails—or refuses—to understand is that, even if it were a morally justifiable or economically feasible for the government to take money from the rich at the point of a gun to pay for his welfare state, he cannot get at a rich person’s money using an income tax. No, an income tax can only confiscate money belonging to people trying to become rich; the indolent rich are spared.

Consider a doctor fresh off of her residency who just landed a three hundred thousand dollar a year job to go along with her two hundred thousand dollars of debt. Inarguably, the income tax is a wonderfully effective method for the seizure of her money. Now consider a divorcee’ fresh out of marriage with three hundred million dollars and no job. (If you have three hundred million, why work?) The income tax can't touch her assets.

Now, which of these two women is rich? And which woman will feel the effects of Obama’s "tax on the rich"?

Warren Buffet falls into the same category as our imaginary divorcee’: rich and, for all relevant intents and purposes, unemployed. He is, in fact, one of the world’s richest people, yet, compared to his lifestyle and reputation, he has admitted that he has little of what the IRS would call “income.” (Incidentally, Buffet proudly voted for Obama, but since the Republican candidate was John McCain, it’s hard to blame him). Instead, Buffet lives very comfortably on his capital gains, stock dividends, and the huge pile of cash upon which he rolls around naked every night. Warren Buffet may be rich, but he is not a potential target of the income tax.

Consider again the stinking rich doctor I hypothesized in a previous paragraph. She lives off the money she receives in trade for the value of the work she does, or what her accountant might call her income. She pays her huge student loans, her exorbitant mortgage, her kids’ college fund, and her spendthrift husband’s credit card bills out of the portion of her income the government didn’t confiscate. And I suppose it serves her right after she put herself through medical school on the backs of the poor. More importantly, she is the “rich” Obama’s tax plan intends to soak.

Buffet commented indirectly on this paradox when he lamented the fact that his secretary pays a higher tax rate than he. And she does. Why? Because his secretary, the doctor I invented, my barber,and everyone else in the universe who pays an income tax has their “contribution” calculated based not on the assets they have, but on the money they receive for the work they do. The more productive you and I are, the more we are charged for the privilege of plying our respective trades. One of the great things about plying one’s trade in the United States is that it can make us rich. But Obama’s plan does not tax the rich; it taxes people trying hard to become rich.

Obviously, by removing more and more of what we earn, an income tax makes becoming rich a whole lot harder. This is bad for you greedy bastards that want to be rich, but it's possibly worse for the economy as a whole; quite literally, an income tax punishes productivity, and therefore discourages it. Not to sound too erudite/full of myself here, but a high national income tax represents a government policy to discourage productivity directly proportional to the rate of the tax. (I would address the effects of the tax on capital gains that Warren Buffet does get to pay, but I don’t want to remind the Obama puppeteers that he promised to raise that one to over 30%. Not only that, it’s a really boring subject. Frankly, I’ve never attempted a capital gains tax smirk-jerker, and I’m not sure I could pull it off without an emoticon or a rim-shot. I’m pretty sure the best I could do is snarky sarcasm.)

Yet we hang a halo of selfless patriotism over the heads of those luminaries—like Warren Buffet, George Lucas, George Soros, Bruce Springsteen, et cetera and ad nauseum—brave enough to support Obama’s income tax hikes. And what do those people have in common? They are already filthy rich. Obama could impose a 100% tax tomorrow and these paragons of altruism could continue living like kings until the country collapses around them—as it surely would.

If Obama wants to implement a confiscatory income tax, he has the majorities in congress to do so. But don't fall for the tax-on-the-rich line he has been tossing around. Rich or poor, the income tax is a tax on productivity, and it is only paid by those who choose to be productive, whatever the state of their portfolio.

The question is, at what tax rate do people say, "why bother?"

Friday, March 6, 2009