Thursday, November 13, 2008

Great Debate!



Wow, I've never read such well thought out and even tempered political arguments on a blog before. I'm kind of excited to be taking part in it.

The following is an edited response I wrote to a friend who expressed some similar ideas to the comments section from my last post. This is geared toward people who want to lay the majority of the blame for today's financial crisis at the feet of Fannie and Freddie.

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First off, I like fiscal conservatives. I just wanted to start with that. I know it sounds like I don't sometimes, but that's only because there aren't any real fiscal conservatives left in the world. I'd vote for a true fiscal conservative, but I haven't seen one with any clout in my lifetime.

A true fiscal conservative would recognize that the role of government has pushed us well past the free market. That may be sad, but let's face it: Public aid is a reality. So policy must take that into account. There are insured institutions aimed at aiding the public (those institutions make conservatives angry), and there are private institutions aimed at making money for investors.

While public aid for home investments is high risk, the state views it as a more complex investment than a typical home loan. New home owners increase the tax base, stimulate growth, improve local schools, and create more stable communities. That's why the state can argue for a propping up of state insured institutions.

I don't like the way Frank & co. defended Fannie & Freddie, but to call those "companies" instrumental in the meltdown is shifting the blame way too far to the left.

It was the private firms that packaged the toxic debt and sold it as assets. Meanwhile other private institutions modeled F&F's lending practices without obtaining the same kind of backing of the government. During all that, it was a bi-partisan decision to look the other way while these large companies leveraged themselves to the hilt.

It was the fall Bear Stearns, AIG, and Lehman Brothers that signaled how intertwined the system has become.

That intertwined quality is not a result of F&F. It is a result of uninsured companies wanting to take the same risks as insured companies, then swapping risky assests around the world. Without insurance, however, those risks have serious consequences. And not just for the companies, but for the global economy.

If you place the blame on F&F, you are placing Fannie & Freddie on the same playing field as Bear Stearns. Six months ago, anyone at Bear Stearns would have been deeply insulted by that. Six months ago a true fiscal conservative would have been insulted by that.

Private firms over-reached. That same true fiscal conservative would let them fail. But at what expense?

I respect the view that government often impedes business. But the firms that froze the credit markets and inflated oil and housing prices are now impeding governments: Iceland, Hungary, and the US are just a few examples.

While I see where you're coming from, I think you've let partisan thinking cloud your judgment. There is not a party or public institution that can shoulder all the blame for this mess. Fannie and Freddie are not innocent, but if they had fallen alone, this would not be a crisis. The Dems didn't stop this, but the Republicans didn't either.
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As for the CRA argument, I never suggested anyone had the power to overturn CRA. I don't think the act should be overturned. I think a bank chartered within a community should serve that community. It is up to them to find an appropriate business model to do so.

CRA strikes me as the latest in a line of strawmen set up by conservative thinkers who want to pretend the private sector didn't do anything wrong. But if that were the case, then why do the private firms need public assistence? If you want to place blame, you are left with an odd choice: Blame the boy who tripped in the mud, or blame the girl trying to help him back up.

I love this kind of dialogue. I want to say this to those who disagree: Thank you for presenting real arguments. I find that these debates often devolve very quickly on the blogs. I really like real arguments devoid of insults.


In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Tuesday, November 11, 2008

The Crunch in Hungary and Where It's Coming From


The payment on my home loan was up about 35% this month. Kind of.

It's complicated.

The Hungarian currency, the Forint, has been taking a beating lately. Our home loan, however, is calculated in Swiss Francs. So the amount of Forints we were charged this month is up significantly. It is fortunate, therefore, that I landed a job that pays in Euros.

All this leads to the question, 'Why is the loan in Swiss Francs?'

It is that question, and its absurd answer, that has kept me abreast of the global financial meltdown. In an attempt to keep it simple, I'll just say this: Due to a serious deficit, the Hungarian National Bank won't lower interest rates (currently at 11.5%), even if a rate cut would stimulate local lending. For this reason, it is much cheaper for people seeking credit in Hungary to borrow in a foreign currency. But when the Forint lost value last month after the credit markets froze, anyone earning in the local currency got pinched hard on this month's repayments. And it doesn't look like a one-month issue. Recovery is going to take some time.

While I'm normally not the kind of person who pays attention to financial news, having to keep track of currencies and national lending rates has changed the way I read the morning papers a bit.

That being the case, I've recently raised some objections to the way the US dealt with the approaching crisis. I've stayed fairly informed for a layman. My opinions are based on real numbers and actual policy. I don't think the way forward is going to be easy, but I am happy about the Obama camp's take on the issue. The only thing I wasn't too sure about was how the opposition felt about things.

Then last night a good friend sent me an article from The National Review Online. My friend knows I'm not much of an NRO reader, but I send him NPR pieces, so all's fair. Anyway, the article he sent, by Mark Steyn, is titled "The Death of the American Idea." I had to ignore Steyn's bitterness over the sound thumping the GOP received in the election, but the focus of his piece exposed an interesting blind spot in current conservative thinking.

Steyn's complaint is concerned with the ever-expanding Federal Government, a legitimate concern, especially for a fiscal conservative. But what struck me was the evidence Steyn used to put his argument over the top. He described the bailout package as the US Government’s latest step towards the left.

As someone who admires the values of fiscal conservatives, I can understand Steyn's objections to the bailout package. However, it is the policies of 'small-government' conservatives that have been peeling away at government regulatory powers over the past two decades. Those powers had been put in place to keep companies from slipping into an AIG-like situation. The value of such regulation has never been as clear as it is today.

On top of that, Steyn feels comfortable ignoring the fact that the bailout is propping up companies whose failure would wreak havoc on the global economy.

Steyn probably hasn't had to sit across from a Hungarian colleague - a colleague already angry with her own government for botching the local economy - and listen to a diatribe on unchecked American greed. Greed that is, according to my colleague, destroying what little progress the Hungarian economy has made in the past few years. Even with an IMF loan, the EU bailouts, and the US bailout in place, the Hungarian economy is tapping the pocketbooks of its citizens, and American greed has a lot to do with that.

Personally, I will probably weather Hungary's economic downturn, but there are a lot of people earning in Forints right now, and they may have some harsh questions for Mr. Steyn.
"You want to let these companies fail, huh? Then what happens next? You want to let my nation's economy fail?"

It was laissez-faire policies that got us into this situation. Fiscal conservatives may be upset that those same policies can't get us out, but anger or blame pointed at election results is misplaced and ill-spent.

It is very easy to be fiscally conservative when the crisis is under a microscope. But I'm on the wrong end of that microscope. The loan I took out was described as the most economically responsible loan available. When the repayment on such a loan jumps 35% in one month, there is something wrong with the system. If we trace the problem to its roots, we find two things:

A mismanaged Hungarian economy (no big surprise there)

&

Unregulated US banks and investment firms packaging bad loans and selling them for a profit around the world.


This is not a problem that will go away if we just ignore it. Men like Steyn can moan about how their ideology has been violated, but they ought to look at where their ideology has taken the world economy. Their time is up, and now the governments they scorned are left to clean up the mess. I’m just glad the US has a leader whose approach is about inspiring the best rather than fearing the worst.