Should We Blame the Market?

Watch five minutes of coverage on the financial crisis and you'll come across one general theme: the markets are to blame. We need more regulation. Go ahead, turn on CNN. How about that, huh.

With the presidential election closing in fast, both candidates, but especially Barack Obama have been pushing for more federal oversight, regulation and assistance. John McCain is less enthusiastic about the regulation, but went ahead and joined Obama in supporting the 700 billion dollar bailout among other measures. And plenty of polls have been showing that people are losing trust in the free market and believe more regulation is required.

Well is this what we should do? Did capitalism fail? Did the markets let us down like they always seem to do? Do we need our benevolent government to step in and save the day? Well if you trust the government to fix this mess you might as well ask the guy who just stabbed you to perform the surgery.

First let me start with a disclaimer, a big one at that. I do not mean to absolve Wall Street of its responsibility. On the aggregate, they screwed up badly. Some, such as Wells Fargo and Bank of America, did the right thing. They played it conservatively when housing prices were skyrocketing and now they're the one's with enough money to buy up all those who got caught up in what Alan Greenspan called "irrational exuberance." However, most of the major firms and CEO's behaved irrationally, irresponsibly and sometimes criminally.

What started this train a rollin' were the flood of sub prime mortgages made by financial institutions to borrowers who had no business buying a home. Many of these loans were interest only or negatively amortized, which basically means that the owners were relying on continued appreciation or otherwise they would be upside down (owe more than the home was worth). Many banks accepted stated income, which boiled down means the borrower simply states how much they make and that's good enough. The stupidity here needs no further elaboration. In addition, many mortgage brokers would do anything and everything they could to get people into these loans because the risk didn't matter to them, they were just in it for the commission. Finally, these mortgages were packaged into mortgage-backed securities that were then sold to investors thereby infecting the entire financial system with garbage loans. Here's a nice little primer on how the whole process worked.

Anyways, when the real estate market finally and inevitably started to take back some of its ridiculous gains, the whole deck of cards collapsed. So again, Wall Street deserves plenty of blame, especially AIG, who after being bailed out is now spending $140,000 on a party for their "top sellers."

Given all of this, you may ask how is not the market's fault you ask? Well gee, where should I begin?

Let's start with the Federal Reserve and its ridiculous monetary policy during the real estate boom. After the dot com bubble burst, the Enron and World Com scandals and the 9-11 attacks the markets looked shaky. Alan Greenspan and the Fed thought that dramatically lowering interest rates could help avert a recession. They lowered the discount rate to 1% and kept it there for about two years! This is a stupidly low rate for a ridiculously stupid period of time. It probably prevented a longer recession after 9-11 (there was still a short one) but the prosperity was all an illusion.

What such a monetary policy did was push floods of liquidity into the market. With people scarred of a tumbling stock market they turned to real estate and the bubble began to form. Housing prices and starts accelerated at record paces and builders built far too many homes and apartments. Why did they do that? Simple, they supplied what demand told them to. Unfortunately the demand was artificial, pumped up by the low interest rates. In turn people started refinancing their newly found equity and used it for all sorts of things (like big screen TVs, new cars, etc.). This spending was what made the economy run. Unfortunately, that money was not only borrowed, it was borrowed against equity that shouldn't have existed in the first place! When the market finally adjusted people found themselves with what amounted to unsecured credit card debt. And predictably the foreclosures started coming en masse.

Unfortunately, this was not the only mistake the government made. Thomas Sowell made a pretty good list, but I'll highlight a couple of the other ones for you. First it was the goal of both the Clinton and Bush administration to increase home ownership. It sounds great, but like most political inventions, these great sounding goals come with unintended consequences. One of the major ways they attempted to influence this trend was with the Community Reinvestment Act. What this program did was push lenders to make loans in poor communities. Sounds altruistic and all, but these lenders need to justify risky loans with higher rewards. So whereas politicians used to be praising banks for making risky, higher interest loans, now they are condemning them. Say what, politicians can be hypocritical... who would have thought?

Then there's the whole Fannie Mae and Freddie Mac thing. These are both government created firms that have made it easier to make home loans. Again nice sounding, but it has lead to a steady and artificial growth in real estate prices for a long time. And a little digging will expose how again the politicians cheered Fannie Mae when it made it its goal in 2002 for every American to own a home. Same old goal, same old political cheering and same old unintended consequences. Now look where we are.

There are a litany of other government offenses, but I'll stop there. The main question is do we need more regulation now? There are probably some helpful regulations here and there, but going back to a strictly regulated economy is not the answer. Whenever that temptation befalls you, just remember the airlines used to be heavily regulated and now they are not. If they still were there would be no Southwest or Jet Blue to give you cheap flights to one of the few other countries that we still have a good exchange rate with. Same goes for many other industries. In addition, we would be regulating to prevent this crisis, not the next one. As the famous military slogan goes "we must be prepared to fight the first day of the next war, not the last day of the last war." Unfortunately, the best medicine for this whole mess is probably just time. Time for the market to liquidate the bad debt so we can get back to some sense of normalcy. Then hopefully our government can maintain some semblance of a reasonable fiscal and monetary policy. Damn, good thing you can't see me because I couldn't even write that with a straight face.

Is George Bush the Worst President Ever? No, but not for a Lack of Trying

Fewer and fewer people these days would dare say George Bush has been a good president. His approval rating is hovering around 30%, worldwide it is even worse, many staunch Republicans like Chuck Hagel, Gordan Smith, Patrick Buchanan and Bob Barr have turned against him, there have been hundreds of books and documentaries lambasting him, Keith Olbermann and Dennish Kucinich among others demanded he be impeached and even my super conservative roommate is completely fed up with him. I posed this question to him "whenever you think we should do something and then Bush comes out with a similar proposal, does it make you question your assumptions?" His answer: an emphatic "yes!"

Bush has certainly been bad. The wars in Iraq in Afghanistan have so far yielded 4677 deaths and possibly many more suicides as well as countless Iraqi casualties. The reasons for the Iraq war turned out to all be false. His administration failed to stop 9/11 or catch Osama Bin Laden. His policies have vastly increased the number of terrorists as well, defeating the whole idea of a “war on terrorism.” The deficit has skyrocketed leading to high inflation. The economy is also extremely weak making the possibility of 70's like stagflation uncomfortably high. Government spending has increased quicker under Bush than at any time since the Great Society. Of all the embarrassing things he has said, the most ridiculous was probably his attack on John Kerry in one of the debates for "pretending to be fiscal conservative." Sorry sir, you are pretending to be a fiscal conservative. OK, back to the transgressions; the Patriot Act set fire to the 4th and 6th ammendments of our constitution allowing federal agents to search your home while you are not there, with out a warrant and with out even telling you they were there. The Military Tribunals Act is a direct assault on Habeus Corpus, the water boarding, renditions and other torture scandals, the miserable response to Katrina, the Scooter Libby scandal, and then there was that ridiculous attempt to put retroactive immunity into a funding bill earlier this year. There are plenty more, but you get the idea.

So how could such a dismal track record not ordain Bush Jr. as the worst president ever? Well, when you're competing with our 42 previous presidents, you've got a strong handicap to start with! Richard Nixon comes to mind right away. In my honest opinion, Watergate was about the best thing he did. However, the worst of all time belongs to a guy who inexplicably manages his way into most historians’ top 10 lists : Woodrow Wilson.

Woodrow Wilson, wait, let me think... oh yeah, World War I, League of Nations, decent president. Well right on the first two, not quite so much on the third. Many historians have called him an "idealist" for the 14 Points he proposed after the conclusion of World War I. The truth is less appealing, for starters, the man was a die hard racist whose favorite film was D.W. Griffith's Klu Klux Klan adoring The Birth of a Nation. And as one might expect from an extreme racist, upon being elected he almost immediately went about segregating the executive branch.

However, being a bad person doesn't necessarily make for a bad president. Ty Cobb was one of the most miserable human beings that ever lived, but he could sure play baseball. Unfortunately, Wilson’s ugly side was more evident in his policies than his character.

We'll start with his economic policies, which were in some ways prescient (being in favor of centralization), but were also disastrous. He brought us both the Federal Reserve and the Income Tax. You can argue that these are legitimate now (I wouldn't), but economists almost universally blame the Federal Reserve for causing the Great Depression. Some, like Milton Friedman blame the Fed for mismanaging the crisis, others like Murray Rothbard blame it for creating it.

Still, all we have is that he was a racist and his economic policies turned out to be disastrous a decade after he left office. No, those reasons alone won’t do the trick. The reason Wilson was the worst president in history was all about World War I.

In 1914, Europe brought upon the world the worst war we had ever seen. The American people were almost unanimous in wanting to stay neutral. Wilson played lip service to this sentiment, even using the line "he kept us out of the war" to get reelected in 1916. However, Wilson wanted the US to have a seat at the peace conference. (1) He wanted to "make the world safe for democracy." The only way to do this was to get the United States into the war. In many ways he was the first neoconservative (except they don’t like the whole League of Nations idea).

To do this he’d need a reason though. Many believe today the cassus belli for the United States to enter World War I was when 128 Americans died after the Luisitania was sunk on May 7th, 1915. However it was actually two years later when almost simultaneously Germany foolishly sent the Zimmerman telegram to Mexico (who was in the middle of a civil war) recommending they retake Texas and reopened unrestricted submarine warfare. Wilson decided this was unacceptable and asked the congress to declare war on Germany (which they actually did back then).

However these were ridiculous reasons on their face. The Zimmerman telegram was bad, but basically meaningless given Mexico’s state of affairs. And was losing a few ships worth hundreds of thousands of American lives? Wouldn’t going to war require more ships to go through dangerous waters? Furthermore, it was blatant hypocrisy. Wilson had no problem with the almost identical policy Britain had in blockading (and starving) Germany.

Wilson went ahead regardless though, and to gain public support for the war he launched the first propaganda ministry in the history of the United States. He set up the War Industries Board that could only be described as fascist. Its job was to control the prices businesses charged, ration resources and bully anyone who resisted into compliance. He censored newspapers, jailed dissidents, initiated the first draft since the Civil War and sent over 4 million Americans to the muddy, rant infested trenches on the Western Front. 117,000 would not return. (2).

Yet somehow it got worse as soldiers returning home brought with them the Spanish flu, which killed another 675,000 Americans. And if all this were not bad enough, his “idealism” failed in every way possible. The 14 Points predictably broke down as the Allies wanted revenge for the brutal four-year war. The League of Nations was all he got through, which the United States didn’t even join. In the end, what Wilson claimed was the “war to end all wars” was only that for 20 years when we were blessed with World War II (the war to end that theory). Unfortunately the peace treaty Wilson wanted so much to be apart of, the vicious Treaty of Versailles, had a lot to do with the Nazi’s coming to power (along with the Great Depression the Federal Reserve helped create).

If the United States had stayed out of World War I, it is certainly possible that the First World War would have ended in a bitter stalemate, which neither side would have wanted to repeat. Instead, one side was humiliated and forced to pay massive reparations. The Nazis capitalized on the discontent the Treaty of Versailles brought as well as Germany’s economic woes to come to power in 1933. While we can never know for sure, it’s certainly plausible that if the United States had stayed out of World War I, we would have never heard the name of Adolf Hitler. Jim Powell strongly defends this argument in his book Wilson’s War. It’s not to say World War II and the Holocaust were Wilson’s fault, but the unintended consequences of his reckless actions should be lessons for everyone today. And it’s still safe to blame him for the 117,000 dead Americans as well as the horrible precedents he set. Afterall, he was the first one that foolishly thought the United States should be the world’s policeman.

So while George Bush has certainly been bad, Woodrow Wilson still has him beat in my book. Luckily for George W, he’s got six months left to screw things up even further. Good luck George.


(1) Tom Woods, The Politically Incorrect Guide to American History, Pg. 123-124, Regnery Publishing, Copyright 2004

(2) Jonah Goldberg, Liberal Fascism, Pg. 108-113, Random House Inc., Copyright 2007