In a market economy, it is not the responsibility of the government to provide jobs (a statement with which nearly everyone agrees, freaks from places like moveon.org notwithstanding). It is the responsibility of the government to provide an environment in which the people of the country can go about their business, which will collaterally result in creating jobs. So the government takes care of the national defense and provides an impartial system for the adjudication of disputes, which in our country is predicated on applying the same set of rules to similarly situated people similarly (unless you are a demunist, in which case the rules get applied depending on whether you are in one of their identified support groups or not, the nub of identity politics). This is something that statists, redistributionists and collectivists like Barack Obama and his Demunistic brethren fail to understand. The more they do to create jobs, the less likely it is that we will have sustainable job growth. They are destroyers. They destroy. If they really wanted to see jobs created, the best thing they can do is get the government the hell out of the way.

In the meantime, America’s  great medical entrepreneurs and doctors and scientists (some from outside America too) have figured out how to extend our lives to the point where we are now living not 2 – but 15, 20 or 30 years past the point where the government starts paying benefits.   So we need to either decrease life expectancies, which seems rather evil, or move the retirement age out to be in line with our ever-increasing life spans.  The blunder the government made at program inception (and one they seem to make with every program in one way or another, do they not ever learn anything?) was not to index the age at which benefits start to life expectancy.  It is just as stupid as not indexing other benefits for inflation.  The Germans have already taken steps to address this.  Are we less capable than Germany?  The obvious solution is to move the retirement age out to be more in line with increased life expectancy.  Is that so hard?  See here for a discussion of how some countries have done this.

Instead we have Demunists trying to take over health care which will have the nearly immediate effect of reducing life expectancies.  While that might help in the long run, it is not the optimal solution I would submit.  And it does not address the other driver of our entitlement crisis, the fact that health costs rise faster than economic growth.  It actually makes it worse.  The country senses this.  Is it any wonder that Commocrats will get wiped up in the fall elections?  Not that I trust the Republicans to do the right thing.   But with them any legislation will likely be only marginally destructive rather than utterly destructive as it will be under the Demunists.

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While people like Paul Krugman will say that the causes of the credit crisis involve many actors, and liberals point the finger at Wall Street and greedy bankers, it is instructive to remember exactly what the problem is.

The genesis of the problem is simply that millions of really LARGE loans were made to people who cannot or will not repay them.  This is not like people not paying their unsecured credit cards.   The dollar amounts involved there are small.  This is about default rates on mortgage loans going from the 1-3% range to the 15-30% range on loans whose average size is in the hundreds of thousands of dollars each.  Because the dollar amounts are so absolutely huge, they represent multiples of the capital reserves of the banking system, hence posing systemic risk.

This problem has been and will continue to be used as justification by those with other regulatory agendas to impose all kinds of burdensome and unnecessary regulations on activities from banking to trading.  Note however that the entire mess could have been avoided with but 2 simple rules relating to mortgage underwriting.

First, the lender should be reasonably sure that the normal anticipated monthly mortgage payment represents some reasonable fraction of income.  This is the Debt Service Ratio test.   Second, the amount loaned must represent no more than some maximum percentage of the appraised value of the property.  This could be as high as 90%, but probably not much higher.

Had these two simple rules been required by regulators of mortgage originators, we would not have the credit crisis we have today, even with securitisation and all the rest of it.  So be wary when you hear government say we need to regulate this, that and the other thing.  We only need 2 simple rules.

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I have been meaning to write about this for about 5 years, but the installment of the Obama administration with what should be a compliant Congress is as good a time as any.  In the sweep of history as viewed from the scale of years to a few decades, we are about 8 to 10 years into a swing away from increasing levels of freedom globally and toward greater statism, or state control of economies and of people’s personal lives.

While there are a few notable exceptions like China which maintained momentum toward greater market orientation, most instances from Asia to Latin America have been swinging the other way.  Like markets, these things do not go in a straight line, but oscillate, sometimes waxing, sometimes waning.

At close scales the change from waxing to waning (if plotted as a curve this would be when the slope of the curve went from positive to negative, not the inflection point from more positive to less positive, ie the change in convexity) is chaotic, messy and jagged, but if you zoom out sufficiently far, it becomes smoother.  I place the changeover in late 1998 with the election of Hugo Chavez in Venezuela.

Prior to 1999, it was clear that there was something magical happening in the world.  The first sign was perestroika in the late 1980s, then the fall of the Berlin Wall in 1989 and the coup in Moscow in 1991.  In 1994 the Uruguay Round of GATT talks concluded, setting the stage for expanded world trade.  In 1995, the Internet became available to a large part of the public.  Large numbers of countries in Eastern Europe, Asia and Latin America were adopting western democratic institutions and opening their economies along market lines.  By 1998 the Internet was a phenomenon, energy was cheap and productivity was galloping forward.  You could find music in any genre from classical to hard core by  any artist on services like Napster and Audiogalaxy.  Open source software blossomed; multitasking operating systems allowed computing to become mainstream.  Prices of things seemed to fall as labor was globalized and living standards around the world brought more people out of poverty than ever before.  It seemed anything was possible as the world headed into the millenium.

Some warning signs had already started to appear.  Late in 1998 Hugo Chavez was elected in Venezuela and started down the path of his self-styled Bolivarian socialist revolution.  At the end of 1999, Putin became President of Russia.  Early in 2000 the asset bubble in technology and other stocks burst.  The major labels put an end to open access to music when Napster was forced to shut down.   The RIAA started suing people for sharing music.  9/11 happened.

After a brief recession, it seemed as if things were going to get back on track.  Home ownership and home prices rose to incredible levels as the stock mania was transmuted by the Fed and a world awash in wealth into the housing bubble.  Commodities began an incredible 6 year bull run in late 2002.  Saddam fell in 2003.  Prices continued falling as manufacturing and service labor was rationalized.  However the forces of statism were resurging and eclipsing the brief flowering of freedom.

Russia jailed Mikhail Khodorkovsky in late 2003.   It was this that really set Crude Oil prices on fire.  Russia also reinstated the practice of sponsoring the murder of political critics.  Russia has returned to a state in which elections are held but they are pretty meaningless as the outcome is known in advance and largely controlled by the party in power, methods that Hugo Chavez and others in Latin America are now also seeking to employ.  More states in Latin America have also turned left;  Bolivia, Argentina, even Brazil.  Other states have also become less free in the last 8 years such as Zimbabwe and Burma (Myanmar).

Now with the bursting of the housing and commodities bubbles and the implosion of the world financial system, even America has elected a congress and a president who are more sympathetic to statism than it has had since Reagan beat Jimmy Carter in 1980.  On the Sunday talk shows this weekend, I heard some idiot (probably Stiglitz) say with relief how the nightmare of the last 25 years has finally come to an end.  Yes.  The ‘nightmare’ that was the greatest period of global wealth creation ever known has finally come to an end.  The question is, is this really the end?  Will the curve of freedom (change) continue below the abscissa?  Or is this a downstroke that will soon reverse?  In other words, will we discard the lessons of history and embrace increasing state control over every aspect of political and economic life?  Or will we remember, pull ourselves together, and return to the path of progress we were on?

They had some clown on to comment on this – he wasn’t actually dressed as a clown obviously but he must secretly yearn to be a clown given the quality of his thought processes – and this clown said “Obviously the reason this is happening is that the [government] programs in place are having no effect [on supporting the housing market]“.  Come again?

First let’s get one thing straight.  The reason that foreclosures are so high is that many many people have signed up for mortgage loans that they can in no way afford to pay.  This inability to pay on the part of large numbers of mortgagees was estimable a priori.  Anyone who did not see it coming should join the CNBC commentator in the circus.

This perversion of thinking is a dramatic illustration of why it is a bad idea to have people come to believe that the government should or must be involved in matters of the economy that were previously left to private actors.  They then also come to believe that when things do not go well it is because the government is not doing enough and that of course the solution is for the government to do more.  They do not then understand that markets have to clear before they can work cleanly again.  Anything that prevents markets from clearing only delays the fact and prolongs the pain, almost certainly increasing the aggregate pain.  There may be slight things that can be done with a light touch that will not perturb this process too much.  But the more the mindset takes hold that government is an acceptable and even necessary economic actor, the more likely it is that the hand will be far too heavy, and therefore ultimately damaging.

Did we not learn this lesson in the 70’s?  There is a reason that the popularity of clowns has waned over the years.  Clowns represent a mask on reality.  They are creepy -  viz. the etrade commercial where the baby underestimates the creepiness of the clown he hires with his trading winnings.  My kids have no time for clowns.  Clowns try to appear to be something they are not.  Like the government trying to be an economic actor.  Something it is not.   Apparently we have already forgotten this lesson which we had apparently learned only 30 years ago and now we have elected people who are ideologically inclined to have the government do more and more.  We will pay the price.   Beware of scary government-is-the-answer clowns.

So if we are going to provide a “bridge loan” to one or more of the Big 3, then why would we not provide taxpayer underwritten “bridge loans” for every single other business in the country that can reasonably claim that financial and consumer market conditions are making business difficult?

A bridge loan is usually a facility that a business aquires in the course of a major transaction that is used until some other more permanent form of financing supplants it.  What is the financing that is going to supplant the assistance being requested in this case?  These are broken businesses.  There is nothing on the other side.  These are Bridge Loans to Nowhere.

The unstated reason that Congress is going to great lengths to provide taxpayer dollars to unbelievably poorly run private businesses is that if these businesses fail, the UAW and other auto workers unions will lose their union contracts.  So this is really a UAW bailout package.  Make no mistake, there would still be a great deal of employment.  Someone would use the assets of the automakers to make cars in America.  So when you hear gasps at the 3 million jobs that would be lost if we do nothing, that is a misdirection.

Count on Congress to do the wrong thing in this as in nearly every other thing they do.

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Today, the S&P500 traded through the low established on the 10th of October.  That low, which I thought would be a durable low, lasted only 17 days.  Stocks are behaving like a ball bouncing on a table.  It bounces, bounces and bounces off of the table, and each time the bounce is lower.  Eventually it falls off the table.  This is what is happening with stocks.

This is happening as the election approaches on Tuesday of next week which is going to set the stage for the American system to come under prolonged attack by the forces of statism and collectivism.  If Obama’s lead remains secure, expect stocks to fall off the table this week.  But I would expect a bounce once the result of the election is known.  Buy the rumor, sell the fact as they say.  The mere removal of the uncertainty will give markets a lift, even if the result is unfavorable for economic freedom.  Between now (Monday afternoon) and next Tuesday however, who knows how low things can go.  See below.

Dodd:  “Anything over 8-10 dollars a barrel profit is very good, everyone knows that.  The level of profits “  is obscene, unconscionable…

Kernan: “Senator, you aren’t talking about congress looking at every industry and deciding what is an acceptable level of profit are you?  That cannot happen in this country can it?”

Dodd:  “It can happen.”  kernan makes that face like ‘Oy he isn’t really saying that is he?’.  “It used to be that way.”

Oh my god.  Democrats are destroyers.  This is the same guy who is holding up several Fed Board of Governors appointments such that the fed board has only 3 or 4 out of 7 governors, at a time of incredible economic uncertainty the Democrats are imprudently politicizing the Fed.  This guy is also a friend of Chavez in Venezuela.

So here is a good target for the bus to fall out of the sky.  [Licking tip of pencil], yeap, lets put a big check mark next to Dodd as an Enemy of Common Sense.

It is very simple.  If you want to bring down the price of oil, boost the value of the dollar in such a way that it is expected to be permanent and ongoing.  The way to do this is to raise the Fed Funds rate immediately by 50bp.  (This will not help in the case that Israel attacks Iran, but is the way to bring the price down permanently.)

And now you hear talk of intervention.  This should already have been done.  When Bernanke went on TV on Tuesday, there should already have been a plan in place to defend 1.5600 or so versus the Euro – where the pair was when Bernanke started speaking Tuesday morning.  The Treasury should have directed the Fed to intervene until the Fed got their act together and raised the Fed Funds rate.  And the Treasury should be pressuring the Fed to raise the rate as well.  Or you fire Bernanke the dove and replace him with a hawk.  This would be unsettling to markets unless you specified that a dove was being replaced with a hawk, so you would have to specify that.

The counterarguments are 3.

1 – this would potentially spook credit markets

2 -  this might raise the cost of mortgage refinancing which is the original source of the worlds problems in the first place and make the housing decline worse (actually the cause of this was the Fed holding real Fed Funds negative for too long after 9/11,  sound familiar?),  and

3 – a higher dollar would hurt exports which are the healthy part of the economy and is helping to bring down the current account deficit.

Objection 1 can be solved by carefully telegraphing the move and elucidating the rationale before hand.  Objection 2 is somewhat real.   But the likely effect would be to bring LIBOR and FED FUNDS more into line and to flatten the yield curve so the effect would be muted.  It would also help shore up employment thus keeping more income streams available to service mortgages.  Objection 3 is true but there is a strong argument that a current account deficit is the sign of a strong economy, is not unsustainable and is therefore desirable.

Net net, raising rates would reduce the tax that is the oil and commodity spike and on balance would contribute more to satisfying the Fed’s twin mandates of maximizing employment and minimizing inflation than would the current course of policy.