A Patriots Manifest Sept 11 2008
William White
The recent Freddie Mac and Fannie Mae bail outs are part of a long list of bail outs and nationalizations going back to at least Nixon’s founding of Amtrak and quite possibly much further than that. This type of crap is a result of the Progressive movement of Cleveland, Teddy Roosevelt and Wilson acting on the proposition that innovation boom and bust is the same as financial boom and bust.
Two sets of examples:
In the 1920s the Radio and Auto revolutions were innovation driven. GMAC financing evermore dubious car loans and Joe Kennedy’s leadership in the RCA corner were financial booms that led to busts. The fall of spot agricultural prices in 1921 but futures contracts not collapsing until 1923 was a warning sign that the Fed was a bad idea. The housing bubble that was nationwide but particularly acute in Florida where the bubble burst in a vengeance in 1925 was another sign of out of control money creation. Would the 1930s have seen 5 or more years of 10% or more unemployment without the printing presses running? Quite possibly. Going from 10% to 90% market share in less than 10 years as happened with cars and radios was quite a shock to everyone. Going from multiple industries expanding at 8%/year to say 2%/year expansion is a shock. 5 years of low to mid teens in unemployment strikes me as likely even with hard currency and the lack of easy money credit. But the 10 years of 10+% unemployment with a suspiciously convenient unemployment peak of 24.9% so FDR could claim to keep unemployment under 25%? Was that even remotely necessary, no.
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In the 1990/2000s dot bomb and com bomb were managed bubbles whose relatively soft landing were based on a housing bubble. Current stock market capitalization is around 17T; current housing values are probably about 19.5T down from a market top of about 27T but that does not include the value of commercial, agricultural, multi-family and other real estate markets. GDP is running around 13T and I say around and about a lot because inflation, money supply, unemployment and other government statistics have been redefined so many times that it is doubtful that any of them have meaning. For example the stock market first exceeded GDP in market capitalization in 1995 and it has stayed above GDP ever since. In 1929 capitalization reached 87% of GDP. The S&P has an average PE of 25. Fair valuation is generally a PE of 15-20 but 1990-1 saw PEs go from 17 to 13; 1966, 18 to 13; and 68-70, 19 to 13. The SEC and Fed are doing everything possible to get the stock market to deflate slowly to a market capitalization of about 10T without a crash. I think that goal will lead to an American Brezhnev era of stagnation but the housing market is the real vulnerability.
In 2007 the subprime real estate mess started to unravel. In 2008 the next lowest level of Alt. A loans started crashing. Jumbo loans, 470+K, involve loans to the most financially sophisticated homeowners. The Jumbos are much more likely to return deeds in lieu of foreclosure than other borrowers. That means that they do not show up in foreclosure statistics and they can afford top shelf lawyers to fight the mortgage company in case of a deficiency judgment so the mortgage companies generally minimize their losses by simply taking the deed back. What comes next are the option ARMs. 500 billion of these negative amortization loans are scheduled to reset 2009-12 and they are concentrated in California, not exclusively but mostly. So Fred and Fran are going to suck up cash to try to prevent a 50+% decline in California real estate values vs. maybe a 30% decline in New York and south Florida real estate values while inhabitants of “flyover country” are told that they get more in federal receipts than they pay in taxes so shut up and be happy.
This often quoted stat begs a lot of questions such as; can an E-4 or below live in a donor states? Since I have lived in DC and I was stationed outside of Chicago I will go into these two of the few major concentrations of military personnel north of the Potomac-Ohio line and west of the Mississippi. Members of the military honor guards and bands in DC who cannot live in the barracks or on base dependents housing can easily end up on welfare so senior enlisted men and well connected junior officers pull every string they can find to stay out of DC. Even less pricey locales can cause problems. My instructors at Great lakes “A” school outside of Chicago could easily be distracted on duty nights by providing them with an audience for their complaints about being stationed there. But keep in mind this was a naval training base and shore duty for many naval specialties are 90% restricted to training bases and DC. Generating any complaints among sailors on shore duty with a duty roster that puts them on watch every two weeks or so is difficult. Yes, complaints about the food and weather is normal but the complaints I heard came from married personnel getting it in the neck for being stationed there was not the normal sailor complaints.
The military chiefs try to avoid extra recruitment and retention costs by basing as many personnel as possible in “flyover” country due to the cost of living. I suspect the Service Academies at West Point and Annapolis would be relocated to Tupelo MS and Mobile AL or to keep the enlisted staff happy if the joint chiefs had their way. This is not just a military problem. The post office and UPS have problems with pay differentials between Arkansas and New York or Alabama and California. Postal and military retirement goes much further in Oklahoma than in Illinois. As a matter of fact servicemen with foreign brides prefer to retire in recipient states so their money goes further, with retiring in the wife’s homeland as the other option. So real assets (blood) are going to be transferred from “flyover” country to the left coast and inflated financial instruments are returned by the Fred and Fran bail out and this will be a hot button issue for decades.
Let’s get one thing straight: economics provides great insight into what is going on in a society but depressions and currency collapses on the bust side and innovations and financial monkeyshines on the bubble side are merely data. What matters is who benefits from the boom and who pays for the bust. As long as the beneficiaries and payers are pretty much the same booms and busts are self correcting but that is not the case for the housing bust and stock market bubble. Ohio, Indiana, Michigan and for the most part Pennsylvania have not benefited from either market. Rightly or wrongly they are leaning Republican to a degree not previously seen. Illinois (through its commodities pits), California, Nevada and the Washington -Boston corridor have benefited from both markets. The higher food and fuel prices that pay for these benefits are fairly close nationwide. So the costs are shared but not the benefits.
To misquote Marx the working classes are being exploited by the bureaucratic classes. Workers of flyover country unite you have nothing to lose but unnecessary bureaucratic BS and being used as the milk cow for DC, New York and Cali. OK, not as poetic as the final line of “The Communist Manifesto” but it is better than nothing. That’s the Republican plan so why is flyover country so strongly Republican?
Well due to voter fraud and ballot access restrictions the alternatives are Republicans and Democrats. So how bad do the Democrats have to be in order to make the Republicans look if not good at least less evil?
Well take the current presidential race McCain has all the signs usually cited for PTSS: confusion, memory loss, episodes of rage and marital unrest; in other words a placeholder with no chance of winning but it looks like he might just win. The Democratic candidate BH Obama is taller, thinner, younger and more closely related to the queen of England than McCain. Even assuming a much higher degree of racism than appears to be the case based on that data and past presidential races the odds of Obama winning should be 10 to 1 in favor (100 to 1 if he were white and assuming 10% of the electorate will show up at the polls to vote against a black regardless of ideology or polling data as opposed to staying home in disgust). Currently the race appears to be a coin toss. How can this be?
Carter brought us hyperinflation in 1976-80, Bill Clinton fiddled with the accounts to hide bad news and those are the successful Democratic candidates for president in recent memory. Carter needed a major scandal to get elected, Clinton needed 3rd party help twice and that means 40 years since a Democrat was elected president on their own merits. So part 2 of this series will deal with why the Democrats manage to make the Republicans look good.
The views expressed by William White are his and his alone and may not be the views expressed by A Patriots Manifest. Thank you .... Michael Roller...