Russell Roberts writes for NPR.org:

“[Treasury Secretary Paulson] can inject all the money he wants into the consumer credit market and it isn’t going to make us want to buy cars or use our credit cards.

We did enough of that for a while. More than enough. Too much. And right now, before we spend, spend, spend, we’re going to wait and see if we keep our jobs. [...]

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn’t liquidity.

It’s uncertainty.

Paulson doesn’t realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.”

An excellent post from SFE blogger Nathan Biller on this whole credit crunch, market crisis, housing bubble, recession or whatever you want to call it.

Here’s an excerpt:

So is there a credit crunch? Absolutely! If you define a credit crunch as a situation where more people want loans than can obtain them. What about all the other crunches? Don’t you have a vacation crunch? A nicer car crunch? As a child I experienced many candy crunches (and not the good kind from Nestle). My parents knew, though that if I was given everything I wanted, I would never learn to appreciate those things. People definitely want credit, and it would sure make things easier if everyone were able to get everything they wanted: unfortunately, as one will learn in Econ 101, economics is about how limited resources get distributed to individuals with unlimited wants. If another business or individual is unwilling to loan you money, that’s really the end of the story. You’re not entitled to loan just as a child is not entitled to candy.

Now go read the whole thing!

From SFE Blogger FreeToChoose:

The real tragedy of the ongoing financial crisis is not the $700 billion bailout, the moral hazard that will accompany it, or the fact that our children and grandchildren will have to pick up the tab for the irrational spending habits of politicians. Instead, it is the false notion that “deregulation” and capitalism are to blame for where we find ourselves today. The answer isn’t so simple. John Stossel has more:

“It’s deregulation’s fault!”

That’s the conventional explanation for the economic mess.

Barack Obama said, “This is a final verdict on the failed economic policies of the last eight years … that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us”.

Is deregulation is the culprit? It can’t be. There was no relevant deregulation in the last 25 years. Meanwhile, highly regulated institutions eagerly bought risky government-guaranteed mortgages, stimulating excessive housing construction and an unsustainable price bubble.

Deregulation wasn’t the problem, and reregulation isn’t the solution.

It’s intuitive to assume that regulation prevents problems, but it’s rarely true. First, how would regulators know what to do? Leaving aside the bias they might have and the brutal fact that regulation is physical force, how can a small group of people understand the workings of a market sufficiently to regulate sensibly? Markets, especially financial markets, are far more complicated than any mind can grasp. They consist of many millions of participants making countless decisions on the basis of unarticulated know-how and intuition. To attempt to regulate such activity requires knowledge no one can possess.

You can find the whole article here at Real Clear Politics.

By SFE Blogger aaronmead:

There has been some speculation on how the weak economy and the bailout of banks will effect the government’s ability to enact policies favored by the Presidential candidates.  At the debates, moderators have tried with little success to get candidates to talk about this.  At the first debate, Obama said grimly that we’d really need to tighten the old belts, but programs reflecting his, or maybe it was America’s, “values” must be exempted from such austerity.  If you can demonstrate that a program is not merely desirable or useful, but constitutes a Values Issue, it is rhetorically invulnerable to considerations of trade-offs and affordability.  Obama went on in this fashion to verbally spend countless hundreds of billions of dollars in a minute thirty.  McCain mentioned his plans to oppose earmarks diverting small amounts of allocated money to Congresspeople’s favored projects.

Matthew Yglesias, star blogger at the Center for American Progress blog (thinkprogress is the somewhat awkward and Orwellian name for their blog headquarters) has been arguing that worries about deficit spending are misplaced:

“You need to respond to a downturn with expansionary policies of some kind. In recent decades, we’ve preferred relying on expansionary monetary policy (Fed interest rate cuts) rather than Keynesian deficit spending. But at the moment, there’s no real room left for the Fed to cut rates. That means you need deficit spending.”

Even if he is right about the need for a Keynesian stimulus, Yglesias’s analysis has problems.  The deficit is already high due to weakening tax revenues and the Keynesian stimulus that passed earlier this year.  It seems like ages past, but in fact earlier this year a bipartisan consensus in Washington, proving that we can rise above our differences, created a spending package that, they told us, was specifically designed to engineer the economy out of recession.  When the economy continued to falter, the Party in power urged us to “give the stimulus time to work,” while the opposition began to hint at the need for another.  Presumably any good Keynesian would find merit in continuing these measures for at least another year.

Further, the bailout, another bipartisan effort specifically designed to rescue the economy, will add further to the deficit.  We are engaging in deficit spending designed specifically to provide a Keynesian boost, which seems to crowd out deficit spending designed to achieve energy independence or universal health care.

Even if we do believe that deficits in the trillions of dollars, dwarfing the totals of the Keynesian heyday, or that spending on certain proposals ought to be a non-negotiable “values issue,” it might be difficult to convince a Congress composed of hundreds of people with their own agendas, priorities, and values to go along.  When Presidents make campaign promises they implicitly ask us to suspend disbelief and ignore the political realities involved in dealing with Congress.  The idea is that election will give them a popular “mandate” and change these realities somewhat, but inevitably only a small portion of a President’s agenda actually gets passed.  It would be far more useful for voters, therefore, to know a President’s priorities, how he will deal with the real world, then what his ideal world would look like absent tradeoffs.  Presidential campaigns allow few hints at this, and those only for voters paying close attention.  We should applaud the media’s effort to create incentives for candidates to more directly show their hands and lament the fact that disincentives to honest answers are still greater than inducements in that direction.

Tom Brokaw writes in the Wall Street Journal’s opinion pages :

Barney "Big Un" Baumgartner of Windblown, Wyo., invited the Federal Reserve and the U.S. Treasury Department to take over his business, The Big Un 24 Hour Tow Service and Trophy Taxidermy.

In a handwritten press release, Mr. Baumgartner explained that with winter and hunting season coming on, the good citizens of Windblown would be without his vital services unless he found a way to deal with his escalating debts, fast.

"This is not just about me or my neighbors in Windblown. Heck, we get three or four tourists and out-of-state hunters here every 10 days or so. What if they need a tow or a trophy mount? The consequences are too great to contemplate," Mr. Baumgartner explained.

He’d be willing to let the government have 80% of his business for a quick cash infusion. He thought something in the neighborhood of $1.8 million should do the trick. That would be enough to gas up his two tow trucks, get some new taxidermy stuffing and clean up that overdue account at the Number 10 Saloon and Casino over in Deadwood, S.D.

Treasury Department officials had no comment on Mr. Baumgartner’s request, but a source familiar with the response to the bailout of American International Group said Treasury has been inundated with similar requests.

- A pawn shop in Reno, Nev., has an excess supply of eight-track cassette players, flower print shirts, broad white belts and Wayne Newton tapes, having gambled that the ’70s would come roaring back. The owner pleaded for a Treasury take-over, arguing, "How can the government stand by and let such a rich part of our American culture simply fade away?"

- The owner of an NFL poster shop in Green Bay, Wis., reports that he has given up on divine intervention and is now asking for Treasury to take over his business in a last-ditch effort to preserve the notion that whatever our differences, we’re all Americans.

Asked how his business got into trouble, Karl Andursen of Muledeer, Minn., said he met a man who specialized in printing Minnesota Viking and Chicago Bears posters. Mr. Andursen said the man was willing to bundle his posters and sell them at a discounted rate to anyone who would take over the Green Bay territory.

Mr. Andurson said in the back of his mind he knew that could be risky since Green Bay is sacred ground for Packer fans who wouldn’t cheer for the Vikes or the Bears if they were promised a fleet of new snowmobiles and lifetime hunting rights on Brett Favre’s farm.

But, as he said, everyone was in the NFL merchandise game and he figured he’d take the territory and after 30 days flip the franchise for a big profit. A year later and he’s not made a sale, not one, but who knew?

He’s offered his complete inventory of Go Bears! and Vikings Rock! posters for 20 cents on the dollar or $500,000 in 30-year Treasury bonds.

- Darlene Dalrymple owner of the Shear Joy Hairstyling and Tattoo Salon in Rockhard, Vt., wrote Treasury Secretary Henry Paulson, inviting him and Federal Reserve Chairman Ben Bernanke to her shop for a free trim and tat if they’d also help with her balance sheet.

Ms. Dalrymple said she’s very busy, but her expenses somehow always exceed her income. She suspects her boyfriend, who likes to use a lot of Wall Street lingo he picks up watching business channels on TV, is shorting her cash register.

Ms. Dalrymple said her boyfriend also called her a moral hazard, and she’d like Secretary Paulson and Chairman Bernanke to explain exactly what that means.

By the Mackinac Center’s own David Littman in today’s Detroit News:

Reject bailout rush to socialism

Fix government ventures, rules that got nation into trouble, not market

David Littmann

Prudent workers, taxpayers and firms are getting the bum’s rush on a massive proposed bailout from panicked politicians who are weeks away from a national election of extraordinary significance.

In this case, a bipartisan group is forcibly trying to eject this country from a market-based, decentralized economic and financial system. Washington, its politicians and armies of regulatory employees are touting another elixir of taxpayer dollars to fix yet another of their colossal fiascos. The proposed federal intervention (up to a $1 trillion bailout of distressed assets and bonus-paying firms) is the antithesis of what the competitive markets of capitalism would permit.

The problem is not the fundamental well-being of our economic system. At midyear, the U.S. economy was still running at growth between 2-3 percent above 2007 levels, even discounting inflation. The national unemployment rate was 6.1 percent, not the 35 percent of the Depression era. The stock market remained higher than the levels of four years earlier.

No, the problem lies with the bursting of the residential housing bubble that developed an irrational price exuberance (except in Michigan) in the wake of the Federal Reserve’s exceptionally easy monetary policies from 2003 to 2006. Economics students understand this axiom: “Loose money policies create tight credit conditions.”

In this case, the tight credit situation — where banks fear lending, and markets no longer supply bonds or equity capital — emerged because of the collapse of the housing bubble and the suicidal regulatory mandates that politicians and their special-interest campaign fund-raisers legislated. And Wall Street’s pursuit of opaque financial derivatives and the credit rating agencies’ complicity in subprime mortgages played a role.

Yet, to cover their corrupting decisions and past complaisance, Washington’s major mouthpieces — from former Federal Reserve Chairman Alan Greenspan and Treasury Secretary Hank Paulson to Senate Banking Committee Chairman Chris Dodd — now say that unless we trust them with a new round of our scarce resources, the U.S. economic system will collapse. This rhetoric is meant to panic us into accepting a new federal steward of our hard-earned dollars.

But when you dissect the palaver, what you see is a bare-knuckled proposal to further centralize federal control over the marketplace of investments and savings. Such a revolutionary move is socialism. It will not simply be a matter of taxing the rich or those with some ability to pay for the purpose of redistributing shelter to the poor. It will represent an institutionalization of financing immoral behavior. Why?

If I take an interest-only loan with the hope and bet that my new mortgage will pay for itself as home prices escalate, it leaves me free to spend, not save, on other things. I have little reason to defer purchases. When housing prices go south, however, I can walk away as if my payments were just rentals and the lender gets back a depreciated asset. Why reward this kind of behavior by either the lender or the borrower?

Considering the incentives that were in place, we now know why so many fellow citizens chose these reckless options. And clearly, Washington does not want you to remember the four ways it has brought us to this unfortunate moment. Let’s review:

• The Community Reinvestment Act (approved in 1977 during the Carter administration) compelled banks and other lenders to loan money and grant mortgages in areas where they would have never dreamed of making such loans because of the exceptional risks of default. Banks were denied charters for growth and geographical expansion if regulators found them to be out of compliance with these politically correct regulations, enforced by the Federal Reserve and others.

• Government-sponsored enterprises (such as Fannie Mae and Freddie Mac) received taxpayer subsidies to provide mortgages and are favored by politicians and regulators with the privilege of maintaining very thin capital reserves as buffers against losses that result from defaulting on delinquent mortgages.

• Insane accounting rules, the Sarbanes-Oxley regulatory regime and Securities and Exchange Commission rules have contributed to the mess, especially the devastating “mark-to-market” requirement. The financial reports of firms and financial organizations must carry assets on their ledgers as though they were forced to sell them immediately into distressed markets, rather than at book value.

This is like requiring people to send wedding or graduation photos of themselves to newspapers while sick with the 24-hour flu rather than pictures of themselves when they are healthy the rest of the year. No wonder the market seized up.

Regulators require that firms go to the market and raise capital when their assets fall below book value, even if it is a paper value, rather than a real loss, that is registered. When hundreds of large and small firms all seek scarce capital at once, the market can’t meet their needs.

• And the Federal Reserve spurred subprime lending by pursuing inflationary money policies that dropped bank-borrowing rates to 1 percent.

To avoid greater government involvement and messes in the future (think Medicare, Medicaid and Social Security), Washington must extricate itself from the market. As real estate prices become more affordable, credit-worthy firms and individuals throughout the nation and world are ready to pounce on bargains that will appreciate.

The government got America into this situation. The solution is simple: Government, get out.

By Ron Paul for CNN:

Many Americans today are asking themselves how the economy got to be in such a bad spot.

For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.

Unfortunately, the government’s preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.

Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.

Government-sponsored enterprises Fannie Mae and Freddie Mac were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.

Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.

These governmental measures, combined with the Federal Reserve’s loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.

When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.

Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.

In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.

This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners — in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers — builders and other sectors connected to real estate that suffer setbacks.

The government doesn’t like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.

I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.

Additionally, the government’s actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.

Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.

The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.

It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.

The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.

Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.

From the New York Times.  We reap what we sow…

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES - Published: September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Entire article here.