Hey Katie, May I Call You Joe? (Wink, Wink)

My boxing days are over, but after the Vice-Presidential Debate last night I allowed myself a couple of upper-cuts—right to the solar plexus.

Because. Because it is so delicious when one of ours, reviled and ridiculed by the Drive-by Media, just socks it to them.

“The next person that winks at me, I’m not sure I’m going to be able to take it after tonight,” said MSNBC’s Rachel Maddow.

That’s according to Byron York at NRO. Yes, Bob Barnett was counting and Sarah Palin did six winks. As Rosalind said: Not to be endured! (That’s another sophisticated literary allusion.)

Yes, but what about a serious discussion of The Issues?

Good idea. And to do that we cannot do better than quote Good Ole Boy Fred Thompson.

“One of the reasons I feel so good for her, just as a human being,” said former Sen. Fred Thompson, “is I have never seen anybody undergo the ridicule, the slanders and the lies, and the blogosphere and what they’re doing, and breaking into her private email, rumors and things about her, and now, most recently, belittling her, taking little snippets of interviews and laughing at her and satirizing her. Those people ought to be ashamed of themselves[.]

You know, if Sarah Palin were a liberal, say an important professor of Womens Studies, and Republicans did to her what Democrats just did, our liberal friends would be tearing up the pavement. They would be bellowing “McCarthyism” from every TV set, and Katie Couric... Well enough about her.

The delicious thing about the whole business is that Sarah Palin’s folksiness drives our liberal friends absolutely nuts.

And there’s a deep philsophical reason for that. Oh yes. This is not just about an excess of colloquialisms. Sarah Palin’s folksiness changes the subject. All of a sudden we are not talking about liberal things, about racism, sexism, classism, and homophobia, or about the endless parade of victims. All of a sudden we are in middle-class land, where people are assumed to have a basic competence about life. It’s assumed that they follow the rules, go to work, pay their taxes, and look after their families.

The whole point of liberalism is that some expert has to do all that for you.

David Cameron's Greatest Speech

That’s what they are saying at conservativehome.com. British Conservative Party leader David Cameron outlined his agenda for change in Britain earalier today at the annual Conservative Party conference in Birmingham, England.

And yes, the speech really was about change. Cameron declared that he would declare war on the underperforming state education sector. Those focus groups must have had some pretty salty things to say about the schools if a national politician felt emboldened to say this:

The election of a Conservative government will bring - and I mean this almost literally - a declaration of war against those parts of the educational establishment who still cling to the cruelty of the "all must win prizes" philosophy and the dangerous practice of dumbing down.

In fact, the Tories propose to introduce schools that will be independent of the state monopoly that operates through Local Education Authorities.

But the biggest line for me was Cameron’s amplification of his core philosophy: “There is such a thing as society. It’s just not the same thing as the state.” He quoted the words of Labour spokesman. “David Miliband said that ‘unless government is on your side you end up on your own.’” We’ve heard that one before, of course. Both Hillary Clinton and Barack Obama have used it. Cameron exploits the opening offered by Miliband.

For Labour there is only the state and the individual, nothing in between. No family to rely on, no friend to depend on, no community to call on. No neighbourhood to grow in, no faith to share in, no charities to work in. No-one but the Minister, nowhere but Whitehall, no such thing as society - just them, and their laws, and their rules, and their arrogance. You cannot run our country like this.

This is a big deal for me, because it anchors Cameron in the broad church of conservatism that begins with Edmund Burke and the “little platoons.” A free society cannot just be the government and the free individual. Instead, as Cameron says, it must be the whole panoply of free institutions, anchored by responsibility:

For me, the most important word is responsibility. Personal responsibility. Professional responsibility. Civic responsibility. Corporate responsibility. Our responsibility to our family, to our neighbourhood, our country. Our responsibility to behave in a decent and civilised way. To help others. That is what this Party is all about. Every big decision; every big judgment I make: I ask myself some simple questions. Does this encourage responsibility and discourage irresponsibility? Does this make us a more or less responsible society? Social responsibility, not state control. Because we know that we will only be a strong society if we are a responsible society.

In all Cameron used the word “responsible” or “responsibility” 28 times in his speech. And that is right, of course. A conservative society is a responsible society.

What is a Mortgage Worth?

Enough of the partisan political rhetoric, already. Let’s think about the big problems.

And the biggest problem right now is to figure a correct value for the great big ugly mortgage assets on the balance sheets of our beloved financial institutions.

That’s the big problem because, until we all feel confidence in the value of the banks’ assets, we really don’t know whether the banks are solvent or not. And nobody wants to have exposure with an institution that might be insolvent.

In a sensible article in VOX, economist Daniel Gros takes a stab at answering this question.

The important fact to understand, Gros states, is that US mortages are “no recourse” loans and that homeowners in conseqeunce have a “virtual put option.”

With a “no recourse” mortgage, the debtor effectively receives a virtual put option to “sell” to the mortgage-issuer the house at the amount of the loan still outstanding. Mortgage lenders are “short” this option, but this is not recognised in the balance sheets. In most cases, the balance sheets of the banks report mortgages at face value -- at least for all those mortgages on which payments are still ongoing.

This fact is implicitly understood by modern homeowners. The understanding is communicated in the popular term “jingle mail.” If things turn south and you can’t make the payments on your home mortgage you can always pull up the moving truck and mail the keys to the bank, which gets a nice jingly package in the mail next morning.

The question for Gros is: what is the value of the jingle mail option? It turns out that it’s bigger than you think.

Applying the usual Black-Scholes formula to a typical subprime loan with an LTV ratio of 100% yields the result that the value of the put option embedded in the “no recourse” feature is 26.8% of the loan, even in the low volatility case. For a conforming loan (a loan that could be insured by Fannie or Freddie) with a loan to value ratio of 80%, the value of the put option would still be close to 14% (still in the low volatility case).

Oh goodie. The Black-Scholes formula. That last reared its ugly head in the tech-startup stock options meltdown.

So the moment that a bank issues a subprime loan it ought to book the loan on its balance sheet at 26.8 percent less than face value. And even with a conforming loan where the homeowner has put down a 20 percent down payment, the bank ought to book the loan at 14 percent less than the face value of the loan.

You can see that this would make a huge difference. We simply wouldn’t be in the current liquidity crisis if the rules that Gros proposes had been followed. Of course, we wouldn’t have had the massive credit bubble either, because if the bank has to book a loan at 20 percent off face value then the multiplier effect of high leverage doesn’t apply any more.

Well, ok Dems. OK Barney Frank. OK Sen. Chris Dodd and the Friends of Angelo. Here’s the answer!

Ahem. Of course, you realize that the lovely stealth social program of sluicing mortgage money at inner-city voters would get caught in the meat-grinder if this rule were enforced upon the banks and Fannie and Freddie. And that would never do.

Our Unserious Politicians

Today the unserious House of Representatives punted on the administration’s plan to empower the US Treasury to buy toxic mortgage debt, get it off the market, and get the financial system going again.

It doesn’t really matter how it’s done.

This is not that hard to understand. When you have a bunch of debt floating around that’s under water—where the assets that provide collateral for the debt are worth less than the face value of the debt—then you have a problem. It’s like the game of musical chairs. Nobody wants to be left with the toxic debt when the music stops, so nobody gets up of their chairs at all.

It doesn’t matter who’s to blame for all this. It seems that there’s plenty of blame to go around, although it is important to realize that the banks, even the investment banks, are all regulated by the government.

We’ve got to get the toxic debt off the market, and these days that means the government.

A hundred years ago, before the Federal Reserve System, it was up to banker J.P. Morgan to direct operations during the Panic of 1907. And he did it. The key moment, as we have written here, was when the brokerage house of Moore & Schley was about to fail. Morgan engineered an asset swap to save Moore & Schley, got President Roosevelt’s approval, and the crisis was over.

If only we could do the same today. But the problem today is that the government has distorted the credit system in countless ways to support its various political agendas. That’s what the flap over Fannie/Freddie is all about. Congress decided to use Fannie/Freddie to boost homeownership in the inner cities. Great idea, and all that, but they didn’t want to pay for it. They wanted the banks to pay for it.

Well, now we are finding out the true cost of this stealth social program, and it ain’t going to be chump change.

March towards the Sound of Guns. Not.

Back in the good old days, when armies marched on their feet rather than Humvees, they had a simple saying: “March towards the sound of the guns.”

The reason is pretty simple. Under normal conditions, armies are scattered across the countryside. The key skill for an army commander is to get all his units to the battlefield before the other chap.

Of course, in real life there are units marching around, or camped, who haven’t got the word. But if they got to the battlefield then they could help. Indeed, they might make the decisive difference between victory and defeat.

So when Sen. Barack Obama (D-IL) declined to go to Washington DC to help in the final stages of putting the Great Mortgage Bailout Act together, he was violating this fundamental principle of conflict. Whaddya mean, call me if you want me?

A guy who wants to be president should be feeling: “I just can’t wait!” He should be foaming with impatience to get to work and solve the nation’s problems, to get into the room where critial decisions are being made.

But no. Sen. Obama elected to stay in Florida preparing for the presidential debate on foreign policy. Foreign policy? How about acting like the leader of your party and corralling senators and representatives together to get a solution to the nation’s economic crisis?

It goes deeper than that. Back to the military metaphor. Suppose you were a young, untested formation commander. You hear the sound of guns. What do you do? You march towards the sound of the guns. Here, at last is your chance to show the old buffers what you are made of. Here is the chance to deploy your troops and smash into the tired enemy troops that have been fighting all day. Here is your chance to show that you are made for greatness—and there may never be another chance.

If I were an Obama supporter, I would have a nasty feeling in my stomach today.

Mr Potter is Buying!

Remember the run on the Bailey Brother Building and Loan in It’s a Wonderful Life? Just as the panicky depositors were demanding their money back from George Bailey, Mr. Potter the evil banker called George in for a chat. You don’t really want that broken-down old Building and Loan, do you, George, he said, and all the bother involved?

Mr. Potter would buy it, he said, and George could have a nice job at Potter’s bank.

Don’t you realize! George yelled at the panicky depositors. Don’t you realize that while you are selling, Potter is buying?

Today, as John McCain suspended his campaign to get back to Washington DC to work on the bank bailout plan, Warren Buffett signed up for $5 billion of stock in Goldman Sachs.

Mr. Potter is buying.

Close-coupled Character

I was commenting on the financial meltdown of 1907 at the American Thinker today. It’s all about sound collateral, I argued. An alert reader complained about the loose ends lying around.

Back in 1907, you see we, had a major credit crunch with trust companies failing all over the place. J.P.Morgan solved it with a bit of asset swapping, so that a shaky Wall Street broker could have collateral that everyone could trust.

In the aftermath of the crisis Congress hauled banker Morgan up to testify so that they could convict the innocent and let the guilty go free. He rather surprised them by saying that the key thing in business is character. Very good. But I then muddled things up by talking about the danger of close-coupled systems. They are bound to break, sooner of later, and then where are you?

You are right where we are today.

Morgan also flummoxed his congressional interrogator by failing to explain why he would buy a stock like Equitable Life, which only yielded one-eighth of a percent.

The answer, I think is character. We can’t just have people running flat out everywhere, trying to get the last ounce of profit out of the economy. That goes for politicians like Barney Frank who want Fannie and Freddie to squeeze the last ounce of credit into “affordable” homes for Democrats. And it goes for Wall Street Masters of the Universe leveraged up to the eyeballs squeezing the last ounce of profit out of the latest hot stock or derivative.

What is needed is some men of substance around like Morgan who, from painful experience, are willing to provide a factor of safety for the economy. They buy a stock not for its immediate potential but because it needs a good home. They unwind their leverage because they don’t want to be wiped—or wipe others out—if they bet wrong.

With chaps like Morgan around, you hope to avoid the risks of the close-coupled system which, when it fails, fails big.

It’s a tricky thing to implement, because we all want more efficiency in the economy, and more efficient use of resources. But how much should we risk for that?