Coyote Blog

Via TJIC:

It took decades and, at times, antagonistic battles, but Harvard's gay community says it has finally cemented its academic legitimacy at the nation's oldest university. College officials will announce today that they will establish an endowed chair in lesbian, gay, bisexual, and transgender studies, in what is believed to be the first professorship of its kind in the country.

Can the adults among us agree that a degree in LGBT studies has about zero economic value?  Even a history degree has more economic value, as history studies tend to still be accompanied by some academic rigor.  But the pathetic scholarship standards and non-existant statistical rigor with which most social sciences, and various [fill in the blank with oppressed group] studies departments in particular, are taught make the economic value of such a degree at best zero and at worst a negative.

I have no problem with anyone studying whatever they wish using their own resources.  This is one place I diverge with Ayn Rand -- she might say that pursuing non-productive activity is inherently immoral.  I would say that pursuing your own goals, whatever they be and however valuable or valueless they might be to others, is just fine as long as you don't demand that everyone else to support you.

The problem is that a degree at Harvard probably requires a $200,000 investment to complete.  Given that, beyond a few career spots in academia, a LGBT studies degree is unlikely to ever recover enough (versus having no degree)  to pay for such an investment, problems are inevitable.  Either someone (read: taxpayers) will likely foot the bill, or else some student is going to find herself with tens of thousands of dollars of student debt and no realistic way to pay it back.

In fact, this latter situation is a common leitmotif of recent media stories, the college grad unable to handle his or her shocking debt load.  Somehow, stories all seem to blame the capitalist system as a failure point.  Michelle Obama, who similarly pursued [historically oppressed group] studies at Princeton, has expressed just this point of view.

Despite their Ivy League pedigrees and good salaries, Michelle Obama often says the fact that she and her husband are out of debt is due to sheer luck, because they could not have predicted that his two books would become bestsellers. "It was like, 'Let's put all our money on red!' " she told a crowd at Ohio State University on Friday. "It wasn't a financial plan! We were lucky! And it shouldn't have been based on luck, because we worked hard."

Is this problem really so hard to diagnose, or have we gotten so politically correct we cannot state a fact out loud that everyone understands -- that is, some degrees have more economic power than others.  LGBT studies degrees likely have very little economic utility.  So it is fine to pursue such a degree, but don't be surprised when you are not offered a six-figure income at graduation, and don't come to me expecting that I pay for your choice.

Kevin Drum posts (sorry, I have to quote the whole post or it won't make sense):

From a Washington Post story about wage cutbacks:

Members and employees of the Virginia Symphony Orchestra are bracing for more hard times. The orchestra has had to contend with a $1.5 billion debt....The musicians were furloughed, and the administrative staff, including Johnson, took a 20 percent pay cut. The two moves saved the VSO about $500,000.

Not bad!  At that rate they should have their debt paid off in another 3,000 years.

I know I'm being sort of prickish for even bringing this up, but seriously: at least one reporter and two editors worked on this piece, and apparently none of them were taken aback by the idea of a regional orchestra being $1.5 billion in debt.  At any rate, not taken aback enough to wonder idly if maybe it was $1.5 million instead.  Sheesh.

I don't know, Kevin.   Your guy Obama proposed to deal with a trillion dollars of deficit by seeking $100 million of savings, and everyone in the press nodded their head and said how wonderful that Obama guy is.  On a percentage basis, a $500,000 cut in a $1.5 billion debt is actually three times more impactful than what Obama proposed.   Is it any wonder the press accepted these numbers without skepticism?  Obama has trained them well.

Apparently, the Obama administration is worried about the shortage of GP physicians.  Personally, I think anything we do within the present framework, or more onerous government interventionist approaches likely to be proposed by Obama, will fail at reversing this problem.  If plumbers were not allowed to contract directly for price and scope of service with individual homeowners they serve, and were forced instead to fill out 23 yards of paperwork just to get paid rates that were set by government bureaucrats, subject to thousands of pages of regulations any one of which could cause his payment request to get rejected, we would have a shortage of plumbers too.

However, since no one in Washington currently seems to be in the mood topromote commercial relationships in medicine that mirror how we contract for every other product and service, I guess we can nibble at the edges of the problem.  David Bernstein suggests:

I have yet to see in any of these articles one simple reform proposed: abolish the requirement of an undergraduate degree before attending medical school, and turn medical school into a five or six-year post-high school program instead. This would eliminate two or three years of debt, and, perhaps even more important, the opportunity costs of two or three years of college. Right now, an aspiring physician must go to college for four years (and take many classes that have nothing to do with his future career), then medical school for four years, and then typically do a poorly paid internship and then residency for another five years. By the time this aspiring physician goes into practice, he will be at least thirty-one years old, and have eight years of student loan debt.

I have a better solution.  Why do we have a one-size-fits-every-corner-of-the-medical-field education and licensing at all?  Why do I need to pay for someone with 8 years of college and five years of residency to put three stitches in my kids' cut?  Or to write a Viagra scrip?  In dentistry, why do oral hygienists all seem to be in dentists' offices?  Why do I need to pay the overhead of a dentist to get my teeth cleaned?

We shouldn't really be surprised, I guess, about this licensing approach -- when the government turns over the licensing board to the incumbents of the industry being licensed, they have every incentive to choke off supply and to kill any initiative that might create low-cost competition for themselves.

So the licensing system that is all or nothing -- you are either a full-fledged medical doctor that can handle anything, or someone who is allowed to handle nothing.  This is reinforced by the payment system we have, where people do not bear the marginal cost of the services they consume.  So, since every office visit costs them the same (zero or a fixed copay), they might as well ask for the most experienced and over-educated guy they can find -- it's not costing them any extra.

Well, this is true for most people.  I have a high-deductible health insurance policy, and we often consider the price of different alternatives. Here is an example.  I am a healthy person, but still go in for a physical each year.  Nothing complicated happens in these visits.  Surely there could be some kind of less-trained traige MD who could conduct such screenings, passing folks on to the full-fledged doctors if anything unusual pops up.  If you told me that I could be seen by such a person for $100 or a full MD for $300, I would certainly consider it, particularly since the triage guy's schedule probably runs smoother as he doesn't get bogged down with the unexpected -- he just passes those folks on.

Flowing Data draws my attention to this nutty chart in the New Scientist  (I have never read the New Scientist, but my experience is that in periodicals one can generally substitute "Socialist" for the word "New").  Click to enlarge.

Will the world really run out of Indium in 5 years?  Of course not.  New sources will be found.  If they are not, then prices will rise and a) demand with be reduced and b) efforts to find new sources will be redoubled.  Push come to shove, as prices rise too much, substitutes will be found (which is why John D. Rockefeller probably saved the whales).  Uranium is a great example -- sure, proved reserves are low right now, but companies that mine the stuff know that there is tons out there.  That is why they are going out of business, there is too much supply for the demand.  Any spike in price would immediately generate tons of new developed resources.  And even if we run out, there are enormous quantities of thorium which is a potential substitute in reactors.

Absolutely no one who was old enough to be paying attention to the news in the 1970s could have missed charts very similar to this.  I remember very clearly mainstream articles that we would run out of oil, titanium, tungsten, etc. by the early 1990's.  Seriously, name one commodity we have plain run out of (*cough* Julian Simon *cough*).

People say, well, the resources have to be finite and I would answer, "I suppose, but given that we have explored and mined about 0.000001% of the Earth's crust and none of the floating mineral reservoirs in space (called asteroids), I think we are a long, long way from running out."

You would think that the guys running this analysis would get tired of being so wrong so consistently for so many decades, but in fact their real point is not about resources but about the US and capitalism.  The point of the chart is not really to say that the world will credibly run out of tungsten, but to tell the world that it is time to get out their pitchforks because the US is stealing all their wealth and resources.  It is an age-old zero-sum wealth fallacy that has never held any water, but remains a powerful talking point among socialists none-the-less.

For socialists, wealth is not created by man's mind and his effort -- it is a spring in the desert with a fixed flow rate.  It just exists to be taken or fought over.  The wealthy, by this theory, have not earned their wealth, they are just the piggy ones who crowd to the front of the line and take more than their share from the spring.  Unfortunately, socialists have never been able to explain why the spring, which flowed so constantly (and so slowly) for thousands of years, suddenly burst forth with a veritable torrent in lockstep with the growth of capitalism in the west.  And why it seems to dry up in countries that adopt socialism.

Postscript: A while back I posted on the New Economics Foundation  (remember what I said about "New") and their claim the world had just gone into ecological debt.

A lot of folks, particularly on the left, look with some fondness at the political economy of continental Europe.  They are attracted by high job security, short work weeks, long vacations, and a strong welfare system.  They make the mistake of seeing in these traits a more promising society "for the little guy," when in fact just the opposite is true.

The European Corporate State

The political economy of companies like Germany and France are actually incredibly elitist, dominated by perhaps a hundred guys (and I do mean guys) who run the country in a model only a few steps removed from Mussolini-style fascism or the Roosevelt's National Industrial Recovery Act.   In these countries, perhaps 20 corporations, ten or fifteen large unions, and a group of powerful politicians and regulators run the economy.

US workers sometimes make the mistake of seeing the political power of European unions and equating this power with being a more egalitarian environment for workers.  But the European political economy is rule by the in-crowd over the out-crowd that exceeds any of the patronage relationships we complain about in this country.  What we don't often see from our American perspective is the way the system is structured not to protect poor from the rich or the weak from the strong, but to protect incumbents (whether they be corporations or skilled workers) from competition.

In the European labor markets, mobility is almost impossible.  The union system is built to protect current high-skilled workers from competition from new workers, whether in the same country of from abroad.  Large corporations that form part of the cozy governance of the country are protected from new competition, and are bailed out by the government when they hit the rocks.

As a result, unemployment is structurally high in countries like France and Germany, hovering for decades between 8 and 12% -- levels we would freak out at here.  Young and/or unskilled workers have a nearly impossible time breaking into the labor market, with entry to better jobs gated through apprenticeships and certifications that are kept intentionally scarce.  Joe the plumber is an impossibility in Europe.  Some Americans seem to secretly love the prospect of not easily being fired from their job, but they always ignore the flip side -- it is equally hard to ever be promoted, because that incompetent guy above you can't be fired either.

Entrepreneurship in Europe is almost impossible -- the barriers just to  organizing your own corporation legally are enormous.  And, once organized, you will quickly find that you need a myriad of certifications and permissions to operate in your chosen field -- permissions like as not that are gated and controlled by the very people you wish to compete with.  The entire political economy is arrayed in a patronage system to protect current businesses with their current workers.

Here is a test, that works most places in the US except possibly in Manhattan.  Ask yourself who are the wealthiest and/or most succesful people that you know.  Then think about where they went to school.  Sure, some of the more famous Fortune 25 CEOs went to name schools, but what about the majority of succesful people you meet in your life?  If you are like me, most of them did not go to Ivy League or what one might call elite schools.  They had normal state college educations.  You will typically find a very different picture in Europe.  While of course there are exceptions, it is much more likely that the wealthy people one meets were channeled through a defined set of elite schools.

Corporations in Europe, particularly the cozy few who wield influence with the government, seldom fail and/or really gain or lose much market share.  I always thought this a telling statistic:  (Fortune 100 by year here)

[Olaf Gersemann] points out that of the top 20 largest publicly traded companies in the US in 1967, only 11 are even in the top 60 today, much less the top 20.  In contrast, he points out that of the 20 largest German companies in 1967, today, thirty-five years and nearly two generations later, 19 are still in the top 60 and 15 are still in the top 20.

Its also an inherently anti-consumer society.  The restrictions on foreign trade, entrepreneurship, and new competition all reduce consumer choice and substantially increase prices.  EU anti-trust enforcement, for example, barely pretends any more to look out for consumer interests.  Most of the regulators decisions are better explained by protection of entrenched and politically influential European competitors than it is by consumer power or choice.

"Progressives" in this country often laud the lower income inequality numbers in Europe vs. the United States.  The implication is that the poor in Europe are somehow better off.  But in fact this is not true.  Careful studies have shown that the poor are at least as well off in the US as in Europe, particularly when one corrects for the number of new immigrants in the US.  (That's another difference, by the way -- Europe is virtually closed to immigration, at least as far seeking new integrated citizens is concerned).  What drives income inequality is that our middle class is richer than Europe's middle class, and our wealthy have more income than Europe's wealthy.

To this last point, I have always felt that comparisons of the wealthy in the US to those in Europe, and comparison of income inequality numbers, are a bit apples and oranges.  The US is a country where access to most of the best perks is via money - they have a price.  In Europe, access to most of the best perks can't be bought by money, they can only be accessed by those with the elite establishment club card.   To some extent, the income numbers understate the difference between rich and poor in Europe for this reason.

Next Stop:  America

We see many of the elements of the European economic system slipping into the US today.  An increasing number of professions require certification by the government, with this certification often either controlled by the incumbents in the profession or with criteria that essentially require new entrants to compete in the same way incumbents do.  We see the top companies with political influence, from Wall Street firms to banks to automobile manufacturers getting government assistance to stay in business or maintain their status.  This, from the proposed GM bailout, is the European system personified:

General Motors and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler, two sources with direct knowledge of the talks said on Monday....

one of the conditions of the merger would be that GM-Chrysler would spare as many jobs as possible in order to win broad political support for the government funding needed to complete the deal, people familiar with the merger discussions said.

This is the same political deal cut in Europe.  Large powerful company is protected from failure by government.  In turn, powerful company protects interest of powerful union.  The only thing missing here, which I think is clearly on the agenda for the Obama administration, is a large protective tariff to shield this inefficient mess from competition.  Left out of the equation are consumers, who get more expensive cars and suffer because GM is again given a hall pass from producing cars that people actually want to buy.  Also left out are potential competitors, who don't get the government deal and who miss out on the chance to buy up GM assets and hire ex-GM employees out of bankruptcy and do a better job with them.  This European system puts a premium on keeping productive assets in their current hands, rather than in the most productive hands:

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

Beyond the actual legislation, the other sign that the European model may be coming to the US is in attitudes.  I think Michelle Obama is a great example of this.  She and her husband checked all the elite boxes - Princeton undergrad, Harvard Law - but she is shocked that having punched her ticket into elite society, society didn't automatically deliver, as it might in, say, France.  She's actually stunned that, had it not been for Barack's succesful books, they might have had to give up their jobs as community organizers and at non-profits to actually earn enough to pay back their 6-figure school loans.

Despite their Ivy League pedigrees and good salaries, Michelle Obama often says the fact that she and her husband are out of debt is due to sheer luck, because they could not have predicted that his two books would become bestsellers. "It was like, 'Let's put all our money on red!' " she told a crowd at Ohio State University on Friday. "It wasn't a financial plan! We were lucky! And it shouldn't have been based on luck, because we worked hard."**

The Progressive Irony

In all this, I think there is an amazing irony.  In a nutshell its this:  The "Change" that Barack Obama is selling to the electorate is in fact the creation of a government infrastructure to fight change.  I have written before that progressives are actually inherently conservative.

Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave....

One morning, a rice farmer in southeast Asia might faces a choice.  He can continue a life of brutal, back-breaking labor from dawn to dusk for what is essentially subsistence earnings.  He can continue to see alarge number of his children die young from malnutrition and disease.  He can continue a lifestyle so static, so devoid of opportunity for advancement, that it is nearly identical to the life led by his ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but certainly no longer than he worked in the field) for low pay (but certainly more than he was making subsistence farming) and take a shot at changing his life.  And you know what, many men (and women) in his position choose the Nike factory.  And progressives hate this.  They distrust this choice.  They distrust the change.  And, at its heart, that is what the opposition to globalization is all about - a deep seated conservatism that distrusts the decision-making of individuals and fears change, change that ironically might finally pull people out of untold generations of utter poverty.

Don't believe me?  Below is from an email I received.  The writer was outraged that I would have the temerity to say that the middle class in the US had it better than even the very rich in the 19th century.

Sure, the average rural resident of a developing country earns more in dollars today than before. But you're missing the big picture. Wealth is about so much more than just money, and status symbols. It is about health, and well being, and contentedness, and happiness. The average peasant family in India in 1900 may have lived a spartan lifestyle by today's standards, but it probably could rely on more land per family, crops uncontaminated by modern pesticides and fertilizers, a stronger social network and village-based safety net. These peasants were self-sufficient. That is no longer the case

Progressives want to eliminate risk and lock in the current world.  New technologies, new competitors, new business models all need to be carefully screened and gated by a government-labor-corporate elite.  Entrepreneurship, risk, mobility, achievement all should be sacrificed to a defined and steady paycheck. In the name of dynamism, progressives, as well as many modern politicians, want to limit the dynamism of the American economy.  In the name of egalitarianism, they wish to create a small political elite with immense power to manage everyone's life.  In the name of progress, they wish to lock current patterns and incumbents in place.

** Postscript: By the way, here is how I responded to Michelle Obama's education debt rant

I don't know why I can't just move along from Michelle Obama's rant about the terrible cost of her Princeton / Harvard Law degree.  Maybe its because I attended the same schools (different degrees) and my reaction is just so different -- I had a fabulous experience and live in awe that I had such a unique chance to attend these schools, while Michelle Obama seems to experience nothing but misery and resentment.  Granted that I did not have to take on a ton of debt to get these degrees, but I have plenty of friends (and a wife) that did.

This analogy comes to mind:  Let's say Fred needs to buy a piece of earth-moving equipment.  He has the choice of the $20,000 front-end loader that is more than sufficient to most every day tasks, or the $200,000 behemoth, which might be useful if one were opening a strip mine or building a new Panama Canal but is an overkill for many applications.  Fred may lust after the huge monster earth mover, but if he is going to buy it, he better damn well have a big, profitable application for it or he is going to go bankrupt trying to buy it.

So Michelle Obama has a choice of the $20,000 state school undergrad and law degree, which is perfectly serviceable for most applications, or the Princeton/Harvard $200,000 combo, which I can attest will, in the right applications, move a hell of a lot of dirt.  She chooses the $200,000 tool, and then later asks for sympathy because all she ever did with it was some backyard gardening and she wonders why she has trouble paying all her debt.  Duh.  I think the problem here is perfectly obvious to most of us, but instead Obama seeks to blame her problem on some structural flaw in the economy, rather than a poor choice on her part in matching the tool to the job.  In fact, today, she spends a lot of her time going to others who have bought similar $200,000 educations and urging them not to use those tools productively, just like she did not.

I haven't posted at all on the brouhaha about mark-to-market accounting of derivatives and whether it was a contributor to the recent financial mess.  If I had to summarize the issue, I would describe it thus:  Investors want something more trustworthy than just management estimates of the value of complex securities -- so they would like an outside market-based reference point -- but the very complexity that makes these contracts hard to value as an outsider also tends to make their markets illiquid and volatile, making it difficult to get a good market value. 

Tom Selling addresses the problem of accounting for the value of credit default swaps here.  He makes what seems to me to be a common sense suggestion:

Requiring the asset and liability sides of derivatives to be separately
measured and reported seems like an amazingly simple fix that could
simplify regulation of the financial and insurance industries, reduce
the need for the disclosures in financial statements written so as to
discourage one from reading them, and help investors more easily assess
risk.

This certainly seems reasonable to me.  When one buys a revenue producing asset with debt financing, the two are listed separately as an asset and a liability, rather than as one "net" asset, even though they may be inextricably linked (say if the asset is collateral for the loan and the loan has high pre-payment penalties).  Any thoughts?  Does this make sense, or is it naive?

After having time to think more about the current crisis, I think the reason it is confusing is that it is the result of two parallel but largely independent causes that worked together to create this mess.  I told my mother-in-law in an email last week that the financial crisis would likely be a Rorschach test where everyone sees the crisis caused by all the things they opposed before the crisis.  Conservatives will see government intervention, liberals will see greed and deregulation.

What makes this situation particularly confusing is that of the two causes I believe led to the crisis, each has been embraced by one of the two parties as the only cause.  It's a case where everyone is half right, but the other half is important too.  It's a two part recipe, with neither active ingredient causing much of an explosion until mixed with the other. (special thanks to the folks at Q&O who have had a lot of good posts on these issues).

Cause 1:  Creating the Asset Bubble

The first thing that had to happen for the crisis was the creation of an asset bubble.  We need some type of over-valued asset whose prices crash to earth to spark the crisis.  So we begin with housing.

Home prices have gone through boom-bust cycles for years, just as have many commodities.  There is a whole body of literature on such cycles, so we will leave that aside and accept their existence as a feature of markets and human behavior. 

But this housing bubble had a strong accelerant, in the form of the Federal government.  For years, this nation has made increasing home ownership a national goal and many laws and tax policies have been aimed at this goal.  The mortgage interest deduction on personal income taxes is just one example.

Starting in 1992, Fannie Mae and Freddie Mac, which were strange quasi-public / quasi-private entities, came under pressure from the Congress (e.g. Barney Frank) and the Clinton administration to add increasing home ownership to poorer people part of their missions.

Fannie Mae, the
nation's biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage
loans among low and moderate income people and felt pressure from stock
holders to maintain its phenomenal growth in profits.

In
addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings
are not good enough to qualify for conventional loans, can only get
loans from finance companies that charge much higher interest rates --
anywhere from three to four percentage points higher than conventional
loans.

''Fannie Mae has expanded home ownership for millions of
families in the 1990's by reducing down payment requirements,'' said
Franklin D. Raines, Fannie Mae's chairman and chief executive officer.
''Yet there remain too many borrowers whose credit is just a notch
below what our underwriting has

The results were astonishing:

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to
increase their purchases of mortgages going to low and moderate income
borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target "” 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005,
Fannie and Freddie met those goals every year, funding hundreds of
billions of dollars worth of loans, many of them subprime and
adjustable-rate loans, and made to borrowers who bought houses with
less than 10% down.

Fannie and Freddie also purchased hundreds
of billions of subprime securities for their own portfolios to make
money and to help satisfy HUD affordable housing goals. Fannie and
Freddie were important contributors to the demand for subprime
securities.

Simultaneously, the 1977 Community Reinvestment Act was pushing private banks to make more loans to less qualified borrowers:

The Community Reinvestment Act (CRA) did the same thing with
traditional banks. It encouraged banks to serve two masters "” their
bottom line and the so-called common good. First passed in 1977, the
CRA was "strengthened" in 1995, causing an increase of 80% in the
number of bank loans going to low- and moderate-income families.

These actions had a double whammy on the current crisis.  First, by pushing up housing demand, they inflated the housing pricing bubble.  Second, it meant that these inflated-price homes were being bought with lower and lower down payments.  In effect, individuals were taking on much more leverage  (leverage is a term that I will use to mean the percentage of debt used to finance a set of assets -- more leverage means more debt and less equity.  The term comes from the physics of a mechanical lever, in that more debt, like a lever, can magnify force.  Profits from assets are multiplied by leverage, but, alas, so are losses.) 

When the economy softened and the housing bubble started to burst, these new mortgage customers the government went out of its way to bring into the system did not have any resources to handle the changes -- they did not have the down payment to cushion them (or the banks) against falls in asset value and did not have the cash flow to cushion them against falling income in the recession and/or rising interest rates. 

The result:  Huge portfolios of failing loans with rapidly falling collateral values.

Cause 2:  Over-leverage of Risky Assets and Related De-regulation of Capital Requirements

I think the word "greed" was used about a zillion times last night in the Vice-Presidential debate.  But what does it mean in this context?  After all, we are all greedy in one way or another, if one equates greed with looking after one's self-interest.

So I will translate "greed" for you:  When you hear "greed on Wall Street", think leverage.  Remember, we said above that as long as the underlying asset values are going up, leverage (ie more debt) multiplies profitability.  [Quick example:  Assume a stock that goes from $100 to $110 in a year.  Assume you pay 5% interest on money.  No leverage, you make $10 on a $100 investment.  With 95% leverage -- ie buying $2000 worth of the stock with $100 equity and $1900 debt -- you would make $105 on the same $100 equity investment.  Leverage multiplied your returns by more than a factor of 10]

Remember that around the year 2000 we had the Internet bubble burst in a big way.  A lot of companies not only dropped, but went to $0 in value.  This was painful, but we did not have a cascading problem.  Why?  In part because most of the folks who invested in Internet companies did not do so in a highly leveraged way.  The loss was the loss, time to move on.  Similarly in this case, if these mortgage packages had been held as a piece of a un-leveraged portfolio, like a pension fund our an annuity, the loss would not have been fun to write off but it would not have cascaded as it has.  The government would have had to bail out Fannie and Freddie, a few banks would have failed, but the disaster would have been limited.

One reason this problem has cascaded (leaving aside blame for Henry Paulson's almost criminal chicken-little proclamations of doom to the world) is that many of these mortgage packages or securities got stuck in to highly leveraged portfolios.  The insurance contracts that brought down AIG were structured differently but in the end were also highly leveraged bets on the values of mortgage securities in that small changes in values could result in huge losses or gains for the contracts.   (Some folks have pointed to actual securitization of the loans as a problem.  I don't see that.  Securitization is a fabulous tool.  Without it, we would be seeing a ton more main street bank failures, as they would have had to keep many more of these on their books.) 

If this all sounds a bit like cause #1 above, ie buying inflated assets with more and more debt, then you are right.  There is an interesting parallel that no one wants to delve into between the incentives of home buyers trying to jump into hot housing markets with interest-only loans and Wall Street bankers putting risky securities into highly leveraged portfolios.  Leverage is really the key theme here.  In a sense, houses were double-leveraged, bought the first time around with smaller and smaller down payments, and then leveraged again as these mortgages were tossed into highly-leveraged portfolios.  Sometimes they were leveraged even further via oddball derivatives and insurance contracts whose exact operation are still opaque to many.

Those who have read me for a while know that I am in the "let them die" camp.  These Wall Street guys have been living high on the extra profits from this leverage in the good times.  They knew perfectly well that leverage is a two-edged sword, and that it would magnify their losses in a bad time.  But their hubris pushed them into doing crazy things for more profit, and I am all for a Greek-tragedy-like downfall for their hubris.  The sub-prime, first-time home buyer can claim ignorance or unsophistication, but not these guys.

During the Bush Administration, these bankers came to the SEC trumpeting their own brilliance, and begged to be allowed to leverage themselves even more via a relaxation of capital requirement rules.  And, in 2004, without too much discussion or scrutiny, the SEC gave them what they wanted:

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis
since the 1930s. But decisions made at a brief meeting on April 28,
2004, explain why the problems could spin out of control. The agency's
failure to follow through on those decisions also explains why
Washington regulators did not see what was coming.

On that
bright spring afternoon, the five members of the Securities and
Exchange Commission met in a basement hearing room to consider an
urgent plea by the big investment banks.

They wanted an
exemption for their brokerage units from an old regulation that limited
the amount of debt they could take on. The exemption would unshackle
billions of dollars held in reserve as a cushion against losses on
their investments. Those funds could then flow up to the parent
company, enabling it to invest in the fast-growing but opaque world of
mortgage-backed securities; credit derivatives, a form of insurance for
bond holders; and other exotic instruments.

In part they traded capital requirements for computer models, a very dubious decision in the first place, made worse by the fact that most of the banks were gaming the models to reduce the apparent risk.  The crazy thing is that, in gaming the models, they really weren't trying to fool regulators, who pretty much were not watching anyway, but they were fooling themselves!  Certainly I would not expect government regulators to do a better job of risk assessment in this environment, which argues for a return to the old bright-line capital requirements that are fairly simple to monitor.  Investment banks played a game of Russian Roulette, and eventually blew their own brains out.  Which begs the question of whether the government's job is to protect consumers at large or to protect financial institutions from themselves.

"We foolishly believed that the firms had a strong culture of
self-preservation and responsibility and would have the discipline not
to be excessively borrowing," said Professor James D. Cox, an expert on
securities law and accounting at Duke School of Law (and no
relationship to Christopher Cox).

The Dog that Didn't Bark:  Ratings Agencies

Clearly, ratings agencies have really failed in their mission during this fiasco.  Right up to the last minute, they were giving top ratings to highly risky securities.  But I think folks who want to lay primary blame on the rating agencies go to far.   Ratings agencies are for individuals and state pension funds and the like -- I have a hard time imagining Goldman or Lehman depending on them for risk assessment.  Its a nice excuse, and we may well have very different companies rating securities five years form now, but its just a small contributor.

The Fix

So you see what is going on.  Republicans are running around saying "the government caused it with the CRA" and Democrats are saying "it was greed and deregulation."  Incredibly, both parties seem to come to the conclusion that sickly mortgage securities need to be pulled out of the hands of the folks who created and bought them and put in ... my hands.  I had smugly thought that I had avoided buying a home with zero-down at the peak of the market, but I was wrong.  Via the federal government, I have bought a lot of them!

I personally would let the whole thing sort itself out, and live with the consequences.  My hypothesis is that much of the current credit squeeze in the money markets is due to Henry Paulson's clumsy public statements and the Fed's busting open the door to overnight borrowing.  Everyone is frozen not by the crisis, but by the prospect of some sort of government action.  Short term borrowers and lenders are doing their business with the Fed, as the government crowds out the private short term markets and causes the very problem it is trying to prevent. 

Without the government bending over backwards to take in short term money from lenders, private firms would be forced to find private options.  Lenders have to lend to stay alive financially, just as much as borrowers have to borrow.  Money may go into the mattresses for a week or two or three, but it can't stay there forever.

I do know that the fix is NOT. 

Fixing these financial problems listed above does not include:

Sec. 101. Renewable energy credit.
Sec. 102. Production credit for electricity produced from marine renewables.
Sec. 103. Energy credit.
Sec. 104. Energy credit for small wind property.
Sec. 105. Energy credit for geothermal heat pump systems.
Sec. 106. Credit for residential energy efficient property.
Sec. 107. New clean renewable energy bonds.
Sec. 108. Credit for steel industry fuel.
Sec. 109. Special rule to implement FERC and State electric restructuring policy.
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 112. Expansion and modification of coal gasification investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability
Trust Fund.
Sec. 114. Special rules for refund of the coal excise tax to certain coal producers
and exporters.
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 116. Certain income and gains relating to industrial source carbon
dioxide treated as qualifying income for publicly traded partnerships.
Sec. 117. Carbon audit of the tax code. Sec. 111. Expansion and modification of advanced coal project investment credit. Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability Trust Fund. Sec. 115. Tax credit for carbon dioxide sequestration. Sec. 205. Credit for new qualified plug-in electric drive motor vehicles. Sec. 405. Increase and extension of Oil Spill Liability Trust Fund tax.Sec. 306. Accelerated recovery period for depreciation of smart meters and
smart grid systems. Sec. 309. Extension of economic development credit for American Samoa. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit.

And, of course, the big one:

Sec. 503 Exemption from excise tax for certain wooden arrows designed for use by children.

All of these, however, are part of the bailout bill approved by the Senate.  Sources here and here.

I liked this bit in particular:

Think of Wall Street as a poker game and Goldman as the
smartest player. It's sad when you think about it this way that
so much of the dumb money on Wall Street has been forced out of
the game. There's no one left to play with. Just as Goldman was
about to rake in its winnings and head home, the U.S. government
stumbles in, fat and happy and looking for some action. I imagine
the best and the brightest inside Goldman are right this moment
trying to figure out how it uses the Treasury not only to sell
their own crappy assets dear but also to buy other people's
crappy assets cheap

Update:  LOL, via Q&O:

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy. 

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

Could these be the dumbest guys in the room?   

I know that most non-financial folks, including myself, have their head spinning after this past few weeks' doings on Wall Street.  Doug Diamond and Anil Kashyap have a pretty good layman's roundup on Fannie/Freddie, Lehman, and AIG.  My sense is that their Lehman explanation also applies to Bear Stearns as well.  Here is just one small piece of a much longer article:

The Fannie and Freddie situation was a result of their unique roles
in the economy. They had been set up to support the housing market.
They helped guarantee mortgages (provided they met certain standards),
and were able to fund these guarantees by issuing their own debt, which
was in turn tacitly backed by the government. The government guarantees
allowed Fannie and Freddie to take on far more debt than a normal
company. In principle, they were also supposed to use the government
guarantee to reduce the mortgage cost to the homeowners, but the Fed
and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits
and squeeze the private sector out of the "conforming" mortgage market.
Regardless, many firms and foreign governments considered the debt of
Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly. 

Fannie and Freddie were weakly supervised and strayed from the core
mission. They began using their subsidized financing to buy
mortgage-backed securities which were backed by pools of mortgages that
did not meet their usual standards. Over the last year, it became clear
that their thin capital was not enough to cover the losses on these subprime
mortgages. The massive amount of diffusely held debt would have caused
collapses everywhere if it was defaulted upon; so the Treasury
announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government
would wipe out shareholders if it carried through with the guarantee),
no self-interested investor was willing to supply more equity to help
buffer the losses. Hence, the Treasury ended up taking them over.

Lehman's demise came when it could not even keep borrowing. Lehman
was rolling over at least $100 billion a month to finance its
investments in real estate, bonds, stocks, and financial assets. When
it is hard for lenders to monitor their investments and borrowers can
rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.

This was especially relevant for Lehman, because as an investment
bank, it could transform its risk characteristics very easily by using
derivatives and by churning its trading portfolio. So for Lehman (and
all investment banks), the short-term financing is not an accident; it
is inevitable.

Why did the financing dry up? For months, short-sellers were
convinced that Lehman's real-estate losses were bigger than it had
acknowledged. As more bad news about the real estate market emerged,
including the losses at Freddie Mac and Fannie Mae, this view spread.

Lehman's costs of borrowing rose and its share price fell. With an
impending downgrade to its credit rating looming, legal restrictions
were going to prevent certain firms from continuing to lend to Lehman.
Other counterparties
that might have been able to lend, even if Lehman's credit rating was
impaired, simply decided that the chance of default in the near future
was too high, partly because they feared that future credit conditions
would get even tighter and force Lehman and others to default at that
time.

A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments.
While its core insurance businesses and other subsidiaries (such as its
large aircraft-leasing operation) were doing fine, these contracts,
called credit default swaps (C.D.S.'s), were hemorrhaging.   

Furthermore, the possibility of further losses loomed if the housing
market continued to deteriorate. The credit-rating agencies looking at
the potential losses downgraded A.I.G.'s debt on Monday. With its lower
credit ratings, A.I.G.'s insurance contracts required A.I.G. to
demonstrate that it had collateral to service the contracts; estimates
suggested that it needed roughly $15 billion in immediate collateral.

A second problem A.I.G. faced is that if it failed to post the
collateral, it would be considered to have defaulted on the C.D.S.'s.
Were A.I.G. to default on C.D.S.'s, some other A.I.G. contracts (tied
to losses on other financial securities) contain clauses saying that
its other contractual partners could insist on prepayment of their
claims. These cross-default clauses are present so that resources from
one part of the business do not get diverted to plug a hole in another
part. A.I.G. had another $380 billion of these other insurance
contracts outstanding. No private investors were willing to step into
this situation and loan A.I.G. the money it needed to post the
collateral.

In the scramble to make good on the C.D.S.'s, A.I.G.'s ability to
service its own debt would come into question. A.I.G. had $160 billion
in bonds that were held all over the world: nowhere near as widely as
the Fannie and Freddie bonds, but still dispersed widely.

In addition, other large financial firms "” including Pacific
Investment Management Company (Pimco), the largest bond-investment fund
in the world "” had guaranteed A.I.G.'s bonds by writing C.D.S.
contracts.

Given the huge size of the contracts and the number of parties
intertwined, the Federal Reserve decided that a default by A.I.G. would
wreak havoc on the financial system and cause contagious failures.
There was an immediate need to get A.I.G. the collateral to honor its
contracts, so the Fed loaned A.I.G. $85 billion.

Update:  Travis has an awesome post with his own FAQ about what is going on.  Here is a taste:

Lots of financially naive folks think that we can remove all risk,
inflation, etc. by only ever trading apples for chickens on the barrel
head, and doing away with paper money (so that all money is gold) and
doing away fractional reserve banking, so that when I deposit one gold
coin in the bank, the bank can then take that actual physical gold coin
and loan it to someone else. It turns out that the friction involved in
doing things this way is so huge that the effect would make The Road
Warrior look like a children's bedtime story. You want to borrow money
to buy a car? The bank can't just loan money that's been deposited in
someone else's checking account - the bank has to get that person to
sign a note saying "yes, I understand that this money is on deposit
until that dude buying the card pays the bank back IN FULL". And the
lender, if he wants his money out ahead of time, is SOL. And even then,
there can be a flood, and your car gets totaled, and you get
Legionaire's disease, and you can't make the payments.

or this:

Now, for the next complication, let's also imagine that there are
300 million other people watching all of this, thinking "How bad is
this? Should I go down to the gun store, stock up on .223 and 12 gauge
shells, then stop by the veterinarians to see how much antibiotics I
can cadge before heading to the hills" ?

And the Feds really don't want 300 million armed folks heading
for the national forests, so they first try to tell everyone who owns a
bicycle "Hey, the value of your bike didn't really drop! It's still
worth $9!".

But no one wants to believe that.

So then they go to the guy who's writing insurance policies on
the value of bikes and they say "if you got $100 million, would that
calm things down a bit?".

We have rising oil prices and falling housing prices.  Mortgages are defaulting and stocks have been falling of late.  The dollar is in the tank.  But at the end of the day, the world still sees the US as the safest and most productive place to invest its money:

Its odd to me that from time to time we go through periods of angst (e.g. the late 1980s panic that the Japanese were "buying up America") about this effect, but we should instead be assured by this vote of confidence from the rest of the world.  One might argue that folks are simply buying US assets today because they are cheap, and certainly the dollar's fall makes US assets relatively less expensive.  But assets are cheap in Russia and Nigeria and Venezuela too, and you don't see the world rushing to invest a few trillion dollars in those locales. 

Postscript:  This foreign ownership of US assets also makes the world a more stable place.  I am always stunned when people argue that Chinese ownership of a trillion dollars of US debt securities gives them power over us.  Huh?  Since when does holding someone's debt give you power?  I don't think Countrywide Mortgage is feeling too powerful today.  The fact is that holding our debt and owning US assets gives China (and other nations) a huge shared interest in our stbility and continued prosperity.

After years of arguing that expanded credit is critical for the poor, and attacking banks for "red-lining" poor and minority districts, the liberal-left of this country has reversed directions, and has decided that the poor can't handle credit.

No matter how much folks want to paint the recent mortgage problem as some sort of fraud perptrated on homeowners, the fact of the matter is that in large part, lenders lowered their income standards and a lot of those folks now can't pay.  While we have yet to see any specific legislation beyond bailouts, it is impossible for me to imagine any reaction-regulation that does not have the consequence (intended or not) of restricting credit to the poor.

But these restrictions are not limited to the housing market.  Many states, for example, are cracking down and even outright banning payday loan companies, often the last resort (legal) credit source before people turn to the loansharks.  First in Ohio (via Mises Blog)

  If Ohio's 1,600 payday-lending stores want to continue operating past this fall, it
appears they will have to find something else to offer besides payday loans.

   A hotly debated bill that effectively would spell the end of the short-term,
high-interest payday-lending industry in Ohio sailed through the Ohio Senate yesterday despite
pleas from lenders that their stores would close and 6,000 employees would be put out of work.

   The Senate was unable to find a compromise that both satisfied payday lenders and
eliminated the debt trap that bill supporters said forced too many borrowers to take out new loans
to pay for old ones. So it did what the House did last month: dropped the hammer.

   "I think everybody said there is just no way to redeem this product. It's
fundamentally flawed," Bill Faith, a leader of the Ohio Coalition for Responsible Lending, said of
the twoweek loans. The industry "drew a line in the sand, and the legislature kicked the line aside
and said we're done with this toxic product."

And perhaps soon in Arizona.  Yes, the interest rates are astonishing, though the dollars involved are seldom huge for the short life and small size of the loan.  And, as an extra added bonus, Tony Soprano does not send someone to break your legs if you don't pay (the Sopranos being the only alternative provider once payday loan companies are illegal).

So, for those of you oppose payday loans, you are welcome to comment below about what a bad idea they are.  However, I challenge folks to criticize payday loans without simultaneously implicitly expressing disdain for the intelligence of payday loan customers, or trumpeting your ability to make better decisions for payday loan customers than they can make for themselves.

However, for those who think they are ever so much smarter than payday loan customers, who are charged a lot of money for small liquidity boosts, consider this:  Let's say you take out $40 each week from an ATM to keep you liquid and that the ATM fee is $1.50.  You are therefore spending $1.50 or 3.75% for a one week liquidity boost of $40, which you must again refresh next week.  Annualized, you are effectively paying 195% to get liquid with your own money.  For this kind of vig, at least payday loan customers are getting the use of someone else's money.

I don't know why I can't just move along from Michelle Obama's rant about the terrible cost of her Princeton / Harvard Law degree.  Maybe its because I attended the same schools (different degrees) and my reaction is just so different -- I had a fabulous experience and live in awe that I had such a unique chance to attend these schools, while Michelle Obama seems to experience nothing but misery and resentment.  Granted that I did not have to take on a ton of debt to get these degrees, but I have plenty of friends (and a wife) that did.

This analogy comes to mind:  Let's say Fred needs to buy a piece of earth-moving equipment.  He has the choice of the $20,000 front-end loader that is more than sufficient to most every day tasks, or the $200,000 behemoth, which might be useful if one were opening a strip mine or building a new Panama Canal but is an overkill for many applications.  Fred may lust after the huge monster earth mover, but if he is going to buy it, he better damn well have a big, profitable application for it or he is going to go bankrupt trying to buy it.

So Michelle Obama has a choice of the $20,000 state school undergrad and law degree, which is perfectly serviceable for most applications, or the Princeton/Harvard $200,000 combo, which I can attest will, in the right applications, move a hell of a lot of dirt.  She chooses the $200,000 tool, and then later asks for sympathy because all she ever did with it was some backyard gardening and she wonders why she has trouble paying all her debt.  Duh.  I think the problem here is perfectly obvious to most of us, but instead Obama seeks to blame her problem on some structural flaw in the economy, rather than a poor choice on her part in matching the tool to the job.  In fact, today, she spends a lot of her time going to others who have bought similar $200,000 educations and urging them not to use those tools productively, just like she did not. 

Postscript: Ironically, two Ivy League schools have actually decided that they want their graduates to be able to afford any career they wish, without fear of student debt, and so endeavor to provide student aid nowadays in the form of grants rather than loans.  One of those is Princeton University, her and my alma mater.

There.  I said it.  And I believe I am right.  My only hope for the Obama administration is that their family is like the Clintons, where Bill was much more moderate than his socialist wife who has held nothing but rent-seeking jobs that gravy-trained off her husbands political position.

"We left corporate America, which is a lot of what we're asking young
people to do," she tells the women. "Don't go into corporate America.
You know, become teachers. Work for the community. Be social workers.
Be a nurse. Those are the careers that we need, and we're encouraging
our young people to do that. But if you make that choice, as we did, to
move out of the money-making industry into the helping industry, then
your salaries respond." Faced with that reality, she adds, "many of our
bright stars are going into corporate law or hedge-fund management."

I already covered the idiocy of my fellow Princeton-Harvard grad's rant on student debt here.  And let's be clear:  You have absolutely no ground to criticize the state of the economy because kids of middle class black families are not doing well when you are busy counseling them to embrace low-paying jobs over higher-paying ones.

Every time I dig into numbers in a media report, I typically find a real mess.  Russell Roberts finds the situation even worse than average in the recent Washington Post article on middle class finances.

The debt figure of $55,000 in 2004 (which supposedly is 151% higher
than in 1989 to pay for day-to-day expenses) is actually ALL forms of
debt INCLUDING mortgage debt. So how can that be? How can the median
family have only $55,000 of all kinds of debt when there's $95,000 of
mortgage debt all by itself?

That's because each line of the chart (other than the top line and
the bottom line) is a subset of all families and a different subset.

So among families that have mortgage debt (maybe 40-50% of all
families) the median mortgage debt among those families is $95,000.

But among families that have any kind of debt, (about 3/4 of all families) the median indebtednes including all kinds of debt
is $55,000. That includes mortgages debt....

So you can't add up any of the lines of the chart or even compare
them to each other. They're each for a different subset of the
population, the population who have that kind of debt or asset.

I think it's so cute when my fellow Princeton grads who pull down nearly a half million dollars a year complain about being put down by "the man."

Blaming your student debt on the structure of the economy when you chose to go to the most expensive school in the country is a bit like trying to get sympathy for the size of the note on your Lamborghini. 

By the way, lost in all this is the fact that Princeton is one of the two schools in the country that now help students graduate debt-free.  In most cases, Princeton has replaced student loans with outright grants. Somehow she kind of forgot to mention that Princeton solved this problem years ago, without even a whiff of government intervention. 

Bill Steigerwald has a great editorial in the Pittsburgh Tribune-Review dissecting per-pupil public school spending in Pittsburgh.  Generally, when I quote media articles about school spending, I have to do what should be the obvious analyses myself (as with this pathetic Washington Post piece on school spending).  However, this would be totally redundant for Steigerwald's column.  I encourage you to read it all, but here are some highlights for Pittsburgh schools:

• Per pupil spending in the public schools is $18,719
• Quality private schools in Pittsburgh charge from $7,000 to an elite level at $19,500.  Humorously, just over $12,000 will get you a year at the University of Pittsburgh
• Barely half of this spending goes towards the classroom.  The rest, presumably, goes to funding a probably enormous corps of vice-principals.  (If you ever are at a school board meeting that allows public comment or Q&A, ask how many vice-principals they have in their system).  In Pittsburgh, administrative costs are 72.5% of teacher salary costs, meaning there are likely about 3 administrators for every 4 teachers.  Ugh.
• Teachers make $86,000 in salary and benefits, or $114,667 if you adjust for the fact they only work 9 months of the year.  Kind of obviates the "teachers are underpaid" myth.

The only other thing I would have called the schools out on is their defense that they have to pay transportation, administration, and debt service out of these costs, as if somehow this made their numbers non-comparable to private benchmarks.  So what?  Do you think my kid's private school evades these costs somehow?  Their school charges about $6,500 for middle school, and they make a profit on this (and do not get any donations).  I am pretty sure they also have to pay for administration of multiple schools (they have a network of 5 schools) and for debt service on the capital costs to build the schools in the first place.  Our schools don't have transportation, but many other private schools do.

Everybody is always trying to spend someone else's money.  This kind of thing would really make me sick, except it is a little funny to see the kind of class warfare and redistributionist economics preached by elite universities come back to bite them:

Dr. Gravelle points out that endowment wealth is concentrated in the
upper ranks, much of it at 62 institutions with endowments larger than
$1 billion. But just three years ago only 39 schools had billion-plus
endowments. That's a 38% increase in just a few years. In 2006, 125
schools had endowments over $500 million"”a third more than in 2002. The
number of schools that can count themselves as endowment-rich or
super-rich is growing rapidly....

What the data shows is that endowment wealth is everywhere"”except in
the hands of the students who need it today. Last year endowments
increased 17.7% on average"”those larger than a billion increased 18.4%.
Yet, despite double-digit increases stretching back a decade or more
"”endowment spending is at a nearly all-time low of 4.2%--down from 5.1%
in 1994, 6.5% in 1982, and 5.2% in 1975....

Tuition has been going up so rapidly for so long it has reached nearly
ungraspable levels. So let me put today's tuition cost in concrete
terms. Senators, what would your constituents say if gasoline cost
$9.15 a gallon? Or if the price of milk was over $15? That is how much
those items would cost if their price had gone up at the same rate that
tuition has since 1980.

I believe that skyrocketing tuition is
undoubtedly the biggest "access" problem in higher education. What can
possibly be more discouraging to a capable student whose parents are
not wealthy than a school with a $45,000 price tag on the door?...

Congress should not hesitate to consider a minimum payout
requirement"”and 5% should be considered a starting point. The 5% number
is a dated one"”even for private foundations. Many schools have been
rolling over so much money for so long that they should easily be able
to accommodate a higher rate of payout. Possibly the most significant
challenge for policymakers will be to make sure that any newly directed
monies actually go toward aid or tuition reduction and don't become
part of a shell game.

Seriously, is there no pocket of private money that socialists won't stick their hand into?  In effect, at the same time Americans get lambasted for saving too little, this guy is going after private universities for saving too much?  And note the implicit assumption about government intervention he holds and expects all of Congress to hold in the third paragraph above:  It is just assumed that if prices go up enough to upset the constituents, then it is Congress's job to act.

Far be it for facts to get in the way of good populism, but I do know what Princeton does with its 2nd or 3rd largest endowment:

• Every student who gets admitted gets a financial aid package from the University that will allow them to attend, no matter what their finances are.  Yes, the student may have to work his butt off, but if he really wants to go to Princeton he will be able to go.  Princeton's wealth also allows it to be much more friendly in these financial assessments.  For example, many assets like the parent's house are taken off the table when assessing ability to pay
• If a student graduates normally, then all of her debts are paid off at graduation.  Every student graduates debt-free, giving them far more flexibility in what jobs they choose our of college.  No longer must they eschew non-profit or low-paying jobs due to the burden of debt.
• Princeton has accepted that applying more money to increasing the educational intensity of its existing 4000 students by an additional 0.1% is not the best use of its investment.  It has committed (in too small of a way for my preferences, but that is another matter) to using its fortunes to increase its size and bring Ivy League education to more people.  This year, it increased its entry class size by 250, which may seem small to those of you from large universities but is about a 20% increase for Princeton.

Since all Princeton students get whatever aid they need and graduate debt-free.  So the tuition number is irrelevent.  And statements like "I believe that skyrocketing tuition is
undoubtedly the biggest "access" problem in higher education" are virtually meaningless. 

I have written before that the government story of the next decade will be the financial meltdown that will ensue as state and local governments are forced to face up to the enormous unfunded pension and medical liabilities they have assumed for their state employees.  Largely, these liabilities are currently well-hidden and off the books, a trick even Jeff Skilling was unable to pull off at Enron. 

My previous prediction that the liabilities probably total over a trillion dollars now seems way low.  Just one state, Illinois, may have over $100 billion in such off-the-books liabilities, and this does not even include liabilities of local authorities like the city of Chicago:

The study puts the state's pension debt at $10 billion, its unfunded
pension costs at $46 billion, its unfunded employee health care costs
at $48 billion, and its unpaid Medicaid bills at $2 billion. The total
costs that will be pushed onto tomorrow's taxpayers without reforms is
an enormous $106 billion, or $8,800 per every person in the state of
Illinois.

The current failures in the subprime mortgage market, both of borrowers and lenders, has become one of those classic Rorschach tests where people self-identify by what description they apply to the market fallout.  Views on capitalism, free interchange, and individual responsibility are all tied up in the choice between:

1. Businesses recognized an opportunity to expand the mortgage market by offering mortgages to poorer, riskier borrowers and managing the risk by securitizing these loans and reselling them in the increasingly robust institutional market for such loan packages.  While certainly in it for the profit, this move was consistent with the long-term trend in the US to wider home ownership.  It turned out, however, that almost everyone involved were working off some poor assumptions.  Borrowers over-estimated their ability to pay and counted too much on the continued upward trajectory of real estate values.  Lenders made a number of bad credit decisions, something not wholly surprising in a new market.  And institutions and other investors under-estimated the risk in these packages, particularly the systematic risk associated with falling housing prices.   The sub-prime market will likely re-emerge, but with everyone smarter the next time around.  Huge losses give lenders and institutions all the incentive they need to change their behavior in the future.
   -- OR --
2. Unscrupulous lenders created the sub-prime market as a way to make a quick buck off of naive and inexperienced borrowers.  They tricked these borrowers into taking on more debt than they could handle in order to get large up-front fees.  Institutions were not arms-length investors, but were explicitly knowledgeable and "in on" this con.  Their goal was to sell worthless bonds to unsuspecting investors.  The fact that the lenders and institutions are taking the biggest losses in the market collapse is not a sign that they are innocent, but that the market fell apart faster than they expected, so they had not had the chance to unload the securities on duped individual investors.  Without regulation, lenders and institutions will continue committing these same crimes and poor people have proven that they need outside help to make good decisions with their money.  Congress needs to step in and prevent poorer borrowers from being offered mortgages in the future, and institutional investors need to be held financially accountable when borrowers take on more debt than they can handle.

Update:  There are several comments that say "can't it be both?"  Surely there can be simultaneous examples of both in the same market, but, as an example, proponents of #2 talk as if theirs is the dominant explanation, and are proposing legislation on that basis. 

Recognize that you have to really believe #2 all the way to even consider some of the draconian measures that Congress is entertaining.  There is legislation that is being seriously considered at this moment
that will fundamentally change the entire mortgage market, not just the
sub-prime piece, for the worse.  In particular, Congress is considering making financial institutions that invest in securitized batches of mortgages liable for any illegal lending practices of the originator.  This will effectively kill the securitization process.  Many of you younger folks won't know what that means, but in effect it will send us back to the mortgage process of the 1970's, which I promise you really, really sucked.  This will make it much harder for everyone to get mortgages.  Since securitization, there are an order of magnitude more mortgage competitors, the mortgage approval and application process take about 1% of the time it used to, rates are lower, and there is much more flexibility in mortgage design. 

The media and many politicians have an inventive system that drives them to take the most pessimistic possible interpretation of every economic event (the media to sell papers, politicians to panic us into giving them more control of the economy).   Chinese ownership of US debt securities is one such issue that everyone seems to be in a tizzy about.  Thanks to Don Boudreaux for finally stating the obvious:

In fact,
foreign-government
holdings of U.S. debt arguably make these governments "hostage to the
economic decisions being made in Washington."  The Fed, after all,
could monetize this debt, inflating away its value.  Or Uncle Sam could
repudiate this debt, or unilaterally change its terms in ways
unfavorable to holders.  Or you and your colleagues could implement
economically disastrous policies that drive up long-term interest rates
and, hence, drive down the value of outstanding treasuries.

Finally!  All you have to do to understand this is reverse the situation.  If the US government owned a hundred billion dollars of Venezuelan government bonds, would this really give us power over Hugo Chavez?  Or would it, more likely, given him more power over us, at least in terms of circumscribing our actions?

I had to say that this, from Janna Goodrich as quoted by Kevin Drum, is absolutely hilarious:

Education is one of the best engines for upward mobility and poor
students cannot afford to pay for higher education on their own. Their
families don't have the physical collateral to borrow money in the
private financial markets nor the savings to pay for the tuition
outright....But if we gave poorer students mostly grant-based aid we'd
be asking for the rest of the society to subsidize those who are one
day going to be wealthier than the average citizen. Two different
concepts of fairness or equality are at play here and I'm not sure if
both of them could be achieved at the same time.

Can you just see the liberals getting twisted in knots?  Oooh, helping the poor is good, but if we send them to college and they get rich, then we are helping rich people, and that's baaaad.  Its like that logic problem where a card says "the statement on the other side is false" and on the other side says "the statement on the other side is true."  Only a liberal could take the happy story of a poor kid going to college and getting rich and turn it into bad news.  I never thought about what a problem education was for liberal ethics, in that it converts sainted victims (e.g poor) into evil exploiters (e.g. rich).  Maybe that explains why they oppose school choice?

By the way, I have about zero sympathy for this whole grants in education discussion.  From an incentives standpoint, it is perfectly reasonable to ask people who are getting public money for self-improvement to share the risk with the public through the debt and repayment obligation they take on.  A lot of people today already don't take good advantage of the opportunity they have while in college, and this is certainly not going to get any better if we give them a free ride rather than loans.

The second problem I have with public funding of grants for education is that colleges and their alumni groups can decide to fix this problem privately if they so desire.  My school (Princeton) makes a commitment that everyone who gets into the school, not matter how poor, will get a financial aid package that will make it possible to attend.  And, the financial aid is all in grants such that the student graduates from one of the most expensive schools in the country debt-free (and yes, the incentives problem worries me some).  All with private money.  We are able to do this because our school makes it a priority and our alumni give the money to make it happen.

I know what you are going to say -- Princeton is full of rich people, so they can afford this.  Yes and no.  First, our alumni do pretty well for themselves, but they also have to help fund financial aid for the highest tuitions in the country.  Other schools with lower tuitions have a lower bar to clear.  Second, while Princeton alums may be wealthier per capita, our alumni population, because we are a small school, is probably one tenth the size of a Berkley or a Texas.  As a result, schools like Texas almost certainly have a much wealthier alumni group in total.  But few of them give back.  It's not a priority for them to create financial aid money for incoming students (instead, T Boone Pickens gives $125 $165 million to the OU OSU football program).  So don't come crying to me that students at your schools need government grants -- you could have funded such a program at your school privately if you had made it a priority.

Postscript: My dad ran numerous fund raising initiatives at the University of Iowa for years.  After decades of effort, I think he has finally despaired of getting state school alumni to donate money for something other than the sports program.

Update:  OK, that's what I get for making a throw-away statement without fact-checking.  Boone Pickens actually gave $165 million to the athletic programs of Oklahoma State, not OU.  I got a bunch of aggrieved emails on this.  Sorry.  Being from Texas, I get all that stuff up in the trans-Red-River region mixed up.

I still get a lot of email and
commentary on my posts explaining why a trade deficit does not
necessarily result in a build up of debt.  Its a mistake that
protectionists like Lou Dobbs make, either accidentally or on
purpose, to confuse the trade deficit with a debt (Dobbs, in the linked article, claimed that we had $5 Trillion in accumulated trade debt).  In another
attempt to explain this, I want to present a thought experiment.

In our hypothetical, a regular old
American guy named Joe walks into a Wal-Mart to buy new Plasma TV.
Lets assume that Joe is presented with two choices, a Chinese-made TV
and an American-made TV.  The American TV is $2000 and carries a
brand Joe recognizes;  the Chinese TV is $1800 and is a brand Joe
does not recognize.  As far as he can tell, both are featured
similarly.

Joe may choose to take a chance with an
unknown brand to save $200, or he may not.  Let's see what happens
either way.  If Joe picks the Chinese TV over the American TV, the US
trade deficit will likely be worse, by whatever Wal-Mart has to pay
to restock the shelves.  But, while the trade deficit may be worse if
Joe buys Chinese, is there any additional debt created by buying
Chinese rather than American?

Well, Joe doesn't have more or less
personal debt either way.  Whether he is paying with cash or
financing the TV, this decision is unaffected by whether he buys
Chinese or American.  He may happen to buy Chinese and take on debt
to purchase the TV, but the decision to take on debt has nothing to
do with the fact that it is an import.  If he had bought the American
TV, he presumably would have taken on debt for that purchase as well.
In fact, if anything, since the Chinese TV is cheaper, Joe's
personal debt is reduced by buying Chinese over American.

In fact, the only way in which Joe's
personal debt could be said to be increased by Chinese imports is if
the $200 price differential was enough to change his mind from
not-buying a TV to buying one, and he then financed the purchase.
But this is only going to occur in a small percentage of
transactions, and besides, it would be unfair to call something so
empowering "“ ie giving Joe the power to get something he really
wants that he would otherwise been unable to "“ as a negative.
(Update: I do think this is sortof the logic trade opponents
use.  They argue that "rampant consumerism"is causing an increase
in consumer debt which is kindof sortof tied up in some way with this
whole cheap Chinese goods at Wal-Mart thing, so therefore trade
causes debt.  This may sound good rhetorically at an
anti-globalization rally but makes no sense scientifically).

Now let's take Wal-mart.  Assuming they
know how to price items, they will make a gross margin on either the
Chinese or the American TV.  How, then, can having to restock the TV
Joe bought by buying one from an American factory for say $1400
affect Wal-Mart any differently than paying the same (or less) money
to a Chinese company?  The answer is that it has no effect.  Buying
Chinese vs. American has no effect on Wal-Mart's debt.

So let's say Joe bought the Chinese TV,
and the Chinese end up with $1400 (the factory price) in US currency
courtesy of Wal-Mart.  If they don't need anything in the US, they
will trade this currency for yuan to someone in China who does want
to buy something in the US.  Let's assume that these dollars are all
incremental, so none go to buying exports from the US or goods to be
consumed in the US.  Let's assume that it all gets invested as
profits, and further, let's assume that it gets invested 100% in US
debt securities.

Aha!  People want to say to me.  There
is the debt!  Chinese are buying up US bonds.  And so they are.  But
trade did not cause or create the debt.  Just because Chinese trade
dollars are reinvested in debt securities does not mean trade cause
the debt.  In fact, the US government debt would exist with or
without Chinese trade, courtesy of the tax and spend whores of both
parties in the US Congress.  If the Chinese had not bought the debt,
someone else would have, and the debt still would have existed.  In
fact, the US debt would likely have just been a bit larger and a bit
costlier without Chinese buyers to bring down interest rates.

So, to review, an average American
makes an incremental decision to buy Chinese rather than American,
the trade deficit gets worse, but no debt is created.  So I renew my
challenge to Lou Dobbs, who claims America has $5 trillion in trade
debt by asking a simple question:  Where?

Sorry posting has been light this week.  A reader was nice enough to point to the latest rant by Lou Dobbs here.  Apparently, he has decided to take the position that free traders are now elitists, while folks like him who want the government to pick and choose winners among American businesses and industries as "populist."  The obvious response of course is that beneficiaries of American protectionist legislation tend to read as the who's who of politically connected elitists.  It is also hilarious to equate free trade, whose benefits are backed by 100 out of 100 economists, with some irrational faith-based belief system.  But I will leave that aside to point to this line:

He and others completely disregard the $5 trillion in trade debt that
the United States has built up through 30 consecutive years of trade
deficits. That trade debt is rising faster than our national debt and
is simply economically unsustainable, no matter what any faith-based
economist would argue. Our political, business and media elites
continue to disregard reality.

Here is my very, very simple challenge for Lou Dobbs to help those of us who obviously don't get it:  Point to where this $5 Trillion of Debt is.   What private individuals or corporations owe it to whom?  That should be simple.  With the national debt, we can just go out and count all those government bonds.  But where is this trade "debt"?

Answer:  IT DOESN'T EXIST.  What he means is that over some time span of several decades, American has a cumulative trade deficit of $5 trillion.  But trade deficit does not mean debt.  I showed this in great detail here.  Calling it a "trade debt" is not a sloppy mistake on Dobbs part but an outright lie, meant to make the point that running deficits every year is unsustainable.  But America has become the wealthiest country in the world running trade deficits for the majority of the last 100 years.   In fact, one can argue that the trade deficit itself only exists as a phantom of the awkward and limited way in which we measure trade. 

Postscript: I constantly get people who write me that the fact the Chinese are buying up a lot of US government bonds or corporate bonds with their trade profits is proof of a "trade debt."  No such thing.  The US Government bonds are evidence of a fiscal deficit of the federal government, also called the national debt, and exists not because of trade but because Congress has no fiscal discipline.  Corporate debt is growing to buy back stock, make corporate acquisitions, and to buy new plants and facilities.  The fact the Chinese help to fund these debts does not mean that trade caused this debt.  In fact, foreigners buying US debt securities depresses interest rates and actually keeps the national debt lower.

Here is a thought experiment:  Wal-Mart runs a multi-billion dollar trade deficit every year with China.  Why isn't it building up lot's of debt to the Chinese?

I have been thinking about this previous post on trade and wanted to improve my answer to Jon Talton, our free-markets-hating business columnist in the Arizona Republic.  In his recent column advocating that we finally give up on all this free trade stuff, he said:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

I thought my answer was OK, but I want to take another shot at it, because I hear the argument all the time that "trade only benefits the US if other countries buy our exports."  This is wrong, but this misconception drives many people's thinking on trade.

If we are importing more from other countries but they are not "buying more of our exports," such that we have a large trade deficit, there are two possibilities to explain this:

• The definition of exports is too narrow
• Someone is throwing away value by building up a big pile of US dollars

The first is the most likely explanation.  A dollar is valueless in China, and the UK, and France except to the extent someone thinks they can eventually use it to buy something in the US.  Dollars that aren't or can't be used to buy dollar-denominated assets of some sort have no value.  The money a Chinese exporter accepts from Wal-mart is only valuable if they can recycle it and buy something in the US with it (or trade the dollars to someone else in China who wants to buy something in the US). 

So the dollars we send overseas for imports are going to come back.  But the  reason our trade accounts are out of balance is that the trade deficit numbers they quote on TV define our exports narrowly.  In short, "exports" as commonly measured don't include all the things we sell to foreigners for dollars.

One example of this is if a Chinese company takes the $10 million dollars it earns from exporting to the US and then invests $10 million in US materials to build a factory in the US.  That sounds OK, right?  That seems to be in balance.  But in the way we calculate the trade deficit, that would show as a $10 million trade deficit, because goods (and services) that foreigners buy in the US and consume in the US (rather than back in their home countries) are not considered an "export."  In fact, I would consider this "better" than an export, since both the dollars and the goods stay in the US.  But to trade deficit hawks, this is worse, mainly because their measurement is flawed.

A second example is if a Chinese company take the $10 million dollars it earns from exporting to the US and invests the money in US mortgage bonds.  Again, this would show as a trade deficit, but the US economy benefits from lower interest rates.  In this case, we are again selling foreigners a product, in this case wealth protection, which the US is very good at since we have a more stable economy and stronger rule of law than any other country in the world.  And again, the way we measure "export" does not encompass this product, since our trade measurement has a strong manufacturing bias that does not match the more diverse nature of our economy today.  (For those that lament forefingers helping to fund the enormous government debt, I share your pain, but that is a government spending problem and not a trade problem).

But what if the foreigners are totally perverse.  What if they ignore their own best interests and refuse to buy our exports and just sit on the dollars they get from trade without recycling them in any way to the US?  What if they do this even if by doing so, they would be throwing away billions, even trillions of dollars in value?  As absurd as this sounds, this is exactly the concern Talton and other trade-skeptics raise.

Well, the US in this case would STILL be better off.  First, the US would be getting whatever goods we are buying overseas cheaper or better (or else people would not be buying them).  This would reduce the costs of inputs to other products, and increase money consumers have to spend on other things.  The labor that would have gone into making these products domestically would be redeployed to making other things, increasing our net wealth. 

By the way, it is this last sentence I think Talton and his peers would not accept.  They tend to view employment as zero-sum, ie there are a fixed number of jobs in the world, and if we import, that creates jobs overseas which must reduce jobs in the US.  But labor markets have never worked that way.  As I wrote before:

I have taken on this zero-sum mentality before,
but it is particularly wrong-headed in this case.  Historically, the
argument makes no sense.  For example, the automation of the farm
sector wiped out 80 or 90% of the farm jobs in the US over the last
century.  By the zero-summers logic, we should be impoverished.
Instead, these people were redeployed to manufacturing and service jobs
that create far more wealth than the old 19th century farm employment.
But while people can sort of accept this historically, they can never
accept this in real-time.  But the fact is that when we lose, say, a
textile job to foreign competition, we not only gain because everyone
pays less for textiles and thus has more money to spend on other
things, but that worker gets redeployed over time to higher-value
functions.  Look at the old textile belt in North Carolina - what's
there now?  Electronics and Bio-tech.

By the way, the other thing that would occur if foreigners just buried dollars in the sand without recycling them is that the value of the dollar would rise to levels higher than it would be at if these countries recycled their dollars, thus further lowering the price of inputs for the US.  Talton laments this very effect:

Now, the populists will get a chance to make their arguments,
especially over what the American response should be to Chinese
currency manipulation, tariffs and subsidized exports.

The currency manipulation and subsidized exports have one thing in common:  They are both ways that the Chinese destroy value for their own citizens in order to lower prices for American consumers.  And Talton claims that the populist argument should be to end these practices?  Why?  I think its great that the Chinese want to hold billions in dollars just to keep the dollar high and prices low in the US.  I think its great that their taxpayers want to subsidize lower prices in the US.   I can understand why a Chinese citizen might want this to stop, but why should we, who are the beneficiaries?

Update: By the way, another common misconception is that a trade deficit implies someone is building up a debt.  This is not (not not not) at all true.  We can run a trade deficit indefinitely without building up a debt.  Yes, foreigners are currently investing some of their trade profits in US government bonds necessitated by the federal government's deficit spending, but the two are only weakly related - a trade deficit does not cause government debt.  A great way to see if a columnist has any idea what they are talking about is to see if they confuse the federal budget deficit with the trade deficit.  It is almost funny how often I see this confusion appears in print.  Anyway, this confusion is why people like Talton call the trade deficit "unsustainable".  See my posts on why the trade deficit is not a debt (and here).

When I see statements like this, I am left to wonder whether folks on the left really believe this, or if it is just throwaway political rhetoric which no one really expects intelligent people to believe (key passage in bold):

But how are people dealing with these drops on their own today?
Mostly by going into debt. As I show in my book, median household debt
as a share of income for married parents was more than 125 percent of
income in 2004. The economist Herb Stein once said, "If something can't
go on, it won't." And the debt hemorrhage of the American family simply
can't go on.

If the returns of rising risk add up to the ability to borrow more
to dig oneself out of short-term holes (thus digging a deeper long-term
hole), then I think we can safely say that most Americans would be
happy to give up the returns to obtain greater security.

But here's the kicker: We can provide security and help our
economy. Just as businessmen and entrepreneurs are protected against
the most severe economic risks they face to encourage economic
investment and growth, we are most capable of fully participating in
our economy, most capable of taking risks and looking toward our
future, when we have a basic foundation of financial security.

How are businessmen and entrepeneurs protected?  By who?  I own and run my own small business, and I have yet to encounter
anyone who has given me any help or succor in our bad years. Or good
years. I don't even get covered by the minimum safety net type stuff my
employees have (workers comp, unemployment) without paying extra out of
my own pocket, which they don't have to do.

This is exactly the kind of throwaway absurdly false statement that
makes it impossible for me as a small business owner to take anyone on
the left seriously, however much I am attracted to them for their
position on a variety of social and war issues. I am sure that this is
the type of statement that most of his readers on the left nod their
heads to, sure that all of us business owners are all dialed into the
fat life somehow via the government, when in fact I spend most of my
life dealing with the myriad of government-required wastepaper that
makes it nearly impossible to run a business at all.

  I am certainly willing to believe that there are certain Fortune
100 companies that recieve all sorts of government rents -- Steel
companies, in the form of protectionism; Wal-mart, in tax abatements
and eminent domain handouts; ADM, in the form of ethanol subsidies;
tobacco companies, in the form of government roadblocks to new
entrants.

However, these type of large politically connected corporations make
up about .001% of the total mass of corporations. And, entrepeneurs,
unless they are already rich and powerful from a previous business,
never get any breaks and in fact often face government roadblocks set
in place by powerful incumbents with political pull. I am all for
eliminating these coporate welfare handouts and incumbent protection
schemes. Before you scream aha! remember that 3 of the 4 government
rent recipients I listed as examples are beneficiaries of programs from
the left side of the aisle.

I discussed this risk-shift concept in more depth here.  One thing I didn't mention in the previous article was the author's attempt to tie household debt to income risk.  I skimmed the book and didn't see any
empirical linkage between rising income uncertainty and household debt.
I am willing to believe they both went up at the same time, but
correlation is not equal to causation. Ten years ago, when folks
lamented rising household debt, it was an issue of personal
responsibility and having the discipline to live within one's means.
Are we past that now? Is debt really going to be added to the list of
things nowadays that are-not-my-fault?

Update:  If he is referring to stuff like this, I share his outrage.  But it doesn't justify his general statement.