how long ago was it when a barrel was 10 dollars? The early 90's!

 

I'm frustrated too. Riding out this downturn is going to hurt. Paying off these bailouts is going to suck as well. But here's what really, really sucks: no one has learned their lesson. I know this because none of the players involved and none of my fellow citizens is talking about the root cause of the crisis. And they're not talking about it because they simply don't know.

Before you read the following articles I'm about to post stop and ask yourself to explain in a few sentences what the EXACT root cause is. If you said 'greed' or 'ruthless lenders' or 'crooked real estate agents' or 'capitalism' or 'deregulation' then you are focusing on symptoms or just mistaken. Read these 3 articles and hopefully you'll see that we are DOOMED unless we make some radical changes.

 

http://online.wsj.com/article/SB122298982558700341.html

How Government Stoked the Mania
Housing prices would never have risen so high without multiple Washington mistakes.
By RUSSELL ROBERTS

Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.
[How the Government Stoked the Mania] David Klein

Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.
Hear No Evil

What some Congresspeople said about Fannie and Freddie.

Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.

Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence. But when they found out that following these policies could be profitable -- which they were as long as rising housing prices kept default rates unusually low -- their complaints disappeared. Maybe they could serve two masters. They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that budgetary dollars were on the line after all.

While Fannie and Freddie and the CRA were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

The Taxpayer Relief Act of 1997 and low interest rates -- along with the regulatory push for more low-income homeowners -- dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn't simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.

Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie's implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?

Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs -- from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.

Mr. Roberts is a professor of economics at George Mason University and a scholar at the Mercatus Center. His latest book is a novel on how markets work, "The Price of Everything: A Parable of Possibility and Prosperity" (Princeton University Press, 2008).

 

http://network.nationalpost.com/np/b...-comeback.aspx

Bailout marks Karl Marx's comeback

Marx’s Proposal Number Five seems to be the leading motivation for those backing the Wall Street bailout

By Martin Masse
In his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.”
If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.
Indeed, analysts at the Heritage and Cato Institute, and commentators in The Wall Street Journal and on this very blog, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled US$700-billion bailout package. (Editor's Note: Scholars at the Cato Institute have not supported Washington’s $700-billion financial bailout plan. The National Post apologizes for the error.) Some of the same voices were calling for similar interventions following the burst of the dot-com bubble in 2001.

“Whatever happened to the modern followers of my free-market opponents?” Marx would likely wonder.
At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets?
The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many institutions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying up of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman’s thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929.
It sounds libertarian enough. The misguided policies of the Fed, a government creature, and bad government regulation are held responsible for the crisis. The need to respond to this emergency and keep markets running overrides concerns about taxing and inflating the money supply. This is supposed to contrast with the left-wing Keynesian approach, whose solutions are strangely very similar despite a different view of the causes.
But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal Number Five: government control of capital.
For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles.
Not only is the central bank constantly creating money out of thin air, but the fractional reserve system allows financial institutions to increase credit many times over. When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated titles to spend and borrow more, leading to more credit creation and to even higher prices.
As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors. With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels.
During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years.
Now, what should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It’s obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments.
Friedmanites, who have no conception of malinvestments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash.
They only see the drying up of credit and blame the Fed for not injecting massive enough amounts of liquidities to prevent it.
But central banks and governments cannot transform unprofitable investments into profitable ones. They cannot force institutions to increase lending when they are so exposed. This is why calls for throwing more money at the problem are so totally misguided. Injections of liquidities started more than a year ago and have had no effect in preventing the situation from getting worse. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one.
Friedman — who, contrary to popular perception, was not a foe of monetary inflation, but simply wanted to keep it under better control in normal circumstances — was wrong about the Fed not intervening during the Depression. It tried repeatedly to inflate but credit still went down for various reasons. This is a key difference in interpretation between the Austrian and Chicago schools.
As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...”
The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction.

Financial Post
Martin Masse is publisher of the libertarian webzine Le Québécois Libre and a former advisor to Industry minister Maxime Bernier.

 

http://www.reason.com/news/show/128988.html

Corporatism, Not Capitalism
The free market has nothing to do with the current crisis

Radley Balko | September 24, 2008

Forget AIG for a moment. Forget Freddie and Fannie, Merrill Lynch, Bear Stearns, and Lehman Brothers. Imagine a company much bigger. Imagine a company that at the end of this year will have spent $400 billion more than it has taken in. Worse, imagine that the company's accounting is so bad, the $400 billion doesn't even begin to cover the whole of this company's liabilities.

In fact, the company deliberately chooses to use what's known as "cash accounting" rather than the more accurate accrual accounting. Cash accounting looks at how much cash the company has on hand, regardless of future liabilities. It's like saying if you have $75 dollars in your checking account right now, you're $75 in the black, never mind that you've deferred your car payment, quit your job, and have a rent check due at the end of the month.

The company also practices dirty accounting tricks like "forward funding," "advance funding," and "delayed obligations," deceptive tricks that hide its precipitous finances from auditors and its investors.

This company routinely borrows from its workers' pension plan to pay off its debt. Its accountants then claim that because the company owes the borrowed money to its own pensioners and not to outside creditors, the resulting hole in the pension plan doesn't really count as a liability. Sometimes, the company's executives neglect to pass a budget at all. When that happens, they keep the company running with "emergency expenditures," which its accountants don't consider real expenditures for records-keeping purposes, even though they're paid with real money.

By now, you've probably guessed where I'm headed. I'm not really talking about any private company. I'm talking about your federal government. If any private corporation employed the same accounting tricks Congress and the White House use to hide the government's massive debt and financial liabilities, its board and executive officers would all be in prison. In the government, it's common practice. And that's not even considering the funding of our two ongoing wars, which somehow emanates from outside the normal budget process.

If the government were required to abide by the same accounting standards as private industry, its debt would be in the trillions, not billions. Last May, Dallas Fed President Richard Fisher said that the government's unfunded liability for Social Security and Medicare alone comes to a staggering $99.2 trillion, or $330,000 for every man, woman, and child in the United States. It's an impossible figure.

So when congressional leaders and presidential candidates Sen. Barack Obama (D-Ill.) and Sen. John McCain (R-Ariz.) call for more government oversight of our struggling financial institutions, go ahead and laugh. You know you want to. The idea that the private sector would be in better shape today if only we demanded more oversight from our politicians is preposterous. Our politicians wouldn't recognize "fiscal responsibility" if it spat in their ears.

Wall Street moguls may be "greedy," as both John McCain and Barack Obama have described them, but at least there are real consequences when their greed becomes excessive. They go out of business.

Except, that is, when the government bails them out. Thus far, in addition to being on the hook for the federal government's own massive debt, taxpayers are also putting up $85 billion to back insurance giant AIG and up to $100 billion each to back Freddie Mac and Fannie Mae, and we're funding the Bear Stearns backstop. Congress is also expected to approve at least $25 billion in corporate welfare for the big three automakers. You can probably expect more handouts down the road. All of this has some analysts now questioning the U.S. government's bond rating, and worse, wondering whether the government itself may soon collapse under the weight of its own debt.

When you, Joe Citizen, spend frivolously and default on your loans, the bank takes your house. When the government spends your tax dollars frivolously, it simply cooks the books to cover its excesses. When the books are left in ashes, the government just takes more of your money, or it prints more money, leaving the money it hasn't already taken from you devalued. Over the last few weeks, we've learned that you now face the prospect of an additional indignity: When your neighbor's bank spends frivolously and defaults on its loans, the government's going to take your money then too, to keep the bank in business.

Many commenters have blamed all of this on capitalism. This isn't capitalism. It's a peculiar kind of corporatist socialism, where good risks and the resulting profits remain private, but bad risks and the resulting losses are passed on to taxpayers. There's nothing free-market about it.

Neither Barack Obama nor John McCain, nor either party's leadership in Congress, has proposed a reasonable plan to deal with the government's unfunded Social Security and Medicare liabilities. In fact, all have proposed expensive new government programs that can't possibly be funded over the long term. All seem both oblivious to the federal government's impending financial peril and intent on making it worse.

Perversely, all are then simultaneously demanding that they be given greater control over the private sector—because, they gallingly explain, corporations have shown that they can't be left alone to behave in a manner that's fiscally responsible.

Governments have been screwing over taxpayers for about as long as there have been governments and taxpayers. Capitalism, on the other hand, is a fairly recent development, and has spurred an explosion of wealth and the greatest standard of living in human history. What's happening now isn't capitalism, but capitalism is certainly taking the brunt of the blame.

Unfortunately, the end result may be that our politicians make capitalism more accountable to them—the same people who have shown that when it comes to the government's finances, they're accountable to no one.

Radley Balko is a senior editor of reason. A version of this article orginally appeared at FoxNews.com.

 

Fixed demand? Are you that ignorant? Oil demand is at about 90m barrels a day and growing thanks to china and, well, US. Yes, yes, the oil companies control the price of oil just as you control your tax rate and Druids control the cycle of the tides.


Agreed.... but i'm writing in ron paul so im pretty much insane. I had a vacation planned for two weeks ago, did i cancel it because **** hit the fan? **** no then it would have been a total loss. if they just simply wrote off the upfront cost of an event like that people like you would still be *****ing at them.

Agreed on the Canada part, although socialized medicine scares me more than sock puppets. Unfortunately even your example of crooked investment bankers was 1.) still partially the fault of investors since they fronted the money for the 'get rich quick' schemes (which is what they were) and 2.) just an example of history repeating itself. maybe investors should learn not to invest in something based on more than past years returns and future predictions.

yes yes yes we can all blame gramm-leach-bliley for this.... to bad it was passed by both the House and the senate and signed into law by a democratic president.

the 'right' is clearly to blame once again. by the way, that bandwagon you have sure is fancy....


um, its called econ-101? head to your local JC and sign up. after all the post oil-crisis production capacity came online in the early 80's the world benefited from extremely cheap oil due to excess supply in the market.

demand continued to increase, supply did not increase at a corresponding rate, hence the price increased.

do me a favor Einstein and calc out the rate of inflation vs the cost of gas over the last 30 years. thats a dinger, trust me.

Aside from that, the recent (last year or so) hyperinflation of commodities is part of a separate market cycle. as, im sure you know, commodities markets typically run at about 12-15 year cycles and we are currently about 9 years into a commodities run. pile on top that investors fleeing from other markets to commodities and there goes oil to 140.

no surprise there

agreed, but hegemonic stability theory shows us that we will not remain the top dig indefinitely and we need to be prepared to switch to a knowledge based economy as england has



eventaully americans will have to face the fact that the only way to change this is to actually get involved in their respective parties. we are a two party system and we always have been. some things dont change

 

No you are the ignorant one, you yourself pointed out that demand is growing, I said fixed, but my point is that demand does not shrink when prices go up too fast- despite all your econ 101 BS about prices reflecting supply and demand, supplies have been generally steady, demand has grown incrementally yet prices and profits have risen exponentially, if it were a anything close to a free market, competition would keep wholesale prices in line with extraction costs and profit margins would be kept in line accordingly.

Much of the rest of your reply is so full of common misconceptions and propaganda that I won't waste my time replying to it- except this last point-


The alleged "two party system" is a total myth perpetuated by the two predominant parties, the republicans and democrats were both at one time in our nation's history "third parties"

Historical political parties
Some of them had considerable influence. Listed in order of founding.

* Federalist Party (c.1789–c.1820)
* Democratic-Republican Party (1792–c.1824)
* Anti-Masonic Party (1826–1838)
* National Republican Party (1829–1833)
* Nullifier Party (1830–1839)
* Whig Party (1833–1856)
* Liberty Party (1840–1848)
* Law and Order Party of Rhode Island (1840s)
* Free Soil Party (1848–1855)
* Anti-Nebraska Party (1854)
* American Republican Party (1843-1854)
* American Party (“Know-Nothings”) (c.1854–1858)
* Opposition Party (1854–1858)
* Constitutional Union Party (1860)
* National Union Party, (1864–1868)
* Readjuster Party (1870-1885)
* Liberal Republican Party (1872)
* Greenback Party (1874–1884)
* Anti-Monopoly Party (1884)
* Populist Party (1892–1908)
* Silver Party (1892-1902)
* National Democratic Party/Gold Democrats (1896–1900)
* Silver Republican Party (1896-1900)
* Social Democratic Party (1898–1901)
* Progressive Party 1912 (“Bull Moose Party”) (1912–1914)
* National Woman's Party (1913-1930)
* Non-Partisan League (Not a party in the technical sense) (1915–1956)
* Farmer-Labor Party (1918–1944)
* Progressive Party 1924 (1924)
* Communist League of America (1928–1934)
* American Workers Party (1933–1934)
* Workers Party of the United States (1934–1938)
* Union Party (1936)
* American Labor Party (1936–1956)
* America First Party (1944) (1944–1996)
* States' Rights Democratic Party (“Dixiecrats”) (1948)
* Progressive Party 1948 (1948–1955)
* Vegetarian Party (1948–1964)
* Constitution Party (United States 50s) (1952–1968?)
* Mississippi Freedom Democratic Party (1964)
* Communist Workers Party (1969–1985)
* People's Party (1971–1976)
* U.S. Labor Party (1975–1979)
* Citizens Party (1979–1984)
* New Alliance Party (1979–1992)
* Populist Party of 1980s-1990s (1984–1994)
* Looking Back Party (1984–1996)
* Grassroots Party (1986–2004)
* Independent Party of Utah (1988–1996)
* Greens/Green Party USA (1991–2005)
* New Party (1992 – 1998)
* Natural Law Party (1992–2004)
* Christian Freedom Party (2004)

I'd say its time for something other than the corporate/republi/democrats

Oh and as far as heading to my local JC for econ 101, pal, I got an A in econ 101 from a very free-market economist at a major university before you were even born.

I've been discussing and fully aware of these issues longer than you've been alive, so cut the condescending BS please.

 

so as you have said, supply has remained the same (as i stated. reading comprehension isnt taught in schools anymore?) while demand increased and surprise, the price has increased as well. check the margin on oil company profits... lower than ever before.
prices have increased exponentially RECENTLY, but not over the duration of the cycle. seriously, plot it out. consumer price vs oil price from 80 til now. they couldnt make those record profits if you were willing to buy their product. maybe you should be on the prius forums?


heres that American laziness again

some really successful parties listed there, with a strong presence is state and national legislatures..... who could forget the Vegetarian party and how they stood up to the establishment to pass major legislation.

yah yah yah and i got an A in Thermo from the top aerospace engineering school in the country, that doesnt make me an expert. what i do know is that i have clearly ridden through more market cycles than you have which probably makes me more qualified to speak on this topic than you.

when you feel like presenting a valid argument let me know, until then im going back to the fridge, and if you feel like checking up my qualifications, ive posted up my my portfolio several times in SrIC.... the search funciton is your friend.

 

I think you and I probably agree on more points than we disagree, while your rhetoric is peppered with straw men and false dichotomies, you yourself agreed with an awful lot of what I posted.

But seriously, you need to wake up from the notion that energy costs are operating in any thing like a "free market", between massive subsidies and "incentives", OPEC, strategic reserves, musical chair boards of directors and blatant collusion, that fundamental notion just isn't true no matter how you look at it.

I never said that the left and democrats are innocent in all of this, just that I think more damage has been done by the right and their blatent conflict of interest policies.

Back in their time, the Whigs and Federalists were each one of their time's two parties. I never said that the list of historical parties have any kind of strong presence now- you chose to ignore my main point which is that the two party system is a fabrication.

Long term trends and costs adjusted for inflation are all well and good when the economy is following trends, but what is going on now is clearly a major departure from anything that has happened in this countries history, the only thing that comes close is the 1929 stock market crash and subsequent "Great" depression, an era that I would encourage you to study up on more.

And you need to explain to me how you have "ridden through more market cycles" than I have when you haven't been alive half as long as I have...

 

Well, I am glad this got people talking about this. Even debate and arguments are preferred over just taking it without question.

 

http://news.yahoo.com/s/ap/20081010/...ltdown_paulson

 

Great idea, nationalize the banks- Just like Hitler did!


Doing a search through your posts reveals that you are a total post *****, who seems to post thousands upon thousands of meaningless responses to meaningless threads.

That search was the biggest waste of time I've engaged in in recent memory, and probably the last time I'll take any sort of suggestion from you.