The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”As the inequality gap grows, there is an ideological battle unfolding in the West.On the one hand, there are those who think government can fix things. It must do more, tax more, […]
On Feb. 7 the United States will once again reach its statutory debt limit, meaning it cannot legally borrow any more money. Since the obvious option of cutting spending to match the amount of revenue that the government collects is off the table for some inexplicable reason, Congress will have to pass a new, higher […]
The New York Times published an interminable article on health care recently. Plenty of facts — how scrupulous are these journalists! — but the article displayed absolutely no comprehension of the basics of cause and effect. I was left wondering about the whole point.The article details how the health care system rewards specialists to an […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Dr. William C. Padgett is a retired optometrist who has been trying to bring an elderly care facility to Beaufort County, North Carolina, for over a decade.“Our senior citizens,” he laments, “are finding that it is difficult and in many cases impossible to find an appropriate long-term care facility locally.” Though he has received several […]
If you don’t have the angst out of your system concerning Wall Street banksters, Government Sachs, and the Affordable Care Act, settle in with Matt Taibbi’s Griftopia to make your blood boil one more time.Investors should be reminded of 2008 as they shrug their shoulders and put their money back in the stock market. The […]
What do 8 of the 10 wealthiest people in the U.S. have in common?Aside from being able to fly in private jets, the common thread is that each of them has made their fortune thanks to a start-up.Let me explain…From tech titans like Bill Gates and Larry Ellison (founders of Microsoft and Oracle, respectively), to […]
“Inequality is the defining challenge of our time,” according to President Obama. It’s certainly the topic of the day for Paul Krugman, Joe Stiglitz and a whole raft of liberal pundits.But have you noticed that hardly anyone else is talking about it? When is the last time you heard a shoeshine person or a taxi […]
In December of last year, I left my career to travel the world for one year.My plan was to visit as many countries as possible on my Star Alliance Around-the-World ticket in the first nine months, then, for the remaining three months, return back to the country that most caught my eye and my curiosity.Nine […]
Economic history is primed to repeat in the nastiest of ways unless the government stops distorting the price of something we use every day.Every product, good, or service has a price, which is essential to rational decision-making. We use prices every day as vital data that guide us. Without true prices, prices not distorted by […]
A new survey from Harvard University found a large majority of young Americans do not believe the law will save them money, do not believe it will improve their health, and do not intend to sign up for insurance through the new exchanges.
Uh-oh!The new pope, Francis from the Pampas, has just warned us to beware the “tyranny” of capitalism.Each man worships his own gods. Some worship at the altar of Jesus of Nazareth. Some at the altar of the Almighty Dollar. The capitalists don’t bad-mouth Francis’ god. You’d think he would cut them the same slack.Bad-mouthing Catholicism […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
A president stands disgraced. Congress is scattering. Bureaucrats are baffled. Pundits are reaching. Industry is scared. Politicians are scrambling to do something, anything, to make it better. One political party is in meltdown and the other loving every minute of it, hoping to ride the calamity to electoral gains.The so-called Patient Protection and Affordable Care […]
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.