Monday, February 9, 2009

Economic Stimulus: Obama Vs. Bush

When Bush became president we were in the middle of a recession and the pressure was on him to do something about the lagging economy. Bush presented an economic stimulus plan that had a set of tax rate reductions. John McCain did not vote for this plan because it did not have associated spending cuts with the tax rate reductions. Many people on the Democratic side have derided Bush's Tax Cuts because he did not cut the budget to match his tax plans. I agree he should have also reduced the size of the federal gov't to reduce deficit spending.

Obama has presented us an economic stimulus plan as the first thing he is going to do as president just like Bush. His plan doesn't have tax rate reductions but tax rebates or just plain hand outs to those not paying taxes. But he doesn't cut the spending to pay for his taxes plan. No he has spending increases. Long term spending increases in the billions to 100s of billions that will take years before measurable impacts to our economy are felt. This increase will also bloat the already way too large budget of many useless Gov't agencies that should quite honestly be shut down forever. Once a Gov't agency has a certain size budget it is very difficult to reduce the budget measurably. And if you do then you are looking at layoffs. Try laying off a Gov't employee in the Gov't Union.

Don't even start me on why a Union is needed for Gov't employees in a Democracy. They have the damn vote if they don't like management.

hmmm.... So far I like Bush's actual actions but Obama does give better parties for TV.

Tuesday, February 3, 2009

Why I hate our congress and Senate

I really hate our congress and Senate. I hated them when they were led by Republicans and I hate them more now that they are led by Democrats. To do something important, like stimulate our economy, our great leaders put in multi million dollar projects that had nothing to do with the purpose of the bill. Maybe these projects have value and need to be done. But focus on stimulating the economy and building jobs.

The depths to how unbelievable corrupt this system is astounds me. At one of our countries worst economic moments in time, we have scum of the earth people pushing their own political agenda and calling it economic stimulus. That our "leaders" would use this emergency to spend multiple billions of dollars at a time when we have a trillion dollar budget shortfall that is not completely dedicated to stimulating our economy shows how badly our system is not working for the Good of the common man.

That we do not have the legislation still that gets us off of foreign oil and allows us to drill in the US blows me away. It's borderline criminal that we still do not have a meaningful plan to end our dependency on foreign oil.

Term limits, right now!!!! Term Limits, no more congressional pensions, no more lobbyists! Term limits!!!! term Limits!!!! Term Limits!!!!

Monday, November 10, 2008

Breaking up is good to do.

In software development we have a saying. Fail often and fail early. The idea is that failure is an eventual given. We are going to make mistakes. And the system you use to build your software should be designed to discover them quickly and correct quickly. This significantly reduces the cost of failure and the impact of failure.

In the Pulitzer prize winning Book, "Gun Germs and Steel" the author explores why Western Civilization had all the things it needed to become the dominant power of societies in Australia, New Zealand, Africa, North, Central and South America. Becoming the dominant culture. It came down to the two countries that had access to the grains needed to have large population centers. China and Europe. However, Europe was a set of smaller countries fighting amongst themselves for resources while China was a very large monopoly. At one time China was sailing to the Americas and had an overwhelming naval fleet. One day the emperor decided to burn this fleet and has never recovered from that mistake. If Spain had made that choice then England or France would have made them pay and Spain would have learned from their mistakes and corrected quickly. But it was hundreds of years before China learned from their mistakes.

Now lets look at our Secondary Mortgage industry. Because Fannie May and Freddie Mac were created by Gov't legislation and supported by Gov't legislation they held a monopoly on a $12 trillion dollar industry. Now all institutions, especially if they are large and a monopoly develop group think. This is where they don't have different voices telling them they are wrong. So they start making mistakes. The problem with group think is that you see the world in a very specific way so it is very hard to realize that you are making the mistake. Even when you begin suffering the results of the mistake it is hard to see the root cause. This condition is inevitable for monopolies. So when we set up our Secondary mortgage system we need to create a system that identifies errors quickly, course corrects quickly and when failure occurs it is not devastating. This is why I think we should break up Fannie Mae and Freddie Mac into 20 to 50 smaller institutions. Reduce regulatory controls and let them compete. when one makes a mistake, let it go out of business. This failure is not devastating and others can learn from it. This is the way we avoid bailing them out in the future.

Build a system that fails early and often and significantly reduces the cost of failure. This is why Capitalism and competition is superior to Socialism and monopolies. Monopolies hold out the promise of control and central control. But it's a lie. Because failure will happen and failure in a central controlled system is devastating.

Friday, October 24, 2008

Sub Prime Mortgages, What are they good for.

One of the key things killing this economy is the sub prime mortgages put into securities that come out of our secondary mortgage industry. So what is a sub prime mortgage and why do people want them and why would a mortgage company deal with them.

A sub prime mortgage is a mortgage that has low payments in the first 3 to 5 year but over time the interest rate rises to much higher than the prime interest rate and the loan payments become much higher after 5 years. so why would a person commit to a 20 to 40 year loan knowing that payments will climb over time so that they can not afford it. They do that because their credit rating is bad and the mortgage rate they would normally get would keep them from getting the house they love. So they take this loan to build their credit rating and in 3 to 5 years they refinance their house with their brand new clean credit rating. The intent of sub prime mortgages is for people with low income and poor credit to prove them selves.

so if the loan is much more likely to become default why would a company give the mortgage. Because they believe the value of the house will definitely climb. So if the loan must be foreclosed on in 3 to 5 years then the house will have gone up and therefore they will get their money back and possibly more because the value of the house has gone up. That was certainly true during the housing bubble but now that the bubble has burst, those sub prime mortgages are very scary problems. And that is one of the contributing factors. we have no idea when the house situation will even out and people can figure out what the actual value of those sub prime mortgages are. because if they get foreclosed on, people could lose their shirts on those houses because a foreclosed house is difficult to sell for profit in a bad housing market.

Next time you see Bill Clinton and a Democratic member of the house or Senate be sure and thank them for the 1999 legislation and the 2004 legislation that allowed Fannie Mae and Freddie Mac to include sub prime mortgages in their quotas for low income housing mortgages purchased and for helping them put those mortgages in our securities.

Tuesday, October 21, 2008

The Forgotten Man

America met Joe the Plumber last week. But a pro-market economist writing over a hundred years ago was already familiar with Joe Wurzelbacher and Americans like him -- and understood how they are used and exploited by politicians.

"They are always under the dominion of the superstition of government, and forgetting that a government produces nothing at all, they leave out of sight the first fact to be remembered in all social discussion -- that the state cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it. This latter is the Forgotten Man."

"He Works, He Votes, Generally He Prays - But He Always Pays"

Sumner wrote of the Forgotten Man: "He works, he votes, generally he prays -- but he always pays -- yes, above all, he pays."Joe the Plumber has struck a chord in the closing weeks of this election because he represents the Forgotten Man. When he confronted Sen. Barack Obama on the campaign trail with the question of what would happen to his taxes under an Obama Administration should he realize his dream of owning his own business, Joe cast the decision that faces us in this election in stark relief:

Which will be better for our economy: Politicians redistributing our wealth or growing more wealth?

Tuesday, October 7, 2008

Government, The problem or The Solution?

Ronald Reagen was elected because of a phrase "Government is the problem, not the solution". I believe that this is mostly the case. While the Government is the solution in some cases, Since the 1930s, our federal gov't has become more the problem and less the solution.

Is deregulation really the problem? Lets explore the issue. Our economy is like a human body. Money is the blood and banks are like a bunch of hearts pumping money in and out of the system. A significant amount of money banks take in comes from Securities founded on Mortgages. Banks leverage securities up to 40 times. For every security valued at $1 million they can loan up to $40 million dollars. This keeps the blood moving. Of course, 40 times is crazy. So if 5% of that $1 million is bad, then they should not have loaned out $1,000,000 *.05 * 40 = $2,000,000. Even though the security's value should only be reduced to $950,000, the money they have outstanding that shouldn't be out there is $2,000,000. And then other banks used that $2,000,000 to also create loans. House of cards!!

The 5% number comes from the Governments estimation to the loans in play in securities that they expect to fail. The $700 billion number for the bailout is 5% of the $12 trillion dollar mortgage market.

Where do these securities come from? Fannie Mae and Freddie Mac. They were created to help loan company's have more liquidity so that more people who couldn't afford houses at that time, afford houses. So Fannie Mae buys up loans from loan company's and creates securities which other companies buy because mortgages are usually a very safe bet. The security's value is based on how much the market will pay for it. So it's value is not based on it's actual value just on it's perceived value. When the sub prime mess became public knowledge these securities perceived value went down far lower than 5%.

How did fannie mae come to exist and how does it do it's job --- Government Regulation dedicated to helping people get houses that couldn't afford it.

Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano
's New Deal to provide liquidity to the mortgage market. For the next thirty years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States. In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.[6] Fannie Mae ceased to be the guarantor of government-issued mortgages, and that
responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). In 1995, Fannie Mae began receiving affordable housing credit for buying subprime securities. In 1999, the Clinton administration and Fannie Mae shareholders encouraged the lender to increase the number of mortgage loans offered to those of low and moderate income, both to improve rates of home ownership among those groups and to increase profits.[7]
In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[8]

Fannie Mae and Freddie Mac gave money to many people in Congress. The person who received the second most money is Barack Obama.

So how did we get all these bad loans into securities. There were a lot of reasons but one of them was Government interference. First we have the 1977 Community Reinvestment Act. This act was passed under Jimmy Carter and it said, if you are bank that receives deposits from low income areas, you must also provide housing loans to low income areas. This was the Government telling people who they could make loans to. Now this act is 31 years old and not enough to have created the amount of poison we have in our blood stream. Now we have a set of "Community Organizers" in organizations like ACORN. This is a Federally funded organization that uses the Community Reinvestment Act to intimidate banks along with other intimidation factors to force banks to give more loans to people who normally couldn't get it. There was an attempt in Congress to give money to ACORN in the recent bailout bill. Barack Obama was a Community Organizer for ACORN. ACORN has also been linked to a fair amount of voter fraud.

So is Gov't the problem or the solution? It's is certainly a contributor to the problem. Do we need more Gov't to solve a problem that they helped create? I don't think so!

Monday, October 6, 2008

To regulate or not to regulate

The financial crisis has created a lot of accusations about deregulation. I hear the word unbridled a lot. But lets review the facts. In 2004 and several time before that and after, the Republicans attempted to increase regulation on Fannie May and Freddie Mac and those regulations were defeated primarily by Democrats. In 2007 the democratic controlled congress saw that their support 30 year support of these monstrosities that were created by regulation was going to come around and hurt them so they ended up passing the similiar bills to what the republicans wanted in 2004. However, 2007 was too little too late.

The point here is regulation is neither good nor bad. It depends on the regulation. Republicans have been trying to get rid of bad regulation and bring in good regulation.