Posted by
federal rb on Friday, October 17, 2008 11:51:38 AM
So at the end of this business cycle we have had a rather rough landing. This is what it feels like when a bubble bursts. So what caused the bubble in the first place? The heart of the matter was the Democratic push for sub-prime loans to people that normally wouldn’t have qualified. Fannie and Freddie were the vehicles to make a market for sub-prime loans. A recent estimate released said that non sub-prime loans are being foreclosed upon at a rate of 2%. While the sub-prime loans are being foreclosed upon at over 20%. There is no economy that can withstand a foreclosure rate of 20%.
The Democrats didn’t have their help in this mess. Alan Greenspan kept the fed rates artificially low throughout this real estate boom. He encouraged this irrational exuberance of the real estate market. Somehow he didn’t learn a lesson from the tech bubble just a few years ago. Although he tried to tamper down on the irrational exuberance then, he had all the tools at his disposal to keep this bubble from inflating in the first place. So if there is a market for these loans and people can make money just processing them and not worrying about any consequences then we just pass the problem along. Who cares, I get a commission and Fannie and Freddie are eating these mortgages up.
Then Wall Street got into the act after seeing Fannie and Freddie create the market place. They bought these mortgages (CDOs) as something to be packaged and sold at a profit. But nobody realized, or cared actually, that these CDOs were infected. Hell who cares, the economy is booming. I can buy this house and flip it a week later and earn $50,000 in the process. Or I can refinance this house, buy all kinds of goodies, because my house will increase in value 30% every year and I can keep milking the equity and live like a millionaire. The whole country was giddy, everyone could get rich. There were even shows like Flip this House. This couldn’t go on forever.
Then we have the tip of the lance that burst the bubble. And that tip was the mark to market accounting rule. Not coincidentally this accounting rule went into effect last November at the height of the market. This rule forced companies not to write down the value of the assets at maturity but at the present day value of the assets. That sounds all well and good, but if there doesn’t turn out to be a market for something then the asset is worthless. And the unraveling started last fall and the infected CDOs made their way throughout all our financial institutions. That’s why quarter after quarter the financial companies kept on writing down huge losses. The values of these CDOs were spiraling downward.
So this whole situation was a perfect storm of events that could have been prevented if any of the things above not happened. But they all did and now we’re here in this mess. At least the global capitulation did us a favor by destroying the inflation bug that sprung up with the high price of oil this summer. Now that we have found a bottom in the global lack of confidence of all of our markets, we can get along with the rebuilding of our economy. Or more importantly the start of the new business cycle. The actions taken by the administration over the last weeks, although distasteful to free marketers, has begun to solidify the bottom of the market plunge. And now we have to address the bubble that got us here. The housing market is integral to our economy. If we can put a bottom there then we can address the larger issues to our economy. McCain was right that we have stabilize hosuing because if we don't make a bottom out this, then we will not be able to grow without housing.
Then the problem will be jump starting the economy or business cycle. How do we do that? Should we tax the rich and give that money to 95% of the people to help them out with their lives? The problem with this approach is that the American people have lived like our Government, well beyond their means. The people will take the money from the rich and pay off their own debts. They’ll go out and buy some essentials at Wal-Mart. That might have a small effect like this past 2nd quarter when our stimulus payments went out and we had a temporary bump in our GDP.
What we need is a pro-growth approach to this economy. We need to create a sustainable growth pattern by creating private sector jobs that puts people to work and gets them to put money into businesses not named Wal-Mart. I am no economist, but it makes total sense to lower the tax rates for companies to attract them to manufacture here at home. And if the market has taken such a beating, wouldn’t we want to attract more investors by lowering the capitol gains taxes? This pro-growth approaches have been offered by McCain are the beginnings of a policy that will work. There is the old adage if you want less of something then you tax it. Then the reverse would be true too. We cannot let Obama highjack this issue with his condemnation of supply side economics. If Obama wins the election and taxes the evil rich people, and keep the taxes high on our companies then we will meander through the next decade like Japan did with crippling low growth. So the tax cut that Obama will have given me will be just chump change.