The outcome of the 2008 election centered around the financial collapse that hit just months before the vote.  Even the most committed capitalists were taken by surprise at what seemed like a significant failure of capitalism.  Outrage was magnified as taxpayer dollars were used to bail out Wall Street millionaires.  In the months before the election we had little insight as to what caused this catastrophe.

Three years later we have collected insights from several good books on the subject.  With the clarity of hindsight we see that there was much more than Wall Street greed involved.  This is not to excuse the behavior of the self proclaimed financial masters of the universe who created self acknowledged crappy products as long as they could find suckers somewhere on the planet to buy their crap.  Their hubris rationalized absurd leverage because they bought into the “this time it’s different” mindset that seems to accompany every financial collapse.  They replaced an old school philosophical understanding of risk with a delusional mathematical certainty based on mathematical models that had soon to be realized severe limitations when applied to human action.   It is amazing what people will believe when they get paid outrageous sums.

But this was not enough to explain what happened.  As Thomas Sowell noted, blaming this collapse on greed is like blaming an airplane crash on gravity.  Greed has always been with us; why would it show so strongly at this time?

This excess was fed by the very institutions that claim to protect us.  Rating agencies gave higher ratings than merited because of implied government guarantees. Worldwide investors poured money into this market because because of the high scores from the ratings agencies.  But the center of the implosion was the housing market and this bust was the direct effect of Federal housing policies and the two Macs; Freddie and Fannie.  Wall Street served the political aims of a government that thought everyone should own a home, regardless of whether they could afford it.  To facilitate this objective Freddie and Fannie threw prudent lending out the window.

At The American Peter J. Wallison and Edward Pinto write Why the Left Is Losing the Argument over the Financial Crisis, 12/27/11.

Excerpts:

To the extent that we have had any success in challenging the conventional narrative about the causes of the crisis, it is because fair-minded people are persuaded by facts, not invective. Our argument is and has been that the financial crisis would not have occurred but for government housing policy implemented principally through Fannie and Freddie and the Department of Housing and Urban Development (HUD). Although there were a number of such policies, the most important were the affordable housing requirements first imposed on Fannie and Freddie in 1992 and expanded and tightened by HUD through 2007.

All told, after adding the SEC’s new data to our original estimates, there were approximately 28 million subprime and Alt-A loans outstanding on June 30, 2008, before the financial crisis, with a value of approximately $4.8 trillion. This was half of all mortgages in the United States. Of these loans, over 74 percent were on the books of U.S. government agencies and firms subject to government housing finance policies. This shows where the demand for these low quality loans came from. Fannie and Freddie were themselves exposed to more than 13 million subprime or Alt-A loans, or 65 percent of the government total.

HKO further comment:

We are only now beginning to see Washington take responsibility for their role in this crisis.  Any effort, law, or regulation that seeks to either solve this problem or prevent such a crisis from being repeated, that does not acknowledge and address this important factor is doomed to fail.

In Thomas Sowell’s collection, The Thomas Sowell Reader he offers an interesting idea in the chapter , ‘Reflections on Term Limits’.

Pay Congressmen $1,000,000 a year.  No benefits, no retirement pension.

The biggest problems with the current system,  in Sowell’s opinion, is the amount of time that is spent on campaigning and the failure to attract qualified prospects from many fields.

The problem with term limits is that unless the term limit is a single term, too much time will still be spent on campaigning.

Congressmen face several critical issues that demand a lot of thought and mental space.  They should not have to redirect those resources to the prospect of campaigning.  The more expensive and complicated our campaigns get the more costly the distraction.

Campaigning has become a different skill set from governance and we are learning that we need those who can govern.  Top leaders in law, finance, healthcare, and business make more than Congressmen and few can afford to take leave from their careers. The result is that we either elect those who need the compensation, unable to replicate the income in the private sector, or those so rich that they are only attracted by the power.  The working wealthy, those most familiar with federal policies’ daily impact, are kept out of the pool.

By paying the Congressmen $1,000,000 a year with no other benefits and limiting the term to a single term, the elected can eliminate the distraction of a campaign and the conflicts of interest that come from it.  While this sounds like a big expense Sowell notes that “Paying this salary to each member of Congress for the entire 21^st century would cost less than running the Department of Agriculture for one year.”

This salary would also attract the best in the fields whose input we sorely need.

There are for sure some shortcomings to the idea.  It may make the campaign for the single lucrative term more intense and may attract the more of the very influences Sowell seeks to minimize.  But lobbyists are a byproduct of regulations more so than campaigns.  There may need to be some restriction on the ability of the elected to deliver on promises made to get elected.

Those that earn seven figure salaries in the private sector are either selected by boards in some objective meritocratic fashion or are self made and measured by their results.  Candidates are selected by a population that is often more motivated by populist appeal than critical analysis.  It would be a mistake to assume voters will make the same decision as a Fortune 500 Board of Directors.

Still Sowell’s idea has merit and is worthy of consideration, if only because it addresses serious flaws in our current system.

From The Atlantic by Derek Thomson, The Most Important Graphs from 2011, 12/21/11

This graph shows how the richest 1% have take a larger share of the economy in the last 35 years:

… or does it?

This graph does consider the effect after taxes and transfer payments, but…

1. Why does it begin in 1979? The Reagan tax reform caused the income discrepancy to widen for two reasons. First the control of inflation caused a transfer of assets from tangible to investment.  During the 1970’s many investors moved assets into tangible assets like real estate and gold to benefit from inflation. Tangible assets were often not reported. When they moved their assets to security investments that were recorded it appeared to be a growth in investment income when in fact it was really a transfer from one asset to another. Secondly Reagan changed the tax code in 1987 reducing tax rates and encouraging subchapter C corporations to convert to sub -S corporations.  Unlike a C-corp which filed taxes as a a corporate entity, a sub -S reported its income on PERSONAL tax returns.  This shift in assets from corporate to personal returns also inflated the growth in the wealth of the upper income.  The effects of these two changes was short lived. It could be that most of the growth in the wealth of the upper income all occurred in the 1980’s as a result of these two non recurring events.
2. Why does it end in 2007?  Is it a coincidence that this picture ended just before the economic collapse that had a much larger impact of the wealthy?  There was a dramatic drop in the wealth of the upper quintile in the last few years.    How different would this graph have looked if it began in 1990 and ended in 2010?  It can be easy to achieve the outcome you desire by selecting the beginning and ending periods to accentuate the picture you wish to paint.
3. This chart shows income as a percent of the total. But this does not mean that the actual dollars in income of the lower quintiles did not also grow.  It is possible that the upper quintile achieved a larger share of a larger pie, and that all groups showed an increase in income.
4. Measurements such as this do not include improvements in living standards at all income levels.
5. Measurements such as this do not consider what drives these results. A better measurement may be the difference in income per hour worked.  Other wise we will be comparing the income of one who works with one who does not. Or we may be comparing the income of one who works 70 hours a week with one who works 30 hours a week.

The point is to be very skeptical of the statistics used to push political agendas.  A part of the truth can be more misleading than all of a lie, especially in this debate. For more information on how the statistics can be intentionally misleading read Income and Wealth by Alan Reynolds.  You can search several postings from this book at the search function in the upper right hand portion of this blog.

Andrew Puzder, CEO of CKE Resturants

Andrew Puzder writes Job Creation Is Price for New U.S. Health Law in Bloomberg, 12/26/11:

Excerpt:

Our company, CKE Restaurants Inc., employs about 21,000 people (our franchisees employ 49,000 more) in Carl’s Jr. and Hardee’s restaurants. For months, we have been working with Mercer Health & Benefits LLC, our health-care consultant, to identify Obamacare’s potential financial impact on CKE. Mercer estimated that when the law is fully implemented our health-care costs will increase about $18 million a year. That would put our total health-care costs at $29.8 million, a 150 percent increase from the roughly $12 million we spent last year.

To offset higher health-care expenses, we will have to cut spending on new restaurant construction, one of our largest discretionary spending areas. But building new restaurants is how we create jobs. An $18 million increase in our costs would more than consume the $8.8 million we spent on new restaurant construction last year, leaving nothing for growth. We will also need to reduce our general capital spending, which also creates jobs and allows us to improve our infrastructure and maintain our business. In summary, our ability to create new jobs could vanish.

The complexity of this legislation makes it hard to anticipate costs in the future. Our investments pay off — when they are successful — over the long term. Because we don’t know what our health-care expenses will be in two or three years, we are unable to determine with any certainty how much our investments will have to return for us to be profitable. All of that counsels in favor of holding off on new investments and saving our funds. We want to grow. But we are unable to do so knowing that large and undetermined liabilities will absorb funds we otherwise would invest for expansion.

HKO Comments:

Mr. Puzder speaks  eloquently how jobs are created and how government policies stifles that creation.  I hear this dilemma frequently, but few have stated it so clearly.

This administration has clearly demonstrated that it has no clue how the private sector works or how government policies impact private hiring.  Government has never created a single job: each job it has “created” came at the expense of at least one job in the private sector, often more than one.  They are capable, however, of killing job creation with its mandates and regulations.

I strongly recommend that you read the whole article. Tips to Carpe Diem for posting it as well.