Another MSM lie: "Stocks end mostly higher after Fed assessment"

As I've pointed out before, the mainstream media spins any economic news as the end of the world while a Republican is in the White House, and it glosses over bad economic news or rewrites it as "Not too bad" once a Democrat takes over.

Today's headline "Stocks end mostly higher after Fed assessment" is so utterly dishonest, as is customary with anything from the MSM. If this had been several months ago, the headline would have read something like, "Stocks lose rally steam after Fed announcement." Let's take a look at what really happened:







The plain and simple fact is that once the Fed made its announcements, stocks dipped. The only reason the NASDAQ and S&P 500 ended higher than their opening is because, unlike the DJIA, they didn't dip enough to erase the gains from earlier. They didn't crash, but the NASDAQ and S&P 500 indices closed at around 1% from today's peaks, and the DJIA closed nearly 1.5% off its peak.

Despite all this, the meaningful indicators are of movements in U.S. bond markets. For example:



This tells you something. The Fed released a statement today at 2:15:

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

Investors overall clearly didn't believe that, evidenced by the sudden afternoon spike in the 10-year's rate. For months now, I've been pointing out that the Fed is creating money out of thin air to inflate the money supply, which inevitably results in inflation. We're in trouble, but most Americans have no idea what's coming.

Indeed, "prices of energy and other commodities have risen of late." I pointed out three months ago that the Fed's pumping of new dollars into the economy is the reason, the only significant reason, that this is happening.

Obama and Geithner's "Money PPIP"

So far, it looks like the White House couldn't make up its mind what to tell Martin Crutsinger about the name of the new bureaucratic boondoggle. This version of his article calls it the "Public Investment Corp." This version calls it the "Public-Private Investment Program."

I prefer "PPIP" because it sounds like the 1986 comedy with Tom Hanks and Shelley Long, so named because the lead characters keep pouring money into a house that's falling apart. The federal government is simply pumping our money into sustaining companies that should be allowed to fail, and propping up asset values that need proper valuation. Once more, the government has been behind everything that precipitated this mess, from instituting mark-to-market accounting at the worst time possible to "rescue" efforts like TARP and PPIP that prevent us from placing true values on these assets.

Few realize how government has sparked the "crisis" and is purposely continuing it. I've written about this across many posts over several months, but I'll put it all here; just follow my explanation for each link in the chain. Right when markets panicked and CDOs and other securities plunged in value, the feds deliberately imposed mark-to-market so that banks' balance sheets would be impacted negatively -- and banks are forced to cease lending if their net assets became negative. The assets are deemed worthless, though, only because TARP and the like are discouraging people from sitting down and determining a real value (as opposed to a bureaucrat's politically motivated guess). Let's say an asset on the market is worth 1 cent on the dollar, and an investor might buy it at 10 cents in the hope it will eventually be worth 50. But the feds are talking about buying it at 70 (easy when taxes always come from other people!), so how can anyone determine the true value? Why would anyone bother?

See, it's all "legal" when the feds create a shadow holding company to hide AIG's bad assets on another ledger, the same fraudulent practice that got Enron and WorldCom in trouble. When it comes to mark-to-market, however, banks must list all assets on their balance sheets, thus assuming all liability for losses! So when one doesn't have positive net assets so it can lend under FDIC rules, the feds so graciously step in with a cash infusion (courtesy of everyone who doesn't make a living via government, in the form of taxes and inflation). Now PPIP will "help" banks by effectively whiting-out these assets, putting taxpayers even more on the hook for the initial purchase plus any future losses. The circle is complete.

I've explained before that "There's plenty of investable money around the world, but no one wants to sink it in *these* securities. They're really that bad. Even Warren Buffett wants the federal government to bail things out, instead of seizing a profit opportunity and jumping in himself. Surely he could put up a 'mere' $1 billion without blinking, but he's smart enough to recognize that the possible returns aren't worth the current asking price." Why do so few see the warning sign that when the private sector is staying away from buying these assets, maybe they're not such great deals? Now, a lot of these assets are worth next to nothing and even zero, but some still have value. Who's to say that a particular security, comprised of notes from such-and-such a neighborhood, isn't a good return in the end? Actually, none of us can -- unless you're well-connected with the government, none of us can really tell if any given neighborhood has people who will get a housing bailout!

Note that I was wrong, though, about the source of the funding for all these programs. However, last September I (and most people) just couldn't imagine the initial $750 billion TARP, then the $787 billion "stimulus," the $1.2 trillion the Fed recently announced it will create, and now the new $1 trillion so that the Treasury can buy up "toxic assets" under PPIP/PIC. Every new dollar that the feds are spending can come only from whatever new money the Fed can create. There just isn't enough of a tax base; there just isn't enough money to borrow.

Trillion, billion, the prefix to the "illion" has sadly lost all meaning. This is pure insanity, and with Obama and Geithner accelerating what GWB began, things will stop only with a disastrous crash.

Update: what irony in Christina Romer's misuse of "silver bullet." Over time, it's been twisted into the simple meaning of something that will work effectively. Proper usage refers to killing an otherwise invulnerable creature (like vampires in old pre-Stoker folklore, or Wolfman in modern monster tales). Romer said, "I don't think Wall Street is expecting the silver bullet," so Wall Street had better beware.

What the Federal Reserve really said

Pay attention: when Bernanke & Co. say "the economy will actually shrink and unemployment will rise higher," it's not so much a prediction as it is the Fed and feds revealing their designs on the economy -- how they will so "graciously" permit the economy to perform. Does anyone still wonder why I call this the Reichstag fire of the financial world?

And now Alan Greenspan is publicly supporting bank nationalization. Like all government programs, it'll start small. The bureaucrats will claim specific targets, but the language of the legislation will in no way confine them to a limited scope. Just a few of the "most troubled" banks, then a few more, and suddenly "mission creep" becomes an understatement. A formal takeover of all banks won't be necessary, anyway. De facto nationalization will come with sufficient control of the web, something like nationalizing a super-majority so that all other banks are effectively isolated from each other. At that point, the non-nationalized banks can do no business (no transfers, no borrowing, i.e. no financial conduits whatsoever) except with nationalized banks.

In the Book of Revelation it is written about the second beast, who "exerciseth all the power of the first beast before him,"

And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads:

And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.

This isn't just trusting an arsonist to putting out the fire he caused. This is an arsonist setting your house on fire, forcing you to trust him to put it out, forcing you to hire him to rebuild it according to his specifications, and all payable via a loan he'll so generously give you! The government created the crisis, fueled it, and now insists it alone can "fix things" (as it always does). This will involve a complete uprooting of every profit-engendering quality of the financial system, such as banks no longer lending to creditworthy people, but rather anyone "underprivileged" or "never got a fair shake in life." And the cherry on top is all the massive new federal debt that future generations will be paying.

Mark my words here: as bad as it is now, we haven't yet seen how finance will become politicians' ultimate weapon to stifle dissent and ensure obedience. Under such a system, much like in African dictatorships, any suspicion that you're not loyal, have mocked or derided a politician, etc., means blacklisting. Financial blacklisting. That means an inability to deposit savings, get a loan, or transmit money electronically. It's not impossible to live that way, but most people don't have the stomach and would rather lick the hands that feed them. Be watchful, for I believe in the coming years we'll see (and most won't realize until too late) what "the mark of the beast" is. Without control of the financial infrastructure, how else could the tyranny of the last days prevent (most) people from engaging in commerce sans the mark?

Greenspan is such a liar. There was never anything "free market" about what he did, like tightening monetary policy too much and causing the 2000-2001 downturn, and keeping interest rates too low for too long after that downturn to fuel today's housing bubble. He wants to scapegoat "the free market" when the free market wasn't even there. By definition, anything he did as a central banker was contrary to the free market, and he knows it, which is why he's flat-out lying. It's one thing for banks to pool resources voluntarily into a fund from which a troubled member can borrow, but quite another for the government to set up a central bank that devalues everyone's money in order to "save" a favored institution.

That word "favored" reminds me. I've always forgotten to mention something here that most of you didn't know. JP Morgan given a sweetheart $29 billion loan from the New York Federal Reserve Bank, but Lehman Brothers was allowed to fail. Like many, I naturally figured that it was because JPM had friends/allies at the New York Fed, and Lehman didn't.

Of course, it had nothing to do with the fact that Jamie Dimon, JPM's CEO, was sitting and still sits on the New York Fed board of directors. Nothing at all...right? Good lord, we shouldn't be surprised. Who needs a friend on the inside when your own chief is on the inside!

And where is the outcry about this blatant conflict of interest, other than a few relatively unknown bloggers? I never saw anything in the Wall Street Journal, which should have been on top of this. Geraldo Rivera didn't have a special investigation. I haven't seen a single major political columnist or blogger talk about this, even Walter Williams, Thomas Sowell, Instapundit or Michelle Malkin.

Where has JPM's General Counsel been, considering that Dimon participating in NY Fed decisions is a crime if JPM benefits? Even recusing himself can still taint any decisions. Sitting on the board of a Federal Reserve bank is something so extreme that even I, being on the compliance end and thus far from business strategy, could (and never should) get approval from my firm's Chief Compliance Officer and General Counsel. There would always be an inherent conflict of interest, and any reasonable person would have an insuperable suspicion that I was not impartial.

Dick Fuld, former CEO of Lehman, used to sit on the New York Fed board, so we can only guess that he wasn't as popular with the boys. Keeping Lehman Brothers alive just wasn't part of The Plan. On the other side of the pond, though, keeping Lloyds and Barclays was, and the latter snapped up Lehman's remains after a mere seven-hour hearing in front of an American judge. Democrats have accused Bush, Cheney and Halliburton of corruption because Halliburton got no-bid contracts. Where is their outcry about banks buying "failed" ones via government-arranged-and-approved deals, with no competitive bidding, like JPM did with Bear Stearns and Washington Mutual?

Using simple reasoning to debunk economic lies

It is a primary purpose of this blog to debunk economic fallacies, and to expose lies wherever they may be. My friend JK fell for one, specifically the claim that on September 18, 2008, the Federal Reserve stepped in to save the collapse of the U.S. economy because they feared $5.5 trillion would eventually be pulled out of money markets.

My reply:

That's a load of horse manure. Don't believe it.

Think about it for a minute. Do you realize how much $5.5 trillion is, and how much $105 billion will not stem such a tide anyway?

Do you realize that money merely doesn't disappear when it's withdrawn? It was hardly evaporating into thin air. People had started dumping money markets on September 17, ever since the Reserve Primary Fund "broke the buck" the day before, and putting into safe paper: bank CDs if the amounts were low enough for FDIC insurance, and Treasury securities otherwise. The money was simply being transferred from one form of savings to another.

"By their estimation" is no more than doom-mongering. They were merely extrapolating what was happening throughout the entire day, when it probably wouldn't have happened at all. Worse, their extrapolation was an outright lie. By 11 a.m., they had "noticed" $550 billion. Even if it had happened in one hour, how could another $5 trillion have been withdrawn in only three more hours?

How could $5.5 trillion have disappeared when the Money Fund Report reported last August that money market assets exceeded $3.5 trillion for the first time? Do you really believe that money markets surged by $2 trillion in just the following month?

Look, my friend, don't take this the wrong way, but god damn, think about things before swallowing this kind of guff. Whatever any politician tells you, even Ron Paul, be skeptical: "believe not every spirit, but try the spirits whether they are of God: because many false prophets are gone out into the world."

"The whole aim of practical politics is to keep the populace alarmed -- and hence clamorous to be led to safety -- by menacing it with an endless series of hobgoblins, all of them imaginary." - H.L. Mencken

When a non-professional economist like me can catch these lies with barely a thought, every economist who promotes these lies should burn in hellfire. And woe to those who believe the false prophets.

Let me add one last thing: motive. Why would politicians and central bankers lie about any of this? Why, indeed? The Great Depression was the first big opportunity for the dark powers to soften Americans up to the idea of government intervention to "save" the economy, notwithstanding the New Deal only made things worse. This manufactured crisis is being used to destroy all confidence in the free market, a return to which is the only thing that can save us, and to instill in people the belief that only government can save them, when in fact it only leads to economic damnation.

Will the Fed be stupid enough to lower the FFR?

Probably. (Hat tip to my friend Billy Beck.)

Tonight I don't have time to delve into the immorality of people being forced to use the government's money, so let's just play the Keynesians' own game. Even if their theories worked, and that's a big "if," look at the FFR now: go here and scroll to the bottom. What is the FFR these days? The real rate, not the intended one. (By the way, the AP writer apparently couldn't be bothered to find rates before 1990. The lazy idiot probably found this page and decided to go no further.)

So, uh, how can the Fed cut the target to 0.5% when it's already there? Does that mean we'd get an effective rate of 0%? And if it cuts it to 0%, does that mean we'd get an effective negative rate?

Anyone who understands Hayek will understand why the Fed can't even hit the target it's aiming for: there's no way such a small group, relative to the whole population, has the information necessary to control such a complex thing. Yet the Fed acts as if it can, and most people are so blind that they believe Fed officials. It's all based on Keynesians' flawed understanding of inflation, which they calculate based on prices. Milton Friedman taught us that inflation comes purely from monetary policy, so any drops in calculated CPI and PPI resulting from the recent drops in fuel prices are not in an of themselves indicative of true deflation. What we do see is that the Fed is still devaluing the dollar. The dollar hasn't "strengthened" lately because the money supply has been cut, unlike when the Fed caused the Great Depression by cutting the money supply. The dollar has been strengthening only vis-à-vis most other currencies, because other central banks are devaluing their currencies faster, and foreigners are buying dollars in massive quantities to buy U.S. Treasury securities.

The Fed is acting like a stupid doctor who worries a patient is losing too much weight, when in fact the patient is shedding obesity that resulted from the same doctor's force-feeding. The Fed has grossly inflated the dollar since 2001, and now it worries about "deflation" undoing part of it?!

Real estate collapse, a stagnant economy despite the central bank lowering rates nearer and nearer to zero...God help us if we're going to spend the next two decades like Japan's spent the last two. We're already in a "liquidity trap": interest rates are so low that monetary policy just can't provide any more economic stimulus, as artificial as it would be.

Tim Geithner and Larry Summers "understand markets"?

John Batchelor, or maybe one of his guests, made a claim on the radio tonight that Tim Geithner, the presumptive nominee for Obama's Treasury Secretary, and Larry Summers, former Clinton Treasury Secretary, "understand markets." As I said the other night, this is how parents can explain the phrase "The more things change, the more things stay the same" to their children. For all his talk of "change," Obama is hell-bent on bringing aboard such insiders as Clintonistas and entrenched Fed officials.

Most Americans probably couldn't tell you who Larry Summers is, or if they can, they don't know him beyond the Harvard controversies. Geithner is even less well-known, and Americans should be truly shocked to learn how personally responsible he was for this "financial crisis." I knew nothing of the man prior to his nomination, but all I needed to know was his specific position at the Fed, and I immediately realized what the man himself has done. The New York Federal Reserve Bank is responsible for the Fed's "open market operations," which is how the Fed distorts interest rates and the dollar's exchange rate. Geithner has been its president since 2003, and he and his predecessor William McDonough bear personal responsibility for doing Alan Greenspan's bidding of low interest rates.

As I wrote last May, Congress threatened mortgage lenders with the stick of investigations and regulations, if the lenders didn't give money to unqualified applicants, and borrowers were irresponsible to take out loans they should have known (and often did know) they couldn't repay. Both of them should bear blame for the housing bust. But it was the Federal Reserve who is mostly to blame, because only it could provide the carrot that facilitated all this: interest rates far too low for far too long, anywhere from 4-plus to 6 years, depending on whether you draw the baseline at 4% or 5%.

The Fed's sudden interest rate cuts began in 2001, a quick reaction to the last year and a half of tightening interest rates. It's much like when I was 16 and first learning to drive. Traveling 55 in the center lane of a highway, the teacher warned me that I was starting to drift into the left lane. So I mindless jerked the steering wheel to the right, and quite quickly. I kid you not, we felt the left wheels go up six inches and then plop back down on the road. It scared the crap out of the teacher, who said "Goddamn it, Perry, don't ever do that again!!!" I understand he was still telling the story for years and probably still does to this day. Well, my idiotic maneuver is exactly how the Fed bankers do their own operations: they're not paying attention (Hayek would remind us it's because central planners can't possibly have all the information to determine what interest rates should be), suddenly discover they need to correct course, and then just as suddenly do something boneheaded because they never knew all along what they're doing.

So back to this thing about Geithner and Summers "understand markets." If they really understood markets, then they'd know that free markets exist only when government doesn't interfere. The moment that government does an iota in "markets," they're no longer free, and hence only a semblance of "markets." Geithner and Summers are chief proponent of government interference. Summers' very job under Clinton, by definition, was figuring out ways for the federal government to meddle with financial markets. Geithner's assuming that role after having been on the other side: as Treasury Secretary, he'll be working with his successor at the Fed about how many Treasury securities the Fed will buy or sell.

If Geithner and Summers don't really understand markets, it means they're very dangerous in their ignorance. If they do understand markets, then they're misguided or perhaps malintentioned in their jobs that subvert markets. I wouldn't doubt that they understand markets, although in the same way that Satan understands what God wants: "Thou believest that there is one God; thou doest well: the devils also believe, and tremble." One can "understand" but still not believe or heed.

Despite being so rich, Warren Buffett is still ignorant of real economics

Buffett is clearly wealthier than I am, and I'll readily concede a "smarter" investor -- whatever "smarter" means. But he might want to use some of his billions and take some real economics courses. Walter Williams, Don Boudreaux, Russ Roberts at George Mason University, or Burt Folsom at Hillsdale College, could set him straight on free trade. And soon Buffett can take the class "History of [Economic] Thought" at Trinity University, which will be taught by Richard Ebeling. I'm proud to call Dr. Ebeling a friend, and I was saddened when he recently left his position as president of the Foundation for Economic Education to accept his position at Trinity.

Alternatively, Buffett can take sporadic lessons from me at no charge. I've previously written about his mistaken belief that a nation shouldn't import more than it exports. Now he could use a lesson on central banking and what it does. From his recent interview with El País (my translation from the original article's Spanish):

Buffett: It is certain that during the Bush era there has been a gradual reduction of taxes that the greatest fortunes pay, whereas the middle classes pay more and more. And I take advantage of each occasion I have to denounce it. On the subject of the crisis, it's evident that after what happened that we must have more regulation. Even the International Monetary Fund supports that. Perhaps not very short term, but all crisis brings about regulatory changes. I do not believe that they are deep, but without doubt what it has happened to banks and American investment banks will lead to stricter financial regulation.

El País: What has failed so that the mortgages garbage unleashed this storm? Do we attribute the errors to the banks or to bank supervision?

Buffett: The banks exposed themselves too much, they assumed too many risks. So the problem is evidently the banks. They are the guilty ones. It does not need to be put on anyone else.

EP: Crisis or recession?

Buffett: I believe that real problems could have arisen in the case of Bear Stearns' drop. The recession is a technical term defined by the National Bureau of Economic Research: two trimesters of falling GDP. We have not arrived at that, so technically we cannot speak about recession.

EP: If you ask someone who's remained unemployed in Spain like the United States...

Buffett: For the one who loses a job there's surely a recession. But to my surprise, the unemployment rate has not changed too much up to now. It shocks me that with everything that happened in financial markets, real estate markets and other sectors, that unemployment has not risen more. I would not be surprised that unemployment will increase in the next months.

EP: That means the worst is yet to come?

Buffett: The steps that authorities and supervisors have taken hold the possibility that problems of bigger size may arise. I do not believe that the situation will deteriorate in the financial markets. General conditions in the business world will deteriorate, but only for a time.

EP. Are there going to be more victims after Bear Stearns?

Buffett: In March we crossed over the worst moment and in my opinion the Federal Reserve's decision in the case of Bear Stearns was a great step forward. It was a decisive moment for the financial system. A line in the sand to contain the crisis. This incident helped eliminate the problem, or at least it was moderated for other investment banks.

...

Buffett: We have an enormous bubble in the real estate sector. Not in all of the country, but in states like California, Arizona or Florida yes we have a true bubble. And we have it because many of those houses were financed at 95% to 100% by banks that in many cases didn't even know what they were buying. Combined with the financial crisis, the repercussions of all that are going to be very painful.

...

EP: You do not seem very satisfied with what's happened in the Bush era. Between the Democrats: Barack Obama or Hillary Clinton?

Buffett: I would bend over backwards completely with both.

Note: the verb used there is "Me volcaría," and the root "volcar" means a variety of things. But from what Buffett says after, it doesn't sound like he meant the "upset" or "overturned" meanings.

EP: Obama or McCain?

Buffett: Either of the two Democrats before the Republican candidate, although McCain is a good sort, with notable political ideas. I will support 100% the Democratic candidate.

EP: Why?

Buffett: I am closer to their ideas on the tax system, on health care, on abortion rights, the right of the woman to choose if she wants to have a child or not. John McCain is a wonderful man, but he would not agree with me on those. I believe that if McCain wins, it is not going to do anything about the matter.

We'll begin from the top. Is Buffett really so blinded by ideological bias, like Hillary Clinton, that he won't admit why a rich investor deriving income principally from investments will certainly pay a lower tax rate? It's because the income is derived mostly from investments, since capital gains are taxed at a lower rate than income. Buffett and other liberals want to tax investments the same as income, which is absurd: actually, any capital gains tax is absurd, because someone had to earn income to invest in the first place, hence it's double taxation. Moreover, raising the capital gains tax to equal income taxes will wreck the financial markets by crimping the incentive to invest. No skin off Buffett's nose, though, since he's already made his billions, but it will screw over the millions of Americans who are trying to save for themselves. This is what liberals want, however: if people can't save enough for themselves, if they can't earn enough for themselves (being taxed to death or even being taxed/regulated out of a job), then they must depend on government.

The truth is that those evil "investment managers" may pay an overall lower tax rate than "a teacher," but the former will still pay far more in absolute dollars. And as "honorable" as we're taught to think the teaching profession is, society judges these investment professionals to be worth more, because they're paid more. And why not? They're the ones creating wealth and prosperity, first for others through their jobs, and second for themselves by investing their own money back into the economy. They deserve their pay. "The labourer is worthy of his hire," the Lord reminded us. If a neighbor happens to get rich from his job, and he coerces no one, what is it to the rest of us?

And Buffett's such a hypocrite. If he thinks he's not paying enough in taxes, then he can voluntarily pay more. As President Bush said in the last State of the Union address, "Others have said they would personally be happy to pay higher taxes. I welcome their enthusiasm. I'm pleased to report that the IRS accepts both checks and money orders." Since Buffett can pay higher taxes if he wants, we can surmise it's clearly not about his taxes being fair. It's that he wants to force others into his flawed notion of "fair."

Well, I have a proposal for him: why doesn't he pay my tax bills, if he thinks I'm not paying enough? He wouldn't miss that money, and according to Congress' idiotic, Keynesian-based idea that "consumption spending" is all-important, my spending would be more than his investment income, right? (Actually no, because economic growth is the same whether the same dollars are spent or invested.) If Buffett wants to give all his money away, then why not devote his foundation to tax relief? And God knows "middle-class" Americans will need it, once our taxes are hiked in 2011 -- because Bush's "tax cuts for the rich" will expire, except that the tax cuts will go up for a lot more than just "the rich."

Regarding the housing "crisis," Buffett wants to blame the banks and the banks alone. While lenders do share some measure of blame, as I'll get to below, it's not entirely their fault. Borrowers must shoulder some blame too, because they're the ones who were irresponsible enough to take loans that they couldn't repay. If you take out a loan, you're borrowing someone else's property. The person lent you property and expected it back, plus compensation for not having use of the property. So if a borrower uses government to force the lender to "rewrite" the contract terms to a lower interest rate, or even "forgive" the debt, that's stealing from the lender.

If a borrower takes out a loan that he knows he won't repay, that's fraud. It's irrelevant if the borrower truthfully represented his (in)ability to repay (meaning the bank failed to realize or perhaps "overlooked" it). If a borrower knew he lacks/will lack the means to satisfy the agreed-upon loan payments, then the borrower made a criminal decision to take someone's property and not give it back as promised. We should be prosecuting the hell out of these predatory borrowers, who are committing fraud and grand larceny by walking away from their mortgages (often literally). But most Americans have bleeding hearts, so they sympathize with the supposed "victim" and want to punish lenders instead. It's the same mentality by which juries award multi-million dollar judgments to plaintiffs in ridiculous personal injury lawsuits.

Lenders share some blame for being too eager to make loans, but all loans have a built-in penalty for that: lenders can lose potentially the entire amount of the loan, should the borrower default. Thus there's no need for statute or juries to penalize lenders merely for making bad loans; there should be punishment if lenders commit fraud, but that's never the case in the sob stories plastered all over the news. I've yet to see one case of a ARM where there wasn't a part of the contract stipulating how the interest rate would increase. There always will be a clause defining that, because lenders will want something enforceable in court (well not enforceable anymore, as I'll explain in a little), something clear enough to satisfy the "meeting of the minds" requirement of a valid contract.

I've always wondered, were these borrowers truly so stupid to think they'd get 1.9% forever? "Always read the fine print," the old saying goes, and just because it's small print doesn't mean it's unreadable. When something will last the next 30 years of your life, is it so unreasonable to read the agreement and perhaps consult a lawyer?

But lenders were coerced by Congress, who shoulders even more blame. Congress for two decades, but particularly in the last several years, has used legislative blackmail to "encourage" (i.e. force) lenders into giving loans to low-income people, notwithstanding that these borrowers are precisely the sort who likely couldn't repay. Let's be objective: should lenders give equal numbers of loans to low-income people as they do to higher-income people? Of course not; that risk makes no sense whatsoever. So when banks denied applications of low-income applicants, it wasn't based on race, but on qualifications. Banks are in business to make money, and the only color they care about is your money, not your skin. However, in the lower-income brackets there are more minorities than whites, so that's been perverted into "racism" and "discrimination." As I've mentioned before, Stan Leibowitz gave an excellent history of ACORN and other groups whining before Congress about "discrimination" in lending. Oh, but there should be discrimination, namely between those who can repay the loans and those who can't. "Discrimination" isn't inherently bad: the word means to determine differences. But ever since "the politics of victimhood" started taking root, everyone who wasn't qualified on true merit would cry "Discrimination!" and thus perverted the word's meaning.

The greatest blame is on the Federal Reserve, which made all of this possible with insanely low interest rates for the first half of this decade. As a line in one of my favorite movies goes, "Jesus, you can't make a buck in this market, the country's going to hell faster than when that sonofabitch Roosevelt was in charge. Too much cheap money sloshing around the world. Worst mistake we ever made was letting Nixon get off the gold standard." Nothing ever changes. As Bruce Bartlett told me, "The Fed always overdoes it."

We're not just finally feeling the effects, we have been for the last few years. We haven't seen this kind of inflation, and true inflation since we're talking purely about the money supply, since the early 1980s. And each time the Fed says it will "inject liquidity" and auction off more bonds, I cringe. It may have its financial uses, but the Fed is continually devaluing the dollar when it should let the financial markets correct themselves. The Fed made money so easily available and directly caused a credit crisis, of which the housing bubble is the most visible part. Lenders had every incentive to borrow as much as the Fed would create, since not partaking meant watching competitors help themselves and make profits. And the vast amounts available the borrow enabled borrowers to bid higher and higher offers on houses, driving up prices artificially. The Fed showed banks the carrot, giving banks the means to finance "no money down" mortgages, and Congress held the stick, namely the threat of investigations and regulations.

One of the most absurd explanations for the crisis is that it's the deregulation of the separation of commercial and investment banks; this two-paragraph concept was expanded into an entire book that my uncle briefly told me about. The repeal of the Glass-Steagle Act did encourage bank mergers, and eventually that banks would underwrite securities based on collateral-based loans like mortgages, but this wouldn't have been possible if the Federal Reserve hadn't made available such immense quantities of loanable funds.

Now people actually believe the Fed can alleviate the crisis by throwing more money at it, when it was the cheap money that caused the problems in the first place? A company can alleviate financial problems and stave off bankruptcy by diluting shares to raise capital. But if it constantly does so often that it becomes policy, investors will trust the company less and less. Why should the Fed be any different when it continually dilutes the money supply?

Buffett would have clarified the general nature of the problem, that it's not just housing, if he knew anything about real economics. He's a great investor, as I said, but did that, or his nickname "The Oracle of Omaha," or now being the world's richest man go to his head, that he goes by his own economic definitions? In this interview, he says the U.S. isn't in a recession, per NBER's definition. Yet he recently told Der Spiegel that "I believe that we are already in a recession. Perhaps not in the sense as defined by economists....But people are already feeling the effects of a recession." So which is it?

I'm actually not surprised that unemployment is so low. By our own historical standards, we're average, and our unemployment statistics in France or Germany would be considered an economic boom. The dollar is in bad shape, and that is a big problem, but overall the U.S. economy is far more resilient than Buffett or the other doomsayers think. Housing isn't the majority of the economy, despite its rippling effects, as are the major banks. Bear Stearns earned $9.2 billion and $5.9 billion in gross revenue in fiscal years 2006 and 2007, respectively. Its operations, including its $1.2 billion dollar headquarters in midtown Manhattan, could have completely vanished off the planet, its 14000 employees could have all stopped working, and it still would make hardly a dent in the $14 trillion American economy.

I tried explaining that a little while back to a pseudo-capitalist who said Bear Stearns was "too big to fail." Nonsense. A free market, with no bailout, would have sorted it out just fine: other companies would have bought out the pieces, and the employees would have naturally gravitated to other jobs, and this Schumpeterian "creative destruction" would have made things all the more efficient. But so many, Buffett included, are fans of the Bear Stearns bailout. Did he really have that big a long position in BSC? Or is he just another pseudo-capitalist who wants the "free market" and "competition" only when it suits him?

Then we have his Democratic bias, showing he's just a limousine liberal at heart. No surprise there. The money he's giving away will do many good things, but that's not enough. He has to force people into his own politics, using the weapon of government.

The two most evil buildings in the Philippines

As you go down Roxas Boulevard, you'll see the main Department of Finance building next to the main headquarters of the Bangko Sentral ng Pilipinas. The latter, as you probably guessed, is the country's central bank.

The central bankers steal from the people by continually devaluing money (especially what's been saved for the future), and by deciding that import and expert prices should be higher or lower. It doesn't matter whether it's the Pinoy who labors in the fields all his life, the family running a little store or restaurant, or the foreigner businessman who's bringing in dollars/yuan/yen/etc. investment: the Bangko Sentral is unequivocally proclaiming that only its governors, a handful of people among 85 million others, know what the peso's true value is. On top of that, though its role is officially about monetary stability, the Bangko Sentral also decides how much economic growth is "too much" or "too little," usually based on a "target" they set. It isn't even a target for the inflation they produce, but a target for economic growth, even though the absurd Phillips Curve has been debunked for years. There is no greater evil that central bankers do, in any country, than to decide they know best whether people should be working or not. Don't fool yourself: that's exactly what they do when they want less or more economic growth. "Less" growth is their decision to throw people out of work and reduce the earnings of the rest. "More" growth is their benevolent decision to let more people work, and all workers perhaps earn more.

The other group has a simpler job, but one no less destructive or despicable. They just look at the shambles of people's lives and steal a portion of what's left, whether through income taxes or the VAT.

And in principle, what both groups do is no different than what happens here. We're just prosperous enough in the U.S. that enough Americans are stupid enough to be "content" with their lives.