Monday, September 29, 2008

Balanced analysis of the economic crisis

There is a vote McCain video (<-- click) in circulation that offers careful research to show that the current economic crisis is caused by Democrats and the history of finance and legislation designed to "provide housing for the poor." My friend and colleague Gordon L. Anderson, Ph.D., author of Philosophy of the United States: Life, Liberty, and the Pursuit of Happiness, responded to the person who sent him the pro-McCain-the-Democrats-are-the-problem video with this following response.

I found Gordon's response balanced and insightful:

William,

This is a pretty good description of why many of the most tragic mortgage foreclosures on poor people in the inner city occurred. However, there was a larger aspect. The two states with the highest foreclosure rates were Florida and California. In Miami, much of this was based on a "flipping" craze, where development raged and many middle and upper middle class speculators took advantage of the low interest rates to buy condos without ever expecting to personally live in them. In California, homes began to average $850,000. This was not your lower class democrat buying these homes; it was yuppies who wanted to buy a house in California. Many others around the country bought these loans on executive houses of $500,000 or more and they simply walked away from them when the credit bubble burst. Fannie Mae and Freddie Mac did these bad things-and I am afraid FDIC is no better prepared. But at the core is a credit bubble designed by the Federal Reserve Banks, Oil Companies, and large companies like Hewlett Packard and auto manufactures who wanted easy credit for consumers to buy their products, as much as the sleight of hand tried by liberal politicians like Obama.

This is a long-time problem brewing. Part of it related to changes in laws by banking and financial lobbyists. They supported supply-side economics under Reagan, but under Clinton the Glass-Stegal Act, designed in the 1930s to prevent some of this was repealed in 1999 making way for the Citibank-Travelers merger. During the last twenty years a number of conflict of interest laws were repealed that reduced oversight on fraud and corruption. There is plenty of responsibility on the part of both Republicans and Democrats.

This video showed how the inner city democrats pushed for loans for poor people and destroyed lives of their constituents rather than helping them. The flip side is that wealthy industries were lobbying Republicans for easy credit for their constituents. In the end both parties and many Americans, raised in a period of economic prosperity, failed to understand financial discipline and accepted credit like an opiate of the masses. The root cause is thus lack of understanding natural laws and basic economic principles-an educational and moral weakness. Our political leaders represent the same lack of self discipline as the culture at large.

The last twenty years our economy has been rooted in the philosophy of earning money from someone else's work. When everyone is trying to get more than they personally produce you have economic decline. Couple that with the national trade deficit, of which dependence on foreign oil plays a major role, and you have a prescription for economic collapse. Republicans and Democrats are both responsible.

The only sound government stands upon citizens who produce more than they consume and have both the freedom and ability to take care of themselves. The layers of government which sit on this foundation need to each become smaller, like a pyramid, with each level of government supporting the one on top of it. It defies the laws of society to have the upper levels of a pyramid support the lower, but that is exactly what our society wants to do. It is a fiction. Family, Society, Nation, World-each is a level that needs to support the level on top of it, not the other way around.

There is another issue related to regulation which we must learn about. Total deregulation of an economy is like having a Superbowl game with no referees. You will hear big business lobby for this type of "free market" because on an unlevel playing field they will win. Just like the biggest guys will be standing at the end of a football game. This is anarchy, plain and simple. The genuine free market is what our founding fathers promoted; it included checks and balances on accumulations of power and sanctions when the actions of one person caused harm to another. This way everyone can play on the field without disadvantage.

The other side is what you see the democrats doing-trying to turn government into business. To socialize or even to create government businesses that compete with the free market by giving the government subsidized business the upper hand on the playing field. The only truly free market is one in which the government plays the role of a referee in which neither the government abdicates its role as referee-with fair laws-nor tries to become a player on the economic field itself. You won't find either party advocating this proper role of government in the economy because, simply put, lobbying is too lucrative. It is more profitable to twist the laws in favor of lobbyists than to make them consistent with the objectives of the U.S. Constitution and the Philosophy of the United States founders like Franklin and Jefferson. (Who both argued that consolidation of credit at the federal level should be avoided at all costs.)

One could get into further discussion of taxation policies that also cause unlevel playing fields, and how big players colluded with the government in ways that shifted tax policies to forms that are both unconstitutional and cause a form of serfdom (they undermine the principles of property rights and the right to the fruits of your labor. But that gets beyond the immediate crisis at hand.

But the main conclusion it this: Don't expect either McCain or Obama, or the Republican or Democratic Party to solve these problems. These are two sides the big guys give us to occupy our time. It is more like rooting for Hulk Hogan or Sting in a wrestling match than doing anything that will affect Vince McMahon's control over the entire process. Both conventions were choreographed presentations for the media. There was not one iota of a chance they would contain any real discussions or dialogue. Those who differed were thrown out by the secret service and the police.

12 comments:

Ed Poor said...

Dr. Anderson, I greatly enjoyed your honest and refreshing analysis. We do need freedom, but we also need referees. Anarchy is not freedom; nor is totalitarianism.

I hope you will find the time to employ your pro-Constitutional philosophy in further analysis of national economic and political matters.

Ed Poor

William said...

Hi Frank, the link to the u-tube video you posted doesn't work. Here is a new link http://www.youtube.com/watch?v=NU6fuFrdCJY

William said...

Gordon,

I think Fannie and Freddie in controlling 50% or so of the mortgage market bear the prime responsibility. They were set up by Roosevelt, perhaps for good reason, in the 30s but since then should have been broken up and privatised as they belong in the market and not the state sector. Instead as the video showed they were used to push loans onto people for political reasons who in the commercial sector wouldn't have been given them for obvious reasons. So I am guessing that the bulk of the toxic debt from sub-prime mortgages that has been passed around comes from the government directed Fannie and Freddie.

I think this is an important principle that you brought up that when governments try to be involved in business it is a disaster and vice versa. The best book expounding these natural laws I have read is Jane Jacobs "Systems of Survival". She identified 2 incompatible moral syndromes one that is appropriate for government and the other for commerce. She argued for a strict separation of government and commerce much as Plato did. Problems arise when the precepts appropriate to one syndrome contaminate the other. Such as when government gets involved in business or when business principles are applied in government. It is a brilliant book and well worth a read as it explains so much of what has gone wrong in democracies as well as in communist countries.

Tyler said...

Just an observation about housing trends from the mid-Hudson Valley, Red Hook area. Over the last decade, a lot of McMansions have been built in the area. Meanwhile, the town has turned Democrat. The owners of the McMansions push laws to keep out the poor folks, to keep out the chain stores, to increase the minimum acreage allowable for a sub-division (I think it's 3 acres per parcel now) and to keep this area bucolic, peaceful, white, and available only to the wealthy. Some of these advantage-takers may be Republicans, but as I said, the town is shifting into a Democratic town after decades of being Republican. The Republicans push for 1 acre minimum sub-division and are defeated. The Republicans push for chain stores and looser business regulations, and are defeated. If I understand it right, this would tend to support the McCain video's argument that the policies of the left exploit the poor to the benefit of the wealthy, keeping the low-paying jobs and people who work them across the river, and expanding the gap between the wealthy and poor.

Marty Miller said...

"As a liberal democrat turned Regan Republican I see both parties erroneous policies; one responding to a constituency that has long held re-enforced ideas of entitlement to the extreme of dismantling our economic standards net, thus ensuring the present chaos, and entrepreneurial bankers, and brokers using exotic process and procedures (derivatives, etc) to flush out cash without the instruments having any other purpose than to squeeze the last dollar. Many of these instruments are devastating foreign investments. Americans are great salespeople and we sold terrible paper to people who thought they could get rich, but like all ponse schemes they collapse in the end. So here we are.
There is stupidity and culpability. Stupidity we can forgive, culpability we need to search out and punish. We also need to shine a light on what happened.
We may learn that standards, especially economic, exist for a purpose, to maintain social economic structure. Even the specter of seeming social inequity is not a reason to lower standards with the inevitable result."
Marty Miller

Antonion Betancourt said...

Frank,

Thank you for the commentary on the economy by Gordon Anderson and of course your response to it. Both the commentary and the response addresses the nightmare that the American people and the world in general are experiencing right now with no light out of the tunnel coming out of the Financial Establishment or Government in a foreseeable future,

Frank, the economic and financial crisis we are witnessing is no other thing that the end of the system as we know it. The economic systems that we inherited from the 18 and 19 centuries are dyng, they are in state of coma and they will not recover. Both the Capitalist paradigm behind the so called Market Economy, with the glorification of individual greed and the Socialist paradigm behind the so called communist or Command economies, with the glorification of envy are based on vices that will never lead to justice. These two systems were deficient from the very beginning. These two systems already fulfilled the out most within the limits of their principles. Nither is equip to address the demand of the masses of todays world for participation as new owners in the the inaugurated global economy.

Capitalist and socialist economic paradigms lead (perhaps unintentionally) to two kinds of monopolies, of concentrated power, financial and economic-money power in the hands of a few. The Capitalist system creates big concentration of economic and financial power on a few representatives of the private sector and renders the majority of the population dependent on that minority, for wages for hire, salaries, employment, prices setting, credit etc.

The Socialist system model also is intrinsic more monopolistic, creates a concentrated power on the bureaucracy of the State or Government. This concentration of economic, financial power, money supply and control of the economy is carried out by much tight monopoly than in the Capitalist system, the state bureaucracy. In this system also the majority of the populations depends on one minority for their economic "empowerment".

Both systems were not designed to empower the majority of the masses. Half of the 20th Century and the beginning of this 21st Century witnessed the necessity of empowerment and participation of the masses in the economy as well as in the political, technological and cultural affairs of the countries, regions and ultimately the world. Past history was characterized by an enlightened, educated minority who led the rest of the population who mostly were kept ignorant, and lacked the education and enlightenment to lead. Today we have a situation in which the masses are enlightened and educated: they want to lead, take responsibilities for their lives and that of their surroundings. In other words economically speaking the large populations of the world are demanding not just employment and wages, but participation in the way capital and wealth is created, and credit is allocated. There is a necessity to retire the two present systems of economic monopolies and create a real expanded "Market Economy for the Masses".

To do this the Wall Street Model is powerless and so is the New Socialist Model represented by Chavez of Venezuela and the new radical left. The world economy beginning with the US and the industrialized nations need to adopt the Ideas of Luis Kelso ( the founder of the ESOPs in America) and His followers since the 1960s.(KelsoInstitute.org, cesj.org, or widp.org,). The world needs a total democratization of the economy by democratizing access to money and credit for the masses. Since the 1970s the financial and legal istruments have been created for the economic trasformation of the world, to a Justice true democratic based economy.

If we want a real political democracy we most create a parallel of real economic democracy. Today we have a disfunctional political democracy parallel with economic plutocracy, that is the reason democracy is not working and expanding in the developing world including of course Iraq,the Middle East, Africa and Latin America. The masses have to become the owners of the new wealth that will be created now and into the future, not just wages for hire, or just employment or contracts, in today's economy this is plagued with insecurity. Only owners is the solution. "One person one vote, one person one owner".This will be "real representative democracy".


The 700 billion dollars as a part of the bailout plan, should not be given to the monopolies that created and are intrinsic part of the problem. This money should be allocated to the masses following Binari Economic Principles that are proven to bring economic empowerment to ordinary citizens.This will harness the wealth creative power, the productive ingenuity of people every where. Democratizing 700 billion dollars in the US, would aloud people to access credit for economic activities, and pay that credit with the profits and revenues of their enterprises. Access to self liquidating loans that would move the masses to participate in the economy of the country and in the economy of the world will create new owners of corporate assets that are producing wealth everywhere.

For more information on what I am talking about please log into the "Center for Economic and Social Justice", web side. They are the gurus in the Economic Justice Movement, Own or be Owned Movement.

Antonio

William said...

Antonio,

Capitalism isn't based on the glorification of individual greed. No analyst or advocate of the free market from Adam Smith to Hayek has suggested it is or should be. Instead they recognised that people have a tendency to be selfish or greedy and that the law governed free market was the best way to keep such impulses in check. They recognised that the free market benefits and give opportunities to the ordinary people as opposed to favouring the powerful as did systems where the powerful held sway and determined everything. Unfortunately the rich and powerful do their best to suborn the government and have legislation passed that undermines the free market and gives them an unfair advantage.

Much of the current crisis has been caused by greedy politicians wanting to use their legislative power to get themselves re-elected using pork-barrel and sub-prime loans so as to bribe their constituents into voting for them.

Frank Bell said...

While current problems have obvious causes, an underlying problem is the trade deficit. What can the U.S. sell, more food?
Well the price of transport just went up considerably. However media content and high tech have promise. Multinational companies
have already converted to metric. U.S. only companies have the option of exporting inch based products to Myanmar or converting to metric. The problem is that there is an inch culture so entrenched so you are unable to buy metric drills at a hardware store.

While the U.S. market is large, it is not global. The only product area of consumer electronics that is supposedly domestic is with computers, and still the hardware is multinational.

Another problem is energy. Nuclear power was targeted by communists and sympathizers in hijacking the environmental movement in the 1970s. Now China is building 40 reactors. Other technologies are possible, but replacing oil for shipping and airplanes is difficult. OK, coal could power ships but that would still contribute to global warming. An alternative example is to build a maglev train track from New York to Paris that could carry passengers at an average of 800 km/h (500 mph), and also carry freight. The Chinese would certainly like a branch line. An enabling technology to such things is electronics, which is rapidly developing. A basic problem is that this pace of development is very different from the pace
of government. The military understand this and have
managed to provide adequate isolation to enable development. Similar management methods for this energy problem would also be
effective.

Sincerely,

Frank, Clifton NJ

Remember Africa Inc said...

Hopefully that America will this time show its greatness to the entire world, by standing tall and proud for Senator OBAMA to be next USA Elected President, therefore putting aside racial issues that can only bring us down and show how low we are as a people. Please look at President Barack Obama as a young dynamic, and capable visionary who will take this country and this world to the Grace land of Unity and Consideration for one another.

Please vote Barack OBAMA for a need of change and justice around the world...

Dr. Caroline N. Hoth
President/CEO
Remember Africa International

Lloyd Eby said...

The best comments, by far, that I have read, seen, or heard about this financial crisis were given by Warren Buffet on the Charlie Rose show on October 1, 2008. This is available online at:

http://www.charlierose.com/shows/2008/10/1/1/an-exclusive-conversation-with-warren-buffett

Lloyd Eby said...

The comment given above about voting for Obama comes very close to being a racist one.

Supporting or voting FOR Obama because he is black is just as racist as opposing him or voting against him because he is black.

In either case you are using race as the criterion for making your choice, and doing that is inherently racist.

Lloyd Eby said...

Several days have passed since the original article appeared on Leaves, and since the various comments were given to it, including mine.

Today on another Internet forum I had an interchange about this with a correspondent who identifies himself as a Democrat and a supporter of Obama. I think his comment and my response are germane to this discussion, so I'm posting it here (without identifying the person to whom I am responding).


> Republicans of course were innocent bystanders [to the coming financial crisis -- my correspondent is being sarcastic], dispite the fact they
> were in control of both the white house,senate and congress.
>
> You may as well blame it on Satan.

___

Yes, for the most part the Republicans stood idly by and did not stop the evil for which the Democrats laid the foundation (by insisting that mortgages and home ownership be made available to too-poor people).

There are numerous reasons for this Republican failure. Among them are:

1) Most Republicans, being somewhat stupid and unobservant, did not realize that there was a crisis coming.

2) Republicanism does contain a populist branch or streak, and opposing giving mortgages to too-poor people (i.e. subprime mortgages) would go against this populist impulse.

3) Opposing the subrpime mortgages would open Republicans to charges of being racist (already that evil genius monster, Barney Frank, has begun to fling this false but poisonous charge at them).

4) Most Republicans oppose government regulation of business as an improper interference in the market. For them to go along with forbidding or regulating subprime lending and forbidding (or regulating) the turning of
those mortgages into bundled securities that banks and lending institutions bought and sold would be such an interference into the market.

5) Everyone was making out like a bandit in this housing market -- including the banks and mortgage companies and brokerage houses -- as long as the bubble kept expanding, so there was little incentive to do anything about it, especially as the people in the banks, mortgage companies, and brokerage houses have tended to be Republican supporters. In addition, a lot of yuppies, many of whom also tend to be Republican supporters, were making lots of money by buying and flipping houses.

6) The Republican control of Congress has been weak, so doing something just by Republicans was relatively difficult. Moreover, since most people do not understand econonomics, banking, and finance, it was quite difficult to get any substantial part of the body politic to understand that the deluge was
coming and oppose what was leading to it, especially as they were, for the most part, doing quite well themselves.

7) The bankers, investors, mortgage companies, and securities speculators were doing exactly what bankers, investors, mortgage companies, and securities speculators are supposed to do: Turn assets (or seeming assets -- they weren't true assets in this case, and that's the root of the collapse) into securities and packages of securities that can be bought and sold at a profit, and then buying and selling them in such a way as to maximize the profit on them. So there was
little reason or incentive for Republicans to attack the bankers, investors, mortgage companies, and securities speculators.

If it pleases you to call this the work of Satan, then do so, although I prefer not to do an analysis using those terms. In order to understand it in those terms, however, you have to understand how Satan works. A false but attractive populism that misleads the great mass of people into supporting political and/or economic movements that seem good and "progressive" at the time but will actually result in leading them into perdition is one of the
best ways to maximize evil.

That's how Lenin succeeded in taking over Russia, Hitler succeeded in being elected and taking over in Germany, Mao eventually took over China, Ho Chi Minh and his successors took over
Vietnam, Castro took over Cuba, Pol Pot gained control of Cambodia, Mugabe took over Zimbabwe, Khomeini's revolution took over Iran, and so on.

Wesley Pruden -- frequently an astute observer and commentator -- got it right in today's Washington Times. He writes (an excerpt):

http://www.washingtontimes.com/news/2008/oct/07/the-kitchen-sinks-ready-for-october/

"Mrs. Palin can expect to be pilloried for the audacity of straight talk; the mainstream media are as determined as ever to collude with the Obama campaign to avoid talking about the senator's carefully hidden past, his murky associations in Chicago and the ambience of windy mischief from which he sprang (in virginal innocence).

This is legitimate grist for Mrs. Palin; revealing the low-down on the high-up on the other ticket is what vice-presidential candidates do. But few voters will concern themselves with crimes of political passion or even the
coddling of vicious criminals while they're watching their life's savings disappear in a vapor of man-made poison. It's still "the economy, stupid," and the fingerprints of Democratic corruption are all over this disaster, crying for airing.

Fannie Mae and Freddie Mac are only components of the disaster, but they're the origins of the subprime-mortgage crisis that got the disaster started, and certain prominent Democrats treated Fannie and Freddie as their very own ATM. Barney Frank, whose "lover" was a senior executive at Fannie Mae,
famously said he wanted to "roll the dice a little bit more toward
subsidized housing." Another Democrat on Barney's House Financial Services Committee insisted there was "no crisis" at Fannie and Freddie, and most devastating of all, Barack Obama himself, for once not merely voting "present," led the resistance to John McCain's attempt to put the brakes on Fannie and Freddie recklessness while there was still time." (Tues, Oct. 7, 2008, p A4)