Are Banks' Problems a Mortgage Meltdown? Or a Derivatives Meltdown? Two, Two, Two Excuses in One!

One thing I have learned after nine years in the corporate world, a few years consulting and 18 years teaching business in college is that it is difficult to understand someone else's business. In the recent discussion about a number of banks' financial problems I have heard that this was a "sub-prime crisis". The banks lent exhuberantly and to low income borrowers to whom they were pressured to lend, and the result was widespread defaults.

Today, the Belmont Club writes that the Washington Post now blames the banks' problems on derivatives trading. Which is it? Mortgages? Derivatives trading? I guess the banks, like the old Certs candy commercials, have two, two, two crises in one.

The Washington Post's familiar solution is of course regulation. But would regulators do a competent job? For regulation to work, the regulator must be smarter than the profit-maximizing investment banker. The question is whether reasonable, ethical, and profit maximizing bankers would have lost the money they have lost. If the answer is yes, then I'm not sure that regulators would have done much better. If the answer is no, then the problem is not regulation. Criminal, enforcement rather than better regulation is needed. Moreover, bankers already have a legal fiduciary duty to ensure the ongoing viability of their banks and to maximize profits. They obviously violated that "regulation". Why would a more esoteric form of regulation fare better? And why would government, which cannot even manage an election competently, be good at overseeing the esoteric world of credit swaps?

The pathology of Progressivism is that even where they do not understand the implications of their proposals, Progressives aggressively argue for them. The proposals inevitably involve expanding the state's powers, and the state then becomes the source of more severe problems than it solves. It is likely that the banks' current problems (and they are the banks' problems, not America's problems) are due to pressure from government, e.g., a form of regulation, to extend loans to low income borrowers who could not afford to repay the loans. Alternatively, and probably even more true, the problems are due to bad ethics on the bankers' part.

The article states:

"Derivatives did not trigger what has erupted into the biggest economic crisis since the Great Depression. But their proliferation, and the uncertainty about their real values, accelerated the recent collapses of the nation's venerable investment houses and magnified the panic that has since crippled the global financial system."

The authors note that AIG suffered a loss due to derivatives, but they do not seem to know how much of a loss, just that it was attributable to $440 billion in mortgage swaps. Was three percent in default? Twenty percent? If AIG does not know, then why was AIG in the business? And if the reporters don't know, why do they claim to know what the solution is to a problem that they do not understand? I would not trust a physician who does not know whether I had a stomach virus or a heart attack and prescribes me medication anyway.

Markets are capable of evaluating and punishing banks that engage in excessively risky behavior better than regulators are at assessing what risks banks ought to take. Markets are attempting to do that, but President Bush and Congress have decided not to let the markets work and to let AIG and other financial institutions fail. If banks fail, the government ought to protect depositors, but they ought not to support incompetent investment decisions and bad ethics.

The media is discussing this issue without providing facts, and then offering specific solutions that are not based on evidence. Perhaps the Washington Post should provide their reporters with packs of Certs, and leave it at that.

New Mexican ACORN Voter Fraud

Ace of Spades HQ (h/t Larwyn)quotes a GOP Press Release that alleges that ACORN committed massive voter fraud in New Mexico:

Obama’s ACORN Must Be Shut Down Before Election, All Activities Investigated

(Albuquerque, NM) – Public records released in New Mexico today confirm that fraudulent voter registrations are in fact turning into fraudulent votes. ACORN, currently under investigation by the FBI, is now confirmed to be responsible for producing fraudulent voter registrations and illegal votes in New Mexico. An inspection of public records has revealed that illegal votes were cast in New Mexico’s 2008 primary election.

“This is a bombshell. We now have undeniable proof that a significant number of fraudulent voters were cast in Democrat primary races for the New Mexico state legislature as a result of ACORN’s voter registration fraud,” remarked State Representative Justine Fox Young (R-Albuquerque). “No longer can ACORN argue that their phony voter registration forms don’t translate into fraudulent votes. They do and today we can prove it.”

"It is safe to say that the number of illegal votes being cast dwarfs the 366 votes that decided the 2000 Presidential election in New Mexico,” said Nina Martinez, Secretary for the Republican Party of New Mexico. “Barack Obama contributed $832,000 to ACORN, organized an ACORN subsidiary, represented them as their attorney, trained some of their members and received ACORN’s endorsement. Obama should withdraw his financial support from ACORN and come clean about what he knows of their activities. Every fraudulent vote cancels out an honest vote. We must ensure the integrity of this year’s election.”

Dorothy Maddox-Holland of the FEC Responds to ACORN Inquiry

The FEC has not responded to repeated inquiries about the Obama birth certificate. However, they have just e-mailed me that voter fraud by ACORN--is not their job.


>Good morning Dr. Langbert

Thank you for your letter dated September 29, 2008 regarding allegations of an unusually high level of voter fraud associated with ACORN.


Unfortunately, this type of inquiry is not handled by the Federal Election Commission (FEC), Office of Inspector General (OIG). However, your letter was forwarded to the Election Assistance Commission who in turn informed the FEC/OIG that this type of inquiry is handled by the Department of Justice, Civil Voting Section, 1-800-253-3931. Once again, thank you for your inquiry.

Sincerely,

Dorothy Maddox-Holland
Special Assistant to the Inspector General

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Fed Increases Monetary Base by 16% in One Week

Howard S. Katz recently put this week's increase in the monetary base on his blog. The increase of over 16% in one week is historical. The United States increasingly looks like the Weimar Republic. Just one month ago I had a conversation with an economist who previously worked for the Fed. She insisted, correctly, that the money supply had not increased in several years (because foreign governments were monetizing our debt for us, creating an unstable monetary "game"). In just five weeks Ben Bernanke has proven her utterly wrong. The monetary base has gone from $888 billion on 9/11/08 to $1.74 trillion on October 16. In other words, Reserve Bank Credits increased better than 16% this week. This should double the money supply in the coming two years. This will cause inflation and a bull market in stocks, at least temporarily. However, there also may be dollar sales as foreign holders panic at this historic devaluation. A rocky road ahead. The chart and numbers follow.