Searching for the Answer

Everybody is searching for the reason for the meltdown and confidently trying to dig up the answer.

Here on Road to the Middle Class we’ve been as confident as anyone.

Jerry Bowyer has taken a look and his candidates for “the reason” include:

1. The Community Reinvestment Act which has forced the banks to make loans to deadbeats
   
2. Fair value accounting, which has wiped $500 billion in assets off the balance sheets of the banks.
   

You can point the finger at the crooks at the banks, and why not. There’s probably enough crookery in there to suit every taste. But the problem when you are searching for a reason is that, of course bankers start to cheat when things go south. They are embarrassed. They feel guilty. They try to hide their mistakes. Politicians like Sen. Christopher Dodd (D-CT) and Congressman Barney Frank (D-MA) do that too. It’s like people and sex. Remember? Everybody lies about sex.

But Bowyer wants to point out the effect of wiping $500 billion off the banks with fair-value or mark-to-market accounting. With fractional reserve banking, where one dollar in capital is needed to support 10 dollars in loans, the write-off has wiped out $5 trillion in credit.

$5 trillion in credit? That could make quite a difference.

It's the Solvency Stupid

Monday and Tuesday the stock market tanked, and today it’s been on a rollercoaster. It was down as much as 2.5 percent and up as much as 2.5 percent, finally ending down 189.01 points on the Dow. You could say that buyers and sellers are fighting over the future. Will the bank bailouts here in the United States and in the United Kingdom do the trick, or is the poison too strong for the present antidote.

Let’s not forget that this is not a liquidity crisis alone. It is a solvency crisis. What are those assets worth on the balance sheets of the banks? Nobody knows, and that’s why the Feds are going to buy the bad apples from the banks. Clean up the balance sheets and you clean up the crisis.

Should we really be frightened? Is this 1929 all over again (or more properly 1931, half way down)? Or is it worse than that? Tony Blankley helpfully suggested that it could be the Black Death when one third of the population of Europe perished.

We humans are hopelessly optimistic—except when we are hopelessly pessimistic. There’s always light at the end of the tunnel, except when we are trapped like rats in a maze.

It has to be that way. After all, we are all going to die. It’s one hundred percent guaranteed. So unless you are hopelessly optimistic you might be tempted to say: What’s the Point.

And what’s the point of that?

"The Great Moderation" Did It?

Is there no end in sight? Today the market nosedived in the final hour of trading on Wall Street with the Dow off 678.91 points.

David Strom thinks it was the Great Moderation that did it.

Ever since the nail-biting recession of 1980-82 the world economy has been remarkably crisis free. There have been all kinds of things thrown at it: “the Savings and Loan Crisis, the ‘Asian Flu,’ the Russian default on their debt, the bursting of the dot com bubble and even the September 11th attacks.” But nothing was disruptive enough to cause a major recession. The global economy just sailed through.

Well maybe that golden age is over. People got used to moderation and in response took on bigger risks. We’ve all cashed in by taking out bigger mortgages and the folks of Wall Street have indulged in a veritable orgy of debt and leverage.

Not to be outdone the politicians geared up Fannie Mae and Freddie Mac to loan money on sub-prime mortgages in what you might call the granddaddy of all bigger risks.

Well, now it looks like the chickens are coming home to roost, with the Paulson bailout unable to arrest the downdraft in the stock market. Only, of course, the chickens are going to be roosting on you and me, not on the politicians and bankers that took the risks and awarded themselves the bonuses.

I suppose it’s too much to ask, but when we get out on the other side of this, could we try to reduce the amount of debt in the economy and try a little equity? It seems to me that it’s more neighborly, as it shares the gains and the losses, rather than grabbing all the wins for me and socializing all the losses for thee, as occurs under the current system.

Obama, ACORN, and the Smoking Gun

Here’s the story so far on the mortgage crisis.

In the 1970s the Carter Administration passed the Community Reinvestment Act that encouraged banks to lend in low-income areas. In the 1990s the Clinton Administration pressured banks to make sub-prime loans by holding up bank mergers for banks that didn’t pour enough money into low-income areas. In the 2000s Republicans tried to reform all this by reducing the exposure of Fannie Mae and Freddie Mac to sub-prime mortgages but Democrats cold-cocked every attempt at reform.

Now comes the smoking gun. It was ACORN, the left-wing group, through an inside/outside strategy of street pressure and lobbying pressure that was the driving force behind the mortgage mess. And Barack Obama was right in the middle of it in the mid-1990s, according to Stanley Kurtz in National Review.

“You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.”

That’s what the Chicago Sun-Times wrote in April 1995. And how could it be that a dead-beat could get a loan? ACORN would help you batter down the doors of that evil bank.

That same year, as a director at Chicago’s Woods Fund, Obama was successfully pushing for a major expansion of assistance to ACORN, and sending still more money ACORN’s way from his post as board chair of the Chicago Annenberg Challenge. Through both funding and personal-leadership training, Obama supported ACORN. And ACORN, far more than we’ve recognized up to now, had a major role in precipitating the subprime crisis.

So we understand this. Back in the 1990s the celebrated moderate and post-partisan Barack Obama was sluicing money at ACORN’s far-left projects on housing and Bill Ayers far-left projects on education. Ayers, remember, was just someone Obama knew in the neighborhood.

Kurtz tells the whole story. It began with ACORN pressuring the local banks in Chicago. But pretty soon it came up against the reluctance of the banks to hold sub-prime mortgages; they couldn’t get them off their books because Fannie and Freddie wouldn’t buy them.

So ACORN went to Washington to pressure the adminstration and Congress to change the rules on Fannie and Freddie to make them accept sub-prime mortgages. They had modest success with the Bush 41 administration and major success with the Clinton administration. Bigger and bigger the balloon got, until one day, it popped. Oh dear. Must be those evil Republicans, eh, Speaker Pelosi?

So now we know.

Up to now, conventional wisdom on the financial meltdown has relegated ACORN and the CRA to bit parts. The real problem, we’ve been told, lay with Fannie Mae and Freddie Mac. In fact, however, ACORN is at the base of the whole mess. ACORN used CRA and Democratic sympathizers to entangle Fannie and Freddie and the entire financial system in a disastrous disregard of the most basic financial standards. And Barack Obama cut his teeth as an organizer and politician backing up ACORN’s economic madness every step of the way.

No doubt Sen. John McCain (R-AZ) will be mentioning this at the debate tonight in a mild and avuncular way.

At the End of the World...

With stocks down seven percent in Europe and the United States today, it looks like the end of the world, and maybe it is.

But maybe it is just a problem of too many people borrowing too much against too little in assets. Or setting up their lives without any thought for the downside.

There’s a simple fact about borrowing a ton of money. Things better work out for you, otherwise you’ll be wiped out.

From time immemorial financial intermediaries like banks have operated in a highly leveraged way, borrowing and lending a lot of money. Problem is that when the assets securing the loans start to go south then so does the bank. And that is what we are seeing now.

The problem right now is that market participants lack confidence that the other party to their transaction is going to be there next week. So they are reluctant to lend to them. The central banks are running around hosing everyone with money but so far this hasn’t solved the problem. There are still a lot of people with assets securing loans that are worth a lot less than they were last week, last month, or last year.

The solution is fairly simple. All these folks who are leveraged up to the gills and beyond are going to have to be rescued by companies that aren’t leveraged up to the gills. That’s what J.P. Morgan did in 1907. He took the questionable assets of a highly leveraged broker and swapped them with the gold bonds of much-less-leveraged US Steel. All of a sudden the broker’s loans were secured by an asset that everyone could trust, and US Steel had an asset that turned out to be worth a lot more that people feared.

Unfortunately this time around our genius leaders haven’t yet decided how to do this. We must hope that they hurry up and figure it out. It’s their job to do stuff like this, after all.

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.