No Crony Capitalism without Government

It's all very well to remind us, as William K. Black does, that the real crooks got away with murder in the late great mortgage bubble and meltdown. Of course they did. Otherwise it wouldn't be crony capitalism.

The Office of Thrift Supervision, the successor to the S&L regulator where I worked, made no criminal referrals in the latest crisis. The Office of the Comptroller of the Currency and the Federal Reserve made less than a handful. Mortgage and investment banks also made very few referrals -- and never against their senior officers.

Putting it as concisely as possible, Black tells us:

The defining characteristic of crony capitalism is the ability of favored elites to loot with impunity and the failure of regulators to do their jobs.

But let us look at the cases he gives us.

First there is the "Texas Rent-a-bank scandal" in the 1970s. According to Joseph M. Grant in The great Texas banking crash, crooks looted $10 billion from "fifty thrifts and banks in the South and Southwest."

Notice something? "Thrifts" were special government-subsidized banks.

Then we have the S&L meltdown in the 1980s. Savings and Loans: government subsidized banks were caught short in the 1980s as they were forced to borrow at high short-term interest rates while their loan portfolios were all long-term 30 year mortgages at low rates.

Then, of course, we have the housing bubble in the 1990s and 2000s, at the center of which were the government-subsidized mortgage giants that were encouraging mortgage originators to sell them mortgages for low-income borrowers.

Of course the government went easy on these crooks. The crooks were just implementing government policy, only a little too enthusiastically. After all, if you are setting up a boom with easy money it doesn't take a genius to figure out that sooner or later it is all going to end in tears. So you need people running the show who aren't too worried about consequences. Otherwise your affordable mortgage boom will never get off the ground.

Look. I'm all in favor of prosecuting bad actors and crony capitalists. But to act shocked, shocked, that fraudulent mortgage origination and/or securitization is going on when you have set the system up in the first place to flood the credit markets with bad paper is nothing but play-acting.

Our liberal friends like to think of themselves as the educated ones, the tolerant ones, the supporters of science. But when it comes to the unraveling of their ideas, from the housing subsidy game to the job-training game to the whole welfare state benefits game, our liberals can go into a denial that make climate skeptics look like rank amateurs.

The simple fact is that when the government starts swinging money around it attracts bad actors like honey attracts bees. Whenever the government gets into something it is always trying to game the system. If it's Social Security then the government is giving pensions to people that haven't saved much money. If it is Medicare then the government is giving health care away to people that haven't put aside money to pay for medical costs in their declining years. If government is running welfare it means that government is giving money to people that don't work much. If government is giving money to education it means that a lot of people are going to school that don't value education that much.

Of course the bad actors come out of the woodwork and game the government's system and commit fraud. Of course the worst of the bad actors probably have good connections with politicians. Of course they do. When you are a bad actor you need some friends in high places to slap down the occasional bureaucrat that doesn't know which side his bread is buttered.

We won't crack the code on crony capitalism until we stop government creating subsidies and economic favorites.

But that means we have to break the religion many people have that you can do good with government programs and subsidies. We, the people of the United States, are a long way from losing faith in government spending, especially when it is spending on "me."

America's Big Social Problem

Back in the 1950s, writes David Brooks, something like 96 percent of adult men were in the labor force. Only about one man in twenty was not working or looking for work. Today, around one fifth, 20 percent of men, are out of the labor force. It's worse at the bottom, of course.

According to data from the Bureau of Labor Statistics, 35 percent of those without a high school diploma are out of the labor force, compared with less than 10 percent of those with a college degree.

So what does David Brooks propose to deal with this social problem? He worries about all the money we spend on Medicare when we should be spending it on the structurally unemployed.

It will probably require a broad menu of policies attacking the problem all at once: expanding community colleges and online learning; changing the corporate tax code and labor market rules to stimulate investment; adopting German-style labor market practices like apprenticeship programs, wage subsidies and programs that extend benefits to the unemployed for six months as they start small businesses.

I see. So government is the solution to this problem.

There's another way to look at this. It is to say that government is the problem. Thomas Sowell worries about one little problem, students that "can graduate from some of the most prestigious institutions in the country without ever learning anything about science, mathematics, economics, or anything else that would make them either productive contributors to the economy or informed voters who can see through political rhetoric." He is talking about the problem of over-educated people in the developing countries, graduates of government universities, that can't get jobs.

The problem is much bigger than a question of funding--or even the problem of the glut of university graduates stupid enough to spend money on a degree in underwater postmodern basket-weaving.

The problem is that government can't be trusted with education. That's because in the hands of government, education becomes captured by the teachers and special interests. For decades, high schools have turned out graduates that need remedial course in colleges. What has happened? The problem has gotten worse. Of course it has. Because angry parents and students can't fire their schools and go down the street. The education industry is too powerful.

But even the problem of government schools doesn't really address the problem. The problem was illuminated years ago by George Gilder in Visible Man. It was about a disabled ex-Marine who knocked up an underage teenaged girl. He married her and got a job at a lumber yard, and supported her and their baby. But when she reached 16 and could go on welfare and get an apartment, well, then their relationship broke apart, and pretty soon the ex-Marine broke apart too.

It's an old story, and it points out a timeless truth. The big social problem is not the suffering working class or traditionally marginalized communities or any other liberal fantasy. The problem is how to socialize the boys, and turn them towards productive work and away from their natural instinct for mayhem and rapine.

And about that, our modern educated elite has nothing to say.

All of which means that things are going to have to get much worse before we can have a hope of making them better.

We will know when there is hope. It will be when the quota conservative at The New York Times feels able to propose to his liberal readership solutions to social problems that go beyond rearranging the government programs on the deck of the Titanic.

That Magic $250,000 a Year

Various conservatives have remarked upon the significance of the Obamian $250,000 a year dividing line. Above that are the rich that must "pay a little more" in taxes and below it are--well, the liberals.

Otherwise why wouldn't Democrats be demonizing everyone over $150,000 a year, or $100,000 a year, or anyone over the median of about $50,000 a year?

Reihan Salam takes a look at this.

In an essay titled “Desperately Seeking Revenue,” Rosanne Altshuler, Katherine Lim, and Roberton Williams of the Tax Policy Center found that achieving a budget deficit of 3 percent of GDP by 2020 through tax increases on over-$250,000s would require doubling their rates, kicking the top rate to 76.8 percent.

A far less damaging strategy would be to reduce "tax expenditures", or loopholes, in the federal income tax, but that would affect liberals, especially in the $100,000 to $250,000 range, and they are the core base of Obama vote.

When our liberal friends go on about how the rich have benefited from the Reagan and Bush eras they neatly elide their own situation. For over the last 50 years there has been a huge increase in employment of experts in government, from colleges to regulatory agencies, that has hugely benefited liberals. Of course, liberals don't earn multimillion dollar salaries in these jobs but they do earn good money, often propelling a liberal couple into the six-figure income bracket.

Charles Murray is saying the same thing in his upcoming book about how well the upper-middle class has done on a variety of statistical indices in relation to the rest of America, most notably, in marriage.

The culture war is, of course, a class war between the upper-middle class, the educated elite, and the rest of the middle class. Up to now this war has been a stalemate because the liberal elite has bought the support of the underclass and other financially stressed Americans with the money of the rich (who pay 40 percent of federal income tax on 22 percent of the income).

My guess is that the major political achievement of the Obama administration is going be chopping off another limb of the Democratic coalition. With every decade it becomes more and more obvious that the administrative welfare state that tosses crumbs to the poor and the middle class is in fact government of the educated elite, by the educated elite, and for the educated elite. Everything else government does is just window dressing and tactical compromise.

In the New York Times today Paul Krugman chastises the elite for blaming the ordinary American for the mess we are in. He politely shows how the Bush elite brought all the messes down on our heads. Of course he would, he's writing for liberal NYT readers. But when you get past Krugman's partisan pot-shots, it is the educated elite of liberals that has brought the current spending crisis to a head, and it is liberals--those lucky few in the $100,000 to $250,000 a year range--that will soon feel the wrath of the people.

Pew Voter Survey: Takeaways

The reliably establishment liberal Pew Research Center for the People and the Press has a new study of the US electorate, and David Paul Kuhn at realclearpolitics.com has a good all-round review of its findings.

In this study Pew divided the electorate into nine categories. Mostly Republicans were divided into Staunch Conservatives and Main-Street Republicans; Mostly Independents were divided into Libertarians, Disaffecteds and Post-Moderns; Mostly Democrats were divided into New Coalition Democrats, Hard-Pressed Democrats, and Solid Liberals. On the side-lines and not really connected to politics at all were Bystanders.

This "typology" contrasts with the groupings in the Pew 2005 voter survey which came out with the following: Republican-leaning groups were Enterprisers, Social Conservatives, Pro-government Conservatives; middle groups were Upbeats, Disaffecteds, Bystanders; and Democratic leaners were Conservative Democrats, Disadvantaged Democrats, and Liberals.

It's interesting to ponder on the changes to the typology. Pew has pulled Libertarians out of the Republican camp and Conservative Democrats out of the Democratic camp. They have rearranged the Republicans, blurring the ideological line between social and economic conservatives and identifying conservatives by intensity. They have created two Obama era groups, the independent Post-Moderns and the New-Coalition Democrats. It seems to me that those two groups are the most loosely attached to the Democratic camp.

But here are two interesting takeaways from the data in the new survey.

• Once a liberal, always a liberal. Pew shows the age distribution of each group and it shows, e.g., that Staunch Conservatives (like me) are older than adults generally. One group, Post-Moderns is heavily weighted with young adults. But Solid Liberals and New Coalition Democrats track almost exactly with the national age profile. In other words, they don't become more or less Democrat as they age.
• Hispanics aren't "hard-pressed". Looking at the numbers by race, blacks are heavily represented in the New-Coalition Democrats and Hard-Pressed Democrats (and non-existent in Staunch Conservatives). Hispanics are different. They are heavily represented in the New-Coalition Democrats but underrepresented in the Hard-Pressed Democrats category. The implication is obvious. Hispanics are much less tightly bound to Democrats. They are open season for 2012.

It is troubling for this conservative to look at the questions and their phrasing. One question asks whether corporations make too much profit. Are people really exercised about that? And there are no questions about social programs other than helping poor people too much or not enough. Are issues like education and entitlements "off the table?" Or are pretty well all voters except Staunch Conservatives agreed on the wonders of big government? And how about a question on "government has too much power" rather than government has too much waste? The answer is, of course, that if Pew were ahead of the game, asking questions that exercised 2012 voters, we would already know who is going to win.

Monbiot's Big Problem

Environmentalists face an impossible problem, according to The Guardian's George Monbiot. On the one hand they are pointing to catastrophe, the end of non-renewable resources, so we should cut back. Yet new resources keep appearing. So, maybe we have reached "Peak Oil." Meanwhile there is "tar sands, shale gas and coal." The predictions of catastrophe keep getting put off.

On the other hand, environmentalists are trying to get us to cut back, and people just don't do that.

In east Africa, for example, I've seen how, when supplies of paraffin or kerosene are disrupted, people don't give up cooking; they cut down more trees. History shows us that wherever large-scale collapse has occurred, psychopaths take over. This is hardly conducive to the rational use of natural assets...

All of us in the environment movement, in other words – whether we propose accommodation, radical downsizing or collapse – are lost. None of us yet has a convincing account of how humanity can get out of this mess. None of our chosen solutions break the atomising, planet-wrecking project. I hope that by laying out the problem I can encourage us to address it more logically, to abandon magical thinking and to recognise the contradictions we confront. But even that could be a tall order.

Of course, for a skeptic like me, it is the environmentalists that are doing the magical thinking.

First of all, the very word "non-renewable" is dicey. In the strict sense, everything is non-renewable. Wood is very non-renewable because on current energy consumption levels, we would cut down every tree on the planet in a couple of years to burn wood for energy. Oil is non-renewable because, obviously, there is a fixed amount in the planet. Nuclear fission is non-renewable because there is a fixed amount of fissionable material on the planet. For that matter, wind and hydro are non-renewable, but only on a time scale of billions of years.

In other words, "non-renewable" just means that we'll have to come up with a better idea some time in the near future. But that is the story of human life. When things can't go on forever, they stop, and humans think up another way to live. When environmentalists point to catastrophe, they are merely telling us that, sooner or later, we are going to have to adapt to new circumstances. Of course we will! That's what humans do.

Also, we humans have really been doing something about "trashing an ever greater proportion of the world's surface." An example I like to rehearse was told to me by a German in 1989. Germany had a real problem over pollution along the Rhine, he said. Every time there's an industrial spill we get a fish kill and a huge media feeding frenzy. What people didn't realize is that 30 years before there were no fish kills because there were no fish in the Rhine!

We should be careful of all catastrophism. Repent, for the end of the world is nigh, is a religious approach. It is very easy to smuggle it into science and then use science to legislate our moral agenda. The problem with all prophesies of the End of the World is that we might be wrong. When environmentalists predict catastrophe and it doesn't come, they begin to look less and less like rational advocates and more and more like religious cultists.

But the human, social, way to deal with problems is to adapt. We usually can't predict what will go wrong, but we humans are certainly good a responding to a crisis and all pulling together in the aftermath of disaster.

Bureaucracy vs. Prosperity

Compare the US Social Security system with the Chilean pension system. The US Social Security system has an unfunded liability of trillions of dollars. The Chilean pension system is celebrating its 30th anniversary and has presided over an economic boom in Chile, according to Monica Showalter.

Over the last three decades these accounts have averaged annual returns of 9.23% above inflation. By contrast, U.S. Social Security pays a 1% to 2% (theoretical) return, and even less for new workers.

Chilean workers are putting 10 percent of their income away in a real savings plan that will create jobs for their children when they are ready to retire. In the US, the 12.6 percent FICA tax just goes to pay current retirees. No savings; no jobs for the next generation.

There is a message here. The bureaucratic, administrative method is a dead method. It transfers money from productive uses into the political bazaar of government programs. And there is never enough, so the government always ends up cheating with the tax of inflation. But the free economy is different. There the system of credit and ownership rewards people for serving their fellows with products and services. People save for retirement and contribute to the prosperity of the next generation. They retire when they can afford to, not when they hit 30 years service in a government bureaucracy, or age 62 in the government's Social Security program. The free economy is a self-adjusting system. You want to live frugally and save money? Then you get to build a nest egg and you get to quit work when your nest egg is big enough. You want to spend it and live large? No problem, but reckon on working till you drop.

Talk to the man in the street, though, and you'll find someone that would rather rely on the government than the stock market. He believes in political power rather than economic power, in Senator Claghorn rather than Fidelity and Vanguard.

Meanwhile there is the example of Chile, where the private sector has given ordinary people 9 percent on their retirement money, compared to 1-2 percent in the US Social Security system.

Bin Laden Dead: Now What?

My argument for electing President Obama is that the nation had to put Democrats in charge of foreign policy to force them to confront reality. Democrats had spent the eight years of President Bush in opportunistically trashing everything he did, inspired by the left-wing culture that always looks for oppression and then denounces it.

The result has been gratifying, as Democrats have re-upped the Patriot Act, kept Guantanamo open, maintained rendition of terrorists, and abandoned the notion of trying terrorists in civilian courts.

Additionally, the Arab Spring has completely liquidated the Democratic idea of re-engaging the Arab political rulers.

But now, with the death of Osama bin Laden the question of the War on Terror raises its head. What is the War on Terror--or whatever you want to call it--really about? Democrats have trouble with this because of their culture of opposing oppression. This has prompted them to co-opt marginalized peoples and use them for their own purposes, as they used the working class as an excuse to build their centralized administrative state, and African Americans as an excuse to interfere in all relations between Americans that involve race. In other words, the liberal agenda is always to pluck oppressed peoples off feudal estates and slave plantations and move them onto the liberal plantation where the marginalized peoples are just as subordinate as before.

But the real movement of history has been not from one plantation to another, but the expansion of trust and the extension of horizons. Capitalism teaches us to abandon the local culture of the land, in which a lord defends his patrimonial estate from pirates and plunderers, and to submit to a new global culture of service and trust. Other people are not a threat, but an opportunity for exchange.

This new culture developed initially in the northwestern European lands, and met resistance even in Europe where the Educated Youth interpreted the new way as a new exploitation. In the last century Russia, China, and India made epic attempts to resist the new culture. China gave up in 1979 and India in the 1990s, and are now the poster boys of capitalist growth if not yet democratic freedoms.

The problem is the Arabic lands of the Middle East. Islam seems to encourage a culture that resists strongly the new culture of trust and exchange, and oil provided a source of wealth that gave the means to resist. Liberals, sympathizing with the oppressed masses of the Middle East, pat them on the head and encourage them in their resistance to the new global capitalism.

But oil-fueled Islamism ends up being a direct attack on democratic capitalism and requires the democratic capitalist nations to counterattack or at least to contain it. This is the reality that Democrats have been facing in the last two years now that they are in power. In the last ten years, the notion of Islamic extremism was personalized in Osama bin Laden. But now that he is dead, the strategic question re-emerges. What are we trying to do about Islamic extremism, and why?

It is good that bin Laden has been killed on Obama's watch, for now he and the liberal ruling class of the educated elite must decide what our grand strategy should be.

We may all hope that, when Republicans take over the federal government after the fiasco of Obamanomics, that the foreign policy of the United States will be set for the next generation in a sensible practical defense of democratic capitalism and a measured offensive against those who attack it.