The SCROTUM would fail to dissolve “the hulking bill,” Orwellianly titled “The Affordable Care Act.” The Supermen Court, after all, doesn’t follow natural law; individual rights, or even the founders’ federalism.
Their devotion (and dotage) prevents President Bush’s lickspittles from realizing that he too considers Rogers Brown ‘outside the mainstream,’ to use the Democrats’ demotic line. Let’s hope, at the very least, that Roberts is a Rehnquist.” AND, “here’s the thing that unsettles: Roberts seems to be all about the moves.”
Salvaging the idea that Congress did have the power to try to expand health care to virtually all Americans, the Supreme Court on Thursday upheld the constitutionality of the crucial – and most controversial — feature of the Affordable Care Act. By a vote of 5-4, however, the Court did not sustain it as a command for Americans to buy insurance, but as a tax if they don’t. That is the way Chief Justice John G. Roberts, Jr., was willing to vote for it, and his view prevailed. The other Justices split 4-4, with four wanting to uphold it as a mandate, and four opposed to it in any form.
Today’s Supreme Court is often referred to as Anthony Kennedy’s Court. Although Kennedy is the swing justice who usually casts the deciding vote in close cases, the landmark ruling this week in the healthcare cases clearly mark the maturation of the “Roberts Court.”
Chief Justice John Roberts was the surprising swing vote in today’s Obamacare decision. Although he agreed with the four conservative justices, including Kennedy, that the individual mandate was not a regulation of interstate commerce, he voted with the Court’s moderates to hold that it was justified as a tax. Because people who don’t obtain insurance pay a tax to the IRS, the mandate was within Congress’s power to raise taxes for the general welfare. As a result, the Affordable Care Act was upheld.
With this deft ruling, Roberts avoided what was certain to be a cascade of criticism of the high court. No Supreme Court has struck down a president’s signature piece of legislation in over 75 years. Had Obamacare been voided, it would have inevitably led to charges of aggressive judicial activism. Roberts peered over the abyss and decided he didn’t want to go there.
UPDATE: Absolutely right is the New York Time: “The decision was a victory for President Obama and Congressional Democrats, affirming the central legislative pillar of Mr. Obama’s presidency.”
The most informative by far is “Kansas Secretary of State Kris Kobach, who helped draft the Arizona statute, as well as similar laws in other states.”
PBS’s GWEN IFILLasked Kobach whether “this stop-and-check provision that was upheld was at the heart of the law.”
KRIS KOBACH, Kansas Secretary of State: “Yes, I think so. It is certainly part of the law that has the greatest scope, so when Arizona claims victory, I think that’s correct. It’s a qualified victory for the states, the part that has the greatest reach.
Put it this way. That provision will kick in, in thousands of law enforcement stops every day throughout the state of Arizona. So it has a great reach. The other provisions are less significant, for example, the part criminalizing the illegal seeking of work.
That’s only going to be relevant if a county launches an investigation of a particular employer, and then they discover certain unauthorized aliens who have broken that law. So, it’s much narrower. The big one was the one that was upheld today. And I think that’s going to give a green light to other states who — some states have already copied that provision of Arizona law.
And there are additional states that probably will try to do so in January in 2013, when the legislative sessions begin again.”
ABOUT the alleged racial profiling in the law, Kobach said this:
… the law in four different sections expressly prohibits application of the law differently to a person whether based on his skin color, his national origin or his ethnicity. The law forbids racial profiling.
The Department of Justice knew that that argument would get nowhere in a facial challenge. And if in the future you had a bad apple police officer who was trying to racially profile, he would be breaking SB-1070, he would be breaking the law. And so his actions wouldn’t in any way indict the law. The bottom line is…
GWEN IFILL: …What is it — how do you walk the line that the court laid out today, which is a law that can — that complements federal law, but doesn’t supersede it, as the court said so much of the Arizona statute did?
KRIS KOBACH: “Well, we now have some clear guidance from the court. We know that the arrest provisions of Section 2-B, the main provision we have been talking about here, those are perfectly fine. We have got a number of other states that have already implemented them and are in circuit courts right now.
There are a bunch of states waiting in the wings to do the same thing. Those can move ahead. If a state wanted to do the criminalization of seeking employment, the Supreme Court has said no.
And one other thing that is really important about this opinion, the court clarified what I have been arguing all along and I think most people who follow this specific area of preemption law know. And that is there have always been windows of opportunity where states can act as long as those actions are consistent with federal law.
And the court reiterated that today. They said, in our federal system, the courts can take certain steps to discourage illegal immigration and communicate and assist with the federal government, assist the federal government in enforcing our immigration laws. And the court reiterated that today. So, I think you’re going to see states continuing to take reasonable steps to try to rebuild the rule of law. …
…This law simply is about enforcing the rule of law and allowing state and local governments to provide a reasonable amount of help when they’re in the course of their normal duties. There is no disrespect for a person’s humanity by simply saying we have certain laws in this country and we simply want to inquire as to whether you’re here legally.
As far as diminishing states’ rights, there is one aspect that I would certainly concede in the majority opinion that says — what the court did is they looked at Congress acting in 1986 when Congress criminalized the employment of an unauthorized aliens, when you have a large number of unauthorized aliens or you have a pattern and practice.
And the court said, well, we’re going to read into what Congress did. We’re going to look at what Congress didn’t do. And we’re going to read into Congress’ decision not to criminalize the employment — the actions by the employee. And we’re going to say that inaction by Congress preempts the states as well.
I think that was a troubling part of the opinion because, you know, when you have inaction by Congress, 99 percent of the time they’re not passing something, and you start drawing conclusions from congressional inaction, then you potentially can displace the states in a way that the framers never intended. …
…certainly Congress can and should take certain actions.
I think Congress should, for example, follow Arizona’s 2007 law that was upheld by the Supreme Court last year requiring E-Verify for all employers in the state. We should have that nationally.
But on the other hand, I would say there are a lot of things we could do to improve our enforcement of the laws. People always say, the system is broken, the system is broken. Well, not exactly.
Some aspects are, but there are plenty parts of the system that work just fine, but we lack an executive branch right now that wants to enforce the law.”
As measured by the Flesch-Kincaid readability test, the president’s speeches are written at an eighth-grade level. (And we’re not talking simple as in straightforward, precise and concise; but simple as in laden with emotion, and full of hot air and appeals to feelings.)
As an example of Obama’s eighth-grade writing, take this run-on ramble—a paragraph with the most awful syntax. BHO just adds clauses as he goes. This man’s mind is every bit as disorganized as was Bush’s.
As I said in my speech on the economy yesterday, it makes no sense to expel talented young people, who, for all intents and purposes, are Americans — they’ve been raised as Americans; understand themselves to be part of this country — to expel these young people who want to staff our labs, or start new businesses, or defend our country simply because of the actions of their parents — or because of the inaction of politicians.
What a dreadful cur!
It is, of course, incongruous to profess libertarianism, while supporting free-for-all immigration, affirmative action, anti-private property Civil-Rights laws, and public education extended to all trespassers—these are policies that violate private property, which is the cornerstone of libertarianism.
Most illegal aliens do not come to the U.S. to wage war, but the reality is that, once in the country, almost all wage welfare. Would that the American Welfare State did not exist. But since it does and is, unfortunately, likely to persist for some time to come, it must stop at the Rio Grande.
UPDATE I: Van Esser at NumbersUSA writes the following:
Perhaps I’m missing something but I can’t find a provision of the US Constitution that authorizes a president to act because he/she just can’t wait for Congress. The Obama Administration must have found the language. Otherwise, the new administrative amnesty-in-place for illegal aliens under the age of 31 would be considered an extra-constitutional directive by fiat.
As far as his Orwellian overreach, Strongman Obama is no different than “The Decider” when it comes to flouting our Constitution. Republicans fuss a lot when Democrats sidestep a Constitution that has long been a dead-letter. Democrat do the same.
It’s a meaningless dance.
Big Man Obama gave the great, late, Democratic Senator, Robert Byrd, palpitations. Byrd, RIP, was “a stern constitutional scholar who always stood up for the legislative branch in its role in checking the power of the White House.” According to Politico.com, this old Southern gentleman, after whom Republicans were always chasing for his past indiscretions, warned about Obama’s executive-branch power grab. Chief Obama created a number of new, extra-constitutional White-House fiefdoms: one on health reform, urban affairs policy, and energy and climate change.
AND now on immigration.
Ditto “The Decider.” He habitually sidestepped the chain of command in the military and winked at the Constitutional scheme. Under The Decider’s dictatorship, matters that ought to have been the business of the people or their representatives were routinely consigned to the executive branch.
UPDATE II (June 17): BHO claimed that deportation of criminal aliens was up 80 percent. Bush did close to nothing to defend against the invasion from the south. Compared to that standard, it is probably true that Obama has bested Bush in enforcement. But when the numbers are so miniscule, percentage increases are huge. So, if Bush deported 50 illegal aliens, to exaggerate; then at 90, Obama can boast of kicking out 80 percent more.
Every serious economic study of immigration has found that the net benefits of present policy are exceedingly small. But that small net is an aggregate of very large effects that cancel each other out. The immigrants get higher wages than they would have earned in their former country. The affluent gain lower prices for in-person services. Lower-skilled native-born Americans face downward wage pressure. In any other policy area, people who consider themselves progressive might be expected to revile a policy whose benefits went to foreigners and the rich, and whose costs were born by the American poor. Immigration policy baffles that expectation.
U.S. Customs and Border Protection, the agency charged with guarding the U.S. borders, has written a secret draft policy that would let its agents catch and release low-priority illegal immigrants rather than bring them in for processing and prosecution. The policy, which has not been signed off on, would be the latest move by the Obama administration to set new priorities for the nation’s immigration services, and would bring CBP in line with other Homeland Security Department agencies that already use such “prosecutorial discretion.”
The policy was detailed in an internal memo obtained by House Judiciary Committee Chairman Lamar Smith and reviewed by The Washington Times, which confirmed the document.
According to the memo, the draft policy “provides circumstances when to pursue enforcement actions … and includes detailed discussion of several factors CBP personnel should consider when exercising discretion.”
Opponents say it amounts to another “backdoor amnesty” for illegal immigrants and could give the administration a tool to pressure Border Patrol agents not to pursue some people.
To continue the theme of this blog post, how is this different from policy under Bush? On this front it isn’t.
…the underlying reason why America’s deportation system remains inexplicably paralyzed by federal litigation and rigged in favor of relief from removal:
Internationalists in the Bush and Clinton Administrations have decided to confine immigration enforcement only to the U.S. borderlands…until there’s no enforcement at all, because the U.S., Mexico and Canada will have been merged into one unit behind a new “North American security perimeter.”
This shared Canada-U.S-Mexico “security perimeter” is exactly what the Security and Prosperity Partnership of North America has in mind for America someday.
Peter Schiff, quixotic financier, defender of free-market capitalism, took his fight to Congress. I disagree with Schiff’s cliche that Congress is “out of touch with taxpayers.” Americans are out of touch with taxpayers—what with 50 percent of our countrymen qualifying as net tax consumers.
And, contra Schiff, Congress, is not “out of touch” with this charade; it is behind it; an orchestrator of this democratic, unconstitutional distribution, at the behest of electoral majorities.
These finer points, notwithstanding, Peter Schiff is The Man. Here he is in his own words:
Dear Friends,
Yesterday, for the second time in less than a year, I was invited to Washington to testify in front of a Congressional Committee that was contemplating regulatory moves to aid the struggling economy. This time around it was the House Subcommittee on In¬¬surance, Housing and Community Opportunity that asked for my views on Federal Housing Administration’s (FHA) policy in the apartment lending market.
Although this is a fairly narrow issue, I told them the same thing I did last year when I testified about job creation: government programs don’t solve problems, they just create new ones. While I thank the Committee for inviting me, I believe the congressmen may have gotten more than they bargained for. I can apologize for shaking up what would have otherwise been a sleepy and forgettable proceeding, but I won’t apologize for trying to inject respect for the Constitution and free market capitalism into a venue that has been doing its best to destroy both.
I have edited down the more than 2 hour hearing into a package of slightly more than 30 minutes. This includes all of my testimony and some of the more noteworthy exchanges I had with the congressmen. The seven other people who testified besides me all represented the many interest groups who benefit from FHA loans. I represented only the interests of U.S. taxpayers, a group that congressmen usually don’t hear from when considering legislation.
When taking heat from these surprised and offended congressmen, I can’t help but think back to the reaction I received when I went down to the Occupy Wall Street protest last year. For those of you who missed that exchange, take a look: Peter Schiff Speaks to Occupy Wall Street. Both venues were dominated by people who knew very little about how capitalism actually works or how the United States rose to economic dominance in the first place. While such ignorance can be excused from scruffy protesters, we should expect more from our elected officials.
This video should give all Americans a better idea of how insulated Congress is from the American taxpayers who are being asked to pay for the government’s spending and borrowing. If you share my concerns, share this video with a friend. Viral videos have a singular power to influence the national conversation. Let’s get it started.
Below, I have included the written testimony that I submitted before my appearance.
House Financial Services Committee
June 7, 2012 – Subcommittee on Insurance, Housing and Community Opportunity – Hearing on FHA Multi-family Programs
Testimony of Peter D. Schiff, economist, author and financial expert
Chairman Biggert, Ranking Member Gutierrez and members of the Committee, thank you inviting me here to testify today. My name is Peter Schiff, and I own Euro Pacific Capital, a privately held stock brokerage firm. I am more widely known to the general public as an economist, author, speaker and advocate of the free enterprise system.
Unlike many of my co-panelists I do not come here representing a specific coalition or group that has an interest in promoting the multi-family sector. I am here to represent the interests of the common U.S. taxpayer who will have to make good any liabilities incurred by the Federal government and who will have to live with the consequences of distortive government policies (as we all have been doing co conspicuously in recent years).
I also assume that I have been invited for my track record in forecasting problems in the housing market. A good deal of my reputation was established in 2007 and 2008 when my prior predictions regarding the dangers confronting the housing and credit market were spectacularly realized. There can be no question that if a hearing similar to this had been convened in 2006 to consider federal home mortgage policies, a roomful of qualified experts would have insisted that no crisis was then evident in the mortgage market. And so I can only thank this committee for its circumspection in this instance.
I have absolutely no objection to the idea that a healthy rental housing market is needed in this country, especially for those lower income individuals who depend on inexpensive housing options. However, I believe that market forces are sufficient by themselves. In general, free markets are the most efficient mechanism to ensure that market demands are met with the most cost effective options.
However, as the housing market has been the subject of an inordinate amount of regulation and market distorting tax and subsidy policies over the years, it has developed in ways that don’t conform to the economic realities of our citizenry. In particular the construction and maintenance of rental units has been stunted by Federal policies have greatly favored home purchasers over renters.
The Federal Housing Authority and the Government Sponsored Entities of Fannie Mae and Freddie Mac, have undertaken herculean efforts to remove the credit risks associated with home mortgage lending. At the same time the tax code is replete with advantages for home owners, most notably the home mortgage tax deduction, that are not available to renters. In addition, the current policy of the Federal Reserve is to keep interest rates as low as possible, specifically to stimulate home purchases. Taken together, these factors have exaggerated the economic benefits of home ownership and have drawn excessive amounts of investment capital into the sector. Put simply, we are dedicated more resources to the single family home ownership market than we would if government had not decided to make home ownership a priority. As a result, financing for multi-family rental units have suffered.
Renting simply offers few of the regulatory advantages than owning does. So the country has not developed as many units as would have been the case had the government refrained from interfering with the country’s housing decisions. As it stands now, Americans have extremely low savings rates. The average American family now only has $7,000 worth of savings, which would not be nearly enough to afford a 20% down payment on the average American house. This would mean that the vast majority of Americans should be renters and not owners. Normally, these simple facts would attract investment capital to build affordable rental properties.
Critics of the free market like to argue that investors will ignore the needs of the poor as the profits are not significant enough to entice development. There is little in capitalism to support this position. Great riches can be made by serving the needs of low income people. Just ask Sam Walton. Wal-Mart became successful by specifically targeting its inventory and pricing to low to moderate income consumers. Wal-Mart was able to expand, prosper, and attract investment capital without government guarantees or incentives. Such would also be the case in the low income housing market if government had not siphoned away investment capital. If there is demand, a supply will be produced. A paucity of rental units relative to demand is all the incentive that industry needs.
But as is usual for government, legislators are now looking to ameliorate the pernicious effects of one set of distortive policies with another layer of regulations. This Committee may be looking to balance a playing field that never should have been tilted in the first place. By insuring a greater quantity of loans to developers of multi-family apartment properties, it is hoped that investment capital can be more willingly targeted to the market. However, hoping to micro manage capital flows always create a raft of unintended consequences.
Legislators also rarely consider the unintended consequences of their actions. Credit in the United States is a limited commodity. Money loaned for one purpose in unavailable to be lent for other purposes. Through its effort to take the risks out of home lending, the FHA has directed more credit into the real estate market that would otherwise been the case. That means these funds were not available to be lent to other enterprises which may have put the capital to work in areas that may have been more needed in the economy. I think capital should flow to where it’s needed most. Market determined interest rates are the factors that control these flows. The FHA short circuits these signals and harms our economy. It’s time that the FHA itself becomes short-circuited.
As a reminder to this Committee to proceed with caution and awareness, I submit as testimony portions of my newly released book, The Real Crash- America’s Coming Bankruptcy that relate to how government policies created the housing bubble in the last decade, and how those policies continue to prevent a true turnaround in the market today. I hope with benefit of this hindsight, this Committee would abandon its instinct to over involve government in another area of the housing market and instead look to withdraw itself from areas that it has already devastated.
Government Creates the Housing Bubble Through Bad Policy
Excerpts from Chapter Two of: The Real Crash – America’s Coming Bankruptcy: How to Save Yourself and Your Country (St. Martin’s Press, 2012)
Politicians in both parties decided that government should promote home ownership. Democrats focused on helping poor people own homes by making mortgages easier to get. Republicans spoke of an “ownership society” that would promote personal responsibility. Bankers and realtors, two of the most powerful interest groups in Washington, both agreed, and they helpfully pointed out ways the government could subsidize mortgages.
The biggest subsidy for buying a home is the tax deduction for mortgage interest. If you rent your home, none of your rent is deductible. If you buy your home outright, your costs are not tax deductible. But if you borrow in order to buy your house, all of the mortgage interest – which is a majority of the monthly payment for many homeowners – is tax deductible.
This is the single biggest tax break most people get, and it’s a huge reason to buy a home – especially one that costs a lot. If you borrow $250,000 for a 30-year mortgage at 6 percent, your monthly payments will be about $1,500. About $1,250 of that is interest. In the first year, you’d pay almost $15,000 in interest, and thus be able to reduce your taxable income by $15,000. In seven years, you will have paid $100,000 in interest, saving at least $25,000 on taxes.
Also, you can deduct the interest on your second home. The only limit is that you can only deduct the interest on $1 million worth of mortgage.
This is a huge mortgage subsidy. Even though it’s just a tax deduction, it’s still a subsidy, because it distorts the market in favor of homeownership (more precisely, leveraged homeownership).
Another reason the mortgage deduction counts a subsidy: other taxpayers pay for it, at least indirectly. According to official estimates, the deduction reduces federal revenue by about $100 billion per year. Total revenue from individual income taxes is just above $1 trillion. So, if Congress abolished this deduction, and instead lowered all tax rates across the board, we could cut everyone’s taxes by nearly 10 percent.
Put another way, almost 10 percent of your tax dollars go to benefit leveraged home-ownership by Americans.
Even if you’re one of those homeowners getting the deduction, there’s a chance you’re still losing out on net. It’s important to remember that subsidizing something doesn’t just benefit the people buying it. In fact, it often benefits the sellers more.
In the case of mortgage subsidies, there are plenty of “sellers” who benefit. First is the homeowner who sold you the home. Decreasing the monthly cost of owning a home also drives up the price of buying a home. After all, you’re not the only one with access to the mortgage-interest deduction. The deduction boosts demand, thus boosting price.
As a result of the home mortgage deduction, homebuyers end up paying more for their home. So while they get to deduct their interest payments, those payments are much higher due to the price effects of the deduction. Take away the excess demand generated by the deduction, and home prices would fall. True, mortgage interest would no longer be deductible, but the payments would be much lower. Most homebuyers would be better off without the deduction.
The real beneficiary of the deduction is the seller, who sells his house at an inflated price. Of course if he uses the proceeds to trade up to an even larger house, he losses out as well. The only winners are those who sell and rent, trade down to less expensive houses – or professional homebuilders, who sell houses for a living.
Realtors also profit. Greater demand for buying a home means more homes bought, meaning more commissions. Also, higher demand means higher home prices, meaning higher commissions. Lenders also profit from the home mortgage interest deduction, which encourages people to not only to buy, and thus take out mortgages, but to take out bigger mortgages than they otherwise would.
The combined influence of realtors and lenders insured the home mortgage interest deduction. The story of the deduction goes back to 1913. When the income tax was created, all interest – including personal loans and business borrowing – was tax deductible. After credit cards became ubiquitous in the 1980s, Congress ended this deduction, but thanks to the lobbying of the realtors and mortgage lenders, mortgage interest was spared, and it remained deductible.
Home ownership gets other special tax breaks, with one big one driving the idea of a home as an investment: the capital gains exclusion. Most investments you might make – say, you start a business, or invest in stock – are subject to capital gains taxes. Your home is not. If you live in your home for two years, you can sell it and earn up to $500,000 in profit on tax free. This is another huge subsidy to homeownership as compared to other investments, and it encouraged serial home flipping during the bubble years.
Fannie and Freddie: ‘one of the great success stories of all time’
The greatest drivers of the housing bubble, after the Federal Reserve, were the Government Sponsored Enterprises Fannie Mae and Freddie Mac, who were supposed to make housing more affordable, but who ended up creating a housing bubble instead. In 2004, if you asked the average Washington politician about Fannie and Freddie, you would have been told that these GSEs were sound, essential, and independent of government. In 2007, as the housing and mortgage crisis became apparent, that same politician would have said that Fannie and Freddie were doing just fine, and they wouldn’t need a bailout. Come late 2008, those very same politicians were crying that taxpayers needed to bail out both.
In 2004, when Alan Greenspan came before the Senate Banking Committee, the issue of the GSEs came up. Senator Chris Dodd, the largest Congressional recipient of housing related campaign contributions said of them, “I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time.” In July 2008, after the New York Times reported that the federal government might have to take over Fannie and Freddie, stocks of both GSEs fell nearly 50 percent.
Dodd chastised the sellers and those of us saying Fannie and Freddie were bankrupt. “There is no reason for the kind of reaction we’re getting. These fundamentals are sound. These institutions are sound. The have adequate capital. They have access to that capital. And this is a reason for people to have confidence in these GSEs-in Fannie and Freddie.” In the end, Fannie and Freddie collapsed, and rather than let them fail, the government bailed them out and took them over.
When you think of the 2008-2009 economic crisis, some words might come to mind: mortgaged-backed securities, housing bubble, subprime mortgages, cronyism, moral hazard, derivatives.
When you think of these words, you should think of Fannie Mae and Freddie Mac.
Franklin Roosevelt created the Federal National Mortgage Association during the Great Depression in order to stimulate home buying (“FNMA” became “Fannie Mae). In 1968, Congress privatized Fannie, and a couple of years later, created a competing agency, the Federal Home Loan Mortgage Corporation, or Freddie Mac.
What these agencies do is to buy mortgages from lenders. You can imagine how this opens up the mortgage market. Without someone buying up mortgages, a bank is somewhat limited in how many loans it can make – after all, even with fractional reserve banking and loose reserve requirements, your loans still need to be backed up by some amount of assets.
The problem with Fannie and Freddie is that they knew that while their profits were real – and huge – there risk was not real. More precisely, the politically connected bigwigs who ran the halls at these GSEs knew that if their companies ever lost money, the taxpayers would bail them out.
This government guarantee was not explicit, but implicit. Of course, Fannie’s biggest boosters denied there was any guarantee. Barney Frank, in 2003, famously said:
“There is no guarantee. There’s no explicit guarantee. There’s no implicit guarantee. There’s no wink-and-nod guarantee. Invest and you’re on your own. Nobody who invests in them should come looking to me for a nickel. Nor anyone else in the federal government.”
Fannie Mae officials also fiercely denied they enjoyed any subsidy. But they did. Fannie Mae was able to borrow at lower interest rates, because lenders realized that taxpayers would bail them out. Near-zero borrowing costs had two detrimental effects. First, it allowed Fannie and Freddie to buy up massive amounts of riskier mortgages. Second, it made it impossible for anyone to compete with these GSEs..
So, the net effect of Fannie and Freddie was to drive down lending standards and interest rates. Had there been no government subsidized secondary mortgage market, selling mortgages would have been harder for banks, and lending standards and interest rates would have been higher.
This was exactly the point. Fannie was in “The American Dream Business,” they would say. Their job was get people to buy homes they who otherwise wouldn’t buy homes, and to make everyone pay more.
Some like to point out that subprime was the real problem and that Fannie and Freddie did not guarantee subprime loans. While that is technically true, they were the biggest buyers of these loans in the secondary market. In fact, without their lavish appetites far fewer subprime loans would have been originated. Not only did their demand help fuel originations, but it helped legitimize the investment merit of the securities. Because the private sector originated subprime loans without any official government backing, many like to blame capitalism, or more specially Wall Street greed, for the problem. However, take the Fed and Fannie and Freddie out of the picture, and subprime would have been a trivial part of the mortgage market.
Fannie Mae and Freddie Mac were the most important players in driving the Fed’s excess capital into housing, but other policies helped, too. The Community Reinvestment Act was one.
The CRA has changed plenty over its 30 years, but the general thrust was always the same: it empowered federal regulators to pressure banks to make more loans to low-income people.
George W. Bush pushed his “ownership society,” too. Bush spoke at a church in Atlanta in 2002 about “the American Dream,” meaning homeownership. The President named some of the new homeowners he had just met and said, “What we’ve got to do is to figure out how to make sure these stories are repeated over and over and over again in America.”
To this end, he proposed the “American Dream Downpayment Act” to help folks buy homes even if they couldn’t afford downpayments. The law, passed in 2003, provided grants of up to $10,000 to cover downpayment, closing costs, and some home repair for first time homebuyers of below-average means.
Of course, the tax preferences above drove the housing market, too. Housing prices soared. At the same time, the American dream was hijacked. Instead of referring to the upward mobility made possible by American capitalism, it was redefined to mean getting rich just by buying a house and extracting equity as it magically appreciated.
Come 2006 and 2007, the housing bubble popped. At first, pundits said it was just a little crisis in subprime mortgages. It wasn’t. I won’t go through the entire story of what happened in the housing and credit markets in 2006 through 2009, but it was a replay (on a much larger scale) of the popping of the dot-com bubble.
When bubbles are built upon foundations of massive leverage, the bust brings real destruction. On the smallest level, consider the guy who took out an adjustable rate mortgage in 2005 to buy a big house with a very small down payment. When his home value drops 30%, it’s not only his on-paper net worth that suffers. His rate adjusts in 2010, and he can’t refinance because his house is underwater. If he sells his house, he won’t be able to get enough money to cover his outstanding mortgage and the bank will take all his savings.
Banks took a huge hit when everyone realized that the trillions investors and banks had spent on mortgage-backed securities were worth a fraction of what they were supposedly worth. All the financial institutions that had been providing credit to the economy were suddenly in trouble, and couldn’t lend like they used to. Those businesses that depended on credit for their day-to-day operations were in trouble.
Never was this on display as clearly as 2008. In March, the Fed bailed out failed bank Bear Stearns. In July, Congress passed housing bailouts. In early September, the federal government took outright ownership of Fannie and Freddie (since then, according to Congressional Budget Office numbers, taxpayers have poured $310 billion into the two GSEs).
In mid-September, the Federal Reserve, with no authorization from Congress, created brand new Enron-like special-purpose entities to buy an 80 percent stake in insurance giant AIG. This was an attempt to bail out a collapsing financial sector. It wasn’t enough.
Most important, though, was the way the string of bailouts fit the government pattern: prevent the economy from correcting itself. Once again, rather than let an inefficient allocation of resources shake itself out, politicians and central bankers decided that the right cure for a drinking binge was “the hair of the dog that bit you.”
That is, when confronted with a crisis caused by government-created moral hazard, cheap money, and central planning, Washington responded with more moral hazard, even cheaper money, and heightened central planning.
Corporate welfare and business subsidies have always been around, but the Bush and Obama administration gave government a role more central in the economy than it have ever played. The government owned insurance companies, mortgage companies, automakers, and more. Washington was giving handouts to power companies, banks, small businesses, big businesses, manufacturers, and every type of business imaginable.
Government had become a venture capitalist, an insurer, and even an owner of the private sector. If the private sector – even with prodding from Washington – wasn’t going to step up and prevent a downturn, the government would.
It was just one more step down the same path. When the dot-com bubble popped, they replaced it with a housing bubble. When the housing bubble popped, they replaced it with a government bubble. The greater problem is that while we at least have something to show for the first two bubbles, a few good Internet companies and some pretty nice McMansions, no such benefits will remain when the government bubble pops.
Cordially,
Peter Schiff
CEO and Chief Global Strategist
Euro Pacific Capital
At last, a program on Fox Business that is accompanied by … yes, words: A transcript. Good for Stuart Varney’s producer.
June 4, 2012:
All right — Looks like we’ve got a global slowdown coming always in progress — official law.
Are you saying we get a crash that this is 2008 all over again.
Unfortunately — it’s going to be worse than 2008 that wasn’t the real — I think the real — Is still calming you know before — I was on I overheard your discussions about wanted to.
— of easing in — QE3 is calming.
I was predicting QE3 when the Fed did QE2.
And the reason I knew QE3 was Communist because I knew QE2 wouldn’t work and that’s why QE four is gonna follow QE3 it never works it just makes the economy sicker the reason we’re — so screwed up.
Is because all this.
Q week.
Is toxic.
Does it kick the can down the road so bombing by that is if the Europeans print euros and about up friends dollars.
Does that just delay the crash that you’ll talking about.
Well it it makes things worse and I I I don’t doubt that we’re gonna try to pressure Germany into printing is — worthy — that’s trying to I’d get a friend dates for the us to go to the go to the beach — were bad influence on everybody.
But it’s much better to allow an homage to restructure its like if you’re if you’re sick you wanna cure the disease.
— And that’s much worse and then the pain associated with allowing the economy to restructure I’d let you know — let’s interest rates go up we have to realize we’re gonna have a deeper recession I I — banks are gonna fail and the government’s gonna happen.
Class and I I I hear what you say.
But I’m wondering why hasn’t the price of gold we’ve gone off.
Very recent it happens yeah yeah yeah well and what it’s is Steve went out to a — 18100 books then come back down to 15100 dollars that’s not exactly a spike at the precise moment when you’ve got people considering printing trillions of euros — trillions of dollars why is it up — law.
Well look you don’t when I first started coming on fox — was around 400 so it’s been going up and hasn’t skyrocket in the last year but that doesn’t mean that it won’t I think there are a lot of people — don’t understand what’s going on look at how many people are buying the dollar look at people buying treasuries that makes no sense either.
What people were lining up to — FaceBook and they quickly discovered that they didn’t want that either.
I think you know the dollar is gonna end up being a FaceBook of safe havens.
I think people that are that are selling — making a mistake my clients are still buying I’ve been sold any in my goldilocks I think it’s going a lot higher I think that eventually people are gonna realize that goal isn’t a risk asset.
It is the safe haven asset that the risk lies in the dollar that the risk — treasuries and other currencies that are being printed into oblivion.
Current we they have we’re looking at a price of — when looking at treasuries were looking of the dollar looking at everything and is a very nail biting time I think we can all agree on the outlook.
Peter Schiff thanks for coming back to his long time since we saw — coming and soon appreciate it.
