"The best laid schemes o' mice an' men."

We are a sorry lot who never learn to step out of the corral.

Glad to have found you through Instapundit. I live in CA where more and more entrepreneurs are shrugging and leaving the state.

"If a detailed, factual study were made of all those instances in the history of American industry which have been used by the statists as an indictment of free enterprise and as an argument in favor of a government-controlled economy, it would be found that the actions blamed on businessmen were caused, necessitated, and made possible only by government intervention in business. The evils, popularly ascribed to big industrialists, were not the result of an unregulated industry, but of government power over industry. The villain in the picture was not the businessman, but the legislator, not free enterprise, but government controls."

- Ayn Rand, "Notes on the History of American Free Enterprise", published in Capitalism: The Unknown Ideal

We used to have a name for "capital controlled by government," but then Godwin made a Law about using the name. 'Whatever,' it's what we've had, more or less, for 40 years or more. Anyone calling on free-market capitalism, for good or ill, is truly invoking an unknown ideal. None of us have ever seen it, and next week's not looking good either.

While the government proved a great enabler and cheerleader in this crisis, I think it's important to recall that Wall Street(Bear, Merrill, Lehman, et al)also provided billions of dollars to loan originators.

Private companies pioneered the no-doc "liar loans" when Wall Street begged for more loans to make CDO's. The CDO's were stamped "AAA" by the rating agencies and thus could be sold as safe investments to investors all over the world despite being utter junk. Frankly, it was the most profitable Ponzi scheme in the history of the world. It makes Madoff's operation look like a child's lemonade stand.

I'm more than confident our government never said make loans to people with no job, no income and no assets. This was done because it was wildly profitable AND a bunch of math geeks thought the worst case scenario for housing was -3.5%. The result: a shadow banking system with 30:1 leverage.

Lots of blame to go around, but it was primarily greed and profit motive that fueled the crisis. This is NOT an indictment of capitalism. Greed does not go away in a socialist society. It's the natural state of things and capitalism does the "least worst" job of exploiting its benefits. It just that every decade or two, things get out of hand and we have to hit the reset button. There will be another "tulip bulb" in the next 10-15 years. Take it to the bank.

"But where would us sheeple be without Daddy and Mommy State shpherding us? Baahhh!"

(I'm translating in advance any comments from "liberals" you may receive in response.)

G Haden,

Remember, though, Wall Street and Banks would probably not have made those loans if there wasn't A: Some fear of expensive lawsuits for refusing to lend to unqualified borrowers, and B: being able to lay off all the bad paper with Fannie and Freddie.

Remove the above and there is far less of a banking/mortgage meltdown.

Government is mostly responsible for the debacle.

Blake,

Fannie and Freddie were extraordinarily late to the sub-prime game. Fannie Mae didn't start buying subprime and Alt-A loans directly (and bundling them into securities) until late 2004 after the accounting scandal that submarined Franklin Raines. The die was cast WAY before that.

FNMA got into the fray primarily because it was like a license to print money rather than some altruistic plan to make sure poor people owned houses. Private loan originators, primarily in southern California, pioneered the NINJA (no income, no job,no assets) loan. All loan officers had do to was ask borrowers to document income and the problem is DOA.

Again, I'm not saying the government is blameless by any means. By and large though, the lure of taking 6% money and making 100% returns has inevitable results. Read Fisher's "debt-deflation theory of great depressions" for a nice breakdown.

So. If the govt hadn't pushed sub-prime (aided by 'community organizers' who successfully sued to get loans made based on percentages of borrowers meeting qualifications (which decidedly did not include creditworthiness, comatus) and Fannie Mae and Freddie Mac had not bought huge bunches of those crappy loans lenders would *still* have made them?

I have my doubts. The part about human cupidity I simply take for granted. If it makes you feel better, call the govt (or parts of it) and others 'enablers'. Still largely their fault that the situation was ripe for being taken advantage of by unscrupulous types. (How are they different from George Soros, anyway?)

JorgXMckie,

I would probably go further and say government policy exacerbated the problem. The largest blame goes to the Fed. If they hadn't held interest rates so low for so long, there wouldn't have been $70 trillion global dollars chasing the "safe," higher returns of CDO's. Investors would have been perfectly happy with a plain vanilla CD at 5%. It just didn't exist due to artificially low interest rates.

In the bull market from 2000-2007, investors were buying mortgages even without the Fannie/Freddie guarantee. The GSE's couldn't even guarantee jumbo loans anyway. This was all Wall Street money. Everyone in the mortgage business turned into a salesman. The sales business being what it is, the more unscrupulous and aggressive the sales operation, the more business it did.

My main point is that the government sub-prime push may have been like a "green light" but Wall Street only pushed the gas because they were essentially getting paid 1.5% "juice" on all loans. I'm seeing way too many bloggers erroneously try to suggest that this was some kind of loan program for poor people jammed down the throats of Wall Street.

G Haden,

You are leaving out the supply/demand effect. The government brought new "demand" into the market. Which makes existing supply more valuable. Prices rise. The rise was monetized. Thus bringing more demand into the market. Round and round. Until there were no more folks in homeless shelters or black marketeers (NINJAs) who wanted to get in on the deal.

Then it all unravels.

It all starts with government inflating demand. That wasn't just contributory. It was essential.

There are two ways to work it off. Deflation. Or inflation. Our geniuses have chosen inflation. The net result will be a new bubble in a "can't lose" proposition. A lot of people think that will be "green" energy.

The internet bubble was not so bad - we got infrastructure out of it that was valuable because even though the rate of rise in demand slowed it was still rising at a rather good clip.

What will we get out of a "green" bubble? Energy supplies that cost 2X to 3X current rates. The only way to make that a winning proposition is to raise the cost of energy (through taxes) by 2X to 3X. Which will cripple the economy and destroy overall demand.

We truly have geniuses running government.

Pondering the imponderable: In the mid-1990s the Clinton Administration loosened regulation on corporate financial reporting that led to the Enron fisco in 2001; in September 2001 we had the WTC/Pentagon attacks that shook the financial markets to their cores. In response to these disasters the Fed loosened credit in 2002-2004 to the point they were just about giving away money. Which in turn strongly contributed to our current lending crisis.

What would have happened if Enron hadn't collapsed and 9/11/01 had passed like any other Sept 11th since the end of WWII? Would our 5 biggest banks be on the edge of insolvency today?

What will we get out of a "green" bubble?

Well, currently the world consumes a bit over 1 cubic mile of oil annually and by the year 2100 demand will surge to ~2 cubic miles/year. There are proven reserves of about 35 cubic miles and another 25-50 cubic miles of unproven or (currently) uneconomically recoverable reserves. Do the math.

If we believe in global warming or not the fact is that at some point, not quite fixed in stone yet, we're going to have to ween ourselves from oil whether we like it or not. If we hadn't stopped building nuclear power plants 30 years ago it wouldn't have become such a huge problem: Now we are make up the nuke-deficit AND go "green" at the same time or drown.

Orion,

My guess is that Bush & Co. were trying to prevent a recession until the war in Iraq was well in hand. Guns and butter.

It worked. Barely.

If the new admin had been willing to pay the price now with a recession - not so bad. But they were not. So they have attempted to keep the ball rolling. Turning a severe recession into a long period of stagflation.

The economy will come back mid 2009 due to the current bubble. Then it will dip again in 2010 when it becomes obvious that the "new demand" is not real.

All warfare is based on economic power. We are so screwed.

Orion,

The time to hit "green energy" hard is when it costs LESS than current sources. That argues for more research not vast spending plans on uneconomical sources.

Jimmy Carter pulled the same trick Obama is trying to pull and it discredited alternative energy for 20 years. I'd rather avoid that.

BTW "green" electricity will do approximately zero for the oil problem. What about electric vehicles? Simple really. Electricity at 15¢ a KWh is equivalent to gasoline at $2.00 a gallon. So let me see here. Electricity at 30¢ a KWh is gasoline at $4.00 a gallon. Which is hardly an economic proposition given the high cost of electric and electric/hybrid vehicles.

And then there is the problem of trying to charge your vehicle at night with solar cells. I propose cells that can collect dark energy.

The best thing Obama could do is to tell his "green socialist" friends that the market will take off on its own once we get solar costs down and that he is going to pour money into research.

Any market that is dependent on government funds for profitability is subject to the vagaries of politics. Such a system is corrupt by its very nature. I'm not a big fan of corruption.

M. Simon,

I think I agree? If you could clarify what you mean by the government creating demand, I might be able to do a better job responding.

The supply/demand dynamic I saw at play was the Fed creating a lot of demand (ie, supply of loanable funds)with a near-zero interest rate policy during the housing bull run. This glut of savings was searching for a safe interest rate better than treasuries and CD's.

The increased supply of loanable funds met the CDO AAA-rated by a 25 year-old quant with a 180 IQ and no common sense, keeping rates well below what the underlying risk should have dictated. With the AAA rating, all of the sudden municipalities in Norway are buying CDO's from Wall Street salesman pitching them as "good as cash." If this is the supply/demand dynamic you are referring to, I agree completely.

I actually worked briefly in mortgage origination. Wall Street bought every loan we could make, because as long as the rating agencies would play along (rating everything as AAA), the loans were extremely easy to resell to a global investing public so hungry for yield with perceived safety. We basically ran out of good credit risks to meet Wall St. demand. After that, the more unscrupulous lenders provided supply by basically processing totally fabricated loan documents. Calling it subprime actually is an insult to subprime borrowers. They weren't subprime loans; they were fantasy loans.

G Haden,

I was thinking more along the lines of the initial start of the bubble with Fannie/Freddie. But you are right about the low discount rate.

Here is a nice article on how Iceland went bankrupt playing liar's poker with smarter liars.

http://www.vanityfair.com/politics/features/2009/04/iceland200904

The discount rate is in there and a lot of other good stuff. Interesting and tragic.

"Ah. Well. If only there had been more regulation. If only. I can tell you one thing for sure: that the whole financial mess proves capitalism doesn't work. When it is controlled by government."

First, I don't think most people actually know whatthe world "capitalism" means. We haven't lived under a capitalist system in America since about 1913.

Second, isn't 200,000 pages of Federal laws enough regulation? That's not counting more laws and regulation at the state, county and city level.

Not enough regulation??? How much is "enough"?

Warren,

It was ironic. You should follow the link given. Their was an attempt to reign in the mess. Under Bush.

Fannie and Freddie were extraordinarily late to the sub-prime game.

The New York Times says 1999/2000.

The New York Times says 1999/2000.

Fannie Mae invested in some securities backed by subprime loans in 1999/2000, but it didn't start buying subprime and Alt-A loans directly (and bundling them into securities) until late 2004. Purchasing of subprime and alt-A mortgages expanded exponentially after Raines was forced out due to the accounting scandal.

D. Simon. Great read on Iceland. Thanks for posting. I've read excerpts form Michael Lewis' Liar's Poker. He really provides a great narrative for otherwise pretty dry material.