McCain has a better answer but misses the root of the problem. He blames Fannie Mae and Freddie Mac for guaranteeing a whole bunch of loans that shouldn’t have been guaranteed, leading banks to assume the additional risk of subprime lending.

Neither has mentioned the Community Reinvestment Act nor its tweaks under Clinton and Bush-43. The hammer is still there for the government to pressure banks to make bad loans. The bail-out is on, but the boat still leaks.

Until someone mentions the government’s perhaps-well-meaning but completely unconstitutional and continuing attempts to put people in homes they couldn’t afford, no bail-out is going to work.

^DJI over President Bush

Andrew Roth at the Club for Growth put up a stock market history graph of the time President Bush has been in office. One may look at this as a pretty good indictment, but I think there’s something else.

I am not a business major, but if we look at the 2007-2008 and see a bubble, we can now note the Dow Jones average is below the values for 2004-2006. That is the area where the Bush tax cuts began letting people have more of their own money.

All other things being equal, the bubble has popped, and the market is now undervalued. Except for loans which shouldn’t have been made in the first place, assets are assets. A Halliburton pump truck doesn’t destroy itself because some speculator doesn’t want to own part of the company any more.

Cycles happen. People employ their gut reactions when assuming risk. Greenspan used to call it “irrational exuberance.” We shouldn’t follow that up with irrational fear. Banks are weighing their risk of bankruptcy vs. getting special treatment from the government for high-risk loans. Sound businesses still make money.

Now I did say, “all other things being equal.” We have an opportunity to royally screw things over through panic legislation and socialism. This market took such a large hit in part because Clinton and Bush economics delayed normal market corrections. Bubbles always pop. Markets will always correct. The longer it takes to pop and the bigger a bubble gets, the bigger the bang. The more our government gets involved in the market and in private industry, the more distorted the market becomes. The bigger our “fix” is going to be, the harder the crash the next time.

McCain’s attacks against Barack Obama’s relationship with William Ayers aren’t working, especially since Obama counters with the more financially relevant Keating 5 scandal.

Bill Bennett said this morning on CNN that McCain has to become the expert on the economy tonight.

If McCain wants to have a shot at winning he has to attack the Democratic-controlled Congress and its potential free reign with a Democratic president. He has to “straight-talk” about the bad legislation under Clinton and Bush-43 that caused banks to loan money to people they shouldn’t have. Bush’s “ownership society” and Clinton’s racial preferences in lending have to be exposed and denounced.

The financial crisis can and should be the repudiation of socialism. If you want the health care system to go the way of Fannie Mae and Freddie Mac, vote Democratic.

McCain’s reputation as a spending hawk is harmed by the bailout. McCain should repent, blasting it for being a dumb idea made worse by “sweeteners” and passed by artificial urgency. One can dream.

Drill, Baby, Drill!

The dollar is benefiting from the European Union’s consideration of a bailout.  Gas prices are going down.  A strong dollar that lowers the price of imported goods and petroleum will ease the pressure on the American wallet.

The Obama campaign seems to recognize that taxes and gas prices are issues where they are weak. If debate moderator Tom Brokaw is worth anything, he needs to ask Obama about Biden’s statement that they are for offshore drilling.  That might have been news to Obama.

Traditional conservative principles should win this debate on the economy.  The question is whether McCain is conservative enough to espouse them.

FastCompany.com reports that a Vatican cardinal is blaming greed for the financial crisis:

The world’s financial crisis is the result of greed, and an example of what happens when God, basic rights, and the common good are ignored.

Don Boudreaux has a nice, non-theological answer for the accusation of greed:

“Greed” certainly can be unleashed to do harm, but it can also be harnessed to do good.  Any compelling explanation of any observed economic reality must take “greed” as a given while identifying the specific incentives provided by prevailing social institutions.  If these institutions make serving the needs of others the best path to personal gain, then “greed” is harnessed for human betterment.  But if these institutions make predating on others - either through force or fraud, or either intentionally or unintentionally - the best path to personal gain, then “greed” will indeed lead people to act destructively.  In either case, though, it is the institutions and their accompanying incentives, rather than “greed,” that explain economic reality.

There is little utility in blaming greed. It is more useful to point out actions that can be reversed, such as bad legislation.

Another problem with punishing greed is that everyone is greedy.  Whether people get a loan on a $250,000 house that they can’t maintain the mortgage on, or whether a mortgage broker collects a fee for selling mortgages the actuarians say won’t get paid off, or whether people collect high-risk mortgages and sell the groups of securities, people are all being greedy. Shall we punish everyone?  Or is the market doing a sufficient job of punishing right now?

“This bill is a $700 billion check to build confidence in our financial markets. It’s a remedy, not a cure, and I’m afraid there’s nothing in this bill preventing us from having to write another $700 billion check in the coming weeks or months. If Central Ohio families and businesses are footing the bill to stabilize our ailing financial markets, they deserve a cure.”

No thanks are due the second time around, on an even more expensive bill. He voted Yes.

On his congressional web site, Rep. Tiberi writes:

“The bill the House voted on today is a heck of a lot different than the earlier version brought up on Monday. My main concern Monday was that the assistance in the bill would never reach local banks, small businesses, and Central Ohio families. I was also concerned that taxpayers who did nothing wrong would end up footing the bill to stabilize our financial markets. I believed it was important to have the right bill, not necessarily any bill.

“Today’s version, while not perfect, is a vast improvement. The FDIC insurance increase will help provide small businesses and entrepreneurs in Central Ohio with increased confidence that when they do business at local savings institutions, their money will be safe. Mark to market clarifications alter outdated rules to allow for accurate accounting of assets. This should help to relieve pressure on local financial institutions. During a time of economic uncertainty raising taxes on the middle class is not good policy. This bill includes provisions to prevent tax increases, keeping hard-earned money in the pockets of Ohio families.

“While we can’t guarantee financial security, I believe today’s bill gives local banks and businesses access to the credit and liquidity they need, while giving families more confidence in our financial system. These steps provide our financial markets the tools they need to put our economy back on track.”

This couldn’t have been “the right bill.” It still contains the bailout. It still rewards the lenders. If the FDIC increase, the one-year Alternative Minimum Tax fix, and the mark-to-market rules were beneficial, they should have been voted and passed separately, rather than serving as lubrication. $110 billion dollars in “answers” came at the cost of $810 billion, and nobody is fixing the cause. This was a lose-lose deal.

I found one good thing about the system from the Chicago Climate Exchange web site. They sell their contracts in metric tons of greenhouse gases that are sequestered or destroyed. Tying money to a physical quantity, rather than a “credit,” is a good thing; otherwise one could change what the “credit” is and really abuse benevolent people.

But there is a severe market distortion: Instead of an independent authority that would stake its reputation in deciding what benefit to the environment results from a certain amount of eliminated gases, and then that authority would issue ratings of environmental stewardship, the government is called in to set emission caps. Caps are used to force companies to buy credits and buff up green companies.

The effects of this kind of government distortion are visible in the financial markets, where banks were coerced into creating loans they wouldn’t have made in the first place. In the environmental market, no homes would be bought by the government, but you can count on a lot of wasteful spending.

The Washington Post reported Tuesday that 10 Northeast states banded together to create a regional cap-and trade system. $40 million dollars in allowances were purchased by (coerced from?) power generation companies. The system has one redeeming quality: it isn’t federally mandated.  Someone took the 9^th and 10^th Amendments seriously. Doing things regionally also gives us the ability to see how a system affects a region without harming everyone else, and maybe someone else will figure out how to do it better.

Note in the Post article, someone has decided that not enough is being done:

Critics have said the program will not have an immediate or national effect, because the emissions cap is set too high — at 188 million tons annually, slightly higher than the current level — and the prices are low enough for utilities to pay the fees and continue to pollute.

Now, this is interesting. The intent is to force companies not to pollute at all. It isn’t enough that they pollute and purchase enough remediation. Are the critics telling us that remediation doesn’t really work? If “purchased” metric tons of sequestered/destroyed greenhouse gases do not counter actual emitted greenhouse gases, the market is broken.

The Washington Times posted an article on Saturday about the House of Representatives’ experience with the carbon offset market. The House calculated that they needed to buy 30,000 short tons of carbon offsets, but they bought 30,000 metric tons, overspending by $25,000. Rather than get a refund, the Chicago Climate Exchange will hold our tax dollars and apply them to future spending.

The GAO is asking the same type of questions posed above about the credibility of the carbon trading system, leading to this quip:

“Without proper assurances, the only thing we know carbon-offset purchases reduce are taxpayer dollars,” said Rep. Darrell Issa, California Republican and ranking member of the House Oversight and Government Reform subcommittee on domestic policy.

Pelosi’s swamp deepens…

Now Congress is interested in capping executive compensation, reports Reuters.

Can we cap theirs?

Last time I checked, employment is still a voluntary contract. Boards of Directors chose to hire these executives with such insane contracts up front. Sure, these guys are probably overvalued, but the risks are increasing, too. They can be held personally responsible for their books, according to Sarbanes-Oxley legislation. They can do the perp walk if they place their trust in the wrong accountant.

The decisions these guys make affect thousands of people’s lives, and that’s just in the companies they run. One Richard B. Cheney decided to combine the individual real estate, IT, and other services within each of Halliburton’s Product Service Lines into one Shared Services line, and 10+ years later we are still feeling the effects of an organizational block that is really good at what it does but has little feel for the needs of its customers, the Product Service Lines. Companies are bought, sold, merged, split, and so forth. Some re-org doesn’t result in productivity improvement, and other re-org is substantially beneficial.

The Federal Government wants to limit salaries because they think CEOs are overvalued? I’d like to tie Congressional salaries to economic performance, the strength of the dollar, and amount of freedom left to the American citizen.

Cafe Hayek has started outlining government policies that directly affected this crisis. They all involve government pushing banks to make loans they wouldn’t normally dare:

The Community Reinvestment Act of 1977, in which Congress requires banks to lend to minorites no matter how bad their credit is.

The Department of Housing and Urban Development removing a 3% down payment requirement in 2005.

HUD Section 8 housing, created in 1975, setting off warning signs as early as 2004.

Changes in the Community Reinvestment Act in 1995, increasing mortgage lending to low- and moderate-income families by 80% — more than twice the increase to other groups.

Thus the potential $1 trillion bill to the taxpayer.

Unfortunately, the proposal has several land mines, according to the article:

• Even if the state gives permission for drilling in state waters, it can’t collect royalties. All royalties go to the federal government.
• In addition to rolling back tax breaks, which I’m not against, additional taxes would be assessed.
• Utilities would be required to use renewable sources of energy for at least 15 percent of the electricity they generate.

I’m not feeling a lot of sincerity on the Democratic side for increasing supplies and lowering gas prices. Even if this passed, no state would allow rigs where they couldn’t collect royalties, and the utilities would raise prices to cover the additional expense of renewable energy.

More analysis, with numbers, here.