2008: Dave Barry's Review

Dave Barry wraps up the main events of 2008. He covers some of the subjects that I commented on here but his version is hilarious. (Hat tip once again to Stephen Hicks.)

Corporatism: The Wave of the Present

David Boaz of the Cato Institute penned an article titled “Bush and Obama Opt for Corporatism Over Freewheeling Capitalist Economy” for the Investor’s Business Daily December 17 edition. It starts with the following.

Is Barack Obama a socialist? Not really. Is George W. Bush a free marketer? Not hardly. In fact, right now they both seem to be pursuing policies that are neither socialist nor laissez-faire but rather corporatist.

The Bush administration has spent close to a trillion dollars to keep the managers of big companies in the driver's seat. Instead of a free-market policy of letting the market determine winners and losers, the administration says Bear Stearns, AIG, Citigroup and other big Wall Street firms are "too big to fail." They can take dramatic risks and the taxpayers will cover them.

…

Corporatism was seen as an alternative to both the egalitarianism of the French Revolution and the laissez-faire economics of Adam Smith, with the state working closely with the different elements of society, especially labor and business.

As the Nobel laureate Edmund Phelps wrote: "The fundamental corporatist idea was to retain the private income, private wealth and private ownership of firms that (were) so central to capitalism (and found in avant-garde examples of market socialism too) but to remove the brain of capitalism — to curtail and to modify the mechanism of experiments and discoveries undertaken by unorganized entrepreneurs and financiers on which capitalism relied. . . . Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector."

We've always had some elements of the corporate state in America — subsidies, tariffs, monopoly privileges, regulatory cartels — but we've prospered because of the freewheeling entrepreneurship and creative destruction that characterizes most of our economy.

I think the most interesting part of this excerpt is Phelps’ comment about corporatism wanting to “remove the brain of capitalism.” By this Phelps means that capitalism is able to provide the endless flow of goods and services because entrepreneurs, managers and employees apply their creative forces to answer the challenges of competing against other enterprises for the customer’s business. Corporatists believe that the wisdom of government bureaucrats can replace these undirected creative, messy forces while still providing the same results.

I’d describe the corporatist’s position somewhat differently than Boaz. The corporatist wants to replace the many minds working independently with one mind, theirs. To modify Adam Smith’s “invisible hand” description of the free market, the corporatist wants to replace the independently operating invisible minds of the free market with the one visible mind of the bureaucrat who omnisciently pulls the levers of the economy.

Phelps (who won a Nobel Prize in 2006) shows in his writings that the record of corporatism fails to supports the claims of its proponents. (See the Wikipedia entry and his own web site.)

A second part of the Phelps quote stands out: “Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector.” Therefore, corporatists believe not only that bureaucrats can steer the economy better than the undirected free market but also they have the moral imperative and the right to steer the economy to better serve our “true” interests.

I agree with Boaz that corporatism is neither socialism (in which “the people” own the means of production) nor capitalism but a hybrid in which they want to harvest the benefits of the free market while giving it a lobotomy. They want to reap the effect while severing the cause.

Bush, Deregulation and the Financial Crisis: Connected?

I've said in earlier posts before the Presidential election that Obama and his fellow Democrats repeated the mantra that our economic crisis resulted from the deregulatory policies of the Bush administration. In saying this the Democrats were trying to convince people that a return to regulation was needed to "fix" things. Jeff Jacoby, columnist for the Boston Globe, paints a different picture in his "The great Bush ‘deregulation’ myth" that apeared in the Jewish World Review. (Thanks to Stephen Hicks for this link. See the December 19 entry.)

Global Warming Revisited

I have not written on this subject for a while. The Presidential election preoccupied almost everyone, including me. Now the we have a new administration which claims to be more aligned with Al Gore's position on global warming which could lead to policies that directly affect us it seems an appropriate time to bring this issue back to the forefront. Here is a link to a minority report issued by the U.S. Senate Committee on Environment and Public Works. The subtitle on the web page says: More Than 650 International Scientists Dissent Over Man-Made Global Warming Claims.

Here are excerpts from the web page explaining the background of this report.

Over 650 dissenting scientists from around the globe challenged man-made global warming claims made by the United Nations Intergovernemntal Panel on Climate Change (IPCC) and former Vice President Al Gore. ... The over 650 dissenting scientists are more than 12 times the number of UN scientists (52) who authored the media-hyped IPCC 2007 Summary for Policymakers.

The chorus of skeptical scientific voices grow louder in 2008 as a steady stream of peer-reviewed studies, analyses, real world data and inconvenient developments challenged the UN and former Vice President Al Gore's claims that the "science is settled" and there is a "consensus." On a range of issues, 2008 proved to be challenging for the promoters of man-made climate fears. Promoters of anthropogenic warming fears endured the following: Global temperatures failing to warm; Peer-reviewed studies predicting a continued lack of warming; a failed attempt to revive the discredited “Hockey Stick”; inconvenient developments and studies regarding CO2; the Sun; Clouds; Antarctica; the Arctic; Greenland; Mount Kilimanjaro; Hurricanes; Extreme Storms; Floods; Ocean Acidification; Polar Bears; lack of atmosphieric dust; the failure of oceans to warm and rise as predicted.

In addition, the following developments further secured 2008 as the year the “consensus” collapsed. Russian scientists “rejected the very idea that carbon dioxide may be responsible for global warming”. An American Physical Society editor conceded that a “considerable presence” of scientific skeptics exist. An International team of scientists countered the UN IPCC, declaring: “Nature, Not Human Activity, Rules the Climate”. India Issued a report challenging global warming fears. International Scientists demanded the UN IPCC “be called to account and cease its deceptive practices,” and a canvass of more than 51,000 Canadian scientists revealed 68% disagree that global warming science is “settled.”

This new report issued by the Senate Environment and Public Works Committee's office of the GOP Ranking Member is the latest evidence of the growing groundswell of scientific opposition challenging significant aspects of the claims of the UN IPCC and Al Gore. Scientific meetings are now being dominated by a growing number of skeptical scientists. The prestigious International Geological Congress, dubbed the geologists' equivalent of the Olympic Games, was held in Norway in August 2008 and prominently featured the voices of scientists skeptical of man-made global warming fears.

...

Skeptical scientists are gaining recogniction despite what many say is a bias against them in parts of the scientific community and are facing significant funding disadvantages. Dr. William M. Briggs, a climate statistician who serves on the American Meteorological Society's Probability and Statistics Committee, explained that his colleagues described “absolute horror stories of what happened to them when they tried getting papers published that explored non-‘consensus’ views.” Briggs, in a March 4, 2008, report, described the behavior as “really outrageous and unethical behavior on the parts of some editors. I was shocked.”

Making Sense of the Current Financial Crisis

Greg Ransom has a nice compendium of articles at PrestoPundit that explain the current financial crisis primarily from the Austrian economics point of view. (This is the school of thought that includes Ludwig von Mises and Friedrich Hayek.)

He also has a long post on "Who Is Barack Obama" that I also recommend.

The Day After

No, I’m not referring to the post-apocalyptic ABC miniseries from 1983. I’m referring to another disaster, also man-made: the McCain campaign. The American Thinker has a good analysis titled Why McCain Lost (posted November 5, 2008) of why the McCain campaign imploded. The key point is that McCain is a Reagan Democrat who wanted to play the nice moderate. However he hamstrung himself by not choosing not to challenge Obama on a number of issues. And he lacks as much understanding of economics as Obama so McCain was unable to question Obama’s economic “plan” (which essentially is a collection of spending programs).

You can't bring moderation to an ideology fight. An honorable, sincere moderate who is behind really hasn't a chance against a cynical ideologue who is ahead. Obama simply dissembled at the debates, while McCain's tongue-tied references to Ayers, ACORN, Khalidi, "most liberal senator," etc., sounded unfairly abrupt, even desperate. Maybe they were? To the bitter end, McCain refrained from "bringing Jeremiah Wright into the campaign," even though Hillary had...Why not?

It wouldn't have looked moderate enough.

It’s tough to position yourself a fundamentally different from your opponent, especially on economics, when you’re really not. National security was the major difference that McCain could have tried to capitalize on but the recent economic troubles pushed security off the electorate’s radar of concerns.

Speaking of the economy here is a prediction. If the economy is still in the doldrums (or, more likely, it’s in even worse shape) at the end of his first term the Obamacrats (Obama + the Democrats) will argue that they need another term to fix all of the abuses of Bush’s eight years. In a way they’d be right but for the wrong reasons. Bush was far from an advocate of the free market. One of my earlier posts describes the work of the Fraser Institute which has devised a measure of economic freedom. This index dropped during the Bush era, thus indicating that Bush didn’t drastically deregulate the economy. Of course, that won’t matter to the Obamacrats. To borrow the phrase of one of their heroes, the facts about Bush’s economic legacy are an inconvenient truth.

Spreading the Wealth: Obama’s Altruist Trojan Horse

I’ve posted links to Investor’s Business Daily (IBD) because I consistently agree with their editorials. I highly recommend their series titled The Audacity of Socialism. Like most right-of-center publications they properly decry the abuses of liberal policy but fall short of challenging the moral premises behind liberal policy. Therefore it is refreshing to see this quote in the editorial “Defining Problems With Socialism For The Post-Cold War Generation” posted on October 27, 2008.

[Socialists] see capitalism with its profit motive as
vulgar and immoral because it's at odds with altruism — the idea that the
general welfare of society is the proper goal of individuals.

What they fail to realize is society is the greatest
beneficiary of our system of rational self-interest. The poorest of the poor and
the laziest of the lazy still benefit from the genius of the entrepreneur and
the risk-taking of the venture capitalist.

The article starts off also with good advice to McCain: slapping the label socialist onto Obama won’t make nearly as much impact as spelling out the personal consequences of Obama’s socialist policies. To most people, especially the younger generations, the term socialism has no meaning. They would take more offense to saying Obama doesn’t like “Dancing With The Stars.”

Returning back to the first point about the altruist premise behind socialism IBD does fall somewhat into the trap that most conservatives do: saying that the invisible hand of the market ultimately helps people more than government handouts. While I agree this doesn’t go far enough. This answer looks at the recipients, not at those who create values. We also need to reinforce the idea that people own the values they created and obtained. Redistribution inevitably means taking -- by force -- values from people who obtained them by investing their time, energy and resources. Everyone has heard the well known saying that “Time is money.” Well, the reverse is true too: money is time. When someone advocates increasing taxes to pay for their pet redistributionist programs they essentially are laying claim to the time it takes for us to pay for the increased taxes. If you dig deep enough what they are saying is that your life and your time is ultimately not yours.

A lot of issues are packed into the idea of redistribution which I’ll get to shortly. Suffice it to say a moral case can be made against “spreading the wealth around” as Obama would say. Congratulations to IBD for bringing this into the light.

Are our problems caused by too much freedom or too little? Addendum

In my earlier post I provided the rankings the Fraser Institute gave to the U.S. and other countries using a number of different criteria. As I dug deeper into their report several more interesting facts come out that shed light on the claims that our financial problems are caused by 8 years of unfettered capitalism.

Consider this. The U.S. ranks as follows in these categories. The country in parenthesis ranked first in that category.

Credit market regulations: 23 (New Zealand)
Business regulations: 25 (Iceland)
Size of government: 42 (Hong Kong)
Legal system and property rights: 21 (Finland)

Not one of the U.S. rating falls in the top ten. Doesn’t exactly paint the picture of rampant capitalism, does it?

Are our problems caused by too much freedom or too little?

While researching recent posts on the financial crisis I found a publication by the Fraser Institute, a Canadian based organization “measures and studies the impact of markets and government interventions on the welfare of individuals. In our research, we bring together academics, economists, and policy analysts from around the world. The Institute's list of researchers has grown to include more than 350 authors in 22 countries (six of whom have been awarded Nobel Prizes), comprising more than 600 Institute publications and thousands of articles.” The publication, titled “Economic Freedom of the World: 2006 Annual Report,” contains some interesting tidbits that undercuts the accusations that “unfettered capitalism” caused our recent financial woes.

The report analyzes economic freedom in 42 different measures falling into four broad categories:

1. personal choice
2. voluntary exchange coordinated by markets
3. freedom to enter and compete in markets
4. protection of persons and their property from aggression by others.

Results? The U.S. ranks 8^th out of 141 countries. The countries ahead of us (starting with #1): Hong Kong, Singapore, New Zealand, Switzerland, the United Kingdom, Chile, Canada and Australia.

I find it interesting the Switzerland is the only European country ahead of us even though it is clear that Obama’s and the Left’s agenda is to turn the U.S. into another European socialist/welfare state. We can see how well that’s working!

The report reaches several conclusions. The following list is quoted verbatim.

1. Countries with more economic freedom have substantially higher per-capita incomes.
2. Countries with more economic freedom have higher growth rates.
3. Countries with more economic freedom attract more foreign investment.
4. Total investment is slightly higher in countries with more economic freedom.
5. Private investment spending is much higher in countries with more economic freedom.
6. The share of income by the poorest 10% of the population is unrelated to the degree of economic freedom in a nation.
7. The amount of per capita, as opposed to the share, of income going to the poorest 10% of the population is much greater in nations with the most economic freedom than it is in those with the least. [HCS note: the average annual income in the least free quartile is a measly $961 as compared to $8,730 in the most free quartile.]

You might say, so what? Maybe economic freedom isn’t all that it’s cracked up to be, that there are other things more important than making money. Fair enough. Let’s take a look at the rest of the conclusions the report draws from their data.

8. Life expectancy is over 20 years longer in countries with the most economic freedom than it is in those with the least.
9. With fewer regulations, taxes, and tariffs, economic freedom reduces the opportunities for corruption on the part of public officials.
10. Political rights (e.g., free and fair elections) and civil liberties (e.g., freedom of speech) go hand in hand with economic freedom.
11. Environmental stresses on human health are lower and ecosystem vitality is greater in countries with more economic freedom.

However, a closer look at the data in this report also refutes the claims that the 8 years of Republican deregulation lead us to our current financial predicament. The Fraser Report provides the previous freedom rankings all the way back to 1970. Here are the rankings broken down by President.

Reagan (1981 – 1989): rank increased from 4th to 3^rd, economic freedom score increased from 7.5 to 8.3 (with 10 being the maximum score).

Clinton (1993 – 2001): rank stayed at 3^rd, score dropped from 8.3 to 8.2 but peaked at 8.6 in 2000.

Bush (2001 – 2009): rank dropped from 3^rd to 8^th (!), score continued to drop to 8.0 in 2006, the last date available.

Conclusions: economic freedom increased 0.6 points during the Reagan years and peaked during the Clinton administration but started to drop before the end of his term. More importantly, our ranking and score dropped 0.6 points and our ranking slipped 5 spots during the Bush years. To be fair the comparative ranking could indicate that other countries overtook us. However, the decline in our overall freedom score shows that we’re back to where we were in 1990, the end of Bush Senior’s term. How about that for irony!

What Caused the Loan Crisis

The following condensation of a series from the Investor's Business Daily explaining "What Caused the Loan Crisis" has been circulated via e-mail. (Hat tip to Frank for sending this to me.)

1977: Pres. Jimmy Carter signs into Law the Community Reinvestment Act the foundation and cornerstone for the impending disaster.. The law pressured financial institutions to extend home loans to those who would otherwise not qualify.

The publicized premise: Home ownership would improve poor and crime-ridden communities and neighborhoods in terms of crime, investment, jobs, etc.

The Results: Statistics bear out that it did not help.

How did the government get so deeply involved in the housing market?

Answer: Bill Clinton wanted it that way.

1992: Republican representative Jim Leach (IO) warned of the danger that Fannie and Freddie were changing from being agencies of the public at large to money machines for the principals and the stock-holding few.

1993: Clinton extensively rewrote Fannie Mae and Freddie Mac's rules turning the quasi-private mortgage-funding firms into semi-nationalized monopolies dispensing cash and loans to large Democratic voting blocks and handing favors, jobs and contributions to political allies. This potent mix led inevitably to corruption and now the collapse of Freddie and Fannie.

1994: Despite warnings, Clinton unveiled his National Home-Ownership Strategy, which broadened the CRA in ways congress never intended.

1995: Congress, about to change from a Democrat majority to Republican. Clinton orders Robert Rubin's Treasury Dept to rewrite the rules. Robt. Rubin's Treasury reworked rules, forcing banks to satisfy quotas for sub-prime and minority loans to get a satisfactory CRA rating. The rating was key to expansion or mergers for banks. Loans began to be made on the basis of race and little else.

1997 - 1999: Clinton, bypassing Republicans in Congress, enlisted Andrew Cuomo, then Secretary of Housing and Urban Dev elopement, allowing Freddie and Fannie to get into the sub-prime market in a BIG way. Led by Rep. Barney Frank and Sen. Chris Dodd, congress doubled down on the risk by easing capital limits and allowing them to hold just 2.5% of capital to back their investments vs. 10% for banks. Since they could borrow at lower rates than banks their enterprises boomed.

With incentives in place, banks poured billions in loans into poor communities, often "no doc", "no income", requiring no money down and no verification of income. Worse still was the cronyism: Fannie and Freddie became home to out-of work-politicians, mostly Clinton Democrats. 384 politicians got big campaign donations from Fannie and Freddie. Over $200 million had been spent on lobbying and political activities. During the 1990's Fannie and Freddie enjoyed a subsidy of as much as $182 Billion, most of it going to principals and shareholders, not poor borrowers as claimed.

Did it work? Minorities made up 49% of the 12.5 million new homeowners but many of those loans have gone bad and the minority homeownership rates are shrinking fast.

1999: New Treasury Secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses. Congress held hearings the ensuing year but nothing was done because Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place. "We manage our political risk with the same intensity that we manage our credit and interest rate risks," Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama advisor, bragged to investors in 1999.

2000: Secretary Summers sent Undersecretary Gary Gensler to Congress seeking an end to the "special status". Democrats raised a ruckus as did Fannie and Freddie, headed by politically connected CEO's who knew how to reward and punish. "We think that the statements evidence a contempt for the nation's housing and mortgage markets" Freddie spokesperson Sharon McHale said. It was the last chance during the Clinton era for reform.

2001: Republicans try repeatedly to bring fiscal sanity to Fannie and Freddie but Democrats blocked any attempt at reform; especially Rep. Barney Frank and Sen.Chris Dodd who now run key banking committees and were huge beneficiaries of campaign contributions from the mortgage giants.

2003: Bush proposes what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago". Even after discovering a scheme by Fannie and Freddie to overstate earnings by $10.6 billion to boost their bonuses, the Democrats killed reform.

2005: Then Fed chairman Alan Greenspan warns Congress: "We are placing the total financial system at substantial risk". Sen. McCain, with two others, sponsored a Fannie/Freddie reform bill and said, "If congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole". Sen. Harry Reid accused the GOP ;of trying to "cripple the ability of Fannie and Freddie to carry out their mission of expanding homeownership" The bill went nowhere.

2007: By now Fannie and Freddie own or guarantee over HALF of the $12 trillion US mortgage market. The mortgage giants, whose executive suites were top-heavy with former Democratic officials, had been working with Wall St. to repackage the bad loans and sell them to investors. As the housing market fell in '07, sub prime mortgage portfolios suffered major losses. The crisis was on, though it was 15 years in the making.

2008: McCain has repeatedly called for reforming the behemoths, Bush urged reform 17 times. Still the media have repeated Democrats' talking points about this being a "Republican" disaster. A few Republicans are complicit but Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats. That's why taxpayers are now being asked for $700 billion!!

Postscript: ACORN is one of the principal beneficiaries of Fannie/ Freddie's slush funds. They are currently under indictment or investigation in many states. Barack Obama served as their legal counsel, defending their activities for several years.

Premises behind the financial crisis

It has been fascinating to note the host of premises and beliefs that lie behind the current financial fiasco, many of which are implicit or simply are not noticed. (When I say fascinating I mean akin to the kind we feel when driving by a horrific traffic accident where you can’t resist looking.) Due to the length of the list I’m not going to comment in detail. It would take a book the size of the bailout bill to address all of them.

Here they are in no particular order of importance.

Economic egalitarianism: the belief that government should ensure equal economic outcomes. (I discussed this idea in an earlier post.)

Psychology trumps economics: that greed is a more fundamental and better explanation than the principles of economics and the impact of government policy on economic decisions. Misses the point that most people and businesses are motivated to improve their condition and that this force is always at work. Why did greed suddenly cause this meltdown? What allowed it to get out of control? Answer: laws that encouraged banks to lower their lending standards, plus the role of Fannie Mae’s management who aggressively marketed their company as a safe investment while cooking the books.

Question: if banks were driven by pure greed why do they need to be forced to loan more money?

Answer: because they also have to protect their bottom line. In order to make a profit they need to ensure that the people to whom they lend money will be able to pay it back. Greed therefore is balanced by prudence.

I have issues with using the term greed which I believe is used as a derogatory, emotion-laden synonym for self-interest and the desire to improve one’s situation. The dictionary definition of greed is “excessive desire for having.” What is considered excessive? Who determines what is excessive?


Punishment of the good for being good: people who did not overextend themselves by buying homes they couldn’t afford and/or didn’t leverage their home’s equity into credit will pay for the sins of those who did.

The best defense is a strong offence (along with denial of responsibility): blame the mess on the 8 years of Bush, on “deregulation,” “greed” without explaining exactly how. Deny the role of your own policies in the fiasco then demand more of the same to “fix” it.

Good intentions (desire to help the people who couldn’t afford homes) absolve you of blame. This includes the management of Fannie Mae who cooked the books to make their business look better than it really was and to maximize their bonuses.

No distinction made between kinds of “greed”: While I dislike how this word is bandied about I’ll use it for the purpose of illustration. As I said above greed is being used as a purposely negative term for self-interest and the desire to improve one’s condition. Having said that there are at least two breeds of greed: (1) the drive to create or produce value (which is what motivates the businesses in the free market), or (2) the greed of obtaining the unearned (Freddie Mac and Fannie Mae senior management plundering tax payers to line their pockets, people buying homes knowing full well they couldn’t make the payments, lawmakers adding pork programs to the bailout bill, and so on.)

Ends justify the means: the “good” intentions of wanting to help people buy homes justify strong arming banks into suspending prudent underwriting standards (e.g., ACORN [to which Obama has ties] fostering activities to intimidate banks, passage and enforcement of the Community Reinvestment Act.)

Ends justifies the means – Part 2: using the bailout plan as an opportunity to shoe horn additional pork into it for unrelated programs and to get the toe in to door for carbon footprint taxes.

Wishes override reality: if banks don’t make loans according to sound underwriting principles let’s encourage them to be more “flexible.” Reality is negotiable!

The role of government is to ensure businesses are serving the community. This is the foundation of arguments for passing the CRA and other laws. However this flies in the face of the greed argument. If businessmen wanted to rape and pillage, I mean maximize profit, you wouldn’t have to force them to loan money. Their profit motive gives them an incentive to “serve” the community. If certain communities aren’t being served that signals the presence of other forces dissuading businessmen from selling their product or service. Implicit in this argument is the belief that customers have a right to demand the services and goods provided by businesses. Of course, this idea underlies arguments for universal health care and whatever other service or good deemed to be too valuable to trust to the market. (Another topic that’s big enough to fill a book.)

Freddie Mae: If only we had listened five years ago

Robert Bidinotto has posted a link to a damning video showing Congressmen including Barney Frank chastising Armando Falcon, director of the Office of Federal Housing Oversight, who blew the whistle on Fannie Mae in 2004. If you’re interested here are links to the web site and to the most recent (2006) report. The report runs 348 pages but reading the 13 page executive summary gives the lowlights of this appalling story. I have provided some quotes below.

What is even more sickening is the fact that the same web page lists reports going back to 2003. All of them share the same theme: Fannie Mae violated standard accounting rules and engaged in dubious (to put it mildly) practices to accomplish the goals of senior management.

When Franklin Raines became Chairman and Chief Executive Officer (CEO) of Fannie Mae in 1999, he sought to lead the Enterprise into a new era of growth in business volumes and profits by challenging senior management and employees to double EPS in five years. Mr. Raines also made changes in Fannie Mae’s compensation programs that enhanced incentives to achieve that goal.

A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions. Those factors included the Enterprise’s enormous financial resources and political influence, the expectation that senior management could write the rules that applied to Fannie Mae, financial rewards tied to a measure of profits that management could easily manipulate, and the relative disinterest of senior executives in adhering to standards of prudent business operations.

Fannie Mae’s Board of Directors contributed to those problems by failing to be sufficiently informed and to act independently of its chairman, Franklin Raines, and senior management, and by failing to exercise the requisite oversight over the Enterprise’s operations.

That misconduct ultimately led to the Securities and Exchange Commission (SEC) directing Fannie Mae to restate its financial results for 2002 through mid-2004, the departure of Mr. Raines and the Enterprise’s Chief Financial Officer (CFO), Timothy Howard, losses of tens of billions of dollars in market capitalization for Fannie Mae shareholders, and expenses for the restatement process, regulatory examinations, investigations, and litigation that the Enterprise has recently estimated will exceed $1.3 billion in 2005 and 2006 alone.

Improper earnings management at Fannie Mae increased the annual bonuses and other compensation linked to EPS that senior management received. Compensation for senior executives that was driven by or linked to EPS dwarfed basic salary and benefits. For CEO Franklin Raines, for example, two compensation components directly tied to meeting EPS goals accounted for more than $20 million for the six years from 1998 through 2003. Three-year EPS goals also played a crucial role in determining the size of the approximately $32 million awarded to Mr. Raines during that six-year period under a long-term executive compensation program. In total, over $52 million of Mr. Raines’ compensation of $90 million during the period was directly tied to achieving EPS targets.

The image of Fannie Mae communicated by Mr. Raines and his inner circle and promoted by the Enterprise’s corporate culture was false. In the words of one current member of Fannie Mae’s Board of Directors, the picture of the Enterprise as a “best-in-class” financial institution was a “façade.” To maintain that façade, senior executives worked strenuously to hide Fannie Mae’s operational deficiencies and significant risk exposures from outside observers—the Board of Directors, its external auditor, OFHEO, the Congress, and the public. The illusory nature of the Enterprise’s public image and senior management’s efforts at concealment were the two essential features of the Enterprise’s corporate culture. Those features, which were both supported by repeated improper manipulation of earnings, are a major theme of the report.

The Bailout: Hey Buddy Can You Spare $700B?

Before I start here are two links to helpful explanations of the economic "crisis." Both come from the Ludwig von Mises Institute. The first, titled The Bailout Reader, lists various articles on their web site. The second, titled The Housing Bubble in 4 Easy Steps, explains how the Fed's manipulations of the interest rate contributed to the housing market bubble. See more below but first I'd like to make a comment on what passes for explanations in the media and among many politicians.

When a systemic problem surfaces like this we need to look at something that leads people to act in a certain way. The popular "explanation" is to lay the blame at the greed of Wall Street and bankers. Question: why didn't bankers greedily loan money to poor folks before the passing of the Community Reinvestment Act during the Carter era and the strengthened enforcement imposed by the Clinton administration? If bankers didn't act this way previously we need to look at a deeper, more plausible reason than greed. Answer: because the change in laws and its enforcement dictated these poor loan choices. Before these laws went into effect the bank's underwriters knew that the rate of default on the loans would make this practice unprofitable. In fact, the people who pushed for these laws did so because the argued banks were "redlining" [not loaning to certain groups of people] and therefore needed to be encouraged [i.e., forced] to do so.

Returning back to the Ludwig von Mises Institute to which I refer at the beginning. I was lucky enough to go to Grove City College for my degree in chemical engineering. Why? At the time I was not aware of Grove City's strong free market economics department, headed by Hans Sennholz, an advocate of the Austrian school of economics. This school, which includes Friedrich Hayek (author of The Road to Serfdom) and Ludwig von Mises, proposed a theory of money, banking and business cycles at odds with the Keynesian model. I happened to become friends with several older students (including Robert Bidinotto) who were taking economics. Out of curiosity I started to monitor Sennholz's classes. What he said made sense so I sat in as many of his classes (with Sennholz's permission) as I could. Sennholz even offered to award me a minor in economics if I paid the school for the credits (which unfortunately I couldn't afford).

I'm probably doing it an injustice in trying to summarise the Austrian approach but in essence they argue that government attempts to foster economic growth by controlling and manipulating the money supply and interest rates ultimately create boom-and-bust cycles that are much more extreme than would occur in an economy where interest rates responded to market signals. Having centrally controlled interest rates leads to mis-investment as businesses plan their future and expansion plans on false information. The analogy which I've drawn in an earlier post is similar to government setting price controls. The inevitable result of government price controls leads to shortages or overstock because no bureaucrat, no matter how brilliant, can predict better than the pricing system of a free market.

The Austrian economists also argue against other attempts by the government to "steer" the economy via legislation. Their arguments are based on economics while others argue that it is immoral for politicians to redistribute wealth by using the full enforcement power of government to ensure we abide by its edicts.

The current financial situation perfectly illustrates both follies of artificially depressing interest rates while forcing banks to make loans to people who normally wouldn't qualify. These policies have resulted in the exact opposite outcomes as the stated intentions of its advocates. Instead of boosting low-income neighbors it will cause them to deteriorate (while leading to frantic calls for even more government "solutions" to fix the problems caused by previous government policies). In a way their egalitarian goals are accomplished but by an opposite mechanism. Instead of helping improve the economic welfare of their intended beneficiaries, the actions of egalitarian motivated politicians makes life more difficult for the middle class, thus pushing them down.

Anyway, I hope you check out the two links at the beginning of this post. Their explanations of what happened makes much more sense than the conventional explanations.

10 Minute Explanation of the Financial Mess

If you have 10 minutes to spare check out this clip that explains how the subprime mess happened. (Thanks to Robert Bidinotto who first posted this clip on his blog.)

The McCain Puzzle

I'm puzzled why McCain doesn't harp on Obama's role in this financial mess: how Obama opposed attempts to impose oversight and controls on Fannie Mar and Freddie Mac, how Obama received so much in campaign contributions from these organizations and how he hired a former top dog to help search for a VP running mate. The MSM certainly isn't going to run these stories (although you can bet if McCain had these ties that's all you'd hear about).

I don't know if McCain feels this is beneath him, if he thinks this would come back to bite him, he is holding this as a trump card to be played at an appropriate time or if his campaign strategists are overlooking this. Wish I knew!

Meanwhile Obama is running ads tying McCain to lobbyists.

The Freddie Mac/Fannie Mae Mess: A good brief explanation

Here is a link to a Fox News bit that does a nice job of explaining what happened with Freddie Mac and Fannie Mae.

The Unquestioned Premises Behind the Financial Crisis

While it is disturbing to watch the financial debacle unfold, it is even more disturbing that the true culprits escape notice: faulty premises.

Faulty premise #1: egalitarianism. There are different versions of egalitarianism. For instance, our political system rests on the idea that all people should be treated equal in terms of rights, due process, etc. However, economic egalitarianism strives to ensure equality in terms of equal pay, living conditions, etc. The extreme version of this is captured in this quote by Karl Marx: “From each according to his abilities, to each according to his needs.” Naturally in America this belief fundamentally contradicts the idea of meritocracy, rags-to-riches, and the America dream.

Economic egalitarianism lies behind the Left’s continual efforts to “correct” the “evils” of capitalism and under girds redistributing money from taxpayers to the “underprivileged” via welfarism. [Note how the use of this term implies that the folks who have done well don’t really deserve it, that they are privileged. A privilege being a special favor dispensed by someone.]

Eventually the Left dreamed up a new tact: instead of cash handouts, why not provide easy credit?

The Office of Thrift Supervision (a government agency I never heard of before researching this post) describes the purpose of the Community Reinvestment Act, a key law in this scenario.

History of the Community Reinvestment Act

The CRA was enacted in 1977 to encourage financial institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. It extends and clarifies the longstanding expectation that financial institutions will serve the convenience and needs of their local communities. The CRA and its implementing regulations require federal financial institution regulators to assess the record of each bank and savings association in helping to fulfill their obligations to the community and to consider that record in evaluating applications for charters or for approval of mergers, acquisitions and branch openings. The federal financial institution regulators are the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the Office of Thrift Supervision.

The law provides a framework for financial institutions and community organizations to work together to promote the availability of credit and other banking services to underserved communities. Under its impetus, banks and savings associations have opened new branches, provided expanded services, adopted more flexible credit underwriting standards and made substantial commitments to state and local governments or community development organizations to increase lending to underserved segments of local economies and populations.

I added emphasis in the second paragraph. The banks adopted “more flexible underwriting standards” no doubt because this is the only way they could comply with the law’s criteria.

Howard Husock of the Manhattan Institute elaborates.

The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

Howard Husock

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

During the seventies and eighties, CRA enforcement was perfunctory. Regulators asked banks to demonstrate that they were trying to reach their entire "assessment area" by advertising in minority-oriented newspapers or by sending their executives to serve on the boards of local community groups. The Clinton administration changed this state of affairs dramatically. Ignoring the sweeping transformation of the banking industry since the CRA was passed, the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A's for effort. Only results—specific loans, specific levels of service—would count. Where and to whom have home loans been made? Have banks invested in all neighborhoods within their assessment area? Do they operate branches in those neighborhoods?

The reason why I say egalitarianism is a faulty premise is that it violates the basic facts of reality. People are unequal in talents, ambition and, yes, in credit risk. The Left capitalizes on our sympathy for people who are less well off. However, the fact that enough people defaulted on their loans to trigger the tsunami of financial failures should be proof enough of the futility of rewriting reality to meet the desires of egalitarians.

Faulty premise #2: the belief that it is the proper role of government to “level the playing field” by manipulating interest rates and encouraging “flexible credit underwriting standards” in order to achieve egalitarian goals. By trying to suspend the basic laws of economics the CRA and other measures distort the signals normally transmitted by the market.

Recall what happened in the 1970s when former President Nixon imposed price controls to stem inflation? As is usual with price controls Nixon’s created shortages of goods as the prices set by government were below the point set by demand. Forcing banks to provide credit to people who normally wouldn’t qualify leads to increased demand for loans. However, there is one key difference. In dealing with material commodities price controls lead to shortages if the government sets the price below the market clearing level. However since money and credit can be easily created at the government’s whim the supply increases to meet the escalating demand.

Meanwhile the management of Freddie Mac and Fannie Mae highly leveraged their organizations with almost no oversight and built a precarious house of cards that was susceptible to the cold wind of falling home prices.

Financial Fiasco: Some Inconvenient Facts

Stephen Hicks has a flow chart (posted September 19) that does a nice job of showing how the current financial fiasco unfolded.

Investor's Business Daily has an editorial titled, Congress Lies Low To Avoid Bailout Blame. Here are some key points from this editorial.

President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.

[Referring to Bush's actions on September 11, 2003] Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.

As for presidential contender John McCain, just two years after Bush's plan, McCain also called for badly needed reforms to prevent a crisis like the one we're now in.

Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office). [NOTE from me: Be sure to check the table of top recipients of campaign contributions from Fannie Mae and Freddie Mac at the end of the article.]

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who's who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.

House of cards built on faulty foundation

As the financial markets roil with the latest developments Democrats like Nancy Pelosi, Barney Frank and even Barack Obama are distancing themselves from the legacy of policies they have endorsed or proposed. They try to blame this mess on Bush’s last 8 years where in fact the roots of this dilemma go back to Clinton and earlier. As this article in Investor’s Business Daily says the main motive of the policies leading up to this was to provide people without good credit ratings to buy homes. So lenders were strong armed into lending to risks they normally wouldn’t have to avoid the wrath of the regulators.

The regulation grew to monstrous proportions during the Clinton administration, obsessed as it was with multiculturalism. Amendments to the CRA [Community Reinvestment Act] in the mid-1990s dramatically raised the amount of home loans to otherwise unqualified low-income borrowers.

The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical "housing rights" groups led by ACORN lobbied for such loans. ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama.

HUD, in turn, pressured Fannie Mae and Freddie Mac to purchase more subprime mortgages, and Fannie and Freddie, in turn, donated to the campaigns of leading Democrats like Barney Frank and Pelosi who throttled investigations into fraud at the agencies.

The problem is that all of us will pay for the sins of these policies while the true perpetrators pontificate about the greed of Wall Street and the “failure” of the market. Most people don’t understand economics (like many politicians) so it’s appallingly easy to throw “bad guys” (i.e., Wall Street) as chum into the water. Meanwhile the true lesson will be lost in this feeding frenzy: when the government tries to force the market to behave in a certain way to achieve egalitarian goals this goal to make everyone equal indeed does becomes reality but not in the way that was intended. We’re all made equal – in terms of financial losses and the pain that goes with it. Instead of a rising tide of prosperity lifting all of our boats we’re drowning in the rising tide of tears and pain, the inevitable consequences of bad premises.

Financial Woes and Free Market Foes

In the aftermath of the most recent financial implosion McCain lays the blame for the recent financial woes on greed thus displaying a dismaying lack of understanding of economics. Meanwhile Obama pontificates about the "ownership society" advocated by Bush really means you're on your own. Well, he's right but not in the way Obama meant. We indeed are on our own .. or should be. As the article titled The Real Culprits In This Meltdown in the Investor's Business Daily notes the roots of this collapse traces back well before George Bush. It traces back even before Clinton but this article has some interesting things to say about the Clinton administration's role. Check it out.

Also recommended, http://www.gregransom.com/prestopundit/ for interesting commentary from a Hayekian viewpoint and for many posts on the Palin impaling by the media.

McCain and Obama: Do they both preach sacrifice?

Before I proceed I encourage visitors to check out Robert Bidinotto's posts on Sarah Palin at http://bidinotto.journalspace.com/. I posted something there that I'd like to put here as well.

I know we cringe when we hear Republicans like Giuliani and McCain make negative comments about self-interest. But I think we make the mistake of assuming that they have the same concept in mind as we do. We need to ask whether McCain and the others have ever read Rand and, if they have, do they really understand what she is saying? (The same question can be asked about some of her admirers.) I am just starting to read McCain’s Worth Fighting For to get a better feel. In the opening pages he makes a brief reference to individualism versus egotism without explaining the distinction he is making. Furthermore, if McCain and his colleagues were completely dead set again self-interest why do they appeal to ours? By that I mean their proposed programs and policies are aimed at our needs.

We ultimately will have a choice between McCain who believes we should serve our country in order to protect and improve it versus Obama who wants us to sacrifice ourselves to everyone else, both foreign and domestic. On the surface it appears there is no fundamental difference between the two. McCain asks us to serve our country while Obama wants us to serve others in general. I think buried in this is a key distinction. McCain is not denying that we have a right to be happy or to pursue happiness. (At least I haven’t found any quotes to that affect.) I think he believes we need to put the interests of the U.S. first because protecting this framework will ensure our freedom and our ability to pursue our values. I’ll admit that maybe this is wishful thinking and might be too generous but I think his voting record supports what I’m saying.

On the other hand I’m confident that deep down Obama does indeed want to change us … into another more consistent welfare-state with a heavily government regulated market that is more in line with the “enlightened” European-model where we can’t drive our SUVs, have to turn down our thermostats and can’t eat as much. (This is paraphrasing a quote from him.) Kind of intrusive, isn’t it? I think he is ultimately uncomfortable with and ashamed of the self-interest that drives us. It doesn’t take much digging to find the collectivist intellectual influences in Obama’s life that would explain his antipathy to self-interest.

McCain's V.P. Choice

In response to John McCain’s announcement of his choosing Alaskan governor Sarah Palin as his running mate, Robert Bidinotto posted on August 29 his (as-usual) excellent analysis. My apathy mixed with antipathy for the candidates on both sides prepared me to expect the worst and to be unimpressed with McCain's choice. However I heartily agree with Bidinotto’s assessment of Palin's demeanor and message. I think this is a clever choice on a number of fronts. It does hamper McCain's early criticisms on Obama's lack of experience but I don't think it's a fatal error. As Bidinotto said, Palin has the most experience actually running a government than any of the other candidates.

Below I have provided some snippets from Robert’s excellent analysis. I particularly agree with his comment on Obama as a self-proclaimed agent of “change.” When I read Obama’s Blueprint for Change there is precious little deviation from the traditional liberal mantra that the government is the cure-all for all ills.

Politically, this is a brilliant move. Absolutely brilliant. I say that with the caveat of my abiding philosophical disagreements with both McCain and Palin on certain issues. But the overarching issues of this campaign for me are national security and energy policy, and on these, the GOP wins over the Dems, hands down.

…

If a candidate for president is trying to brand himself as a force for political "change," he shouldn't pick as his running mate an aging liberal fossil who's sat in the Senate for 36 years -- an old-boy-network Washington insider. That completely undercuts his "change" message, communicating instead a desire to pander to the Establishment and a clinging to "business as usual." It informs voters that the "change" message is utterly phony.

By contrast, if you are campaigning as an independent-minded maverick, you'd lose credibility by selecting a standard old-school politician as your running mate. You'd want somebody who underscores your outsider, maverick image and message. And if you select such a person, it communicates to voters: I'm the real deal; I mean what I say; you can trust that my actions will match my words.

Ask yourself, strictly from a branding and marketing standpoint, which candidate now comes across as the authentic and genuine agent of "change" -- McCain or Obama.

…

Obama is increasingly coming across as an empty suit, an ambitious phony with a dubious background; Biden is just another stock liberal. By contrast, McCain is showing independence and daring; his biography backs it up; and so does his running mate.

I’d say McCain’s choice was courageous. We’ll see if it was a brilliant decision after the election.

McCain's Choice of Palin - The Right Move?

Robert Bidinotto has posted some comments on McCain's choice of running mate which I think are worth checking out. In response I posted this comment.

Robert,

I heartily agree with your assessment of Palin's demeanor and message. My ongoing apathy mixed with antipathy for the candidates on both sides prepared me to expect the worst and to be unimpressed with McCain's choice. I think this is a clever choice on a number of fronts. It does hamper McCain's early knocks on Obama's lack of experience but I don't think it's a knock out blow. As you said, Palin has the most experience actually running a government than any of the other candidates. I hope this strategy works!

Obama: Our Savior?

I recall earlier this year Michelle Obama took some heat because she said Obama was going to save our soul (or something to that effect). At the time I figured her comment was just election-year hyperbole, magnified by talk-show hosts who like to create controversy. Well, looks like I was wrong. To see what I mean please check out Robert Bidinotto's excellent analysis of Obama's recent behavior and statements, "Obama the Presumptious continues his premature victory lap" (dated July 31), complete with humorous animation.

Freddie Mac and Fannie Mae: The New Deal Legacy Coming Home to Roost

With the Fed pondering what to do to stave off credit collapse of Freddie Mac and Fannie Mae it’s only a matter of time before the pundits start intoning about yet another alleged failure of the market. The Von Mises Foundation has posted several good articles explaining the history of these institutions and their impact on the financial markets.

Freddie, Fannie, and Curses on FDR

Ludwig von Mises had a theory about interventionism:

It doesn't accomplish its stated ends. Instead it distorts the market. That distortion cries out for a fix. The fix can consist in pulling back and freeing the market or taking further steps toward intervention. The State nearly always chooses the latter course, unless forced to do otherwise. The result is more distortion, leading eventually, by small steps, toward ever more nationalization and its attendant stagnation and bankruptcy.

Government intervention is like a vial of mutating poison in the water supply. We can get by for a long time and no one seems really worse off. One day we wake up and everyone is desperately ill, and blaming not the poison but the water itself. So it is with the housing crisis. Lenders are being blamed for the entire fiasco, and capitalism is going to be subjected to a beating as usual, since Freddie and Fannie are traded in public markets. But the fact remains that there is only one reason that this went on as long as it did and became as bad as it is. It was that vial of government poison.

Freddie Mac: A Mercantilist Enterprise

While these institutions have been privatized to a degree, they still remain tied to the federal government in some important respects. In fact, Fannie Mae and Freddie Mac have access to a guaranteed line of credit of $2.25 billion with the U.S. treasury. This guarantee, coupled by the perception that federal money would be used beyond the extent of the credit limit, allows both companies to maintain lower borrowing costs than would otherwise be the case. In many cases, the companies are able to sell bonds yielding only a few dozen basis points above U.S. treasury benchmarks. If the government's guarantee disappeared, the borrowing spreads for both companies would widen. Beyond the government's line of credit, these companies are also exempt from state and local income taxation and are exempt from SEC filings. Moreover, their securities are listed as government securities and can be held by banks and thrifts as low-risk bonds. These benefits provide a significant advantage since such privileges are not offered to other financial institutions.

Fannie Mae: Another New Deal Monstrosity

Fannie Mae is not a free-market entity, nor is it a private body that must compete on the same playing field as its competitors. Fannie Mae is representative of all that's wrong with central planning institutions: it is a government-created conduit for carefully crafted financial and market socialism that the bureaucrats uphold for the purpose of propping up their fantasies for pandemic social engineering.

There's nothing "American" about this dream. In the eyes of the Republic's visionaries, this particular dream has turned into a nightmare.

God is Green: Part 2

The Wall Street Journal had an editorial by Bret Stephens titled Global Warming as Mass Neurosis. He touches on how the message of the global warming crowd has strong elements of religiosity to it. Instead of God saving us, we'll find salvation by sacrificing ourselves to a false theory.

Socialism may have failed as an economic theory, but global warming alarmism, with its dire warnings about the consequences of industry and consumerism, is equally a rebuke to capitalism. Take just about any other discredited leftist nostrum of yore – population control, higher taxes, a vast new regulatory regime, global economic redistribution, an enhanced role for the United Nations – and global warming provides a justification. One wonders what the left would make of a scientific "consensus" warning that some looming environmental crisis could only be averted if every college-educated woman bore six children: Thumbs to "patriarchal" science; curtains to the species.

A second explanation is theological. Surely it is no accident that the principal catastrophe predicted by global warming alarmists is diluvian in nature. Surely it is not a coincidence that modern-day environmentalists are awfully biblical in their critique of the depredations of modern society: "And it repented the LORD that he had made man on the earth, and it grieved him at his heart." That's Genesis, but it sounds like Jim Hansen.

And surely it is in keeping with this essentially religious outlook that the "solutions" chiefly offered to global warming involve radical changes to personal behavior, all of them with an ascetic, virtue-centric bent: drive less, buy less, walk lightly upon the earth and so on. A light carbon footprint has become the 21st-century equivalent of sexual abstinence.

Finally, there is a psychological explanation. Listen carefully to the global warming alarmists, and the main theme that emerges is that what the developed world needs is a large dose of penance. What's remarkable is the extent to which penance sells among a mostly secular audience. What is there to be penitent about?

As it turns out, a lot, at least if you're inclined to believe that our successes are undeserved and that prosperity is morally suspect. In this view, global warming is nature's great comeuppance, affirming as nothing else our guilty conscience for our worldly success.

Stephens doesn't use the word but there is a key concept behind this antipathy towards the West in general and specifically towards capitalism: altruism, the belief that we don't have the right to exist for our own sake and our own happiness. Because capitalism is based on the profit motive it is considered morally inferior to socialism where everyone is supposed to live from everyone else. Therefore I have a quibble with his use of the word neurosis in the title. The problems inherent in the behavior of the global warming advocates are not psychological. They're philosophical.

Review of The World is Flat 3.0

Do you ever debate buying a book? You know what I mean. Something about the cover or title catches your eye. You pick up the book, skim it a bit then put it back onto the shelf. The next time you go back to the store you go through the routine again. And again. Finally you break down and buy the book. After reading it you wonder why you didn’t buy the book the first time. That’s the story of The World Is Flat 3.0: A Brief History of the Twenty-first Century by Thomas L. Friedman. I must have picked up the book five times before buying it. I wish I had bought it sooner.

Not that this book is perfect. A 100 or more pages could easily be trimmed with tighter editing and removing repetitive passages and Friedman’s name-dropping stories. But his premise is interesting and particularly applicable to individualists. By “flat” Friedman “means equalizing, because the flattening forces are empowering more and more individuals today to reach farther, faster, deeper, and cheaper than ever before, and that is equalizing power.”

Friedman contends we are in the third version of globalization.
In Globalization 1.0 countries were the key agents in the world.
Globalization 2.0 shifts from countries to international companies;
Globalization 3.0 shifts again with individuals becoming the focal point.

The World is Flat identifies ten flatteners behind this evolution. While I won’t discuss each one they fall into three categories: political, business practices and individual empowerment. The key political flattener was literal: the flattening of the Berlin Wall in 1989 which enhanced the free movement of best practices. Most of the other nine flatteners deal with corporate practices such as work flow software, outsourcing and off shoring which drew formerly isolated countries such as India, China, Mexico and others into the world market. As the corporate practices lowered barriers between countries other developments occurred to enhance the ability of individuals to obtain information and, more important, to express their ideas that normally would have no outlet. Of course, we’re talking about the Internet, search engines and blogging. Traditional media outlets like TV and radio (except call-in talk shows) are just that: outlets in which the participants passively receive media output with limited ability to have their voices heard.

Blogging, personal web pages, etc. allow individuals to express themselves and to form collaborative virtual communities. In addition, as Friedman notes, small and medium size companies hire the most people, not the mega-corporations. Flattening allows these small businesses to compete better with the big boys. All of these developments provide tools to empower individuals like no other time in history.

These developments also could bode well for preventing wars. While some conservative thinkers fear (appropriately) the growth of Islamic terrorism and the rebirth of totalitarianism, Friedman shares something both interesting and hopeful: the Dell theory of conflict prevention. “No two countries that are both part of a major global supply chain, like Dell’s, will ever fight a war against each other as long as they are both part of the same global supply chain.” In other words, economic interdependence can trump political agendas. One can only hope that this theory is true! Of course there are no guarantees. Political leaders can force their agenda onto an unwilling citizenry. However the ease of being able to do this is getting more difficult as the world flattens.

Returning back to the individual, Friedman offers some advice to succeed. “The most important competition is now with oneself – making sure that you are always striving to get the most out of your imagination and then acting on it.”