People in glass houses (subsidies edition)

By Phil Levy

The Obama Administration last week launched a new World Trade Organization case against China. The United States complained that China has limited exports of industrial materials like bauxite and coke. These limits drive down prices for Chinese producers and raise prices for foreign users. The effect is to subsidize Chinese firms at the expense of foreign firms. We are officially shocked -- shocked! -- that any nation would do such a thing.

This case raises questions of both legal and economic principle. The legal question of whether China's specific measures contravene WTO agreements is best left to the lawyers. The economic question is whether such subsidies are just. U.S. Trade Representative Ron Kirk argued emphatically last week that they were not. He said the policies created "unfair preferences" and "skew the playing field against American workers and businesses." The answer? "Now, more than ever, we must fight against this kind of domestic favoritism," Kirk said.

To be sure, there are commendable aspects of last week's WTO complaint against China. From an economic standpoint, the Chinese measures do constitute a subsidy, and if the United States is to attack them, it is best to do so at the WTO. What's more, it is nothing new for the United States to object to foreign subsidies. The United States is still pursuing a WTO case against Europe for its financial backing of Airbus. In that case, the United States argues that Europe's provision of funds for aircraft design, retooling of manufacturing sites, and debt forgiveness all gave the European aircraft consortium an unfair advantage over its American rival, Boeing.

These cases show that the United States is opposed to other countries distorting markets in favor of their own domestic producers. And yet, consider three headlines of recent months:

1. The Obama administration has provided tens of billions of dollars in support for Chrysler and General Motors. This money, which no private investor would provide, is intended to finance the companies' emergence from bankruptcy and allow them to create new automobile designs. Further, the U.S. Department of Energy last week began to disburse $25 billion in low-interest loans to let domestic auto factories retool their manufacturing sites to produce more environmentally friendly cars. There certainly seem to be conceptual parallels to the Airbus complaint.

2. President Obama signed into law the "Buy America" provisions of the stimulus bill, which are intended to direct business toward domestic producers of goods like steel. After an outcry over an early draft, these provisions were scaled back so they would only hit countries like China, which is not a signatory to WTO government procurement rules. In practice, though, uncertainties over implementation rules have meant that trading partners like Canada and the UK have been hurt as well. This is clear domestic favoritism.

3. The president strongly embraced legislation limiting carbon dioxide emissions, the Waxman-Markey "cap and trade" bill, that passed the House on Friday. Among other things, that legislation aims to raise the domestic price of emissions, but it distributes significant batches of permits free of charge to favored industries. The effect is to subsidize the producers.

Each of these three measures has been contentious; taken together they present a very murky picture of the U.S. stance on subsidies. But who really needs consistency, anyway? There are all kinds of intricate rules at the WTO, and we have good lawyers. Why not just throw everything at dispute settlement panels and see what we can get away with?

There are a couple reasons why not. First, the WTO is not well-equipped to fill in the blanks on contentious and complicated issues like a government's power to subsidize. Those questions are best resolved through negotiation, not litigation. Second, in order to flourish, the global trading system must be perceived as fair. This is unlikely if its principal member is simultaneously subsidizing its own industries while attacking other countries' efforts to do the same. The United States needs to provide principled leadership -- and practice what it preaches.

Ambassador Kirk is absolutely correct that we should reject arguments for domestic favoritism. But he may also want to raise that point at the next Cabinet meeting.

Pass the Ball for Victory?

by: William Rivers Pitt

Sarah Palin resigns as governor of Alaska. (Photo: Reuters)

What the hell is going on with Republican politics lately?

Insane southpaw Bill "Spaceman" Lee once described Boston Red Sox baseball (pre-2004, of course) as high tragic opera, the kind of shattering long-running mental and emotional experience that leaves one with arms flung heavenward screaming, "Why, God, why?"

One must assume there were very many Republican strategists greeting the Saturday dawn in painfully similar fashion. It would not come as a tremendous surprise if reports surface next week about a rain of frogs and plague of locusts striking Republican National Committee headquarters.

I mean, seriously. This is getting entirely out of hand. The Republican Party, its adherents and its advocates have been running an astonishing gauntlet of shame, silliness and disgrace for four long years now. Randy "Duke" Cunningham went to jail for accepting $1.3 million in bribes, Bob Ney pleaded guilty to accepting bribes as well, Tom DeLay got indicted for money-laundering, Jack Abramoff lobbied half the GOP members of Congress into federal investigations, Mark Foley went sideways with Congressional pages while Dennis Hastert covered it up, Larry Craig tapped his foot in a bathroom stall and got busted for solicitation, and Ted Haggard, minister and leader of one of the largest evangelical churches in America and a pillar of the GOP base, was discovered enjoying meth parties with homosexual prostitutes in his spare time.

This deluge of ignominy eventually resulted in a ravaging defeat at the polls for the GOP in the November 2006 midterm elections. There was, and remains, nothing particularly inspiring or exceptional about the Democratic Party which routed them and took back Congress that year - they were, and remain, a fairly bland and timid lot in the main - but the GOP was just so bad that the country abandoned them, thus beginning the long, slow crumbling of Karl Rove's dream of a permanent Republican majority.

The pattern continued two years later when John McCain concluded perhaps the most preposterously poor presidential campaign in American history with a decisive defeat at the hands of Barack Obama, who almost literally came down with the last drop of rain but was more than able to upend a badly damaged Republican Party.

In the aftermath of the 2008 presidential election, the entire GOP seemed to go, quite literally, insane. Spokespeople such as Rush Limbaugh, Sean Hannity and Glenn Beck began braying about FEMA concentration camps being built to imprison conservatives, which in retrospect may have been the GOP's best option; they'd be in cages, sure, but at least they wouldn't be able to hurt themselves any more than they already had. The hits just kept coming like tidal waves of bad news, the most ridiculous of which, for a little while anyway, was the madcap sex scandal that erupted around South Carolina governor and 2012 GOP presidential hopeful Mark Sanford, who got caught cheating on his wife in Argentina.

Sanford set the benchmark for absurdity for about a week, until Alaska governor and former vice presidential candidate Sarah Palin detonated her political career with a resignation press conference on Friday that likely will remain the gold-standard for political insanity for many moons to come. The 2008 campaign introduced Palin to the American people for the first time. McCain's decision to place Palin on the GOP ticket will go down in history as one of the more extraordinary political blunders of all time. For the Democrats, Palin and her berserk brood have been the gift that keeps on giving, right up to this past holiday weekend.

First, Palin announced that she would not seek re-election as governor. Almost immediately after this announcement, Palin gave a press conference in which she declared that she had no intention of being a lame-duck governor, and so was stepping down from office. The fact that she made herself a lame duck by announcing her intention not to run again was merely an accent in the symphony of dumb Palin unleashed upon an astonished press corps.

The full transcript of Palin's resignation press conference reads like the ramblings of a badly deranged child:

We are doing well! I wish you'd hear more from the media of your state's progress and how we tackle Outside interests - daily - special interests that would stymie our state. Even those debt-ridden stimulus dollars that would force the heavy hand of federal government into our communities with an "all-knowing attitude" - I have taken the slings and arrows with that unpopular move to veto because I know being right is better than being popular. Some of those dollars would harm Alaska and harm America - I resisted those dollars because of the obscene national debt we're forcing our children to pay, because of today's Big Government spending; it's immoral and doesn't even make economic sense!...

Let me go back to a comfortable analogy for me - sports ... basketball. I use it because you're na‹ve if you don't see the national full-court press picking away right now: A good point guard drives through a full court press, protecting the ball, keeping her eye on the basket ... and she knows exactly when to pass the ball so that the team can win. And I'm doing that - keeping our eye on the ball that represents sound priorities - smaller government, energy independence, national security, freedom! And I know when it's time to pass the ball - for victory....

In the words of General MacArthur said, "We are not retreating. We are advancing in another direction."

Wow.

Whatever the ultimate reason for Palin's resignation may turn out to be - looming scandal, presidential aspirations or raw, undistilled stupidity - the fact of it has added another leaf to the long tome of Republican woes. The idea that McCain actually thought this person fit to be an elderly heartbeat away from the presidency is mind-boggling, and the thought of her trying to run for president in 2012 is nothing short of hilarious.

This is the GOP of the 21st century. You'd think it couldn't get any worse, but if Palin, Sanford, Haggard, McCain, DeLay, Foley, Cunningham, Ney, Abramoff, Limbaugh, Beck, Hannity, Bush and Cheney have taught us anything, it is that we can never assume the bottom of the GOP barrel has been reached. The Republicans will really have to outdo themselves to top this most recent disaster, but nobody should doubt they have it in them.

Stay tuned.

THE ECONOMY:
Against Regulations

By David R. Henderson

Deregulation caused this crisis? In many ways, the markets are more regulated than ever—to our detriment. By David R. Henderson.

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“Americans May Be Losing Faith in Free Markets,” said the headline of a “news analysis” last summer by Los Angeles Times reporter Peter G. Gosselin. “Wave Goodbye to the Invisible Hand,” suggested an article by Washington Post columnist Steven Pearlstein. This recent theme in economic reporting actually began earlier last year with an article by New York Times economics reporter Peter S. Goodman. “A Fresh Look at the Apostle of Free Markets,” which I examined at length, was full of misinformation, not just about his subject, the late Hoover senior fellow Milton Friedman, but also about economic thought and the state of the U.S. economy. Newer articles continue the trend. And they’re all wrong. Many journalists claim that the U.S. economy since the late 1970s has been very free, with little regulation; that this absence of regulation has caused markets to fail; that there was a consensus in favor of little regulation; and that now this consensus is fading. On all these counts, the reports are false. Specifically, the U.S. economy has not been free since before the New Deal of the 1930s. Even before the 1930s, the U.S. economy was “mixed”—that is, a combination of economic freedom and government regulation—and Franklin Roosevelt’s New Deal altered the mix substantially toward regulation and away from freedom. The deregulation of the late 1970s and 1980s reversed some of the regulations that came with the New Deal and some that preceded it, but the net amount of regulation has been much higher in the alleged era of deregulation than it was during the post–National Recovery Administration New Deal. Even before the 1930s, the U.S. economy was “mixed”—a combination of economic freedom and government regulation—and the New Deal altered the mix substantially toward regulation and away from freedom. Moreover, most of the apparent “market failures” that these recent news articles refer to fall into one of two categories: either they are not market failures at all but market successes, or they are failures that are due to government regulation. Moreover, the consensus has not shifted from deregulation to regulation: there never was a consensus in favor of deregulation. Such a consensus prevailed among economists and a minority of politicians in the late 1970s and early 1980s but never among the majority of politicians. Finally, most of the problems that have happened in the U.S. economy in the past few years strengthen the case for economic freedom and against government control. Consider some specifics. Pearlstein wrote: For the past twenty-five years, the United States has put its faith in open, unregulated and lightly taxed markets, and there’s little doubt that over time, that model has expanded economic output and improved economic efficiency. But what Americans have also come to realize is that the same model is less adept at providing other things that we value highly—things like safety, fairness, economic security, and environmental sustainability. There are two main problems with that two-sentence paragraph: the first sentence and the second sentence. AN ERA OF DEREGULATION? Take the first. “Unregulated markets” for the past twenty-five years? The Federal Register, which lists new regulations, averaged 72,844 pages annually during the Carter years of 1977–80. Presumably these were, by Pearlstein’s twenty-five-year standard, the last time before now that Americans failed to have “faith” in open, unregulated markets. Then the average fell to 54,335 during the Reagan years, rose to 59,527 during the Bush I years, to 71,590 during the Clinton years, and, finally, to a record 75,526 during the administration of that great believer in laissez-faire, George W. Bush. It’s true that when governments deregulate, they must announce those changes in the Federal Register, too, and so some of the pages represent genuine deregulation. But most of the pages were new regulations, no matter which president was in power at the time. So, far from moving away from regulation, the U.S. economy became even more regulated during Pearlstein’s alleged twenty-five-year era of light regulation. Together, regulation of homeland security and of finance and banking accounts for over half of federal regulatory spending. The number of pages in the Federal Register is not the only measure we need consult. Veronique de Rugy and Melinda Warren, in Regulatory Agency Spending Reaches New Height, an August 2008 report by the Mercatus Center and the Weidenbaum Center, found that, between 1980 and 2007, roughly the years that Pearlstein labels unregulated, the number of full-time employees of U.S. government regulatory agencies increased 63 percent, from 146,139 to 238,351. During that same time, the U.S. population rose from 226.5 million to about 301 million, an increase of only 33 percent. Moreover, according to de Rugy and Warren, U.S. government spending on regulation alone (not including compliance costs, a much bigger number) tripled, from $13.5 billion to $40.8 billion (all in 2000 dollars). As a percent of GDP, spending on regulation rose from 0.26 percent to 0.35 percent, a 35 percent increase. Some deregulation. One could argue that we need to distinguish between different kinds of regulation. Often people refer to “economic regulation” when they mean restrictions on new firms entering business or rules that require firms to get government permission before setting their prices. If this is what they mean, then there is a case to be made that, in substantial sectors of the economy, there is less government regulation now than before the late 1970s. There has been substantial deregulation at the federal level of airlines, trucking, railroads, oil, and natural gas, to name five large sectors. And indeed, as we shall see later, this deregulation has had, on net, good effects. What was the nature of this new regulation? The biggest growth came in so-called homeland security, where spending more than quintupled, from $2.9 billion in 1980 to $16.6 billion in 2007 (all in real 2000 dollars). The second-largest growth rate was in regulation of finance and banking, where spending almost tripled, rising from $725 million to $2.07 billion. Together, regulation of homeland security and of finance and banking now accounts for more than half of federal regulatory spending. Also incorrect is Pearlstein’s second sentence. Free markets have done much better than governments at providing safety, fairness, economic security, and environmental sustainability. The reason, for three out of the four, is simple. Economic freedom tends to lead to economic growth, as Pearlstein himself admitted in the above quote, and economic growth leads to more safety, more economic security, and more demand for environmental quality. One reason we haven’t had the environmental quality we demand is that overregulation has prevented private ownership—and stewardship. Safety and environmental quality are what economists call “normal goods.” As our real incomes rise, we want more of them. Over the twentieth century, as our real incomes rose, we workers demanded more safety, and we got it. As economist W. Kip Viscusi notes in “Job Safety,” published in The Concise Encyclopedia of Economics, as U.S. per capita disposable income per year rose from $1,085 in 1933 to $3,376 in 1970 (all in 1970 prices), death rates on the job fell from 37 per 100,000 workers to 18 per 100,000. Note that all this preceded the Occupational Safety and Health Administration, which originated in 1970. This shouldn’t be surprising: as workers, we show our demand for safety by the wage premium we insist on to take a given risk. As real incomes rose, this wage premium rose. Employers found it cheaper to avoid some of the risk premium by reducing risk—that is, by increasing safety. In short, there is and has been a “market for safety.” The case with environmental quality is similar. Past some income level, environmental quality is almost certainly a normal good. But demand does not guarantee supply. Why not? One major factor is that so much of the environment is a commons, a resource that everyone can use but no one owns. As Garrett Hardin pointed out in his classic 1968 article “The Tragedy of the Commons,” when no one owns a resource, it will be overused because no one has much incentive not to overuse it. One obvious solution is to transform, to the extent possible, the commons into private property; this has been done with rivers, lakes, and land but is hard to do with air and oceans. But certainly we could go much further toward private ownership than we have until now, turning rivers, for example, into private property, as is done in Scotland. (Scotland, not coincidentally, has pristine rivers.) So, contra Pearlstein, one reason that we haven’t had the environmental quality we have demanded is that overregulation has prevented private ownership. On the issue of economic security, the wealthier we are, the more secure we are. And because economic freedom creates wealth, as Pearlstein himself admitted, it necessarily creates security. Virtually no one in America ever needs to worry any more about starving. That is due in part to the welfare state but mainly to the riches created by relatively free markets. Of course, if by “economic security” Pearlstein meant confidence that one’s income will never fall, then he was right that markets don’t lead to that. Nor does government regulation. Government regulation of the economy’s money supply, high tariffs, high taxes, and regulations that kept wage rates high all caused the Great Depression or contributed to its length. FREEDOM AND FAIRNESS Pearlstein objected that economic freedom does not lead to fairness, but it does. One of the fairest things in life is that people reap what they sow, getting the benefits when they make good decisions and bearing the costs when they make bad ones. Markets create that fairness every day. Elsewhere in his article Pearlstein wrote that “government has had to step in to rescue the markets from their excesses and prevent a meltdown of the financial system.” If he really believes that those are excesses and if he truly wants fairness, why does he think that the government should bail people out from their mistakes? Some of the people whom the government is bailing out are very wealthy people who will retain more of that wealth because of the bailouts. Many of the people paying taxes for the bailouts are middleincome people who acted responsibly. Just what is Pearlstein’s view of fairness, anyway? Gosselin, in his article, detailed three factors that he said were “pushing people to favor more regulation”—the high price of gasoline, the fall in house prices, and the dismal performance of the stock market for most of the current decade. If Gosselin were simply stating that these factors have made people more favorable to regulation, he might have a point. But that’s not all he said. He seemed to take the side of those who see these three factors as market failures. On gasoline prices, although he pointed out that most economists thought the then-high prices were due to “booming global demand meeting limited global supply,” he dismissed that reasoning, arguing that “the price run-ups seem out of whack with demand, which has increased only about 1 percent worldwide.” But Gosselin confused demand and consumption. Consumption of oil increased a little, whereas demand increased much more. That’s why the price rose. A standard exercise in introductory economics classes is to show students that when supply is fairly inelastic and demand increases a lot, the price will rise a lot and the actual amount produced and consumed will rise just a little. That is what happened in the world oil market. Whether one favors or opposes restrictions on drilling, they do constrain the supply of oil and do, therefore, cause the price to be higher than otherwise. Moreover, why has global oil supply been so limited? There are three main reasons, all entirely due to regulation. The first is OPEC, an organization of governments that regulates the supply of oil. OPEC was formed, incidentally, in response to President Eisenhower’s regulations on oil imports, which discriminated against imports from the countries that formed OPEC. The second is that almost all oil-producing countries have government-run oil industries. The third is the U.S. government’s restrictions on offshore drilling for oil and on oil development in the Arctic National Wildlife Refuge. Whether one favors or opposes these restrictions on drilling, they do constrain the supply of oil and do, therefore, cause the price of oil to be higher than otherwise. Interestingly, Gosselin leaves out the major price declines that have occurred in some of the most unregulated or newly deregulated parts of the economy: computing power (there is little regulation of the computer industry) and clothing (there has been a major shift toward free trade in clothing). FANNIE, FREDDIE, AND THE HOUSING CRUNCH On housing prices, Gosselin claims that “the rise in house prices and the recent plunge grew out of an almost unregulated corner of the mortgage market—the one for riskier loans.” But much of this problem arose, in fact, from regulation. Jeffrey Hummel and I detailed in an Investors’ Business Daily article last year how federal government regulation contributed to the problem. First, the federal government helped create the boom in housing prices by helping to create moral hazard: people taking risks because they knew that if things turned out badly, someone else would bear some of the cost. The federal government’s semiautonomous mortgage agencies—Fannie Mae, Freddie Mac, and Ginnie Mae—all buy and resell mortgages. Of the more than $15 trillion in mortgages in existence in early 2008, about onethird were owned by, or securitized by, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration, Veterans Affairs, or other government agencies that subsidize mortgages. Although Fannie Mae and Freddie Mac were no longer government agencies during the period at issue, they were government-sponsored enterprises. Many buyers of their repackaged loans, therefore, assumed an implicit federal government guarantee— an assumption, as we now know, that was all too true. This implicit guarantee caused less scrutiny by lenders than otherwise and thus helped drive up housing prices. The federal government’s second contribution to the increase in housing prices was the Community Reinvestment Act. This act, passed in 1977 and beefed up in 1995, requires banks to lend in high-risk areas they would otherwise avoid. Banks that fail to comply pay fines and have more difficulty getting approval for mergers and branch expansions. As Stan Liebowitz, a University of Texas economist, has pointed out, a Fannie Mae Foundation report enthusiastically singled out one mortgage lender that followed “the most flexible underwriting criteria permitted.” That lender’s loans to low-income people had grown to $600 billion by 2003. Its name? Countrywide, the largest U.S. mortgage lender, now in deep trouble for its lax lending practices. Finally, a little-noted change in regulations by the comptroller of the currency in December 2005 acted as the trigger. The comptroller made it mandatory for banks to require minimum payments on credit card balances. Many people who hold subprime mortgages would have trouble making a higher monthly payment on a credit card. Before this regulation took effect, many people’s priorities would have been mortgage first, credit card second; now, many borrowers have reversed the order. Thus, the comptroller’s seemingly small increase in regulation had the unintended effect of causing some mortgage borrowers to default. This is not to say, of course, that private businesses never do anything stupid unless it is caused by bad government policy. Certainly, many actors in the private sector expose their money—and other people’s—to absurd risks. It is safe to say, though, that in the case of the subprime mess, regulation and government subsidies deserve much of the blame. WHY REGULATION FAILS Notably absent from all the articles discussed above is an argument for how regulation would work or how deregulation fails. I have already provided evidence of how badly regulation has worked in oil and in the housing market. Regulation generally works out badly for two reasons. First, regulators have little incentive to get things right. Indeed, when their regulations fail, they often use the fact to argue for more power and more regulation. (Astonishingly, the argument often works.) Second, regulatory agencies are often captured by the politically powerful and used to stamp out competition. Recent regulations on housing finance, for example, require mortgage brokers to be licensed. That will reduce competition in mortgage brokering and enhance the incomes of existing mortgage brokers. Moreover, we have powerful evidence of the beneficial effects of deregulation. Airfares, for example, according to Brookings Institution economists Clifford Winston and Steven Morrison, are 22 percent lower than they would have been had regulation continued. Brookings economist Robert Crandall and Mercatus economist Jerry Ellig estimated in the late 1990s that when the lower air fares are adjusted for the decline in quality and amenities, passengers saved $19 billion a year. In other words, the majority of us prefer lower fares to higher fares, more meals, and emptier airplanes. According to Hoover economist and senior fellow Thomas G. Moore, inflation-adjusted rates for truckload-size shipments between 1977, the year before deregulation of trucking began, and 1982 fell 25 percent even as service quality improved. And, of course, because of decontrol of oil and gasoline prices under Presidents Carter and Reagan, increases in world oil prices have been passed on to consumers rather than suppressed, so that the time-killing lines for gasoline in the 1970s have not been repeated. It’s safe to say that in the case of the subprime-mortgage mess, regulation and government subsidies deserve much of the blame. Perhaps I’m being too harsh on Gosselin. Maybe his tone simply reflected that of the Americans whom he sees as souring on economic freedom. But shouldn’t economic journalists get the facts right? And the three overriding facts are: we have not had a period of light regulation, deregulation did not fail, and regulation makes things worse.

Barack Obama's Skeleton Closet

Barack Obama is a genuine trend (or is he a fad?) without Americans knowing much of anything about him. He started his public career with an unusual move--- writing a book where he talks about using cocaine. It's unconventional, but damned if it doesn't look like it just might work.

Quotes

"It was a mistake to have been engaged with him [Antoin Rezko] at all in this or any other personal business dealing that would allow him, or anyone else, to believe that he had done me a favor" -- Barack Obama

"There's no doubt that this was a mistake on my part. 'Boneheaded' would be accurate. There's no doubt I should have seen some red flags in terms of me purchasing a piece of property from him." - Barack Obama

"I think very highly of Hillary. The more I get to know her, the more I admire her. I think she's one of the most disciplined people I know. She's one of the toughest. She's got an extraordinary intelligence, and she's somebody who's in this stuff for the right reasons. She's passionate about moving the country forward on issues like health care and children." -- Barack Obama

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Cocaine

Long before he ever ran for political office, Obama wrote a book about, well, himself, and his amazing his journey from messed up kid to, um, himself. It was quite an epic, considering he was 34 at the time.

In that book, called "Dreams From My Father", he writes that he used marijuana and cocaine ("maybe a little blow".) Oddly enough, he writes that he didn't try heroin because -- wait for it -- he didn't like the pusher who was selling it. (Weren't there any other reasons?) In a later interview, he added "Teenage boys are frequently confused."

But cocaine aside, the press has ignored the one truly outrageous drug scandal that Obama has successfully hid -- he's a SMOKER. That's right, tobacco cigarettes. Obama theoretically gave it up, and claims he never smoked more than 7 or 8 cigarettes a day, but if you dig deeper, he admits he has been bumming cigarettes during the campaign.

Tony Rezko & the Shady Land Deal

Barack Obama has been friends with Antoin ("Tony") Rezko since at least 1990. Barack interviewed with Rezko for a job in the early 1990s (offered, but declined), and has raised at least $150,000 for Obama's campaigns. Prosecutors charge that at least $10,000 of the money Rezko gave Obama was extorted in return for political favors by a different politician. In return, Barack arranged an internship in 2005 for John Aramanda, the son of a Rezko business associate (Joseph Aramanda, who himself gave Barack $11,500.)

There's more. In June, 2005, Obama bought a house in Chicago for $1.65 million ($300,000 below the asking price). The same day, Rezko bought (in his wife's name) the vacant lot next door for $625,000, the full price asked. Seven months later, Rezko sold Barack a slice (1/6th) of his lot so the Obamas could have a bigger yard. There's no evidence that Rezko bought the vacant land for any other reason than to do Obama a favor. The seller would only sell the house if he could sell the lot on the same day. And the lot is only accessible through Obama's yard. Rezko and his wife sold the lot last year to someone they owed money to, and let that person keep the small profit he made.

Here's the real problem: among other problems, Rezko was convicted in a federal government corruption case for demanding kickbacks from companies wanting to do business with Illinois Governor Blagojevich, another politician that Rezko has befriended and donated to. (Rezko is also under indictment for shaking down a Hollywood producer for $1.5 million in campaign contributions for Blagojevich. The guy takes care of his political friends.) In fact, Joseph Aramanda is an unindicted co-conspirator in one of the kickback cases.

Obama has admitted that the land deal was a mistake, and donated money donated directly by Rezko to charity. His story has changed, though. When the land deal was first reported, Obama said his only contact with Rezko was asking him if it was a good deal. In February 2008, though, one of Obama's staffers admitted that the candidate walked around the house and lot with Rezko. Rezko has said he bought the lot to help the Obamas expand their backyard.

Hanging Out with Radical 60s Bomber

Bill Ayers, the son of a rich utility executive, calls himself a "small-C communist." In 1969, he and his wife Bernadette Dohrn helped found the Weathermen (aka the Weather Underground), a radical group that bombed several buildings, killing a police officer and three of their own members. In 1981, an armed robbery of a Brinks truck by Weather Underground members killed two police and a security guard.

By then Ayers and Dohrn has morphed into reasonably respectable professors in Chicago, and weren't involved. But Ayers has no regrets; in 2001 he even wrote "I don't regret settings bombs. I feel we didn't do enough." Ayers and Dohrn were never convicted because of illegal wiretaps and other prosecutorial misconduct that got their charges thrown out.

Great scandal, huh? Only problem is that Ayers' links to Obama are not that clear. They live 3 blocks apart in Chicago's Hyde Park neighborhood, and their kids go to the same school. In 1995, they were both on the board of a charity founded by Walter Annenberg, the billionaire founder of Reader's Digest (not exactly a liberal - he was Nixon's ambassador to Britain). From 2000 to 2002 they were on another board together (the Woods Foundation). Obama praised one of Ayers' many books, in a 1997 newspaper interview. Ayers donated $200 to Obama's 2001 campaign. The biggest link was in 1995, when Ayers and Dohrn hosted a coffee fundraiser, at which State Senator Alice Palmer introduced Obama as her chosen successor as state senator. Obama certainly had no problem with that hosting, though since then he has criticized Ayers' crimes many times as "detestable".

The big question is, does this indicate that Obama is a secret radical? I haven't seen any solid evidence beyond this. But I'm all ears -- email me.



Muslim? Educated in Madrassa? Won 't Salute the Flag? Fox News ran a story claiming that Obama had been educated in a madrassa school in Indonesia. If you're not familiar with that term, it's a type of fundamentalist Muslim school, often funded by the extremist Wahabi sect of Islam (with Saudi money) and often very anti-American.

There was only one problem with the story: it was completely false. Yes, Obama had gone to school in Indonesia as a kid; two schools in fact. One was Catholic, the other was a public school, with teachers and kids of various faiths.

The only scandal here is that Fox News ran the story with no facts or reporting backing it up. They simply repeated a story from a highly partisan website, with no effort to check out the school. It's there, still open, and easily visited. Reporters who did so found out that the story was false in minutes.

There have been several other stories about Obama floating around in emails -- that he's secretly Muslin, refuses to put his hand over his heart when saying the pledge of allegiance, that he is secretly Muslim, etc. We print REAL scandals, not fake ones.

Republic of the Insouciant

The Big Whorehouse on the Potomac

By PAUL CRAIG ROBERTS

As Americans celebrate July 4, they can contemplate that the union of “free and independent states,” like the former British colonial power, has evolved into its final manifestation--a complete whore house. While Members of Parliament in London charge their expense accounts with every personal expenditure, including the rental of adult xxx-rated films, an American newspaper put the reporting of public policy out to bids until politico.com blew the whistle.

In Washington, everything is for sale, including journalistic integrity. The Washington Post, which abandoned investigative reporting eons ago, decided to boost its sagging revenues by spreading her legs. The Post’s business division put out a flier offering lobbyists access at the Post’s CEO’s gracious home to “those powerful few” in the Obama administration, Congress, and among the Post’s editors and reporters who decide the nation’s policies, such as health care.

The Washington Post’s flyer offered a Wal-Mart low cost of a mere $25,000 for one “salon” to interact with decision makers and $250,000 for eleven interactions.

Alas, people with an old fashioned sense of integrity impugned the Washington Post’s new business model, and the Post’s boss, Katharine Weymouth, had to rescind the offer that would have rescued the newspaper by turning it into a “facilitator for private lobbyist-official encounters.”

I say damn the old fashioned moralists. America would be much better served if the Washington Post was selling access to lobbyists instead of selling the US government’s PSYOPS operations in Iran, Afghanistan, Iraq, Georgia, Ukraine, Serbia, Venezeula, Honduras, and everywhere else, for which the paper receives a pittance: the reporter can tell his editor that he has a deep source within the government, hardly an adequate recompense for wars that cost American taxpayers hundreds of billions of dollars at a time when Americans cannot pay the mortgages on their homes.

America would be better off if the Washington Post whored for lobbyists than for the US Imperial State, which has failed to adjust its imperial ambitions to its bankruptcy. As an example of its whoring for US Imperialism, on July 2, the Washington Post reported President Obama’s claim that Russian Prime Minister Putin is a person who lives partly in the past, with “one foot in the old ways of doing business and one foot in the new.”

If Putin has “one foot in the new,” he is ahead of Obama who has both feet in the past.

Obama said that Putin needs to learn that “the old Cold War approaches” to relations with the US are “outdated.”

The Post reported this as if a failure of Putin’s is endangering US/Russian relations. The Post did not point out that it is Obama, not Putin, who has wars of aggression against three independent countries--Iraq, Afghanistan, and Pakistan, with a fourth war threatened with Iran. We know for a fact these wars originated in the Bush administration’s lies and deceptions, but Obama continues the occupations and expands the wars, thus endorsing the deceptions.

It is the Washington whorehouse that unilaterally abrogated the anti-ballistic missile treaty with Russia and begin constructing anti-ballistic missile sites designed to negate Russia’s nuclear deterrent. If Russia’s nuclear weapons can be made useless, Russia can be knuckled under to accept America’s hegemonic will, and US hegemony takes another step forward.

It is Washington that is surrounding Russia with military bases: an anti-ballistic missile base in Poland, an anti-ballistic missile radar site in the Czech Republic, American-made “color revolutions,” which have installed US puppet governments in Serbia, Ukraine, and Georgia, with failures in former constituent parts of Soviet central Asia.

NATO, once a European/American alliance against Soviet invasion of Western Europe is now a mercenary US force fighting for America in Afghanistan and attempting to encircle Russia from the Baltics to Central Asia.

Obama will soon be on his way to Russia to discuss whether or not Russia is willing to give in to US demands to prostrate itself before US hegemony. Obama hopes to drive a wedge between Prime Minister Putin and President Medvedev, like the wedges Washington has facilitated between the ambitious ruling ayatollahs in Iran. If Obama can get Putin and Medvedev at odds, Russia will be neutralized.

That would leave China alone as an obstacle to US world hegemony.

The US has no media. But it does have a Ministry of Propaganda. Americans were programmed with days of propaganda that Islamic Iran, a member of the US-designated “axis of evil,” stole the election from the Iranian people. According to the US Ministry of Propaganda, the Iranian people are allied with the US government against the Iranian government.

Even people who are regarded as Iran experts said, without any evidence, that the elections were stolen. One of their arguments is that three hours were not enough time to count all the votes, yet it was announced that Ahmajdinejad won. The ignorance of “experts” made theft a certainty for American TV audiences.

The “experts” who make this assertion are obviously ignorant of Iran’s electoral procedures. For the ignorant “experts” and the Americans deluded by them, here is the way it works:

There are more than 45,000 voting places, which means less than 1,000 votes per voting place, an easy number to count and report in three hours. At each voting place there are a dozen or more observers, including every candidates’ representatives, representatives of the Guardian Council, and the local police. The votes are counted in the presence of all, and all sign documents attesting to the count.

The vote totals are forwarded to a central office in the region that has representatives of the candidates and the Guardian Council, where they are verified by a dozen or a dozen and a half of witnesses. From here the vote count goes to the Minister of the Interior, where the vote is announced.

Unless these procedures were not followed, and no evidence has been provided that the procedures were not followed, it is impossible to steal an Iranian election. It is much easier to steal an American one, which happens routinely.

There are thousands, indeed tens of thousands of witnesses, perhaps hundreds of thousands of witnesses, to the Iranian vote. Yet, only Mousavi and his corrupt supporters among the high living Iranian elite, who are fighting for personal power in Iran, contest the vote. The kids in the street were the usual dupes. At this stage in history, how can anyone believe that there is a pure candidate that wants to bring freedom and justice to the people? Anywhere. In any country, the US included.

Ignorant “experts” made a great noise about the fact that 50 cities or towns had votes in excess of registered voters. Again, this is a demonstration of the total ignorance of “Iranian experts” . In Iran, voters can vote wherever they happen to be at the day of election. Vacationers, business people on travel, commuters, and the partial absence of distinct voting districts, can produce a vote count in excess of the local registered population.

The Guardian Council examined these differences, added them up, and noted that if every additional vote was fraudulent, the number was insufficient to affect the outcome.

The Guardian Council has agreed to post every vote count.

Did you learn of these facts from Fox News, CNN, the New York Times, or from the CIA and Mossad bloggers? Of course not. Every time “your” media opens its mouth lies jump out that serve the US government’s hegemonic propaganda.

America’s salvation lies with Charles Pelton and the Washington Post’s business side managers. Once the American media is obviously a whorehouse, which it is, Americans might pull themselves out of their stupor and learn to recognize facts and to think for themselves.

But don’t hold your breath. From what I have seen, with few exceptions, Americans are as dumb and insouciant as they come. And they think they are the salt of the earth.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

A Government Failure, Not a Market Failure

The housing bubble was a fully rational response to a set of distortions in the free market—distortions created primarily by the public sector.

JOHN H. MAKIN

As a people we need, at all times, the encouragement of home ownership.
--HERBERT HOOVER, 1932

The idea that home ownership confers special benefits on American society is deeply embedded in our culture—so much so that our national tax policy confers a special benefit of its own on it. Home ownership is granted an advantage over all other forms of ownership in the form of an enormous deduction on the interest payments most individuals incur in financing their homes. Nothing else in the tax code comes anywhere near that deduction in scope or size. We have decided, as a nation, that home ownership is not only a good thing for an individual or a family, but that it is beneficial for the public at large and the country as a whole. Otherwise, why would it be necessary for the government to give it this kind of preferential treatment? Without it, clearly, we believe that the national rate of home ownership would be lower, and that a lower rate of home ownership would be deleterious to our common weal.

After 2000, the national push toward home ownership intensified in three dimensions, leading to a doubling of housing prices in just five years' time. First, the Federal Reserve Board's interest-rate policy drove down the cost of borrowing money to unprecedented lows. Second, a common conviction arose that home ownership should be available even to those who, under prevailing conditions, could not afford it. Finally, private agencies charged with determining the risk and value of securities were exceptionally generous in their assessment of the financial products known as "derivatives" whose collateral resided in the value of thousands of mortgages bundled together. The rating agencies understated the risks from these bundled mortgages by assuming that home prices were simply going to rise forever.

When the housing bubble burst in 2006, the damage to the financial system pushed the global economy into the worst contraction since the Great Depression. In the midst of the pain and suffering that have accompanied financial collapse and economic contraction—over $15 trillion in wealth has been lost by American households alone while, to date, more than 6 million job losses have boosted the unemployment rate to 9.4 percent—much of the blame has been placed on unregulated financial markets whose behavior is said to have revealed a terrible flaw in the foundation of capitalism itself.

This was a market failure, we are told, and the promise of capitalism has always been that the self-correcting mechanisms built into the system would preclude the possibility of a systemic market failure.

But the housing bubble only burst after government subsidies pushed house prices up so fast that marginal buyers could no longer afford to chase prices even higher. A bubble created by rigged financial markets and a government-sponsored obsession with home ownership is not a result of market failure, but rather, a result of bad public policy. The belief that home ownership, per se, is such a benefit that no amount of government support could be too great and no pace at which home prices rise could be too fast is the root of the crisis.

There was no market failure.

According to The New Palgrave Dictionary of Economics, an invaluable collection of precise summaries of virtually every topic in the dismal science: "The best way to understand market failure is first to understand market success, the ability of a collection of idealized competitive markets to achieve an equilibrium allocation of resources which is Pareto optimal." Allow me to translate. "Pareto optimality," a term named after the Italian economist Vilfredo Pareto (1848– 1923), is defined as an allocation of economic resources that produces the greatest good. Thus, if one changes the allocation of resources away from "Pareto optimality" for the purpose of making someone better off, that change will make someone else worse off. Economists have expended a great deal of effort to demonstrate that free and competitive markets produce an outcome that is "Pareto optimal."

This is not to say that there is no such thing as market failure. There are many instances of market failure. Someone may possess information that others do not, as in insider trading, and thereby gain an illegitimate leg up. There may be too few players in a given market, which allows them to manipulate, hoard, and toy with prices. Capricious government intervention in cases where it is neither required nor appropriate constitutes another condition that may create a market failure.

There are also cases of market failure in which some people get a free ride while others bear a disproportionate burden. This is the case in national defense, for example, in which soldiers bear a burden non-soldiers do not. Consequently, a government subsidy for national defense is necessary for the maintenance of security and power, and the overwhelming majority of citizens acknowledges it and does not complain about it. National defense is a public good, perhaps the original public good.

Owner-occupied housing is something else that has been deemed a public good. Herbert Hoover's affirmation of the need for encouragement of home ownership "at all times" came in 1932 at the fiercest stage of the Great Depression. Others have made powerful arguments that homeowners make better citizens and contribute to stable communities. Why renters do not and cannot offer the same contribution to the public good is never specified, but existing homeowners, homebuilders, mortgage lenders, and mortgage servicers have all seized on the idea that subsidizing home ownership is "Pareto optimal."

It isn't.

Subsidies for home ownership—in the form of full deductibility of mortgage interest, lower mortgage borrowing rates derived from government guarantees for mortgage lenders like Fannie Mae and Freddie Mac, and deductibility of local real-estate taxes—have long benefited those who own homes at the expense of those who do not. The size and severity of the burst bubble makes a mockery of the argument that the disproportionate gains to homeowners also improved the welfare of renters. By erasing, in just a few years, nearly one-third of the wealth on the national balance sheet, the collapse has created a substantial loss in national welfare, including for renters.

Home ownership should not be considered a public good deserving of government subsidies even without the bubble collapse for a simple reason: Those who receive the subsidy get to capture the benefits in the form of home prices that are higher than they would otherwise be without government support. The subsidies make homeowners better off while they make renters worse off. They are, therefore, not Parieto optimal.

In addition, home-ownership subsidies are inherently unjust. They favor the relatively well-off at the expense of those who are poorer. Why? Because the value of an owned home and the size of the government subsidy both grow as income increases. A tax deduction tied to home ownership for a well-to-do American with a $1 million mortgage and a $60,000 annual interest payment is worth $22,000 (assuming the American is in the 35 percent tax bracket). The higher the marginal tax rate rises, the more valuable the mortgage-interest deduction is to the homeowner. For a family with a modest income that may pay little or no income tax, the mortgage-interest deduction is worth virtually nothing. And yet, for the past 15 years, even the party in the United States most associated with preferential treatment for the poor began preaching the evangel of home ownership as a form of class salvation.

During Bill Clinton's first term, government housing policy changed substantially. After decades in which liberal politicians and thinkers devoted themselves to arguments for expanding the number of public-housing units, the disastrous condition of those units led the President, a "new Democrat," to a dramatic ideological shift in emphasis. No longer would public housing be at the top of the liberal Democratic agenda. Instead, borrowing from conservative ideas about the inestimable benefit of home ownership to the striving poor, the Clinton administration and members of his party in the House and Senate decided to use government power to achieve that aim.

In 1994, the "National Homeownership Strategy" of the Clinton administration advanced "financing strategies fueled by creativity to help homeowners who lacked the cash to buy a home or the income to make the down payments" to buy a home nonetheless. It became U.S. government policy to intervene in the marketplace by lowering the standards necessary to qualify for mortgages so that Americans with lower incomes could participate in the leveraged purchases of homes.

The goal of expanding home ownership led to the creation of new mortgage subsidies across the board. The loosening of standards became the policy of Fannie Mae and Freddie Mac, the pseudo-private "government-sponsored enterprises" that bought mortgages from originating lenders. A particular change in the tax law in 1997 encouraged many households to make buying and improving a home the primary vehicle by which they enhanced net worth. By eliminating any capital-gains tax on the first $500,000 of profits from the sale of an owner-occupied residence once every two years, Washington encouraged enterprising American families to purchase homes, fix them up, re-sell them, and then repeat the process. Flipping became a financial pastime for millions because this special advantage created a new incentive—which didn't exactly fit the model of encouraging people to remain in a stable home for many years and thereby help to stabilize the neighborhood around them.

There was, however, a rival to home ownership as a way of building wealth in the late 1990s—the run-up in the stock market, which was caused by another bubble, this one in the technology sector. Given the size of the gains in the stock market, which were running 20 percent or more a year, the relative desirability of home ownership eroded. But when, in 2000, the tech bubble burst, households were left in search of an alternative way to store and enhance wealth. Home ownership emerged as the most promising alternative. After 2000, and especially after 2002, U.S. real house prices began to surge.

Everything I have described thus far constituted a necessary but not sufficient precondition for a full-fledged housing bubble. It took the addition of a new market in derivatives to drive bankers, lenders, and credit agencies to create the conditions for an implosion by expanding mortgage financing to borrowers who could not possibly afford the homes they were purchasing.

In February 2003, Angelo Mozilo, then head of the major mortgage supplier called Countrywide, declared that the need to provide a down payment should no longer be an impediment to home ownership for any American.\*08d0c9ea79f9bace118c8200aa004ba90b0200000009000000e0c9ea79f9bace118c8200aa004ba90b740000002e002e002f002e002e002f0044006f00630075006d0065006e0074007300200061006e0064002000530065007400740069006e00670073002f004b0067006a00650072006d0061006e0069002f004400650073006b0074006f0070002f004d0061006b0069006e002e00680074006d006c0000000600000066006f006f00740031000000 Was it any wonder that a home-buying frenzy occurred when Countrywide's chieftan was suggesting that there was no need for a purchaser to supply even a minimal equity stake in his purchase? During 2004 and 2005, the rise in home prices accelerated. That, in turn, caused Americans to refinance their homes to remove their equity—their accumulated wealth, in other words—and convert it into disposable income. They did so because they were confident the equity would simply be recreated by continued growth in the value of their homes.

The hunger for more mortgages that could serve as backing for more new securities led to the acceleration of undocumented, no-down-payment, negative-amortization mortgage loans to individuals with virtually no prospect of servicing them. The designers of derivative securities effectively collaborated with the rating agencies, such as Standard & Poor's and Moody's, that were relied upon (often through government mandate) by pension funds and other gigantic repositories of wealth with identifying the securities safe enough to invest in.

A situation in which creators of derivatives provide the monetary compensation for the very agencies that are tasked with determining the riskiness of their securities hardly constitutes a competitive market. Indeed, it constitutes dangerous collusive behavior. But that collusion, again, was made possible by the distorting actions of government agencies, which effectively provided a subsidy for risk-taking that was, by definition, unsustainable.

It is fair to ask, in the light of past bubbles that have burst—like the entire economy of Japan in the 1990s and the tech-stock tragicomedy—why investors were prepared to take on the substantial risks tied to unfamiliar derivative securities whose value was tied to the continued rise in house prices. A substantial part of the answer lies with the Federal Reserve Board. It deliberately adopted a policy that it would not seek to identify bubbles and then to act in ways that would let the air out slowly. Instead, Fed Chairman Alan Greenspan allowed bubbles to inflate and then stepped in to repair any damage afterward. This constituted a substantial subsidy to excessive risk-taking.

The policy became clear in 1998, the year in which the unwinding of the Asian currency crisis together with Russia's defaulting on its debt created huge volatility in the credit markets. At the time, Long Term Capital Management, a hedge fund, was on the verge of collapse, and an aggressive intervention was staged to save it. The New York Fed provided its offices and encouragement to bring financial firms together to contain it.

The salvation of Long Term Capital Management suggested a new reality for the marketplace: Aggressive risk-taking in pursuit of huge profits was manageable even if bubbles were created, just so long as the Fed was around to raise the "systemic risk flag" in the event of serious trouble. There would always be a rescue; the trick was to get out before everything began to collapse. It was this fact that led Charles Prince, then the head of Citicorp, to give the game away in July 2007 about the reckless and imprudent nature of his bank's conduct. "When the music is playing," Prince said, "you've got to get up and dance."

The housing bubble was thus a fully rational response to a set of distortions in the free market—distortions created primarily by the public sector. The heads of large financial institutions, as Prince's remark suggested, recognized the risk-taking subsidy inherent in public policy, but felt they had no choice but to play along or fall behind the other institutions that were also responding rationally to the incentives created by government intervention.

The housing collapse and its painful aftermath, including that $15 trillion wealth loss for U.S. households (so far), do not, therefore, represent a market failure. Rather, they represent the dangerous confluence of three policy errors: government policy aimed at providing access to home ownership for American households irrespective of their ability to afford it; the Fed's claim that it could not identify bubbles as they were inflating but could fix the problem afterward; and a policy of granting monopoly power to rating agencies like Standard & Poor's, Moody's, and Fitch's to determine the eligibility of derivative securities for what are supposed to be low-risk portfolios, such as pension funds.

The Fed's bubble policy has evolved in a constructive direction since the bursting of the U.S. housing bubble. The trauma of dealing with the aftermath, including the fire sale of the investment bank Bear Stearns and the outright failure of Lehman Brothers, has convinced the Fed that more effort should be directed toward identifying bubbles before they grow too large.

Now the collusive relationship between rating agencies and creators of derivative securities needs to be ended by bringing more market discipline to the process. Free entry into the rating business should be permitted. The monopoly of a small number of rating agencies to determine the eligibility of new securities for investment by massive pension funds is unjustifiable. The practice whereby the creators of such derivative securities compensate the rating agencies for the ratings also needs to be ended.

Alas, the federal government's response to the collapse of the housing bubble has been deeply problematic. It has chosen to provide additional subsidies to homeowners while nationalizing the government-sponsored enterprises, Fannie Mae and Freddie Mac, that helped to subsidize lower mortgage-interest rates While the extreme distress visited on American households by the collapse of the housing bubble certainly needs some alleviation, over the longer run we must have a serious national debate on the question of the degree to which we still want to consider home ownership a public good.

The long-term solution is for government to stop playing favorites, as it has for decades with housing. Home ownership should neither be penalized nor favored under government policy. We have seen how that distortion led inexorably to a degree of wealth destruction we have not seen in our lifetimes. The distortion of the market introduced by government intervention can and must be brought to an end. The market that would take its place after this dramatic and admittedly difficult change would allow Americans to allocate their resources more effectively. It would no longer create an unjust advantage for the wealthy homebuyer. And it would, finally, make it possible for Americans to see their homes as they should be seen—not as investment vehicles, but rather, as the places they live in, the hearthstones of their families.

John H. Makin is a visiting fellow at the American Enterprise Institute and a principal at Caxton Associates.