October 2008 Archives

I voted for John McCain. I'd like to think it was a vote against Barack Obama, but that's just kidding myself. I've heard many Objectivists, conservatives, and libertarians say that they were going to vote for Obama and I was sympathetic to a point.

The rationale for such a counterintuitive move takes one of the following forms:

• Obama has never done anything in his life except fall into positions of power. He did nothing on the Harvard Law Review, he did barely anything while in the Illinois legislature, and he's voted present more than yes or no while in the Senate. He talks a great game, but if elected he'd probably spend most of his time campaigning for re-election.
• The Republicans in Congress would be forced into the role of the opposition party and would thus prevent his more egregious efforts towards socialism from bearing fruit.
• When America's economy is wrecked and our health care system is a-shambles, it'll be a socialist at the helm. No one can blame capitalism for the situation. So it should be the end of the century-long love affair with socialism in much the same way that the fall of the Soviet Union marked the end of Communism as a legitimate political viewpoint.
• Voting against McCain will send a message to the religious right that the party needs to return to its small government platform.
• McCain is an enemy of free speech as witnessed by his sponsorship and promotion of McCain-Feingold, the primary vehicle of campaign finance regulation. He should not be put in a position of even greater power.

In a rationalistic sense, each of these seem like a sensible strategy. Divorced from political reality, they're plausible. But in today's environment, they are completely irrelevant and futile—if not terribly naïve. Each one neglects crucial facts that both undermine and undercut their viability.

Obama hasn't accomplished much in his life, given the position he finds himself at today. To have risen so quickly, most people would have had a string of milestones or achievements that would inspire or earn respect. McCain's been a senator for a very long time and all of the other candidates, both Democrat and Republican, had relatively lengthy resumés behind them. Obama has none of that. So it's easy to underestimate his acumen or ambition. His "present" votes were politically shrewd and every step he's taken has seemed to be with an eye towards the presidency. He's made no move that would betray his carefully-crafted moderate politician persona—except maybe his ACORN litigation or his membership in the socialist New Party. If you read the story of ACORN's "inside strategy," you can easily recognize Obama's "lay low and get power" path. Ignore that at your own peril.

Often, the same people that argue for the Republicans as better in opposition to a Democrat president than when they're in power are the same ones who argue that the GOP has been co-opted by the religious right and have abandoned any limited government principles they may have once had. Expecting the Republicans in Congress to act as a bulwark against creeping (or galloping) socialism is investing in them an unwarranted hope. They have been ascendant in Congress for quite some time and they have brought the federal government to unprecedented spending and regulatory levels. To think that losing the presidency would make them do a double-take and wise up is ludicrous.

To be sure, Obama will wreck the economy and ruin the health care system. If he wins, his mandate as the first black president and a complicit Congress will insure that whatever he wants will sail through the legislature and into law. When his plans run into the inevitable obstacles (like crazies still expecting property rights to be upheld), he will have no trouble assigning blame to capitalism and those who want a free-for-all. He called the situation that led to the bailout plan the "final verdict on an economic philosophy that has completely failed" even though it was demonstrably caused by government intervention. Others stepped up to agree with his assessment. There were voices raised at the absurdity of this, but they were few and far between. It certainly wasn't from Republicans in Congress.

If Obama wins, I can't see how the religious right will be cowed. McCain was not their darling—quite the opposite, in fact. I could easily see how they could declare that McCain lost precisely because he had alienated this supposedly all-important base of support. They won't vote for Obama, but they may withhold their vote and that may be enough to throw the election. Given how close Romney and Huckabee got to passing the primary test, I find it hard to believe that an Obama election will do anything but embolden the religious right.

Finally, my fellow travelers object to McCain's support of free-speech restrictions. I'm there: it is very disgusting to me that anyone could sponsor such ignoble legislation. The right of free speech is never so important as when it comes to the political sphere. But lets not give Barack Obama a pass on this one: he wants to bring criminal charges against an organization that produced an ad linking him to William Ayers, he's used his campaign as a way to shout down those who oppose him, and his party is chomping at the bit to restore the Fairness Doctrine, which he ostensibly opposes. There is reason to expect that the intolerant political correctness will be coming to the greater body politic: there's already some trial balloons floating about the "angry mob" that McCain-Palin is stirring and bringing out the H-word.

So that is why I couldn't possibly vote for Obama. I think he has covered his socialist trail well enough that he stands an excellent chance of getting elected, especially given his admirers within the media. Once in power, I predict that his true intentions will be revealed: we will start down the path that Europe has blazed for the last 75 years and plenty of new programs will be enacted that will be difficult to rescind. He's an avowed pragmatist whose political reality exists in the liberal atmosphere. (I won't even get into the cult of personality that freaks me out.) I cannot in good conscience help that one along in his quest for power over me even though McCain is terrible and I am sad that it comes down to this choice.

[UPDATE: Here's more about the Obama-ACORN link.]

[UPDATE (10/15/2008): More cult of personality creepiness.]

Much has been made about how the nine largest banks were coerced into accepting the federal equity purchase, but it appears that regulators will also decide which of the smaller banks are unduly suffering and must accept government ownership:

Federal regulators said they did expect some banks to volunteer, though none stepped forward yesterday. But they added that they would not rely on volunteers. Treasury will set standards for deciding which banks can be helped, and the regulatory agencies will triage the banks they oversee: The institutions faring best and worst will not receive investments. The institutions in the middle, whose fortunes could be improved by putting a little more money in the bank, will be pushed to accept the money from the government.

I can't even begin to describe the problems this is going to create down the road. The Treasury and the Federal Reserve are floundering: taking action where none is warranted, overreaching their Constitutional bounds, and moving the center of American finance from New York City to Washington. All on the pretext of averting another Great Depression, even though almost nothing outside of the stock market points to a general economic slowdown. Unemployment is up, but that could still be the lingering effects of a market adjusting to the minimum wage increase. Retail sales are down, but uncertain times lead people to hold back on purchases.

I sincerely believe that the next president will usher in an era of malaise and bad times, no matter which candidate wins. We may in fact be in for another Great Depression since, like the first one, government intervention will deepen and prolong any downturn.

[UPDATE (10/23/2008): I was most disappointed to hear that John Kovacevich, CEO of Wells Fargo, folded but I'm not surprised. Even Henry Rearden signed away Rearden Metal. The parallels between today's political environment and Atlas Shrugged are many and distressing.]

Something's going on over at The Washington Post. First, they publish an article entitled "Don't Blame Capitalism". Now there's an unsigned editorial affirming that the "unregulated free-for-all financial sector" wasn't free. This represents a different tack from the one taken earlier.

I'm not going to go crazy and get all hopeful about this turn, but I am glad that the editors at WaPo are willing to acknowledge the government's role in both catalyzing and aggravating this financial problem.

If you're more interested in the subject of James J. Hill after reading my mention of him, I would encourage you to read this series of blog entries that does a capable job of an overview:

1. James J. Hill, Entrepreneur
2. James J. Hill, Empire Builder
3. James J. Hill, Conservationist
4. James J. Hill's Legacy

In the "Conservationist" entry, I cannot believe that the author left out the Great Northern Railway's pivotal role in the development and promotion of what would later become the Glacier National Park. It could have served as an excellent, private model in lieu of the National Park Service.

[UPDATE (10/17/2008): Added "Legacy" link.]

"It's not the proper role of government to prop up stocks, housing or any other market. Yet like the vaudeville performer on the old Ed Sullivan show, politicians now see their duty as to keep the plates spinning just a few more months, maintaining constituents in their homes and jobs at least until after the elections, without any thought to the long-term cost being paid to do so."

"What Americans don't get, however, is that the goal of the bill isn’t to help Wall Street or Main Street, but to centralize power in Washington. Not surprisingly, that's where its biggest proponents just happen to reside." – Jonathan Hoenig "Politicians Use Bailout to Grab More Power"

Statists may want to tiptoe around the N-word, but when the federal government buys equity stakes in private firms and dictates how they should be run, that's nationalization.

I read an article on the parallels between today's financial crisis and the Panic of 1873 with considerable interest. I got my bachelor's in history and am halfway through a master's degree with an emphasis on business history and the post-Civil War American Industrial Revolution. And two of my personal side interests are in banking and railroad history. But I'm pretty out of practice, having set aside plans for my master's and doctorate to raise my children and work in software, so I read that article uncritically.

I reconsidered the subject when I read this New York Times blog entry following up on the earlier article. Suddenly memories of my research on the Great Depression flooded back into my consciousness and I realized, as usual, that only half the story was being told—perhaps completing the parallels to today's situation.

Scott Reynolds Nelson (tellingly) never mentions the Northern Pacific by name and only casually refers to Jay Cooke, instead laying the blame for the panic on rampant European mortgages, a bubble that depended on ever-increasing land valuations. Bank failures there spread across the Atlantic where investors lost confidence (inexplicably) in complex railroad bonds and the stock market crashed, he alleges. It's all very tidy and one is left in awe at Santayana's maxim, tut-tutting how we never learn.

Jennifer 8. Lee (aside, what's the story with the number for a middle initial) doesn't have the luxury of omitting the Northern Pacific since she's looking through contemporaneous newspaper accounts—where the railroad and Jay Cooke were demonized. She breezed over the issues in Europe, again because the Times wouldn't have particularly covered them at the time.

But both omit the underlying accelerant in the panic: government subsidy of the railroads on a scale unprecedented in American history. I don't know anything about European economic history of the nineteenth century except to note that there's a reason everyone over there was migrating over here—it was pretty dismal except for the landed. Moreover, I know that no- to low-down payment mortgages are a very recent phenomenon: any mortgage of that day would have a substantial equity component that would make it difficult to lose money on a foreclosure.

The transcontinental railroad race was wholly the creation of the federal government, which wanted at least three lines built to link the east to the west as quickly as possible. It meted out cash payments, enormous land grants, and generous loans over the course of nearly 20 years. Despite its best efforts and oversight, each of the transcontinental lines was rocked by financial scandal, bankruptcy, and bribery. But the federal government had a mission and was prepared to spend handily to achieve it.

Each of the railroads, and especially the Northern Pacific, were paid based on how much track was laid. So the main line took precedence and quality of track was of minor importance; this meant that the railroad couldn't be viable unless goods were transported to stations built on that main line. After the quick buck, which was right in line with the government's desires, railroad builders of the time spurned branch lines to mines, farming centers, and manufacturers and sited their lines along the easiest grades as straight as possible.

But even doing business that way proved too capital-intensive for the companies so they issued copious quantities of bonds to get the money for building. These bonds, far from the unfathomable financial instruments Nelson would have you believe, were straightforward and relatively short-term. The railroads hoped to complete sections of track in time to pay the interest portions of the bonds and thus stay one step ahead of receivership. Sometimes they made it; sometimes they didn't.

The country had invested a lot of its hope in the railroads, for they were truly the most modern and mammoth institution America had ever seen. The race across the frontier was followed by everyone in every town across the east. They eagerly bought railroad bonds because they seemed like a prudent investment—the railroads weren't going anywhere and the government was backing the whole enterprise.

The whole thing was a house of cards. Once the main line track was completed, there were operating expenses of an unprecedented scale and very little freight to generate revenue. With the 1872 Crédit Mobilier scandal fresh in the public's memory, the bankruptcy of the Northern Pacific in 1873 brought everything crashing down.

Jay Cooke prophetically said in 1869: "Why should this Grand and Glorious country be stunted and dwarfed—its activities chilled and its very life blood curdled by these miserable 'hard coin' theories—the musty theories of a bygone age. These men who are urging on premature resumption know nothing of the great and growing west which would grow twice as fast if it was not cramped for the means." (Murray Rothbard, The Mystery of Banking, p. 231-2) Four years later, his bond bubble would result in chilled activities and a stunted country.

The problem at its root was the distortion and perverse incentives of government subsidy. As Ayn Rand put it:

It is not a matter of accidental personalities, of "dishonest businessmen" or "dishonest legislators." The dishonesty is inherent in and created by the system. So long as a government holds the power of economic control, it will necessarily create a special "elite," an "aristocracy of pull," it will attract the corrupt type of politician to the legislature, it will work to the advantage of the dishonest businessman, and will penalize and, eventually, destroy the honest and the able. "Notes on the History of American Free Enterprise" from Capitalism: The Unknown Ideal

It is convenient to blame the Jay Cookes and mortgage brokers of then and now, but getting rid of them while leaving the underlying system untouched will not address the problem. The well-run and well-planned railroads of the day, like James J. Hill's Great Northern Railway, did not need government assistance and financed their trek across the United States slowly but safely. The well-run banks of today, like BB&T or Wells Fargo, did not drink from the subprime trough and they're still around, as viable as ever.

The government needed to get out of the railroad financing business then and it needs to get out of the mortgage finance business now. For starters.

"It's not that I want to punish your success. I just want to make sure that everybody who is behind you, that they've got a chance for success too. My attitude is that if the economy's good for folks from the bottom up, it's gonna be good for everybody … I think when you spread the wealth around, it's good for everybody." – Barack Obama, Response to a Plumber

[UPDATE (10/16/2008): Uh oh, McCain and Obama talked about Joe (the plumber above) and now the liberal goon squad is all over him: he's had a tax lien, he's a registered Republican and probably a plant, he's a racist, he's a nutjob, he's lying. The message is "dare to question The One publicly and you'll get people around the country digging into your past to post online." It's so disgusting and I see it often among liberals, who revel in finding and airing dirty laundry about their opponents.]

I am a longtime fan of John Shadegg. I have voted for him in every election he's been on my ballot. I was heartened to see his name in opposition to the bailout bill when it failed in the House of Representatives. And I was disgusted when I saw his name in support when it came back around, this time with pork.

My initial idea was to punish him by voting for Bob Lord, his Democratic opponent. But that was just the initial feeling of betrayal talking. If I let politicians stabbing me in the back determine who to vote for, my voting would be governed solely by revenge. In today's political climate of unprincipled pragmatism, flipping politicians are in fashion.

After reading his reason for the reversal, I'm certain that he is definitely not his father. If Barack Obama gets elected, we'll need all the Republicans we can get in Congress so I just couldn't let my disappointment affect the long-range view. And he is more oriented towards small government than most of his GOP brethren.

"Well, it's [Fannie Mae and Freddie Mac] really an incredible case study in regulation because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that's $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.

"And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went—wrote 100 page reports, and they said, 'We've looked at these people and their standards are fine and their directors are fine and everything was fine.' And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350–340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation." – Warren Buffett, CNBC Interview from 8/22/2008 {via}

Here's how I voted, starting at the top of my ballot and working my way down:

• President: John McCain
• U.S. Representative, District 3: John Shadegg
• State Senator, District 6: Pamela Gorman
• State Representative, District 6:
  • Sam Crump
• Corporation Commissioner:
  • Barry Wong
  • Marian McClure
  • Bob Stump
• Maricopa County Board of Supervisors, District 3: Andy Kunasek
• Maricopa County Assessor: Keith Russell
• Maricopa County Attorney: Andrew Thomas
• Maricopa County Recorder: Helen Purcell
• Maricopa County School Superintendent: Don Covey
• Maricopa County Sheriff: Dan Saban
• Maricopa County Treasurer: Charles "Hos" Hoskins
• Justice of the Peace, Desert Ridge: Paul Henderson (write-in)
• Constable, Desert Ridge: Cory Hazlett
• Maricopa County Special Health Care District, District 3: Susan Gerard
• Maricopa County Community College, District 3: Pam Petty
• PVUSD Board Member:
  • West Kenyon
  • Nancy Case
  • Anne Greenberg
• Question 1: NO
• Question 2: NO

Here's how I voted on the propositions:

• 100: YES
• 101: YES
• 102: NO
• 105: YES
• 200: YES
• 201: NO
• 202: YES
• 300: NO

If you are interested in why I voted for a particular candidate or proposition, leave a comment.

I haven't had a chance to fully digest the recent turn of events that have seen the Senate pass the massive bailout (and then some) one day, the House of Representatives reverse its previous decision on the next, and President Bush sign the bill the same day. This strikes me as eerily similar to the justification for the Iraq War proffered by the Bush Administration: the financial markets have WMD, we must invade them, and there is no time to dawdle or falter. Only maybe they don't have the liquidity crisis we thought they did.

This interview with John Stumpf, CEO of Wells Fargo, lays out a better understanding of the situation from one of the major players on the ground, so to speak. There are some great insights (sorry that they're big quotes, but I liked them so much that I didn't want to trim them):

On why Wells Fargo isn't in trouble, while others are:

We never participated in some of the real exotic things that the industry and others participated in. For example: we never understood why it made sense to make someone a loan, a home mortgage with negative amortization. So you would owe more on the home later than what you started with. That didn't seem sensible to us. We don't do it in any other credit products, not in credit card, why would you do it on someone's home? Because you don't know what's going to happen in the future. You don't know what's going to happen to home values, so you owe more than what you start with some time later, or you underwrite somebody so they can pay a 'teaser rate' … part of the rate, and they can't afford the full rate. How can that possibly make sense? So as we saw, and we probably didn't see as early as we should have, but as you see 5-6 years of unprecedented appreciation, some time it is going to go down. So we started to trim back and thank goodness we didn't do a lot of those things, but here's the real secret … many companies not only did that for their portfolio, they also structured off balance sheet vehicles known as 'SIV's and CDO's and CLO's. I thought a SIV was a four-wheel drive; I had no idea what it was! And they put these products, and they leveraged their balance sheets with these off-balance sheets things, these vehicles that add NO value and now they're coming back on-balance sheet. And that's where the 380 billion dollars of losses have happened around the industry and we didn't participate in that.

On the blame for the subprime mortgage crisis:

Yes, but they [mortgage brokers] get paid when someone signs a loan, and they're out of it. Well you can imagine the opportunities for not telling the truth; the so-called 'liar loans'. A number of borrowers said and thought themselves, this thing is going to the moon. And they told fibs about their occupancy interests, in other words … they said they were gonna live there but they really weren't. It was their fifth loan. Or they lied about their income. Or they expected that somehow this would all work out, and it didn't. So the originators are part of the problem. Over-aggressive borrowers have some blame. The rating agencies, the syndicators … So, and what happened to the days I used to borrow money, I still borrow money for home loans … I went to a bank or an S & L and that person took your application, reviewed all your information, verified your income, verified all of what you could afford and said, "here's how much you can afford to borrow." And then they put that loan on their books. Today, many times you go to … the originator says, "What would you like to buy and I'll figure out a way to make the paperwork justify it." It was done in just the opposite way in a lot of situations. So, but let's also keep this in perspective. I'm not minimizing the problems at all. But the Treasury Department recently shared information that's pretty interesting. There are 80 million homes in America. Of those 80 million homes, 25 million have no debt on them at all. Of the 55 million that have debt on them, 51 million are fully current. 4 million are in some situation of past due and of that 4 million, 1 million are in foreclosure. Now that's a big number. It's problematic. Congress is working on that, regulators are working on that, the banks through help now are working on that. These are big issues, but it has to be kept in perspective.

On the "liquidity crisis:"

I'm not sure that I would buy that statement [that people with really good credit are having trouble getting loans]. Now maybe that's true but what I'm hearing more from customers is, "I want credit on the same terms that I got at 3 or 4 years ago." With no documentation, no income verification and at the rate, and frankly, we didn't put mortgages in our books or even a lot of credit in our books a few years ago because there was no return built in for risk. These were viewed as riskless assets, and they're not. So today, we are getting paid for the risk and frankly for some of the liquidity. So it's built into the rate, but for the most part … and while credit, there's always this talk about credit crunch and liquidity crunch, I'm not so sure there's a liquidity crisis. There's plenty of money out there. Now on the credit side, if you qualify, you can get credit.

Well, there can't be [a liquidity crisis]. Look at what happened … 380 billion dollars of losses in the industry have been recapitalized. I mean, just look around. Capital is flowing everywhere. We saw in our industry where Wamu got 7 or 8 billion dollars of capital recently, and Citigroup has raised capital, and National City has raised capital; I mean there's capital all over the place.

Many have asked me who I'm voting for this November. My stock answer is "I'm voting against Obama." We all laugh and then I get to disparage McCain while touching on my fear of the government expansion that Obama is seeking. Sometimes I get assent about that growth but many other times I get a puzzled look or even, puzzlingly to me, a disagreement that he's going to expand the federal government in a big way.

This Investor's Business Daily editorial does a decent job of covering the salient planks of Obama's platform that should give pause to all freedom-loving Americans. Really though, a good reading of his campaign's policy issues sections ought to make you an anti-Obama voter too.

I could go through his platform plank by plank, but I'm not sure anyone reading this would be interested. Leave a comment if you would be…