Let them fail

The transportation special session had barely ended when the troubles of Fannie Mae and Freddie Mac began to dominate MSM reporting (oddly enough, bloggers have been largely quiet about it).  I mention that juxtaposition because it enabled a few things to come into focus and stark clarity, leading to one ominous, painful, yet inevitable conclusion: we must let these mortgage giants fail. That’s right: fail - as in declare bankruptcy, fall into receivership, have the assets unloaded, etc.

If one looks at several issues we face here in Virginia and elsewhere (traffic, environment, land-use, the ”popped” real estate bubble, inflation, etc.), one finds that much of it is driven by settlement patterns that Jim Bacon has been skewering for years (inflation is the obvious exception, I’ll get to that one later).  Oddly enough, Bacon et al seem to miss the biggest factor in leading to spread-too-thin settlements and all the problems they cause - government-driven, artificial inflation in the demand for property, and the two biggest culprits are Fannie Mae and Freddie Mac.

Fannie Mae began in 1938 as the Federal National Mortgage Association a New Deal government agency set up to provide loans to banks that they themselves could loan out to homeowners (David Fum, National Post).  Since these were government loans created from a policy deliberately designed to make homes “affordable,” the banks treated it like the free money it really was, and loaned it out like they were supposed to do.  Thus did the government begin artificially inflating property demand (to hear FDR fans tell it, the FNMA was just part of the great New Deal vision that rescued America from the Depression; more and more economists now understand that the rescue can be best attributed to World War II).

For thirty years, FNMA kept property demand artificially high (which likely had a lot to do with the first suburban wave of the post-World War II era), but by the 1960s, the program was doing its job so well that it was becoming a budgetary eyesore.  So the Johnson Administration decided to “privatize” it.

Why do I put it in quotes?  Because Johnson’s motives were hardly pure (Frum):

In 1968, the Johnson administration decided to privatize Fannie — not for any free-market reason, but because the federal government’s debt was rising fast, and the administration realized it could make the government’s accounts look better by moving Fannie Mae’s obligations off the books.

In other words, LBJ had no problem with the government continuing to underwrite the mortgage industry; he just didn’t want the accountants to notice.  So instead, he and the Congress of the time (Democrat-dominated, although I doubt the pre-Reagan GOP would have done much better) came up with a half-hearted scheme that moved FNMA cost off the government books but still gave it all the perks of a government agency (no real regulatory oversight, White House appointments to the the board of directors, and - here’s the kicker - Fannie Mae never had to pay taxes).  Making matters worse, the Congress and LBJ created a second such monster (the Federal Home Loan and Mortgage Loan Corporation, a.k.a. Freddie Mac) as “competition” for the new “private” Fannie Mae.

So now, there were two companies, both ostensibly private but with obvious government favors, government ties, and the implied government backing that came with them, artificially driving up property demand for forty years.

Until about ten years ago, that meant suburban stretched farther and farther out.  Then the campaign against “sprawl” went national.  Spurred largely by liberals at the national level and a politicalhodgepodge at the local level, the movement focused not on the demand for developed property, but the supply.  The result was a slew of zoning regulations, purchase of development rights programs, proffer demands - and, inevitably, a steep upward climb in home prices as demand lapped supply.

The final nail in the coffin came in the mortgage rush of the early 21st century.  We’ve all heard about folks signing up for mortgages they couldn’t afford, and lenders who ignored economic reality and let them sign.  How much attention, however, has been given to the government-sponsored corporations who continued to make it far easier and more profitable for lenders than any free-market would allow?  Even when Fannie Mae was caught inflating its own profits by $6 billion (roughly four times the size of Enron’s transgression), not a thought went to what this meant for the housing market.

Well, supposedly, we all know better now - except that no one is considering the one option that will ensure these mistakes are never repeated: letting these two behemoths fail.

For starters, the collapse of Fannie Mae and Freddie Mac will put a swift end to the nonsense of ”government-sponsored enterprises” (yes, that’s their name).  An organization can be a private firm or a government agency, but not both.

More importantly, all of the housing-based issues that we are facing today (everything I listed above except inflation), wold be consigned to history, because the demand for property will finally be restored to its natural level.  On the financial front, that removes the danger of future massive housingcorrections like the one we’ve seen recently - a correction that has placed so much pressure on the Federal Reserve to keep interest rates low that the American economy is almost entirely disarmed from fighting inflation (unless Congress is willing to reduce overall demand pressure by cutting spending - yeah, I know, they’ll start with the Flying Pork Squad).  On the “quality of life” front, it means the inflated property demand that led to “sprawl” in the first place would vanish.

Now, I don’t expect our political leadership to have the courage to let Fannie Mae and Freddie Mac fall, especially not in an election year.  If these companies must survive, then they must become companies, forced to act like any other private firm with the same risks, obligations, costs, etc.  If the free market has a genuine place for Fannie Mae and Freddie Mac (and it probably does, but not to the tune of $5.3 trillion in mortgage debt holdings), then let them find and operate in that place.

The important thing is - get the government out of the real estate business, once and for all.

McCain’s economic plan endorsed by 300 economists

There’s an old saying - perhaps you’ve heard it - about economists: ask two economists a question and you’ll get three different answers (I myself, as an Econ Prof at my local community college, actually answered an either/or question “Yes and No” once.  Good times!).

So when 300 professional economists can agree on anything, it’s news; when they agree to give the thumbs up to the economic plan of a candidate for President, it’s big news.

So John McCain can be proud of himself today:

U.S. Senator John McCain’s presidential campaign today released a statement signed by over 300 professional economists in support of John McCain’s Jobs for America economic plan. The list includes Nobel Prize winners, business economists with experience in the private sector, policy economists with experience in government and academic economists from major universities and state and community colleges.

Most important for me, the list included one man I admire a great deal: Dr. Jim Miller - former two-time Republican candidate for U.S. Senate (I backed him both times; sadly, he was never nominated).

If Bush’s energy bill was so bad, how about we elect the guy who actually opposed it?

The Audacity of Hype had this to say about President Bush’s energy policy (McCain campaign):

When Bush assigned Cheney to create energy policy, he met with the environmental groups once, the renewable energy groups once, he met with the oil and gas companies 40 times. Washington has become so dominated by the powerful, by the well-connected, that the voices of the American people are no longer heard.

Based on that, we should obviously be very upset that the President’s energy policy was voted into law three years ago.  In fact, if we want to be the change we’re waiting for, we should listen to Obama and support the one candidate who voted against it!

Whoops!  Never mind.

Mark Warner is economically illiterate, and dangerous

I was looking forward to firing up the Warnerese-English translator for Mark’s recent statement on energy, until I realized he may actually mean what he says.  It just goes to show you, just because a guy can make millions via insider trading on cell-phone licenses (Riley) doesn’t mean he actually knows how an economy works (Washington Times):

Make no mistake about it: what has happened over the past few months has not been the result of the market. Actually, driving demand in the United States and consumption have fallen and we’ve seen record increases in the price of gas.

Why yes, Mark, the price has risen and demand has fallen here in the United States, but that did not mean demand has fallen worldwide.  We can’t simply control the price of oil by fiat here.

So why would I simply analyze something so ridiculous without breaking out the translator?  The answer is his audience - “a group of technology investors” - in other words, folks that Warner likes to think are “his people,” as opposed to the mountain folks he’s managed to hoodwink into voting for him all these years.  He’s not likely to go into Warnerese with that crowd.

In other words, Warner really doesn’t understand how international markets work.  He thinks the United States can just close itself off from the rest of the world.

Even worse, he sees millions of ordinary investors and mutual fund managers looking for long-term gains in the commodities markets as ”predatory speculators.”  The last time I heard that kind of talk was when the market destroyed Great Britain’s attempt to join the pre-euro Exchange Rate Mechanism at a badly overvalued currency rate.  The Tory government (led by John Major) had the same hysterical reaction to “speculators.”  Voters knew better, and the Conservative Party hasn’t been elected to power since.

So what would Warner do?  Take a look at this nonsense:

Quicker relief, he said, would result from federal action against speculators who have made billions by inflating crude oil prices on overseas markets, from aggressively using U.S. trade leverage to pressure oil cartel nations to increase production, and from “enforcement action” against nations and corporations that collude to drive up oil prices.

In other words: locking up every individual investor who decides to put their money in oil or oil companies, repeatedly begging Saudi Arabia to increase production, and retaliatory trade tariffs that could spread the fuel inflation to every sector of the economy and bring back the Smoot-Hawley Great Depression of old.

Again - and I can’t emphasize this enough - Warner really believes this stuff.  That’s why he cannot be elected Senator.  Nonsense like this is merely a hop, skip, and a jump away from Maurice Hinchey’s demand to ”nationalize” oil production.

I only wish I had paid more attention to this when it first came out three days ago.  Mark Warner is no longer just a shifty politician who plays fast and loose with the truth.  The man is actually dangerous.

Cross-posted to Bloggers 4 JimGilmore

McCain didn’t flip-flop on oil drilling; Florida did

The Democrats have become so desperate to divert the issue from their refusal to support offshore oil drilling that they are now claiming John McCain flipped on the issue.  Sadly, most on the right have become so enamored with considering McCain a lefty that they’re swallowing the myth whole.

The fact is, McCain has always supported the same policy on offshore drilling: let the individual states decide.  McCain’s policy never changed; the implications of it changed dramatically.

As late as ten days ago, McCain’s policy appeared similar to an offshore ban.  Irwin Stelzer (Weekly Standard) put it thusly on June 9:

. . . Obama wants to maintain the ban on drilling off-shore, and by leaving it to the governors of those states, McCain effectively favors the same ban.

The reason the policies seemed similar was the widespread assumption that no coastal state would support offshore oil drilling - including the biggest of all swing states: Florida.  The Sunshine State’s opposition to drilling seemed particularly etched in stone (Politico, emphasis added):

A veteran of Florida politics who is not tied to Crist says the gas price-driven poll numbers justify the drilling flip-flop (justify in the political sense, that is):

“[After many years working in the state], I would have told you that it was the single issue that would never, ever, ever change. Ev-uh,” says the source.

Then, the people of Florida affirmed Steyn’s Law (”something always happens until it doesn’t”).  Or, as the source cited by Politico puts it:

But “somewhere between $3.00 and $4.00, the [poll] number literally flipped upside down.”

Translation: oil drilling is now OK (politically) in Florida, meaning McCain’s difference with Obama is an actual difference.

Of course, all of this is merely a distraction from the larger point. McCain is at least willing to expand America’s domestic energy supply (and not just in fossil fuels, he called for a doubling of America’s nuclear capacity - Bloomberg); whereas Obama has presented nothing but flowery words and populist rhetoric.

House Dem calls for socialism in oil market

Damn.  Riley beat me to it.

I can’t say I’m surprised by this. And if we get President Barry Obama, you can look forward to more such boneheaded moves.

House Democrats responded to President’s Bush’s call for Congress to lift the moratorium on offshore drilling. This was at an on-camera press conference fed back live.

Among other things, the Democrats called for the government to own refineries so it could better control the flow of the oil supply.

. . .

Rep. Maurice Hinchey (D-NY), member of the House Appropriations Committee and one of the most-ardent opponents of off-shore drilling

. . .

“We (the government) should own the refineries. Then we can control how much gets out into the market.”

Oh, yes. By all means, let’s have the government try to straighten out this mess. That would be the same government that hasn’t allowed a new oil refinery to be built in 30 years thereby restricting our capacity to get gasoline and home heating oil to market. We can have all the oil we need, but if it we don’t have the capability of refining it all, it is as good as useless.

Actually, it’s worse than that.  Hinchey is dumb enough to believe that ownership of the refineries means “we can control how much gets out into the market.”  That’s insane.  Refinery ownership will not increase the oil supply one iota.  All it will do replace the profit motive with political favoritism in determining how to operate the refineries.  We all know how that goes (and they’re finding out once more in Latin America - more on that later).

Still, if Hinchey had any economic intelligence, he wouldn’t be a New York Democrat.

The sky refuses to fall (Part II)

Wall Street braced for the next statistical storm this morning (the job numbers), and ended up happy and dry (Market Watch):

The U.S. labor market was not as weak as expected in April, the government said Friday. The economy lost 20,000 nonfarm payroll jobs last month, according to a survey of business establishments, much less than the 81,000 lost in March and way below the 78,000 decline expected by economists surveyed by MarketWatch (RWL Note: in the household survey, the number of people actually employed rose more the 350,000 - Department of Labor) . The unemployment rate inched down to 5.0% in April from 5.1% in March. Economists were expecting the unemployment rate to tick up to 5.2%.

So not only were job “losses” far less than expected (and, if you use the household survey, actually healthy gain, but the unemployment rate actually fell.  Once again, the American economy, while certianly bruised, has refused to go down.

In defense of the gas tax holiday

You can always trust an economist to hate a popular idea.

In this case, its the gas tax holiday first proposed by John McCain - and then embraced by Senator Clinton.  Perhaps it was the latter’s shameless opportunism that has scared so many right-wingers off, but just about everybody “in the know” has a reaction similar to Doug over at Below the Beltway:

Apparently, the Republican National Committee has decided to sign on to John McCain and Hillary Clinton’s stupid, and in the end pointless, idea to suspend the Federal Gas Tax during the summer.

. . .

There isn’t a lot that I agree with Barack Obama on in terms of policy, but in this one he is absolutely 100% correct. Suspending the Federal gas tax will do nothing to address the “problem” of higher gasoline prices in the long term, and it is unlikely to have any real impact at the pump for the majority of consumers.

The fact that he supported such a suspension as an Illinois Legislator and now opposes it as a Presidential candidate is, in my book, a point in his favor. Unlike the other two Presidential candidates, he isn’t pandering to the public by putting forward an idea that sounds good when you first hear it but, in reality, accomplishes nothing.

Now, I will acknowledge I do not have a doctorate in Economics - just a Master’s; also, I do not teach Economics at a University - just a Community College.  Still, I’d like to think I have some expertise I can bring to this discussion, and while the arguments of Doug et al sound very sensible - especially as it rejects the populist impulse - they are also very, very wrong.

Gasoline, like everything else, is a good that follows the laws of supply and demand, but those laws mean different things to different goods.  In some cases, consumers demand for a good will fall steeply as the price rises; we call those goods elastic goods.  Other goods, however, will see hardly any change in demand despite price fluctuation; these goods are called - wait for it - inelastic.

Taxes on elastic goods an have a dramatic effect on demand if the sellers (who have to collect the tax and send it to the governments who levy them) try to pass the tax cost onto consumers in higher prices.  Thus, the sellers usually raise the price of elastic goods more gingerly (if at all) and end up eating the tax cost.  Inelastic goods are another matter; since demand is unlikely to change much, sellers can more easily pass the tax cost on in higher prices.

So which one is gasoline?  Well, according to a recent analysis by Jonathan Hughes, Christopher Knittel, and Dan Sperling (all professors in the University of California system), gas is a very inelastic good, meaning it is consumers, not sellers, who are actually paying the gas tax.  Thus, a suspension of the gas tax would indeed lead to lower prices at the pump.

The question next becomes: what will consumers do with the money?  Will they spend it - thus adding to short-run GDP?  Or will they save it, adding to the pool of investment money (or reducing the debt pressure on same) and leading to a long-term increase in economic capacity?  As one would expect, the answer is some of both, meaning a marginal gain in GDP now and potential GDP later.  Given the knife’s edge on which the economy currently sits, every little bit will help.

But what of the lost revenue to the federal government?  Well, that question depends on how well one thinks Congress is doing with the taxpayer’s money, especially on transportation (which is where gas-tax money goes).  Putting aside that this is, well, Congress, there is also the more pertinent question of how effective a gas tax really is as a user fee.  Keep in mind, Washington gets the money whether you drive on the Interstate System or not, thus you end up paying for roads you don’t use.

Unfortunately, most right-wingers have been led astray by (of all people) Adam Smith, who considered roads one of the few things deserving of government funds.  Transportation has been considered “good spending” by conservatives ever since, despite the massive differentiation of street uses (interstates, primary roads, secondary roads, and subdivision streets) that clearly put into question the idea that governments should maintain every square inch of asphalt.

In the final analysis, the question devolves to this: is it better for the government to spend this money or for the people to spend it?  To ask this question is to answer it.

Are there better ways to reduce the tax burden?  Of course there are, but McCain is already supporting many of them, including cutting the corporate tax rate and ending the Alternative Minimum Tax.

With luck, the gas tax suspension will force people to think about better ways to pay for roads (perhaps shifting in part from use-based to value-based, from federal funding to more localized funding, and/or from taxes to tolls).  Even without such desperately needed soul searching, it will provide a quick boost to the economy when it is needed the most - at a cost of less than half the earmark total from last year (Toronto Star and the Heritage Foundation).

Just remember: Hillary Clinton supporting something doesn’t make it wrong.

This is an abomination

Did you know the Pentagon (and everyone else in government) can’t use Albertan oil?

It’s true (Arab News, via The Corner):

In an interesting tussle, a virtually unnoticed clause was added almost at the least moment to a US energy bill that bars the government, in particular the Department of Defense, from using Alberta crude because it is deemed unconventional and too dirty.

A provision in the US Carbon Neutral Government Act incorporated into the Energy Independence and Security Act of 2007 act effectively bars the US government from buying fuels that have greater life-cycle emissions than fuels produced from conventional petroleum sources.

The United States has defined Alberta oilsands as unconventional because the bitumen mined from the ground requires upgrading and refining as opposed to the traditional crude pumped from oil wells.

California Democrat Representative Henry Waxman, chairman of the House Committee on Oversight and Government Reform and Republican Tom Davis added the clause.  

Keep in mind, Alberta not only has a tremendous amount of oil, it is also the most pro-American province in Canada.  I would argue that Albertans are, by and large, more pro-American than half the blue states in this country.

So I can see Henry Waxman trying to sabotage our friends in Canada, but what is the Emperor of Northern Virginia’s game here?  One resource analyst has a theory (same links):

Some analysts, however, are claiming that the clause was added after some political maneuvering by Saudi Arabia as it is “increasingly threatened” by Canada’s growing market share of oil production.

Strategic resource analyst Paul Michael Wihbey recalling the November OPEC summit, said it was then that for the first time Saudi Oil Minister Ali Al-Naimi “took a swipe at the oilsands.” He claimed the minister then said “Canada is one of the world’s costliest oil producers and requires high prices to remain viable.”

. . .

“They’re playing hardball … then all of a sudden this legislation pops in, literally a month after these statements were made in November,” noted Wihbey.

Now, we can’t say for certain if the Saudis had a hand in this (and Arab News certainly is skeptical), but it’s almost beside the point.  This is a slap in the face to our neighbor, friend, and ally, and especially galling given just who within Canada (pro-American Alberta) is taking the punch.

The sky is refusing to fall

The new numbers for Gross Domestic Product (econ-speak for “the economy”) are out, and it turns out the recession that supposedly descended upon us over the last six months actually didn’t happen (Associated Press via Yahoo, h/t Shaun Kenney):

The bruised economy limped through the first quarter, growing at just a 0.6 percent pace as housing and credit problems forced people and businesses alike to hunker down.

The country’s economic growth during January through March was the same as in the final three months of last year, the Commerce Department reported Wednesday.

In other words, the last six months, which numerous economists believed would show a recession, showed no such thing (sidenote-primer: a recession is defined as two consecutive quarters of GDP-shrinkage.  Each quarter’s statistics are released a month after the quarter ends, as the Jan-March state were today, and then revised three months later, as the Oct-Dec 2007 stats were).

More intriguingly, despite the Fed’s numerous interest rate cuts and surging prices in oil, gas, and food, inflation actually fell this quarter compared to last quarter.  I didn’t see that one coming at all.

What with the tax rebates, the Feds’ actions taking further hold (especially if it keeps the ARM rates low at reset time), the economic picture could look much better over the course of this year than previously expected - and we all know what that could mean come November.