Are you a deflationist? Or an inflationist? No matter which way you believe the wind will blow, the truth is this: it’s up in the air. But, as Jim Rickards explains, there are things you can do to cover your assets, no matter which one wins the tug-of-war. Read on…
There are two things you shouldn’t do this Election Day: one, vote; two, buy gold. Why? Chris Campbell explores this and more in today’s Laissez Faire Today. Read on…
America has about 4% of the world’s population, yet houses 25% of the world’s incarcerated. What’s going on here? Chris Campbell digs deep into the industry to figure out the truth. While many blame the private prison industry, the real culprit, says Chris, begins right outside your door. Read on…
“While I heartily subscribe to your premise of pursuing one’s dream,” one reader, Donald J., wrote, “there are alternate perspectives worth considering.”[We’re listening… go on.]“Some wiseguy once said that life is what happens to you while you’re waiting for something better to come along. Milton put it a little more poetically in one of his […]
Want to get rich? Don’t listen to financial “gurus,” says Chris Campbell. In today’s Laissez Faire Today, Chris shares a Zen proverb and shows how understanding it is the only real way to get rich (and live a rich life). Read on…
Sometimes life deals you lemons. It’s up to you to make lemonade. This month’s Insider Cellar recommended winemaker had no intention of making wine when his family settled just north of Santa Barbara. When our reluctant winemaker’s father walked his land in the early 1980s, he was probably disappointed when he discovered the soil did not have the nutrients to support his strawberry crop
Ben Franklin once said, “An ounce of prevention is worth a pound of cure.” In today’s Laissez Faire Today, you’ll learn about one FREE website that has the potential to not only keep your family safe – but also open your eyes to what’s happening in your own neighborhood. Chris Campbell has all the details. Read on…
All over the world, power is dying. The dictators and tyrants of the world are no longer able to wield it like they once used to. And they’re losing it to the “little guy.” Chris Campbell shows you how to be the king of your castle by taking advantage of this fact. Today, you’ll learn how to grab “power gaps” in the market and channel them into your product idea or project. Read on…
The fireflies along the tidal rivers of Malaysia show "feats of synchrony that occur spontaneously, almost as if nature has an eerie yearning for order." Chris Campbell tells you where else this might occur in the world. Also, new technology may revolutionize the agriculture industry and what we think of as a farm.
Jeff Davis is running for Governor in Hawaii and has an interesting campaign strategy. Also, what motivates hackers is revealed and the findings might surprise you. Finally, Ferguson is discussed in a new light. Chris Campbell has more...
This month, I’m going to tell you a hard truth. It’s one that Wall Street brokers and financial analysts try to hide. It’s one that most newsletter writers choose to ignore. In fact—when it comes to the financial world—this is a “secret” that everyone knows… but no one will mention.
When the government pumps trillions of dollars into the economy, they’re not actually printing the money. It enters as digital entries in banks across the country. It’s made the system fast, responsive, and, unfortunately, vulnerable. Now our money is no longer something we hold in our hands, but something that exists on a very susceptible network.
The so-called recovery is only built on debt and printed cash declares our own Byron King. In the long term, the only option for the government to continue financing it's operations is to print too many dollars. Money printing has it's limits, however. It's Byron's opinion that at some point, perhaps very soon, the government will have to turn to more desperate measures. Namely, capital controls. In the following featured essay, Byron outlines 4 probably ways the government will take your cash and one play you can buy through your broker to prepare today. Read on...
Americans expatriate because they want to get out of the country. Corporations expatriate for similar reasons. Clem Chambers explains...
In a 2009 article, the Huffington Post went into considerable detail about the number of people with PhD degrees in economics employed by the Board of Governors of the Federal Reserve System. This is the government’s branch of the Federal Reserve. It is not one of the 12 regional Federal Reserve banks, all of which […]
They lurk somewhere in everyone’s 401(k) program. Tick, tick… And it might be years before you discover them. Tick, tick… By the time you do… Kaboom! It’s too late. They’ve already blown up your retirement.
The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in […]
The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance or the get-rich-quick adventurer. They will die poor.– Jesse Livermore, How to Trade in StocksThe trouble with capitalism’s guardians is that they have no […]
John Foust, a Democrat running for the 10th congressional seat in Northern Virginia, is — like Gov. Terry McAuliffe and other state Democrats — gung-ho to expand Medicaid. His wife’s position is, shall we say, a bit more nuanced.Foust has slammed his opponent, Republican Del. Barbara Comstock, for her opposition to expansion. He has spoken […]
The midterm election season is upon us, and it’s a tossup whether the Republicans will win the Senate, or if President Obama, seemingly oblivious as conflict flares up around the world, will, through his continuous campaigning, keep Harry Reid in his majority leader seat.The only thing we know for sure is that sociopaths will be […]
One industry is expected to grow from an estimated $77 billion sector by the end of 2014… to around $700 billion in 2024. And that, frankly, is a conservative estimate, as you’ll see below. This isn’t because of some resource boom or new discovery. This isn’t because of funny business or a trader play. This is real spending, done by real companies to combat a very real threat. It’s already an established industry but poised for exponential growth. Because the problem it combats is growing exponentially.
Alexander Hamilton was America’s first Secretary of Treasury under President George Washington. When he first entered office in 1789, America was an agricultural nation of just 4 million still broke from its financially costly victory over the British Empire in the Revolutionary War.The states had accumulated relatively massive debts to finance that war, which mostly […]
A great technology solves a problem that we didn’t know we had. It makes us aware of deprivations we didn’t know existed until we discover the new thing. Once discovered, we can’t go back.People in the 1950s, for example, never missed the smart phone. They were pleased to have a phone at all. But today, […]
Fifty years after the 1929 crash, a group of money managers and investment thinkers put together a collection of essays looking back at that experience. The result was a distillation of some pretty fine investment wisdom. Timely, I think, to review now.One of the contributors was Arthur Zeikel, then with Merrill Lynch. The title of […]
Although the mainstream media have turned its attention away from the wreckage of Obamacare, don’t think for a second that all is well.As the politicos in D.C. focus their attention on the midterm elections in November, now is a great time to study, prepare, and seek out the most affordable, accessible, and highest quality options […]
Where do great investors come from?I’m not sure what the hurdle rate for greatness is, but Guy Spier has put up impressive results. His Aquamarine Fund has returned 463% since inception in 1997, versus just 167% for the S&P 500 (a broad proxy for the market). Put another way, $1 million invested at inception is […]
Turn on the tube and economic ignorance seems to be everywhere. There is constant shilling for more government. Business is demonized. Man is said to be trashing the environment. “Workers and women are oppressed” is the constant mantra.And members of the clueless media nod their heads in unison.Only John Stossel has provided the fresh air […]
In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]
In the minds of many people around the world, including in the United States, the term “capitalism” carries the idea of unfairness, exploitation, undeserved privilege and power, and immoral profit making. What is often difficult to get people to understand is that this misplaced conception of “capitalism” has nothing to do with real free markets […]
Some people are saying it is just what the doctor ordered. Others are saying that the cure is worse than the disease.The Affordable Care Act? Reengagement in Iraq? Tea Party bullying in the GOP?Not this time. Just as protracted in the corridors of Congress and the White House is the debate over the proposed reform […]
I made a choice five months ago. And that choice has saved my life. This wasn’t some instantaneous decision, with danger near. It wasn’t some great “eureka” moment, either. There probably isn’t a person out there who would question what I did. In fact, more and more people are making the exact same choice every day. And each one does it to the sound of applause.
In 2012, money mandarins running the European Union chose stagnation over restructuring. Here’s a consequence of that choice: expectations for a self-sustaining economic recovery keep getting crushed.Two years ago, European Central Bank (ECB) chief Mario Draghi promised to do “whatever it takes” to hold the eurozone together. He bluffed nervous investors into believing in a […]
People jacked up about income inequality can find a new hobby. The 1% are victims of a doomsday machine, and the countdown is ticking. Machine, thy name is “family.”This came to mind as I was reading a preview of Columbia Professor Andrew Ang’s forthcoming, must-read book on Asset Management. Ang is that oxymoron, an exciting […]
The other night, I tuned into The Flaw, a 2011 documentary about the 2008 financial crash.
While telling the crash story, the movie flashes in and out of a street tour offered by an ex-mortgage bond trader. The young man has the required effervescence to keep a dozen tourists entertained while they look at nothing more interesting than office buildings. He cleverly lets members of his tour touch a toxic asset. Well, a page of the legal document of a collateralized debt obligation (CDO), anyway.
The camera pans to tourists taking pictures next to Charging Bull, the 7,100-pound bronze sculpture closely associated with Wall Street. The guide starts his tour saying what has become a worn out cliché. “Welcome to Wall Street; this is the heart of American capitalism.”
But is Wall Street really the heart of capitalism?
If we understand capitalism as a social system of individual rights, a political system of laissez faire, and a legal system of objective laws, all applied to the economy with the result being a free market, is Wall Street really capitalist?
The laws that govern the securities industry start with the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, The Investment Advisors Act of 1940, the Securities Investor Protection Act of 1970, the Insider Trading Sanctions Act of 1984, the Insider Trading and Securities Fraud Enforcement Act of 1988, the Private Securities Litigation Reform Act of 1995, and the Sarbanes-Oxley Act of 2002.
Of course, all of these acts weren’t enough to prevent the crash of 2008, so we now have the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Jumpstart Our Business Startups Act of 2012. That seems like a whole lot of regulating for something that’s supposedly a capitalist marketplace.
Back when lawmakers were pithier in writing legislation, the Securities Exchange Act of 1934 ran 371 pages. Dodd-Frank totals 848 pages. This mountain of paper and regulation is anything but laissez faire. Thousands of government employees are charged with enforcing these byzantine rules. Does this sound like the deregulated, Wild West Wall Street we’re told brought the nation to its knees?
When investment banks Goldman Sachs and Morgan Stanley were in danger of failing in September 2008, they applied to become commercial banks; their applications were quickly approved. Even in the boom times, bank charters normally took a couple of years to be approved. Now it’s impossible. The last de novo charter was approved in the fourth quarter of 2010.
While The New York Times made a big deal of the additional regulations the banks would have to endure, these banks were rescued as the FDIC insured their deposits, stemming a possible run. The change also allowed the banking behemoths to borrow from the Fed against a wide array of collateral. No one can call this “survival of the fittest” capitalism.
Much of the business on Wall Street is bond business. As of a couple years ago, the bond market totaled $32.3 trillion. Just over half this market is corporate, mortgage, and asset-backed bonds. Government, municipal, and agency bonds make up 44% of the market.
The trading of government and mortgage bonds can be considered capitalism, but the instruments traded certainly aren’t the spawn of free markets.
The 30-year mortgage would not exist without government. Before the Depression, home loans were short term. Residential mortgage debt tripled during the roaring ’20s, however, and “much of this financing consisted of a crazy quilt of land contracts, second and third mortgages, high interest rates and loan fees, short terms, balloon payments, and other high-risk practices,” explains Marc Weiss in his book The Rise of the Community Builders.
Mortgage lenders would often lend only 50% of a home’s cost and often for only three years. But from the National Housing Act of 1934 emerged the Federal Housing Administration (FHA), with the intent being to regulate the rate of interest and the terms of mortgages that it insured, or in the words from the FHA’s first annual report, “to bring the home financing system of the country out of a chaotic situation.”
The FHA standardized housing and financing through its Underwriting Manual, which required homes to be built and financed by the book. The FHA initially insured mortgages for 20 years at 80% of cost. This was eventually increased to 30-year, fully amortizing terms and 97% loan to cost.
The FHA believed its appraisal process would expose inflated values and risky properties. Of course, the agency would claim not to dictate development practices. “The Administration does not propose to regulate subdividing throughout the country,” the FHA’s 1935 handbook Subdivision Development claimed, “nor to set up stereotype patterns of land development.”
However, the handbook’s very next sentence states, “It does, however, insist upon the observance of rational principles of development in those areas in which insured mortgages are desired.”
James Moffett, who headed the FHA in 1935, said his agency, by guaranteeing mortgages, “could also control the population trend, the neighborhood standard, and material and everything else through the president.”
After World War II another mortgage guarantee program was born so war veterans could more easily obtain credit. The U.S. Department of Veterans Administration (VA) loan program started modestly, guaranteeing only 50% of a loan up to $2,000 for 20 years. Today, veterans can borrow up to 102.15% of a home’s sales price.
Fannie Mae was created by the government in 1938 to provide a secondary market for mortgages. After the Civil Rights Act of 1968, the government established Ginnie Mae to buy FHA loans originated as a result of the Fair Housing Act. In 1970, Congress authorized Fannie Mae to purchase conventional mortgages and chartered Freddie Mac to also purchase mortgages under control of the Federal Home Loan Bank Board.
Fannie and Freddie were taken over by the government during the financial crisis, and the FHA is in financial trouble.
Every modern president has been foursquare behind home ownership. In 1994, Bill Clinton’s HUD Secretary Henry Cisneros rolled out the National Homeownership Strategy that championed looser loan standards.
Ten years later, George W. Bush said, “If you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country.”
Ironically, at the height of the housing bubble, government backed fewer than 40% of mortgages. Since the crash, as Jesse Eisinger wrote for ProPublica last December, “With little planning and paltry public discussion, the government has almost completely taken over the American home mortgage market.”
“It is creeping nationalization,” says Jim Millstein, an investment banker who worked in the Obama administration’s Treasury Department as the chief restructuring officer.
Speaking just weeks ago in Phoenix, the current president laid out five steps to heal the housing market and promote homeownership. The president urged Congress to pass a bill allowing every homeowner to refinance at today’s low interest rates. Second, he said, “Let’s make it easier for qualified buyers to buy homes they can.”
Reforming immigration, putting construction workers back to work, and creating adequate rental housing were also part of the president’s pitch.
Defending the 30-year mortgage in The Washington Post, Mike Konczal writes, “It would be nice to imagine that the ‘free market’ will just take care of this issue. But remember that the housing market is created through a huge web of government policy.”
And if there wasn’t enough government involvement in the housing and mortgage markets already, the Federal Reserve’s third round of quantitative easing (QE3) policy consists of the central bank purchasing $85 billion per month of Treasury and mortgage-backed securities.
Since its founding 100 years ago, the central bank’s manipulation of interest rates has distorted asset values and misdirected capital, working contra to where free markets would funnel resources.
Near the end of The Flaw, tour guide Andrew Luan is asked if he feels any responsibility for the financial crisis. He looks away from the camera nervously and contemplates. While he doesn’t answer verbally, the cheerful tour guide’s face becomes etched with guilt.
However, Mr. Luan has nothing to be sorry for. People want to direct their anger at Wall Street and blame the crash on investors and traders. But Wall Street is not synonymous with capitalism and markets. It was government intrusion and regulation over many decades that caused the crisis. We know this. Yet the counternarrative persists in the public mind.
Sadly, rather than get out of the way, increased government interference keeps capitalism from doing its regenerative work. This keeps the crisis fresh in people’s minds, the search for scapegoats heated, while the punk economy lingers.
— Doug French
Article originally appeared here.