As an informal spectator of the finance industry, I had whittled things down enough to make myself happy.  I blamed two fundamental causes for all of this:

1. Artificially low interest rates set by the FED.  More people purchased homes than had the means to.
2. Rating agencies over-rating the hugely risky financial instruments employed by the big investment banks.  Overconfidence led to risk leaking into places it didn’t belong — insurance policies, pensions and the like.

Others site greed, speculation or lack of regulation.  Some blame capitalism itself.  I concede that there are many ways to skin this cat.  One can probably remove only a couple of the many factors cited by just about everyone and successfully avoid a spectacle of this magnitude.  But I like simplicity and I like freedom.  I believe in capitalism.

Recently I came across a post on the Freakonomics blog that teases with the intro “Too Big to Fail” wasn’t the problem.  OK…  Happily, I clicked through to Russell Roberts’ excellent article entitled Gambling with Other People’s Money: How Perverted Incentives Caused the Financial Crisis.  This is, to date, the best article I have read on the financial crisis and I have adjusted my outlook accordingly.

The executive summary gets to the point:

“In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.”

Now I’m paying attention.  The summary continues:

“In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.”

Preach it, brother!  The well-cited piece continues to explore the housing market, sub-prime lending, Fannie, Freddie and or course our friends, the investment banks.  The meat of the paper deals with how exactly Wall Street was able to wind up 30-, 40, 50- and even 60-1 leverage and not even blink an eye — by using your money.  Roberts says it best:

“If you don’t know who the sucker is at the table, it’s probably you.  We are the suckers.  And most of us didn’t even know we were sitting at the table.”

Zing.  He provides numerous accounts of government bailouts which made creditors whole (or nearly whole) but wiped out equity holders.  In the sub-prime mortgage debacle, the creditors – big Wall Street banks, were mostly made whole.  The equity holders (most consumers and, later on, the taxpayer) got the very large bill.  With only a cursory look at the relationship between the government and big business during the last two decades, it’s clear that big investment banks and their cronies have very little to worry about.  This freedom to play with our money no matter the outcome was the prime cause of the financial crisis.  And we’re perpetuated the problem by doing exactly what they hoped we’d do — bail them out.

What about the executives?  Surely they have a stake at the table.  Not exactly…

“The worst that could happen to [Jimmy] Cayne in the collapse of Bear Stearns, his downside risk, was a stock wipeout, which would leave him with a mere half a billion dollars gained from his prudent selling of shares of Bear Stearns and the judicious investment of the cash part of his compensation.  Not surprisingly, Cayne didn’t put all his eggs in one basket. He left himself a healthy nest egg outside of Bear Stearns.” (Emphasis mine)

“Richard Fuld did the same thing. He lost a billion dollars of paper wealth, but he retained over $500 million, the value of the Lehman stock he sold between 2003 and 2008. Like Cayne, he surely would have preferred to be worth $1.5 billion instead of a mere half a billion, but his downside risk was still small.”

So while there is risk inherent in the system, it’s not enough to stave off bad business when there is no possibility of bankruptcy.

The rating agencies had their hand in the till, too.  As the Wall Street firms bundled up mortgages and sold them off as CDOs, various rating agencies were engaged to put a risk value on these securities.  In order to make things look more attractive, these mortgage-backed securities are divided up into tranches (French for “slices”) and rated separately.  The least risky slices — the senior tranches — command a AAA rating and so on down the line.  One might think that an investment bank paying for higher ratings would be front page news, but alas, not so much.

“The problem with these explanations is that most investors knew that the issuers were paying the agencies. They also knew that these assets were extremely complex and that the agencies may have lacked the expertise needed to analyze the assets correctly. They took the ratings with many grains of salt. The commercial banks bought the assets, not because they trusted the agencies, but because they could leverage them under the new regulations. The investment banks bought the assets because they were highly profitable and easy to borrow against.

“The lower capital requirements for AAA- and AA-rated securities helped fuel the demand for sub-prime mortgage-backed securities and helped create the crisis. But just because your car can go 120 miles per hour doesn’t mean you’ll choose to go that fast. Why would a firm want to take advantage of this deregulation and put itself at risk of bankruptcy? And how would a firm be able to take advantage of this looser capital requirement? Why would anyone lend them the money?

There are other consequences, too.  The money that drove the housing craze in the 1990s and 2000s necessarily kept funding away from other areas of the economy:

“…And a few trillion dollars flowed from the Chinese and my father and other investors into new houses and bigger houses because the Fannie and Freddie conduit offered such an attractive mix of risk and reward. That flow of money was terribly costly: channeling precious capital into housing meant it didn’t flow into other areas that were more valuable but that were artificially made less attractive. So we got more and bigger houses and less of something else—less money going to fund new medical devices, cars that get better gas mileage, more creative entertainment, or something else creative people could have done with more capital.”

Russel concludes that the system is far too complex to regulate in any meaningful way.  Wall Street is far from unregulated today and still we found ourselves in this mess.  He sums it up thusly:

“Instead of trying to improve a system we only imperfectly understand, we would have better luck letting the natural restraints of capitalism reemerge. Rather than trying to turn this dial or push that lever the optimal amount (holding everything else constant, somehow), we should let natural feedback loops reemerge that encourage prudence as well as risk taking.”

I’ve given only cursory service to the article here so I really recommend reading it in full.  If the original publication is a bit hard to focus on, try the printable version or the PDF.

Now most teens are pinheads in some ways. But here the blame falls primarily on the parents of the girl, who obviously have little control over her or even over Britney Spears. Look at the way she behaves.

I wonder, then, what Mr. O’Reilly thinks about 17-year-old Bristol Palin’s bun in the oven? Her mother, the Republican nominee for Vice President of the United States, ostensibly does everything “right” — she’s pro family, pro-life and a strong supporter of abstinence-only education in our schools.

Maybe permissive parenting isn’t always to blame. Maybe teaching abstinence as the only choice fails to educate human teens who will eventually get into situations that are hard to resist.

I will give credit where credit is due. Bristol is keeping her child and while I may disagree with Sarah Palin’s socially conservative agenda, at least she’s not a hypocrite.

Part of the reason for this is situational. While it’s easy to lump all Washington politicians together, there are some pretty important philosophical distinctions at work. Differences in core economic and social thinking prevent lawmakers from finding a suitable mutual starting point. The first step to a cure is admitting there’s a problem, and we’ve beat that one to death. We know it’s broken, we know it has to be fixed, but let’s define what we want before we define how we’re going to get it.

So what do we want? Is health care too expensive? Too unavailable? Are not enough Americans covered? How many should be covered? Are we entitled to have routine checkups paid for out of public coffers? Are poor people entitled to the same care as rich people? Do we have a right to free health care? If not, should it be tax deductible? Why should Joe get a great PPO for he and his family while Fred gets an entry-level HMO for himself and the option to pay out of pocket for coverage for his wife and two children? Should gay couples in committed relationships have family coverage made available to them just like heterosexual couples? How about hetero life partners or cohabitant unmarried parents?

We can’t even begin to work on a solution until these questions are well on their way to being answered. And here is where the compromise will have to come in. There’s a damn good chance that we’ll screw the whole thing up again just trying to arrive in the middle. But we need to define the problem first.

I generally consider myself a Libertarian so I’d love nothing more than to see the free market at work here. The health care industry is far too regulated to say that we’ve given this an honest try. We’ve protected big pharma from cross-border competition to the detriment of just about everyone, and the FDA prevents common, safe drugs from being dispensed without a costly doctor visit in which the patient may or may not even see an MD.

But the Liberal in me tends to think that in this day and age there ought to be some way of taking care of the citizenry to the extent that a doctor visit is neither a complete hassle or a huge expense. But the Liberal in me isn’t Liberal enough to admit that every American has the right to free health care, no questions asked. Sure we have the unalienable right to life, liberty and the pursuit of happiness, but when did the land of opportunity become the land of guarantees or the land of handouts? At what point does entitlement for the truly needy turn into redistribution of wealth on an unfair scale? Is redistribution of wealth fair because those who cannot should be entitled to the fruits of those who can? At what point does this become Communism?

But I digress. I’d love to hear some opinions on this so comment away!

If our country ran like it was intended, the state gubernatorial election would be as (or more) important than the national election. Alas, it isn’t; so a lot of people just don’t care who’s at the helm in Tallahassee. We should care, so I’m hoping to spur a little reading with this post, maybe even some discussion.

The most difficult thing for me is always finding objective information about each candidate. Political ads have degraded to cheap slander. Candidates’ web sites can be a source of information, but you have to be able to see through the empty rhetoric. Local news is decent from time to time, if they can cease the dramatization of every little matter for a moment. The Sun-Sentinel has a pretty readable section on the race. That same article also has individual sections on the Democratic front-runners as well as the Republican ones.

I’m still looking for a good side-by-side, issue-by-issue rundown from some nonpartisan source. A friend suggested realpolitics.com but considering the source, I don’t think that was what he was intending. Anyone have a good comparison site for state officials?

“…the President is not going to get on the slippery slope of taking something that is living and making it dead for the purpose of research.”

No, no, that would be a tragedy. But taking living things and making them dead in the name of world politics is a completely noble cause. Jackass.

During the 2004 campaign season, I became aware of a group called the Project for the New American Century, or PNAC. This group, made up of just about every Bush croney in the White House and nearby, states “that American leadership is good both for America and for the world; and that such leadership requires military strength, diplomatic energy and commitment to moral principle.” Sounds a little fishy, but it gets better. Casual perusal of the site uncovers the tenets of PNAC which include:

• Military increases
• Stronger ties to allies (do we still have any?) and stronger threats toward enemies (used to be able to count those on one hand)
• Promoting the cause of freedom abroad (presumably through war, see the first bullet (no pun) point)
• America (not NATO, not the UN, not Western Civilization) is unique in its ability to rule the world

I strongly recommend reading the PNAC Statement of Principles which goes into more detail and also lists the members (Bush, Cheney, Rumsfeld, Wolfowitz, just to name a few).

Folks, this group scares me to death. They outright state that their goal is to build military might and take over the world! Anyone see a problem with this? Is the reasoning behind our meddling in the Middle East becoming more apparent now?

If the last 3 years have shown us anything, it’s that PNAC is incapable of doing good. The Middle East is just one little section of their plan, and it’s failed miserably. Imagine what might happen if they get their tentacles into other parts of the world. Sheer disaster.

Please do your political duty and get familiarized with this group, so that you see what the White House is up to. Many decisions made after 9/11 will become clear when you realize the motives of the people we’ve elected.

For a more thorough assessment of PNAC, read Miles Wooley’s recent article on LewRockwell.com.