REHABILITATING PRESIDENT BUSH (Our Screwup-in-Chief)

In an effort to win more congressional seats in November it looks like the Republican Party is going to argue that the country needs to re-embrace Bush Era policies in the coming months. That's not a typo. Here's what NRCC chairman Pete Sessions said on Meet the Press this past Sunday.

"We need to go back to the exact same agenda that is empowering the free enterprise system rather than diminishing it."

Got that? The Republicans think that re-embracing the market fairytopia mindset that brought us President Bush's failed policies, and our current economic debacle, is a winning strategy in November.

Responding to the effort to rehabilitate President Bush's image, Bruce Bartlett reminds us what happened when, in Bartlett's words, our "Screwup-in-Chief" was in office (be sure to read the comment section). It's useful to keep in mind that Bruce Bartlett is not only a columnist for Forbes.com, but was Deputy Assistant Secretary for economic policy at the U.S. Treasury Department during the George H.W. Bush Administration. He also served as a senior policy analyst in the White House for Ronald Reagan.

The incredible thing for me is that America even needs to be reminded about the Bush Debacalypse. What a complete and utter disaster for our nation, and for our friends around the world.

Fortunately for us there are people who have spent a good deal of time documenting - and linking us with the evidence that chronicles - President Bush's failed presidency. You can read about our Screwup-in-Chief's 400 biggest failed decisions and policies here.

- Mark

ARIZONA'S IMMIGRATION LAW ... STUPID IS AS STUPID DOES

Of all the issues surrounding Arizona's anti-immigration law perhaps the greatest source of frustration for me is watching the irrefutable stupidity emerging from the "What-part-of-illegal-don't-you-understand?" crowd. Dominated by xenophobia from the far right and by political conservatives (both Democratic and Republican), it's clear that this group is not only intellectually clueless about the forces that drive immigration, but they have no moral compass.

Put more simply, they're a bunch of idiots. Here's just one reason why.

Market Driven Immigration
Back in the late 1980s President George H.W. Bush got together with Mexico's president, Carlos Salinas de Gortari, and Canada's Prime Minister, Brian Mulroney, to propose what would become the North American Free Trade Agreement (NAFTA). Based on the assumption that markets work best when government is pushed out of the way the United States, Mexico, and Canada proceeded to create NAFTA (signed 1992, ratified 1993, implemented 1994).

In the process they also happened to craft one of the most heavily regulated and rule based treaties in diplomatic history.

The important point here is how NAFTA and it's "market-based" rules would work to help push millions of Mexicans into the United States after it was signed into law. Yeah, that's right, NAFTA - which was sold to America as an immigration reducing treaty - actually increases Mexico's migrants into the United States.

Of course, while the negotiations and regulations surrounding the treaty were industry driven, it would also be government enforced. Adam Smith's invisible hand, it would appear, isn't as strong as free marketeers would have you believe.

The important point here is how NAFTA and it's "market-based" rules would work to help push millions of Mexicans into the United States after it was signed into law. 

In an attempt to apply market rules to Mexico President Salinas de Gortari initiated a market-based program that would "privatize" Mexico's publicly held (ejido) land, where more than 20 million poverty-stricken Mexicans reside. But there was a hitch. This could only be accomplished by pushing Mexico's smaller, inefficient farmers off the land. But where would they go? 

Market Fairytopians Get It Wrong (again)
Incredibly enough, none of the free market geniuses negotiating NAFTA gave this much thought. In their world the magic of market would take Mexico's new landless peasants, and turn them into productive capitalists -- in Mexico, of course. Like much of the rhetoric and ignorance coming out of the current immigration-bashing crowd, our NAFTA free marketeers simply didn't understand how the real world works.

Instead of magical market fairies endowing millions of Mexico's landless peasants with education, skills, and a pocket full of money (from the sale of public land that suddenly became theirs) they became free market losers because of Mexico's embrace of market capitalism (to the extent that you can call NAFTA market-based). Like America's failed Homesteaders in the 19th century, and the crushed Dust Bowlers of the 20th century, Mexico's landless peasants would do what they needed to do under dire circumstances.

Migration in the face of daunting circumstances - however you label it - is an historical and human constant.

But wait, it gets worse.

Small Mexican farmers, who decided to stick it out and try to make a living competing in NAFTA's make believe market world, would come to feel the back side of Adam Smith's invisible hand too. In addition to failing to provide any kind of assistance or training to Mexico's rural poor, NAFTA's Founding Fathers didn't do anything of significance about the billions of dollars in market supports in the U.S. and Canada. Under NAFTA America's farmers would continue to receive water subsidies, infrastructure supports, tax write-offs, price supports, and other farm subsidies that have helped make them the most productive farmers in the world.

Mexico, which doesn't have the resources to play the subsidy game, would accept these conditions during NAFTA negotiations. President Carlos Salinas de Gortari simply caved in to U.S. demands in the area of agriculture subsidies. Desperate to get a treaty that would elevate him in the eyes of the world, he accepted verbal assurances (genuine, no doubt) to do something about subsidies later.

As should be expected, those assurances didn't count for much.

Moctezuma's Revenge, Neutered by Price Supports
In 2002 - the 10th Anniversary of NAFTA's signing - the U.S. Congress passed, and free marketeer President George W. Bush signed, a farm bill that would increase U.S. farm subsidies by $180 billion over a ten year period. Because Mexico doesn't have the resources to play the subsidy game they could do little but stand on the side of the road, barking at NAFTA's moving wheels.

To be sure, efforts have been made to make small producers market competitive (see NAFTA and the Campesinos). But with hundreds of billions of dollars in subsidies, and other market supports, in the U.S. Mexico's producers simply can't compete.

For example, America's heavily subsidized corn producers under price Mexico's corn farmers on a regular basis. Today Mexico is a net importer of corn, a commodity that is native to Mexico's heartland. Moctezuma's Revenge, if there ever was such a thing, has effectively been neutered by the God of Profit and price supports.

In practical terms, with similar patterns emerging in other commodity products, this means that Mexico's market-based initiatives in the countryside have had only a marginal impact on creating market entrepreneurs. Without the subsidies, infrastructure supports, lack of credit, tax write-offs, etc. it's impossible to expect the tens of millions of impoverished farmers who live in Mexico's countryside to prosper under NAFTA. Who could have expected more?

Oh, yeah. The same anti-immigrant zealots who push for punitive measures against Mexico's "illegal" immigrants are cut from the same clothe that gave us NAFTA's free market fairytopians. They're mostly republican, conservative democrats (it was Bill Clinton who signed NAFTA into law), and profoundly ignorant when it comes to understanding how modern markets really work.

More simply, you can't craft an industry driven, subsidy-friendly trade agreement - which leaves tens of millions of impoverished Mexicans exposed - and then expect the "magic of the market" to make things whole.

These are the dynamics that the anti-immigration zealots in the U.S. ignore.

Final Comments
The issues surrounding immigration in America are far deeper than being "illegal" in the eyes of the law. We have law breakers around us every day - jaywalkers, speeders, crossing a double yellow line, etc.  Yet, we don't demand draconian-like punishment from the authorities. Intuitively we understand that there is a difference between those who prey on society and every day law breakers trying to make their way through life.

Those who support Arizona's anti-immigration laws need to think these things through, and at another level. Unfortunately, they don't.

I take great pride in pointing to an academic piece I wrote 16 years ago (it's in Spanish). I wrote that NAFTA would not work as promised. In fact, I warned that we would be faced with the grim prospects of increased border tensions when NAFTA failed if we didn't rethink NAFTA. We didn't rethink NAFTA, and NAFTA hasn't worked as promised (which I wrote about here). The results were not only predictable, but are being played out before us now.

Today, just 20 years after celebrating the fall of the Berlin Wall, many Americans are prepared to support repressive border programs that are destined to become national monuments to ignorance, race-baiting, and political cowardice. Today's anti-immigrant zealots, who sing the praises of Arizona's border laws, need to quit acting like history's fools, and take a broader approach to understanding why "illegal" immigration from Mexico occurs.

Ignorance drenched in political cowardice is a hard thing to beat. But, as Forrest Gump might say, "Stupid is as stupid does."

Those who support Arizona's draconian approach to immigration need to think these things through a little better. Sadly, history tells us this will not be the case.

- Mark

WHAT DO YOU KNOW ... YOU CAN TURN A PINTO INTO A MUSTANG

Some of you might recall that back in October of 2009 I wrote "You Can't Turn a Pinto Into a Mustang." At the time I was using Ford cars to explain how - in the real world - you can't take a piece of crap car (Pinto) and suddenly revalue it and get classic car (Mustang) prices. That is, of course, unless you're one of the financial institutions that can take advantage of a Jan. 1, 2009 government ruling which says "Go ahead, revalue the toxic crap you own ... we don't mind."

In my October post I explained (by using Ford cars as a metaphor) how the Financial Accounting Standards Board's (FASB) 2009 ruling effectively allows America's financial institutions to ...

Level I: Price their financial instruments according to everyday market prices, known as the "mark-to-market" method.

Level II: Price their financial instruments according to what similar assets might sell for if more of them were around and/or sold. On this, think assessed value on hard to value antiques or one of a kind goods.

Level III: Ignore Level I and Level II pricing methods and simply make shit up ... known in the accounting world as the "mark-to-make-believe" method. 

All too often, it appears that America's financial institutions are using Level III mark-to-make-believe methods to make up their prices. What I didn't explain at the time are the details behind the game. Here's how it's happening ...

It turns out that when FASB implemented "Statement 157" on January 1, 2009 - in addition to directing financial firms on how to assess "fair value" for their goods (Levels I, II, or III) - it also left a loophole wide enough for William "The Refrigerator" Perry to walk through.

More specifically, FASB rules allow America's financial institutions to ask for a pricing waiver on financial instruments if they don't like the numbers from Level I or Level II methods. This is akin to a homeowner who hopes to secure a loan on their house being able to say, "I don't like the value my house was assessed from the Level I or Level II methods. I want a waiver so I can apply mark-to-make-believe (Level III) methods ... yeah, I want to let Peter Rabbit assess the value of my house."

Put another way, you get another shot at reassessing the value of your house at a price that has nothing to do with what it's really worth. Making matters worse, other financial institutions, the American taxpayer Federal government, and other unsuspecting market players have to play along with the charade and accept the price too.

To be sure, the financial firms have to fill out some extra paper work to gain access to the mark-to-make-believe (Level III) pricing method. The FASB does have it's standards (wink, wink). But what's a few more fairy tales penned in an economy that already has an Alice in Wonderland character to it? Once you're down the rabbit hole does it really matter if you burrow deeper?

Gaining access to mark-to-make-believe (Level III) method is the result of a loophole that says if your financial asset is exposed to "forced liquidation or distress sale" conditions you can apply for a waiver. As you might guess, given the market conditions of the past year, virtually any toxic financial instrument created on Wall Street could qualify for a Level III categorization, as long as the financial firm is willing to do the paper work.

And just like that, a toxic CDO or an SIV (which are akin to financial toilets), can be revalued to some made up number that makes Wall Street's financial mandarins feel better about themselves. More importantly, because of Tim Geithner's hare-brained scheme - which allows financial firms to use their toxic crap as collateral for new money - financial firms can dump their repriced assets on the American taxpayer Federal Reserve for new loans, credit, and profits.

To be sure, the market value of the product may still be in the toilet. But who cares? As long as the book value of the instrument hasn't collapsed we can all make believe that our banks are doing just fine. Thank you FASB.

In the end, it's because of FASB (which is under the SEC) that Wall Street's biggest players (1) have been able to maintain the illusion that their assets and their financial institutions are worth more than they really are, and (2) can go to Uncle Sam for more loans and credit guarantees, using collateral that's toxic and/or has tanked in value.

So, yes, if you work in Wall Street's Alice in Wonderland world, it appears you can turn a Pinto into a Mustang.

-  Mark

WHAT MILTON FRIEDMAN GOT WRONG ... EXAM POST

Does homo economicus exist? The notion that market actors are the dominant players who drive and shape society towards efficiency and stability - and should be left alone to pursue their ends for doing so - has it's roots in the 18th century, and persists to this day. In my view, whether you believe in homo economicus isn't as important as whether you can explain WHY you believe it.

All to often people believe something simply because: (1) it's convenient, (2) it's what they were told growing up, or (3) they don't know any better. This is one of the reasons why I wrote The Myth of the Free Market: The Role of the State in a Capitalist Economy. I wanted to help shed light on the misguided belief that market players should be deferred to because they're virtuous in a market setting.

To help my students prepare for exams in my International Commerce class I address the issue of what Milton Friedman got wrong, and cover several concepts they need to be familiar with for their exams. Below are some of the issues I've covered (I've listed page numbers where the topic can be found in my book throughout the text below).

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HOW DID MILTON FRIEDMAN "GET IT WRONG"?
To understand how Nobel Laureate Milton Friedman got it wrong I start by looking at what Adam Smith, the patron saint of modern capitalism, said about markets and trade in 1776. Adam Smith made it clear that a level playing field - or what he called the "laws of justice" - should not be undermined. Custom, tradition, privilege, market conspiracies, favorable legislation, and affronts to human dignity all work to undermine the market's playing field by shifting resources to those that don't necessarily work for their reward (15-17, 26).

The interesting thing is that Adam Smith wasn't the only one who saw how the laws of justice could could be violated in 1776. James Madison and the Founding Fathers spoke about the need to reign in merchants and other factions because the "most common and durable source of factions has been the various and unequal distribution of property" (17-19).

These considerations, according to the Founding Fathers, inflamed "passions" in post-revolutionary America and threatened to tear apart the new union. Worse, according to Madison, is how "the latent causes of factions are thus sown in the nature of man." Simply put, we're not necessarily good people, especially in a trading environment. Madison wrote: "If men were angels, no government would be necessary." Guess what? We're not angels. And unicorns don't exist either.

We can't trust one another, even in a market setting. This is why we have a Constitution (see especially Art. I, Section 8). This is why we create laws and regulations.

FRIEDMAN'S UNICORN VIEW OF CAPITALISM
All of this is something Milton Friedman passed over, or got wrong, when he discussed the power of "the market" to transform the passions of merchants. More specifically, Friedman placed so much faith in people doing the right thing in a market setting that he virtually ignored what the Founding Fathers, and Adam Smith, said about the human condition. The Founding Fathers, in particular, had seen in real time what a weak central government would produce, and did not want to re-visit the Articles of Confederation.

Like it or not, they all believed merchants can't always be trusted in a market setting. Indeed, Adam Smith believed that merchants, left to their own devices, would work against the interests of the consumer, and would use the state to secure their positions if necessary. If  Adam Smith, James Madison, and the Founding Fathers understood this, why not Friedman?

I think I know why ...

Making Milton Friedman's position on freedom even more bizarre is how he assumes liberty is like air, it's just there for everyone. This is why he suggests an "umpire model" for society. Let the state call balls and strikes in markets, and that's it.

However, Friedman ignored how umpires can be changed (to market friendly umpires). He ignored how strike zones can be changed (deregulation & favorable legislation). He ignored how, for a long time, some people never got to the plate (women and people of color). Finally, he ignored how umpires can get dirt thrown in their faces (yes, market players can and will collude with government regulators and members of Congress ... as Wall Street in 2008, and what's happening in the Gulf of Mexico now, illustrate).

THE MORAL JUSTIFICATION OF CAPITALISM
All of this can undermine our level playing field and, worse, can destroy the moral justification of capitalism. We need to remember that the moral justification of capitalism, which is the cornerstone of our market economy, rests on one simple principle: If you work hard you will get ahead.

Personal responsibility and a strong set of moral obligation has grown out of this simple principle.

Once you undermine the conditions that make the moral justification of capitalism work we're all in trouble. Personal debt levels, record bankruptcies, and homeowners walking away from their mortgages, among others, are not good signs today.

Still, today market players continue to invoke what Adam Smith referred to as our system of "natural liberty" to pursue their own selfish ends. Ironically, while they channel the spirit of Adam Smith to justify their efforts in the market, their activities in the modern era both undermine the laws of justice (i.e. our level playing field which helps determine how reward and resources are distributed) and violate what Adam Smith called "the order of nature and reason" (which leads to market imbalances and societal disconnect; 37-45).

Because his belief that market players will do the right thing in a market setting was so strong Milton Friedman irresponsibly grafted his biases on to his policy analysis, and his policy prescriptions. This is where he got it wrong. Men aren't angels. Men pursuing profits and wealth can become even worse.

To believe otherwise is to embrace the unicorn.

DOUBLING DOWN ON THE UNICORN
Milton Friedman didn't simply get the human condition wrong. He doubled down on the Unicorn.

Specifically, he went beyond promoting his umpire model of markets (we can all be trusted in a market setting while we're pursuing profits) to deliberately distorting the debate, and the facts. While there are many things that Milton Friedman missed when it came to understanding human nature, below is a partial list of what Milton Friedman got wrong, ignored, or misrepresented in his work(s) (which I discuss in chapter 2 of my book).

FALSE DICHOTOMY
Throughout his writings Friedman consistently warns about the collectivist tendencies he saw in western democracies. Seeing socialist ghosts in every corner, Friedman constantly warned about creeping socialism, and how market capitalism (at least his Unicorn vision of markets) was being threatened. What Friedman ignored is that markets aren't an either/or proposition. This is a false dichotomy (10). Saying you either do it my way or we're going down a socialist rat hole does not represent what happens in the real world, and is not sound analysis (especially for jump starting a debate).

IGNORES ECONOMIC GROWTH
For all of Milton Friedman's dire warnings about America - and the west - going to hell in a hand basket because of the creeping socialism he saw threatening our world, Friedman missed one important fact: Post-war America and the west experienced the greatest, and widest, degree of economic growth and prosperity in human history (5-13). We avoided the threat of major market collapse, or economic depression too.

Warning about the dire effects of an evolving "collectivist" regime when growth and stability are high and widespread is simple fear-mongering. Global confidence in the sturdiness of the world's financial center, New York, evolved for one simple reason: Transparency was tethered to sensible regulations (something to think about today).

PLAYING POLITICAL GAMES
Milton Friedman understood he could ride on the back of the field of economics, which maintains in an elevated - but undeserved - position in the political world, and in the social sciences of academia. This position was a powerful tool politically. Milton Friedman understood this and deliberately sought to discredit his opponent's arguments by:

(1) Conflating government regulations and the push for civil liberty protections with socialism and collectivism (his influence is so great that Tea Baggers today still don't know the difference between the categories).
(2) Marginalizing the efforts and duties of government as wasteful, when we all know that state functions are distinct from those of the market.
(3) Dismissing other, competing, disciplines as "speculative philosophical discourse" that are less rigorous than economics (which studies homo economicus).
(4) Denigrating his opponents arguments by making references to the "bubbly emotionalism" of their position(s).

To be sure, all intellectual battles require that you distort, marginalize, dismiss, and deride the efforts of your opponents if you can't defeat them on the merits (I know, I know ... the Unicorns). But think about it. How many professional economists saw the market collapse coming in 2008? (I'll link a short list here later.) How many understand it's roots today? (And, no, it's not Fannie Mae's fault, or the fault of all those people who took out loans they couldn't afford, or the fault of government spending alone ...) Milton Friedman understood the political climate of the day, and took advantage of it to irresponsibly push his world view (see esp. the intro to Ch. 4).

DOWNPLAYS DEMANDS OF MODERN WORLD
If you create an automobile we now know that we need the DMV, the CHP, the DOT, and ... the list goes on. Do you really trust Wall Street to do the right thing now that the crisis has passed (for now)? Do you trust British Petroleum will make things whole in the Gulf of Mexico? Do you care if your medical doctor is certified? Complex industrial societies require rules and regulations. Commerce over long distances requires it. Milton Friedman seemed to believe that creating a complex and interdependent society across a continent is it's own achievement. It's not. You might want the government off of your back, but I can assure that you want him on your neighbor's.

DOWNPLAYS HISTORIC ROLE OF THE STATE
Whether it's Manifest Destiny, land grant colleges, our Indian land policy (someone had to kick them off for you to invest in it), land acquisition policies (war/purchase), market subsidies, mass market purchases (starting with the Civil War), infrastructures (Erie Canal, RR, etc.), the creation of America's middle-class (yeoman farmer, blue collar workforce, and the social wage earner), education policies, tariff policies, civil rights, etc. it's clear that the state has had the dominant role in creating the conditions for wealth creation in America (30-35, plus Ch. 6). There are no invisible hands here.

IGNORES WHAT MAKES THE MORAL JUSTIFICATION OF CAPITALISM TICK
Work hard and get ahead? Not if you were a woman, black, or even white male without land (initially). The state has worked hard to open and guarantee opportunities for those who were once relegated to second class status in America. Access wasn't provided by enlightened market players. There was too much money to be made keeping the field tilted in their favor.

Later, when child labor laws, family wage laws, and Jim Crow/Civil Rights laws were required, the state once again stepped in. Industry, for the most part, fought the state every step of the way. The market didn't open opportunities magically. It was democracy in action. It was people making demands on the state, and then having the state act. This is politics, which means the state. The state made the moral justification of capitalism work in America, not market players.

There's more, but this is more than enough (for now). Next exam post: From War & Mercantilism to Classical Liberalism.

- Mark

AMERICA ... A NATION OF IGNORANT WRETCHES?

Want to know why public pension funds are sucking wind (California is going to be short at least $350 billion), and why your house and/or the commercial real estate market is either underwater or in deep trouble? It's not because of the actions of Freddie Mac and Fannie Mae, as moral coward and former Fed Chair, Alan Greenspan suggested during his testimony to the Financial Crisis Inquiry Commission. It goes much deeper, as this Dylan Ratigan clip outlines.

Visit msnbc.com for breaking news, world news, and news about the economy

I especially like the Hollywood movies Ratigan uses to explain what's happened. Former Federal Reserve Chair, Alan Greenspan, is The Godfather. He makes the banking sector an offer they can't refuse: Virtually free money with carte blanche to do what they want. The banks, and other market players (especially the "shadow banking" institutions), take the money and make unrealistically low interest rate loans across the economy.

And why not? The Godfather, Alan Greenspan, had their back. (Paradoxically, in spite of his hands off "free market" beliefs, Greenspan also believed it was his duty to write blank checks and ignore market corrupting practices to keep the market afloat.)

For their part, American consumers thought the money coming in was "all good" and would last forever. Like Doyle Lonnegan in the Robert Redford movie The Sting, American consumers didn't realize that they were getting their pockets picked, and that the ones doing the picking were the people America trusted to take care of their business - Alan Greenspan and Wall Street (a process I wrote about in early 2008).

Like Doyle Lonnegan, the American taxpayer was footing the bill for the con men (Alan Greenspan and Wall Street) to play and make their bets. When the time for making the real big con (bet) arrived, Lonnegan was again tricked out of his money by a first-class sting operation. In many ways, with the American taxpayer Federal Reserve footing the bill for the low interest rate loans to Wall Street, and with the American taxpayer covering the cost of the bailout for Wall Street, there's little doubt that the American taxpayer has been connned too.

Heads they win, tails we lose.

Still, there's little doubt that America was pleased with the immediate results, and did not worry too much about the future when the game was being played out. And why should they worry? Americans were told over and over again that market players are good, rational people. You can trust Wall Street. Government, on the other hand, was bad. Government regulations were worse. And besides, Wall Street historically returned about 7.5% per year, which would likely go on for eternity (so the argument went).

With this mind-set as America's backdrop, it should come as no surprise that Wall Street's sting operation wasn't such a hard sell. In many respects, we were asking to be fooled.

The end result? Bankers and investors went nuts borrowing and lending, borrowing and lending, borrowing and lending ... well, you get the drill. But it didn't stop there.

The good people on Wall Street took all the newly created debt contracts, repackaged them into high paying securities, and then sold them to pensions and other fund managers. Wall Street effectively marketed them as securities that were as safe as government bonds. With the ratings' agencies and Wall Street financiers working together to make sure the debt looked clean on their computer models, what could possibly go wrong?

Well, we know what went wrong. Because America is chock full of people who have a child-like understanding of how markets work, we got conned. And it's happening again.

Today, no one in Congress seems willing to stand up to get our money back. Part of the reason for this is that they don't understand what the hell is going on either (Republican Ron Paul and Democrat Alan Grayson excluded). Worse, those who helped pull off this scam are too gutless to accept blame because of what it would do to their egos, and their bank accounts. Recent regrets from CEOs, without assuming responsibility, are simply public grandstanding.

As a result, it should come as no surprise that the pieces of legislation making their way through Congress are left lacking (though Audit the Fed is promising).

At the end of the day I don't expect much out of the reform efforts (which can be tracked here). Americans are woefully ignorant about too much of this stuff to push for anything of substance. Our Congress is too dependent on Wall Street lobbyist campaign contributions to stand up for the American consumer. Worse, most Americans - especially the market sycophants in Congress - have bought into a free market mantra that is more fairytopian than grounded in reality. This explains why accountability is missing from our current debate.

Simply put, because the vast majority of Americans still believe in self-regulating markets they don't understand where to begin when it comes understanding the market failure we just experienced (hint, it's not just Fannie Mae or Freddie Mac).

When it comes to understanding how modern markets work we really need to ask whether America has become a nation of ignorant wretches. If we are honest with ourselves I have to believe that the solutions would have become obvious by now ... which, in my view, explains why we're going to do 2008 all over again.

Stay tuned.

- Mark

GREENSPAN WINS DYNAMITE PRIZE IN ECONOMICS

The on-line journal Real-World Economics Review Blog recently had a contest to see who their readers believed was the economist most responsible for blowing up the world economy.

Here are the top three vote getters for the Dynamite Prize in Economics, with a brief professional "bio" explaining their rank.

Alan Greenspan: As the former chair of the Federal Reserve (1987-2006), Alan Greenspan won because of how his fairytopian market views helped ruin our nation's economy. His economic dream world ran so deep that he believed markets didn't need regulation because they're so efficient that even corruption and stupidity are eventually weeded out. People, after all, can be expected to do the right thing when money and profits are staring them in the face. He was so convinced about his Ayn Rand drenched ideology that he consistently lowered interest rates, and expanded the money supply, foolishly believing that people who get money nearly for free will act rationally.

For believing that people are angels in a market setting, Greenspan's award is well deserved.

Milton Friedman: Encouraged by the brilliance of his own writings (he was a good writer), Friedman managed to convince himself that the Federal Reserve was to blame for the Great Depression. Friedman pushed his delusions about markets - and evil government - to such a degree that he wrote the policy paper that led the U.S. out of the draft and into an all volunteer military. To get the results he needed - which focused on market efficiency rather than national security - he deliberately ignored the research methods he was asked by Congress to use in the policy paper. Because of Milton Friedman we now have: (1) a Federal Reserve that believes it's so important that it can stonewall congress, and; (2) a military that allows U.S. presidents to ignore the will of the people (a draft to fight reckless wars would get our attention), and increasingly depends on private mercenary companies, like Blackwater.

After considering how his academic career influenced public policy, Friedman probably should have received a Life Time Achievement Award.

Larry Summers: Former Harvard economist Larry Summers was at the center of the good 'ol boy wolf pack that went after Brooksley Born. Who's Brooksley Born? In her post as director of the Commodity Futures Trading Commission (CFTC), Born warned Washington that if we did nothing to rein in derivative trading that we were looking at a market collapse ... in 1997! Summers - along with Robert Rubin (Treasury), Alan Greenspan (the Fed), and Arthur Levitt (SEC) - thought it was better to bury Born politically. Kudos.

Proving that his Born Stupidity was not a one time fluke, in 1999 Summers also gave intellectual weight to the idea of dispensing with the Glass-Steagall Act (1933). The Glass-Steagall Act separated commercial banks, investment banks, and insurance companies after it was discovered that the financial sector had worked collectively to speculate and defraud customers before 1929. For reasons not yet explained, Summers believed that ignoring history and bringing banks, brokers, and insurance companies together again was a good idea.

Don't feel bad for Larry Summers if you think he should have won this time around. He can still prevail. For my money, as a member of President Obama's "don't-push-Wall-Street-too-hard" economic team, Summers has a very good chance of winning the Dynamite Prize in Economics in the future.

While I would have liked to see Arthur Laffer, the economic genius behind supply-side economics, as one of the nominees, there's no doubt that the top vote getters deserve their place in Dynamite lore.

- Mark

MARKET DELUSIONS RUN DEEP, II

A couple of days ago a friend sent me this market analysis, written by two economists, who explain why Wall Street wanted to suspend market prices on certain products. This practice, which suspends the "market-to-market" (MTM) accounting method, essentially allows market players to reprice an asset that they hold if it's generating income, even if the underlying asset is under water (akin to a homeowner making payments on a house that is not worth what they owe on it).

The logic behind suspending market prices is to help keep those who "own" the product from having to provide more cash or collateral to backstop the asset. The idea is to prevent fire sales on Wall Street. All things being equal, this is a good idea.

But all things aren't equal.

I wrote about this on Friday, and made it clear that the suspension of MTM effectively allows the financial sector to suspend reality. Among the many concerns I have is that suspending MTM is being done for the wrong reasons, with virtually no strings attached, and with plenty of government guarantees. It virtually invites another market collapse.

MARK-TO-MARKET’S A RED HERRING
As Bloomberg’s David Reilly points out, MTM is little more than a diversion employed by America's biggest financial institutions “to dodge two big issues -- their reckless use of borrowed money to boost returns and their inability to make sound loans and investments.” According to Reilly, of the $8.46 trillion in assets held by the 12 biggest banks before the meltdown, only 29% of it was something that could be marked to market. In some cases it wasn't even that at that level. General Electric Capital - which is similar in size to the sixth-biggest U.S. bank - said that just 2 percent of it's assets could be marked to market.

What’s really dragging down the banks? According to Reilly, its loans made to consumers, businesses, and other institutions. Because loans for cars, credit cards, and other activities are held at their original cost, when they fail to pay out they act as a drag on the banks. When this happens they need to come up with more collateral, or loan loss reserves. The banks didn't have the money. This is what banks were up against.

Put another way, MTM is a red herring that diverted attention form the bad loans banks made.

Real investors know this. They’re worried about the loan portfolios and the bad investments of the biggest banks. Simply put, they didn’t trust what the biggest banks were doing, and where they were lending their money. As Reilly points out,

… the Big Four have a higher percentage of tough-to-value assets due to their investment- banking activities. In many cases, losses that stemmed from those holdings reflect banks’ decision to enter risky transactions or markets. In that case, mark-to-market simply recognizes the reality of those missteps.

The biggest banks were being dragged down by their short-sighted lending decisions and their own stupidity. Mark-to-Market helped expose this.

DUMPING THEIR STUPIDITY ON THE AMERICAN TAXPAYER
Apart from transparency, and exposing the short-sighted decisions of America's financial institutions, why should we continue to use market prices to gauge what a product is worth? Because suspending MTM effectively allows financial institutions to reprice toxic securities. This, in turn, allows them to tell their creditors, their customers, and the government “Look at how much our securities are worth now … we don’t need more collateral or loan reserves … And besides, based on our magically repriced asset, if we want we can get a government guarantee or a government backed loan (through Federal Reserve and Treasury Department sponsored programs).”

I won’t go into the details how this happens (take a look at TALF and Maiden Lane programs to get an idea). Still, it's says much that Bank of America is shoving more and more of it’s “nonconcurrent” (and probably most toxic) loans on to the backs of the American taxpayer.

Consider the following. Last year, only 2.7% of BofA’s failing loans were backstopped by the American taxpayer (student loan guarantees, etc). Today over 20.5% of BofA’s $61 billion bad loans are now the responsibility of the American taxpayer. Take a look at the numbers.

I can't tell (yet), but it seems to me that BofA is doing this because they’re now able to tell the government, “These loans aren’t really bad because the underlying asset is still worth $100 million. See, we just repriced the asset.”

Yeah, and watch me pull a rabbit out my hat … nothing up my sleeve. 

At the end of the day, MTM is not the real problem. The problem is how much banks borrowed against assets whose prices have collapsed. I'm not sure, but it seems to me that suspending MTM was just another way for America's biggest financial institutions to reprice assets so they could dump them on the government through taxpayer funded guarantees.

OK, SO WE SUSPENDED MARK-TO-MARKET
OK, so the Financial Services Accounting Board (FASB) suspended MTM last April (2009). This could be a good thing. Franklin D. Roosevelt did it, so it can't be all that bad, right?

What we've forgotten is that FDR backed away from MTM because he had other programs and regulations in place (or being put in place) to help insure that suspending MTM wouldn't get out of hand ... or lead to excessive borrowing, inflated books, or wild speculation in other areas. What this tells me is that if we're going to take market prices out of the market, as FDR did, we should also reinstate the 1933 Glass-Steagall Act, which kept commercial banks, investment banks, and insurance companies away from each other's business.

While we're at it we should also repeal the Federal Reserve's 3-2 decision in 1987 that allowed commercial banks back into the securities' market in a big way. We should also put some teeth into the Securities and Exchange Commission, pare back FDIC guarantees, limit brokered deposits, do something about credit default swaps, repeal FANNIE MAE's privatization, and put some teeth into limiting GSEs. And, for good measure, we should have brought back HOLC (instead of President Obama's disasterous, and bank-driven Making Home Affordable Program) and bolstered the hand of labor.

The point is, FDR suspended MTM only because there was a regulatory framework in place to help insure the stupidity we saw in the run up to meltdown in 1929 (and 2008) did not occur.

CONCLUDING COMMENTS ON MARK-TO-MARKET
At the end of the day, the market analysis from the two economists got it wrong. Bringing MTM back in 2007 didn’t cause the market to collapse. It simply exposed the market stupidity that was going on after we deregulated the markets.

Look, I have no problem with suspending MTM, like FDR did. But if we're going to suspend MTM, and channel the legacy of FDR in the process, we should also bring back FDR-like programs which worked to insure that bubbles and other market stupidity didn't get out of hand in the post-war era.

We want to keep in mind that one of the reasons that market players were able to create such fabulous "wealth" over the past 20 years was because no one really knew how much some of the instruments they created were worth. But their computer models did. This helps explain why so much toxic, over-leveraged, debt was created. Market players were living in a market world governed by computer models rather than the logic of the market. MTM helped expose this fairytopia.

Simply suspending MTM, without calling for the regulatory infrastructures (especially related to over leveraging) that helped make our economy such a success in the post-war era, is like throwing a group of kids into a candy store and saying "Do what you want, but don't eat too much". Without rules, things will get out of hand.

What many ignore in all of this is that if our financial institutions hadn't borrowed and lent so much against shady assets - or if they had kept enough capital reserves - they wouldn't be worried about MTM valuations. Hyman Minsky has much to say about this (I'll leave Minsky alone for now; you can read about Minsky in my book, or in the labels below). But in a deregulated environment, where the biggest market players are borrowing and/or betting on assets of dubious value, well ...

Banks and other financial institutions have been making stupid decisions for years. The series of bailouts and subsidies for industry is long and sobering (for my money, much of it starts with the bank bailouts in 1982, and the S&L debacle). What happened in 2008 should have been a wake up call for the industry.

If market players don’t like what they saw once MTM exposed what was happening after 2007 they should act like real market players. They shouldn’t be getting so deep into products that create such a big mess for them, and the American taxpayer. That’s the way real market players deal with uncertainty.

Pretty simple if you ask me.

- Mark

THE GOOD, THE BAD, AND THE UGLY

On a regular basis I get comments about what I have written or said in public forums or in the media. Some of it is good. Some times it's bad for what it reveals about America's future. Other times it just makes you laugh because of what it tells us about the crazies that are out there. I especially enjoyed this diatribe directed at me after I wrote to a Tea Party crazy conservative that the "Fairytopia market world" they believe in doesn't exist.

 Mark your vast knowledge of fairies would lead one to believe that you belong to that low life, scum sucking, bottom dwelling, dingy smelling group of nefarious would be communist Marxist who are by some twisted fate, members of that disgraceful group known as the Barney Frank, act alike, Democrats. If I were you, I would hide myself in shame and ... See Morerealize you really are not American at heart or of mind. But most definitely are an accumulation from some oderferious, decayed part of the world, like the bottom of a human waste pit. Consider yourself properly vetted and cast out of membership with any real American patriot. "WE THE PEOPLE" shall overcome the likes of detrimental ilk, such as you. I will pray for you, but not very much!

I know, pretty ugly. But you have to admit, it's kind of funny. Entertaining too.

Most of the time, though, I get genuinely good comments. Yesterday, for example, I gave a talk at the university for the 60+ Club. The group is made up mostly of retirees who support the mission of the university, and attend presentations given by faculty members because they're interested in the world around them.

One of the comments yesterday dealt with the specific definition of "mark-to-market" accounting. In a few words mark-to-market accounting in our post-meltdown world allows market players to reprice collapsed financial products upward. Apparently I didn't make it clear enough that mark-to-market accounting has been turned on it's head since the bailout, and is really just another way for market players to avoid taking responsibility for the stupid decisions they made. This is one of the reasons many accountants refer to the concept as "mark-to-make-believe" (which I should have noted yesterday).

In all cases, these comments demonstrate you've got an audience that's done their homework, and makes presentations fun. This is good.

Then I get comments from people who aren't looking for clarification. Nor are they foaming at the mouth Tea Party diatribes (like from the guy mentioned above). Instead, they're ideological rants that the writer believes are bold statements of fact, when they are really little more than emotionally-charged opinions. For example, a couple of days ago I received these comments on the blog site I have for my book, The Myth of the Free Market: The Role of the State in a Capitalist Economy.

The free market did not write a 60,000+ page tax code that punishes work, rewards sloth and buys the votes of special interest groups, the government did.

The free market did not destroy our public school system and graduate (or fail to graduate) generations of civically and financially illiterate citizens, the government did.

The free market did not drive our jobs overseas and kill our entrepreneurial spirit with over-taxation, over-regulation and frivolous lawsuits, the government did.

The free market did not ban drilling for oil, vilify coal and block the building of nuclear power plants in the United States, thereby transferring hundred of billions of dollars of American wealth and many thousands of energy-industry jobs to foreign countries, the government did.

This crisis is the result of a giant social engineering experiment and vote-buying scheme gone tragically wrong.

The free market does not try to engineer society or buy votes, the government does.

The government caused this crisis, the free market did not.

The government cannot fix the crisis, the free market can.

What's clear is that - like my Tea Partying friend noted above - this individual has a utopian view of how markets work. In a few words, the state creates the conditions under which wealth is created. I can't emphasize enough how silly it is to believe that market players in a market setting without rules suddenly become virtuous and ethical. The pursuit of profit does ugly things to people who might otherwise be decent people (then again, many of them are unhinged sociopaths).

What's interesting, though, is that I shouldn't have to write any of this.

James Madison and the Founding Fathers made it clear that what was behind the activities tearing the country apart, especially after winning our independence from Britain, were the conflicts and "factions" driven by people in the pursuit of wealth. Without going into a long history lesson here (read my book), it needs to be said that our Constitution includes Art. I, Section 8 (and other sections) precisely because the Framers understood that market players don't always do the right thing, and needed guidance. Indeed, the patron saint of captalism, Adam Smith, wrote that government action to protect consumers and citizens from market players was necessary. There's a reason why he wrote this (it's tied to collusion and favorable legislation), but this post is already long enough. Click on the labels below for more.

The point is, believing in market fairytopias is intellectually lazy and, quite frankly, reveals a penchant for embracing myths that's dangerous because they work against our understanding of reality. This is bad for the country because it prevents us from developing policies that deal with real world problems.

At the end of the day, market players in the pursuit of profit don't alway do the right thing. People in the state of nature aren't angels either. Believing otherwise is sweet. But it's also delusional.

- Mark

THEY'VE LEARNED NOTHING ...

Back in March and July I wrote about how our non-regulatory and non-punitive responses to the 2008 market collapse effectively sets us up for an Extreme Do Over.

In a few words - and using ABC's Extreme Makeover Program as an example - I argued "that rather than demolish the commercial banking and investment infrastructure that got us into this mess - and then rebuilding everything with strong firewalls - the Obama administration has signed off on the old framework."

The point I made in both posts was that we've learned little to nothing from the market meltdown. The same people, the same thinking, and the same institutions that got us into this mess are still dominating our economy. In many respects, these developments create all the trappings for an Extreme Bailout Do Over.

This article from William Black offers additional insight into why we should not be surprised if we go through another 2008 market meltdown.

Black - who is a white-collar criminologist, a former senior financial regulator, and now an Associate Professor of Economics and Law - tells us that the epic regulatory failures at the Federal Reserve are the product of the continued intersection of a failed ideology with bad economics.

Specifically, Black points to five failures that are the stuff of legend:

1. Former Fed Chair Alan Greenspan believed that the Fed should not regulate fraud because the market would clean up fraud on it's own.

2. Current Chair Ben Bernanke also believed that the Fed should rely on self-regulation by “the market.”

3. Former Federal Reserve Bank of New York President Tim Geithner believed that he was never a regulator while he headed the NY Fed (a true statement as it applied to him, but not one he’s supposed to admit).

4. Bernanke gave key support to the Chamber of Commerce’s effort to gimmick bank accounting rules to cover up their massive losses — allowing them to report fictional profits and “earn” tens of billions of dollars in bonuses

5. Bernanke recently appointed anti-regulation crusader Dr. Patrick Parkinson as the Fed’s top supervisor.

Of these five developments, Dr. Parkinson's recent appointment is especially noteworthy because it shows that our regulatory mandarins have learned nothing from the past year.

Specifically, Dr. Parkinson was appointed largely because he shared Dr. Bernanke’s anti-regulatory ideology, a view that he hasn't changed even in the face of the Great Recession. Perhaps more importantly, as Black points out, Parkinson is an economist who has never examined or supervised. This is important because Parkinson is also known for naively claiming that credit default swaps (CDS, a.k.a the financial derivatives that destroyed AIG) should be unregulated because fraud was impossible among sophisticated parties! Huh?

Who believes crap like this? Oh, that's right. The same people who believe "invisible hand" pixie dust creates free markets where people magically become virtuous in the pursuit of profit.

And fairy tale market conditions exist too ... if you just close your eyes, click your heels together, and repeat the words, "There's no place like home ..."

Look, I'm all for creating useful myths and legends that help to build and unify a society (like George Washington never told a lie). But saying fraud is impossible among sophisticated parties in a market setting is like saying mingling among societies' power elites will turn ladies of the night into ladies of virtue. It doesn't happen.
 
At the end of the day, the anti-regulatory policies that Greenspan, Bernanke, Geithner, and now Parkinson champion are simply naive and reckless. Wishful thinking is no substitute for good policy.

- Mark

WHAT WENT WRONG ...

I wasn't going to post for a few more days but this article (by way of nakedcapitalism.com) caught my attention. It was written by Steven Keen, at Business Spectator, who was asked to contribute to a German journal. The discussion topic? The failure of the vast majority of mathematics-economic models to anticipate the Global Financial Crisis.

In a few words Keen argues that economists have created so many myopic models that they and our increasingly sycophantic media don't understand how our economic world really works. Keen looks specifically at two "modelling" areas that have led economists off track: (1) a continued belief in Milton Friedman's monetary theories, which don't adequately account for credit and debt creation, and (2) a disturbing belief that economies tend toward disequilibrium.

How did these two beliefs impact our (mis)understanding of the world before last year's meltdown? Keen responds:

Because neoclassical economists treated any economic variable generated by a market economy as being in equilibrium, they fantasised that stock and house prices were in equilibrium when clearly they were in a bubble, and they ignored rising levels of private debt in the belief that whatever level of debt applied was an equilibrium one – and therefore justified by market fundamentals.

In a few words what we have is market arrogance coupled with ideological blinders working to create - as I have described elsewhere - a fairytopian world of perfect competition and fluid decisions that somehow work themselves out ... as if some mythical and magical invisible hand make things work in harmony all the time.

What a bunch of crap.

I wrote about this in my book when I described how markets really work, whether through favorable legislation or money policies that benefit specific groups. Specifically, I pointed to economists like Hyman Minsky (who saw debt as both good and bad, and tried to make sure that we understood the difference too) and John Maynard Keynes (who saw disequilibrium). Both understood and saw the flaws Keens writes about. Still, modern economists try to explain away favorable legislation, or downplay disequilibrium, as aberrations because they don't fit the model.

This is why I especially like what commentator Raymond D'Hollander has to say about economists depending too much on mathematical models:

Mathematics is simply a tool to be used in engineering systems. Nothing more, nothing less. Every engineer knows that the world is not perfectly normal (in the statistical sense) so no engineer worth his salt would base his entire design on some untested mathematical formulas. Boeing or Airbus would never design an airplane in a computer, manufacture it from the computer-generated instructions, and then immediately load it up with 300 passengers on its maiden flight. On the other hand economists and the global financial sector appear to believe that this is a perfectly viable way of approaching the world's economy.

In my view, economists and market players believe in the models they create for two, self-serving, reasons.

First, models - especially in CDS, CDO, and other ABS markets - allow(ed) economists to believe that they are "scientific" and are in control of what they see. Second - and simply put - the models that have been created allow market players to get rich. They buy enough time to squeeze money and profits that don't really exist. The bailout funded counter party payouts (thank you Ben Bernanke and Tim Geithner) show this to be true. The money wasn't really there, unless you were always banking on a bailout.

Steven Keen does a good job of explaining what went wrong with the models and assumptions of economists (though some might find it somewhat technical). I encourage you to read it if you get the time. The comment section is especially good too.

- Mark

MARKET CHEERLEADERS LIVING IN FAIRYTOPIA

Back in March I got into a rather interesting e-mail discussion with one of the economists at Merrill Lynch (in New York). It came after I read one of their monthly newsletters, where the authors presented the world with what they thought was sound market analysis. It was garbage, and I let them know.

Well, hang on to your hats. We're now getting more and more of the same garbage, as you can see in this "It's Not the Government's Recovery" piece by Brian S. Westbury and Robert Stein. The authors do their level best to show the world that people in the bailed out financial sector (like them) know what they're doing when, in fact, they don't get it. In my view, they have no idea about cause and effect relationships when it comes to our current market environment.

Check this out.

The authors first claim that accounting gimmicks like "mark-to-market" - which allows the financial sector to reprice garbage - have made things better. And it did ... for market players on Wall Street.

What the authors don't mention is that the freedom to reprice their garbage came in the bailout language signed by President Bush after Newt Gingrich and the financial industry lobbied Congress extensively (here's what I think about mark-to-market), while others worked on FASB rules. This means that the federal government altered the rules for the industry to help revitalize collapsed market prices. There were no invisible hands here as the authors suggest.

Then the authors argue that "easy money and the the normal tendency for free markets to heal from panic" created the conditions for recovery. This is truly pathetic.

Look, I voted for President Obama and genuinely want him to succeed. But the recovery isn't real (no matter what Larry Summers says). Those of you who read this blog regularly know why. To the extent that things may have stabilized, the "easy money" policies (via low interest rates) that made this possible were mandated/facilitated by the Federal Reserve. This occurred with the cooperation of the White House and the Treasury Secretary. This is government policy.

Finally, the authors also hide behind industry junk terminology ("V-Shaped recovery", "monetary velocity," etc.) that, I'm sure, impresses gullible family members and drunk neighbors. But it does little more than camouflage reality. It completely misses the multi-trillion dollar guarantees that the Federal Reserve, the FDIC, and the Treasury Department created for Wall Street's market garbage. This along with mark-to-make believe are what is creating the illusion that things are picking up on Wall Street (by facilitating counterparty payoffs). 

At the end of the day, what Westbury and Stein present is stunningly superficial and myopic. It really belongs in the Irving Fisher School of Permanent Plateaus. More to the point, to suggest that markets are "healing" because of some kind of Magical Market Pixie Dust is simply delusional.

There's more from the authors (including the incredibly ignorant suggestion that the "economy would be doing even better ... if government had stayed out of the way") but it's clear that Westbury and Stein really have no clue what's happening in the economy. These guys are living in a free market fairytopia.

That they're writing this stuff, and people take them seriously, should be a Red Flag. They're cheeleaders, not analysts.

- Mark

PETER PAN, DARWIN & OUR HEALTH CARE DEBATE

From time to time I've gotten into e-mail discussions about what I write in the Bakersfield Californian, what I say on radio or TV, or for what I presented in my book. Or I'll get stuff from local conservative politicos, which reminds me why living here in Bakersfield is so much fun for a Liberal like me. There's a lot of good conservative material to comment on. Usually it involves some naive assertion about how wonderful markets, Christ, or freedom are (or some variant thereof).

Then there are the self-appointed geniuses. They like to use Latin terms (poorly) and then take me down intellectual cul de sacs that make sense only if you like debating word definitions and/or their Rush Limbaugh-Glenn Beck-FOX News-fed interpretation of events. This winds up with them telling me how much smarter they are than people in academia (which includes me too). I know they're smart because conservatives tell me they are (what more proof do I need?). This usually trails into the self-styled genius confiding to me how nice it is that "a couple of intellectuals like us" can discuss the issues (being demoted and elevated to genius level in a span of 15 minutes is always fun).

Whatever the topic, it always includes statements about how great everything would be if we just let markets, Christ, freedom, etc. work their "magic."

No real knowledge of history, spirituality, nor a sense of the human condition are necessary. Research? Nah. Studying an issue? Too egg-headish. Catholics? Going to hell (something about icons). You just need to believe in their fairytopia world, where people do good because it's the right thing to do ... as long as you believe. Tax cuts for the rich? Don't worry, they won't produce deficits (this time). Seriously. At some point I expect Peter Pan to emerge. 

At the end of our exchanges I'm usually entertained with direct or indirect judgments about "moral degenerates" sucking off the system. This usually stops the discussion because a line has been drawn, and the sense of rugged individualism these geniuses attribute to themselves is beyond debate. They have won Darwin's evolutionary race to top. Just ask them. Debate over.

This, ironically, is counter intuitive when you consider that many of these Darwinian winners also claim to be Christians. When I acknowledge their evolutionary greatness and point out, just for kicks, that what they're suggesting about themselves fits in with what Darwin said about evolution they go ape (figuratively speaking, of course). The discussion is usually finished once we reach the functional equivalent of an Ayn Rand puppet show.

I discuss all of this because I got the following on the health care debate from a prominent local politico the other day.

I HAVE BEEN OPPOSED TO MEDICARE FROM THE BEGINNING. PEOPLE NEED TO LEARN TO TAKE CARE OF THEMSELVES.

I REFUSED TO ALLOW MY MOTHER TO USE MEDICARE OR MEDI-CAL WHEN SHE HAD KIDNEY FAILURE. IT IS HERS AND MY RESPONSIBILITY AND NOT THE REST OF AMERICA. SHE HAD INSURANCE AND SHE HAD SAVED FOR A RAINY DAY.

I thought to myself, "How is it that rather than saying, 'Thank God that my family is blessed, and that we have had the good fortune to do well for ourselves' this person would rather put himself on a pedestal and wag fingers at the rest of the world?".

I know part of it has to do with him pounding his chest (like an ape?) about his personal accomplishments. So I responded with this:

Dear____________.

According to the Bible there are four causes for poverty and the conditions that make Medicare a necessity. Laziness, or what you might want to call a lack of personal responsibility, is just one of them. Look, you can't speak about "personal responsibility" if people are getting ripped off, are wrongly judged, or are thrown into a condition through no fault of their own. A man getting run over by a truck because he didn't look both ways is no different from a man run over by a drunk driver. I would like to think that I would still care. If I couldn't do anything to help I have no problem pitching in to support those who can. Or does your sense of personal responsibility say, "Let them die in a ditch"?

As well, you want to keep in mind that the party you work for has been systematically transferring wealth from one class (the middle-class) to another (America's already rich) with government support. The wealth that has been created over the previous generation is not a product of hard work and personal sacrifice alone. It's also a product of favorable legislation, especially in the financial sector. That you would confuse hard work and personal responsibility with write-offs, subsidies and favorable legislation explains much. It especially explains why republicans continue to think that more of the same is exactly what we need in order to clean up the mess Reagan started and Bush finished off.

I didn't get a response. It doesn't matter. It probably would have been incoherent and ancedotal.

Still, I think it's important that we understand what we're trying to do when it comes to this health care debate. As a result, I'm going to synopsize the numerous health care posts I have presented here into a brief overview (no more than 750 words) explaining why health care reform is absolutely necessary. No FOX News sound bites. No Glenn Beck emotional breakdowns. No Rush Limbaugh ignorance. Just simple policy points, and how health care reform will make America stronger. I'll make it interesting too.

I'll post it by this time tomorrow.

- Mark

ARE WE KILLING THE MORAL JUSTIFICATION OF CAPITALISM?

In my book I wrote that "The moral justification of capitalism in America rests upon one very simple assumption: If you work hard you will get ahead." Are we killing the moral justification of capitalism for America's middle class? I think so. Here's how.

While the banks have gone back to their old irresponsible habits (see previous post) Elizabeth Warren, chair of the Congressional Oversight Panel for the bailout has an interesting take on what's been happening to the heart and soul of America. Specifically, she's worried about what's happened to America's middle-class. Warren writes:

Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can't make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.

Part of the reason for this is that middle-class Americans are now spending more money on health care, taxes, and on their homes than they did thirty years ago. Wages? They've dropped for both married couples and single men. Americans might be working more hours (i.e. those who have jobs) but the reality is middle-class America is in trouble in the areas of job security, job quality, and salaries (though the top 1% are doing just fine).

Here's the incredible point. These developments aren't tied to some mythical invisible hand in the marketplace. Nor is it tied to irresponsible consumers who brought debt loads upon themselves. Put more simply, none of Middle America's descent into debt, uncertainty, and pink slips is an accident.

As I pointed out in my book what's happening today is tied to favorable legislation that inflates profits and then protects inherited and ill-gotten wealth. Want proof? Take a look at (1) the logic behind the 2005 Bankrupty Reform bill, (2) the real beneficiaries of "Dead Peasant" Insurance, (3) how the politics behind the Estate Tax had nothing to do with saving the "family farm" and (4) why corporations really locate in off-shore havens. These developments have literally transferred trillions of dollars from Middle America to the top 1%. And this was before the bank bailout.

Middle-class America's descent is also tied to a state that's bought into the idea that financial institutions create wealth, even when they're busy sucking it out of the American middle class via bailouts and government enforced bankruptcies and foreclosures. And all for what? So the financial titans of America can continue gambling on interest rates and foreign currencies, as they are currently doing? Give me a break. This is wealth extraction, not wealth creation.

While I'd like to say that the real losers in this capitalist market charade are middle-class Americans, local community banks, small businesses and future entrepreneurs, I can't. To be sure, they're losing out. But the real loser here is the American ideal.

More specifically, while Elizabeth Warren is correct to point out what's happening to America's middle-class it's more important to understand what's happening to America: We are slowly killing the moral justification of capitalism.

Simply put, the idea that you can work hard and get ahead is getting smothered by well-connected financial titans who believe they are entitled to government-escorted profits in an economy they wrecked ... It's being smothered by a political class that believes in free market fairytopias, where market players do the right thing (and must be left alone) because they're virtuous in the pursuit of profit ... Finally, it's going to get smothered by a middle-class that will one day balk at the idea of having to pick up the pieces in the form of higher taxes, more uncertainty, and a faded American Dream (an early sentiment captured in the photo below).

America became America because we figured out that financial reward shouldn't go only to those of social standing (aristocracies), protected networks (elites), or to those with royal bloodlines (monarchy). America became America because we learned how to create opportunities and reward for those who worked hard. Rather than believing in free market fairies we need to relearn how this happened.

- Mark