Unforeseen Contingencies

...and other matters.

For the most part, the U.S. elections are a done deal. The Republican Party will be crushed, a fate they worked very hard to earn and richly deserve. It’s a pity that there’s no one any better to replace them. Obama-Biden will win by a landslide. The Democrats will strengthen their holds on both houses of Congress. The massive nationalizations inflicted on us by the Bush regime will be institutionalized. The United States, and for that matter the whole world, are in for a rocky ride ahead.

But not all news is depressing. In Michigan, two ballot initiatives stand a good chance of passing, although the margins appear close. Proposition 1 legalizes medical marijuana, and the more opponents campaign against it, the more the leads in polling seem to grow. I have never understood how anyone could oppose such a measure. As victimless crimes go, smoking marijuana is as harmless as they come, even to "perpetrators." And marijuana is a beneficial natural remedy for painful medical problems: so far as I can tell, one must simply hate humans to oppose it.

Michigan’s Proposition 2 would permit scientists in Michigan to do stem cell research that, similarly to medical marijuana, could eliminate a good deal of human suffering. I can at least understand the opponents here - they imagine that an embryo is an individual with rights. While I disagree, I can at least appreciate that they mean well, unlike opponents of medical marijuana, who can’t claim to be making anyone better off. The problem for Proposition 2 opponents is that the taking of stem cells from embryos does not destroy embryos as documented on this blog in September 2006.

Bottom line: Unforeseen Contingencies hereby endorses Michigan’s Proposition 1 and Proposition 2, and asks any Michigan readers to support them. (As if I had any readers!)

This is all a little too much "positivity," isn't it? Shouldn’t a libertarian blog be negative about the election? Well sure, and here’s one to oppose: California’s Proposition 8, the disgusting initiative to outlaw same-sex marriage. This is another position I cannot understand. I get it that some people might not like or approve of homosexuality. That's certainly their right. But the idea that people who love each other should be forbidden from mutually agreeing to live together as a couple is simply appalling. And the idea that a religion as crackpotty as Mormonism (the Mormon church is the number one financier of the pro-8 campaign) should be able to seize control of the law to discriminate against Christian churches that do look favorably on same sex marriage is utterly horrible. And there are already existing marriages that would be outlawed by this crazy proposition. What would the Mormons and Catholics think if the Protestant majority decided to outlaw their heretical & unbiblical marriages? Proposition 8 is as wrong as anything can be, and very dangerous for everyone's liberty, including its proponents.

Happily, No on 8! seems to be leading against the hate-mongers & bigots, but just barely. This is one issue where I’ve put my money where my mouth is, and I encourage all UC readers to please donate as well. The No on 8! ads are intelligent, libertarian, and often amusing. (No links here, but they are all on You Tube.) I don’t regret donating, and neither will you.

If you donate, I thank you. This isn’t an issue that affects me directly, as I always hope never to enter California, nor to ever again have to deal with any person who isn’t female. But for purposes of defending individual rights, this vote is about as important as they come.

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Many thanks to CLS and his Classically Liberal blog for warning us about Proposition 8. When you donate, please do it in honor of his fine blog.

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Also, I highly recommend Dick Gordon's interview with a Mormon priest who dares to oppose his church's bigotry: well worth listening, and very libertarian.

What's the craziest bit of conspiracy theory you've heard surrounding this year's U.S. elections?

As we move towards the denouement of the presidential campaign, hysteria and nuttiness seem to be on the rise, no doubt exacerbated by the stress and worry induced by the financial debacle. A few weeks ago I sent a bit of economic analysis to an internet discussion group, and found myself inadvertently sucked into an email "debate" with conspiracy theorists who imagined that we pay interest on every dollar in existence, that the Fed earns enormous profits that it funnels to shadowy international bankers, and that no one actually must pay income tax. I managed to extricate myself by insisting that I be excluded from the list, but not before being accused of being a "sheeple," or even worse, an active member of the conspiracy.

OK, that's old stuff, refuted years ago, that will persist longer than the Fed itself, no doubt. Isn't there any new paranoid kookiness out there?

Particularly with the campaigns entering the endgame, I would expect conspiracy nuttiness to be really heating up. Hence "we" at UC are offering a fine prize for the craziest piece of conspiracy theory submitted. (Double prize if it proves to be true!)

A few ground rules:

1. It must be new (that means new to "our" panel of judges).

2. It shouldn't be obviously stupid. E.g. the claim Obama was actually born in Kenya and hence isn't a natural born citizen is, umm, stupid. Those who make the claim don't argue his mother wasn't an American citizen... but that's all that is required for him to be a natural born citizen.

3. There must be some contingent of people who actually believe the theory. E.g. apparently everyone now agrees that Sarah Palin, not Bristol, really is the mother of Trig.

4. Entrants may not submit conspiracy theories that they've invented themselves... unless they can document that they've first convinced at least 1% of American voters that the rumor in question is true.

5. Entries must be submitted here before 0:01 EST (12:01 AM) 4 November 2008.

6. Assuming there are any entries, prizes will be announced on 5 November 2008. All decisions will be final.

I have not yet decided on prizes, but they'll be awarded for the first three places, and will be at least as useful as the fine tinfoil hat sported by our attractive model above.

Greenspan says he can't understand what has happened, he's in "a state of shocked disbelief."

Let me help, Alan: Mises was right.

Happy news, yes?

In lieu of an essay, here are some bulleted points on the financial crisis, with links.

• The claim that this problem resulted from free markets is wrong. There’s substantial evidence that government interventions in the market are behind this catastrophe.

• The credit crisis is one of mistaken and unsustainable investments. The resulting asset bubbles pop. We’re seeing this in housing now, and soon with other kinds of "investments" in consumption.

• There’s one thing that drives the systematic malinvestment: artificial credit expansion by central banks. The Fed led the way in this (see the post below), but other central banks are culprits as well. The artificially low interest rates and cheap money foster manias and asset bubbles. There’d be no speculative bubbles without them.

• An even deeper problem underlying this is the something for nothing mentality. In particular, central governments have taught that one can consistently consume more than one’s revenue. They have taught us this through entitlement programs that promise each of us more than we pay. The difference is made up by borrowing. As Adam Smith argued, if a nation consistently spends more than its annual revenue, it eats its capital stock and decays.

• Housing became the locus of the problem because of favorable tax treatment, government encouragement of lax lending standards, government encouragement of securitization of dodgy mortgages and tolerance of shady accounting and possible fraud (the Federal Department of Justice actually blocked several state investigations into possible mortgage fraud).

• Private borrowers and lenders jumped at the opportunities created by artificially cheap credit and favorable treatment for housing. Subsequent irresponsible (and often criminal) private actions poured kerosene on the fire.

• The credit bubble is far deeper than housing. Credit card debt, auto loans, student loans, commercial real estate mortgages, and the like are similarly overinvested, and will begin collapsing when the global recession really bites.

• Widespread bank failures in the United States are a near certainty. Expect 750 to 1,000 closures by March. (See 4.a.)

• A global depression (multiple years of hard recession) is increasingly likely.

Barack Obama is about to win the Presidency by a landslide (as predicted here in August). The Democratic Party will increase their hold on both houses of Congress. They are all beginning to talk of massive new programs of socialism that would out-do the nationalizations of Commissars Bush, Paulson, and Bernanke. They’d do well to reconsider, because government intervention has brought us to the brink of ruin. Increased government regulation and spending will push us over the edge. We’re on a course for national bankruptcy. It will take drastic action on behalf of fiscal responsibility to prevent this.

Socialism no! Spending cuts, yes!

Want to know the proximate cause of the financial crisis? The accompanying graph shows what Greenspan's Fed did with with the Federal Funds Rate from 2002 to 2004: it's below 2% for the entire period. This "free money" policy was a necessary condition for the credit bubble, for without cheap credit, the wild borrowing would not have occured. In turn, housing prices wouldn't have been bid up. Greenspan may have whined about "froth," but he was running the eggbeaters.

As Ludwig von Mises warned us, inflationary monetary policy inevitably leads to a financial crackup. Compound easy credit with policies that encourage lower leading standards and favor consumpton over saving, and catastrophe is assured.

Now political entrepreneurs are trying to pretend this is all the fault of the free market. It's time for supporters of liberty to be ready for the fight of their lives. A key thing to remember in this fight: without artificially cheap credit, there'd not have been this orgy of irresponsible borrowing.

Blame the Fed!

OK, maybe not credit; we've had altogether too much credit of late. Kudos, maybe.

Since I occasionally lambaste the Mises Institute for promoting nonsense, it's only fair that I mention that they've done a fine job of covering the financial crisis and bailout. Comrade Lew has just posted a particularly pithy little comment on using the "full faith and credit" of the Federal government to salvage worthless investments.

I agree, Paulson and Bernanke might just as well start guaranteeing every teenage boy's love note.

(Wait a minute. Do teenage boys actually write love notes? Girls do, sure...but boys?)

My nephew, Spc. Warren Steele, an infantryman with the Montana National Guard, heads for Iraq. Montana's Lt. Governor John Bollinger bids him farewell.

A quick note to my readers... I have lots to say about the economic debacle, but have been extremely busy. (Just trying to figure out what is happening daily is a full time job!)

I will be posting quite a bit on the financial debacle, and the bailout, fairly soon. For now, I'll simply say that I fear it will not work, and that a real mess lies ahead. This isn't my prediction, it's what I'm hearing from analysts such as Nouriel Roubini.

I keep thinking of something I read on Bloomberg that I found chilling: an advisor to the Peoples' Bank of China wants the PBC to have three way meetings with the central banks of Japan and Korea. Why? So they can coordinate so as to avoid a sale of U.S. debt instruments that snowballs into a panic, with everone dumping trillions onto the market.

If true, this is scary. The financial balance of terror is teetering.

(I'll try to get a link or more info on this up later)

Dear Senator Baucus,

I respectfully ask you to consider the following:

1. No purchase of toxic securities by Treasury, i.e. no pure bailout for Wall Street. The Bush/Paulson proposal simply puts all the burden on us taxpayers and lets foolish investors off scot-free. (And puts enormous unchecked power in the hands of the Bush administration.)

2. If the banking system really is in jeopardy and bailout needed, then Charles Calomiris' (Columbia U.) proposal using preferred shares is far preferable. Ask him.

3. No bailouts for irresponsible homeowners. We taxpayers who lived within our means should not be bailing out greedy neighbors who knowingly took on debts they couldn't afford.

4. CEO compensation: it's unimportant. Much as I despise some of these people, any solution ought to minimize financial disruption and minimize costs to us taxpayers. Punishing people isn't the point of this. Don't jeopardize a fix by making this a sticking point.

5. Most of all, we need a fix of the system, of the process that led to this mess, and not simply a bailout of existing mistakes. Get the Fed under control, abolish it if necessary. No more of the low interest/expansionary policy that stimulated the real estate bubble. And no more Federal deficit spending.

This is the most important issue that America has faced in my lifetime. You are very influential. Please consider these points and make them part of any solution. I have not voted for you in the past, but if you do right on this one, I'll support you in every way I can.

Sincerely,
Charles N. Steele, Ph.D.
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Dear Charles:

Thank you for contacting me regarding my vote in the Senate on the state of our financial markets and economy. I appreciate hearing from you on this very important issue.

This vote was one of the toughest votes I have cast in my Senate career. The letters, phone calls, emails and faxes from Montanans across the state expressed disbelief and frustration with our economic state and concern for our economic future.

The greed and failure of public and private institutions to safeguard our financial security have let us down. Montanans are struggling just to make ends meet, and don't want to see their hard earned money go to bail out Wall Street.

I voted for this legislation because I was concerned that the impacts would start to be felt by families and small businesses on Main Streets across Montana and the country. Congress was charged with the responsibility to ensure that this crisis was interrupted before the effects began to ripple through Main Street. The legislation includes tools and resources to build a stronger financial framework with oversight and safeguards.

Locally, I am concerned about the lack of access to credit and how it affects Montanans and Montana communities. If a bank can't get credit, neither can the local hardware store, the coffee shop, the car dealership down the street, college-bound students and the new neighbor who just bought the house next door. Already the funds that Montanans depend on are beginning to dry up, and the crisis is starting to hit home. Without this credit, businesses will stagnate and start to close, folks will lose their jobs and Main Street economies across Montana will begin to decline.

From the start, I insisted that any plan I support must ensure the following: 1) Montanans and Americans won't shoulder all the costs of mistakes made by greed on Wall Street; 2) chief executives won't get large payouts or golden parachutes; 3) middle-class homeowners will get relief; and 4) this situation never happens again.

To provide stability to our community banks and ensure its customers' money is safe, I successfully included a temporary increase in the FDIC deposit insurance limit from $100,000 to $250,000. The FDIC insurance limit was last increased in 1980.

To help homeowners, this bill requires the government to work with lenders and servicers to modify mortgage terms for those struggling to keep up with payments.

I demanded oversight provisions in the bill to create an independent Inspector General (IG) to oversee this program - and only this program. The IG is accountable only to Congress and the taxpayers. I want the IG to be on the ground on Wall Street, closely monitoring the firms that receive taxpayer money.

It is not acceptable for executives to get big payouts when their firms are getting assistance from the government. That is why I worked so hard to ensure that this bill limits compensation to executives, and includes provisions to end tax breaks that these participating companies get for executive pay.

The package of vital tax incentives that were included in the economic stabilization legislation will help to create more jobs. We will need these good-paying jobs to help restore our economy. These provisions included the extension and creation of tax incentives for renewable energy, a one-year fix for the 20 million-plus Americans who are slammed every year by the Alternative Minimum Tax, a tax break on college tuition, and a tax deduction for State and local taxes paid. Extensions of the tax credit for teachers' classroom expenses and tax relief for companies in research and development are also included.

I believe our country's economy is at stake. Our economic situation is as dire as I have ever seen in my years in Congress. While the legislation was not perfect, I felt it was necessary to address Montanans top concerns that I listed above, and it had to be done immediately.

Additional information about the legislation is available at the website listed below: http://thomas.loc.gov - click on the link entitled Economic Stabilization on the front of the website. If you do not have access to the Internet, please contact my toll-free number at 800-332-6106 for assistance from my staff.

Thank you again for getting in touch with me. I hope this response has answered some of your questions regarding my vote.

With best personal regards, I am

Senator Max Baucus

http://baucus.senate.gov

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Dear Senator Baucus,

This is a terrible thing you have done. Giving Secretary Paulson the authority to purchase toxic assets is not a solution. We taxpayers now will be buying other peoples' mistakes. To recapitalize the banking system you could have done a preferred shares injection: minimal risk to taxpayer and treasury, and doesn't take those who made mistakes off the hook.

Furthermore you've done nothing about the incredible greed and incompetence of the Fedral Government: Congress, who pushed for lower lending standards and for Fannie and Freddie to be a ready market for bad mortgages, the President and his administration, who presided over the growing housing and asset bubble and encouraged it, and most of all the Federal Reserve, which fueled the fire with cheap credit.

You in Washington D.C. created the mess. Now you pass it to us. You are shameless.

Resign, now.

sincerely,

Charles N. Steele