Archive for December, 2011

The debasement of the currency

Wednesday, December 21st, 2011

I see almost nothing about the severe inflation of the past 50 years. It is astonishing and annoying to see comments about the rise in the stock market by people who have no idea why this occurs. The peak of the Dow Jones Industrial Average in 1929, before the crash, was 381.17. The dollar was valued at 1/20 of an ounce of gold. Certainly, the Dow Jones Average has changed the companies included but the principle is same, to show the average value of the large companies that anchor the US economy.

In 1934, Roosevelt outlawed the private ownership of gold and took the country off the gold standard. He set the value of gold at $35 per ounce, a substantial devaluation. This gold price held until Nixon took the guarantee of the gold price away in 1971, placing the country, and the world economy on what is called “fiat money”. A number of friends of mine were buying Swiss gold francs in spite of the law against US citizens owning gold. They kept their gold coins in Switzerland, which charged negative interest on such accounts.

In 1969, I bought my first house for $35,000, in South Pasadena. IN 1968, I bought my first new care, a 1968 Ford Mustang convertible for $3050. I paid $95 / month to the LA County Hospital Credit Union and, in three years, the car was paid for. My first house in Mission Viejo, where I had decided to settle and open a surgery practice, cost $67,000. Three years later, the bank told me it had tripled in value. Jimmy Carter had been president two years.

Now cars now cost around $30,000, ten times the 1968 price. Some of this is related to safety measures, most of which are of little use. The plastic bumpers do little but provide expensive repair bills for minor fender-benders. What has been the history of inflation since 1968 ?

Here is a chart showing inflation since 1980 The chart shows a 50% decline in the value of the dollar since 1980. I think that may understate the case. The change in value of the dollar has also tracked the gold price since the 1920. In 1928, gold was $20 per ounce. In 2011, gold is valued at roughly $1700 per ounce. That works out to the dollar being worth 11.8 cents.

As I am personally dependent on a fixed income, supplemented by a variable additional income which has declined severely the past two years, inflation worries me. It destroyed the German economy in the 1920s.

The cause of the financial crisis

Thursday, December 15th, 2011

Peter Wallison has a piece in the Atlantic that explains the basic policy error that led to the housing bubble and the subsequent financial crisis. Barney Frank has been trying to evade his share of responsibility for the problem. He has been telling people that a failure of bank regulation is the source of the problem. In fact, it is the opposite. Banks were obliged by regulators to offer mortgages to people who were not credit worthy. This was an attempt by politicians like Frank to respond to ACORN and similar activists who complained that poor people and minorities had a hard time buying houses.

His most successful effort was to impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy–in other words, prime mortgages–but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

The GSEs, like Fannie and Freddie, were required to buy these subprime loans. The bankers, and mortgage brokers like Countrywide, responded by shifting the business plan of lenders from buying and servicing mortgages to selling mortgages and then flipping the loans to a third party who bundled them into the notorious “mortgage backed securities” that sank the economy. I have bought several homes over my lifetime, the first in 1969. Each time, I was required to document my ability to repay the loan and make a 20% or greater down payment. In fact, I sold my first home in 1973 when I moved to Orange County for the same price I had paid for it, thus losing my equity to the selling agent’s commission. Appreciation of housing prices did not start until inflation took off in 1976 with Carter’s election. By 1978, my house in Orange County had tripled in value. Even so, when I bought another house in 1979, I had to document my income and pay 20% down.

These requirements had disappeared by 2003 and mortgage brokers were making good incomes by processing loans they would not service and which they cared little about long term solvency of the buyer. It wasn’t their problem.

By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit. This continued through the 1990s and 2000s until the housing bubble–created by all this government-backed spending–collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.

There is no doubt where the source of the problem lies. Now, we have to figure out how to get out of it. Cutting government spending and cutting regulation, which failed to do anything about the housing bubble, will help but that will take an election. If through mischance Obama is re-elected, we will have a ten year Depression. We are nearing the middle of one right now.

UPDATE Why I am not voting for Newt Gingrich.

This is a devastating report on Newt’s relationship with Freddie Mac. I was undecided and quite impressed with Newt’s debate performance until I read about his deals with Freddie Mac. He has denied lobbying but I find that very hard to believe. I reproduce the WSJ article because it may be behind a subscription wall.

Newt Gingrich’s opponents aren’t letting up in their criticism of his lucrative ties to the failed mortgage giant Freddie Mac after he resigned as House Speaker in the late 1990s. More damaging to his Presidential candidacy is that Mr. Gingrich doesn’t seem to understand why anyone is offended.

In his first response after news broke that he’d made $300,000 working for Freddie, Mr. Gingrich claimed he had “offered them advice on precisely what they didn’t do.” As a “historian,” he said during a November 9 debate, he had concluded last decade that “this is a bubble,” and that Freddie and its sister Fannie Mae should stop making loans to people who have no credit history. He added that now they should be broken up.

A week later Bloomberg reported that Mr. Gingrich had made between $1.6 million and $1.8 million in two separate contracts with Freddie between 1999 and 2008. The former Speaker stuck to his line that “I was approached to offer strategic advice” and had warned the government-sponsored enterprises (GSEs) to stop lending to bad credit risks.

Then on December 2 our colleagues at the Journal reported that as late as April 2007 Mr. Gingrich had defended Fannie and Freddie as examples of conservative governance. “While we need to improve the regulation of the GSEs, I would be very cautious about fundamentally changing their role or the model itself,” Mr. Gingrich said in an interview at the time.

Mr. Gingrich added in that interview that there are times “when you need government to help spur private enterprise and economic development.” He cited electricity and telephone network expansion. “It’s not a point of view libertarians would embrace, but I am more in the Alexander Hamilton-Teddy Roosevelt tradition of conservatism,” he said, adding “I’m convinced that if NASA were a GSE, we probably would be on Mars today.”

This doesn’t make it OK and he has some explaining to do. His attack on Romney this week, talking about his career at Bain Capital as if it were deplorable, was even worse.

Why opposition to the XL pipeline is insane.

Sunday, December 4th, 2011

We are on the cusp of a new era in energy production in North America. Soon, assuming the Obama administration is defeated next year, we will be independent of the increasingly unstable middle east for oil. We need nuclear energy for electricity production. That is the most efficient source for base electrical generation. For transportation, we need oil or natural gas. For home heating, natural gas is the most efficient as it can be supplied by pipelines embedded in the streets and serving each house in urban neighborhoods. Rural customers can be served by CNG or propane tanks on the property. Even solar panels may contribute in tropical settings like southern California (where I live) or Arizona.

The present political climate, especially that in California, is enamored of irrational environmentalist theories that are holding up efficient solution to problems. The ban on incandescent light bulbs is an example of irrational legislation that will, hopefully, be reversed, at least outside of California which is hopelessly infected with environmentalist nonsense.

We are facing a foreign policy catastrophe in the middle east where even Israel, our single ally, may go under, albeit in the gotterdammerung of nuclear war. The Obama people have tossed aside our ally in Egypt, Mubarak, as Jimmy Carter did the Shah. The results will be similar. We have no friendly governments in the middle east except Israel and the increasingly fearful Jordan. Turkey is gone as the government, now largely Islamist, is edging toward Iran in policy.

I am not an isolationist but we need to anticipate a world where we are surrounded by hostile regimes. Self sufficiency must be our policy and the delusions of environmentalism are dangerous. Those opposed to our use of energy resources should consider suicide to make room for those of us who want to enjoy the promise of American life. Drilling for oil in the Gulf has been seriously damaged by Obama as many of these expensive drill rigs have left the Gulf for other parts of the world and will not return any time soon. In fact, there is evidence that George Soros has invested in some of these rigs that are now positioning themselves off Brazil for the same deep water drilling techniques that were criticized by Obama acolytes when they were located in the Gulf of Mexico where they were shut down by Soros-beneficiary Obama.

The technique of “fracking” has been criticized by the same environmentalists who oppose all sources of energy independence. They, of course, oppose all forms of oil production. Wind and Solar, which they do support, are capable of producing less than 10% of all energy needed by our huge economy. That way lies economic suicide and one wonders at times if that is the purpose. Tom Clancy, who has done a very good job of predicting the technological future, including the use of a jetliner as a flying bomb, has a novel, called Rainbow Six that considers an environmentalist group so radical that they plan to kill most of the earth’s population, excepting themselves, of course. I sometimes wonder if he was too extreme in what he attributed to the radicals around Obama.