Written By Thomas Sowell:

Bailout Politics
By Thomas Sowell
September 30, 2008

Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis.

Among the Congressional “leaders” invited to the White House to devise a bailout “solution” are the very people who have for years created the risks that have now come home to roost.

Five years ago, Barney Frank vouched for the “soundness” of Fannie Mae and Freddie Mac, and said “I do not see” any “possibility of serious financial losses to the treasury.”

Moreover, he said that the federal government has “probably done too little rather than too much to push them to meet the goals of affordable housing.”

Earlier this year, Senator Christopher Dodd praised Fannie Mae and Freddie Mac for “riding to the rescue” when other financial institutions were cutting back on mortgage loans. He too said that they “need to do more” to help subprime borrowers get better loans.

In other words, Congressman Frank and Senator Dodd wanted the government to push financial institutions to lend to people they would not lend to otherwise, because of the risk of default.

The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously.

But the magic words “affordable housing” and the ugly word “redlining” led to politicians directing where loans and investments should go, with such things as the Community Reinvestment Act and various other coercions and threats.

The roots of this problem go back many years, but since the crisis to which all this led happened on George W. Bush’s watch, that is enough for those who think in terms of talking points, without wanting to be confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac.

N. Gregory Mankiw, his Chairman of the Council of Economic Advisers, warned in February 2004 that expecting a government bailout if things go wrong “creates an incentive for a company to take on risk and enjoy the associated increase in return.”

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: “The Federal Reserve is concerned” that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to “multiply the profitability of subsidized debt.”

Chairman Greenspan added his voice to those urging Congress to create a “regulator with authority on a par with that of banking regulators” to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

—

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His Web site is www.tsowell.com; he just happens to be black.

“In a democracy, the people (always) get the government they deserve.” – Alexis de Tocqueville, author of Democracy in America,

Being an Englishman and therefore European, I have always fully understood the importance of the United States as the hegemonic leader of the free democratic world. But what I fail to understand is the sheer tinsel “Hollywood” run-up to the actual Presidential elections.

Americans don’t seem to be bothered that millions and millions are spent on spin, media infighting and travel — money hugely wasted on these presidential candidates, money that could be so useful helping the American needy, particularly in these worsening economic times. The people place all their faith in one candidate and then rant and rave about their policies, leadership qualities and seem to trust them implicitly. Hope does have this effect on people, but the eventual reality can be so cruel. The real acid test is what the elected candidate will actually do when he or she becomes president. Isn’t this the whole point ? Put it this way, is there anybody out there who regrets the fact the Dubya was elected instead of Gore or Kerry in the last two presidential melees ? I, for one, cannot understand the reasons why the American public ever even considered Bush Jnr. His reign has been continually characterized by mumbling gaffs, bad grammar in full media view, apparently non-existent geopolitical knowledge, an unhealthy infatuation with World Terrorism, who supports outright torture, zero-level diplomacy, complete disrespect for the UN and therefore the International Community, shadow agendas and he is someone who has a distinct penchant for taking the Second Amendment to illegal international extremes. I surely don’t have to describe anymore do I ? It is notable that Colin Powell served briefly as Secretary of State in the Bush administration. His moderate and calm diplomatic voice was always at loggerheads with The Shrub. Powell was a man who fully understood both the necessity for National Security (having served very favourably as US National Security Adviser under Reagan), as well as for the clear need for the support of the international community. He had wide experience as well as  international respect. If ever a particular person should have become President of the United States — he was it. Simply because he had that international respect.

So, how could the American electorate get it so wrong ? How come the American Electorate actually trusted G. W. Bush and elected him to be President — and not just once but twice ?

In my thoughts and wonderings about all this, my conclusions seem to point to differences in personality and character regarding the Presidential front runners and not their policies. Or perhaps it’s just a case of “I have always been and always will be a Republican” and has nothing whatsoever to do with leadership qualities or policies ? Is this true ? I think it is. After the feckless leadership by Bush Jnr under the Republican flag, why else is McCain neck and neck with Obama ? It is certainly not based on Dubya’s winning Republican Presidential achievements is it ? And, as a comparison, how does Dubya compare with the present unpopular English leader and Labour PM — Gordon Brown? Both Bush Jnr and Brown compare very favourably in regard to current national hatred and dissent although, in terms of international respect, I would suggest that Gordon Brown is just a tad ahead. And I can safely tell you now that the Labour party in England has not got a cat in hellfire’s chance of winning the next election (even with a diffferent Labour leader) in 2010. It’s already a foregone conclusion. That is the punishment which is politically due to the Labour party(Brown’s party). But not so with the current Republican candidate and the American electorate. No, no — McCain will definitely be different…

So how do you find out what any presidential candidate stands for or what their policies are and, most importantly — Why ? Trouble is, the US system is not particularly transparent — not as transparent as the UK system anyway. Particularly in the support and funding by that candidates’ backers. It’s far less transparent in America. It even allows a running candidate such as Hillary Clinton and husband to refuse to declare their funding or earnings openly. In UK it is Law, any politician or political party must declare all earnings, funding and support.

Has Electorate America ever thought of looking “behind the door” to see who is supporting Obama or who is supporting McCain ? Who are the Oil Barons supporting or funding ? Who is Big Business funding or supporting ? Who is the Mafia supporting ? Who are the Green Ecos funding (indeed, have they got any money to do this?). Doesn’t this tell you anything significant about the real policies of the candidate? Remember that words are just that — words. But actions are the only thing that should ever convince us. Not high platitudes, plagiarism, promises, blah, blah. This, of course, is only a guarded European view.

But one thing I do know — the monetary candidate support from the Oil Barons, Big Business or Mafia or whomever can only mean one thing - Of this, I am sure…

Payback in full by any future American President.

After all is said and done I think Biden was a one-sided selection. If you have had any news on then you’ve heard how he will shore up Obama’s lack of foreign experience and it could be said help Obama’s lack of experience in total. Biden is also supposed to be a good attack dog which will allow Obama to stand above that sort of thing. Overall, he will help Obama nationally with the independent voters.

However, I am guessing that the core Democrats involved in this race are not happy. To be honest, the Clinton supporters would not be happy with anyone other than Hillary. I think they might have been more understanding if Obama had picked some outsider. Instead they go with someone who is old school, which she is, too. Why go for someone with a good resume when you could have someone with a great resume? And already PUMA is arguing that Biden had a whopping 9,500 votes during the primary vs. Hillary’s 18 million. (I know it isn’t a fair comparison as Biden dropped out early but who ever said politics is fair?)

But it is the core Obama people who are also rumbling a little bit this morning. Obama’s entire campaign is based on change. But his first important decision to select his running mate and he completely turns his back on the idea of change. Instead of an outsider he went with Biden who is yet another old white guy who has been in DC since Watergate. Or as I heard one African American reporter tell it - she wasn’t even born when Biden was first elected.

I would also think that Obama’s advisors aren’t that pleased either. There are two primary jobs for a VP candidate. The obvious one is to step in as President in case the President is unable to perform his job. The other purpose of a VP is to bring in votes that the President elect may not have been able to capture himself. I am not sure how much Biden will help Obama in this. In the past VP candidates have come from large electoral states or from swing states or from geographical areas that normally go for his opponent.

As everyone now knows - Biden is from Delaware which has a whopping 3 electoral votes. Nor is Delaware a key transitional state. Some analysts are saying that Biden may not readily have a large group of people that will now be for Obama. But he might have large corporations and big bucks behind him. And every candidate always could use more money.

Later today Obama and Biden will officially announce this in Springfield Ill. (And didn’t Obama’s idea of texting his supporters first backfire. But more on that another time.) Anyway, back to the picture of the two of them standing together, most likely with raised hands held together as you always see it. And how will that look? How will America react to this picture of a youngish good looking black man holding hands with an old grey haired white man? In spite of what the picture might indicate, is America ready for an African American President?

Now that the Olympics are wrapping up tomorrow, let the real games begin!

It is no surprise that my mind is preoccupied with feisty ladies. The biggest one, of course, is tropical storm Fay who will be passing close to my home later today. Unlike the three hurricanes which went right over my roof during a 6-week period in 2004 this one will be more ladylike. As of this morning, Fay is taking her time as she dawdles up through Florida leaving a trail of minor wind and rain damage.

The other feisty ladies are four groups I happened to find while surfing the internet. I would look for these ladies to be raising their voices next week in support of the feistiest lady of the land, Hillary Clinton. According to The Stiletto, these different groups are now all coming together into one group, The New Agenda, to promote a variety of women’s issues.

It is more interesting, however, to look at the individual groups. I think the largest group is PUMA, which stands for Party Unity My Ass. Ever since Obama won the Democratic Primary, Howard Dean and Barack Obama have been continuously lecturing that all Democrats must now come together as one party. The name of this pro-Hillary group pretty much sums up what these women think about that!. As Hillary supporters they are demanding a roll call of votes during the DNC Convention next week to remind everyone how many votes Hillary did have and just how close Obama came to losing plus they wanted Hillary to have a prime time slot for her speech.

I Own My Vote is a group of Hillary supporters who argue that their votes do not belong to any party or candidate and that they will vote however they like. See a trend here? In fact their website http://www.iownmyvote.com/ would make a McCain staffer proud. They are also demanding a roll call of votes during the DNC Convention to remind everyone how close the race was etc.etc.etc.

Just Say No Deal appears to be a group of PUMA bloggers who are demanding a roll call of votes to remind everyone blah blah blah. Together 4US is a group of 8,739 women who have signed a pledge requesting that the DNC Convention have a roll call of votes yadda yadda yadda. You get the picture.

Four different groups of women, all furious with the Democratic primary, all continuing to support Hillary and not only wanting Hillary to be recognized during the DNC Convention but to remind Obama that he just barely won. For many, they are not only pro Hillary but have become anti Obama as evidenced by their stinging rhetoric in their websites and by their “NOBAMA” signs. Apparently some of these women have reached the tipping point where they are so angry with their party that they are actually voting for McCain. This is making an impact as the polls have been showing that Obama is not doing as well as expected in the “white women” group.

Now all these pro Hillary groups are merging together. Tropical Storm Fay might be causing havoc this week but it sounds as if these other women might do the same during the DNC Convention . I think that Howard Dean just might have his hands full if these women come out in force in Denver. I also wonder what would happen if they all start to chant for Hillary, especially if they do so while Obama is standing by himself in that stadium. Fay may have moderately high winds and even throw off some tornadoes but nothing will come close to what Dean and Obama might have to face as they are reminded of that oh so true statement: Hell hath no fury like a woman scorned…

Used to be that the US Dollar was a respected commodity. The Dollar was everywhere, all countries were eager to accumulate this currency. But in the last year or so, something has happened to the Dollar. In its recent extended crash and volatility, what are its chances for recovery?

Well, if you don’t want to read the rest of the reasons — in short — it ain’t gonna recover. Pure and simple. If you want the reasons — read on, but it’s not pretty and you might be offended if you are an American.

Since its determined inception in 1944 with the Bretton Woods agreement, the Dollar went stellar in its world importance as the new World Reserve Currency. The new Greenback position fueled the start of the modern American Way, easy living with abundance for all. Then came credit for all in the 70’s and ’80s and again there were the good times. So, what happened?

Certain key events happened along the way that have fueled the inevitable crash. In 1971, Nixon turned around to the IMF and refused to pay back his countries huge debt. Instead, on his own — and for the benefit of just the US and not the World — he disconnected the world trade dollar from gold and set the dollar free. Because, as a stipulation under the Breton Wood agreement the dollar became the World Reserve Currency, the whole world must pay for important basic commodities like food, oil, metals etc. in Dollars, there was no real problem for Nixon in his actions. So, without any gold backing, the dollar only relies now on political goodwill and mainly oil for it’s position and value.

First political goodwill. Well what do you think? How have the past Presidents fared in terms of peaceful and friendly world diplomacy? How does the current Bush administration shape up in terms of world sway and respect? I guess I really don’t have to explain this. So much for the political goodwill then…

Secondly, the dollar has always been linked to oil. When oil went up in price, the dollar’s value was forced down. This was a wonderful mechanism to keep the oil price low, steady and cheap. After all, oil is the commodity that has always both fueled the American Way, and kept those stroppy OPEC countries in their place. Right?

Well, even an idiot must except that the positions has changed. With oil prices popping their top, all OPEC has been saying is, “Oh…well we never realized that there would be such a demand for oil by Asia and particularly China. We certainly have enough oil, it’s just….well…we haven’t got enough refineries to process the oil. Terribly sorry.” OPEC is a rich, modern, high level business organization, with everything at its fingertips — and they couldn’t accurately project the demand for oil increasing in 2008 ? Yeah, right…

So oil skyrockets and the dollar is left out in the cold. More and more countries are unlinking their currencies from the dollar now. Brazil, Russia, China, India, Argentina, Kuwait and many others have done this. Numerous countries have also started to trade commodities in Euros. How dare they do this I hear you cry, what about the Bretton Woods contract? Well what about it? One of the stipulates of Bretton Woods was that the US dollar must always be backed by gold. So, if Nixon can break the contract …. Perhaps another memorable lesson in America leading by selfish example ?

This consequent loss in dollar confidence is stinging the dollar badly and still the US government does nothing effective.

I read one angry blog — by a cerebrally deficient American — who more or less said how dare the EU allow the Euro to get so strong against the dollar. Goddamn — how dare they, after all we did to win the Second World War — we should punish them harshly and teach them a lesson !! I was amazed at the sheer, blind stupidity of his blog. Another example of current clear-thinking and subtle US diplomacy perhaps? And as if America ever pays its debts — what about Nixon when he refused to pay the huge IMF debt? What about their current National Debt? — which stands at over $9 trillion dollars now, and is increasing by $1.63 million every single day. This is a big yawn to all US governments and is not seen as a problem. Every time the debt approaches the limit set by Congress they just pass another Bill, raising the bar. Trouble is, it’s not the US that pays the debt — its every other country in the world that holds US dollar reserves and Treasury Bills etc…And all to fuel the cheap, American Way. In other words, Europe and the rest of the world have been paying back America’s national debt for years and years. It is fairly apparent from all this that the US Government really does believe that the trade dollar should be looked after and supported monetarily by the rest of the world. After all, they’re the one’s that need the dollar, isn’t that right?…..

So what’s left? Will there be a recovery of the dollar? I don’t think so. For the simple reason that the US government has lost control of its own currency and is only just realizing this painful circumstance. But other forces are at work here, outside forces that are not good for the Western World. It is interesting that the Free World Markets — the very fabric of democracy — are probably or at least partially to blame for the dollar’s rapid demise. There is about $1.8 trillion dollars outside America now. China and Japan both hold over $1.1 trillion of this. So, as a practice scenario, what would happen if say China were to dump all its reserve dollars and buy Euros? Yes, all those worthless dollars would come back to America, and there would be massive uncontrolled inflation, and a long-term recession not seen since the killing inflation that Germany had to suffer after World War ll.

There are other more significant threats and questions related to all the above. Now I come to the what if scenarios. What if China and Russia are using the Middle East as pawns in a greater game, to drain and strain the US economy? What if China does dump all her dollar reserves? What if oil really is running out? What will happen to the US ?

After all, before you go to war, you always try and weaken your opponent economically first.

I have a lot of time to ponder these days.

I think of mid-Africa, which has about seven or eight wars or rebellions ongoing right now.

Climate change has a direct affect here, crop failure usually springs rebellions and wars. The other reasons are all for greed — diamonds, gold, oil — it’s all there. Mugabe rants on safely within his broken Zimbabwe, still blaming Britain or Europe or America for his countries predicament and still regularly committing atrocities. And even South Africa’s Mbeki supports him. Truly laughable. Recently Mandela gave vent on his 90th birthday. The only powerful African to speak out against Mugabe’s regime. Perhaps we should leave Africa alone, just do nothing and let all its corrupt governments implode as must happen. This would be the cheapest option. If they aren’t willing to reform and help the people and not the corrupt governments then why bother?

And then we have the crashing dollar, oil prices skyrocketing and the markets still — after nearly a year — unrecovered and in turmoil. The dollar is a funny beast.

This currency — much hallowed in it’s heyday — is the World Currency. In 1971 Nixon told the IMF to go swing when they asked for debt payback and in a cunning ploy, he disconnected the dollar from gold. And since then, the greenback relies on its fame or political goodwill and The Bretton Woods agreement. This agreement states that all major commodities - that’s food, metals, oil etc are to be traded in dollars. So all governments must support dollar reserves to by essentials. Or so they say. Lately, and because of the dollar’s feckless performance, some countries have defected from Bretton Woods. The political goodwill will is evaporating it seems. Brazil, Venezuela, India, Russia, China, Kuwait and others have all disconnected their currencies from the dollar and they are doing well. Many, including China, are trading commodities in Euros or Yen. Indeed, at the Industrial level, more and more businesses in China are insisting on payment with Euros. Which is why the Euro has been stomping the dollar over the past year. And the hapless dollar continues to diminish in value…

The American government has never supported any of its debt. They just don’t seem to care about their National Debt — now running at over a record breaking $9 trillion dollars and rising at 1.63 million a day. Ah well, Ben — just spew out a few more bucks — that oughta take care of things. But there is surely a limit to ‘fractional reserve lending’. This is the method by which The Fed produces money out of thin air. The rule says that if you are a financial institution in the US and you have $10 million — then you are allowed to lend out $100 million. $10 million goes to the Treasury and $90 million is lent out by The Fed to the financial institutions at a low rate. Then the banks re-lend out this money out at a much higher rate. This is how banks make such indecent amounts of profit every year. The issuing of Treasury Bills etc., supports this. So other countries “take the heat” through owning dollar reserves. Clever, eh?

I was greatly amused to read recently that The Fed is to be audited by The World Bank. The Fed has never been audited since its malformation in 1913 !! Imagine Ben Bernanke’s reaction when the auditing party asks :” …Is it at all possible for us to go to Fort Knox, Mr. Bernanke — we need to check The Fed’s real gold balance…”

Is there any gold left in Fort Knox?

Has anyone ever seen it ?

There you go…..

By now everybody has seen the cover of the New Yorker depicting Obama and his wife as Islamic terrorists. You can almost hear the magazine’s staff laughing at the thought that less educated, less sophisticated and less enlightened people actually believe this about the Democrat candidate. This cover was meant to ridicule these rubes while the article defended Obama’s patriotism. The only problem with this satire is that, as backed up by recent surveys, there really are a significant number of people who believe that Obama is associated with Islam and US radicals. They believe that instead of being a satire the New Yorker cover actually depicted the “truth” about Obama and his wife.

No surprise that Obama is furious. He has spent millions trying to establish that he is a patriotic American and that all the rumors are lies. And yet as they say, a picture is worth a thousand words, and this cover erased a lot of the progress he had made. The TV news and cable shows continuously showed this cover and it is so provocative that people will remember the image long after they remember that it was to be a satire. The New Yorker cover also had an unintended result which might be a key to defeating Obama this fall.

The more I watch Obama, the more I feel that he is becoming a self righteous, self important man who believes in his own hype. Think about it. What kind of man would create a seal identical to the presidential seal? How egotistical is it to move his acceptance speech from the hall to a stadium where he can speak to the masses all gathered to worship him? Or to want to speak from the Brandenburg Gate in Germany, where only President Kennedy and Reagan have spoken? He really is beginning to think of himself as the next JFK and Martin Luther King rolled up into one.

Then along comes The New Yorker cover which seems to be ridiculing Obama and his wife rather than the intended satirizing of red state Republicans. And you know what? Obama’s reaction is showing a trait that could become an Achilles heel for him. He can’t laugh at himself. Barack has become such a stuffed shirt that he can’t tolerate anyone making fun of him or satirizing him. Sure, he has some humorous moments in his speeches but these are ones he approved and it never shows him in a negative or even awkward situation.

A few days before the latest problem he and his family had been interviewed by a tabloid gossipy TV show. It was light and fluffy and cute but he didn’t even like it when his own little girls teased him. Papa Obama was clearly uncomfortable although he laughed and went along with it. It appeared that he was also annoyed that his girls got more questions and coverage than he did. What could have been a wonderful PR moment turned negative when afterwards he said he regretted doing it and will not do any more family interviews. This interview was quickly followed by the New Yorker cover plus the callous remarks by Jesse Jackson. Barack might have diffused these situations if he laughed them off. Instead he got angry, righteous and superior which only served to prolong it all.

In the beginning of the year Obama seemed to be a likeable young man. Yet it seems as if he has changed into a pompous hypocrite who no longer tolerates anyone making fun of him and instead believes he deserves to be treated as someone who is destined for greatness. These new traits also include the inability to tolerate anyone making fun of him. And that is what the Republicans must do if they want to win. Show how rediculous he has become and laugh at him. For if he has become this arrogant and this self righteous when he is only a candidate for President, can you imagine what he will be like if he is actually elected President?