Who’s To Blame?

Much ink has been spilt, much of it wasted, in attempts to determine the root cause of the current meltdown in the economy.  Libertarians point to the Federal Reserve, who slashed rates way below the inflation rate (which the government understates) and left them there too long.  Or they point to Nixon’s unilateral removal of any real backing of the US dollar in 1971, making our currency truly fiat in nature.  Others point to Wall Street and its compliant boards and astonishingly overpriced and overpaid executives and officers.  And of course, some point to citizens themselves who bought houses they knew, on some level, they could not afford.  This in no way exhausts the lists, to which must be added mortgage brokers and appraisers, bond rating agencies, insurers of mortgage derivatives, and according to some, even short sellers and speculators.

Any attempt to dissect the crisis to determine its root cause must deal with a logical separation between first and second causes, and any corrective policy must both correctly identify and address that first cause, from which all effects and second causes emanate.  Not, to do this in an environment of fear, panic, congressional hearings, and frankly, lazy journalism is no mean task, as there is a great deal of smoke (and mirrors) precisely when what is needed is clarity.

One way to begin is to ask a few pointed questions from what we now know, to direct and focus our thinking. For example, the last great bubble to inflate and pop was the dot com boom in equities and venture capital.  On the heels of that bust (and 9/11), Alan Greenspan lowered the cost of debt and credit to unheard of levels, nearly guaranteeing another bubble somewhere.  As we know, that bubble occurred in real estate. Here is the question….Why real estate?  And why, more specifically, residential real estate?  Why not gold, or restored 1934 Fords?  Or commercial real estate?

Since we know where the bubble occurred, our next question should focus on the largest players in residential real estate.  These are easy to identify – the Government Sponsored Enterprises (the GSE’s) of Fannie Mae and Freddie Mac.  By far, these two companies hold most of the paper for residential mortgages, which they resold to investors looking for “safe” yields.  China, Russian, and the Middle East (GCC) countries own a tanker-load of this stuff they thought was ultra-safe.  

If you will imagine that you are constructing a rocket, Fannie and Freddie would be the physical rocket, perhaps. The fuel was the artificially low rates of the Federal Reserve under Greenspan.  Continuing in that analogy, no rocket will get off the ground without a guidance system.  This was provided by, you guessed it, Washington politicians who both set oversight for these GSE’s and “managed” the terms under which they would function.  The primary movers in this arena have been Senator Christopher Dodd (D.,CT) and Representative Barney Frank (D., MA).  Since the Hon. Mr. Frank has been the most vocal (what else is new), it is instructive to review his view of how to govern and “serve the people” in this matter.

Item 1: Frank has “served” on the House Banking Committee since 1981, has been the ranking member since 2003, and its Chairman since 2007.  The Committee has jurisdiction over Fannie and Freddie, along with the Office of Federal Housing Enterprise Oversight (OFHEO), which is under the Department of Housing and Urban Development. So Frank is, or should be, knowledgeable about the GSE’s.

Item 2: While on the Committee charged with oversight of these companies, Frank carried on a 10-year “romantic” relationship with Herb Moses, a Fannie executive who was the assistant director for product initiatives, and later, the Director of this post.  Moses, according to the National Mortgage News (Feb. 23, 1998) was “at the forefront of relaxing lending restrictions at the company for rural customers” (Business and Media Institute, 24 Sept., 2008).  Frank, meanwhile, was actively supporting the GSE’s, including Fannie, where his lover was a high official.

Item 3: Frank was the fifth-ranking House member to receive campaign contributions from Fannie and Freddie ($40,000 in total; Source: Investors Business Daily, 19 Sept., 2008).  All told, these GSE’s spent $200 million to lobby Congress, contributing to both their and presidential campaigns.

Item 4: (New York Times; 11 Sept., 2003) – Frank is quoted as saying that “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis…The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”  This, right as house prices are starting on their upward trajectory.

Item 5: (Wall Street Journal; 4 Oct., 2004) – This article was published after the regulators from the OFHEO found that Fannie was “cooking the books” to smooth out its earnings.  Why? “This flexibility also gave Fannie the ability to manipulate earnings to hit – within pennies – target numbers for executive bonuses.”  At year-end 2003, when Frank was making his comments above, “Fannie had some $12.2 billion in deferred losses,” which if recognized on their balance sheet, would have left its minimum capital requirements in violation of that required by regulators.

So what we have here is two public companies who have bought politicians – most notably Barney Frank – to run interference for them while their executives pocketed millions in bonuses by manipulating their reported earnings.  Frank’s lover was at the forefront of lowering lending standards, essentially opening up the throttles on the rocket, which lept into the sky on Greenspan’s easy money and credit fuel.  But just as all systems were thought to be “GO,” the rocket blew up in mid-air.  And the wreckage is raining down now on the American taxpayer.  

You know, the ones who managed their debt, paid their bills and their taxes, lived prudently, but naively thought all was well.   Until it wasn’t.

The elites have effectively caused this present crisis (the first cause), and the resultant malinvestment of capital and the mispricing of risk occurred on Wall Street, who is ever-competitive to secure the marginal earning penny per share (it wants bonuses too).

Now we are told to heed Dodd, Frank, Bernanke, and Paulson – the very elites that got us into this mess.  Should we be most upset at their corruption, their egotism, or their sheer incompetence?

Decisions, decisions……

How should Convervatives think – and only then, act – concerning the recent government bailouts to financial (and now, automobile) firms?

One commentator on CNBC noted that as many as 80% of people working on Wall Street could classify themselves as ‘Republicans,’ from floor traders to brokers to the corporate boardrooms.  And yet, as the mortgage, credit, and liquidity crises emerged and fed on one another, these self-described Republicans looked to government to bail out a host of firms, from Bear Stearns to AIG.  Secretary Paulson, the ex-Goldman Sachs CEO, duly responded to the cries from his old banking buddies, Bernanke got on board, and Congress – including Republicans and John McCain, their standard-bearer in the election – acquiesced to a shocking bailout called TARP, the largest government transfer of wealth in U.S. history.

It was called an “investment,” of course, even by some Republicans.  CNBC journalists opined that we should not worry about principles of free markets, or the moral hazard, because holding to principle would mean the onset of a financial “nuclear winter” if Goldman, Merril, Bear, and/or Citi were allowed to blow up, ala Lehman Brothers.

Two questions immediately present themselves. How did we arrive in this mess, anyway?  That is, who and what caused this situation? Was it Wall Street? Government? Real Estate speculators? Short sellers in the markets?  Consumers? Mortgage brokers?

The second question is more troubling but simpler to address – why have so many Republicans, so-called conservatives mind you, joined the collectivists in stealing from the American citizenry?  We shall attempt to show how poor thinking on the Republican side, combined with sheer political demagoguery on the collectivist side, and abetted by the Bush Administration (Paulson, Bernanke, and Cox at the SEC), functionally colluded to produce this mess.  In other words, all of this current economic crisis was avoidable, which makes it all the more tragic.  Worse, the effect is that the freedom of our markets has been severely compromised under a so-called “conservative” Republican administration.  What happened? Why? And how can conservatives respond now, that the Big Three automakers are asking for taxpayers to “invest” in them?

The answers to this questions must begin with right thinking, which can only then begin to inform what actions conservatives must make, both in the solutions they propose and the socialist agendas they must resolutely oppose.

First of all, welcome . . .

To this point I have successfully resisted creating a blog, for the simple and good reason that there is no a priori reason for me to assume anyone will be interested.  Time will certainly tell.

In the spirit of our Founding Fathers who, in declaring the Colonies independent from George III, considered it both prudent and necessary to enumerate the motivations for their Declaration, I am similarly constrained.

As the title of this blog suggests, it is my contention that conservatives cannot ultimately meet with success in preserving the Republic without a solid intellectual base out of which all positions and policies issue.  We must begin, once again, to think correctly before we can presume to be acting correctly. And since conservatism is the politics of reality, genuine conservatives must recognize certain realities of our lot in life.

First of all, we must recognize that conservatism will never triumph in the sense of final victory over our collectivist opponents. Why? Liberalism is the politics of the utopian dreamer who imagines a better earth as being attainable if only everyone would see things their way.  The liberal actually believes he is better than he is as a human being, that he has in him the ability to act contrary to his nature.  He will outlaw greed or self-interest by this or that policy, thinking that he has advanced heaven on earth by the stroke of a pen.  Of course, the liberal cannot repeal human nature, and is constantly taken by surprise when his plans are thwarted.  If he taxes corporations to provide for a class he favors, he is shocked to find that capital flees the jurisdiction to wherever it is better treated and tax can be profitably avoided. The genuine conservative knows this, but can never ultimately triumph, because every generation believes it is smarter than its predecessor and is willing to repeat the same failed policies.

The conservative must therefore maintain a constant vigil against collectivist dogoodism which constantly ignores human nature, history, and reason.  But conservatism can never really triumph in the sense of total victory.  Liberals shall always, alas, be with us. Some of them are talented enough to be elected, meaning that they are sufficiently intelligent to couch nonsense as sense and promise hope’s triumph over reality.

Second, it is high time that genuine conservatives (as opposed to the ‘neo’ species) understand that we should not be defenders of the Second Amendment if we are then going to repeatedly persist in shooting ourselves in the foot, politically.  We must realize that nominating a candidate on the Republican side who is demonstrably not a conservative, and then attempting to pass him off as one is a sure recipe for mediocrity (at the minimum) and outright betrayal of conservative virtues (at the margin).  In this past election, we should each find the people who voted for McCain in the primaries and caucuses and personally thank them for electing Barack Obama and securing a near-insurmountable majority in Congress. 

And finally, conservatives must clean its own stables, intellectually, as its first and most important action.  When George II championed “compassionate conservatism,” genuine conservatives should have been horrified, not merely because it was redundant, but because it ceded moral ground to liberals who, in lying to the citizenry, wrapped themselves in the flag of “compassion” while impoverishing them financially, socially, and culturally.  George Bush thought he was onto something substantive, when in point of fact, it was sheer nonsense.  And when Mr. Cheney said that “Ronald Reagan proved that deficits don’t matter,” genuine conservatives should have taken that man to the woodshed (or invited him on a hunting trip).  Reagan would have been horrified to hear such a thing, and mystified to understand how anyone with more than a two-digit IQ could ever come to such a silly conclusion. Where were you, Fox News? Some conservatives did wince a bit, in articles and on talk radio.  But Mr. Cheney should have been roundly condemned for his remark, not only because it was a lie, but because it reflected an astounding lack of principled conservative thought.

Again, welcome….