Friday, February 20, 2009

Real WHYS and Big LIES

Below is an excerpt from a newsletter by Mark Skousen, who used to be an economist for the CIA. His job was to find out what was really going on in the economies of countries around the world. It was there that he gained his Washington sources of congressman and insiders, and his research know-how. He now publishes a regular investing newsletter called Forecasts and Strategies,

This lays out the REAL WHY of the present economic “crisis” and the BIG LIES we are being told about it, in simple, understandable language. ~ Eileen

Excerpt by Mark Skousen

Big Lie #1
"The subprime mortgage and real-estate bubbles would never have existed had government not created them — by creating incentives for home-buying and selling and removing disincentives for irresponsible lending and borrowing.

In other words, the real culprit in today’s financial crisis isn’t capitalism, but government — whose fingerprints are everywhere to be seen:

It was government that, to encourage broader home ownership, passed the Community Reinvestment Act in 1977, then amended it in 1995 to require banks to lend to high-risk (subprime) borrowers.

Banks that failed to comply were hit with fines and faced rejection when they requested mergers and branch expansions. Suddenly, the subprime mortgage business was born, and Countrywide Financial became its poster child.

It was government that offered an implicit guarantee to cover the performance of the two giant “government-sponsored enterprises” (GSEs) Fannie Mae and Freddie Mac, which allowed subprime lenders to turn their long-term risk over to the government. Absent this guarantee, market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.

It was government that, through the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income, created unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.

It was government that imposed “mark-to-market” accounting regulations on financial institutions, forcing mortgages and other loans to be written down to zero simply because they couldn’t be sold, even if they were still being paid by customers. As a result, we’ve seen financial tornadoes causing institutions to be downgraded and in some cases to completely collapse.

It was government that, through the Federal Reserve under Alan Greenspan, reduced interest rates to 1% in 2004, causing a dangerous increase in irresponsible lending patterns, over-leverage of capital investment, and speculative heat waves in real estate, subprime ARMs, corporate bonds, and other assets.

And it wasn’t just our government. To artificially heat up their economies, central banks in developing countries (especially Russia, China, and India) deliberately inflated their money supply at unprecedented rates.

The resulting inflationary boom in real estate and other assets created a structural imbalance in the U.S. and the global economy as a whole. At the height of its prowess, Fannie Mae had leveraged its equity 40-to-1. When the real estate boom ended, the bubble burst.

Which brings us to…

Big Lie #2: Government is the Cure
Talk about adding insult to injury. The government intervenes massively in the economy to fuel the biggest speculative bubble in history, and when the bubble bursts with catastrophic consequences for the entire world — it offers more government as the solution.

After all, we are told, the last time laissez-faire economics put the economy into a massive hole — the Great Depression — it was government that dug us out. Only something of comparable scope — a “New New Deal,” they are calling it, in the form of trillion-dollar deficit spending on infrastructure and “green” energy, paid for by tax hikes on “the rich” and capital gains, and together with more and stricter regulations on the financial markets — can prevent an even greater depression from occurring.

The only problem with that is that it’s based on a series of historical myths — myths that are unfortunately taught in nearly every high school and college textbook. For instance:

You were taught that unregulated speculation caused the Roaring Twenties and the Crash of 1929. Wrong: It was the recently created Federal Reserve that fueled an investment boom with artificially low interest rates, leading inevitably to a crash (sound familiar?).

You were taught that Herbert Hoover was a laissez-faire ideologue who refused to intervene in the economy even as citizens had to live in “Hoovervilles.” Wrong: Hoover engaged in unprecedented efforts to prop up wages and farm incomes, boosted government spending by more than 50 percent, and hiked the top tax rate from 25 percent to 63 percent. His opponent, FDR, actually accused him of leading the country “down the path to socialism.

”You were taught that Roosevelt’s New Deal led us out of the Depression. Wrong: The New Deal turned what would have been a sharp but brief correction into a decade-long catastrophe. In 1938, unemployment was 19% — nearly 2% higher than when FDR took office five years before.

But don’t take my word for it. Take that of FDR’s own Treasury secretary (and best friend) Henry Morgenthau, who on May 9, 1939 — after almost two full terms of Roosevelt and the New Deal — made this startling confession to his fellow Democrats on the House Ways and Means Committee:
“We have tried spending money. We are spending more than we have ever spent before and it does not work… We have never made good on our promises… I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot!”

Yet these are the same kind of policies that “experts” like the Nobel Prize-winning economist and New York Times columnist Paul Krugman — author of the bestseller, The Return of Depression Economics — are urging on our political leaders, who seem all too eager to adopt them.

Which brings us to…

Big Lie #3: Obamanomics Will Save Us
Look, I’m a professional economist and investment advisor, not a pundit. So, I’m not here to talk politics.

But make no mistake: when it comes to the economy, Barack Obama shows every sign of being a throwback to big-government liberals like FDR, LBJ, and Jimmy Carter. And once his policies kick in, the consequences for taxpayers and investors will be enormous.

His new “stimulus package” alone would add an estimated $1.5 trillion to the federal budget.

As for the tax hikes to pay for all this, my friend Steve Moore of the Wall Street Journal calculates that the Obama tax plan adds up to a 39.6% personal income tax, a 52.2% combined income and payroll tax, a 28% capital-gains tax, a 39.6% dividends tax, and a 55% estate tax.

And remember: Obama and his fellow Democrats — who now enjoy greatly strengthened majorities in Congress — don’t have to do anything for these tax hikes to take effect. They simply have to allow the Bush tax cuts to expire on schedule in 2010, as they have promised to do.

My friends, you can’t have capitalism without capital. Yet, Obama wants to penalize capital, individual and corporate.

In addition, Obama is beholden to the most radical special interests of the Democratic Party, including the unions — which caused the woes of the Big Three auto makers — and that will spell trouble for investors like us.

Finally, studies show that the most dangerous time in American history has been when one party (whether Democrat or Republican) controls all branches of government. One-party control means the worst kind of big government, huge deficits, and tax hikes.

For the next two years at least we will have one-party control. Be prepared for a lot of bad legislation.

The bottom line? If they succeed in their plans, the Democratic majority in Congress will lead the nation toward the kind of socialism now operating in Western Europe — where production and growth can be charitably described as stagnant.