Friday, January 30, 2009

President Obama and the Current Crisis

Congratulations are in order. To President Obama, I give my congratulations freely and openly. It was a hard-run campaign against tough and seasoned opponents. You not only won; you did so decisively and mostly honorably and for that, I honor you. Know that until such time as you step down, I will hope you are a good and strong President, that you lead this country with honor, integrity, and intelligence, and that your time as President is successful, not in the political sense, but in the governmental.
To those closer to my own political ideology; we owe our President full faith and loyalty, even when we disagree. Even though we do not agree with our President on many things, we should take pride in what he, and this county, have managed to accomplish. President Obama is not just the first black President. He's the first minority to be elected to the highest office in any country, anywhere, in the history of the world. For that, we can all be proud. Perhaps we are finally turning the corner away from our past and towards a better future when it comes to race relations. While most of us have long sense abandoned the immorality of racism, some of us have not and we need to move past the assumption. Much of that now falls on the President's shoulders, and how he approaches his unique position. Some of that falls on our shoulders, and how we express our disagreements and our difficulties.
I would like to say that I now have hope for the future. I didn't particularly like President Bush's style, his communication, or many of his policies. He grew the size of our government more than any president before him, increased spending without actually paying for it, and involved us in two foreign wars without the necessary increases in military force to provide for them. He continued the long standing policy of ignoring our boarders, at a time when security alone demanded strong attention. Yes, I could sit here for a long time and discuss what President Bush did wrong. But at least he tried to maintain the mostly free-market economy which provides this country with all of its power, political, economic, and military.
With President Obama, I have no such hope. He's already working towards increasing the level of government involvement in healthcare. That's one sixth of the economy. He talks about pushing some form of cap and trade or carbon tax, affecting the energy back-bone of our economy. His tax policies clearly demonstrate a desire to cripple the production of this country. Then we have this despicable 'stimulus' package.
The first problem is that we do not have an economic crises. I know, we are in a recession. Large amounts of wealth have been lost, but it's not real wealth. Homes are still standing, property is still available, and production moves along briskly. People are being laid off as business struggle for the capital to maintain previous business levels, but all of these are temporary situations.
What we have is a government crises. The very source of this mess isn't in the private sector, and it isn't going to be fixed until that source is acknowledged. Government intervention is what has caused the crises. As with most things, it started with good intentions, but as the desire to good things no matter the real world costs increased, so did the possible damages that would occur when things finally fell apart. Most people tend to think of the Free Market as a theory, or an idea. In this they are incorrect. The Free Market is a force, like gravity or nuclear forces. It does what it does. We can mitigate, control, and effect, but we cannot control. As we grow to better understand the nature of that force, we can plan on it and we can turn it to our advantage, but we still will not have actual control.
To help illustrate my point, allow me to use a metaphor. Think of the Mississippi river. The whole of it's banks are levied, there are locks and controls all along its length to try and mitigate flooding. Most of the time they work fine, because most of the time the force of the river is well understood. It's a function of the amount of water currently being drained into the river. When rain fall is unusually heavy however, the levies cannot hold the banks. One of my strongest memories of my childhood comes from flying out of St. Louis in '94. The whole of the city was under water, the heavy storms having flooded the banks.
While the levies work great upriver, downriver can be a very different story. Levies may control flooding, most of the time, but they also increase the amount of force behind the river, causing it to flow faster the more the shores are levied. This is illustrated by the trouble Baton Rouge has with flooding. There are several rivers in and around the city, the largest being the Mississippi itself, but several tributaries are near the city and empty into it close by. Even the smallest rainfall can create flooding throughout the city in a very short amount of time. These factors almost certainly contributed to the massive flooding caused by Hurricane Katrina a few years ago.
The levies are necessary, as people live all along the banks and without them, the Mississippi would return it's normal meandering path and fill its floodplains, making life there impossible. Yet understanding the effect of the levies can help us understand how to plan and prepare for when they fail. Understanding market forces is no different.
While my metaphor is imperfect, it can help to understand how the current crises is not one caused by the market. Just as levies were built to try and focus the Mississippi, government policy was enacted to try and focus the market towards politically desirable ends. What were these policies? They were primarily the Community Reinvestment Act of 1977 and later revisions to that act, and the establishment of Fannie Mae and Freddie Mac, in
conjunction with other rules such as the mark-to-market rule
What do these policies do, and why are they the main cause of the current crises? Again, it starts with good intentions. The Community Reinvestment Act of 1977 established by law that a loan could not be refused due to the location of the borrower and that lenders had to provide services to anyone within their sphere of business. In short, no 'redlining' and removing whole neighborhoods out of your range of service. This has minor impact on the lending business, forcing them to accept greater risk. However, the lending market was able to absorb this greater risk and things went along fine. The earlier establishment of Fannie Mae and Freddie Mac, with their congressional orders to increase home ownership, further mitigated the dangers of this greater risk. Yet they increased the danger downriver. By having large organizations absorbing the greatest level of risk, it concentrated the risk that one of these would eventually falter due to defaults. Starting to sound familiar yet?
Enter the mark-to-market rule. Again, it starts with good intentions. The mark-to-market rule requires companies to mark all assets at their current market value. Just like the levies on a river, during normal times this allows for better transparency, more honest reporting, and an easier time understanding a company's true worth. But what happens when the rains come? When the value of a particular type of asset, such as a mortgage, begins to plummet, the market cannot provide a value and the asset must be marked as a full loss. The property may still be there, the borrower may still be paying in full every month, and the property may still be of the same monetary value in resell, but the holder of the mortgage must write it down as a full lose because the asset has no value in the current market.
Rivers flow into one another. When the Mississippi is filled with water from heavy rains, it has less room for the waters from its tributaries. The further downriver one moves, the more effect this will have. While the Missouri may be able to empty easily into the Mississippi, the Red River will have more problems, and its level will also rise in response. The market is not much different. As financial companies struggle to determine their current assets, they are unable to provide loans to other companies. Credit begins to freeze, other companies struggle to pay their bills, provide production, and meet demand. Some companies are forced to release some workers, and others become worried, cutting down on spending and thus cutting back on demand. This cuts into more businesses, creating more lay-offs and a higher demand for credit to try and keep current production . . . And thus the levies created to protect us from the river break and it all comes spilling out.
Under this light it becomes apparent that any stimulus is probably not going to work without first addressing the underlying causes of the problem. And our political leadership has yet to try and address these underlying problems. In fact, this so-called leadership has yet to even acknowledge the effect of these policies on our economy.
Then there are the problems with the bill itself. It's filled with fluff spending projects. Support for the arts, community action groups, and many more of the usual dredge of useless government programs that will have little to no effect. Even the Congressional Budget Office has published findings that most of the money will not work itself into the economy for years, so how much immediate stimulus can it actually provide?
Further more, from where is the money going to come? Despite apparent popular belief, government does not create wealth. Its budget of 1.6 trillion dollars is all raised from taxes on the economy as a whole. Before it can spend anything, it must first get that money from somewhere. It can raise it through taxes, which will fall as the economy shrinks, it can borrow, or it can print more money. Any money raised in taxes is pulled from the economy, borrowed money creates a greater debt to be paid later, increasing the demand for taxes later, and printing more money creates inflation, eroding whatever effect spending it would have in the first place.
Pay close attention to the numbers here. The federal budget is 1.6 trillion dollars. That's all of its current spending projects, including so-called entitlement programs such as Social Security and Medicare. The federal fiscal year runs from October through September. That means that the stimulus plans passed this fiscal year already account for more than 1.5 trillion dollars, or very near the whole of the budget. In order to pay for all of this, the federal government is going to have to borrow, tax, or print money equal to its entire budget. How badly will that effect the future economy?
I sit here and I watch this slow-speed train wreck, wondering if there is anything I can do. Am I to be a modern Cassandra, to watch the destruction of our future, to call out against it, yet to go unheard and unbelieved? What am I to do?
The short answer is that there is nothing I can do. I can look out for myself, do what I can to ensure my own survival, but little more. I will continue to put my voice out there to be heard by those who wish the hear it, and maybe it will be enough. I highly doubt it, but still I can try. And, I can give my thanks to the House Republicans and their Democrat colleges who voted against this slow suicide. You men and women are true heroes on this day. Others may degrade you, others may ask why it took you so long.
For this American, I cannot find the desire to care why it took so long. You men and women stood for principle this day, and you did what you could. Keep up the good work. For the 244 of you who voted for this monstrosity, I hope you are voted out next term. You deserve greater punishment for your attempt to destroy my children's futures.

Return to the Debate

To my readers, how you few you may be, I apologize for my long absence. I must admit that I gave into despair shortly before the election. I know that without regular posts, I cannot expect regular readership, and thus cannot expect to have any effect.
I will now make it a point to publish at least once a week, and if I see any additional long-term absences forthcoming, I will try to give good warning. So, let's get things started once again, shall we?