The Stimulus Resort Town

Politicians like the idea of stimulus spending because it justifies taxing, borrowing, and spending. Spending is always pleasant and gains friends and support. They claim that stimulus spending will make us prosperous because it multiplies wealth in the economy.

The Obama team claimsEasyOpinions: Let's counterfeit our way to wealth that each $100 of government spending creates $150 in new wealth, so everyone wins, and it doesn't matter on what it is spent.

Craig C's comment at Mises.org gives an analogy commonly used to illustrate how stimulus loans or spending multiplies production and trade. I repeat it here, revised.

People start in gridlock. A stimulus loan breaks the gridlock. They resume working and trading, and end up happy. The money involved is a true stimulus; it unlocks the local economy and is paid back. This is a vivid and amazing example. But, it is contrived and unreal, like finding five dominoes ready to fall by pushing just the first one.

Stimulus Story

It is rainy and quiet in a small resort town. It is a tough time. Everyone is in debt and lives on credit.

A government official enters a restaurant, lays a $100 bill on the counter, and tells the owner Frank that it is a stimulus loan.

• Frank takes the $100 and runs to pay his debt to the butcher.
• The butcher pays his debt to the farmer.
• The farmer pays his debt to the supply store.
• The supply store pays its debt for newspaper advertising.
• The newspaper pays its debt to Frank at the restaurant.
• Frank lays the $100 bill back on the counter.

The official smiles at all of the good he has done. He remarks that this is the Keynesian Multiplier in action; $100 in new money promoted $500 in production and trade. He takes back his $100 and leaves town. The town is now without debt and looks optimistically to the future.

That is supposedly how the Stimulus Plan works.

Read more for the reality ...

Reality

I like that story because it sets up a beautiful situation, just so. The government provides a "stimulus", the money flows around, everyone is happy, and it didn't cost anything, like a fairytale.

I like another version even more. Frank writes a bad check for $100. The check goes around the town and comes back to Frank, who tears it up. The check is illegal, but the government stimulus isn't needed. This version supports counterfeiting.

The less amazing, more realistic version of the story goes like this.

Restaurant owner Frank, impractical and desperate, owes everyone in town. He spent his last borrowed dollar rather than sell the restaurant to someone who could run it at a profit. He waits behind the counter for his creditors to call. He doesn't have $100 in the bank to pay the butcher.

Meanwhile, the butcher takes $100 out of his bank account to pay the farmer, and that $100 goes around the town. The newspaper pays Frank $100, and he pays the butcher.

We don't know why the butcher would extend credit to a restaurant with no money in the bank. Soon, Frank declares bankruptcy and sells the restaurant.

The Stimulus Story proposes a group of businesses all doing useful work for each other. They have already produced things and have traded among themselves. They only need to pay their bills. Any one of them can take $100 from his bank account to settle the chain of obligations. Usually, they all take $100 from their accounts to pay their bills.

In reality, a whole town is not caught in the trap of having no cash to exchange while selling to others on credit. A stimulus loan has little or no effect on current business transactions.

The flurry of payments settles $500 in past transactions, which makes it seem like the $100 has multiplied 5 times. It is a distraction from what the stimulus loan actually accomplishes.

The Real Stimulus Effect

The true value of a $100 loan is just the value given to restaurant owner Frank. Frank can buy an extra $100 of goods, pay debts, or save. (Paying debts or saving isn't so bad.)Click/Return to see below why this is not a burden on the economy.

If Frank is going bankrupt, he probably spends his loan, hoping for a miracle. If Frank is not desperate, he pays down his debts or saves the money. He is not going to risk the loan by expanding his business in a poor economy.

Say the money is a grant instead of a loan. Frank is even happier, but this doesn't lead to risky investment. It is his money now, and he doesn't want to lose it.

Government Spending

In a bad economy, people have debt and jobs are uncertain. It is natural for them to pay off their debts. What can a government do to "pump" money into the economy to buy goods for consumption? The government spends the money. (Note) If you must ruin an economy by artificially increasing spending on consumer goods, then government spending is about the only way to do it.
 Government claims this helps the economy. Instead, it pays politicians and supporters, and builds voting support. The claim of helping the economy is a cover story.
 The government must collect more tax from productive people to support these schemes..

It is true that a specific $100 in production may occur from an extra $100 in government spending. But, for every Frank who gets extra business, there is a Jim who has the money taxed from him. Jim buys $100 less of something, removing $100 of production which would have happened anyway.

The total effect of the stimulus spending is that Frank gets $100 more business, and Jim buys or saves $100 less. That fails to "jumpstart" an economy, no matter how big the amount which is taxed and spent by the government.

Government Borrowing

The government can borrow the $100 that it spends at Frank's restaurant. Frank is happy, and Jim doesn't seem to be affected, at first glance.

Frank is happy with the extra business. But, this is not a sustained flow of money, and Frank does not install more tables. He hires only temporarily or part-time, if he hires at all.

Business owners read the newsEconomists Surprised That People Read the Paper
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06/08/09 - Easy Opinions
  Leftist economists don't consider that people react to policy. People see the coming wave of taxes, regulation, and inflation, and they alter their behavior immediately. They stop investing and prepare for hard times.. They know the government is temporarily increasing purchases. They can't know what part of their sales is from stimulus and what part is from an improving economy, so they delay expanding and hiring. Worse, they don't know how increased taxes will affect sales in the future.

Business owners are being rational. It is better to miss some business by expanding later, than to expand early and risk bigger losses if sales drop. Ironically, the stimulus interferes with the sales signals and market stability that would encourage businesses to expand. This slows expansion and reduces employment.

The current stimulus is being distributed over a period of years, so it will interfere with business decisions for years.

•  Jim prepares to pay

Jim knows that he will soon have to pay higher taxes to pay off what the government is borrowing. So, he lowers his spending and saves for that future expense. He overestimates; it is better to spend too little than too much. The government creates uncertainty by proposing many, confusing, new and increased taxes.

The result is that Frank gets an extra $100 in business. Jiim reduces his consumption spending by $100 or more, and instead buys safe investments. This does not improve the overall economy, but it does produce a different demand for goods, helping some businesses and hurting others. Unemployment rises as people must change jobs between businesses, and people must take jobs at lower salaries while they learn new skills.

Politicians arrange photo-opportunities with businesses that have government contracts. They don't advertise the many businesses that shrink or close because their sales have declined in a disrupted economy.

Politicians point to improved businesses and call for increased stimulus spending to stop layoffs at other businesses. This is clueless.

Creating Money

The government can "create the moneyClick/Return for detail below. All money is created by the Federal Reserve Bank. The government usually gets to spend it first." and seem to take value magically out of the air. The government first raises taxes and borrows, but that doesn't satisfy its desire to spend.

Creating more money causes all money to lose some value through "inflation". Prices go up as store owners notice they are selling all of their goods on hand. They raise prices following price increases by their suppliers. They wonder where the extra demand (money) is coming from, and why supplies do not increase to meet that demand. The answer is that government is increasing demand without producing much to increase available supplies.

This steals value silently from everyone with a job or a bank account, and it falls more heavily on the lower and middle classes. Their wages fall behind inflation and their savings are more in cash, bank certificates of deposit, and bonds, which lose value as prices go up.

So, Frank happily spends or saves an extra $100, and $100 is silently skimmed from the value of all money. The transfer of value is like a tax, but the result is more negative due to business uncertainties and dislocations.

Some business owners see increasing sales, and wonder if they are from a better economy (more production all around) or from inflation. Other businesses suffer as their customers buy different goods. Some people save more as they see prices going up, or possibly spend more to beat future price increases. Business becomes less predictable.

Notice that the government properly considers counterfeiting to be a serious crime. But, politicians call it "fiscal policy" when they create money out of thin air and spend it to promote projects for their supporters.

Disinvestment

People are productive because they have knowledge and tools, personally or through their employer. A person needs a hammer to build a house, and a power-nailer builds faster and at lower cost. A small shop can make a few hammers. It takes a large factory to make many hammers and power-nailers, and much effort to work out ways to make them better, safer, more durable, and cost less over time.

There is a big risk in building a factory, and many lose money. Sometimes, the owners become rich through knowledge, planning, management, and some luck. It is fascinating that these people become despised as "the rich", when their wealth comes mostly from practical achievements that help others to a productive and comfortable life.

Progressive tax rates04/2009 - Easy Opinions
  A comparison of the 2006 tax rates and total tax contributions by adjusted gross income. take more money from high earners as a percentage of their income. The idea of a stimulus extends the idea that the rich should pay more of their lazy money to others who will spend it and create a growing economy.

Here is the problem. The rich are the major investors in companies, and so in factories. Money taken from them does not get to those investments. Instead, it goes to Frank, who buys more consumer goods or invests more conservatively in bank accounts. Investment that would create jobs is drained away to create some overtime for current workers.

"Soak the rich" is bad policy.

• High productivity produces most high incomes. There is no moral basis for taking a higher percentage of that money from the people who have earned it; they aren't bank robbers. The government is acting like a bank robber, taking money from those who have it, as pure politics and power.
• Taking that money removes it from the people who have the most judgment and ability to bear the risk of building new companies. The government is much worse at this.
• "Soak the rich" puts the non-rich out of work or reduces their incomes. That isn't a good tradeoff.

Large Incomes, Skill, and Luck

You may think the rich are partly lucky, so they shouldn't keep all of their money. Do you also think that lottery winners should split their winnings? They are 100% lucky, and do much less to produce a productive society.

Successful actors and athletes are admired because their abilities are on direct display. We like watching them, and we understand the basis for their incomes, even if there is some luck involved. We don't yell at them to take less money, because we understand that they are worth it. They would not have put in long years of training and sacrifice if they didn't have a chance to make it big.

The skills of successful businessmen/women are not directly on display. But, we can see that they produce products and they create jobs to make those products. Products and jobs provide for better lives. Yet, people are easily angered by the large incomes of some businessmen. We should understand that, like athletes, they are worth it. They would not have put in long years of training and personal risk if they didn't have a chance to make it big.

Details

Spending, Paying Debts, and Saving

We hear that 70% of the economy is consumer spending. The quick reaction is to 03/2009 - EasyOpinions: Cargo Cult Economics
 Government sees that people spend more during prosperous times, and wrongly concludes that higher spending causes prosperity
 I get it. People use umbrellas when it rains, so using umbrellas causes it to rain.do something, anything, to increase this spending. Government tells us that spending is good and saving is bad.

This has now moved to the strange idea that if the public won't spend enough, then the government will do it for them. This is the idea that the government can spend its way to our prosperity, taxing along the way.

Actually, paying debts, saving, and investing are all types of spending.

• Paying debts is the completion of past spending. If spending is good for the economy, the debtor has already done his part. Paying off the debt prepares for future spending. Not paying the debt would cause economic disruption.
• Saving lends money to a bank, which supports spending by other people. Credit card debt supports consumer spending. Housing and car loans support buying those durable goods. Loans to businesses help them produce more.
• Investing is a high-powered use of resources at a higher risk. Investing directly supports new businesses, major business expansion, and the creation of jobs.

The amount spent on each of these is a personal decision. The "economy" is there to serve the individual, not the reverse. People should acquire the goods, savings, and investments that they understand and can support with their earnings.

Would it help the "economy" if the government forced you to take 10% of your savings and spend it on something? Only in the sense that "consumer spending" would go up. It would hurt you personally because it would disrupt your plans.

If you are saving money rather than buying a new car or a vacation trip, it is because you want the option of buying something more important in the future, maybe food and rent.

Go back

Creating Money

Is Money Worth Anything?

All U.S. dollars are printed or electronically distributed by the Fed, the United States Federal Reserve Banks. The Fed runs the U.S. Mint to print currency and stamp coins. It creates electronic money by sending authorizations to its member banks. Paper dollars are Federal Reserve Notes, literally small obligations of the Fed.

Each dollar is an obligation of the Fed to pay you a dollar. You are allowed to laugh at this. What does it mean to present a dollar to the government and be paid back that same dollar bill? Before 1935, the government would give you a definite amount of gold or silver, if you presented the dollar bill for payment. Since then, there is no obligation of the Government to give you anything for your dollar.

All dollars are created out of thin air, so why do they have any value?

• There is an established market and price for trillions of dollars of real goods and services.
• Dollars are defined by law as "legal tender". Any transaction can be valued in dollars for disposition by a court or for the collection of taxes.
• The Federal Government levies taxes and you can use dollars to pay taxes.
• The Federal Reserve has assets that are supposedly worth the dollars created.

There are trillions of dollars in private loans secured by tangible things, such as commodities, automobiles, and buildings. Some loans are secured only by future income, like credit card balances. All loans are obligations between people, and the supply of money represents these obligations, giving value to the money.

Inflation

The Federal Reserve Banks can abuse their power to create money, so that all money loses some value.

Inflation results when the Fed loans money to the US Treasury, creating money, which the government spends, without a resulting increase in tax revenues that can pay back these loans. Inflation is the loss of value in the money supply from bad loans made to the US Treasury.

The longer explanation of inflation requires knowing how a good bank can create trustworthy, electronic or paper money. This will wait for another post.

Go back

Links

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The Federal Reserve
Investopedia
An overview of the structure and duties of the Federal Reserve.

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Money Created Out of Thin Air
07/30/04 - Richard Benson, President Specialty Finance Group

[edited] Money is created in two ways. First, money creation comes from borrowing it and spending it. Second, it is simply printed up "out of thin air" by a central bank and used to buy something.

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The Record of the Federal Reserve
07/24/09 - LewRockwell.com by Erik Voorhees

[edited] The Federal Reserve System is fraudulent. Its effective purpose is to create a mechanism of deficit spending by politicians, through invisible taxation by monetary inflation. The Government buys services for its voters with created money at current prices. The voter's money buys less the following year, as the new money raises prices, and they are none the wiser.

From 1776 to 1912 (136 years):

• A dollar would buy 11% more consumer goods in 1912 than in 1776.
• $1,110 in 1776 bought the same bundle of consumer goods as did $1,000 in 1912, for comparable goods.
• The dollar was a stable and slightly increasing store of value. You gained a little if you put it under your mattress.

The United States Federal Reserve (the Fed) was created in 1913 to "conduct the nation's monetary policy in pursuit of full employment and stable prices". "Stable prices" means that a dollar should buy about the same amount of consumer goods over time.

From 1913 to 2008 (95 years):

• A dollar would buy 95% less consumer goods in 2008 than in 1913.
• $50 in 1913 bought the same bundle of consumer goods as $1,000 in 2008, for comparable goods.
• The dollar slowly sank in value. You retained only 5% of its value if you put dollars under your mattress during that time.

Americans should feel outrage about this. Yet, they are not very upset, and the vast majority has no clue. Americans are educated in Government schools, which barely teach basic accounting, let alone monetary theory. In public school, I was forced to memorize the names of every African country. There was no discussion of the nature of money or the economic principles which caused political turmoil in Africa.

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Keynes, Upside Down
02/02/09 - Richard Benson, President Specialty Finance Group

[edited] Too much borrowed money has left the private sector riddled with bankruptcy. Far too many loans were made on the probability of being refinanced, not on the ability to be repaid!

Bad loans could be refinanced into bigger bad loans while liquidity (willingness to lend) was flowing. Now, the refinancing has stopped. Millions of Americans and business owners are suffering and can't face the music.

Too many loans (liquidity) were made to people who could not pay them back. This caused mass insolvency. How can more loans and public borrowing be sold as the cure? It is government double talk. They are calling this insolvency a "liquidity trap" so they can print fresh money without guilt.

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Recipe for Economic Stagnation
07/21/09 - American Thinker by Andrew Foy and Brenton Stransky

[edited] John Maynard Keynes recommended government intervention. Milton Friedman recommended free markets and a predictable, boring economic policy.

The government followed Keynesian principles in response to the Great Depression. It created 15 agencies, increased spending by 220%, increased taxes by 68%, and increased the deficit to $24 billion.

Friedman proposed that government intervention prolonged the depression. His view has been validated over time. "Far from the depression being a failure of the free-enterprise system, it was a tragic failure of the government."

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Cargo Cult Economics
03/2009 - EasyOpinions

Government economists see that people spend more during prosperous times, and wrongly conclude that higher spending causes prosperity.

I get it. People use umbrellas when it rains, so using umbrellas causes it to rain.

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Let's Counterfeit Our Way to Wealth
02/2009 - EasyOpinions

The Obama team follows Keynesian economic principles. They claim that every dollar in government "stimulus" spending creates $1.50 in wealth.

The 1.5 wealth multiplier is part of the Keynesian myth that distributing money promotes a recovery. But, every dollar spent by government has to be collected as tax, sooner or later. Any money borrowed now takes resources now from some other, valuable use.

If the multiplier were true, then the government could license counterfeiting and we would all become rich. Actually, the government attitude toward printing money is very close to counterfeiting.

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Banks Create Money
08/09/09 - Ingri Mayne - CyberEconomics

[edited] For several centuries now most money has been in the form of bank debt. A checking account is merely money that the bank owes you, and paper money represents something that the Federal Reserve System owes you. (Try to collect this debt from the Federal Reserve, though, and see what you get.)

The creation and destruction of money is the creation and destruction of bank debt.

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Federal Reserve Ready To Buy Assets
07/29/09 - Telegraph Co UK - by James Quinn

[edited] The Fed may buy back U.S. Treasuries, support lending to small businesses, and support credit card and car loans. The Fed continues to buy large amounts of government-backed mortgage securities.

The Fed creates more money by buying assets. Usually, it limits itself to buying government debt, Treasury bonds. It is now directly buying other debt, such as bonds representing bundles of home loans (Mortgage Backed Securities).

If these debts are paid off, then the money created will not cause inflation. If not paid off, the losses show up as inflation, the decreased value of all money.

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Google Search: Money Creation Inflation

The Present Tells Us About the Depression

The Smoot-Hawley tariff of 1930 imposed tariffs (taxes) on the import of goods. Other countries imposed similar taxes in retaliation. This started a "trade war", a frenzy of higher taxes on trade that increased the problems of the Depression.

People worldwide were thrown out of work for the simple fact that they traded their production to people in other countries. Everyone became poorer as the world economy tried to adjust to this self-imposed restriction and cost.

How could they have been so stupid? Because taxes raise money for politicians, and taxes on certain imports raise profits for political supporters who make those goods locally. Politicians did not care that the imposed costs put other people out of work.

Read more ...

Level the Playing Field and Bring Down the Economy
06/25/09 - Open Market by Fran Smith

[edited] Beware of any proposal that attempts to “level the playing field.” Usually, this hobbles competition with restrictive regulations and raises costs for consumers.

The House Ways and Means committee proposes carbon taxes on imports from countries that don't control greenhouse gas emissions. This can have broad, disastrous consequences

The huge and complex Waxman-Markey energy bill will be voted on Friday. Environmental groups are eager to suppress energy use. It sets up a “cap and trade” system by setting a limit on carbon emissions and issuing tradable allowances.

Some carbon-intensive industries with high energy use understand the high costs they will have to pay and pass on to their customers. They are worried about “leakage”. Companies in other, less burdened countries would be able to offer lower prices, and those countries would be a better place to locate businesses and jobs. The solution is to also hit those imports with a hefty tax. Congress is figuring out a way to do that.

People usually think that looking at 1930 and the great depression can give us an insight into what we should do now.

Actually, it is the reverse. Our government is giving us an insight into what happened in 1930. There isn't any real care about economics or recovery. There isn't any fear of making a bad situation worse, or of taking a 2 year recession and making it a 10 year misery.

The fact then and now is captured by Rahm Emanuel, Obama's chief of staff. He said that no crisis should be wasted as a political (money acquiring) opportunity. What we have/had is an explosion of political class self-interest and a grab for money and power. The economic crisis (caused by these same politicians) is merely the excuse to enact wild theories and hand out favors during the turmoil.

There are no limits, because they can take the money now and let the accounts settle themselves later. They don't have to care what happens to the "little people" when they look out in the future from their hilltop homes. They will have gotten theirs.

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What Caused Unemployment in the Great Depression?
The government caused uncertainty that delayed reinvestment, just like today.

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We Guarantee It
The government is guaranteeing us into poverty. The story of the housing and economic crisis. Politicians discovered a loophole in government finances. They could borrow as much as they wanted, off budget and without debate, by granting guarantees.

Supposedly private businesses like Fannie Mae and Freddie Mac borrowed as much money as the entire national debt at the time, $5.4 trillion ($5.4 million million). The guarantees go on today. The politicians crying the loudest about the free market and lack of regulation were the ones who directed this disaster and refused restraints.

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The Political Manual: Adequate Compensation
"This is not a new problem, and you owe much to prior politicians. They have worked tirelessly on methods to receive adequate compensation. You stand on the shoulders of giants. You can create any amount of mischief spending vast amounts of public funds, provided it is from the heart and not for personal gain. You are a servant of the people. Any benefit you may receive personally is coincidental."

The Department of Work and Production

We Will Improve Your Work and Lower Costs

(a large waiting room in a giant federal building)

Desk Clerk: Ticket 363. Is ticket 363 here?

Joe: I have number 363.

Desk Clerk: (without looking up) Go to office 26, through the gate, turn right, left down the corridor, on the right.

(Joe easily finds his way. He has been here before. The water fountain still doesn't work.)

Official: (behind desk, seated, remains seated) Please close the door and have a seat.

Joe: (sits down, recognizes the official) Hi, how are you doing?

Official: Do I know you (looks through folder) . . . Joe?

Joe: We've met a few times here. I suppose you see a lot of people.

Official: Do you know why you are here?

Joe: Is it GDP again?

Official: As you can see from the sign on my desk, I am now a case officer for the new Department of Work and Production. The government, your government, has decided to remove the inefficiency from various occupations.

We have had great success with the healthcare system, and we are now applying these techniques to professions that affect national security. We want to improve your knowledge, pay, and working hours. Would you like that?

Joe: That sounds good. (a bit suspicious) Does this really apply to me? I'm an accountant.

Read more ...

Official: Yes, I know you are an accountant. (irritated) I see it in your folder. As an accountant you are an important element in producing trustworthy, accurate, and timely measures of efficiency and production. This is a function vital to the economy.

I think you will enjoy being part of a coordinated team of trained professionals, working together to attain the highest efficiency and accuracy. You will no longer be alone in a fragmented, distant company without standards. You will be part of a national group.

Joe: Will I still work for Acme International?

Official: You will physically work there, or somewhere else where you are most needed, but your work standards and pay will be coordinated through your professional license. All accountants will now be federally licensed, for the security of the country and for efficiency. The high, hidden costs of accounting must be reduced if we are to prosper as a nation. I'm sure you agree.

Joe: Well, I, uh . . .

Official: Good. You will be pleased with the changes in your compensation. First, we are going to raise your salary 20% in the amount that you either save or receive.

Joe: A 20% raise is great. What do you mean by "save or receive"?

Official: We take the smart view that your effective salary is what you take home and don't waste. You may remember our accomplishments a few years ago when government investment saved or created 4 million jobs. This applies the same philosophy.

Your new salary is set at 80% of your current salary. Here is a copy of "My Salary Savings". This gives you easy, fun ways to stop wasting 40% of your salary. The result is that you will either save or receive 120% of your current salary, which is a 20% raise.

Joe: Wait a minute. (with self control) You are actually cutting my salary 20%.

Official: No, we don't see it that way. We have arranged for you to save or receive 20% more than you are currently making. You would not have a job without these adjustments. Do you want to impair your professional license? You could always do something else other than accounting.

Joe: (thinks quickly) Yes, I see. That is very good. Thanks.

Official: I think you will enjoy your reduced 38 hour work week with Advancement-Plus. A-Plus is a 6 hours/week program that gives you advanced training, interesting additional exercises, and provides time for you to report your efficiency measures to the central database.

Joe: So I will work 44 hours per week?

Official: Are you sure you are an accountant? Your work week is reduced to 38 hours. We don't consider your training for advancement to be work. That is your personal investment in continued employment. We certainly don't regard your efficiency reporting to be part of your accounting job. That is part of your professional self-management.

Joe: (bites tongue) And, my vacation?

Official: Based on a 38 hour work week, of course your vacation is slightly reduced. The details are in this manual "National Work Standards Panel: Accounting Compensation".   (hands Joe the manual)

Joe: (subdued) Thanks.

Official: Ummm.. (looks through folder) ... Joe. You have a good record in accounting. You could work directly for the Government if you work hard and study our new methods and measures.

We have been able to increase pay by 20%, reduce work hours 5%, and maintain vacations and leisure in every profession that we have managed so far, starting with medical care. Improved accounting has been a major factor in our success.

Joe: It is certainly something to think about.

Official: (closes folder, writes on a form, hands form to Joe) Take this to the front desk. The clerk will give you a "brick". That is our informal name for your efficiency milestone reporting module. He or she will arrange to deduct $295 from your pay to cover the cost. The instructions for using it are conveniently online, along with many useful details about your new work requirements and professional responsibilities.

Leave the door open on your way out.

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Phony Jobs Claims
6/9/09 at the Wall Street Journal

Obama and his administration claim to be "saving or creating" jobs by spending massive amounts of money as "stimulus". There is no data that could support or verify that jobs have been "saved". If the economy does not improve, and more jobs are lost, Obama can still say that it could have been worse.

The Department of GDP
You can spend, or government will do it for you.
You owe it to us all to increase GDP.

HHS.Gov - Measures/Codes
Government brings welcome rationality and precision to a profession that was severely lacking in measurement codes. (smile) This is current and real. It is not a drill. Don't think of the work to collect this data, think of the cost reductions when enough is collected. Via Dr. Wes.

New! Status Update regarding CPT II Coding Issues for the 2009 PQRI

CMS has identified a technical problem affecting twenty (20) quality-data codes (QDCs) used for reporting thirteen (13) quality measures through the claims-based method for 2009 PQRI. For further information and guidance regarding this issue, please see the "Status Update on CPT II Coding Issue for the 2009 PQRI and Options for Eligible Professionals (EPs)" document in the "Downloads" section below.

2009 PQRI: This page contains information about PQRI quality measures, their specifications and related release notes, an implementation guide for reporting individual measures through claims or registry-based reporting, measures groups specifications and a related guide to implementing measures groups.

2009 PQRI Individual Quality Measures List: This document, which identifies the 153 quality measures selected for the 2009 PQRI, is available in the "Downloads" section below. (continued ...)

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To 911DOC -- Thanks for your comment. My hope for this post was to give everyone a sense of what it might be like for the government to manage their profession. Governments look for capital to steal redistribute. Usually it is money, but they also will redistribute the capital represented by years of study, experience, and excellence, as in medicine.

Reasons I'm Leaving Emergency Medicine #2
911DOC explains how government regulation and the EMTALA law is disrupting emergency medicine and bankrupting hospitals.

Phony Jobs Claims

The Media Fall for Phony 'Jobs' Claims
06/09/09 - Online.WSJ by William McGurn

The Obama Numbers Are Pure Fiction.

[edited] "Saved or created" has become Barack Obama's signature phrase. Obama declared yesterday that the stimulus had already saved or created 150,000 American jobs.

He announced faster stimulus spending so he could "save or create" an additional 600,000 jobs this summer. Obama promised earlier that his recovery plan would "save or create three to four million jobs over the next two years."

Tony Fratto was a senior member of the Bush administration communications office. He sees a double standard at play.

We would never have used a formula like "save or create". To begin with, the number is pure fiction. The administration has no way to measure how many jobs are actually being 'saved.' If we had tried to use something this flimsy, the press would never have let us get away with it.

The inability to measure Mr. Obama's jobs formula is part of its attraction. Never mind that no one actually measures "jobs saved". Neither the Labor Department, the Treasury, nor the Bureau of Labor Statistics does it. The New York Times delicately reports that Mr. Obama's jobs claims are "based on macroeconomic estimates, not an actual counting of jobs." Nice work if you can get away with it.

Harvard economist and former Bush economic adviser Greg Mankiw writes:

The expression "save or create" is political genius. You can measure how many jobs are created between two points in time. There is no way to measure how many jobs are saved. Even if things get much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

My Fantasy Beats Your Reality

Reality Versus Leftist Fantasy
06/03/09 - ChicagoBoyz by Shannon Love

[edited] Leftists claim that every economic crisis shows the failure of the free market, and assume that they would never have economic crises. Leftists have a wildly exaggerated sense of their own understanding of the economy and everything else.

The left doesn’t actually have a developed system of thought regarding the economy. They can’t actually explain why the real world political process will make better decisions than the free-market. Instead, they point to any reversals in the real economy, regardless of cause, and assert that in their imaginations leftist politicians could have done better.

Leftists create elaborate fantasies. Then everyone else must argue for reality against the fantasies. The real-world system always comes out worse.

Alternative-energy advocates feel entitled to paper over any shortcomings of their favored technology by evoking future technological breakthroughs. But, they won’t let you postulate future technological breakthroughs that would make current energy sources even more attractive.

If you point out that wind and solar power is unreliable to the point of near uselessness, proponents will breezily respond that future technological breakthroughs in power storage or distribution will overcome the problem.

However, if you point out that developments in nuclear technology could create power systems that would completely recycle their waste, they respond that we should not plan for nuclear power unless we have absolutely proven that the technology works. And, let’s cut funding for the research that would prove it works.

There are More Ways to Go Wrong Than to Go Right
06/19/09 - ChicagoBoyz by Shannon Love

Many leftists debate in this style: “I have an idea and you don’t, therefore I must have the best plan”.

I see this in debates about energy. Some believe fossil fuels cause global warming and nuclear power is too dangerous, so solar and wind power must be viable technologies. Unfortunately, the fact that one specific technology has problems has nothing to do with whether another unrelated technology will work.

The urge to do something, anything, to solve a problem can backfire badly. People immersed in politics begin to think that because there are only two major divisions in our politics, there must be only two altnerate solutions to any problem.

They begin to think that if the idea of one side is bad, then the idea of the other side must be good. If we think that any idea is better than no idea at all, we are more likely to do more harm than good. There are more ways to go wrong than to go right.

Will universal healthcare control costs?
06/16/09 - The Atlantic by Megan McArdle

There have been promised cost reductions for Medicare in the past. Why haven’t they happened, and what has changed to make them feasible now? When I ask this question, I get angry demands that I put forward my plan for cost control, rather than merely critiquing everyone else’s. This seems rather like demanding that I put forward my design for a perpetual motion machine before I am allowed to point out problems in the US energy market.

- - -
Magic Power
Could the nerds give us cheap power if they wanted to?

Problems With Green Energy
"Honey, please go up on the roof and sweep off the solar panels."

More on Energy choices ...

Stimulus Shrinks Economy

Stimulus Package Shrinks Economy, Destroys Private Sector Jobs
05/31/09 - OpenMarket by Hans Bader

This is only the last part:

[edited] A provision in the stimulus package that blocked a mere 97 Mexican truckers from U.S. roads "caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade", destroying 40,000 American jobs.

The vague "buy American" provisions of the stimulus, doing little to promote purchases of U.S. products, managed to ignite a trade war with Canada.

Obama's policies echo those of Herbert Hoover, who helped spawn the Great Depression through his protectionism and tax increases.

One of Obama's advisers admits that “the barrage of tax increases proposed in President Barack Obama’s budget could kill any chance of an early and sustained recovery.” Even the Washington Post, which endorsed Obama and once supported his auto bailouts, now has soured on them and their waste of taxpayer money.

Treasury Recalls All Dollars (smile)

Treasury Issues Emergency Recall of All U.S. Dollars
05/04/09 - Reason by Katherine Mangu-Ward

See the short video by The Onion. Very funny, if it doesn't become true. "Just put all of your money into the plastic bag and mail it in. Don't worry, in time you will earn it back."

Actions by the Federal Reserve that are somewhat similar.

A Quick Explanation for the Recession

An Explanation for the Great Recession
03/25/09 - The Angry Economist

Warning. You will need some self confidence to read this explanation. It is short and understandable. You may tend to believe complicated presentations that you don't understand. Really, if you don't understand something, they haven't explained it very well, or they are hiding their own ignorance.

[edited] Austrian Economists can explain this recession in the same way that all the other ones are explained:

[ Sorry, you will have to go to the original article to find out. ]

What is Krugman (the moron) telling us that we need to do? Spend, spend, spend, don't save!

Every REAL economist will tell you that's stupid. Everyone believes Krugman only because he got a Nobel Prize back before his brain failed.

+ + + + +

Cargo Cult Economics
Obama's economic team says "Spend, Spend, Spend". They claim that government spending multiplies wealth. Actually, private spending AND SAVING has the same effect in creating a vibrant economy. Savings don't sit around being lazy at the bank. They provide the means to build businesses, employ people, and buy commercial goods.

The Fake History of the Depression

The Fake History of the Depression
04/20/2009 - Mises Daily by Robert P. Murphy

His new book is "The Politically Incorrect Guide to the Great Depression and the New Deal".

[edited] Nobel laureates and presidential advisors proclaim that it was Herbert Hoover's free-market penny pinching that exacerbated the Depression. They say that the economy was saved only when FDR boldly ran up enormous deficits to fight the Nazis. But, this official history is utterly false.

Contrary to what you have heard, Hoover was a textbook Keynesian after the stock-market crash. He cut income tax rates for 1929 by one percentage point and increased federal spending by 42% from 1930 to 1932.

This enormous jump in spending occurred while tax receipts collapsed, due to the decline in economic activity and the price deflation of the early 1930s. This combination led to unprecedented peacetime deficits under the Hoover administration — something FDR railed against during the 1932 campaign!

Hoover spent $4.6 billion against only $2 billion in tax receipts. The 1932 deficit would translate into an astounding $3.3 trillion deficit in 2007 (instead of the actual deficit of $162 billion for that year). Hoover's 1932 deficit was 4% of GDP.

GDP is Gross Domestic Product, or total national income. The official government measures of rising GDP during the war years is misleading. Massive military spending was included in GDP, even though producing tanks is hardly the same measure of prosperity as producing consumer goods.

Normally, when the Fed prints money to buy massive quantities of goods (such as war supplies), the price level and cost of living goes through the roof. The price level is expressed as the CPI, the Consumer Price Index. The government applied price controls during the war. [ Price controls were either ineffective or produced shortages. -AG ]

Say that your salary goes up from $30,000 to $33,000, a 10% increase. But, the cost of what you buy goes up 10% also because of inflation. Your "inflation adjusted" income is still $30,000. The same applies to GDP, which is supposed to measure total income.

Statisticians would normally adjust for the price level to compute the "inflation adjusted" GDP. This adjustment couldn't occur, because the government made it illegal for the CPI to go through the roof. Official measures showing "real GDP" rising during World War II are as phony as the Soviet Union's announcements of industrial achievements.

+ + + + +

Building tanks and bombs doesn't make you rich. Building new infrastructure (bridges, roads, and railroads) only increases prosperity if it is highly useful. Just the building of the structures doesn't do a thing.

A Tested Stimulus Plan
The housing crisis is the result of our last stimulus plan. How do we like it?

Cargo Cult Economics
Spending and saving by individiuals is more "stimulative" than taxing and spending by government.

We Must Spend or We Are Going to DIE!

From: Ruling Class
To : Public
Re : We must tax and spend now, or we are all going to DIE!

We don't want to tax and spend (cough), but we must react to the crisis that we have identified. We are going to borrow, spend, and tax reluctantly to support our actions. The alternative is DEATH. No one wants that.

So what if you are poor in the future? At least you will be alive, and we will continue to guide you through supportive government to help you out of poverty. We will create and assign the jobs of the 21st century. Your children will pay most of the taxes, and we are training our children to have the public spirit that will allow them to rule wisely.

We have heard no reasonable argument or plan to do anything else. It is irresponsible for some people to say that there is no crisis, or that our spending will not solve the crisis. If you don't have a plan, worked out in detail, ready to implement, with people in office who support you, then you have nothing to offer.

Who are you? If your ideas were important, you would be in office and be one of us, not part of the public. You didn't care enough to be elected, so don't complain now.

We think that you are complaining because you have some money in the bank. You should realize that most Americans don't have savings, so you are unnaturally well-off.

What you have is one vote, and we have more votes than you do. We are going to arrange for everyone to participate in the American Dream, not just those with savings. Learn to appreciate the simple life, and have some respect for the people who are duly elected.

Less carbon, more community!

--------------
A Tested Stimulus Plan
The housing crisis is the result of our last stimulus plan. How do we like it?

A Trillion Dollars On Display

What does one TRILLION dollars look like?
04/01/09 - PageTutor.com

The final graphic at the above link shows the volume of $1 trillion in $100 bills, stacked onto 10,000 shipping pallets. The graphic is 50 wide, 100 deep, and 2 high.

$1 trillion would buy 4 million houses, each house costing $250,000.

Read more ...

Fannie Mae and Freddie Mac are Government Sponsored Enterprises, and the biggest companies in the mortgage market. They borrowed $5.4 trillion to buy home mortgages and package them into bonds. At least $1.5 trillion were sub-prime mortgages, the ones most in trouble now. They set the standards for what was required for a loan. They did this under close government oversight, regulation, and approval. They are essentially departments of the government.

Private banks put together another $1.5 trillion of sub-prime mortgages, all under government oversight, regulation, and approval.

AIG went broke guaranteeing the value of private bonds built on mortgages that were entirely similar to those that Fannie and Freddie were buying and packaging into their own bonds. The credit rating agencies regarded these bonds as AAA, highest quality. Maybe this is why the government felt like bailing out AIG, since AIG was doing exactly what the government wanted it to do when it failed.

It is ridiculous for our legislators to claim that this crisis was caused by a "lack of regulation" of financial services. Consider the following when you hear cries for "more regulation" to keep such disasters from happening in the future, unless you mean more regulation of Congress.

• The losses are concentrated in the institutions which were most directly regulated.
• The regulation was done by congressional and senate committees, and by OHFEO, the requlatory agency created by Congress to control housing lenders.
• Housing loans and housing policy were the most regulated parts of our economy.
• Lenders were doing what the government wanted them to do, using decreasing credit standards for granting loans.

Financial Rescue Nears Value of Total GDP
03/31/09 - Bloomberg.com by Mark Pittman and Bob Ivry

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

This money isn't yet lost, so it is not yet budgeted as an expense. I suspect that trillions will in fact be lost from these "stabilizations" and guarantees.

Spending on "stimulus" and new government programs will increase the cumulative deficit to $9.3 trillion by 2019, in addition to a $1.9 trillion increase in taxes over the same period. The Congressional Budget Office made these estimates. The CBO reports to Congress, and is now directed by the Democrats as the majority party.

It will be your job to pay it all back, or maybe your children's job.

The government isn't helping our country's problems. It caused our financial problems through guarantees and housing policy, and now it is making those problems bigger.

People in the private sector have the knowledge to unwind this mess. The government is discouraging them from acting, through unpredictable policies and massive borrowing that could ruin them.

- -
We Guarantee It
The government is guaranteeing us into poverty.

- -
Visualizing the US Debt
July 2011 - Demonocracy
Similiar graphics showing $1 trillion, and more showing the size of the US Debt. Did you guess higher than the Empire State Building in New York City?

Cause of the Financial Crisis: Left vs Right

Their Mistake Was Trusting the Government
03/13/09 - ChicagoBoyz by Shannon Love

Shannon Love participated in a detailed, interesting discussion of his post about the failure of a small bank and the causes of the financial crisis.

Here is an edited version of what appears at the link. I intend it to be a bit more readable, and intact in tone and meaning. Red marks the comments of Shannon and his supporters. Blue marks the comments of his critics on the Left. Gray marks my editorial comments.

Rep. Maxine Waters was a major investor in OneUnited Bank, which lost heavily on its investment in Fannie Mae and Freddie Mac when they were taken over by the Treasury.

Ironically, she fully supported Fannie and Freddie in her congressional role on the House Financial Services Committee. That committee had oversight and detailed knowledge of what Fannie and Freddie were doing. They supported lending to risky borrowers without verifying the loan applications.

Her experience is an example of what happened to banks worldwide because of Fannie and Freddie and their government supported actions in the housing market.

Read more for the discussion ...

Shannon Love:

For leftists, OneUnited should represent the perfect small, minority owned bank. The “socially responsible” Maxine Waters invested in the bank and sat on its board. There is no evidence that it made predatory loans.

Yet, OneUnited failed, but not due to any short-sighted, greedy decisions of the bank’s management. The bank’s management and board members, including Waters, trusted that the mortgage-backed securities (MBS) issued by the government sponsored enterprises (GSEs) Fanny and Freddie were worth the paper they were written on.

OneUnited is a microcosm of the entire financial collapse. Over the past 40 years, the GSEs have piled up a vast store of toxic assets created by the attempt to get something for nothing, by fooling the market about the risk of residential mortgages.

A "toxic asset" is a loan that is hard to investigate or value. A "good" loan is supported by an honest borrower and by a house with enough value to repay the loan. A "toxic" loan may have a borrower in default or who can go into default, backed by a house of little value or fraudulently represented value. -amg.

Ratings firms gave the GSEs, and the MBS they issued, top ratings because of their implied government guarantee and oversight. Banks like OneUnited bought into the political myth, and now they and everyone else are paying for it.

I regard the failure of OneUnited and other institutions as the result of government action. Leftists need to explain why this is not true. They won't, of course.

Fred Lapides:

So, that explains the entire economic meltdown? Then, why is Greenspan apologetic? Glad to see the SEC, under Bush, and the credit rating dudes are all in the clear.

Shannon Love:

They are not in the clear. But the critical failure, the one that did everyone in, was with the GSEs. If everybody else had performed perfectly, the failure of the GSEs would still have brought down the system.

Look at Maxine Waters' bank. Are you seriously going to suggest that one of the most radical leftists in the congress was playing fast and loose? Should the SEC and other regulators have prevented her bank from purchasing government sponsored securities?

We're paying for 40 years of intentional market distortion. The crisis was caused by issuing too many risky loans. The entire reason for the existence of Fannie Mae and Freddy Mac was to encourage lenders to make loans that the free-market had determined were too risky.

How exactly was the SEC supposed to prevent that?

BGates:

Are you seriously suggesting that being a radical leftist puts Waters above suspicion?

Shannon Love:

No, but it probably puts Waters above suspicion for someone like Fred Lapides.

The sad truth is that no fraud is needed to bring down an institution if they bought into the GSEs. A lot of people fell for it across the financial world.

The basic problem is that the market is like Mother Nature; you can't fool her without paying a price. Government programs tried to trick the market and now we have to pay the consequences.

Andrew Garland:

Fannie Mae and Freddie Mac were specifically put outside the regulation of the SEC.

Congress maintained close oversight of what Fannie and Freddie were doing, and approved of it. Congress created OFHEO (The Office of Federal Housing Enterprise Oversight) especially to regulate Fannie and Freddie. The much larger and more visible SEC (Securities and Exchange Commission) was available, but Congress wanted its own regulator.

OFHEO was captive to House congressional committees, and outside the influence and control of the Bush administration.

This seems unconstitutional to me, but I am not an expert.

The House Financial Services Committee did not object, and actually encouraged more lending to subprime borrowers. Barney Frank (D. MA) has served as most senior Democratic member on this committee at least since 1992, and has chaired the committee since 2007 in the Democratic majority.

There is a long history of Barney Frank proclaiming that all was well with Fannie and Freddie, and no further oversight or inquiry was needed.

"We Guarantee It"
A collection of news and analysis about the causes of the mortgage and financial crisis. How the government directed massive resources into subprime lending by implicitly guaranteeing the actions of Fannie Mae and Freddie Mac.

Zach:

Despite the rating agencies and the role of Fannie and Freddie, there was still considerable private sector action needed to make this crisis endemic to the system itself.

1. Greedy, mostly middleclass homeowners who sought homes slightly outside their means.

2. CDO's which made "too big to fail" a reality

A "CDO" is a Collateralized Debt Obligation. This is a collection of MBS bonds that is bundled together and sliced into layers. Each layer is a CDO bond having a different priority of repayment, if there are losses in the underlying MBS bonds. This complexity is blamed for the current difficulty in "unwinding" the bond obligations and renegotiating the underlying mortgage loans. -amg.

Saying that leftists have to explain themselves is just a hyperbolic, knee-jerk simplification.

Shannon Love:

Blaming financial problems on greed is like blaming a building collapse on gravity. Both are universals that need to be planned for. Creating a system that will fail if people are "greedy" is just stupid.

The central problem here is that government intervention blinded the market to the risks of residential mortgages. The government made it seem safe to buy securities based on bundled mortgages. That is why their use grew in the private sector. Indeed, most of the growth in the industry came about as private institutions took market share from the GSEs.

This isn't a moral problem of greed. The government intentionally destroyed information so that the financial system could no longer calculate risk. Once blinded to risk, the entire system began to come off the rails.

Leftists who extoll the virtues of political systems versus private alternatives should explain why government issued securities proved to be worth less than similar, private securities. If the political system makes such great decisions, then the GSEs should be a financial Gibraltar in a private collapse, instead of ground zero.

Sean F:

The issue is not with greed, which is universal. The issue is with market failure to accurately price risk. The market is imperfect, like any human creation.

Factors such as imperfect information and bad incentives make it more likely for market failure to occur. To oversimplify a little, markets aggregate human behavior and markets are more likely to fail where humans don't know very much and have structural incentives to behave badly. Both of those things were true about the US banking and securitized debt markets.

It is unsurprising that Canada, which regulated CDO and MBS trading in general, has come out of this rather well. It is unsurprising that Iceland has come out of this mess in perhaps the worst shape, whose banking system was run by an ideologue whose favorite thinker was Hayek.

Personally, I think the current economy is a huge problem for the conservative movement in the US.

Here's why. People are remarkably reluctant to admit mistakes. Political opinions and "truths" tend to be formed early and are very resistant to change. Cognitive dissonance (when the real world annoyingly refuses to do what we think it should) actually tends to encourage further denial.

And the conservative movement in the US is in denial right now. It experienced some success with the idea of solving economic problems through tax cuts and deregulation. It then jumped to the unwarranted conclusion that deregulation and tax cuts were the panacea to any economic issue. Predictably, that led to a giant mess.

Now, the movement is in denial and produces convoluted explanations that convince only those who are already conservatives. I think this is good news for the Democrats because the Republicans will lose independents, new voters, and the educated.

The whole effort to paint the GOP as the party of Rush was a masterstroke. It's hard to deny because it's at least partially true. The conservative "base" has only helped the GOP electorally - so far. If Rahm's strategy to make the GOP "base" an electoral liability pays off, we could experience a realignment along the lines of 1980.

So in short: the GOP's attempt to blame the collapse on Clinton, Maxine Waters, and big government is a good strategy -- for the Democrats.

K.J. Webb:

What is it, Sean F, that you think conservatives are denying? If it's the ability of the Dems to make rhetorical hay out of the crisis, you could be right. Politics ain't beanball, as a noted Chicagoan once said. And another notable once said that a conservative is someone who stands athwart history and yells Stop.

But if you're really talking about the roots of the crisis, and not just indulging in schadenfreude, then I haven't really heard you take issue with Shannon's thesis that at the bottom of it all is a government policy, which encouraged making loans to folks who would not otherwise have gotten them, with ensuing moral hazards and unnatural events cascading therefrom.

I'm a Canadian. Right now we're sitting somewhat prettier than we customarily do when we compare ourselves with our elephantine neighbour. However, history matters. Canada didn't have to confect a social policy to deal with a legacy of slavery and a permanent underclass.

It didn't matter so much to Canadians that it was relatively harder for our poor to get credit, not having institutions like Fanny and Freddie. We didn't see the necessity, given that there aren't racial and cultural divides in need of healing.

In big cities like Montreal, the poor and somewhat poor happily rent apartments all their lives and don't think of buying a house. Nobody thinks they need to do this to show that that they've escaped the noose of poverty and racism.

Canadians are inherently less likely to take risks anyhow. This is broadly the cultural effect of a former colony in a northern climate with a great playground for adventure next door. The risk-takers in our midst usually head off south of the 49th [the U.S.]. These are not reasons for national congratulation, particularly, but history and culture matter.

A dose of reality always gets administered by the dismal science [economics] when nature is mocked. It may be hard for a liberal to believe, but conservatives see such effects as validation. As another Chicagoan said [economist Milton Friedman], ideas have consequences

Shannon Love:

Sean F said:
The issue is not with greed, which is universal. The issue is with market failure to accurately price risk. The market is imperfect, like any human creation.

Factors such as imperfect information and bad incentives make it more likely for market failure to occur. To oversimplify a little, markets aggregate human behavior and markets are more likely to fail where humans don't know very much and have structural incentives to behave badly. Both of those things were true about the US banking and securitized debt markets.

I agree with everything in these paragraphs. Where you go off the rails is your lack of examination of why the market failed to accurately price risk.

Let me give you a hint: The commercial real estate market has no government intervention at all, it has some securitization, and it was fine until the entire financial system tanked. You have previously argued that private individuals cannot price risk without the guiding hand of the State. If so, why didn't the commercial real estate market bubble and burst before the heavily regulated residential market?

The market did not price risk properly because the government set out specifically to blind the market to the risk of residential mortgages. The entire point of the creation of Fannie, Freddie, and other GSEs was to hide the risk of residential mortgage lending!

Do I need to repeat that?

You claim that free-market advocates are in denial, but it is you that can't see the problem, even when you type it out yourself. Unless you can explain why 40 years of government intervention in the market did not produce dangerous distortions, you look really foolish.

K.J. Webb:

In a talk show interview, Phil Donahue accused Milton Friedman of basing everything on greed. Friedman pleaded guilty, but asked incredulously whether Donahue really believed that leaders in the Communist world, and politicians in general, operated on some different principle. Donahue didn't have much of a reply except to suggest that virtue would be a better principle.

Doesn't that say it all about the wishful thinking of the liberal worldview? And there is a sinister implication that if you aren't virtuous, then a Robespierre or Pol Pot will see that you get that way.

Tyouth:

The government made securities based on bundled mortgages seem safe. That is why their use grew in the private sector.

When the GSEs changed the rules of the game by backing insecure loans, private institutions figured to stay in the game and began the same loose practices in order to stay competitive and get what they saw as their share of the spoils.

You can call it greed if you want to, I suppose, although it also might be seen as a matter of keeping one's job, a created moral hazard.

Ginny:

In previous booms and busts, weren't commercial properties hit harder than private ones? They would seem considerably more volatile in theory, but they haven't been exceptionally problematic at this time. This may indicate how much more tinkering it takes to increase that volatility.

Sean F:

To KJ Webb:

I think conservatives are denying the responsibility for the economic collapse that occurred under 8 years of a conservative presidency that prided itself on a lack of oversight and a lack of regulation of new financial products. And of old financial products too, like stocks. The SEC went down the tubes.

The excuses go something like this. Bush wasn't conservative (so only successful conservatives are conservative?), and excessive regulation was really the problem.

The problem is that sure, people tend to believe even imperfect explanations if the explanations reinforce their current beliefs, and yes, these explanations might convince conservatives. They're not likely to convince non-conservatives, because they're not very credible. When even Greenspan thinks deregulation was the problem, the old time religion just ain't gonna fly, if you pardon the mixed metaphors.

To Shannon Love:

You are rational and smart, from what I've seen of your posts. Try a thought experiment -- assume you're not correct. Assume that government policy with Fannie and Freddie wasn't the problem that led to the collapse. Don't assume they didn't distort the market -- that would be unrealistic -- but set aside, for a minute, the assumption that their distortion was the trigger.

Look at all the evidence suggesting that something other than Freddie and Fannie was the problem. Give it a fair hearing, no preconceptions. Do what I do. read the rational people you don't necessarily agree with you ideologically. Try Krugman. Read Marginal Revolution. Not everyone's opinion is entitled to the same weight so discount those who, regardless of partisan affiliation, don't have any basis for their opinions.

You may still come out the same way, believing regulation is somehow, as usual, the problem. But you may not. At least you may not be so sure whatever answer you have is correct.

Dave T:

To Sean F:

If deregulation is the source of the current economic problems, then what, specifically, needed to be regulated? If something like risky mortgages needed further oversight, for example, that would put banks and other lenders in a difficult position.

On the one hand, Fannie Mae and Freddie Mac were encouraging such mortgages and willing to buy them. On the other hand, a stronger regulatory body would be telling lenders that they can't do those mortgages.

So, Fanny and Freddie would themselves really need to be regulated. Without Fannie and Freddie to buy those loans, banks would be less willing to take on any risky mortgages. The responsibility for that regulation would fall on Congress, rather than the President. And now, we have the problem that Barney Frank and others prevented any such further restrictions on Fannie and Freddie.

K.J. Webb:

Let me see if I understand you, Sean. You're willing to half accept that the underlying cause of our current problems was government policy regarding Fannie and Freddie. But you think that lots of regulation could have controlled the underlying pathology, permitting the benign aspects of market distortion and suppressing the malignant ones.

That is, poor people would get loans backstopped by the government (a good thing), and the same government would root out all the morally hazardous activity that would otherwise naturally flow from this policy. Voila: the Just Society.

Conservatives don't deny the possibility of crisis, whoever is at the helm. Indeed they think it's part of the structure of reality. Liberals think it's always preventable and always someone's fault, likely someone with evil in his heart, a greedy Republican or Texas yahoo, or both.

Sean F:

To KJ Webb:

First of all, I disagree that "liberals always think it's preventable and always someone's fault." It does not jibe with my experience, but I do get what you mean, and it is probably how conservatives see liberals. Reverse the words and it probably equally and more accurately (in my admittedly biased perception) applies to how liberals see conservatives, especially social conservatives.

Any attempt to "remedy" human behavior through enforced control is bound to fail. Human behavior is, for better or for worse, human behavior. Yes, of course government regulation of private activity, economic or not, always creates its own set of problems.

But one has to maintain a sense of proportion. The solution is not always worse than the problem. Our system of criminal justice is plagued with all sorts of problems. Would you rather have no police system and no criminal courts at all?

Also, I don't think that government policy was "half the problem". The policy probably made it worse. Would regulation of the CDO market have helped? It may not have eliminated the problem but it may very well have. And we came to know about the problems with Fannie and Feddie first, before the full scope of the crisis emerged, only because they were regulated and subject to public disclosure requirements.

Personally, I think you're right. We probably will see some liberal ascendancy as the pendulum swings back a bit. We're also likely to see liberal overreach; the left is just as susceptible to that as the right.

Personally, I suspect the growth of the regulatory state -- police, the SEC, zoning laws, whatever -- is really the result of the increasing and mindboggling complexity of modern life. State action is not a great tool to order human life. I don't know whether my view is shared by most of those on the American left, but I'm certainly not a big fan. I just don't see a better alternative. Some regulation, at least, is essential.

At a (rather pessimistic) minimum one could say that regulation through the political process at least legitimizes outcomes and prevents social instability.

One reason I don't hate taxes as much as I could is that I do think it's the price we pay for civilization. I can't think of one society that has endured as a democracy for a long time without a strong middle class and the attendant lower levels of income inequality that implies.

In my view the naive ones are conservatives who buy into the "research" churned out by think tanks like AEI. They imagine they are living in some heroic Randian free-market Eden with rewards for the deserving, risk-taking, yet honest, small business, salt of the earth, and with justice for everyone else.

K.J. Webb:

Sean, you're one of a vanishing breed - a liberal one could actually have a conversation with. I reckon that's why you're a regular on this site!

I will grant the wisdom of much of what you say about government as a sort of necessary evil, and it being a question of where we draw the line. At the very end of your post you make the natural assumption of all good liberals, that the real goal of the regulatory state is redistribution. You believe that disparities of wealth are socially destructive, perhaps evil.

When you say that regulation "legitimizes outcomes", aren't you really saying that it rigs the deck to get the outcomes which it wants? For only the best of reasons, of course!

That's what makes a reasonable guy like you, one that's half right!, a man of the Left on a continuum that leads to the Naomi Kleins of this world.

Thomas Sowell has written well on the reason socialism never dies. We thought it had been finally discredited some time in the late 80's, but he knew otherwise. The longing for utopia is perennial. So is the longing to soak the rich. I have some of those longings from time to time myself.

Shannon Love:

To Sean F:

Look at all the evidence suggesting that something other than Freddie and Fannie was the problem.

I would point out that your role in this conversation is to provide that evidence. Yet, although I've asked repeatedly for you to provide alternative evidence, you never do so. For example, you should explain why the commercial real estate securities market did not boom and bust.

Instead you make arguments like the following:

Try a thought experiment -- assume you're not correct. Assume that government policy with Fannie and Freddie wasn't the problem that led to the collapse. Don't assume they didn't distort the market -- that would be unrealistic -- but set aside, for a minute, the assumption that their distortion was the trigger.

I have had religious people make this exact argument to me in discussions on evolution/creationism. They ask me to ignore actual science and instead think about the possibilities of their particular religious explanation. I am unwilling to consider a religious explanation for matters subject to scientific study. They claim that this makes me closed minded and a slave to scientific authority.

You've made the same type of argument: You consider it axiomatic that markets will fail without continuous political interference. You take the recent collapse as "proving" your axiom and don't understand why I don't see that. Just like the creationist, you want me to ignore data and instead just adopt your viewpoint as an act of faith.

It ain't gonna happen.

You can't ignore the role of the GSEs (Fannie and Freddie) in the collapse for two reasons:

(1)  The GSEs were huge. Imagine what would happen to the economy if every bit of debt issued by the federal government prior to 2009 had been declared worthless overnight. That is pretty much what happened with the GSEs. If you want me to ignore them, you need to present a stronger, numbers based argument. You need to explain how the economy could have survived such a massive hit.

(2)  You need to explain your position, that even though the GSEs' insolvency preceded the crisis in the rest of the financial system, that the GSE insolvency was actually caused by the failure of the private parts of the financial system, and not the other way around.

I don't insist that the GSEs alone caused all the problems in the world's financial system. Obviously, the GSEs did not cause the problems that German and French banks have in Eastern Europe. However, they did play an enormous role in the damage done to the American part of the system. You have offered me no intellectual or quantitative argument for why I should think otherwise.

You are an honest and thoughtful guy, but I think you have a bad case of leftist insularity. You think it is so obvious that political intervention in the economy is usually for the better, that you don't even understand contrary arguments enough to shoot them down. You fall into the religious type of argument above, because you don't personally know anyone who thinks otherwise.

You believe that we here at a libertarian blog are just gaga over Bush's big-government conservatism. This shows that you really don't understand how we think. You don't address the factual argument we make, instead you invite us to abandon our intellectual constructs and make a leap of faith to join your "church".

Sean F:

To KJ Webb and Shannon:

Thanks for your gracious comments. The reason I read Chicagoboyz is because I find the posts interesting, the dialogue rational, and the posters intelligent. Quite unlike a lot of the blogosphere.

FYI, my aim is not to “convert” anyone. Joining a movement requires loyalty and faith – two things I suspect you can’t afford to have, if you want to think for yourself. I post here for selfish reasons - because debating ideas with thoughtful people helps me think through things, and because I think I can learn more by having a discussion with those who have a genuinely different perspective.

To Shannon:

Yes, the GSEs MBS debt was huge. But why do you think that somehow proves that big government or regulation was to blame for poor decisions at the GSEs? And why do you think that the GSEs' debt is the most important trigger of the entire financial crisis when so many other actors were involved? The real story is more interesting.

1.  Mortgage brokers, all private, are an unregulated part of the financial market with no controls. In the mid-1990s, they began surging growth by targeting high-risk borrowers, to the point that 20.1% of all US mortgages were subprime. They didn’t care about the risk because they repackaged and sold the loans immediately to investment banks. The credit rating agencies were paid to rate, and had an incentive not to upset their customers. They rated the higher tranches of CDO bonds as considerably lower risk than they actually proved to be.

Fannie and Freddie, and private institutions, bundled collections of home mortgages into MBS bonds (Mortgage Backed Securities). Private institutions bundled MBS into CDO bonds (Collaterallized Debt Obligations).

Mortage payments support the repayments of principal and interest on the MBS, and so on the CDOs. The CDOs are divided into layers called "tranches". If there are any mortgage defaults, the "higher" tranches ae paid first, leaving any losses entirely to the lowest or lower tranches. Buyers of CDOs knew this, and CDO tranches were priced accordingly.

2.  The investment banks made a lot of money selling these loans (now smelling like roses) as MBS to international investors. By 2007, the international market for these loans was $1.5 trillion.

3.  AIG and other international insurers sold insurance (credit default swaps) to the buyers of these loans who needed to hedge their risk. AIG probably knew that their risk estimation completely ignored systemic risk, but the money was too good to pass up. Investors thought they were golden because they had high-grade MBS bonds backed by insurance.

4.  This whole thing worked as long as payments were being made. When the economy slowed, payments stopped being made, and the whole system came crashing down, because the risk estimation, from everyone, was completely off. Some people, certainly the mortgage brokers, knew this from the start. But they didn’t have the right incentives to care, not when so much money was to be made in the short term.

Who came out ahead? According to the Prospect article below, the executives and officers of some mortgage finance companies cashed out before the market crashed.

• The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007.
• The three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006.
• Paul Krugman reported in The New York Times that the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million last year.

But they are just poster boys. The financial services industry made a killing by packaging sows ears as silk purses.

And where do the GSEs come into this? They were a part, but not the central part by a long shot. In 2000, Fannie, a "mortgage insurance" company, made a fateful decision to expand into sub-prime, relying on computer models to manage risk. Why? Politics. The Bush Administration wanted to expand home ownership, and the Democrats were not going to complain. If you want to be a cynic, the real explanation is supercharged stock prices. Franklin Raines was the CEO of Fannie for a while. He made $90 million between 1998 and 2004.

In 2004, Angelo Mozilo of Countrywide threatened to end it’s partnership with Fannie unless Fannie bought Countrywide loans. In 2003, Fannie had lost 56% of its business to competition from Wall Street banks. Also, Mozilo was a major GOP donor and player. The new CEO, Mudd, caved and agreed. Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. By 2007, the whole thing came crashing down.

Fannie wasn’t the cause of the crisis. It made the crisis worse because it was captured by unregulated mortgage brokers like Countrywide, who used it for their own short term profit.

See The NYTimes: Fannie, or more generally The NYTimes: The Reckoning.

Who is really responsible? Very poor structural incentives, a belief in deregulation for the sake of deregulation, a complete failure by the Bush Administration, and unwarranted faith in the ability of free markets to fix their own failures despite all the causes for market failure being present.

If you can get past the partisan language, the authors of the Prospect article below think conservative dogma had a major part to play in this crisis, and they make good factual points. An early analysis, from 2007 is eerily prescient. Looking back from 2009, they were dead on.

The American Prospect: Conservative Origins of the Subprime Mortgage Crisis

Shannon Love:

Yes, the GSE MBS debt was huge. But why do you think that somehow proves that “big government” or “regulation” was to blame for poor decisions at the GSEs?

Because they were government creations.

• They operated under an implied government guarantee that allowed them to borrow money at around half the cost of private actors.
• They operated under a custom set of laws and accounting regulations established by congress purely for the GSEs.
• They were created solely for the purpose of distorting the market to encourage the making of loans that the free-market judged as too risky.
• There is simply no way that their distortions of the market and their eventual catastrophic failure cannot be laid at the feet of the political system.

I don't think you understand just how huge the GSEs were in terms of market share of the MBS market.

Since the late 1980's, the GSEs bought at least 40% of every residential mortgage issued in the U.S. That grew to 54% by 2003, when they got busted for corruption.

Unlike in the private sector, most of those mortgages were bundled into MBS. The accumulation of these long term MBS means that 60%-70% of all MBS in the market today were issued by the GSEs.

Almost every company that went broke due to MBS, such as Waters pet bank, did so because they bought government sponsored MBS. Had the GSEs remained solvent and their MBS retained their value, we would not now have a major crisis even if every private issuer failed.

That is one reason why the GSEs and the political complexes that created them bear the lion's share of the blame in the crisis.

I would point out that when it came to the regulation of the GSEs, the Democratic and Republican roles reversed. Bush tried on 18 separate occasions to bring the GSE practices in line with those of private issuers. The Democrats shot him down each time. This is especially important because the GSEs did not have the external discipline of the market as private actors did. They really needed political oversight.

The GSEs had the implicit guarantee of the government. Private banks would lend them money, buy their corporate bonds, no matter how risky was their inventory of mortgages. They could do what they wanted unless restrained by government regulation. But, the oversight committees encouraged further and riskier purchases of subprime loans. -amg

Mortgage brokers, all private, are an unregulated part of the financial market – no controls.

This is not true. All private mortgage issuers operate under the same set of federal and state laws. Countrywide and a small town bank all operated under the same laws. But, mortgage brokers didn't have the same free-market limits as did small banks that kept their mortgages in house.

In the mid-1990s, they began surging growth by targeting high-risk borrowers – to the point that 20.1% of all US mortgages were subprime.

Well, here the government played a role. It doesn't take a genius to know that high risk borrowers are more likely to be people in the bottom half of the income distribution. These are exactly the people that the Clinton administration sought to help by leaning on banks and by empowering leftist organizations to sue banks for discrimination.

This led to changes in long standing lending standards evolved in a free-market. Banks can't legally discriminate between borrowers, so changes in lending standards for some borrowers became changes in standards for all borrowers. Again, a government intervention drove a change that the free-market would not have made, because subprime loans are too risky.

They didn’t care about the risk because they repackaged and sold the loans immediately as MBS to investment banks.

You left out a part. It should read, "They didn’t care about the risk because they sold the loans to the GSEs which repackaged and sold the loans immediately as MBS to investment banks."

The GSEs were created specifically to sever the issuing of a mortgage from the risk of holding it. The mortgage brokers, both pure brokers and banks who acted like brokers, were not bugs in the GSE system, they were its intended agents!

The entire point in creating the GSEs was to induce banks to make loans that the free-market judged as too risky. To this end, they induced mortgage issuers to pay attention only to whether they could sell the mortgage to the GSEs.

The GSEs, with their government backing and political mandate, grew less and less concerned about the risk of the mortgages they bought. The entire risk assessment system of the residential mortgage market broke down. Which, again, was the point of creating the GSEs in the first place.

1.  The credit rating agencies were paid to rate, and had an incentive not to upset their customers. They rated the higher tranches as considerably lower risk than they actually proved to be.

There was no significant residential MBS market prior to the GSEs. No private MBS issuer could assure buyers that the securities would retain their value. The government stepped in to address this "lack" in the market. Only after the GSEs had been issuing such securities for nearly 30 years, did private institutions find they could also issue them.

The GSEs conditioned the market to treat MBS as safe investments, an intentional distortion. The private issuers used the same risk assessment methods of the GSEs. The rating agencies gave good ratings to the GSEs based initially on their [implicit, not formal] government backing, so they had no reason to downgrade the private issuers.

Again, without GSEs, there would be no high rating for MBS. The industry would not have developed on its own to the scale it did.

2.  The investment banks made a lot of money selling these loans (now smelling like roses) to international investors. By 2007, the international market for these loans was $1.5 trillion.

The GSEs did this first. You imply that the private MBS issuers where doing something different and irresponsible when in fact they were following the GSEs. And again, the accumulation of GSE MBS was so large that even if the private issuers remained solvent, the failure of the GSEs would have destroyed the system.

3.  AIG and other international insurers sold insurance (credit default swaps) to the buyers of these loans who needed to hedge their risk.

Which would have worked if the GSEs had not collapsed. We see private actors using the statistical models of the GSEs to assess risk. Had the GSEs not existed, this market would not have existed or it would not have grown so large.

4.  This whole thing worked as long as payments were being made. When the economy slowed, payments stopped being made

That is wrong. The whole system worked as long as the market value of the properties backing the MBS stayed up. When those values tanked, the MBS became worthless. It had little to do with the money coming in the door. Instead, the accountants downgraded the value of the GSE issued MBS to near zero. Anyone who held those MBS as assets found themselves technically insolvent, such as Waters' bank.

In 2000, Fannie, a mortgage "insurance" company, made a fateful decision to expand into sub-prime loans, relying on computer models to manage risk. Why? Politics. The Bush administration wanted to expand home ownership, and the Democrats were not going to complain.

You need to check your dates. Bush assumed office in 2001 and Fannie and Freddie had both been increasing their subprime lending since 1995. Bush certainly wanted to increase home lending, all politicians do, but when it comes to oversight on the GSEs, Bush is clearly on the side of the angels. He tried 18 times to reform their practices, but got shot down by the Democrats every time. The record on this is very clear.

The damage to the market was already done by the time Bush came into office. All of the trends that would lead to disaster were already running. Had Bush gone to the mat to restrict lending to home buyers, who would have supported him? Certainly, not the Democrats.

Fannie wasn’t the cause of the crisis. It made the crisis worse because it was captured by unregulated mortgage brokers like Countrywide, who used it for their own short term profit.

Fannie and Freddie did cause the crisis, because they created the entire residential MBS market along with the intentional alteration of the perception of risk.

• Had they never existed, the residential MBS market would be small and stable like the commercial MBS market.
• Had they never existed, there would have been no mortgage brokers or banks acting like mortgage brokers.
• The American Prospect article simply ignores the creation of the GSEs as instruments of market distortion.
• It ignores the role of the GSEs in the rise of the mortgage broker.
• It ignores that the mortgage industry is the most heavily regulated part of the financial sector.
• It ignores that the volatility of the mortgage industry has increased as regulation has increased.
• It ignores that the least regulated sectors work just fine, such as commercial mortgages.

I've read dozens of articles, blog posts, and comments from the leftist perspective, and none of them address any of the complaints of the free-market perspective. Indeed, just like the articles you link to, they don't give a hint that they understand the crucial free-market role of prices as a means of communicating information such as the risk of mortgages.

Instead, they see a moral drama, a narrative, in which the noble and altruistic leftist restrains the greedy and stupid business people. The entire story is not a technical examination of a system, but a morality tale with the conclusion that one political group should be dominant over the other.

If you want to criticize free-market types, conservative or not, criticize us for not recognizing the market distortions and responding accordingly.

• We should have pushed harder and sooner for more oversight of the GSEs.
• We should have forced rating agencies to asses the risks of private MBS without regard to the GSE versions.
• We should have destroyed the GSEs.

In the end, we collectively produced this problem by wanting something for nothing. We wanted houses, but we couldn't accept the verdict of the market that we couldn't afford them.

Our short sighted politicians gave us the easy answer of tricking the market. Back in the 70's, we built our housing policy around the guarantee of the Federal government, to hide the risk of mortgages. We were going to have a major problem. The market cannot be fooled forever.

Sean F:

You're saying that the GSE's distorted the market perception of risk and created the problem. That view allows you to sidestep any responsibility for private actors, and retain your trust that unregulated free markets don't fail.

But consider, if the GSE's were mostly responsible for the bulk of the crisis, then the commercial MBS market should be fine. After all, you claim it is the GSE's that are the major source of the distortion. So a market subject to the same forces but without the GSE's should be fine, or at least much less affected.

And therein lies a problem. The facts. The commercial MBS market is as dead as a dodo. See Commercial Mortgage Alert for a rather depressing roundup of the current news.

The above link is to the front page of a blog on mortgage news. The headlines change over time. It is not directly possible to identify the source of Sean F's conclusion. -amg

Perhaps one could jump through a few more hoops and come up with yet another explanation that somehow implicates the GSE's. I'm sure it might be fun to try. But at some point, you run into Occam's razor.

For most of those without the faith that markets can effectively self-regulate, anyone not part of the conservative movement, the simpler explanation is probably correct.

The conditions for market failure were ripe. The market failed. That doesn't mean markets are bad, they're great, better than most other forms of economic ordering.

But they're not perfect. Lowering taxes and trusting in the market doesn't always work. Deregulation or non-regulation can sometimes lead to an incredible amount of value destruction and market failure. It isn't always good.

I think this is very hard for the GOP to accept. Goes against the dogma. I think the party needs some more electoral drubbing before that happens. Sort of like the Democrats and welfare reform.

Shannon Love:

If the GSE’s were mostly responsible for the bulk of the crisis, then the commercial MBS market should be fine.

I will turn the question around in two ways.

First, if the free-market is to blame, why didn't the commercial real estate market exhibit the same rabid boom, and why didn't the commercial MBS fail? If your model is true, we should expect to see a correlation between the degree of government intervention and oversight and the stability and reliability of the market. Instead, we see the opposite, in many different financial sectors.

Second, if the free-market is to blame, why did the GSEs fail? They were and are government creations operating under special laws and with government backing? If any government agency should have been able to judge the systemic risk of the residential mortgage market, it was the GSEs. Why didn't they see the problem years in advance and limit their purchases to safe mortgages?

Why did they fail before the private entities? Why did their failure bring down so many otherwise solvent private entities? If government regulation is so good and great, why aren't the GSEs safe harbors in a financial storm, instead of the eye wall [most destructive part] of the hurricane?

At best, you are arguing that the politicians you place so much faith in are no better at managing risk than the free market. At worst, the political intervention created the problem.

And, I will answer your question directly. As a leftist, you have a hard time understanding that conditions alter economic behavior, especially government force. The GSEs distorted the entire residential mortgage market and altered the behavior of all actors in the market, whether they dealt directly with the GSEs or not.

Almost all players did deal directly, either selling mortgages to the GSEs 50% market share or buying their MBS or stock. The GSEs altered the standards and practices of the entire industry over the course of 40 years, as they were designed to do.

Even if private companies had done everything right (which they never do), the failure of the GSEs would have brought the system down, and they were certain to fail. The cost of distorting the market had to be paid eventually.

Without GSEs, there would be no failure. Without the example of the GSE MBS, no private company would have gone into the business, because no private buyers would invest in such risky securities based on only the assurances of a private issuer.

No private issuer could purchase the large numbers of mortgages needed to get statistical protection against mortgage defaults. It took the enormous pockets of the federal government to get the ball rolling. Only after two decades of large scale government backed MBS flooding the market, could private issuers get a foothold by using the same standards as the GSEs.

The GSEs are the elephant in the leftist parlor. You are sitting around sipping tea and leaning around the elephant to talk about the failure of the free-market. You won't acknowledge that it's your elephant that you brought to the parlor. You won't even admit that it died. Its comical.

The market failed. That doesn’t mean markets are bad. They’re great, better than most other forms of economic ordering. But they’re not perfect.

Perfection is for leftists and their utopias. The only thing that free-marketers assert is that the free-market is more robust than political meddling. The failure of the GSEs and the politically regulated markets, and the stability of the unregulated markets bear this out.

Markets fail, but they fail small-time. It takes the power and enormous scope of government to wreck an entire economy.