Category Archives: Credit Crisis

Strategic Default – Not Good, But Sometimes Necessary

The big one making the rounds today is the NYT story on people who’ve simply stopped paying their mortgages, living in their houses for free, waiting on the potential eventual foreclosure machine to spit them out whenever it gets around to it (which isn’t happening quickly).

Quite a few folks (TJIC, James Joyner) are weighing in on these freeloaders like they’re the scum of the earth. And frankly, the quotes in the article are almost enough to make me agree with them. Here are a few samples:

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. “They’re all crooks.”

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

“The longer I’m in foreclosure, the better,” she said.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond. “I need another year,” he said, “and I’m going to be pretty comfortable.”

A lot of these people are simply blaming others for their own problems — some explicitly. That is a behavior I can condemn all day long. Although the weakened lending standards are quite a proximate cause of this mess — the companies who gave loans to people who clearly couldn’t pay them unless prices continued to skyrocket never should have done so — nobody forced people like the Pembertons to REFINANCE their house to take out equity in the middle of the boom. People clearly went way too deep into debt for completely unnecessary reasons, and now they’re in foreclosure. While they’re not yet paying the price for their mistakes (it won’t come until they actually get kicked out and/or need to use credit), that is a hammer that will one day drop.

So the real questions are these?

1) Do these folks have a “moral” obligation to pay back a loan rather than accepting the results of breaking their contract?
2) Are these folks stealing by continuing to be squatters in their foreclosed residence.

For the former, I have to say that the moral obligation is lacking. A mortgage is a business contract. In that contract there are terms for severance of the contract. Those terms are often unhappy for the borrower, but those terms are clearly spelled out. In a market such as this, that borrower has to make a business decision — are the negative effects of breaking my contract worse or better than the negative effects of sustaining my end of the bargain?

Frankly, there are a lot of people who can clearly say “no”. In the Pemberton’s case, they owe $280,000 on a house likely worth half that. If they continue to pay, even with the amount paid to principal it may be easily 10 years before they’re above water, as the housing market is unlikely to return to its peak for at least a decade. If they are evicted, they can probably rent far cheaper than the cost of their mortgage. And for the time being, the money saved on their mortgage is helping them to keep their own business running. While the negative impacts to their credit will be painful, it’s probably a better option than trying to stay in their mortgage.

In short, the economic calculation they made is no different from this one, where a hotel investment group chose to default on a loan for a luxury hotel despite having adequate liquidity to repay the mortgage. At some times, it simply makes more sense to get out from under the burden.

The second question is more complex. Is it stealing to remain in the residence despite not paying for it? Here’s where the tables get turned…

It’s stealing *IF* the lender says it is.

These are hard times. Right now lenders know that they aren’t going to get their money, and that they have every legal right to kick these freeloaders out to the curb. To do so, they merely need to work with the local sheriff to evict them. But there’s a problem — they don’t have the capability to manage these homes and put them on the market. So if they evict the tenants, it doesn’t mean they’ll turn around and auction the house immediately; it means they’ll be sitting with a vacant house for months. They’ll be sitting with a house with no utilities being paid for. They’ll be sitting with a house with an unkept, un-tended yard. They may have a house that becomes inhabited by other squatters, or vandals, or worse. In short, they end up dealing with a property that has only downside if it goes vacant.

How does the lender deal with this? They don’t. They string the freeloader along with the prospect of maybe performing a loan mod somewhere down the road, or at the very least, they simply let them be squatters. I honestly believe that it’s a calculation on the lender’s side of the table to let them stay, because they realize that it’s easier to let someone live in the house and keep it moderately maintained than it is to send them packing and have to deal with it themselves. Further, for the lenders, the longer they can string this inventory out, the better chance they have of not having house prices crater a second time, throwing even more people into the foreclosure pool as their houses drop in value.

I liken it somewhat to an amicably broken marriage. A divorce is a tremendously unsettling event, and one which upends the life of both spouses and potentially children. In some cases, though, it isn’t exactly easy for the parties to quickly part ways and have one (or both) party leave the shared residence. It’s not unheard of for a divorcing couple to live together for a time until they can make more stable long-term arrangements. One of them probably ends up on the couch, of course, but we wouldn’t consider the one on the couch to be a trespasser just because the marriage is broken, would we?

The thing to understand about the economic mess that we’re in is that we need to make up the rules as we go along. We’re looking at foreclosure rates well in excess of normal. We’re looking at a nationwide cratering of house prices. We see a lot of people, through their own fault and also due to a lack of any natural checks on market excesses, in a situation that they simply didn’t have any concept of in 2005.

Granted, the road that led us here gives us a lot of hindsight. Borrowers today are helped by the fact that it is extremely difficult for lenders to go after your other assets to cover the difference between your home’s foreclosure auction price and the balance of the loan. In some states, government interaction gives the borrower excessive legal cover to fight foreclosure, making this process harder on lenders than it needs to be, which is certainly being exploited by the debtors here. Lenders, to the dismay of many of us, were similarly shielded from the negative consequences of their bad decisions through government bailouts and the backstopping of the mortgage market by Fannie and Freddie. There is a lot of government-induced systemic intervention that has distorted market operation.

Will the long-term effect of this have negative externalities? Yes. The long-term consequence will probably be tighter lending standards and the inability of those on the margin to get a loan and the chance at home-ownership that many of us — including myself, who has sat on the sideline as a renter since returning from GA to CA in 2007 — dream of. At the same time, though, this tightening of lending standards will be one of the critical cogs of preventing another similar bubble in the future. The sad, and yet at the same time necessary, fact is that expectations about home ownership must change, because a mortgage market built on liar loans and the constant expectation of rising prices is not reality.

But that doesn’t change the nature of contracts. Contracts can be broken by either party, and in the case of many homedebtors, the economic calculus is that it is a net positive to default on a loan. As many have pointed out, it’s improper to assign a moral component to what is an economic decision, despite the natural inclinations we have towards a society “where people pay off their debts”. Once the borrower makes that calculation, the lender holds the cards, and it is the LENDERS decision to allow the homeowner to continue to squat, rent-free, in what is now the lender’s home. I don’t fault a lender for choosing to go the eviction route, as it is their right as the property owner, but until they choose to exercise that right, it’s premature to label the borrower’s continued residence as “stealing”.

Prosecutors Ask If Congress Duped CBO To Obtain Favorable Score

Okay, that’s not true. But it’s no different than this:

Prosecutors Ask if 8 Banks Duped Rating Agencies

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

I just finished reading Michael Lewis’ The Big Short, and it’s pretty clear that the banks knew enough about the rating agencies’ models to pretty successfully turn shit into shinola. In fact, the agencies made enough of their ratings models public to make it absolutely certain that the banks would game the system. Not *dupe* the rating agencies, mind you, because the ratings agencies were willing partners.

But I thought about it a little bit more, and I was struck by another thought.

The Democratic house leadership wanted to cost projection of the healthcare bill to come in within a certain number. So what did they do? They duped gamed the CBO rating system to ensure that the bill they wrote would have the price tag they wanted it to have. The CBO is a respected and non-partisan office, but they’re asked only to score what legislators give them, NOT what they think the legislators will do in other bills immediately or a few years down the line.

Essentially both the Wall Street banks and Congressional leadership did the same thing: they were teaching to the test. They knew specifically what was needed in order to generate a favorable outcome from the “test”, and they made sure they did exactly what they wanted, but in such a way that got the right score.

So who’s going to prosecute the Democratic leadership when this healthcare bill inevitably costs the American people more than they advertised?

Quote Of The Day

Ezra Klein, reviewing Michael Lewis’ The Big Short, on the financial meltdown:

Like the poor, idiots will always be with us. In fact, we’ll frequently be among them. The seductions of group-think, the tendency to trust experts, the incentives for employees to go along with their bosses rather than contradict them and the need to deliver short-term profits even at the cost of long-term risk are more powerful than any regulation and will exist long after the visceral lessons of the subprime meltdown are gone.

Sounds like the exact problems facing Congress and most of the regulatory agencies, not just Wall Street.

The short version is that incentives and human nature matter and are more powerful than regulation. But Ezra goes on to show how new regulations will solve these issues, which I’m absolutely sure will be free of gaming and loopholes and lax oversight. I’m sure once we get new regulators, incentives and human nature will magically change. The King is dead! Long live the King!

Quote Of The Day

Those of us who predicted lenders would avoid US Treasuries during the financial meltdown we initially somewhat surprised to see investors flocking to them. It’s the result of a supposed “flight to quality”, and nothing at the time seemed less risky than buying US Treasury bonds, since the Treasury sells its bonds in a currency it can print.

Well, that has changed, as represented by yields:

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

When it’s “safer” to lend to a corporate businessman who can’t print his own currency or extort his subjects citizens for more tax dollars, you know something serious is going down.

Berkshire Hathaway, P&G, Johnson & Johnson, and Lowe’s are all trading below similar maturity US T-bills, a situation the linked article calls “exceedingly rare”.

But don’t worry, mere citizen. I’m sure Obama’s working on an individual mandate to get you to “do your part” and invest in Treasury bonds.

Hat Tip: QandO

UPDATE: Looks like yields are continuing to rise.

LP’s Wes Benedict on ‘Limited Government’ Conservatives

Those of us who truly believe in limited government* tend to be simultaneously amused and irritated hearing the folks at CPAC speak of limited government as though it’s a principle they truly support. Yesterday, the Libertarian Party’s Executive Director Wes Benedict, monitoring the CPAC festivities from afar, said some of the things that many of us have been thinking:

Unlike libertarians, most conservatives simply don’t want small government. They want their own version of big government. Of course, they have done a pretty good job of fooling American voters for decades by repeating the phrases “limited government” and “small government” like a hypnotic chant.

It’s interesting that conservatives only notice “big government” when it’s something their political enemies want. When conservatives want it, apparently it doesn’t count.

– If a conservative wants a trillion-dollar foreign war, that doesn’t count.

– If a conservative wants a 700-billion-dollar bank bailout, that doesn’t count.

– If a conservative wants to spend billions fighting a needless and destructive War on Drugs, that doesn’t count.

– If a conservative wants to spend billions building border fences, that doesn’t count.

– If a conservative wants to “protect” the huge, unjust, and terribly inefficient Social Security and Medicare programs, that doesn’t count.

– If a conservative wants billions in farm subsidies, that doesn’t count.

It’s truly amazing how many things “don’t count.”

Benedict went on to point out the lack of concern these same people had with the government expansion of President Bush and the health care mandates of another CPAC favorite – Mitt Romney.

While I’m by no means a supporter of the Obama Administration, the idea that many Conservatives seem to have that all the problems we are faced with started on January 20, 2009 is completely ludicrous**.

These are the same people who would gladly support Sarah ‘the Quitter’ Palin, ‘Mandate’ Mitt Romney, or ‘Tax Hike Mike’ Huckabee – none are what I would call ‘limited government’ by any stretch of the imagination.

» Read more

Quote Of The Day

Seems many Republicans are looking to change their narrative. Just in case there is an actual economic recovery (I’m personally still betting double-dip), they want to start blaming Obama for the deficits and spending rather than the pathetic jobs numbers. To this, Kevin Drum asks:

Well, at least we’ve been prepared. If the economy sucks, it’s Obama’s fault. If the economy prospers, it’s a dangerous mirage brought about by Obama’s failed policies. What do you think are the odds that the media will buy this?

Oh, I’d say those odds are about zero. They’ve already swallowed the “things are shitty but the Obama administration saved them from being a depression” line.

How can I be so sure? Because about 7 hours prior to Drum’s post, Ezra Klein said this:

You have to sympathize with the Obama administration: It has done more to save and create jobs than any White House in recent memory. It stabilized a financial system that was teetering on the edge of collapse, and that would have sent unemployment skyrocketing if it had fallen. The administration passed an $800 billion stimulus bill that has already created more than 1.6 million jobs and is likely to create 2.5 million by the time it ends. And still it’s hammered, on the one hand, for not doing enough to create jobs, and on the other hand, for high deficits, which are a direct product of how much the administration’s doing to create jobs.

To that, I’ve got a question. What are the odds that the media will understand that the true problem is not that Obama is to blame or that Obama is our savior, but that this economy is the reckoning of 30+ years of bad government policy by both parties, and is not some transient moment?

Yep, just about zero.

Optimism

Politicians all try to sell spending by underselling the true cost:

1) They determine a plan to spend money, sell it as low spending.
2) Despite pundits claiming it will be much higher than projected, they claim it’s not true.
3) When the spending is actually measured, it’s often higher than pundits’ estimates.

We’ve all seen the trajectory of the politicization of economic data:

1) Administration makes overly optimistic forecast.
2) Initial numbers (compiled by the government) look good (but below politician’s forecast).
3) Months later, numbers are quietly revised downward even further.

So tell me, if these are the optimistic numbers, just how royally screwed are we?

At the end of 2010, the unemployment rate, according to the administration’s forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.

I guess rose-colored glasses don’t change the fact that you’re staring into a pile of shit.

National Debt Tops $ 12,000,000,000,000

Just 247 days after topping $ 11 trillion and 414 days since passing the $ 10 trillion mark, America’s national debt is now above the eye-popping level of twelve trillion dollars:

It’s another record-high for the U.S. National Debt which today topped the $12-trillion mark. Divided evenly among the U.S. population, it amounts to $38,974.34 for every man, woman and child.

Technically, the debt hit the new high yesterday, but it was posted on the Treasury Department website just after 3:00 p.m. ET today. The exact calculation of the debt is a 16-digit tongue-twister and red-ink tsunami: $12,031,299,186,290.07

This latest milestone in the ever-rising journey of the National Debt comes less than eight months after it hit $11 trillion for the first time. The latest high-point is not unexpected, considering the federal deficit for the just-ended 2009 fiscal year hit an all-time high at $1.42-trillion – more than triple the previous year’s record high.

Much of the increase in the deficit and debt is attributed to government spending outpacing revenue – both exacerbated by the recession and the government response to it – including hundreds of billions in bailouts and stimulus spending and tax cuts along with decreased tax revenues due to rising unemployment.

In recent days, President Obama has spoken of the need to bring the rising deficit and debt under control.

“I intend to take serious steps to reduce America’s long-term deficit – because debt-driven growth cannot fuel America’s long-term prosperity,” he said in remarks prepared for delivery to the leader’s meeting last Sunday at the Asia Pacific Economic Cooperation summit.

The National Debt has increased about $1.6 trillion on Mr. Obama’s watch, though less than $4.9 trillion run up during the presidency of George W. Bush.

Of course, Obama has only been in office ten months, not eight years.

Since Barack Obama took the Oath of Office, the national debt has increased from $ 10,626,877,048,913.08 to $ 12,031,299,186,290.07. That’s an increase of $ 1,404,422,137,376.99 over 302 days, or $ 4,650,404,428.40 per day, $ 193,766,851.18 per hour, $ 3,229,447.52 per minute, and $ 53,824.13 per second.

Anyone want to bet how long it will take to get to $ 13 trillion ?

My guess is August 15, 2010.

Ludwig Von Mises Finally Getting Some Of The Respect He Deserves

von_mises

When Ludwig von Mises first arrived in the United States after escaping from Nazi Europe, and pretty much up until the present day, he was essentially ignored by the mainstream economics community in the United States. It was only through the assistance of American businessmen that he was able to get a job teaching at New York University, and, even then, the work he did had nothing to do with official university activities because he was, effectively, shunned for his uncompromising defense of the free-market.

Earlier this week in The Wall Street Journal, though, Mises is given credit for being one of the few economists in the 1920s to foresee the impending Great Depression:

Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (“The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

(…)

We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises’s logic, was this a failure of capitalism, or a failure of hubris?

Mises’s solution follows logically from his warnings. You can’t fix what’s broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don’t encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I’m going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

That was Mises’ argument in The Theory Of Money And Credit, but he did so much more than that. In Socialism, first published in 1921, Mises laid out in detail the reasons why the centrally planned economy of nations like the USSR could never produce a rational economy and were doomed to failure. He was, of course, proven right in that regard as we learned only twenty years ago. Mises’ magnum opus is Human Action: A Treatise on Economics and while it’s not easy reading it is well worth consuming for even the amateur student of economics.

Here’s hoping people will start taking Mises’ lessons to heart before we make the same mistakes all over again.

Chinese Worried Obamacare Is Too Expensive For Them To Pay For

Obama says that he won’t sign a healthcare bill that adds one dime to the deficit. I hope he’s right about that, because the people who are financing that deficit are a tad bit worried about the prospect:

And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn’t dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. “They were intrigued by the most recent legislative developments,” Orszag says. “It was like, ‘You’re fresh from the field, what can you tell us?’?”

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world’s largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. “At some point, if you refuse to contain health care costs, you’ll go bankrupt,” says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. “It’s widely known among [Chinese] policymakers.” Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine–kind of the Chinese version of Fortune.

The Chinese, unfortunately for them, have worked their way into a suicide pact with America. They are simply too heavily invested here to see any serious problems with our economy, government, or monetary base. Had they not spent the last decade buying up enormous Treasury holdings, they could let us implode our economy and “fix” our debt/spending issues through debasing our currency, and then swoop in to buy assets on the cheap once we hit bottom. But that’s not on the agenda. If we take the low road, we’re towing them along for the ride.

Obama says he won’t accept a bill that adds to the deficit. I don’t believe him, since I’ve already seen him fail to live up to his promises on taxes and legislative transparency. Even worse, though, he’s got the folks who plan to finance that deficit worried. And the last group you want to scare are the ones you’re trying to get to lend you money.

Hat Tip: Ezra Klein

Quote Of The Day

From The Economist, Buttonwood (their financial op-ed analyst):

This only adds to my worries about the Weekend at Bernie’s aspects of this recovery (and kudos to “Hedge fund guy” who first used the analogy). The Japanese spent much of the 1990s propping up their economy and sticking sunglasses on its face; every time they let go, it slumped again.

The discussion is the extent to which the economy will falter when government stops throwing money at the problem. It’s an issue that I doubt we’ll need to worry about, though, as our government has shown no signs of stopping.

Newspapers Report Green Shoots — In Sep 2008?

Want a laugh? Well go back one year to this column, and ruminate on whether it could be possible for the author to be any more wrong…

There have been 11 recessions since the Great Depression. And we’re nowhere close to being in the 12th one now. This isn’t just a matter of opinion. Words — even words as seemingly subjective as “recession” — have meaning.

Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we’re on the brink not of recession, but of accelerating prosperity.

Yes, folks, that was Sep 14, 2008!

He goes on to talk about how employment, industrial production, and the housing market really aren’t that bad and not in for anything severe.

I’m all for optimism. Any chance I can get some of whatever Luskin was smokin’?

I think Barry Ritholtz at The Big Picture puts it best:

If you had a time machine, knew the future, and purposefully tried to write something where every word was literally wrong, you could not have done a better job.

Go read the whole thing. Then decide whether you can take the MSM’s announcement of green shoots seriously.

Another False Green Shoot Exposed

Here in California, our state decided to offer a tax credit to buyers of new housing construction. Unsurprisingly, $10K in free money gave the housing market a bit of a kick in the pants, particularly new construction.

Now they’ve run out of money. And in a complete and utter coincidence, which nobody could possibly have predicted, new housing starts are drying up!

California Building Industry Association says the state’s homebuilders hit the brakes on starting new housing after the state’s $10,000 tax credit for buyers of new homes ended in early July. The state incentive had ignited a modest building and buying burst when it started in March.

According to July stats from the Construction Industry Research Board:

  1. Builders pulled permits for 3,011 total California housing units in July, down 14 percent from June.
  2. 2,045 California single-family permits, down 29% from June — that was the busiest month since July 2008.
  3. In Orange County, 62 homes were permitted in July — down 43% from June and off 69% from a year ago.

Says CBIA’s president, Robert Rivinius: “Our homebuilders reported a significant drop in traffic last month, largely due to the state closing the window on the homebuyer tax credit. Activity stopped as quickly as it started, which is bad news for housing and the broader economy.”

The recovery will be solid when economic gains are due to real fundamental improvement in the economy. Relying on the effects of government largesse as a sign of rebound, though, is not especially trustworthy.

Inflation Causes Misallocation of Production

The spike in car buying has caused automakers to ramp up production (via John Stossel):

Many auto industry analysts and dealers expect sales volumes to fall now that the program is over. They worry that many people who took advantage of the program were merely accelerating purchases they would have made later in the year.

If that’s true, the premature sales could hurt automakers, which increased production in the third quarter to replenish clunker-depleted inventories that had already grown low because of factory shutdowns over the summer.

Cash for Clunkers is essentially an inflationary policy. This is a policy well described by Adam Smith Milton Friedman, with the exact same consequence:

In a dynamic world demands are always shifting, some prices going up, some going down. The general signal of increasing demand will be confused with the specific signals reflecting changes in relative demands. That is why the initial side of faster monetary growth is an appearance of prosperity and greater employment. But sooner or later the signal will get through.

As it does, workers, manufacturers, retailers will discover that they have been fooled. They reacted to higher demand for the small number of things they sell in the mistaken belief that the higher demand was special to them and hence would not much affect the prices of the many things they buy.

The government has arbitrarily and falsely increased demand for a specific good (new cars). They’ve done so by throwing money at it (a locally inflationary policy) and the automakers are ramping up production in response to what they THINK is a more stable recovery. But they may soon find, as Adam Smith Friedman predicted, that they have been fooled.

Obama: You’re doing a heck’uva job, Bernie

Continuing his George Costanzaesque presidency, Obama has decided to reappoint Ben “Helicopter” Bernanke to another term on the Fed.

Here’s what Obama had to say:

Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall

I thought it might be useful to take a look at some highlights of this Solon, this central – planner whom George Bush put in charge of the money supply:

Of course, as usual, Obama is dead wrong: the Federal Reserve’s actions have actually prolonged the downturn, made it worse, and have laid the foundations for an even bigger crash down the road.

Monetary Base of U.S. Dollar

In the days before the election, I told many of my fellow Massachusetts residents that Obama was not so much a break from George Bush as a continuation of his worst policies. I am sorry to say that he has been proving me right since. And this is yet another nail in the coffin of an administration that is showing itself to be even more incompetent than the Bush presidency.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.
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