I will quote extensively from his comments and bold the comments that I believe are important to note. This financial report is extremely relevant to the upcoming income tax increase on the ballot May 4th. For more information on that subject, see my posts on the income tax increase (Grand Rapids Tax Increase: It’s the Pensions Stupid, and Grand Rapids Fires Police, Firefighters, Keeps Parking Lot Sweepers).

By approving this tax increase, the taxpayers of the city will simply be kicking the can down the road one more year. As I’ve already demonstrated, if the tax increase passes, the city will be forced to come back again next year for even more money because the pension plans are killing the city’s budget.

Here are CFO Scott Buhrer’s comments. I know it’s long, but reading it is a must for all city residents:

Today it is obvious that the U.S. economy has far more capacity to produce goods and services than the demand for those goods and service. So any increase in demand will result in little price change. This will be the case until our underemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 72% utilization rate. In his book The Return of Depression Economics and the Crisis of 2008, Paul Krugman, winner of the Nobel Prize in Economics, correctly predicted that monetary policy (i.e. zero interest rates) would not lead us out of this financial crisis, and subsequently, as a columnist for the New York Times, Krugman has written of his belief that much more federal stimulus funding is required. But, at the end of the day, can you solve a problem that at its very heart emanates from excessive debt by continuing to fuel demand underwritten by government debt?

Over the last year I have provided assessments of National, State, and local economies. On September 15th I reported that the federal government had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the United States last year (i.e. Gross Domestic Product, or GDP).

Which brings us to today. Irrespective of whether the economic recovery has begun or not, the United States (and much of the rest of the industrialized world for that matter), will face a long and difficult stretch of time as we deal with the excessive debt levels that have been accumulated over the past two decades.

The 19th-century British journalist Walter Bagehot claimed that during each speculative upturn merchants and bankers “believe that the prosperity they see will last always, that it is only the beginning of greater prosperity.” A boom in U.S. stocks in the early 1900’s was remembered by Alexander Dana Noyes, the financial editor of the New York Times in the 1920’s, as “the first of such speculative demonstrations in history which based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedents of finance were obsolete; that things could be done safely today which had been dangerous and impossible in the past.” This mode of wishful thinking has continued up to the present day.

Instead of providing beneficial warning, economists have more often played the role of enablers during each successive New Era. The noted and early neoclassical economist whose work is perhaps more respected now than when he was alive, Irving Fisher of Yale, notoriously opined in September 1929 that stocks had reached a “permanently high plateau,” justifying this view with the claim that Prohibition had enhanced worker productivity and that businesses were employing new “scientific” management practices.

More recently, just a few short years ago, Federal Reserve Chairman Ben Bernanke and a number of other academic economists hailed the “Great Moderation,” arguing that rising institutional debt levels were tolerable, thanks to better monetary policy and better risk reducing financial innovations. During the boom years, Mr. Bernanke pronounced that rising house prices were a sign of improved economic fundamentals rather than speculative excess. It turns out that the Great Moderation was, in fact, a trap – a time of overindulgence of borrowing and risk-taking that would eventually destroy wealth rather than create it. Financial catastrophe is invariably preceded by periods of prosperity and New Era rationalizations.

The same Irving Fisher first highlighted the fact that an economy’s debt level could have harmful impacts on the economic growth, if it is excessive. In 1933 Fisher published his debt deflation theory that pointed out that the contraction of debt levels (which is currently occurring) usually results in prolonged economic distress. Borrowing binges invariably unwind, often quite precipitously, with sharp declines in asset prices, consumption, and high unemployment.

Housing prices are a remarkably accurate predictor of banking crises. Banking crises often follow periods of financial liberalization or deregulation. For all its “this-time-is-different hubris”, the United States has proved no exception. Rapidly rising housing prices should have set off alarm bells. Especially when the cumulative real price (i.e. inflation adjusted) increase in the United States between 1995 and 2006 rose 92%, more than three times the 27% gain for the preceding 100 or so years – and the total value of mortgages reached 90% of GDP. In 2005 alone, at the height of the bubble, real housing prices rose more than 12%, which was six times the rate of GDP growth.

International institutions (e.g. the International Monetary Fund) might help avert crises by promoting greater transparency in reporting financial data. Although it’s better than most, the United States government “runs an extraordinarily opaque accounting system.” In the past two years, the federal government (including the Federal Reserve) added huge off-balance-sheet guarantees and trillions of dollars of difficult-to-price assets to its books – and to date the Federal Reserve has refused to disclose details about these assets to the U.S. Congress. Bloomberg (a media company providing business and financial news and information) has sued in an attempt to compel disclosure.

What we do know is that Congress authorized up to $300 billion to bail out Fannie Mae and Freddie Mac. Quietly, on Christmas Eve, Treasury pledged unlimited support for the two agencies, without any additional Congressional approval.

Financial over-indulgence knows no boundaries and has no expiration date. Human nature is at the heart of the financial disasters. A recurring theme: investors, lenders and policymakers repeatedly delude themselves during economic booms into thinking that business cycles have been repealed and that the good times will go on and on. Indeed, after the recent financial collapse, 140 banks failed in 2009. If you think banking failures are declining and the financial crisis is over, consider this: the Federal Deposit Insurance Corporation’s (FDIC) board recently voted to approve the 2010 budget, which includes $2.5 billion for staffing to resolve failed banks taken over by the agency. That does not include the cost of winding up the affairs of these failed banks, which is almost impossible to estimate. That FDIC budget for staffing to resolve the affairs of the failed institutions is up 92% from $1.3 billion in 2009. The hiring plans will bring the number of FDIC employees to 8,653. Sheila Bair, Chairman of the FDIC, said the budget approved for 2010 “will ensure that we are prepared to handle an even larger number of bank failures next year, if that becomes necessary and to provide regulatory oversight for an even larger number of troubled institutions.” The number of problem banks on the FDIC’s confidential list as of September 30th more than doubled to 552 – the highest level in 16 years – up from 250 at the start of the year.

Three important factors pertain to the present situation in the United States and the world.

First, when debt becomes excessive, regardless of whether the government or the private sector is accumulating the debt, countries lose the ability to grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased savings.

Second, whether the debt is owed externally or internally is not as critical as the excessiveness of the debt. Economic damage occurs as a result of extreme over-leverage, whether the barometer of performance is economic output, the labor markets, or asset prices.

Third, government actions, even involving sizable sums of money, are far less helpful than they appear. Further increasing government debt to solve the problem of over-indebtedness in the private sector only leads to greater systemic risk and general economic underperformance.

The question that is currently being debated is “are we headed for massive inflation or deflation”? As is widely feared here in the U.S., many countries have had the right
circumstances and mechanisms to inflate away their debt overhang, and, in fact, have done so by debasing their currency. This approach poses the most risk to those individuals who are on fixed incomes. Those particular circumstances, however, are not currently present in the United States, not with underemployment in excess of 17% and industrial capacity utilization at 72%.

I view the present inflationary environment as benign because: 1) the U.S. economic system is overleveraged and academic research confirms that this circumstance leads to deflation; 2) monetary policy is, and will continue to be, ineffectual as efforts to spur growth are thwarted by declining asset prices, loan destruction, and adverse regulatory influences; and 3) the federal government’s stimulus spending will ultimately lead to increased taxes and governmental borrowings must inevitably rise, further stunting any economic growth. These factors ensure that inflation will remain contained. Interest rates easily can and do rise for short periods, but remaining elevated in a disinflationary environment is contrary to the historical experience. If we do see higher interest rates it could be coupled with stagflation.

Fisher’s 1933 “Debt-Deflation Theory of Great Depressions” and modern “quantitative” methods have now essentially confirmed this conclusion: over-indebtedness and major contractions, particularly those that involve geographical regions (or in the present situation, extend worldwide) lead to deflation, not inflation.

The U.S. response and the world-wide response to the financial crisis have been remarkable.

But, we may find that at the end of the road, the cure could be as deadly as the illness. In 2009 the book This Time is Different – Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff compiled a database by looking at over 250 financial crises in 66 countries over a period of 800 years. The common theme in explaining the crises is that debt was excessive relative to national income (GDP). They make the compelling case that this old rule still applies and this time is not different. After studying data spanning 800 years, Reinhart and Rogoff characterize the current financial crisis as the “ Second Great Contraction.”

Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises such as the one that we are currently experiencing, share three characteristics:

First, asset market collapses are deep and prolonged. Declines in real housing prices average 35% stretched out over six years, whereas equity price collapses average 56% over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of seven percentage points during the down phase of the cycle, which lasts on an average more than four years. Output falls (from peak to trough) more than 9% on average, although the duration of the downturn, averaging roughly two years, is considerably shorter than that of unemployment.

Third, the amount of government debt tends to explode; it rose an average of 86% (in real terms, relative to pre-crisis debt) in the major post-World War II episodes. The main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. The upper-bound estimates of the banking bailout costs pale next to actual measured increases in public debt. The biggest driver of the governmental debt increase is the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions.

The Reinhart and Rogoff book is very sobering. It provides extensive empirical data that supports my belief that we have a lot of pain left to experience because of the bad choices our nation has made. We, in this case, is the entire developed industrialized world, and the emerging world will suffer, too, as we go through it. It is not a matter of pain or no pain. There is now no way to avoid it. It is simply a matter of when and over how long a period. The lesson of history, then, is that even as the economy and financial institutions improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.

Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis. As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness.

All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. This time may seem different, but all too often a deeper look shows it is not. Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced.

Conclusion

The enormous amount of federal borrowing and stimulus programs are likely to serve to restrict long-term economic growth. The slow U.S. economic growth environment will obviously lead to continuing budget challenges for the City and the State. If we continue to push expenses into future years it will assure that our future will be challenging even if the economy improves.

We’re hearing bleats from the likes of the National Association of Realtors that housing may be turning around and that prices are up. Prices may have ticked up slightly in some areas. This is due to a few government and bank policies that are distorting the market – temporarily.

First, The Federal Reserve has printed nearly $1.25 trillion of counterfeit money to buy Mortgage Backed Securities from Freddie Mac and Fannie May. This has had the affect of creating a market for mortgages that wouldn’t have been there otherwise. This has kept rates low and loans easier to get. This program ends in March.

Second, we all know about the $8,000 first time homebuyer tax credit that was set to expire last year and was extended to April of this year. This also bumped up demand and prices, but at the expense of future demand and prices.

Third, banks and the government mortgage entities tried foreclosure moratoria to give borrowers time to catch up and work out loan modifications. This has been a failure and foreclosures are picking up again.

Some suggested reading material to learn more about these market-distorting policies:

• The Housing Double Dip Began In December
• Foreclosures down in January, but surge on way?
• Rising FHA default rate foreshadows a crush of foreclosures

According to Trulia, if you bought a house in Grand Rapids in 2005, the value of your house has dropped 25% or more. Anecdotal looks at housing in my personal experience shows a 30-40% decline.

The point is that the decline is not ending and more pain is to come. Foreclosures are increasing and more and more people are realizing that paying on a mortgage for a house that will take decades to regain its value is a waste of time, money, and worry. As I previously posted, the option of walking away from your mortgage is rapidly becoming more and more attractive. This is a good thing. Why? Because it clears the market more quickly and gets us to where we need to be (and will eventually end up anyways) in order to begin rebuilding the economy. The government has wasted, literally, trillions of dollars to prevent the inevitable.

Banks are trying very hard to make people believe that walking away from your mortgage is somehow immoral or shirking your responsibility. Yet banks and businesses walk away from mortgages all the time, because it’s simply an economic decision.

See the article Double standard in mortgage walkaway:

NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can’t.

Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000.

“I have 12 years of money put into this property that I will never get out,” said the 50-year-old Gilson, from Rapid City, S.D. “But I am still paying because this is what I have been told to do. That’s what I think is right.”

Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country — Florida, Nevada, Michigan, California and Arizona — the share tops 40 percent.

Some experts say it makes sense for some people to walk away if they’re deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money.

The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They’ll make fewer loans. Home prices will plunge more.

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York’s trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan’s east side, it’s the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city’s middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market’s peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.

And you thought you overpaid for your house.

I suggest you read the entire article.

Just look at it this way – if it’s significantly cheaper than your mortgage payment to rent a property similar to your current home, you’re underwater and losing money each month.

Of course, if you decide that fixing your family’s balance sheet is more important than propping up a bank, you should consult an attorney who specializes in foreclosure and short sales. Every state is different in terms of its real estate law, so you must get good advice before making the decision.

More on the local impact, and reaction, coming soon…

The government, by changing the rules and allowing the “too big to fail” banks and their executives to escape the consequences of their actions, and ultimately causing the “too big to fail” banks to get bigger, has set the stage for the ultimate moral hazard. What does that mean? By changing the rules and bailing out the multi-million dollar bonus executives, they have shown us that the rules don’t apply across the board. If your gigantic “systemically important” corporation gives enough money to Barney Frank and the rest of Congress, you get your bonus even if you’ve succeeded in destroying your company.

This means that those of us on main street, who were caught up in the Federal Reserve’s asset bubble creation (aka, the housing bubble), are stuck holding the bag while the politicians and the bank CEOs laugh all the way to the bank – literally.

The housing market in Michigan won’t get back to it’s pre-housing bubble days until at least 2023, according to estimates. This means that chances are pretty high that your house is worth far less than you owe, assuming you got a mortgage in the last ten years (and didn’t cash out with a home equity loan). In fact, chances are your house is worth 30%+ less than it was just three years ago.

The solution? Walk away from your mortgage. There’s a handy calculator that will tell you if it is worth it to walk away. You can try out the calculator here.

I can hear it already. Moral obligation, doing the right thing, living up to promises, etc. Yes, you might have been right five years ago. Now, the rules changed in favor of the oligarchy. That means that all bets are off. We, the taxpayers, are stuck with an exponentially-growing national debt. The federal government continues to take on bad debt from the private sector. We get saddled with bad debt; the bank get to keep their bonuses and get even bigger.

The housing market isn’t coming back any time soon. In fact, it’s going to continue to get worse as we are hit with a deflationary depression. Japan did exactly what the US government is doing now. They’ve been stuck in a deflationary spiral for over ten years.

Fix your family budget. You alone will look out for yourself. Don’t expect the politicians or CEOs to do anything that’s in your best interest.

1. Consider walking away from your mortgage. It’s suddenly in vogue to rent again. You can rent a house nicer and bigger than the one you have for less money.
2. Move all of your checking/savings/investment accounts away from the big national banks. Find a local credit union. Credit unions didn’t participate in the housing bubble run up. They don’t screw over their customers with outrageous fees. They are non-profit institutions that return profits back to members.
3. Pay off unsecured credit card debt as fast as you can. Cut up the cards. Pay for everything else with cash (or your credit union debit card).
4. Stockpile CASH. In a deflationary spiral, cash is king. Instead of (government-created)  inflation eating away at the value of your money, deflation increases the value of your cash.
5. If you lose your job, stop paying on debt immediately. Build up savings, if you can. Only worry about feeding your family and keeping a roof over your heads. Foreclosure can take more than a year as the banks are overwhelmed.

This isn’t capitalism any more folks. This is oligarchy.

WARNING: If you are considering walking away from your mortgage, it is extremely important that you work with an attorney experienced in foreclosure and short sales.

Update: See my latest post on this issue: Housing and Taxes.

This is a bit like the arsonist firefighter declaring that, after he set fire to your house, he then “saved” it from the fire. Right.

He lied then. He’s lying now.

Change we can believe in.

First is the number of new home sales. 

New Home Sales - Holy Crap!

Second is retail sales:

Retail Sales

Finally, to see what a bubble really looks like, check out the Case-Schiller home price index, indicating the rise and decline of average home prices:

Average Home Prices - Your Federal Reserve at Work!

All these graphics come from one of my favorite blogs: Calculated Risk.

A chemistry professor at a large college had some exchange students in the class. One day while the class was in the lab the Professor noticed one young man (exchange student) who kept rubbing his back, and stretching as if his back hurt. The professor asked the young man what was the matter. The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country’s government and install a new communist government.

In the midst of his story he looked at the professor and asked a strange question. He asked, ‘Do you know how to catch wild pigs?’ The professor thought it was a joke and asked for the punch line. The young man said this was no joke. ‘You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again.

You continue until you have all four sides of the fence up with a gate in the last side. The pigs, who are used to the free corn, start to come through the gate to eat; you slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught.

Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

The young man then told the professor that is exactly what he sees happening to America. The government keeps pushing us toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine, drugs, etc. While we continually lose our freedoms — just a little at a time.

It’s a good story by itself, explaining how government breeds dependence. But another thought popped into my mind as I thought about this story. What happens we you take away the corn? 

We’re in the midst of the largest expansion of federal spending in the history of this nation, with over $8.5 trillion of federal government outlays and guarantees, just in the last four months. We have a national debt that has doubled under the Bush administration, to over $10.5 trillion. We have future unfunded liabilities, just at the federal level, of over $40 trillion. We have state and local governments that put taxpayers on the hook with unsustainable defined benefit pension plans that are just now beginning to collapse. 

The point is this: The American people have been fattened up by corn over the last several decades, with an acceleration over the last two decades of Federal Reserve-induced malinvestment orgies. First in technology, then in real estate. These malinvestment orgies led to expanded government spending and government promises, making more and more people dependent on government money (corn), one way or another. However, the math doesn’t work in the long term. Something has to, and will, give.

We are seeing the first stages in a potential catastrophic collapse. We are in the midst of deflation. The Federal Reserve and politicians in Washington will do anything they can to prevent deflation. So they have cranked up the printing presses and are expanding the money supply at a truly unprecedented rate. We have collapsing banks, collapsing industry, a collapsing economy, a collapse in debt, and a collapse in consumption. Eventually, people (and, more importantly, foreign governments) will stop buying US Government bonds as they see that annual deficits of $2 trillion are unsustainable. Then what?

“Stimulus” plans will fail. Hoover/FDR stimulus plans in the 1930s only extended the length and depth of the depression. The Bush/Obama stimulus plans will do the same.

Folks, the government corn will run out when we all realize that nothing can be done to stop the natural correction of the economy.

General Motors, the City of Detroit, and Everyone Else Feeding At the Trough of Government

It was only a matter of time. Now that the Congress and US Treasury have decided that it is legitimate for the Federal Government to spend $700 billion “bailing out” various banks and financial companies, the line is getting longer of those holding their hands out for free money from heaven.

First, we were told that if the Federal Government didn’t spend $700 billion (a figure pulled out of thin air) to buy “toxic assets” from failing banks, that the world would end. Then, this week, we are told that they don’t plan to buy any toxic assets at all. Instead, everyone and their brother is holding their hands out to get more free money from the government.

General Motors is in dire straights as they burn through $2 billion in cash each month because they are such a colossal failure of a company. But hey, who cares, let’s lend them another $10 billion or more to keep the doors open, even though they already have a negative net worth of over $59 billion. Just because they’ve lost $75 billion over the last few years and they can’t pay the bills as it stands, borrowing more money from taxpayers, when no bank in the universe would do so, is a sure way to fix things, right?

But wait, don’t look twice. Now cities are asking for bailout money. That’s right, the City of Detroit is asking for $10 billion to shore up their budget. That’s in addition to Philadelphia, Phoenix, and Atlanta. More to come, just stay tuned.

Next, our own City of Grand Rapids admitted this week that their financial manager, apparently having the intelligence level of a monkey with a typewriter, has lost $225 million of pension funds since May. Nowhere in the discussion was mention of firing the idiot who has lost that much. No, instead they discussed how to dump an additional $10 million into the fund next year. Oh, and they promise they won’t raise taxes to do so (wink wink).

Folks, this is the worst financial crisis since the Great Depression and the moronity in Washington (and Lansing) seems to be at an all time peak. These bailouts do not come without consequence. Bad companies need to fail. Cities need to get their financial decks in order. Unsustainable pyramid-scheme defined-benefit pension plans are destined to fail. It’s just that no one wants to face the facts now, they prefer to defer those problems to future ill-informed politicians.

Well, the cows have come home, and we have yet to see any real intelligence shining through the political class. No, instead we have the Michigan House of Representatives ramming through a law to ban wine retailers from shipping to Michigan residents. Ah yes, priorities.

It looks like the national debt is going to increase by $2 trillion or more next year as the US Treasury issues debt like there’s no tomorrow. The next problem is that foreign countries will slow their buying of US debt. We’re already seeing a decrease in demand for treasury issues. Countries like China and Japan are more interested in spending money on their own people than buying US Treasury securities. The stuff is coming even closer to intersecting with the fan.

Folks, this problem was created by government in the first place. We have a federal reserve that prints money out of thin air, encourages malinvestment through artifically low interest rates, and encourages leverage through fractional reserve banking. This house of cards is beginning to fall. Government can not spend its way out of this. In fact, government is making things worse.

Stop the bailouts. Stop the futile “stimulus” discussions. Reduce taxes and spending dramatically. Phase out the Federal Reserve, Fannie Mae, Freddie Mac, and all the pseudo-government entities that created this mess in the first place. It will be painful and rotten, but it will clear out the cancer of perverse government incentives in the market and allow our economy to heal itself.

But, frankly, there is no hope of any of that happening. That’s why we ain’t seen nothin yet.

What is the origin of the current economic crisis? Is it capitalism run amok? No. It is government run amok. As with so many economic failures, this crisis has its roots in two government programs – Fannie Mae and Freddie Mac. We will say this categorically: this economic crisis would not be happening if those two entities had not been created by (and implicitly guaranteed by) the federal government. This is not a failure of capitalism, it is a failure of government. This is what happens when the government interferes with the market.

Read a New York Times article from 1999 to understand exactly what started this mess.

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

…

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

A few more resources on this gigantic destructive government failure:

• Are Fannie and Freddie Too Big to Fail?
• Understanding the Crisis
• What’s Behind the Financial Market Crisis?

Just remember – it is government (the Federal Reserve) that created the Great Depression, it is government (FDR’s “New Deal”) that extended the Depression to last over 15 years, it is government that created this credit crisis. The government needs to get out of the way and allow the market to correct. Fannie Mae and Freedie Mac need to be liquidated and terminated. It is only when true market mechanisms are allowed to work will we come out of this crisis. “A bailout in every pot” will only prolong the pain.