In the Times today:
Noted intelktchooal David Brooks is puzzled by Economics lack of utility in predicting and preventing crashes. Quires he, “Where were the intellectual agenda-setters when this crisis was building?”
A constellation of inputs resulted in the deliberate lowering of the prime rate. Clinton/Bush kept rates as low as possible to drive up the economy. To be re-elected you want to keep unemployment down, the stock market rising, and real estate prices growing. If one perceives their constituency as The Middle Class, they will pursue policies that further those trends.
But, Political Correct attitudes metastasized from the Poverty Industry to the mainstream Republicratic Party. Years of superficially agreeing with the tenets of Economic Justice without defiantly naming the un-namable, merely ignoring it, caught up. No mainstream politician ever refuted the claims that social justice advocates made. No one asked “Why? Why does decreasing the difference between the wealthiest and the poorest indicate a more Just society? As long as the poor have the necessities of life and access to public schools, why is the redistribution of wealth necessarily the more moral path?” No “Compassionate Conservative” had the courage to make that plain argument! And no empathic “pain-feeling” politician did either. After years of tepid banalities, there was no moral strength left with which to oppose those who would manipulate interest rates to grant credit to those who were non-credit worthy. This is the price paid for allowing spouters of “Compassionate Conservatism” to go unchallenged intellectually.
The bankers weren’t rushing out to extend credit to ACORN’s clientele, and others, for the good reason that doing so would be grounds for charges of malfeasance and fraud to be leveled by those to whom the bank had fiduciary responsibility, (depositors, stock holders etc). So, professional procurers, like Rangel, Dodd, and innumerable others “felt” the bankers’ concerns. They snapped their fingers and voila, Fannie Mae and Freddie Mac showed up to guarantee the “slight” risk entailed by banks writing loans to folks who need not show proof of income, have no down payment, no collateral, and no prospects. Bankers get to profit from the loan’s interest, or even better get to sell bunches of them to Investment companies.
Responsible adults had taken “advantage” of enticingly low interest rates in order to get a piece of the real estate boom. Every single gambler who bet that interest rates wouldn’t increase when the rates “adjusted” bet wrong. These were presumed to be rational adults, rationally pursuing their best interests, as they perceived them. In the past, lenders would have evaluated the applicants previous record of rational behavior, would have considered that having saved for a down payment indicated a stable and functioning family or individual. Armed with statistical tools not dissimilar to those employed by the Health Insurance Industry, a reasonable assessment of risk would be determined. That risk would then translate into whether or not a loan would be made, and if so what the terms of interest would be. That has been the system upon which the largest and most comfortable middle class in the entire history of the world was built!
But, but, if someone else bears the risk, and The Poor are “enfranchised” into the “ownership society” by fiat, all bets are off! No politician had the courage to state the obvious. The Government produces no wealth. For some folks to gain unearned benefit, someone else must lose. Credit is a good. To have Credit is beneficial. To construct a system, in which Credit doesn’t matter, is to take a benefit (Good Credit) and make it worthless. This is no different than demanding that high school grades cannot count in seeking higher education. It in effect takes from those kids who took their schoolwork seriously, worked hard and valued education, and makes a mockery of their effort. It steals their efforts! That is the moral case never made!
We know the rest of the story. The Federal Deficit increased to the point where higher interest had to be given to get buyers for America’s debt. The laws of physics cannot be waived by fiat! As adjustable rates came due for adjusting, the awesome power of Reality reasserted itself. Interest rates went up. Those whose mortgages were approved to remedy the “credit-based loaning practices of the past that were arbitrary and unfair (psst…racist, too)” were unable to make the increased monthly cost. Defaulting loans increased as did the numbers of houses on the market. Despite every Five Year Plan through out the centuries, that stubborn fact of the Law of Supply and Demand remains Reality. Increased supply without an increased demand of course leads to falling prices. Eventually the prices of many houses fell below the amount of money owed on them. These “underwater” homes were often swum away from. And then there were even more houses on the market, and further reductions on prices. We have seen the effects of yet another Government that thought it could command Reality. Every positively reinforcing interaction that built up the middle class utopia of suburban America has now been turned on its head. A negative reinforcing spiral has begun. And there are those who somehow believe that the Government can change this?
Are there? Or are there those who think the Government can use this crisis. We have seen and heard them brag how they never wasted a good crisis! Who are these people and why do they persist in their schemes?
Those who knowingly brought the State into their schemes did so in order to enlarge their constituency to include the non-taxed voters. Some did so to reap but a small stream of corruption. (Small in terms of the percent of money passing through their hands, but actually large in absolute amounts!) Others did so in order to get that warm feeling associated with demonstrating ones compassion and generosity, (with other people’s money of course!). Very few if any were mere “useful idiots”. Idiots do not finagle villas in the Dominican Republic, or in any case do not receive the campaign money needed for a stake in the game.
The Greedy, the Useful Idiots have been accounted for. Who is left?
Those who knowingly set this process in motion, who with cold calculation have plotted to overwhelm the tax paying class by crushing them under mountains of debt. No poor will be raised by this deliberate demolition! But, as the system buckles under the weight of the entitlements of the non-tax-paying majority, the new order is taking shape.
Let us recall the key to the planned implosion of the real estate market and its direct path to crises in the Investment Industry. The Investment Industry Crisis was not to be wasted either. “Too Large To Fail” has been created as a concept to cleverly turn the very size and power of a company into a weapon that the Government can wield as it sees fit. This puts the entire Investment and Financial Industry on notice that they exist only at the Government’s pleasure. But, not to worry! The big shots of the industry are now a part of the Government.
The Middle Class alternately at times aligned with the wealthy capitalists in the common interest of preserving stability, and American foreign policy interests. Both shared the desire for wide spread education. One to better their children’s prospects, the other to widen the pool of potential employees. In other times the Middle Class aligned with lower classes. Together they both benefited from unionization. Rising pay to the lower class trickled up to the middle class. Never has the Middle Class been isolated before! Never have the wealthy capitalist class and the poor non-tax-paying voter allied against the Middle Class. And now, the Constitutional limitations on what the Government can do have been swept aside. The majority of voters are net consumers of Government funds. Their representation though is the same as those who are the net providers of funds to the Government. Just as they stripped Credit-worthiness of any actual benefit, the paying of taxes entitles no advantage over those who do not.
So the current Government elected by a majority (though it would be interesting to see statistics on how net payers voted), is in league with the capitalist class; both against the Middle Class.
Notice how it is done. They take a Good for which people have worked hard (Credit, Grades, Income) and devalue it. This way they are not seen as looting people’s goods directly. They merely are quietly devaluing them. But, by diminishing their value though leaving their form, it is not seen as The Revolution that it is. As Van Jones said, he is willing to forgo the glamour of the revolutionary pose, for the deep satisfaction of seeing the actual revolution (something like that). And it has worked in health care too.
Just as the lenders were forced to make loans without regard to credit history and Fannie and Freddie “guaranteed” them, and they were sold on to Investment Firms which were” too big to fail”, except for the ones that weren’t, who didn’t have friends in high places; just so Previous Medical Condition will be taken out of the equation. Having good health whether through good genes, good healthy practices, or good luck is now deemed “irrelevant” in pricing health insurance. Hey, that sounds like ignoring credit history, grades, income etc.
Watch the parallel plans. Health Insurance Companies, like Lenders have traditionally used actuarial statistics in assigning relative risk and hence price, whether of health insurance or mortgages. The Government by fiat has now made that impossible to do. Thus Health Insurers must count me, an over-weight; fifty-six year old diabetic with asthma (to be polite) as if I were a twenty-seven year-old (fresh off Mom and Dad’s plan), who never smoked, nor tasted beer, and engaged in only FDA-approved safe sexual practices! That is not insurance! Insurance, like lending money, is done profitably only by those who have and know how to use actuarial data. Health Insurance Companies must raise everybody’s rates or go bust. If they do so the Government will dramatically turn and point to the greedy insurance executives and gloat that they have demonstrated that Capitalism has failed. But few will afford the rates and the insurance providers will fold. But, the Public Option will be unveiled. The entire debate about whether or not to have a Public Option was theater! And damn boring theater at that! The Government forced the Investment Industry into a semi-merger, but the Insurance Industry will be destroyed. The executives perhaps will become public employees, adding even more to the ranks of those who vote and are net recipients of government funds.
David Brook in the NY Times today opined how Economics must renounce its claim to being Science. No, not even the dismal science, it must return to its roots as a branch of History and even Art. Brook comes claiming that Economic crashes are just not predictable or preventable by any scientific means.
Perhaps it is not the fault of the Dismal Science. An Economy in which rational, knowledgeable, self-interested adult humans are free to choose, free to evaluate and act upon risk is what is lacking. Given that Economy, I suspect that Hayek, Smith, Friedman, and even Greenspan (at least in his undertaker years with Ayn) would be able to prognosticate. The fault lies not in Economics, but in the existence of a Fiat Economy.