How the government can help

As many people may know, the Fed has changed its long-standing policy of being the lender of last resort only to regulated-commercial banks. This turn became apparent with the backed rescue of Bear Stearns two weeks ago. They have provided the credit market with liquidity and has done its job of making sure the credit markets don't completely collapse, along with any consumer confidence in the markets. But what of the housing market? Is there anything the government can do to facilitate the recovery of the housing market? We read of Hillary Clinton's call for the government to buy up sub-prime mortgages and Barack Obama's call for additional stimulus money (about $30 billion last I heard). Most approaches from the fiscal side embraces the idea of the state solving the problem. I propose that they not solve the problem per se, but do their part to allow the market to solve the problem itself. What I speak of is the real estate short sale and what the government can do to facilitate them.

A short sale is when a homeowner sells his or her house for less than what they owe on the house. This leaves a remainder for the houseowner to pay. In a short sale, the bank can agree to forgive the remaining debt on the mortgage basically in exchange for the home being sold. The down side of this deal is that the difference between the selling price and the mortgage debt is taxable income. In some markets, houses are losing hundreds of thousands of dollars in value. That is a lot of money to be added on someone's tax return as income. So much so in fact, that homeowners may still choose bankruptcy or foreclosure because they cannot afford this loss. This is where the government can help.

A well-regulated fiscal policy by the US government can forgive that loss through legislated tax policy. The government through its tax policy can facilitate short sales all over the country. If that loss is not counted as income, then this may lubricate the market better than any liquidity policy by the Federal Reserve.

This will revive the real estate market in several ways. First, it will allow buyers to enter the market again through short sales. Banks, needing better collateral to loan again, will have a lower price to loan a potential buyer. A lower price means a higher likelihood of having the 10-20% down on a new home. The mortgage market can move away from the fast-cash, no collateral, interest-only ways toward a more stable credit market with buyers with better credit. Second, this prevents the banks from taking on countless assets on their balance sheet through foreclosure, which will be sold at a loss anyway. Why not take that loss upfront, with someone not only still occupying the house, but still paying a mortgage? It may be less, but it is a lot more than if the bank was forced to bear the costs of foreclosure. Lastly, it will guide the housing market toward a more natural equilibrium. No one can argue that the housing market was inflated by the time of this downturn. A downward correction is needed, encouraging short sales will facilitate this correction.

If the government regulates these short sales to prevent misuse and fraud (and this is a big IF), then tax-forgiveness can be the lubrication the real estate market needs to move toward stability. A poorly regulated financial market, facilitated by the Fed's cheap money policy from 2001 to 2007 caused a white hot rise in real estate prices. They are coming down, and some argue they have further to fall. Now, this can be an absymal crash or it can be guided landing. The government has the fiscal authority to change tax law. Forgiving this mortgage debt is how the state can help. It is a minimal intervention, but it can have maximum effectiveness if it is done soon. The state will intervene at some point, let's just hope it is with the feather touch and not the iron fist. We may all lose in the end if that fist comes crashing down.
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1929 all over again?

As anyone reading this blog may realize, my eyes have turned on to this country's current economic crisis. I've been seeing a few news articles that suggest that this recent turmoil in the financial markets is dangerously similar to the crash that occurred in October 1929. When historians remember the Great Depression, they point at one moment as the turning point: Black Friday. Normally, the way it is read is that of some kind of cause; what most may not realize is that Black Friday was an effect. We would be wise to remember the lessons of 1929-1930. If we do, then we will see that today's problems are not that of the Great Depression, at least not yet.

A myth, propagated by the likes of J.K. Galbraith, blame the crash of 1929 on impetous investment and an immature margin system. Too many people bought too much stock with credit, and a chain reaction of margin calls sent the stock market into a downward spiral that caused the Great Depression. Though the stock market did in fact crash, this was a response to government legislation, not irrational investing. The legislation I refer to is the Smoot-Hawley Tariff of 1930 which sliced this country's imports in half, nearly overnight. An Act that spurred retaliation tariffs from other countries and ground international trade to a virtual halt. The crash of 1929 was in response to the likelihood that Herbert Hoover was going to sign the Tariff into law. Investors were not irrational as some would believe. They knew what was coming, and a massive sell-off was the result. This sell-off culminated on Black Friday. This sell-off was the result of a government's attempt to heal an economy by restricting international trade. It was the greatest backfire in this country's history.

There are similarities between today's markets and those of the late 1920's. The tariff was passed in response to a recession in 1929. A recession that occurred as countries were still healing from the First World War. Our government tried to "fix" our economy and ended up destroying it instead. What will we do now that our economy has faltered? Xenophobic rage is boiling up again, with hatred for China, India and other countries that have "stolen" our prosperity. Will we again try to block international trade in response to a recession? It could happen. Listen to today's rhetoric, especially from the Democrats. Free trade is the cure to this mess not the disease. The lessons from history are laid bare for all to see, do not ignore it; for a wise man once said those who ignore history are bound to repeat it.
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Why buy American?

If anyone is unaware, let me be the first to let you know that this economy is, in fact, in a recession. Now that is not official, but last month private industry shed over 100,000 jobs. There should be little doubt at this point that our economy is shrinking. But, what does this mean? Besides the obvious fact that many Americans are now out of work, or looking for work, there is the predictable backlash against some scapegoat. Our economic woes aren't our fault, they must be someone else's. I recently received this email that perfectly illustrates what I'm talking about:

As you may have heard the Bush Administration said each and every one of us would now get a nice rebate. If we spend that money at Wal-Mart, all the money will go to China. If we spend it on gasoline it will all go to the Arabs, if we purchase a computer it will all go to India, if we purchase fruit and vegetables it will all go to Mexico, Honduras, and Guatemala, if we purchase a good car it will all go to Japan, if we purchase useless crap it will all go to Taiwan and none of it will help the American economy.

We need to keep that money here in America, so the only way to keep that money here at home is to buy beer, since those are the only businesses still in the US.

What these statements show is a sign of the times, and a shallow knowledge of economics and trade. It is short-sighted to assume that since we buy something from somewhere, that money is gone and we are at some net loss. We are living in a global economy, and America is losing its status as the powerhouse. I imagine that upsets a lot of people. I guess many Americans believe that we should be manufacturing goods, and if we are not, then we are somehow worse off. There is a reason we get all these products from the abovenamed places. They are less expensive! We are buying these products at a lower price than what can be produced here, and we end up with more money in our pocket to spend on something else. We have a net gain! We are better off, why can't anyone see this?

Buying our products at lower prices not only helps consumers, but it also spawns new industries. There is a reason why sales is one of the hottest jobs today. Someone has to package and distribute all these foreign products in America. Who do you think does all this? Americans! Jobs are also created by international trade. For the last ten or so years, we have been trading with these international partners. I didn't hear people complaining then. Only now, after our own housing market and financial industries have collapsed do we turn to the foreign monster.

It is time that we move on from this pointless xenophobia. International trade is a boon to all who participate. Shift can sometimes be painful, as many Americans are noticing, but new jobs and new industries come from this shift. New opportunities will come. Trying to persuade an otherwise ignorant consumer to buy American simply for the fact that it is American is a great way to ensure that this recession continues. You want them to spend more money than they did yesterday for a product because of where it is made? If a product is good, then buy it, it doesn't matter where it comes from. A prosperous global economy makes the world better off and in the long run it will make America better off. Look past the foreign-bashing, and you will see that.
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Why Keynesian Economics won't end this

I've written on the ideas of why Keynesian economics does not work in the past. Simply put, an unproductive government cannot be trusted to make better decisions with people's money than they themselves. The saddest thing is that voices like this are being drowned in a sea of populist economics.

Since the time of FDR and the disastrous policies of the New Deal, governments have been trying to ease economic woe with policies fraught with unintended consequences. We've already seen the first strike from fiscal policy. The Congress and President made record time in passing legislation giving everyone in the country a tax rebate check. This reeks of political posturing in an election year. That check will do as much for the economy as attempting to put out a forest fire with a squirt-gun. But, this is the playbook for economic downturns. Encourage consumption through either government programs (WIC, Welfare, Social Security, etc.) or through direct payment (rebate checks). These programs will do nothing to consumption in the long-run, even in the short-run its effects are questionable.

It appears to me that this economy is undergoing a general deflation from an artificial inflation. Two examples lend credence to this idea. First, the housing market. Thanks to the Fed's cheap money policy and perverse economic incentives, housing prices skyrocketed far past anything that can be attributed to a rise in value. People with awful credit were allowed to take out hundreds of thousands of dollars in loans and credit. Even some with reasonable credit dove in over their heads. Now the market is shrinking, there will be a lot of casualties.

But what about the weakening dollar? Through this government's excessive and destructive spending on credit, the dollar became very strong through foreign investment. The dollar kept its status as long as our economy was strong. Now that the economy has turned, those investments aren't so great. That investment is starting to wane, and this is showing up in the flight to commodities (ahem, gold and oil). If the government sticks by its Keynesian guns and tries to spend its way out this, then you can expect even bigger problems than we have today.

An unbridled government spending spree will weaken the dollar even more. This means higher oil prices (oil price is tied to the dollar), as well as higher overall prices, since cheapness in exports will have been washed away in a high exchange rate. Remember, there are consequences to unwise spending. We found that out in the 1930s with the depression, in the 1970s with inflation and gas lines, and today with both a crumbling housing market and a freefalling dollar. Unless the government reins in spending (through perhaps a Balanced Budget Amendment), we can expect to see a lot more widespread suffering, as the State tries to "fix" this problem. Unlikely, but we can always hope though, can't we?
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Chilun gettin dem Edications?

For most who know much about our public school system, they should know not how good or bad it is, but rather how inconsistent it is. As a student in the Cherry Creek School district in Aurora, Colorado, I've seen how good a public school can be. It doesn't hurt that the school is in a very affluent area which pads tax revenues. This allows the school to hire better teachers, offer better books and overall a better curriculum. For me, it allowed me to get a leg up on thousands of other American students, like my wife who attended a less presitigious school. In Miami, less prestigious means schools like those in the movies "Dangerous Minds," or "Stand and Deliver." Places where survival was not always assured, much less an education.

In Miami, the tax revenue is far less than some affluent neighborhood in Colorado. My wife tells me stories of classrooms not having enough desks or books. Students would have to sit on chairs and balance their notepads and books on their laps. Although I know one example does not make a trend, I've heard about the general dilapidation of school systems all over the country, especially here in D.C. A strong teacher's union, with low tax revenues makes for one shitty school system. A school system that has claimed countless administrators in trying to fix it. I believe this inefficiency lies in the fact that schooling is administered by the government.

But why would I say the government makes inefficient school systems? It is very simple. It all goes back to the idea that in trying to do everything, nothing is done well. This is just as true in schooling. I believe a more specified system would do better for the individual student and his or her parents. If parents were allowed to choose a school for their child the same way they choose their children's food, clothing, etc., then they would be better able to choose the best school and indirectly the best future for their child. Please don't be fooled, most parents do want what's best for their children, despite what seems like constant news of child abuse. Horrible parents are outliers, otherwise they would be more common and far less horrifying.

Giving parents the ability to choose schools allows schools to compete for that choice. This gives schools the incentive to provide better books, hire the best teachers and offer a competitive curriculum that will provide for a child's future. A private school can have just as much scrutiny as any public school. An example that relates is the rating companies for the stock market. The same can be done with schools. This would help parents make the right choice for their children. What's better, this would lead to an entire industry opening up in the economy. Tax money would go back to the taxpayer, some of which would go toward tuition.

I know this could be a lot longer argument and that I've forgotten or glossed over a lot. The idea is still valid though. Providing for children's future is not a government's job, it is a parent's. Giving them the opportunity to provide the best education is the best thing any state can do for its constituents. It makes an economy more productive and gives children the best tools to compete in an ever-shifting world.
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Cry Havoc, Please!

I just don't get it. Especially after seeing Tuesday's primary results, I am even more confounded. This truly is the election that won't die! I asked in my last entry if Obama would strike while Clinton was ready to fall. The answer? An infallible no! It would appear as though Obama really is a lolligager who can't come up with the right formula to deliver a game-ending shot. Instead, it was Hillary Clinton who delivered the precise blow. Back-room deals with Canada, unanswered questions about slumlords seems to have rocked Barack Obama from his hope pedestal. It would appear as though both candidates are ready for a romp in the mud. Indeed, if Obama wants to survive and win this nomination, he has little choice.

What I don't understand is that I, as a relative policital neophyte, see glaring omissions or inconsistencies in Clinton's arguments for her presidency. Why doesn't everyone else? It seems the media broadcasts these concerns hourly, yet no one hears. Am I just taking crazy pills, or has the world gone topsy-turvy? Number one, what experience is this that she is flaunting so wildly? She is in her second term as a junior senator from New York. That is her only elected position! Experience? I'm sorry, but First Lady does not count. You had sex with the President, fantastic. Apparently, so did a few other ladies (allegedly). Number two, she's horribly inconsistent with her message. Now she's against NAFTA? Come on everybody, let's take a timeout from trade? What does that even mean? I thought it was abundantly clear in her book that it was a 'great success,' what gives? Lastly, she is about as transparent as a lump of coal. Her income, or more accurately her sources of income have become a state secret. One of the themes of this election has been a movement toward government accountability, and that begins with transparency.

Last I checked Obama is from the Chicago school of politics, which I read today handles politics 'with a crowbar.' It would behoove Mr. Obama to break this woman down, now that he has been struck with the proverbial kitchen sink. I'm sorry, but now's the time to expose Hillary Clinton for the ever-shifter that she is. To do otherwise would be to let this country slip back into business as usual, extinguishing any hope of a better future.
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