The International Monetary Fund has warned that long-term fiscal reforms will be required among advanced economies as it projected the UK’s gross debt to gross domestic product would rise to 90.6pc in 2015.
According to Mark Littlewood at the IEA,
These statistics underscore the need to drastically cut government spending. Only through cutting spending and subsequently lowering the tax burden will growth be stimulated in the UK economy.
The IMF is right to point to the UK’s spending on health and pensions as areas of concern. However, when pensions liabilities are taken into account, UK national debt already stands at a staggering 333% of GDP; far worse than the 90.6% the IMF predicts for 2015. It is time for politicians to be frank and honest about our real debt levels.
The coalition government has made a start, but it must be bolder and more radical if it truly is to deal with this gargantuan task.
Regular readers will remember the Cobden Centre article by Prof. Kevin Dowd, which suggests the figure may actually be as high as 530% of GDP — “Two different methodologies by reputable researchers, both painting a very bleak picture”.
In his latest article for CentreRight, Steve Baker explains his vision of the Big Society:
The change we need is a change within. From a belief that human relationships should be based on class conflict and mutual plunder mediated by the State, to a reliance on mutual cooperation. From the view that business is somehow bad, to the realisation that all enterprise is social. From condemnation of profit, to an understanding that it is a measure of the value created for others. From fear of bearing risk, to the truth, that the search to create value for other people is the foundation of worthwhile community. From waiting for the State to decide and provide, to energetic, innovative mutual support.
In the UK there is little if any discussion on Intellectual Property Law. I think it would be correct to say that it would be considered a backwater of law for specialists and of not much relevance to the better running of society . Tucker and Kinsella, in this article, put IP law at the very heart of the advancement of a free society. Most readers of this site will know and understand that private property rights exist only when there are scarce goods, but what of goods where there is no limit to them such as an idea, or a copy of an original bit of digital data? They argue conclusively that these are truly free goods and that there is no ethical, moral or philosophical justification for the coercive restrictions on the use of these free goods. This may well be a challenging read to your commonly perceived views, but well worth a read no less.
As I reflect on this article and what this would mean to wealth creation is that if all IP laws were removed, we would unleash a tsunami of intellectual excellence that has been applied (restricted and protected thus limiting its use) in a proven fashion by entrepreneurs, in technological improvement for example, that would massively benefit more people.
I spend my time explaining to monetarists and underconsumptionist crackpots how wealth is really created:
You can only create wealth in society by entrepreneurs thinking about new ways to mix existing factors of production in better ways, by invariably investing in more intense capitalistic methods of production to produce better more plentiful and cheaper goods and services. No amount of increasing the money unit or taking from existing pools of wealth to spend via the government will create wealth; only entrepreneurs will, by going though this continuous process over time. Government should get as far away from this process as possible by not taxing corporate profits, not taxing wealth transfers from one generation to the next, not trying to “pick winners” via an Industrial Strategy, and not imposing rules and regulations over and above standard common law protections for consumers.
Now I will add “not giving monopoly privilege to creators of technology, ideas and know-how, as this prevents their widespread application; these are unlimited free goods, do not need to be economised, therefore they should not have property rights attached to them.”
In his usual delicate and roundabout way, in the first of two new videos, Peter Schiff criticises several recent media articles about how a new recessionary dip is impossible, due to the nature of the current upwardly sloping bond market yield curve.
[As Gary North explains, most ordinary US recessions are presaged by a downwardly sloping yield curve, where long-term interest rate yields are lower than short-term ones.]
With short-term interest rates at zero, Schiff argues it is impossible for the bond market yield curve to play any meaningful role in such forecasting, because no part of it can go lower than zero.
[You cannot push a man back any further when he is already hard pressed up against a wall; physicists call this a boundary value problem. In the past, the inverted yield curve signal did play a useful part in predicting recessions, because investors knew the Federal Reserve would engage in a standard cycle of first cutting interest rates to please incumbent US presidents, to 'stimulate' the US economy at crucial political times. Later, the Fed would then increase interest rates, in timetable fashion, to cut off the ensuing rise in price inflation.]
“The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting.”
Things have changed, says Schiff. The Fed has now boxed itself in, because it has reached an end game in maintaining this cyclical ‘heating’ and ‘cooling’ cycle. He explains why the Fed will now keep interest rates at zero for as long as it can, rather than raising them in the old fashion, thus invalidating the chartists’ yield-curve-must-invert prediction tool, based upon the Fed reflexively raising rates in ‘ordinary’ situations.
Schiff then argues why the bond yield curve shape actually indicates price inflation ahead, rather than the impossibility of a further ‘double-dip’ recession.
To continue his debt analysis, Schiff then comments upon the various US bond mutual funds being flooded with the savings of American investors, who are betting on US government bonds rather than stocks. Schiff thinks these bets are misplaced, because those savings are being wasted on useless government spending rather than useful productive investment in industry.
The government will not pay the last bond holder back in real purchasing power, says Schiff, but will pay back these bonds in newly printed Federal Reserve currency, when they face the position of being unable to roll US government debt over any more and the Fed steps in with its printing presses to save their day.
“The Fed chairman must do as the President wants or the Fed would lose its independence.”
Moving on from bonds, Schiff extends his earlier ideas on unemployment benefits and defends his core position on why he thinks the Dollar is going to ultimately collapse:
In his second video, Schiff comments upon the recent news of what the mainstream media thought was an unexpected 27% drop in US housing sales.
‘Why are they surprised?’ asks Schiff. The housing bubble has burst and cannot be reflated. If the government keeps trying to reflate this bubble, they will keep wasting all of the resources employed and it still won’t work.
The video goes on to discuss the continuing plunge of the Dollar against the Yen and also ends with a defence of Schiff’s own predictive record in the face of a hostile US media, all of whom only wish to hear that the Emperor is wearing a full set of rich embroidered clothing tailored from the finest silks and cottons:
Below is also the latest economic commentary article by Peter Schiff, published by Euro Pacific Capital, expanding on several of the issues discussed above. Look out particularly for the single line quote which precisely summarises, in a piquant nutshell, the main reasons behind the multi-decade war-torn hazardous strife of most of the African continent:
In a CNBC debate last week, former Labor Secretary Robert Reich presented a set of contradictory beliefs that unfortunately reflect the conventional wisdom of modern economists. In a discussion with Wall Street Journal columnist Stephen Moore, Reich correctly and comprehensively listed the reasons why American consumers could spend so lavishly before the crash of 2008 and why they can no longer keep up the pace. But instead of making the logical conclusion that former levels of spending were unsustainable and that spending should now reflect current conditions, he advocated that government take on additional debt so that tapped out consumers can spend like they used to.
To achieve this, Reich called for lowering taxes on working Americans and raising taxes on the rich. He argued that middle-income Americans are more likely to spend additional dollars while the rich are more likely to save and invest. As a “demand-side” economist, Reich made clear that spending is superior to savings and investing as a catalyst for growth.
To put it simply: Reich believes that the cart pushes the horse. In his worldview, businesses produce goods and services simply because consumers spend. Therefore, anything that increases spending fuels growth. Unfortunately, he fails to see what should be strikingly obvious: capital formation must precede production, which then allows for consumption.
In a complex society like ours, those relationships are hard to see. However, if we break it down to a simpler level, it becomes more obvious (as I try to accomplish in my new book: How an Economy Grows and Why it Crashes). For example, let’s take a look at a simple barter-based economy consisting of only three people: a butcher, a baker, and a candlestick maker.
If the candlestick maker wants cake, he can’t simply demand that the baker hand it over. The cake needs to be produced, and the baker has to expend labor and material to produce it. Unless the candlestick maker offers the baker something of value in exchange, the cakes won’t get baked. The ability of the candlestick maker to demand cake from the baker is a function of his ability to supply candles to trade. Without production, consumption can’t occur.
What if the candlestick maker gets sick and produces no candles? As the baker would be unwilling to give his cakes away, he would likely stop baking cakes for the candlestick maker. Economic activity would naturally contract until the candlestick maker recovers.
But according to Reich, if the candlestick maker doesn’t have anything to trade, the government should step in and give him candles. But where will the government get them? It could take them from the candlestick maker; but if he is not making candles, how will he pay the tax? Even if there were a few candles left to tax, any that the government took would simply transfer demand from the candlestick maker to the government. No new demand is created.
Alternatively,if the butcher is still healthy, the government could tax him, and give his steaks to the candlestick maker to buy cakes. However, this doesn’t create new demand either. It simply transfers demand from the butcher to the candlestick maker.
Some may feel that a barter-based metaphor doesn’t hold water because the ability to expand the money supply and create credit gives an economy far more flexibility. This is a deceptive argument. Although money is more efficient than barter, it doesn’t change the dynamic between production and consumption.
But Reich suggests that printed money can stimulate demand just as effectively as real candlesticks. But what good will the paper offer the baker if there are no candlesticks to buy? All the baker can do is bid up the prices of those goods, like steaks, that continue to be produced. Similarly, if the government simply prints money and gives it to people to spend, no new production occurs. Prices merely rise to reflect the increase in the supply of money relative to the supply of consumer goods.
In a more complex economy, the relationship between production (supply) and spending (demand) still holds. Every consumer either lives off his own productivity or the productivity of someone else. When individuals work, the wages earned result from the productivity of labor. The ability to consume is directly related to the production of goods or services that result from one’s efforts. However, if people waste their labor in unproductive jobs, little real demand is created.
In the Soviet Union, everyone had a job, yet workers had to stand in line for hours for basic necessities. Although everyone worked (for the government), production was too low. This lack of production meant wages delivered relativity little in the way of purchasing power.
Since production cannot be created by government stimulus, neither can demand. To the extent that there are savings, demand can be brought forward by stimulus – but only at the cost of future demand, plus interest. If stimulus could produce demand, then no nation would be poor. Taken to its logical end, Reich’s argument suggests that African poverty would be wiped out if African governments simply printed money more freely. In reality, Africans are not poor because they lack currency to spend; they are poor because their corrupt and inept governments inhibit production by soliciting bribes, denying property rights, abrogating contracts, preventing the accumulation of capital, and nationalizing profits.
Reich is correct about one thing: Americans are indeed broke. But rather than encouraging the country to spend itself deeper into debt, he should call for greater savings so that we have the means to invest in new businesses and new industries. That is the true road back to solvency, but it will only work if we have less government spending, fewer regulations, lower taxes (particularly on those with the highest propensity to save and invest), and higher interest rates.
Unfortunately, Reich and his allies are calling the shots in Washington. The country cannot recover until the only thing politicians stimulate is demand for new economic leadership.
Mortgage lending would be “capped” to stop borrowers taking out risky loans under radical Bank of England plans to prevent a repeat of the credit crisis, a senior official has disclosed.
But why did borrowers wish to borrow so much, so riskily? And why did lenders wish to lend so much, at such risk?
In the first place, credit has been too cheap for too long. Low interest rates are bound to encourage people to borrow more and save less. Therefore, people saved less and borrowed more. This was the result of the Bank of England’s decisions.
House prices kept rising because people kept borrowing and pumping money into housing. Housing was excluded from the Bank’s measure of inflation, so rates stayed low.
The appearance of inevitable and uninterrupted house price rises gave the impression that we were in a new era within which the old rules did not apply: borrowing caps could be raised to excessively risky levels and borrowers could rely on price increases to deal with the capital.
Lenders used models which fundamentally understated risk. For example, markets do not behave within the Gaussian or “normal” distribution: extreme events happen more often than a normal distribution predicts. Furthermore, the risk of mortgage default correlates across similar mortgages when the economic environment changes. Still, the models said risks were lower than they were, so more credit could be extended.
Since the lenders were neither, on the whole, mutuals or partnerships with open-ended liabilities and since the employees making the decisions shared only in the upside, there was insufficient motivation to manage to the true level of risk.
Moreover, securitisation of mortgage pools and so forth palmed off the risk onto hapless investors who probably trusted the risk models and the market environment created by excessively cheap credit. And, “Hey, look at the returns!” The personal touch was missing from the relationships between borrowers, ultimate lenders and intermediaries, further corrupting the system.
Of course when the pantomime ended, the taxpayer was forced to pick up the bill. And still bonuses were paid in bailed-out banks!
Now, having created the boom with cheap credit and moral hazard, the Bank plans, not to fix the root problems, but to pile intervention upon intervention…
There is much else to be said, for which I recommend The Alchemists of Loss and Money, Bank Credit, and Economic Cycles. However, on the face of it, the Bank’s present proposals merely extend the infantilisation of the financial services sector.
Later this week, I will indicate ten serious plans for financial reform.
The Mises Institute is doing some great work in building up a comprehensive online university curriculum covering every aspect of Austrian economics. In this sample introductory lecture from the Mises Academy’s inaugural online course, “Understanding the Business Cycle,” Dr Robert P. Murphy attempts to answer the question, “What is Austrian Economics?”.
The subjects covered in this introductory lecture, after a brief introduction, include:
Methodological Individualism (starts at 1:45 minutes) — The basis of all economics should be based upon the individual person making discrete choices
Methodological Subjectivism (10:00 minutes) — The preferences behind those choices and how they determine the processes behind price formation
Market Process vs. Equilibrium Determination (17:00 minutes) — The Austrian need for entrepreneurial interaction in the market process and why other schools of economics entered the rival blind alley of mathematical determinism
Time Structure of Production (26:15 minutes) — The vital and almost unique inclusion of the passage of time in how Austrians view capital formation and structures of production, and how this builds towards the human act of final consumption
A Priori Deductive Laws (31:30 minutes) — The Misesian and subsequent Rothbardian tradition of building up economics from basic axioms, the primary one of which is that humans act
Why Austrian Economics Matters (39:15 minutes) — A brief exposition on why the Austrian school is seen by outsiders as being merely ideological, but why it really matters despite this criticism
Overview of the Mises-Hayek Trade Cycle Theory (44:00) — The view from 30,000 feet of the Austrian Business Cycle Theory (ABCT) and how this theory lies behind the booms and busts of the modern financial world
Materials recommended for further reading alongside the lecture series include the following two books, both of which are available online in their entirety:
Right at the end of his lecture, Dr Murphy also points towards the famous Hayek-Keynes rap video, which explains the entire dichotomy between Keynesianism and Austrianism in a mere seven minutes and thirty-three seconds. Fortunately, Dr Murphy’s reference in his lecture provides me with the great excuse to link to this video here:
For those with a few hours to spare, rather than seven minutes and thirty-three seconds, my own favourite and fuller introduction to the Austrian school is the six lecture series provided by Murray Rothbard on The History of Economic Thought:
”The National Health Service is the closest thing the English have to a religion,” wrote the former Tory chancellor Nigel Lawson in his memoirs.
Daniel Hannan MEP was torn to pieces politically for daring to say that in his view the service provided was not optimal. In the book he co-authored book with Douglas Carswell, The Plan: Twelve Months to Renew Britain, they suggest alternative solutions.
In the late summer of 2009, in the run up to the General Election the following year, this sparked David Cameron into a defensive stance, and being the astute politician he is, he sensed the political mood music and declared his “wholehearted commitment” to the NHS. He suggested that the NHS represented a “simple, practical, common sense, human understanding of a fantastic and precious fact of British life”. He added “That’s why we are committed to the NHS and the principle of a healthcare system that is free at the point of use, based on need and not the ability to pay.”
It is generally understood that if you wish to be taken seriously in this country, you must never be critical of the NHS. Suggest a reform here and a fine tuning there, but don’t so much as imply that fully taxpayer-funded and state-provided health care might not the best solution for the people. Should you dare go down that line of thinking, you are sure to be dismissed as a wide-eyed loony!
It is assumed that the market for health care is naturally monopolistic as the medical profession can organise at the expense of the consumer, who is ignorant. Naturally, the State needs to step in and protect the ignorant consumer. This is akin to saying that food producers know more about food (essential for life!) and they will have a tendency to organise at the expense of the consumer, so the State should step in and we can have a National Food Service (God forbid: an 18 month wait for a can of Baked Beans!) and all those starving people that the private sector does not provide for will be fed! Also private provision will never cover the poor, already sick, and the needy; therefore the State must step in. Historically this has notbeen the case.
David Green in 1985 wrote a magnificent book Working Class Patients and the Medical Establishment: Self-help in Britain from the Mid-nineteenth Century to 1948. He shows that health care provision prior to the 1911 National Insurance Act was spontaneously provided by worker-organized mutual or friendly societies. Indeed, 75% of all provision was via these organizations with the balance paid for by private provision by those who could pay on the nose directly for medical related services; and for the utterly impoverished small minority, the Poor Law provision. Interestingly, these societies were paid for by a flat subscription fee for all. Green shows that only 4.5% of applicants were turned down.
These societies employed doctors, on the whole provided drug dispensing services and sick pay for their members. Doctors were often elected and answerable to the committee of lay people of the society. This democratic control was detested by a vocal minority of doctors as it afforded accountability. They also detested the dominant consumer. Many, though, were happy and content.
The societies, who negotiated individually with doctors, would ensure a good wage for the doctor, but some in the General Medical Council viewed this to be “infamous conduct” — lowering your wage to be affordable to the masses was enough to get you struck off. Ironically the Trade Union thugs and dinosaurs of the 70’s and 80’s would have no doubt approved of this closed shop, restrictive practice which was so much at the expense of the working-class patient. How the original trade unionists, who were so supportive of the friendly societies, would be spinning in their graves.
The great success of the mutual provision of a private welfare state was in effect its own downfall. Lloyd George sought to extend the benefits that the freely chosen mutual provision of the masses had achieved to cover the very poor. Green shows us how during the passage of the bill, the medical profession, which did not like working for the proles and being governed by lay committees, managed to advance arguments that would deliver control of the goods and services provided by the mutual societies, demanded by the patients and the lay committees that ran them, to the medical profession themselves.
It was successfully argued that the pay that the Doctor received on contract to the Society prevented him from providing a full unbiased professional service for the benefit of the patient. It was argued that the practice of certain doctors in competing for the individual subscriptions of members by undercutting other doctors was bad for the provision of medical care. Working-class fraternalism was the BMA’s worst enemy, as competition for patients kept the doctors’ pay at levels that the masses of working-class people could afford.
The commercial insurance companies too had long detested the competition that the Societies had given them and with the BMA, they formed themselves into the Combine and extracted concessions to the Bill.
Green says
The essence of working-class social insurance was democratic self-organization: amendments to the Bill obtained by the BMA and the Combine undermined it. Doctors pay had to be kept within limits that ordinary manual workers could afford: under pressure, the government doubled doctors’ incomes and financed this transfer of wealth from insured workers to the medical profession by means of regressive poll tax, flat-rate National Insurance contributions.
The unhappy outcome of this legislation initially intended to extend to all citizens the benefits of friendly society membership, already freely chosen by the vast majority, was a victory for the political muscle of the Combine and the BMA. They achieved a very considerable transfer of wealth and power from the relatively poor working –class to the professional class.
Post 1911, the doctors were paid out of the state insurance provision and ultimately by the state via the National Health Service, post 1948. Popular, affordable, voluntarily-funded healthcare was crowded out. We now have inefficient Soviet style provision of health care. Dress it up how you like, but essentially the state is the prime provider of health care. Private provision is sidelined and often only available to the wealthy. Choice in services is limited. Patient consumer control of the doctor / medical provider is negligible. Until we have consumer control, our service will always be suboptimal.
David Cameron and the Big Society: Could this be a return to mass private affordable consumer controlled democratic provision of medical care?
I have previously written here about my enthusiasm for the Big Society project.
On August the 13th 2010, 12 projects were launched that allowed public sector workers to take control of delivering services. Could it be possible that we could take control of our local general purpose hospital and local GP services? For this to happen, we would need to get a full tax rebate for all participating members and form a traditional friendly society and extract those services from the state and return them from whence they came, on the whole, to the working-class mutual societies that Green writes so eloquently about.
Would the government be prepared to give a rebate in our tax so we could use the money as our ancestors did, to arrange our own healthcare in a mutual format? Can we see the lay people of say Welwyn and Hatfield, where I live, rise up and form a mutual for all its members benefit? That is a truly wonderful thought. At the moment, our local QE11 hospital where my youngest child was born is facing closure with only the A&E services and one or two other things being left open, and there is much popular support to keep it open. Do the people want to go this far? If we were given our tax back I am confident most citizens would seek to pay their subscriptions, vote in their doctors, and arrange for the full service that they want on a lowest cost basis. Could consumer control and patient power return to Britain?
Yesterday I discovered a brilliant article by Graham Stewart about the legal challenges to the Coalition budget launched by the Fawcett Society:
successive anti-discriminatory legislation, culminating in Harriet Harman’s statutory behemoth, the Equality Act (which received its Royal Assent in April), forces all government departments to undertake an impact assessment on the likely outcomes for ‘protected’ groups in society before implementing policy. Where such an assessment shows a policy may widen rather than close inequality gaps, the government is expected to take corrective action. The Equality Act defines the ‘protected’ groups as those who suffer discrimination on grounds of age, race, disability, sex, sexual orientation, gender reassignment, marriage and civil partnership, religion and belief, pregnancy and maternity.
…
But the cuts must go through or the United Kingdom faces ruin. And it will be a ruin that will not discriminate between men and women, the able bodied and the disabled, the unisexuals from the transsexuals or whatever other section of society the Equality Act wishes to ring fence as exceptional. So the choice for the Government is clear. Either the budget must be enacted in full or the obstructive passages of the Equality Act must be repealed.
John Williams is the founder of the Shadow Government Statistics Newsletter found at Shadowstats.com, the excellent web site which uses old US government methods to work out current US government statistics, to give the rest of us multi-decade visibility on what’s really happening to this global gorilla-in-the-room economy.
Mr Williams was interviewed recently by Eric King and delivered some illuminating and wonderfully politically-incorrect thoughts about current world events and where he thinks they are taking the rest of us. These thoughts may be sobering, but as he says himself, it’s better to know the worst and to get prepared for it and to protect yourself from its possible deleterious effects, than to sail blithely over a watery precipice in oblivious government-worshipping merriment and wonderment:
The main points in this interview are summarised below:
There will be a marked contraction of economic activity in the US over the next quarter, which will continue unabated into next year, as the depression re-intensifies
This next leg down will be extremely painful and the most severe downturn since the 1930s
Using un-doctored US government statistics, the average weekly US wage is down 10% since the 1970s, which has led to often more than one person working in most households, whereas one person generally earned enough in the 1970s, in each household, to pay the bills
This doubling-up of incomes is still not enough to make ends meet for most people, because the former easy route out of debt borrowed against rising property prices has been cut off at the spigot
This means that the US economy must contract, particularly because Mr Williams expects another hefty downturn in the housing market
The US government solution to this will likely be the printing of more helicopter currency to keep prices gorged up
The Federal Reserve has been successful in holding off a predicted day of reckoning till now, dumping money out of helicopters, however this day of fiscal reckoning will not be restrained in its cupro-nickel cage much longer
Confidence in the Dollar is now finished and its collapse is therefore imminent, especially once the first fire sale entrepreneur shows up
What has been mistakenly judged to be recovery has merely been bottom-bouncing
The second leg down should make it clear what is really happening
Mr Williams also mentions a special report on hyperinflation, which you can read here:
In the first of two new videos, Peter Schiff discusses Bill Gross, of PIMCO, and his proposed complete nationalisation of Fannie Mae and Freddie Mac and how Mr Schiff thinks this will benefit Bill Gross and cost everyone else, as yet more resources are poured into consumptive house construction and therefore taken away from the building of new factories and other productive facilities.
Mr Schiff also predicts a second bankruptcy for General Motors, immediately following its unloading by the US government in a new IPO. Schiff’s Austrian-based advice is to stay away from this IPO:
He also examines the über-rosy assumptions which lie behind the Obama administration’s economic ‘plans’ (such as they are), with strong predicted economic growth this year at 2.5%, rising to growth of over 4%; interest rates staying almost permanently at 0%; and inflation also staying low. Schiff states that these are the economic assumptions of fantasy land. He predicts instead a weakening US economy, high interest rates, and high inflation, with all of this starting in either 2011, or 2012 at the outside.
Other topics he brings into his video blog are the importance of savings rather than spending, to grow an economy, and how many of America’s banks will go bust when interest rates rise, due to the continuing machinations of the US government in the housing market:
To supplement the video above, here is the article Peter Schiff wrote two years ago on how the US government takeover of Fannie Mae and Freddie Mac would pan out, which the mainstream stated at the time would be an enormous success:
Treasury Secretary Henry Paulson, the man who said that subprime was contained and that the Bazooka in his pocket would never be used, now assures us that the bailout of Fannie Mae and Freddie Mac will be costless to taxpayers. Despite the near euphoria that the plan has sparked on Wall Street, the move will go down in history as the biggest policy blunder of all time, and will be credited as a pivotal point in the financial collapse of the American economy. The ultimate cost to Unites States citizens will be in the range of hundreds of billions of dollars, perhaps more.
The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay –just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bills when they default.
In contrast to Paulson’s continuous misreading of the market, I have consistently predicted the failure of Freddie and Fannie. I did so in my book Crash Proof, and in numerous speeches, commentaries and television appearances. I also was quick to point out that Paulson’s Bazooka would not remain holstered for long.
There is absolutely no substance to Paulson’s insistence that based on the government’s first claim on the future profits of Fannie and Freddie, the plan offers protection for taxpayers. There will be no future profits, just more heavy losses. Americans will now have unlimited ability to continue to overpay for houses and commit to mortgages they can’t afford. In fact, the plan insures that eventual public sector losses will vastly exceed those that would have befallen the private sector in a free-market resolution.
Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to a market clearing level. As long as home prices remain artificially high, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. With private lenders justly cautious, the government intends to hold open the lending spigots, without the pesky concerns over losses or financial risk. The hope is that the new lending will prevent home prices from falling further. It won’t work. The government “solution” will simply delay the fall of artificially high home valuations and temporarily preserve the illusion of prosperity.
In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Since all the losses will now be borne by taxpayers, those lax standards will be much more problematic. The moral hazard that existed prior to this bailout has become that much more hazardous. Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.
Of course the biggest collateral damage caused by Paulson’s bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it can not do? In effect the Federal government now has absolute power to corrupt absolutely.
