Collective Amnesia About Housing Crisis

The Republican response to the State of the Union was peppered with stale Paul Ryan-esque ideas and uncompromising right wing rhetoric. What struck me most about Sen Marco Rubio's (R-FL) statement was his insistence that the housing crisis was caused by bad government policies. After belching out this gem, he goes on to encourage using a non-discriminating chainsaw to the federal budget.

Congressional Republicans seem to have a collective amnesia about what caused the housing crises. Sen Rubio wasn't even in Congress when the Financial Crises Inquiry Commission released a report detailing the causes of the financial collapse. In short, the housing crisis was caused by a mix of high risk investments, a shadow banking system, the proliferation of complex financial instruments and lax oversight on part of government watchdogs in the financial and housing sector. 

High risk investments were concentrated around the obsession by lenders to package risky, sub-prime mortgages into securities, paying rating agencies to slap a favorable rating on them and selling them to investors, both government backed (Freddie and Fannie) and private (WaMu, BofA, Citigroup, etc.). The shadow banking system refers to a proliferation of complex and unregulated financial instruments, like over-the-counter derivatives and credit default swaps. 

Even after a series of economic crises that led to unprecedented government intervention (Savings and Loan crisis, high level defaults, etc), the government had little appetite for continued oversight. Under the leadership of chairman Alan Greenspan, the housing and financial markets were essentially deregulated. Under these conditions, the derivatives market ballooned to a value of over $600 trillion and companies like Freddie and Fannie had trillions in securities investments with little capital to insure against default. 

The securities that some of the entities held were diverse and numerous in nature. Analysts justified their positive review of these assets by relying on the relatively harmless nature of a few thousand defaults in a diversified portfolio coupled with the assurance from the Fed that the economy was on sound financial footing and could absorb a massive default. Greenspan also instructed the fed to inject liquidity into the housing market through interest rates to further grow a bubble that would inevitably burst. 

In short, this was a failure of both the government through their insistence on not regulating complex financial markets and propping up a bubble. But, it was also a failure of the public financial sector by approving mortgages that were below standard, packaging these loans as securities, giving them positive ratings and not ensuring that some of the investor houses had enough capital. 

But all of this information is trumped by emotion. Sen Rubio knows that government failure under both a Democratic and Republican administration contributed to the housing crises. But, by employing the evil "G" word, people will connect the economic crisis and all of its ills to the current president. 

Politicians from both sides of the aisle have not (or do not want to) connect the dots between slashing spending indiscriminately and its effects on the ability of the government to stave off and discourage the type of disastrous and risky speculation that led to the housing downtown. 

By using government policy as a scapegoat for a event that had so polarized the nation, Republicans are assuring a emotional response to the task of deficit reduction. An emotional response leads to what many on the right like to call "starving the beast." The supposed failure of the government will be used as a means to cut the budget of some essential oversight agencies. This creates a self-defeating cycle that will only foster an environment of further reckless risk taking, negligence and crisis. 

Lost in the Fray of the CT Shooting

Once again, we must attempt to explain why a young man decided to pick up a gun and use it on innocent people. Once against we must try to ask, discuss and debate the merits of gun control and the limitations of our mental health system.

Was he insane? What kind of disorder plagued him? How did he get the gun? What kind of gun? Should we pass new gun control legislation?

But, there is something lost in the fray. Something that makes this situation unique. One simple question must be asked: What about the children?

How can we even begin to explain to a 5 year old that his best friend will not be there tomorrow? They won't have play dates, won't each lunch together and won't see each other on the playground. How can we explain to a class of Kindergarten students that their teacher was murdered?

What the children do know is that a man walked into their classroom and killed people. They know who and they know how. But will they ever understand why.

Happy Constitution Day!

225 years ago, a set of principles, set forth by intellectuals, politicians, merchants and statesman became the guiding principle for the beginnings of a great democracy. This document, and it's written and unwritten principles, have survived war, depression and internal strife, only to emerge as a undamaged pillar for the every growing sense of inclusiveness and participation that defines our countries' evolving governance.

Throughout the last two-and-a-quarter centuries, despots, tyrants, revolutionaries and military juntas have challenged and upended their governments, creating chaos and uncertainty. Those who disagree were thrown in jail, tortured or killed. Religion was used as a tool for oppression and disenfranchisement. When the United States faced a crisis, our Presidents, statesmen and leaders did not abandon our democracy. They debated and discussed how we could maintain a Union. And, they did this by consulting and interpreting the Constitution and the principles therein.

We have proven that key tenets of our democracy, like freedom of the press, assembly, speech, religion and petition are essential for both our survival and our evolution as a country. While many will disagree on how these principles are afforded, they will defend to the end our right to have them. It is a tradition, set in precedence, that is uniquely American.

As Supreme Court Justice Oliver Wendell Holmes said, "the law, wherein, as in a magic mirror, we see reflected, not only our own lives, but the lives of all men that have been"

Post-War America?

Today marks the 11th anniversary of the attack on the World Trade Center. Over 2,700 people lost their lives and and the U.S. was once again mobilized for war. This anniversary is not a time to debate the justification behind going to war in Afghanistan or Iraq. This anniversary is a time for mourning, but also a time for inward looking.

Each passing year, Americans are given the chance to re-evaluate the first major epoch of the new Millennium: The Post-9/11 Era.This re-evaluation should consider something that the Romney campaign has been asking in the last couple months: are we better off? Is our continued presence in Afghanistan a symbol of our enduring fight against terrorism, or an unrealistic nation-building project that will never take hold?  Given the implications of a war on terrorism, will we ever be a post-war nation?

When President George W. Bush stood on the ruins of the World Trade Center, he vowed to hunt down the perpetrators of the horrendous attacks. We searched for terrorists and their sympathizers in caves, city streets, village squares and urban homes. With bomb, missile, artillery and gunship, we collapsed networks and disrupted cells.

That was Iraq. That was Afghanistan.

Now, it's Yemen. It's Somalia. It's Pakistan. It's Karachi, Mogadishu, Tehran, Sanaa and Aleppo. It happens on subways in London and Madrid, hotels in Mumbai and secret compounds in Pakistan. It is disruptive, unstable and unending.

This War on Terror is a misnomer: it is not a war.

Wars end.

Deficits or Jobs, Deficits and Jobs

According to Republican talking points, a high deficit means that less jobs will be created.

According to LSAT Logic Reasoning, when making an argument you have to an unwritten assumption that connects the conclusion (no jobs) to the evidence (high deficit). You can also make assertions about statements through formal logic. For example, if there is high deficits, then there will be no job creation. An equivalent statement would  be the contrapositive, or if there is job creation, then there are no high deficits (or a balanced budget). You can also say there will be job creation unless there is a high deficit (taking the double negative of "if not high" to mean low or balanced).

Republicans in Congress and the Romney/Ryan ticket have not budged from the idea of renewing the Bush tax cuts without an end date. The tax cuts, in their current form lower the marginal tax rate for the highest income earners. Passed during the first Bush, Jr. Administration, these tax cuts have been a significant drain on government coffers. Along with a prescription drug rebate that borrowed against 26 years of Social Security, you end up with quite a deficit.

They charge that the Obama Administration has ballooned the deficit to such a point that the economy is slowing that jobs are not being created. While Romney and Ryan might not agree on how to slow the increasing cost of the some of the highest additions to the deficit (Medicare or Healthcare, in general), they do have a plan to create jobs. This plan includes keeping the Bush Tax Cut and lowering tax rates to give businesses certainty about the way they can spend their capital.

According to LSAT Logic Reasoning, when you are looking for an assumption, the best strategy is to find the "rhetorical jump" (my characterization). In other words, find out where the argument added a word or concept in the conclusion that was absent from the evidence (IE, if you are talking about dogs and the conclusion says something about Dobermans).

The plan's conclusion is that it will result in the creation of jobs. But, one cannot divorce the deficit from job creation, according to the talking points. This is where the rhetorical shift comes in. Can you use policies like those in Romney's plan to create jobs AND reduce the deficit, or do you have to separate your strategy and create jobs OR reduce the deficit.

But, the ticket has a response the charge that lowering tax rates and keeping the Bush Tax Cuts will not reduce the deficit. Their plan is to eliminate certain tax breaks and/or loopholes that will balance out the gaping hole in the treasury caused by the lower revenues. But, Romney has yet to reveal which tax breaks and/or loopholes he wants to eliminate. Political poison pills like the home mortgage interest rate deduction and renters credit are all fair game, but not expected to be on the chopping block.

In the LSAT Logic Reasoning section, you can strengthen an argument by adding facts that support the conclusion or you can weaken an argument by inserting something that might undermine the conclusion. Oftentimes you can weaken a causal argument (x is related to y so x caused y) by showing that there is an alternative explanation (x is related to y, but q can cause y).

Was it the deficit that is causing significantly low job creation, or is it something else? Could it possibly be that gridlock in Congress over a certain debt ceiling debate created something called a "sequester," whose diversified cuts could lead to a sharp increase in unemployment and a significant decrease in GDP growth? Could it be a possible EU-wide recession? Both of these events could create so much uncertainty over growth and tax rates that businesses might be reluctant to hire.

For some reason or another, regular citizens have become so passionate about kicking out the current Administration that they have a near contempt for logic reasoning or the truth. I heard an interview on the radio recently where a Romney supporter was enraged about the Administration taking out the work requirement for Medicare. After hearing that the Administration was not going to take out that requirement, she responded by saying, essentially, that the truth has become relative and that she trusted Romney more than Obama.

Anecdotal or not, the ticket has used this point and many other selectively edited statements, stamped them on campaign material and spewed them out from battleground to battleground, effectively skewing the truth to whatever the ticket endorses.

Let's Talk About the Market

Presumptive Republican presidential nominee Mitt Romney has leveled various accusations against the Obama Administration's policies on energy and the economy. He has called the administration out on everything from failed solar companies to failed Stimulus Packages. For Romney, and a lot of the Republican base, the president has chosen "winners and losers" in the market, thereby propping up failing industries that will inevitably go belly up. They believe that the administration's policies towards the economic recovery have failed solely because they were inadequate at lowering the unemployment rate and only added to a ballooning deficit. They assume, wrongly, that the administration is solely responsible for the current freeze in hiring and general economic malaise.

For a party that lionizes the free market, they have taken a very narrow view of it's area of affect. They have assumed, for political reasons (most likely), that commodities that are traded on the international market that often portend trends in international economic growth or stagnation do not apply to US markets. Do you remember when Newt Gingrich said he would magically create $2.50 gasoline?  Derp.

The basic assumptions about commodities like coal, natural gas, oil, oil-based products, corn, soybeans, jet fuel and every other internationally traded commodity is that all countries who trade in those goods are affected by price fluctuations. In a recent interview with Platts, two international economists pointed out that the shale gas boom in the United States (and abroad) has been pushing lower quality Atlantic metallurgical coal into the international market, which has depressed the price of that commodity. Coupled with an overproduction of steel and piling surpluses of coal, production companies are experiencing depressed prices and lower profits. This, in part, led to the bankruptcy of Patriot Coal, whose reserves are heavy in eastern Atlantic met coal.

What does this all mean?

It means that the price and use of coal power is subject to the whims of the international market. It has entered a cycle whereby lowering domestic use of coal in the US is pushing surplus to the international market which is depressing the international price. This is not the result of the so-called "War on Coal."

Do you remember Solyndra?

Romney and Congress have used Solyndra as a way to target the Administration and it's use of tax-payer money. They believe that companies like Solyndra (and Renewable Energy, in general) are only propped up by political nepotism and government largess. Again, they fail to realize that the market had a big play in the failure of the company. At the time that Solyndra failed, the market was being flooded with cheap solar panels from China. Domestic solar panel companies could not compete and many, including Solyndra shut their doors.

While Republicans hammer at the Administration for the Solyndra failure, they do not point to the cost overruns of the coal-gas, carbon capture Taylor Energy Station (DOE - Private partnership), the nuclear guarantees to build reactors in South Carolina and Utah that have cost an extra $2-4 billion (That is nearly 4-6 Solyndras) and the failure to create a utility scale coal plant with Carbon Capture and Sequestration technology, despite millions of government funds for so-called "clean coal." In the same vein, they criticize the Administration for not creating jobs, yet they are willing to eliminate tens of thousands of jobs in the Wind industry by not approving the Production Tax Credit. I digress...

Romney has been hammering the Administration's policies on the economy since he announced his bid for president. For every month that the US has released a sub-par job report, the Romney camp has attacked. For every bankrupt company, depressed mill town and broke farming community, Romney has towed the line that the President is the sole creator of the Recession and the current slow recovery.

Here is what is happening in the international market:
1. Greece Bailout
2. Spanish Bailout
3. LIBOR rate fixing
4. Portugal and Ireland economic troubles
5. Electoral uprising in EU (France, Greece, etc)
6. Chinese economic slowdown
7. EU recession
8. US "fiscal cliff" (Sequester cuts, Payroll tax expiration, Bush Tax Cut expiration, etc)

What does this mean for the US and the "small businesses" that Romney loves? Uncertainty. It means uncertainty in the rate of exports to China. It means uncertainty in EU bond markets. It means financial uncertainty in the EU economy. It means uncertainty in the international market.

When businesses are uncertain, they will retain cash and forego hiring until things are certain. But, there is one certainty about the international market: No matter what the Administration does, it cannot affect the long-term health of the EU or China. If these economies falter, our economy falters.

Congress has the power to institute measures to improve job growth and soften the effect of the slow recovery on the economy. But, what did Congress do this week instead of looking at stimulative measures? They repealed Obamacare...for the 33rd time...

I suppose we will all have to wait until November...

The EU and Greece

The most recent edition of The Economist had a good amount to say about the future of Greece, the European Union and the Euro. Most of the coverage of Greece and the EU in the United States has been from the usual doom-and-gloom political statements from Republican presidential candidates about excessive government spending. While the charge may be true relative to the large size of the public sector in bailed out Greece, Portugal and Ireland, the crises in Europe requires a deeper and more nuanced review of the Union.

The EU, while united under one currency (The Euro) and a few policy authorities (Council of Ministers and European Council), is still a hodgepodge of countries of various sizes, cultures and political persuasions. From the 1992 Treaty of Maastricht to the current banking crises, many of the EU nations have taken fiscal governing  of such a large body with a less than adequate level of seriousness. That is, rules set out to avoid a crises of this nature took a back seat to the financial interests of some of the larger economies (France, Germany, etc). The article in the Economist highlights this problem with an anecdote about France's view of budget cuts:

 In 2002, Francis Met, newly installed as French Finance Minister dismissed commission requests for budget cuts to comply with the stability and growth pact by saying that "France has other priorities."


The article rightly states that the current finance minister under newly elected French president Francois Hollande would quickly lose his job if he were to dismiss EU fiscal responsibilities in the same manner. While some nations ignored the fiscal pacts of the Union, many still believed that a region united under one currency would facilitate political integration through fiscal unity and stave off a crises. But, as the article points out: They did not foresee that it [financial/political unity] would do so by throwing the continent into crises.

The EU is also facing a crises of democracy. Smaller countries with smaller economies (like Greece) are becoming less relevant in a growing Union. Once a country feels that their electorate and local issues are being ignored in favor of a Union controlled by the larger economies, a sense of resentment grows. When the fiscal crises in Greece came to a head, many in the country protested to the Austerity Measures because they believed that it was a problem that they did not create. Overspending by the Greek government after the conversion to the Euro that led to massive deficits and lack of a voice among bigger economies like Germany and France created a disconnect between the electorate of Greece and the wider Union.

The result of increased austerity measures has been political and financial turmoil. In elections, citizens increasingly voted for extremist candidates who opposed or favored a renegotiation of the terms of the Euro bailouts. In Greece, nearly 7% of the vote went to the ultra-right wing Golden Dawn Party, whose party platforms are anti-immigrant and anti-bailout. Their party symbol resembles the swastika. There was also no consensus candidate, which sent the election to a runoff, taking place on June 17th. In France, the Conservative party under incumbent Nicholas Sarkozy was ousted by the Socialist candidate Francois Hollande.

One major problem remains for the European Union: there is a disconnect between the larger and smaller economies, fostering disillusionment with the Union and individual country's national governments. Germany's chancellor Angela Merkel (Christian Democrats) has shown visible disappointment with the way that Greek government has managed it's finances. She is reluctant to continue using German banks to prop up failing economies. At the same time, voters within Greece have become weary of their technocratic governing coalition and have voted in droves alongside anti-immigrant, nationalistic parties on the right and left. Continued entrenchment by larger economies like Germany will only foster nationalism and hatred towards the Union, leading to a possible exit by Greece. Once this happens, any country with the same sentiment might use that precedent to also leave the Union.

There is a way out of this crises for the EU. Direct election of members of policy making bodies in the EU by member countries can bring more democratic power to smaller states. Currently, the leaders of the European Council and Council of Ministers are appointed by member states. But, the Union must provide an efficient, enforceable method to institute fiscal policies in order to reign in on indebted countries and stave off future crises. In this way, smaller countries get more say in the inner governance of the Union while larger economies prevent having to bail-out smaller economies. But, above all, it keeps the Union intact without having to face the international consequences of a bank run or an exit.

During the debate over the ratification of the U.S. constitution, larger states wanted representation in Congress based on population (Virginia Plan). Smaller southern states proposed equal representation, as they would be less relevant under the Virginia Plan (New Jersey Plan). Congress created a compromise (Connecticut Compromise) that created a bicameral legislature whereby the House of Representatives would be based on population and the Senate would have two members elected from each state.

The EU should take note of this idea, giving equal representation to smaller economies, while redefining their ultimate goal of unified stability and fiscal control.