Fiscal Calamity Brought On By Clueless Troublemakers

Yesterday was a typical day on Wall Street. The Dow fell a little. Oil slipped a little. The dollar held steady at $1.49 per euro, about where it has been for months. And the price of gold went up.

No matter what else happens, gold seems to go up. Watch out, though. This gold market is ready for a correction.

As we said yesterday, a little bit of governance goes a long way. You’d think the feds might have learned their lesson. Their low rates…and subsidized mortgage loans…led to the biggest bubble in housing in US history. But no…they continue to cause trouble:

This from the Independent Institute:

“FHA Encourages More Bad Mortgage Loans

“An astounding 20 percent of the Federal Housing Administration’s $725 billion portfolio of mortgage loans will go into default as the result of the agency’s recent campaign to subsidize first-time homebuyers with little cash and weak credit. That prediction comes from an industry insider who has seen it all happen before: former chief credit officer of Fannie Mae, Edward Pinto, who recently testified before a House committee on the gathering storm of FHA mortgage defaults. It’s déjà vu all over again. But why did federal policymakers allow history to repeat itself?

“To listen to our glorious leaders discuss such matters is to realize that they have no real understanding of what they are dealing with,” writes Independent Institute Senior Fellow Robert Higgs in a new post on The Beacon. “They see the collapse of an artificially stimulated house-construction industry, and they conclude: the government must subsidize more house construction. They see the collapse of real estate prices, and they conclude: the government must stimulate demand for real estate in order to raise its price.”

Had policymakers grasped the causes of the housing boom and subsequent bust, they would have stopped subsidizing unqualified borrowers, stopped trying to raise the prices of houses, and let the economic process work itself out through market processes. Continues Higgs: “Simply piling on more and more of the same distortive policies that generated the crisis in the first place can, at best, only delay the day of reckoning while magnifying the adjustments that ultimately will have to occur.”

“Government Responds to Economic Woes by Making More Bad Mortgages Loans,” by Robert Higgs (The Beacon, 11/22/09)

Housing America: Building Out of a Crisis, edited by Randall G. Holcombe and Benjamin Powell

“Anatomy of a Train Wreck: Causes of the Mortgage Meltdown,” by Stan Liebowitz (10/3/08)

In other news, Eliot Spitzer is trying for rehabilitation. He seems to be attempting a comeback as the champion of the little guy. So, in Slate Magazine, he attacks Tim Geithner’s deal to save AIG. It was a sellout of the American taxpayer, he says.

“Geither’s Disgrace,” he entitles it.

But wasn’t that the whole idea? To bail out Wall Street with the taxpayers’ money?

AIG was saved…thereby saving a lot of bankers’ bacon all up and down Wall Street. But what about the firms that weren’t saved? The New York Times reports that their bacon was fine too:

“At Lehman, the top five executives received cash bonuses and proceeds from stock sales totaling $1 billion between 2000 and 2008, and at Bear, the top five received more than $1.4 billion, according to the study, which was released on Sunday night on the Web site of the Program on Corporate Governance at Harvard Law School.

“The payouts came in the form of cash bonuses as well as thousands of shares of stock that the executives sold as the share prices of their companies soared. Most of the executives sold far more shares during that period than the number they held when their companies hit bottom.

“‘There’s no question they would have done massively better had their firms not collapsed,’ said Lucian Bebchuk, one of the study’s authors. ‘But the wealth of those top executives was hardly wiped out. The idea that they were devastated financially has kind of colored the picture people have about what payoffs they were facing.’”

The Daily Reckoning