Inflation and Deflation
Inflation and Deflation
[Excerpted from Human Action, Scholar's Edition, pp. 418–419]
The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money.
Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. Changes in money's purchasing power generate changes in the disposition of wealth among the various members of society.
From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renders can be neither improved nor impaired by changing the supply of money.
There may appear an excess or a deficiency of money in an individual's cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.
From the point of view of this insight one may call wasteful all expenditures incurred for increasing the quantity of money. The fact that things which could render some other useful services are employed as money and thus withheld from these other employments appears as a superfluous curtailment of limited opportunities for want satisfaction. It was this idea that led Adam Smith and Ricardo to the opinion that it was very beneficial to reduce the cost of producing money by resorting to the use of paper printed currency.
However, things appear in a different light to the students of monetary history. If one looks at the catastrophic consequences of the great paper-money inflations, one must admit that the expensiveness of gold production is the minor evil. It would be futile to retort that these catastrophes were brought about by the improper use which the governments made of the powers that credit money and fiat money placed in their hands and that wiser governments would have adopted sounder policies.
As money can never be neutral and stable in purchasing power, a government's plans concerning the determination of the quantity of money can never be impartial and fair to all members of society. Whatever a government does in the pursuit of aims to influence the height of purchasing power depends necessarily upon the rulers' personal value judgments. It always furthers the interests of some groups of people at the expense of other groups. It never serves what is called the commonweal or the public welfare. In the field of monetary policies too there is no such thing as a scientific ought.
The choice of the good to be employed as a medium of exchange and as money is never indifferent. It determines the course of the cash-induced changes in purchasing power. The question is only who should make the choice: the people buying and selling on the market, or the government?
It was the market that, in a selective process going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hundred years the governments have interfered with the market's choice of the money medium. Even the most bigoted étatists do not venture to assert that this interference has proved beneficial.
Inflation and Deflation; Inflationism and Deflationism
The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians.
They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.
However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power.
Since the question as to at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorical precision required for praxeological, economic, and catallactic concepts. Their application is appropriate for history and politics.
Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation — i.e., big cash-induced changes in purchasing power — is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.
The terms inflationism and deflationism, inflationist and deflationist, signify the political programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power.
The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates.
This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.
First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy you cannot name. Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public when they want to question the expediency of issuing huge amounts of additional money.
They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly.
The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse.
The best example was provided by the subsidies granted on the part of the governments of the United States, Canada, and Great Britain to farmers. Price ceilings reduce the supply of the commodities concerned because production involves a loss for the marginal producers. To prevent this outcome the governments granted subsidies to the farmers producing at the highest costs. These subsidies were financed out of additional increases in the quantity of money.
If the consumers had had to pay higher prices for the products concerned, no further inflationary effects would have emerged. The consumers would have had to use for such surplus expenditure only money which had already been issued previously. Thus the confusion of inflation and its consequences in fact can directly bring about more inflation.
It is obvious that this newfangled connotation of the terms inflation and deflation is utterly confusing and misleading and must be unconditionally rejected.
Should We Believe the GDP?
Should We Believe the GDP?
Third quarter Gross Domestic Product (GDP) figures were announced recently with that index rebounding to reflect that the US economy is growing again at a 3.5 percent rate. The financial talking heads rejoiced and investors continue to power the stock markets higher. Fed Chair Ben Bernanke even predicted that the recession was over when he told the Brookings Institute in mid-September, "From a technical perspective, the recession is very likely over at this point."
Mark Zandi, chief economist and cofounder of Moody's Economy.com told the Joint Economic Committee, "The Great Recession has finally come to an end, in large part because of unprecedented policy efforts by the Federal Reserve and fiscal policymakers."
Never mind that the third-quarter numbers included Cash For Clunkers and other direct government intervention that skewed the numbers; what's the value of GDP numbers anyway? Just because the Department of Commerce crunched their numbers and the result comes out positive that means we are all better off? None of the 15.7 million officially unemployed Americans is thinking the recession (Great or otherwise) is over; especially if you are one of the over five million people who have been out of work for more than six months.
Megan McArdle takes GDP worship to task in the November issue of the Atlantic, in a piece entitled "Misleading Indicator." McArdle writes that Simon Kuznets made a "titanic achievement" when he created a system of national accounts, but GDP "counts the dollar value of our output, but not the actual improvement in our lives, or even in our economic condition."
McArdle uses the example of a new home built during the boom to make the point that all of that homebuilding pumped up the GDP numbers during the boom, but now the "house sits empty while bankers, borrowers, and regulators squabble. One of the 2.4 million excess homes on the market, its only function right now is to bankrupt its owner."
Likely without knowing it, the Atlantic's business and economic editor states a point made obvious by Austrians: "GDP does not, and cannot, reflect the waste of enormous effort, and precious natural resources, that went into building something that suddenly no one wants." Yes, all of the malinvestment made GDP soar, but ultimately just wasted capital. As Frank Shostak explains, "The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption."
Murray Rothbard always made the point in his class lectures that GDP figures were suspect because government outputs are included. Of course, government doesn't produce anything that consumers will pay for willingly, thus it must take from the productive economy to provide these services. So there is at least double counting of the outputs.
"GDP can record how much money we spend on health care or education; it cannot tell us whether the services we are buying are any good," writes McArdle. With the House passing a bill calling for the government takeover of healthcare as it has education, the result will be the same: GDP numbers will grow, but the quality of healthcare will go down while the cost goes up.
But while McArdle criticizes Kuznet's creation, it is only because she believes that another econometrician can create a "better statistical yardstick." She believes that man is Enrico Giovannini, who has been working on "more-reliable metrics for measuring change in our health, education, the environment — the many ways that human beings make themselves better or worse off."
But of course putting numbers and measurements to these subjective values is nonsense. As Ludwig von Mises wrote, "The attempts to determine in money the wealth of a nation or of the whole of mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimensions of the pyramid of Cheops."
Kuznets himself even questioned the usefulness of these numbers:
The statistician who supposes that he can make a purely objective estimate of national income, not influenced by preconceptions concerning the "facts," is deluding himself; for whenever he includes one item or excludes another he is implicitly accepting some standard of judgement, his own or that of the compiler of the data. There is no escaping this subjective element. (Kuznets, National Income and its Composition, 1919–1938, NBER, 1941.)
But McArdle is a believer. She's disappointed that Giovannini has left the OECD (and the new index project) to head Italy's statistics authority. However, she believes when "our grandchildren face their financial Waterloo, they may have Giovannini's brainchildren to help guide them through it."
But for now we have Kuznets's creation, which provided, as Sean Corrigan points out, "Roosevelt's statist Brain Trusters with a template on which to realize their Mussolinian fantasies of how the nation's affairs should be ordered."
If all this number crunching were relegated to parlor games, no harm would be done. Unfortunately, central bankers and central planners believe these statistics have relevance, justifying their interference with businesses and making us all poorer in the process — no matter what the numbers are.
HSBC, the UK’s biggest lender, and Barclays both posted upbeat trading statements in which they claimed the rise in bad debts has peaked and profits are sustainable.
Michael Geoghegan, HSBC chief executive, said: “I believe that the biggest jolt has now passed through the global economy. But it is too early to claim victory, especially while unemployment is still rising in the West.”
Barclays resumed dividend payments for the first time in 15 months and said bad debts this year would be at the bottom end of earlier forecasts of £9bn-£9.6bn.
Both lenders were buoyed by a strong performance in their investment banks. Although HSBC did not disclose any numbers, it said the division “maintained its record performance for the year to date”. Barclays Capital posted pre-tax profits of £1.42bn for the first nine months of the year, helping the group to overall profits of £4.54bn.
The two divisions’ success will inflame the row over bonuses though, unlike Wall Street banks, neither bank revealed the current pay pool. Barclays said bonuses were accruing at a “broadly consistent” rate to prior years, which analysts estimate to be an average of £200,000 per investment banker. However, it confirmed that decisions were yet to be taken on how much would be paid out to staff.
Banks are facing a crackdown from the Financial Services Authority and are preparing to reduce the overall compensation pool and pay out less in cash and more in stock. Barclays is also talking to major investors over bonus pool levels ahead of its year-end decision.
Chris Lucas, finance director, said: “We will be fully compliant with the G20 rules in considering bonus amounts and we will be thinking of all our stakeholders – employees, shareholders and the broader community and we will be taking into account all of their views.”
The G20 rules require lenders to defer 40pc-60pc of bonuses over three years and pay at least half of that in shares, all of which should be subject to a clawback. Last week, the Government went further with Royal Bank of Scotland and Lloyds Banking Group by demanding that all bonuses for those on more than £39,000 be paid entirely in stock.
The pressure on banks to rein in their cash bonuses comes as regulators, including the FSA, demand banks rebuild their capital buffers. Barclays revealed that its core tier one ratio is 8.9pc and HSBC’s 9pc – higher than the current 8pc benchmark set by the FSA.
Bad debts at Barclays jumped sharply in the past nine months, by 65pc to £6.2bn, due to the deteriorating economy. However, the increase in provisions slowed in the past three months, which the bank said was a positive sign and suggested the worst may be over.
The improving outlook helped persuade Barclays to restart dividend payments with a 1p third quarter payout on December 11. It last announced a dividend in August last year.
Group pre-tax profits fell 19pc to £4.54bn, but last year’s numbers were flattered by an exceptional £1.5bn gain from the acquisition of Lehman Brothers’ US operation. Excluding exceptionals, Barclays’ pre-tax profits more than doubled from £2.05bn to £4.41bn for the nine months.
As expected, profits in the commercial UK retail banks “decreased significantly” due to the “current economic conditions”. Barclaycard, though, saw an improvement in profits largely due to a pick up in international business.
At HSBC, “profitability for the first nine months was stronger than our expectations at the start of the year [and] ahead of the comparable period in 2008”. The third quarter was also “significantly ahead” of the same quarter last year. It was helped by a marked improvement in its disastrous US personal lending division.
The US operation, which originated sub-prime mortgages and was one of the first into the crisis in late 2006, is now in liquidation and found “loan impairment allowances declined in the quarter – representing the first quarterly fall since the start of 2006”. “Driven by stabilised credit performance in the US, loan impairment charges have fallen to their lowest quarterly level for over a year,” HSBC added.
Credit cards is the only US personal finance division HSBC plans to retain, having ditched mortgage lending and car finance. HSBC said: “The cards business remained profitable through the last quarter despite difficult economic conditions and lower fees from reduced volumes. As a result of improved economic conditions, we plan to resume marketing spend to grow new card originations modestly in certain segments.”
On issues of regulation, Mr Geoghegan added: “The global banking industry is in a period of significant and necessary change. The need for strong, well capitalised banks is indisputable.” However, he warned against moving to quickly.
“If capital ratios are increased before Western economies have had the chance to stabilise, this could trigger a number of unintended consequences. These include a rise in the cost and a fall in the availability of credit, which would undermine the ability of the banking industry to play its full part in supporting economic recovery. It may also encourage regulatory arbitrage and the emergence of a shadow banking system, beyond the reach of regulation.”
Barack Obama pledges to tackle Beijing on yuan
Barack Obama, the US President, will confront Chinese officials on the divisive subject of the yuan next week in a bold move which could anger America's largest creditor.
By James Quinn, US Business Editor
Published: 12:09AM GMT 10 Nov 2009
President Obama, who, since taking office in January, has resisted branding the Chinese government as currency manipulators, promised to discuss the thorny issue of the yuan, and whether it is undervalued, as part of a visit to Shanghai and Beijing.
"Currency, along with a host of other issues, will come up, and I'm confident that both the United States and China can arrive at a broad set of policies that encourages trade that benefits both countries, that allows ongoing economic growth," said Mr Obama.
Although vocal about the yuan during his candidacy, Mr Obama has held his tongue until now on the Chinese currency, with the US Treasury only delivering "serious concerns" about the "flexibility" of the yuan.
"If we don't solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship," he added.
Concerns are that Beijing artificially hold backs the value of the yuan to cheapen the cost of its exports, therefore making Western goods more expensive.
But Mr Obama will have to tread carefully as the Chinese government owns almost $800bn (£477bn) of US Treasuries, its largest foreign creditor.
Earlier in the day, the Chinese premier, Wen Jiabao, urged the US to "effectively discharge its responsibilities" and "maintain an appropriate size" to its budget deficit.
President Obama leaves Washington DC tomorrow to embark on his first trip to Asia, visiting Japan, South Korea and Singapore as well as China.
It’s the 20th anniversary of the fall of the Berlin Wall, as important to the 20th Century as the victory over Germany and Japan — probably more so, since Nazism was not an ideology with hundreds of millions of followers in the West and throughout the Free World that Communism had.
Among them were the editors of The Nation who open their anniversary feature – a fawning interview with the last Soviet dictator, Mikhail Gorbachev, with these fatuous but also sinister remarks:
“Historic events quickly generate historical myths. In the United States it is said that the fall of the Berlin Wall and the end of a divided Europe was caused by a democratic revolution in Eastern Europe or by American power, or both.”
So, according to The Nation (actually Katrina vanden Heuvel and her husband who conducted the interview,) the Czechs’ velvet revolution, Poland’s Solidarity movement, Ronald Reagan and Maggie Thatcher, America’s military buildup, Nato, the anti-communist cold warriors and the forty year containment of an expansionist totalitarian power had nothing to do with the frustration and collapse of Soviet power, the end of the Cold War and the liberation of more than a billion people from the worst tyranny in history. Instead, according to The Nation, the story has a Communist hero. Contrary to the myths concocted by the democracies of the West, it was really the dictator Mikhail Gorbachev, a man who described his own agenda as “saving Communism” (not to mention a man collusive in its monstrous crimes) whom we are to regard as the hero of the age.
And in case that didn’t register, The Nation’s editors dot the i’s and cross the t’s:
“With the twentieth anniversary of the fall of the Berlin Wall approaching, we believed that the leader most responsible for that historic event should be heard, on his own terms, in the United States.”
So, the Soviet dictator, unprompted, just decided to let the prisoners of the Soviet empire go free.
And now for that bridge that’s for sale.
But of course this is not really a laughing matter. The Nation’s deep hatred for America, for its institutions and above all its freedoms, is on display here and underscores why the Nation is also in the forefront of the movement to disarm America in the face of its Islamist enemies, undermine its security and deliver us to the mercies of the soldiers of Allah.
Architects of Ruin:How Big Government Liberals Wrecked the Global Economy — and How They Will Do It Again if No One Stops Them
By Peter Schweizer
With Architects of Ruin, Peter Schweizer again delivers a knockout punch of a book that is the must read of the season for conservatives and should be a main topic of conversation for conservative media.
Schweizer blows the lid off the 30-year leftist war on banking standards in the name of “equality” that created the housing bubble and caused the foreclosure crisis. (Somebody get this book to Glenn Beck as he recovers from his appendectomy- it’ll give him at least a week’s worth of blackboard material when he returns.)
For just over a year, Republicans have half-heartedly tried to point toward Democrat politicians for being too close to federal mortgage lenders Fanny Mae and Freddie Mac. They pointed out that Barack Obama got lots of campaign contributions from the lenders and protested that Democrats from Franklin Raines to Barney Frank and Chris Dodd have their fingerprints all over the housing meltdown that tipped the economy into crisis.
But these dark rumblings don’t really explain what happened. Instead, people see the Wall Street disaster, companies going under (or worse, getting bailed out by taxpayers’ money) and their 401ks tanking. Egged on by the media, most folks pin the blame on Big Capitalism, aka Republicans. At best, the public wishes a pox on both parties.
In succinct, witty and easy-to-understand language, however, Schweizer lays bare how radical activists spent 30 years undermining the banking system for their own benefit, and he exposes how liberal social engineering led to disaster.
The Racial Shakedown
Since 1977, when Jimmy Carter signed the Community Reinvestment Act pushed by fellow Dems with a lot of support from squishy-soft Republicans, the most important bank examiners in the United States have been Jesse Jackson, ACORN and a housewife named Carla Cincotta, a Saul Alinsky disciple from Chicago.
The CRA effectively gives community organizers a hecklers’ veto over bank mergers and other major banking decisions. They were given the statutory power to hold up deals worth billions until they received million-dollar payoffs. Since the shakedowns were enforced by federal law, banks inevitably buckled, surrendering one lending regulation at a time.
This led to such “reforms” as accepting food stamps as income on a loan application and the introduction of such previously unheard of “innovations” as no-money-down mortgages.
Think of how many times in the past three decades you’ve heard the terms “fair housing,” “affordable housing” and “community investment.” When you substitute those euphemisms with the words “lower lending standards,” it becomes pretty freaking obvious how we got into a banking crisis.
That’s the most important revelation in Architects of Ruin. For 30 years, the vast majority of so-called banking reforms and regulations have been at the behest of “community organizations.” Banks initially buckled under to the pressure under the threat of being labeled racist by Congress and a willing media, but the sums at risk grew from billions to trillions under the Clinton administration, when ACORN’s agenda was backed by the full force of the Justice Department.
In a nutshell (an acorn?): For 30 years, radical socialist groups who view banks as racist hoarders of the downtrodden proletariat’s money have had the power to block normal business activity unless a bank pays them gobs of cash in tribute.
This is something that has only been hinted at in the debates over the causes of the financial meltdown. Leave it to Schweizer — who proved in his bestselling Do As I Say, (Not As I Do) — that he is the master of exposing liberal hypocrisy and fecklessness to bring us the story.
Schweizer reveals how Alinsky-inspired Chicago radicals from Jesse Jackson to ACORN dragged banks, kicking and screaming, into what are now called “predatory lending” practices, and the institutions that actively resisted the tide were painted as racists. As the author writes:
“(I)t has now become an article of faith for American liberals that the mortgage industry is pervasively (if unconsciously) racist. … Having ceded this argument to the Left in the 1960s, conservatives have allowed home ownership to be defined as a new civil right, one that must be guaranteed by the federal government, rather than as a privilege to be earned by hard work and wise financial management.”
Once home ownership was made a civil right, banks were viewed as both the obstacle to that right and the means for securing it. The process became so upside-down that a bad credit score became a way to get favorable lending treatment.
Clinton’s Bail-out Capitalism
But even this wasn’t enough to bring down the system. The loans may have cost more, encouraged bad habits and were bad for banking, but it was a matter of a few nuisance billions. They were, after all, secured loans. The system could absorb it, and we all paid for it.
To overload the system to the tune of trillions took the full faith and credit of the U.S. government — and a slick President willing to play the system for votes and cash.
Bill Clinton filled his administration with both fair housing activists and Wall Street masters of the universe. While experts knew housing discrimination was largely a myth by the early 1990s, Attorney General Janet Reno — with Clinton’s blessing — paid back their campaign supporters by sending hundreds of Justice Department lawyers to harass banks into making more “community investments,” based on bogus “studies” that took race but not credit history into account to “prove” racism in lending.
More importantly, Schweizer writes, Clinton began the bail-out culture that meant Wall Street gamblers — most notably the Clinton-connected firm of Goldman-Sachs — could make millions even while making bad investments.
After Clinton bailed out Wall Street firms for wildly speculative investments in Mexico, Russia and South Korea, derivatives based on stodgy, old federally insured American mortgages — no matter how the regulations had been diluted — could hardly raise an eyebrow.
Fannie Mae and Freddie Mac suddenly were more than just housing assistance agencies –they became the biggest players in the mortgage business, and everyone in the banking business realized they could make money by writing mortgages and passing off the risk to Uncle Sam.
You see, once banking requirements were lowered, they were lowered for everyone, not just those intended to be helped. The middle class and the well-off used the new mortgage instruments to move into increasingly larger homes — and, even worse, used the inflated housing values to get equity loans on their property so they could get money to spend on other things.
By the end of Clinton’s reign, such mortgages had mushroomed from a nuisance level of $5 billion to more than $4 trillion — an amount equal to a good portion of the GNP. Still it was only a fraction of what would later be revealed to be troubled mortgages based on illusory housing values.
The Bubble Bursts
While George W. Bush’s administration eased back on the throttle and put forward a few reform attempts, Schweizer writes, the efforts were beaten back by Democrats quick to cry racism.
Although Schweizer doesn’t mention it, Bush also liked to brag a lot about the “ownership society” and the fact that more minorities owned homes during his administration than in any other time in history. Like spending discipline, this was just another conflict the Bush administration avoided while fighting two wars.
But as the title of a good new economics text by Guy Sorman, Economics Does Not Lie, reminds us, the chickens came home to roost. One of the first major banks to fail after the Fed had to bail out Freddie, Fannie and AIG was Washington Mutual, a bank that spent an inordinate amount of time bragging about its “multicultural loans.”
In the end, George W. Bush panicked and pushed TARP, the mother of all bailouts, but it did not work and may not have even have been necessary. The move may have pushed the correction down the road, and once again, Goldman Sachs was not only protected from bad losses but also made out like bandits.
Schweizer lists many of the politically powerful people and groups that also became rich through Fanny, Freddie and the whole “equal housing” scam:
- ACORN was not only able to spread the wealth around and accrue political power, it also received $9.5billions in direct funds.
- Rahm Emmanual, a senior advisor to Clinton and now Obama’s chief of staff, made $46,000 an hour serving on Freddie Mac’s board.
- Obama not only was one of the Senate’s top recipients of Freddie and Fannie campaign donations, but also, as a young ACORN attorney, sued Citibank for declining the mortgage of a black woman who had bad credit. The case generated $1 million in attorney fees.
- Various other Clintonites — including Raines, Richard Holbrooke, Henry Cisneros, Webster Hubbel and Harold Ickes — were rewarded financially through Fannie or Freddie even though they had no background in finance, just a history of activism on behalf of “affordable housing.”
The Next Bubble?
So what has Washington learned from the last 30 years blowing up in their faces? Not a damned thing.
Less than a year after easy mortgage lending blew up the economy, Barney Frank has suggested the fix is: more easy mortgage lending.
Obama, who advocated Robin Hood policies against banks and corporations as an ACORN community organizer, has gone beyond bailouts with General Motors and Chrysler by taking them over. Since then we’ve had the “Cash for Clunkers” program, which produced a mini-bubble in auto sales, and an increase in the CAFE regulations that contributed mightily to the automakers’ ruin in the first place.
Now Obama wants to take over health care, the most complex and personal industry and tells us it will “save money.”
But, Schweizer warns, the biggest boondoggle of alli s likely to be the “green economy.” It will seem to have value in the short run, but as we saw with housing — which actually does have intrinsic value — something does not attain real economic value through government declaration.
Schweizer writes:
“At the heart of the problem lies the American liberal Left and its continued inability to understand the nature of capitalism and the process of wealth creation. Saul Alinsky and the activists who pushed through this CRA recognized that by tapping the assets of private corporations they could accomplish great things that could not be achieved through the federal government. There simply wasn’t enough money in federal coffers to do that. Today’s activists continue to embrace this strategy even more than in the past.”
Fasten your seatbelts, it’s going to be a bumpy ride.
Sidenote: While Architects of Ruin focuses mainly on the political culprits, Thomas Sowell, in his typically masterful fashion, gives a more complete economic picture in The Housing Boom and Bust. Sowell, gives aFreakonomics-style look at the incentives that got everyone on board this disastrous gravy train — including a fascinating look at how California environmental regulations not only drove up housing prices but also how they rippled across the nation.
While Sowell’s book is wider ranging, he still traces the ultimate problem back to the CRA and the fact that banks were forced to adopt social goals rather than financial soundness. Both books are essential reading, though Architects gets the nod as a recommendation for the lay reader.
The Fed Is Already Transparent
The Fed Is Already Transparent
The central bank doesn't need more political interference as it decides when to move against inflation.
ANIL K. KASHYAP FREDERIC S. MISHKIN
Under the banner of increasing Federal Reserve transparency, Congressman Ron Paul has sponsored a bill that would subject the Fed's monetary policies to an audit by the Government Accountability Office (GAO). The bill is a veiled attempt to undermine the Fed's independence. If it passes, it will cripple policy making—particularly when it comes to inflation.
It is completely appropriate to hold the Fed accountable for its decisions. But the Paul bill, H.R. 1207, will only produce redundancies: Congress already has multiple ways of finding out what the Fed is doing and why.
The Fed produces a report and testifies twice a year before Congress about its monetary policy actions. During this testimony, the Fed is forced to explain what it has done, and elected officials question the Fed about its choices. In addition, the Fed makes the minutes from its monetary policy meetings available to the public, and Fed officials routinely give speeches explaining their approach.
What's more, it is highly doubtful that the GAO has the technical competence to evaluate monetary policy. If it did try to conduct these audits, at best it would merely rehash known information. At worst, the GAO would generate confusion by offering its own analysis.
Economic theory and massive amounts of empirical evidence make a strong case for maintaining the Fed's independence. When central banks are subjected to political pressure, authorities often pursue excessively expansionary monetary policy in order to lower unemployment in the short run. This produces higher inflation and higher interest rates without lowering unemployment in the long term. This has happened over and over again in the past, not only in the United States but in many other countries throughout the world.
The Fed's independence is critical to its credibility. During the financial crisis, this credibility allowed the Fed to take extraordinary action to prevent a possible depression without triggering inflation. But eventually the Fed will have to scale back its unprecedented monetary accommodation. When it does move to tighten monetary conditions, it must be allowed to do so without political interference.
Weakening the Fed's independence now might raise the risk of inflation, which would cause borrowing costs to rise and would lower prospects for a strong economic recovery. For these reasons, we joined over 400 prominent economists in July when we signed a petition opposing the type of incursion on the Federal Reserve that Mr. Paul is proposing.
Fortunately, Congress is considering an amendment to the bill that would prevent the negative consequences of the original Paul legislation. This amendment, put forward by Rep. Mel Watt (D., N.C.) would change the focus of the bill by instructing the GAO to audit the new lending facilities at the Federal Reserve that were authorized under the 13(3) "unusual and exigent circumstances" clause of the Federal Reserve Act. The 13(3) lending authority, which had not been used by the Fed since the Great Depression, was the basis for many of the most controversial decisions made during the crisis, including the rescue of AIG and the establishment of new lending facilities.
This audit would involve oversight of the operational integrity of these facilities' accounting, internal controls, and protection against losses. It would also disclose the borrowers from these facilities one year after the facilities are closed. The audit would produce new, important information that is not otherwise available and would play to the strengths of the GAO. And the amendment would exempt the Fed's normal monetary policy actions from the audit.
We strongly support an amendment of this type because it will increase the Fed's accountability without compromising its monetary independence. We also believe that the lag in disclosing the names of borrowers would enable Congress to have appropriate oversight over these facilities without compromising their effectiveness. Earlier disclosure would diminish the efficacy of these facilities because of the so-called stigma problem: If borrowing from emergency lending facilities is immediately made public, the markets would know that the borrowers might have financial difficulties, which would make it harder for the borrowers to operate.
No one can be fully comfortable with all the unprecedented actions that the Fed has taken to limit the damage from the financial crisis. We appreciate the frustration of the public and members of Congress who want a better understanding of what has happened. Forming a committee of experts to write a report on the crisis might help reassure the public and provide some lessons for crisis management in the future. But the Paul bill, as originally written, won't help with these goals and will only stifle the recovery.
Mr. Kashyap is a professor and director of the initiative on global markets at the Booth School of Business at the University of Chicago. Mr. Mishkin is a professor of finance and economics at the Graduate School of Business at Columbia University, a former governor of the Board of Governors of the Federal Reserve System, and the author of "The Economics of Money, Banking and Financial Markets" (Addison-Wesley, 2009).
After the Fort Hood Massacre
After the Fort Hood Massacre
Sorting the Hasans from patriotic Muslims in the U.S. military.
There are two irreconcilable views of Army Major Nidal Malik Hasan's murder of 13 people last Thursday at Fort Hood, Texas. One is that Major Hasan should be seen as not much different than many other disturbed individuals, whose demons pitch them into homicidal frenzies. The other is that the Hasan murders raise hard questions about the ability of Muslims to serve at all in the American military.
Neither view is acceptable. It will be the job of public and military officials in weeks ahead to shape a policy response that recognizes the hard political and ethnic realities of the Fort Hood massacre.
The central reality is that 13 people are dead on American soil, all but one in service to the country as a member of the U.S. Army. Sergeant Amy Kreuger of Kiel, Wisconsin, enlisted explicitly in response to 9/11, she said, to oppose the forces that caused that day. These appear to be the same violent forces that turned Major Hasan into an instrument of terror.
So no, Major Hasan is not just another nut. He volunteered himself into a larger Islamic jihad, whose political weapon of choice is the murder of innocents across the globe.
The Fort Hood massacre makes clear, again, that Islamic terror is unavoidably a domestic U.S. problem as well. There is a strain in American thinking that deludes itself in believing that somehow this force will occupy itself mainly with blowing up marketplaces in faraway Pakistan or Afghanistan. On Thursday, their problem was our problem.
In the aftermath of these shootings, the best venue for exploring the domestic threat from radical Islam and what to do about it is Senator Joe Lieberman's proposed hearings into the Hasan murders. News reports piecing together Major Hasan's history suggest an association years ago with a pro-al Qaeda imam at a mosque in northern Virginia. That imam left for Yemen in 2002, and his lectures there in support of al Qaeda have appeared on the computers of terrorists suspects in the U.S., Canada and the U.K.
Investigators are collecting information from Major Hasan's PC and his email traffic, with officials already noting that he spent time surfing radical Islamic Web sites. This sounds similar in some respects to the aborted car bombings in the U.K. in 2007, committed by Muslim doctors there who also spent evenings absorbing violent exhortations on Web sites. A Radio Free Europe/Radio Liberty study that year documented the reach and sophistication of radical jihadi media on the Web—accessible to anyone with an Internet hook-up in Kabul, Islamabad, London or Fort Hood.
Before the Democrats came to power in the 2008 elections, one issue they pushed hardest through the policy debate was their opposition to domestic electronic surveillance in pursuit of Islamic terror activities. If the Hasan investigation concludes that he arrived at his pre-spree cry of "God is great!" after immersion in the world of violent Islamic Web sites and prior time spent at radical domestic U.S. mosques, then we would hope that the response of our lawmakers would be more than a shrug that these 13 dead are simply the price we have to pay for living in "our system."
Likewise, Mr. Lieberman's hearings could explore if the Army needs ways to muster out personnel such as Hasan or recruits ambivalent about fighting fellow Muslims.
Just as Americans can't blink away the dangerous world of radical Islam, however, we also cannot pretend that we can field a military that doesn't include Muslims. The unreality of attempting to fight this enemy without Muslim soldiers or operatives should be obvious. In Iraq, devout Muslims worked loyally as translators and guides for U.S. forces, sometimes dying to rid their country of the world's common enemy, which is homicidal Islamic fanatics.
In recent years U.S. soldiers have fought a common enemy on behalf of and often alongside Muslims in Bosnia, Kosovo, Kuwait, Somalia, and elsewhere. The U.S. is fighting a sworn enemy today, just as in World War II American Germans, Italians and Japanese fought sworn U.S. enemies of the same race and religion. Many American Muslims will do the same if we stay focused on the real enemy, and show we have the will to do what's necessary to find them and stop them.
From Berlin to Baghdad
Will the peoples of Islam tear down their walls as the people of Central and Eastern Europe tore down theirs?
By FOUAD AJAMI
For all its menace and fanfare, Eastern European communism, one of its countless chroniclers observed, left the theater of history on tiptoe. The simple, surprising end came 20 years ago, Nov. 9, 1989, when an apparatchik of the German Democratic Republic read out a note announcing that the border that had cut through Germany would be opened for "private trips abroad." The Berlin Wall had fallen.
A mere two years earlier, in November 1987, there was a celebration of the 70th anniversary of the Bolshevik Revolution, and even Mikhail Gorbachev—the fourth Soviet leader in three years—gave the appearance of normalcy. But it was too late for such pretense. The subjugation of that "other Europe" had come to an end.
"Gorbachev's role, though honorable, has been exaggerated," British historian Norman Davies writes in his monumental book, "Europe: A History." "He was not the architect of East Europe's freedom: he was the lock-keeper who, seeing the dam about to burst, decided to open the floodgates and to let the water flow. The dam burst in any case; but it did so without the threat of a violent catastrophe."
There were the Hungarians, in October of 1989, on the 33rd anniversary of the crushing of their national rebellion, abolishing the entire ruling Communist apparatus. There were the people in Prague again, a mere two decades after the snuffing out of their freedom, launching their Velvet Revolution. Poland wrote its own distinctive history. Its national church never faltered—a gifted primate of that church, Cardinal Karol Wojtyla, rose to the papacy and helped steer his nation's history freedom's way. Its shipyard workers led a movement that made a seamless transition from workers' rights to the cause of national freedom.
It wasn't always pretty, the emancipation of these captive nations. Communism always carried within its doctrine the stern warning that national chauvinisms would spring to the fore were its "internationalism" to give way. Yugoslavia bore out that message. What rose from its graveyard were pitiless nationalisms whose crimes are indelibly etched in our memories. Tito had indeed held together an impossible country. Nor were matters pretty in Romania, no velvet revolution in the twisted, dark tyranny of the Ceaucescus. The march to ballots and free markets was not always an attractive, or a straightforward, tale.
An angry, uncompromising Russian sage, Alexander Solzhenitsyn, the oft-told story tells us, came to Washington in the summer of 1975 but was denied the opportunity to meet with President Gerald Ford. The story's significance shouldn't be overdone. Two generations of Americans had done their work "containing" the spread and the appeal of Communism.
But Soviet power seemed at its zenith in the 1970s. The cause of freedom was embattled—Jean-François Revel said a "totalitarian temptation" was in the air. Soviet troops and their proxies were deployed in Vietnam, Cuba, Yemen, Angola, Mozambique, etc. A nativist revolution had plunged Iran, America's "pillar" in the Persian Gulf, into a new darkness, and in affluent Western Europe a willful Euro-Communism had resonance all its own.
It was against this dismal background that Ronald Reagan had risen. He may not have known much about the foreign world, he may not have always been a master of his brief—the details and the execution and the discipline were supplied by his gifted collaborator, Secretary of State George Shultz—but he trusted his own instincts. He had his feel for history's march, his faith in human freedom. He had recoiled from all the talk about America's decline. He had boundless belief in the American mission in the world.
"I do have a strategy," Reagan said after one detailed briefing on the challenge of the Soviet Union: "We win, they lose!"
He was to be vindicated. Where political regimes had taken on an authoritarian cast in the 1970s, the number of countries that chose what broadly could be called political freedom increased by 50% between 1980 and 1990. The American strategic build-up in the Reagan years was of a scale that the Soviet Union could not match.
In Afghanistan, the last battle of the Cold War, the Soviet imperial thrust was broken. American weapons and American will, Saudi money, a Pakistani sanctuary, and a ragtag army of volunteers from the wider world of Islam broke the Soviet will. (We thought well of these volunteers then, they were freedom fighters, the mujahideen, and we nicknamed them "the mooj" in affection.)
It would stand to reason that 45 years of vigilance would spawn a desire for repose. The disputations of history had ended, we came to believe. Such was the zeitgeist of the '90s, the Nasdaq era, a decade of infatuation with globalization. The call of blood and soil had receded, we were certain then. Bill Clinton defined that era, in the way Ronald Reagan had defined his time. This wasn't quite a time of peace. Terrorists were targeting our military installations and housing compounds and embassies. A skiff in Aden rode against one of our battleships. But we would not give this struggle the label—and the attention—it deserved.
A Harvard academic had foreseen the shape of things to come. In 1993, amid this time of historical and political abdication, the late Samuel P. Huntington came forth with his celebrated "Clash of Civilizations" thesis. With remarkable prescience, he wrote that the end of the Cold War would give rise to civilizational wars.
He stated, in unadorned terms, the threat that would erupt from the lands of Islam: "The relations between Islam and Christianity, both Orthodox and Western, have often been stormy. Each has been the other's Other. The 20th century conflict between liberal democracy and Marxist-Leninism is only a fleeting and superficial historical phenomenon compared to the continuing and deeply conflictual relation between Islam and Christianity."
The young jihadists who shattered the illusions of an era practically walk out of Huntington's pages. We had armed the boys of the jihad in Afghanistan. They came to a conviction that they had brought down one infidel empire, and could undo its liberal rival.
A meandering road led from 11/9 to 9/11. The burning grounds of Islam are altogether different than the Communist challenge. There is no Moscow that serves as the seat of Jihadist power. This is a new kind of war and new kind of enemy, a twilight war without front lines.
But we shouldn't be surprised with some of history's repetitions. There are again the appeasers who see these furies of Islam as America's comeuppance, there are those who think we have overreached and that we are riding into storms of our own making. And in the foreign world there are chameleons who feign desire for our friendship while subverting our causes.
Once again, there arises the question in our midst of whether political freedom, broadly conceived, can and ought to be taken to distant lands. In the George W. Bush years, American power and diplomacy gave voice to a belief in freedom's possibilities. A different sentiment animates American practice today.
For the peoples of Islam, the question can be squarely put: Will they tear down their walls in the manner in which the people of Central and Eastern Europe tore down theirs? The people of Islam are thus sorely tested. They will have to show their own fidelity to liberty. Strangers with big guns and ample means can ride into their midst with the best of intentions and skills, but it is their own world, their own civilization, that is now in history's scales.
Mr. Ajami, a professor at Johns Hopkins School of Advanced International Studies and a senior fellow at Stanford University's Hoover Institution, is the author of "The Foreigner's Gift" (Free Press, 2007).
Bart Stupak wins a ban on federal funds for abortion.
By WILLIAM MCGURN
Not many folks in Washington have made Nancy Pelosi cry "uncle."
Bart Stupak is one of the few. For months, the Michigan Democrat has been threatening to bring down any health-care bill unless the House was given the opportunity to vote to extend the ban on taxpayer dollars for abortion to the new federal programs being created. On Saturday night, Mrs. Pelosi caved and Mr. Stupak prevailed.
The result is one of the few, real up-or-down votes we ever get on abortion—and the only part of the health-care mess that shows any bipartisan consensus. In the end, 63 Democrats and Mr. Stupak joined all but one Republican on an amendment that does two things: prohibits federal funds for an abortion or for abortion coverage; allows (notwithstanding pro-choice propaganda) private insurers to offer abortion coverage so long as tax dollars are not involved.
"Mr. Stupak and I have not always agreed on things," Indiana Rep. Mike Pence, chairman of the House Republican Conference, told me. "But I commend him for his effort here. His willingness to dig in the way he did was admirable."
What makes this interesting is that Mr. Stupak is no Blue Dog. Though some Blue Dogs joined him, the Stupak amendment in fact offers a striking contrast between the success of pro-life Democrats and the persistent failure of Blue Dogs. The pro-lifers came together, held their line, and got their way; the Blue Dogs never seem able to coalesce, and generally have been picked off individually.
Not that the press ever noticed. Up until almost literally the 11th hour, Mr. Stupak's push for a vote was treated as a sideshow. Nor was President Barack Obama ever called to answer for his flatly contradictory public statements on the place of abortion (the preferred term is "reproductive health care") in any health-care reform.
Mr. Stupak has just changed all that. On Sunday, the president of Planned Parenthood, Cecile Richards, sent out an action alert asking supporters to tell Mr. Obama to "make good" on his "promise to put reproductive health care at the center of [his] health care reform plan." She should know: She was standing next to Candidate Obama in 2007 when he declared that "reproductive care is essential care, it is basic care, so it is at the center and at the heart of the plan that I propose."
Unfortunately for Ms. Richards, during his recent appearance before a joint session of Congress, Mr. Obama promised something different: "no federal dollars will be used to fund abortions."
Notwithstanding the president's promise, page 110 of House Speaker Nancy Pelosi's bill authorized the secretary of Health and Human Services to determine when abortion is allowed under the government-run plan. All Mrs. Pelosi's preferred "compromises" left this undisturbed, using what in effect would be a money-laundering scheme to cloak the reality of a federal agency paying for abortion.
But Mr. Stupak stood firm, and Mrs. Pelosi realized something would have to give if she wanted to get a health-care bill passed. So she gave Mr. Stupak his vote—and his victory.
Now, some believe Republicans should have voted "present" on the Stupak amendment, on the grounds that the worse they could make the bill, the harder for Speaker Pelosi to get the magic 218 votes. That's pretty short-sighted, for several reasons. For one thing, in September all but a few Republican House members signed a letter to Speaker Pelosi demanding such a vote. Had Republicans defeated a pro-life amendment they had asked for, they would have paid a dear price for their cynicism.
For another, it's not even clear it would have worked. The Stupak alliance of Democrats was a broad one, from liberals like Minnesota's Jim Oberstar to conservatives like Mississippi's Gene Taylor. The danger of the cynical GOP strategy is that it could easily have backfired, freeing up Democrats to give Mrs. Pelosi her victory—and putting Republicans in the awkward position of being unable to press for funding restrictions they had explicitly defeated.
As it is, Democrats now have to make some decisions that may anger their Planned Parenthood wing. The fight itself will be interesting, judging from a claim by Diana DeGette (D., Col.) in yesterday's Washington Post that 40 Democrats will vote against a final bill unless the Stupak amendment is stripped out. Of course, if it is stripped out, that will put even more pressure on those 64 Democrats who voted for the amendment.
"We won because [the Democrats] need us," says Mr. Stupak. "If they are going to summarily dismiss us by taking the pen to that language, there will be hell to pay. I don't say it as a threat, but if they double-cross us, there will be 40 people who won't vote with them the next time they need us—and that could be the final version of this bill."
Stocks Pause After Rally
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
Major stock-market indexes were mixed Tuesday as investors took a breather following Monday's sharp rally.
Shortly after the start of trading, the Dow Jones Industrial Average was little changed, sliding less than three points. The S&P 500 and Nasdaq Composite Index also were flat.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
The Dow leapt to a new 13-month high Monday of 10226.94 as investors grew more optimistic about the continued flow of easy money to support economic recovery. The blue-chip measure has risen 4.7% over the four-day winning streak that began with the Federal Reserve's policy statement last Wednesday, which quelled fears that the central bank might raise rates soon. Gold rose to a new record, oil futures snapped two days of losses and the dollar fell.
On Tuesday, the euro crossed about $1.50, gold was down slightly after rising to a new high of $1,111.70 on Monday. Oil prices also slipped after the threat of Tropical Storm Ida to U.S. oil and gas installations receded.
"[Ida] isn't expected to cause any lasting oil industry facilities damage ... the storm has been downgraded to unpleasant from nasty and everything should be up and running again by mid week," said London-based brokerage PVM Oil Associates in a note.
Beazer Homes USA shares climbed more than 9% after the company returned to a profit in the fiscal fourth quarter.
Elsewhere, Asian stocks climbed after the Wall Street rally, with the Nikkei 225 up 0.6% in Tokyo and the S&P/ASX 200 up 1.3% in Sydney. Europe stocks edged lower.
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