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 […]
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 […]
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 […]
It might sound like the latest new product from Apple, but IPAB is actually the newest major legal challenge to Obamacare.Recently, a three-judge panel in the 9th Circuit Court of Appeals in San Francisco heard arguments about the Independent Payment Advisory Board, or IPAB, a 15-member panel created by the Affordable Care Act and empowered […]
Americans have come to believe that the IRS and the income tax are inevitable parts of our lives. After all, most everyone alive today has lived his entire life under federal income taxation.It wasn’t always that way. For some 125 years, the American people lived without having any tax imposed upon their income.The obvious question […]
Here’s a fun fact: Although we all hate the U.S. dollar, as it continues to hemorrhage wealth, its foothold as the world’s reserve currency isn’t going to disappear overnight.A Russian gas deal with China won’t change that — as we’ll highlight below.But before we get to the nitty-gritty, let’s dive into a story that’s right […]
Franklin Delano Roosevelt famously used the term “forgotten man” in a 1932 speech to describe those at the bottom of the economic pyramid who, he felt, government should aid.But the originator of the phrase “forgotten man” had a whole different meaning in mind. He aimed to expose the seeming good intentions of government to reveal […]
The Keynesian disaster recovery plan has been to lower rates, force people to take more risk in search of yield, and entice others to borrow and spend and, magically, more jobs will be created. If people won’t buy stocks, central banks will.Back in 2011, Ben Bernanke, when asked if QE2 was driving up stock prices, […]
I want to share some insight and give you a front-row seat to America’s next big shale play.Let’s get to it…Over the past 10 years, the U.S. has turned the ship around, quite literally.We’ve gone from a country that was expecting to import massive amounts of oil and gas — to a country that’s sitting […]
Whatever your views on the role of government, one thing is clear: There will be no way to pay for it if the economy doesn’t grow. And I’m not talking by a measly percentage point or two. If we can’t find our way back to 5% annual economic growth or above soon, America’s accumulated federal […]
According to the Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper.Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why […]
Politicians love raising the minimum wage because they don’t have to ask voters to pay more in taxes. They just dump the costs onto shop owners. But they don’t act like politicians and go into debt to pretend like they have all the money in the world. They face real world situations. And sometimes that means replacing workers with more affordable options...
Regulation is supposed to keep you safe and make the economy function smoothly. At least that’s what they tell you in the news. But there’s another cost to regulation. One that you won’t hear about unless you have to deal with directly. And for the people in the economy who do, they’re the ones who have to pay the final cost.
The experts will tell you the recession is over, but they’re only torturing the data to hide the truth. The economy never recovered from the downturn it experienced. But the downturn happened in 2000, not 2008. The country’s been in the middle of a 14 year recession and hardly anyone knows the truth.
Every time Bitcoin crashes, it winds up at a price greater than it’s previous high. Yet the experts still call it a currency fad that will fade away. But a little over a year since it really took up, the digital currency is still going strong, and is once again seeing its price rise. But is there another reason why people are buying Bitcoins.
All paper currency has a shelf life. It could be 5 years or 500 years, but at some point, the value of any paper currency eventually reaches zero. That's why, for centuries, people have turned to one shiny metal to safeguard their personal store of wealth. And, as Jim Rickards explains, you still have that option. Read on...
According to some estimates, one man - whose name you're probably not familiar with - has saved over a billion lives. Who is he? And how has he influenced the current crop of innovators? Josh Grasmick explains...
It’s a destructive cycle that comes around everytime your politicians ask you to take to the polls. The government’s meddling creates unexpected problems that eventually overshadow the planners’ original intentions. But that only leads the way for even more interventions.
Politicians love inflation. It’s a way to pay for the government’s debts without upsetting the public by raising taxes, or their special interests by cutting government. So they’ll flood the economy with easy money and eat away at your savings. But that’s only part of the story...
You can count the number of people who went to jail over the 2008 financial crisis on one hand. Which is strange considering the U.S. loves to put people away in jail. But as one author discovered in his most recent book, having the right connections and a big enough bank account, can protect you from even the worst crimes.
Obama recently claimed this was the “Decade of the Brain”. But it not the first time the government made that promise. The last time they did it, they wasted millions of your tax dollars. Now they’re back for round two. But this time, their failure could mean more than squandered money. It could mean making Alzheimer’s even worse for those who suffer from it.
“So we have, indeed, had a disappointingly slow recovery, and our consistent expectations for a pickup in growth have been dashed over a number of years… And the labor market is behaving in some perplexing ways and showing patterns that are novel.”–Federal Reserve Chairperson Janet Yellen in a speech to the Economic Club of New […]
When Michael Lewis’ new book Flash Boys came out, the author caused a stir while making the media rounds to promote it. “The stock market is rigged,” he told 60 Minutes flatly. His comments set off a firestorm of debate as to whether sharp techies and their fast computers are screwing small investors.As titillating as […]
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.