After many months of the “mainstream” media refusing to discuss the real causes of the sub-prime financial crisis, the deafening silence has finally been broken in a January 5th front-page article in the Wall Street Journal (WSJ) that begins to unmask the truth. In “Housing Push for Hispanics Spawns Wave of Foreclosures,” Susan Schmidt and Maurice Tamman report that the sub-prime mortgage meltdown was directly caused by government policies on behalf of various interest groups in the cynical name of “opening the doors to the American Dream” for America’s poor and minorities. This article corroborates the pioneering work of Independent Institute Research Fellow Stan Liebowitz in his Independent Policy Report, Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, which was released throughout the media on October 3rd and featured in a cover story in National Review. As the WSJ article states:

An examination of that borrowing spree by The Wall Street Journal reveals that it wasn’t simply the mortgage market at work. It was fueled by a campaign by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos.

The network included Mr. Baca, chairman of the Congressional Hispanic Caucus, whose district is 58% Hispanic and ranks No. 5 among all congressional districts in percentage of home loans not tailored for prime borrowers. The caucus launched a housing initiative called Hogar—Spanish for home—to work with industry and community groups to increase mortgage lending to Latinos. Mortgage companies provided funding to that group, and to the National Association of Hispanic Real Estate Professionals, which fielded an army to make the loans.

Predictably, Congressman Baca has tried to deflect any blame for the crisis onto others:

In a written statement, Mr. Baca blamed the foreclosure crisis among Hispanics on borrowers’ lack of “financial literacy” and on “lenders and brokers eager to make a bigger profit.” He declined to be interviewed for this story.

But to its credit, the WSJ article does not hesitate to dig deeper:

But a close look at the network of organizations pushing for increased mortgage lending reveals a more complicated picture. Subprime-industry executives were advisers to the Hogar housing initiative, and bankrolled more than $2 million of its research. Lawmakers and advocacy groups pushed hard for the easy credit that fueled the subprime phenomenon among Latinos. Members of the Congressional Hispanic Caucus, who received donations from the lending industry and saw their constituents moving into new homes, pushed for eased lending standards, which led to problems.

. . .

The Congressional Hispanic Caucus created Hogar in 2003 to work with industry and community groups to increase mortgage lending to Latinos. At that time, the national Latino homeownership rate was 47%, compared with 68% for the overall population. Hogar called the figure “alarming,” and said a concerted effort was required to ensure that “by the end of the decade Latinos will share equally in the American Dream of homeownership.”

Hogar’s backers included many companies that ran into trouble in mortgage markets: Fannie Mae and Freddie Mac, both now under federal control; Countrywide Financial Corp., sold last year to Bank of America Corp.; Washington Mutual Inc., taken over by the government and sold to J.P. Morgan Chase & Co.; and New Century Financial Corp. and Ameriquest Mortgage Corp., both now defunct.

Going into revealing and politically incorrect detail regarding the connections between particular government officials, minority activists and private interests, this exceptional article confirms that federal officials and agencies (and not “the free market”) deliberately created the sub-prime financial bubble and continue to try to evade any responsibility for the disaster that has resulted, especially for the many millions of disadvantaged Americans whose lives are now being ruined. As Dr. Liebowitz carefully shows in Anatomy of a Train Wreck:

[I]n an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.

With the sub-prime mortgage disaster’s extensive corruption and the enormity of the economic upheaval that has been produced worldwide, will anyone be held accountable? This article and Dr. Liebowitz’s Policy Report will hopefully begin the process. However, so far under George W. Bush, only huge bailouts, nationalizations, and financial debasement of the dollar by the Federal Reserve have been pursued. And President-elect Barack Obama has given every indication that he wants far more of the same.

Not many people are aware that during the early 1930s, thousands of Americans emigrated from the United States to the USSR. Some, many of them unemployed engineers and technical workers, went simply in search of employment in the Soviets’ big push to industrialize; others went in search of a better society they mistakenly believed the Communists were building.

No doubt, most of them became disillusioned after a while, if not immediately. Worse, thousands of them were enmeshed in Stalin’s purges of the latter 1930s and ended up in the Gulag, where prisoners endured an extraordinarily harsh life, usually cut short by a painful death after a few months or years. Some of these victims managed to appeal to U.S. diplomats inside the USSR for help, only to be turned away by over-cautious junior-level careerists or, in effect, by supercilious higher-ups who were even more despicable.

Tim Tzouliadis has written a book about these things, The Forsaken: From the Great Depression to the Gulags Hope and Betrayal in Stalin’s Russia. For an interesting and informative review, see Adam Hochschild’s article in The Times Literary Supplement, December 23, 2008.

HT: Elizabeth Higgs

Most people, journalists included, accept the notion that the New Deal “worked” to shorten the Depression. Many economists, and to a lesser extent, historians, disagree. Why, then, do criticisms of the New Deal get met with a blank stare akin to stating that the world is flat? Recently, one Salon.com pundit declared the New Deal success a fact; nay, an incontrovertible fact. To argue otherwise is “abject insanity.” Only dim-witted conservatives would believe such nonsense.

At the risk of being labeled “insane,” here goes. . .

In 1995, economic historian Robert Whaples published a survey in the Journal of Economic History asking “Where Is There Consensus Among American Economic Historians?” (Vol. 55, March 1995). Half of the economists and a third of historians agreed, in whole or in part, that the New Deal prolonged the Great Depression.

Specialists of the period may come to this conclusion but most people get their history from textbooks. A 1998 survey of history textbooks reported how criticism of the New Deal was erased from what most Americans read:

“only about half of the economists and three quarters of the historians disagreed fully with the  statement  that the New Deal lengthened and deepened the Great Depression. Not a hint of that shows up in the textbooks, which cite as criticisms only statements from sources like President  Hoover, the Liberty League, or business interests, that to modern ears sound highly ideological, naive,  or self-serving.  Obviously, such statements were made, and their tone probably represents accurately  the majority of the contemporaneous criticisms. All the same, one might wish that the texts would also discuss some of the more sophisticated criticisms, or else avoid evaluation altogether because of the complexity of the issue.” (Thomas F. Cargill and Thomas Mayer, “The Great Depression and History Textbooks,” The History Teacher (August 1998).

Contemporary critics of the New Deal included John Maynard Keynes (yes, that Keynes). Keynes repeatedly criticized FDR for discouraging private business investment with his taxes, regulations and overheated rhetoric (the White House charged that opponents were “Big Business Fascists”). Radical historian Howard Zinn (yes, that Howard Zinn) published Keynes’s criticisms in his New Deal Thought reader (1966).

As one who teaches the economic and business history of the USA, I can say that this subdiscipline is an orphan in the historical profession at large. Most economic history is consigned to Economics departments, rather than History, where fashionable trends in social and cultural studies hold sway. Look for specialty studies of the Great Depression and you will find  them written by economists. That is a good thing but most Americans get their understanding of our economic past from history teachers, both K-12 and post-secondary. Thus the disbelief that any one could seriously criticize the New Deal.

If this country is to have a “New New Deal,” we need a more nuanced understanding of the original New Deal. In arguing for open debate, one might take a page from New Dealer Harry S Truman, who famously stated that “the only thing new in the world is the history that you don’t know.”

I rarely read Paul Krugman’s column, but today I did, because an old friend sent the latest one to me. I gotta tell ya, Krugman could do standup! Really, he’s a riot. Most economists can pass for undertakers, but not this fellow. He’s truly funny.

I know I should be kind to him, on grounds of collegiality toward a fellow economist, so I’m not going to go on and on about his stunningly sophomoric ideas on economics, income distribution, the Great Depression, how best to deal with business recessions, and so forth. Besides, I’d never earn a marksman’s medal for shooting a fish in a barrel.

But good golly, Miss Molly, here’s what he says in the column, in discussing the proposed “stimulus” plan the next administration hopes to get enacted into law soon after it takes office. “The biggest problem facing the Obama plan . . . is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs—a burden of proof never imposed on proposals for tax cuts.”

Think about that statement; roll it around in your mind. Krugman worries that certain politicians may obstruct enactment of the stimulus plan by insisting on a demonstration that its benefits exceed its costs. Could anything be more unreasonable than such hidebound insistence that the government’s expenditures be shown to be worthwhile? That’s not the funny part, though.

The hilarious part is the appended phrase “a burden of proof never imposed on proposals for tax cuts.” Think about that one, if you can stop yourself from rolling around on the floor in laughter. Look, here’s the deal, Krugman is saying: these conservative fuddy-duddies insist that the government not spend the taxpayers’ money unless the spending passes a benefit/cost test. Pretty dumb, huh? But even dumber is that these hypocritical prigs never insist on such a test when they decide to suck a little less than they’ve been sucking out of the taxpayers’ bank accounts. Damned cheeky of these old fossils, eh?

Krugman obviously subscribes to the belief, immensely popular inside the beltway, that all the money rightfully belongs to the government, whether it is being considered for involuntary transfer from its private holders to the government or being considered for retention by the people who earned it in the first place. He wants anyone who proposes to allow such retention to bear a burden of benefit/cost proof. What a guy. I tell ya he slays me!

If only to regain my composure, I will mention a somewhat related idea I take seriously about who should bear the burden of proof. Consider the following proposition: a gang of armed people calling itself a government has a right to take money from and impose rules on people who are innocent of violating anyone’s just rights, employing violence and threats of violence against these unoffending people to get its way. My idea is that anyone who supports this proposition bears a heavy burden of proof—so heavy, indeed, that no one can bear it on the basis of logic, evidence, and a moral standard higher than a wolf’s.

I don’t expect Krugman, a plumed knight of the economics profession and a designated hatchet man for the goofy left, to bother trying to meet this challenge. Yet I wish he would do so. Watching his antics would be a barrel of laughs.

Over at my FreeU blog, devoted to higher education issues, I posted a column on “Credentialism and Civil Rights in Higher Education.”

The dirty little secret of the “diversity” industry is that it doesn’t produce the results: blacks are still graduating at rates far below whites and Asians — and now a college degree is needed for ever more jobs that simply don’t require the knowledge and skills learned only in college.

This is an email than I just sent to Daniel Gross a reporter at Newsweek:

Dear Mr. Gross:

I am a professor of history at the University of Alabama. Much of my research and teaching focuses on the Great Depression era in American history.

In an article in Salon on January 2, 2009, David Sirota quoted you as stating, “One would be very hard-pressed to find a serious professional historian who believes that the New Deal prolonged the Depression” (See here).

If the quotation accurately represents your views, it is very mistaken.

Off the top of my head, I can name “several serious professional historians” who would probably argue (and argue strongly) “that the New Deal prolonged the Depression.” In addition to myself, they include Jonathan Bean of Southern Illinois University, Brad Birzer of Hillsdale College, Brad Thompson of Clemson University, Jeffrey Hummel at San Jose State University, Larry Schweikart of the University of Dayton, Michael Allen of the University of Washington at Tacoma, Ralph Raico of Buffalo State College, Burton Folsom of Hillsdale College, David Mayer of Capital University in Columbus, John Moser of Ashland University in Ohio, and Paul Moreno of Hillsdale. All have doctorates in history from top-ranked universities.

This is just off the top of my head. If you want additional names, please feel free to call me at 205-348-1870.

Of course, I would happy to discuss my own views on this topic.

Sincerely,

David T. Beito
Professor
Department of History
University of Alabama

In his book The Cigar, Barnaby Conrad III writes that before John F. Kennedy signed the trade embargo in 1962 banning Cuban cigars he had his press secretary, Pierre Salinger, get him 1,000 cigars. Once Salinger had secured 1,100, the president said: “Now, that I have enough cigars to last awhile, I can sign this.”

Martha Stewart went to jail for far less than this but it seems that presidents, including those known to preach about “public service” and “sacrifice,” are exempt from the same moral code that applies to the rest of us.

The British National Health Service has claimed another victim. Despite a phone call and note from a doctor stipulating that a critically ill patient, Stewart Fleming, be given immediate care, the staff of Medway Maritime Hospital in Gillingham, Kent, kept him waiting for six hours. By the time they finally got around to treating him, it was too late.

According to Stewart’s wife Sarah, when they arrived at the hospital “it was full to bursting. I walked to the front with the letter and told them what the GP had said but I was just told to go to the back of the queue.” Representatives of the the National Health Service stated that they were “saddened” by the news but explained that they had particularly long lines this time of year.

Writing in the Wall Street Journal on December 23, Robert Lucas expresses approval of the Fed’s latest reduction of its target range for the Federal Funds Rate to approximately zero, calling it “welcome.” Lucas notes that this policy does not leave the Fed without the ability to inject additional reserves into the banking system, because it can purchase not only Treasury bills, as it normally does in its open-market operations, but also longer-term Treasury securities and private bonds, which continue to trade at prices that imply substantially positive yields. Of course, Ben Bernanke has already hinted that the Fed is prepared to inject funds into the financial system in any way necessary in order to pump up spending.

Lucas finds the Fed’s actions in adding more than $600 billion to bank reserves in the past few months to be “the boldest exercise of the Fed’s lender-of-last-resort function” in its history. He believes, as I do, that in recent months financial decision-makers have engaged in a “flight to quality”—I call it a flight from risk—and that by injecting reserves into the banks, the Fed has effectively exchanged risky assets (the banks’ collateral securities) for a riskless asset (deposits at the Fed), thereby satisfying their demand to hold additional high-quality assets when the market itself was not supplying more such assets.

Viewing the Fed’s action as an effective way to stimulate spending, Lucas also applauds it as superior to the alternative policies to achieve this objective. “It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities.”

I agree that these alternative policies are probably worse than direct Fed lending to the banks, but, unlike Lucas, I do not view the Fed’s abrupt, massive lending with equanimity. Indeed, as I indicated three days ago, I view the banks’ current, gigantic holdings of excess reserves as a veritable Sword of Damocles with the potential to cause a near-collapse of the dollar’s purchasing power.

I also differ with Lucas—and with Bernanke and nearly all of the mainstream commentators on the financial scene during the past several months—in that whereas he views the present situation as a liquidity crisis, I view it as fundamentally an insolvency problem for many banks and other financial institutions, inter alia. By treating this situation as if it were a liquidity crisis, like the banking situation from 1929 to 1933, one may moderate the recession for a short while or even reverse it, but only at the expense of preserving a plethora of malinvestments that ought to be liquidated by balance-sheet adjustments and, in many cases, bankruptcies, so that the valuable assets can be reallocated to their most valuable uses, rather than being kept impounded in zombie enterprises, including zombie banks. Because Lucas, in good mainstream-economics style, views the current situation in terms of aggregates, he is not looking inside the capital stock and therefore he is failing to see that the easy credit and reckless lending from 2002 to 2007 gave rise to a great many rotten investments that are not viable except by some species of Fed or Treasury bailout.

If the economy is to experience healthy sustainable growth, this garbage needs to be thrown out—and the incompetent managers and investors who created it need to be removed from positions of control over assets they have demonstrated they cannot manage responsibly and successfully. Free enterprise is a system of profit AND loss. If the government rides to the rescue of every large-scale, politically connected loser, the system will grow ever more rotten from the top down.

Yes, this way of proceeding entails short-run pain, but the alternative only pushes the pain into the future while ensuring that when it strikes, it will be even more severe.

When President George W. Bush was recently interviewed on CNN regarding the economy, he left us with another “Bushism” that will likely go down in history along with the economy his interventionist policies are destroying, “I’ve abandoned free-market principles to save the free market system.”

Bush incoherently believes that corporatism (e.g., the bailouts) and the Federal Reserve’s hyper-expansion of the money supply (e.g., monetary socialism and debasement of the dollar) are crucial to make free enterprise viable, despite his claimed devotion to the Christian, natural-law, moral principle that the end never justifies the means. However as with most politicians (including Obama, Dodd, McCain, Pelosi, Schwarzenegger, Frank, Reid, Cheney, Biden, Clinton, . . .), for Bush, means are ethically situational depending on one’s own personal and political fortunes.

A classic Calvin and Hobbes cartoon by Bill Watterson illuminates many of the key factors at work here (i.e., vanity, arrogance, intolerance, ignorance, narcissism, fraud, greed, indifference, foolishness). Thanks to Paul Theroux for the reference (please click on image to see full size).