Please follow the bouncing ball….
On Wednesday, David Frum wrote:
“…Those estimates make intuitive sense as we assess the real-world effect of the crisis: the jobs lost, the homes foreclosed, the retirements shattered. When people tell me that I’ve changed my mind too much about too many things over the past four years, I can only point to the devastation wrought by this crisis and wonder: How closed must your thinking be if it isn’t affected by a disaster of such magnitude? And in fact, almost all of our thinking has been somehow affected: hence the drift of so many conservatives away from what used to be the mainstream market-oriented Washington Consensus toward Austrian economics and Ron Paul style hard-money libertarianism. The ground they and I used to occupy stands increasingly empty….”
Because of obscenely low interest rates brought about by Randian disciple Alan Greenspan, the US faced a housing bust based on idiots buying homes for outrageously over inflated prices they could not afford. Because mortgage companies made these low interest rate loans, they went under, starting the banking crises.
People couldn’t afford to pay their loans because the libertarian fool theory about low interest rates stimulated an insanely week dollar.
When we have a weak dollar, we pay more for oil.
When we pay more for oil, people pay more for gas.
When people pay more for gas, they get kicked with an obscene inflationary cycle that leads to a bust because they don’t have money for other things.
And – that is what Randian disciple Alan Greenspan did to the American people.
“...In 2002 and 2003, the economy was still not recovering adequately despite the extreme rate cuts the Greenspan Fed initiated. Now Greenspan thought deflation— an overall decline in prices— was a far greater worry than inflation, which could result in financial turmoil. Debtors don’t pay back their loans because dollars are more valuable— they can buy more. Creditors take large losses. Greenspan always believed he could recharge the economy by cutting rates sharply. The financial markets had come to depend on this ever since his rescue in 1987, and it became known as the “Greenspan put”—a floor Greenspan would always place under securities prices. But now the lower rates were not working. As economist Mark Zandi said, Greenspan realized the only way out was to push interest rates even lower to ignite a housing boom. Perhaps he believed he could this time pull the plug just short of its becoming a housing bubble. If housing was stimulated, higher house prices in turn would encourage consumers to spend— the “wealth” effect, as it was called. Greenspan cut the target federal funds rate to 1 percent and kept it there until mid- 2004, the lowest since the early 1950s.
The low rates between 2000 and 2004 were the lifeblood of the housing boom. Thousands of new mortgage brokers, and twenty or so giant ones, were vying with one another to sell mortgages to lower- income Americans, relying in particular on adjustable rate mortgages, or ARMs. Buyers paid low interest rates in the first two years of the mortgages after which rates rose, usually substantially. But with house prices rising relentlessly, the homeowner could refinance with another ARM, or pay down some of the mortgage and reduce the monthly payments. A rapidly growing number of these were subprime mortgages, sold to home buyers with poor credit. But middle-income Americans also often took ARMs, to buy homes once out of their reach. With rates so low and no federal oversight, mortgage lending practices, long suspect, became widely abusive. Even the FBI warned in 2004 of an “epidemic” of fraud in subprime mortgage writing, but it had devoted so many of its resources to antiterrorist activities, it had little left to pursue unscrupulous mortgage brokers.
Greenspan knew about these loans, and was warned by associates at the Federal Reserve that abuses were mounting. He had the authority to investigate but chose not to. In 2004, remarkably, Greenspan himself spoke favorably of the ARMs. “Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed- rate mortgages.” As economist Zandi wrote, such a comment was essentially an endorsement of the practice….”
All I know about Keynes was taught to me in American History 102 by a professor who was a proclaimed socialist. I know even less about Hayek, other than he was a libertarian economic god. All this tells me is that if you balance the pair of them you might get something normal.
How hard can this be. On Wednesday, while channel surfing, I encountered an interview with Ron Paul. Since it was not on FOX, I listened to him whine for about two minutes. That’s all I can stand of his tone of voice. He reminds me of a petulant child who must continually whine because no one is listening to him.
Paul suggested freezing government spending. Durn, but The Pink Flamingo actually agrees with him on that Then he suggested we cut back government spending by 1%. That’s when he lost me again.
That’s all – 1%?
Why not cut back 5%?
We’re all cutting back at least that, if not more. That’s why we’re having this blasted recession. Cut the clueless pontificating about dead economists and let’s try a little reality here.
Like I said, I don’t know much about economics, but it looks to me like much of the mess we are in is because of Ayn Rand acolyte Alan Greenspan. You need to go back and search financial articles before the libertarians took over and began to lie about what is going on to protect Rand’s reputation as goddess all knowing.
Evidently, Greenspan’s libertarian policies created the fine mess we are in. One of the problems was the insanely low interest rates the fed has been using for ages.
“…Greenspan’s monetary excess was also crucial in setting off a chain of bad government policies. As Taylor argues, Greenspan Loose was amplified by the popularity of subprime mortgages, especially adjustable-rates, which promoted risk taking. And it made for a lethal brew in a pot of policies to promote homeownership.
Greenspan pulls out many stops in his defense. He even quotes the great Milton Friedman’s approving assessment of Fed policy between 1987 and 2005. Well, Friedman died in 2006 and, in 2009, his equally great colleague, Anna Schwartz, has this to say: “There never would have been a subprime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for.” As for Greenspan’s argument that the whole mess is China’s fault, she says tartly: “This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can’t be blamed on global events.”….”
Greenspan’s libertarian policies created the easy interest rates that led to the housing boom, that has led to our current problems.
“…But consider how your own life has changed over the past few years. How have Greenspan’s actions affected your stock portfolio, 401(k) or mortgage? Will you be better off for having lived through the Greenspan era, or will you be much poorer for having done so?
The truth is that the majority of Greenspan’s decisions as Fed chairman from Aug. 11, 1987, to Jan. 31, 2006, were not beneﬁcial to you, nor did they leave the country better off, despite Greenspan’s glowing self-critique in his latest book, “The Age of Turbulence.” In reality, the overwhelming majority of people in the United States will be worse off in the years ahead as a result of his stewardship.
Some might ask, “He was the Fed chairman — how could he have been wrong?” My response is: Greenspan erred by continually picking an interest rate that was too low. Then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low….”
Even Steve Forbes said that Greenspan is responsible for the mess we are in. All you need to do is read this little Wiki summery of some of his time at the Fed and it is obvious the libertarian policies Greenspan used were an abject disaster. He created the low dollar. The low dollar causes us to pay more for gas. When we pay more for gas, people can’t pay for other things. High gas prices started in the summer of 2008. They are higher now. The recession is getting worse. How hard can this be?
“...During the Asian financial crisis of 1997–1998, the Federal Reserve flooded the world with dollars, and organized a bailout of Long-Term Capital Management. Some have argued that 1997–1998 represented a monetary policy bind—as the early 1970s had represented a fiscal policy bind—and that while asset inflation had crept into the United States, demanding that the Fed tighten, the Federal Reserve needed to ease liquidity in response to the capital flight from Asia. Greenspan himself noted this when he stated that the American stock market showed signs of irrationally high valuations. While presenting the Federal Reserve’s Monetary Policy Report in July, 2002, he said that “It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.” and suggested that financial markets need to be regulated.
In 2000, Greenspan raised interest rates several times; these actions were believed by many to have caused the bursting of the dot-com bubble. However, according to the Economist Paul Krugman “he didn’t raise interest rates to curb the market’s enthusiasm; he didn’t even seek to impose margin requirements on stock market investors. Instead, he waited until the bubble burst, as it did in 2000, then tried to clean up the mess afterward.” In autumn of 2001, as a decisive reaction to September 11 attacks and the various corporate scandals which undermined the economy, the Greenspan-led Federal Reserve initiated a series of interest cuts that brought down the Federal Funds rate to 1% in 2004. His critics, notably Steve Forbes, attributed the rapid rise in commodity prices and gold to Greenspan’s loose monetary policy which he believed had caused excessive asset inflation and a weak dollar. By late 2004 the price of gold was higher than its 12-year moving average….”
We are in this economic mess because of libertarian theories.
If David Frum is correct, and we are trying not to say that we are in a depression (and The Pink Flamingo thinks we are), then government spending is not going to get us out of this mess. We’re simply watching history repeat itself. There were several crashes during the Depression. World War II began to bring us out, but at the end of the war, we were headed toward another one.
Dwight Eisenhower is the one who managed to get the US out of the Great Depression. He did not do it through libertarian stupidity. What he did is contrary to both the Dems and the GOP, and certainly contrary to what the libertarians want. For one thing, he fought inflation. Right now we’re battling obscene inflation created by high gas prices and low interest rates.
“...Eisenhower believed that a free enterprise economy should run itself, and he took little interest in domestic policy. While his 1952 landslide gave the Republicans control of both houses of the Congress, Eisenhower believed that taxes could not be cut until the budget was balanced. “We cannot afford to reduce taxes, [and] reduce income,” he said, “until we have in sight a program of expenditure that shows that the factors of income and outgo will be balanced.” Eisenhower kept the national debt low and inflation near zero.
There were three recessions during Eisenhower’s administration — July 1953 through May 1954, August 1957 through April 1958, and April 1960 through February 1961. Real GDP growth averaged just 2.5% over those eight years. Eisenhower allowed the recessions to occur, to wring out the inflation of wartime. Under the Eisenhower administration the economy had greatly expanded, with the DOW beginning at 288 and soaring all the way to 634…
…Eisenhower promoted the Federal-Aid Highway Act of 1956, which created the United States’ Interstate Highways. It was the largest public works program in U.S. history, providing a 41,000-mile highway system. Eisenhower had been impressed during the war with the German Autobahn system, and also recalled his own involvement in a military convoy in 1919 that took 62 days to cross the U.S. Another achievement was a 20% increase in family income during his presidency, of which he was very proud…’
“…Although conservatism was riding on the crest of the wave in the 1950s, and Eisenhower shared the sentiment, his administration played a very modest role in shaping the political landscape. Instead of adhering to the party’s right-wing orthodoxy, Eisenhower instead looked to moderation and cooperation as a means of governance.This was evidenced in his goal of slowing the growth of New Deal/Fair Deal-era government programs, but not weakening them or rolling them back entirely…”
It is quit obvious that we had a big problem in 2008. When the Dems went on their spending spree they made it horribly worse. If Obama had actually done something honest, and not pandered to his liberal cronies, and committed to actual infrastructure repairs, he may have made a difference. If they had committed to greatly expand our nation’s space effort it would have helped.
Instead we get the tea party “patriots” and their billionaire enablers, playing alongside the liberal billionaire enablers. They are manipulating their followers in order to increase their bank accounts and bottom lines.