The Freedom Factory

HUD program turns out to benefit contractors and not the poor…go figure! China cranks up its printing presses-expect global inflation, Peter Schiff (“Dr. Doom”) discusses his book “Crash Proof”, Goldman Sachs plans to sell billions in stock to pay off government aid ASAP, gas prices up 5% in 3 weeks…inflation? Top U.S. general says we’ll be out of Iraq by 2011, and 75% of Americans want to lift Cuba embargo… Continue Reading

Former Federal Reserve Chairman, Alan Greenspan, published an editorial in the Wall Street Journal today that absolves himself of any wrong-doing in the housing bubble and its subsequent destructive aftermath. Latching onto a weak argument that circa 2002 long-term mortgage and short-term federal funds rates had statistically diverged in correlation, he suggests that the overcapitalization of housing resulting from cheap credit was not his fault. Many critics have pointed the finger at Greenspan for setting short-term rates too low for too long. Access to cheap credit, according to critics, sparked “irrational exuberance” in the housing market, flooding the sector with unprecedented capital and driving prices to ridiculous levels.

Rather, Greenspan blames global trade in boosting foreign savings rates and leaving the U.S. with large current account imbalances that were subsidized by our trading partners. The current account cash flows went almost exclusively into housing, driving long-term mortgage rates to unprecedented lows and encouraging speculation.

Hilariously, in his editorial Greenspan cites famous economist Milton Friedman as saying that during Greenspan’s tenure from 1985-2005, “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”

Friedman did not live to see the aftermath of Greenspan’s policies. Short-term federal funds and long-term mortgage rates did diverge in correlation, but they did so precisely because of Fed and other governmental policies. The structural distortions in our economy leading to sustained trade imbalances were caused by irresponsible monetary and fiscal policies. Congress legislated the creation of the secondary mortgage market, mandated that it funnel capital to subprime borrowers, and taxed away America’s industrial base. Couple this with a sustained period of negative real interest rates orchistrated by Greenspan, and the U.S. economy grew ridiculously distorted over time, channeling the world’s savings towards our consumption, leaving the country bereft of productive capacity. Housing is not productive, but consumptive.

Global trade is not the problem. Current account and trade deficits, of themselves, are not the problem. Artificial interest rate manipulation, social engineering legislation that drives consumption over production, and inflationary monetary policy that drives perpetual inflation and currency debasement are the issues.

Mr. Greenspan accuses his detractors of rewriting history, but that is precisely what he is attempting to do.

With all the speculation on a government takeover of the banking industry, including Alan Greenspan’s statement that “the U.S. may have to temporarily nationalize some banks until the industry is restructured,” we should do some serious soul searching. America has a long tradition of respecting property rights and restricting government power from the private domain. Overt nationalization would be unconstitutional, but change is in the air… Continue Reading

Ever heard of the crash in subprime mortgages? In 2008, this was the primary cause behind the financial and credit crises. The reason: too many loans to people who could not afford them. One government department, in particular, was very much responsible for getting property into the hands of large numbers of people who should not have been buying: U.S. Department of Housing and Urban Development (HUD). HUD’s new solution to “fixing” the housing crisis: make it easier for subprime buyers to keep on buying!

There were various reasons for the high number of loans to unqualified buyers:

• Low interest rates set by the Federal Reserve
• Explosive growth in the money supply following 9/11
• Congressional mandates to Fannie Mae and Freddie Mac to expand the percentage of subprime debt held in their portfolios
• Expansion of HUD programs to make it easy for low-income buyers to obtain loans

Wall Street geniuses came up with some clever methods for splices up these loans and trading them on secondary markets, adding liquidity and making the engineered instruments look better than the subprime debt of which they were comprised. The premise for securitization is great, but the underlying risks posed by this inflated financial system were not recognized by far too many parties to these transactions.

What happened was an implosion of debt instruments related to subprime mortgages. Now, after trillions of dollars of losses, our currency and entire financial system in jeopardy, the children of Congress are tossing more money at HUD to extend more loans that will end up bad. Are these people insane or trying to bankrupt us all?

Community Organizer (CO) Barack Obama has repeatedly stated that this financial crisis proves a fundamental failure of our economic system. He’s right. Although, I doubt he realizes exactly why. CO Obama believes these hard times point to the failure of free enterprise, markets, and Capitalism. On that count, he’s incorrect…nearly treasonously so.  We are witnessing the results of decades of bad government policy.  Social engineering on so many convoluted levels has finally caused such a severe blow to our society that we are finally taking notice. The best explanation comes from Harvard University economist, Jeffrey A. Miron. Continue Reading

I read an article today that brought up two great points: Housing bubbles are worse in localities with high land use regulations, and federal housing policies geared towards subsidizing low-income homebuyers encourage folks who can’t afford to buy to do so anyway. Tag on ridiculously low federal funds interest rates for way too long and you have a recipe for disaster. Continue Reading