Dirty Public Official

If you’ve ever wondered who is at fault for the problems in this country, see the above video for a prime example (no not Maddow, she’s just snarky). I can’t imagine why Steve Buyer went on her show. He must have thought he was a good enough lier that the shame wouldn’t show through, or that he could talk his way through any questions that might come up. What a disgusting thing public service has come to.

Booms, Busts, and Government Stimulated Demand

Those who look busy in politics enjoy short term success. After Sept. 11, the majority were thirsty for blood and supported the Patriot Act and the invasion of two foreign nations. Now they are demanding that something be done by government to fix the economy. In the latter case as well as the former, those who came out against the madness will reap the political rewards of their investment of opposition in 4 years time.

It could be argued that politicians talked up the economy. It isn’t so much that they talked it up or down, but that they did them backwards. If they had tightened lending during the boom, we never would have been in the position to bust. Talking up the bust and down the boom makes me wonder if they wanted us to crash in order to boost U.S. manufacturing (see my conspiracy theory post), or if it was just straight corruption at the point where regulators choose who gets the money.

Our government is comprised almost entirely of investor-class elected officials. When times are good, they want to use their power to fuel growth and for their own profits and popularity. When times are bad, they feel the ire of the populace threatening their re-election and seek someone to blame in order to appear to be cracking down on the problem. We can see an example of this in the housing market boom and subsequent crash:

• In 1977 Jimmy Carter signed the Community Reinvestment Act, which went a long way towards giving government the right to force the banking system to lend to high risk borrowers.
• In 1982, Congress (with a Democratic majority) passed the Alternative Mortgage Transactions Parity Act, which allowed non-federally chartered housing creditors to write adjustable-rate mortgages.
• Clinton put pressure on “Government Sponsored Entity” Fannie May to relax credit requirements in order to try to boost lending to low income buyers. HUD wanted them to keep 50% of their portfolios in loans to low income people.
• Clinton threatened to essentially audit lenders and air their dirty laundry if they didn’t comply. Here is what realtytimes was saying back in the beginning of ‘03: “Government policies encouraged riskier lending. They did this ‘encouraging’ with threats to step in with GSE reform legislation in response to accounting scandals, and other such methods.” There is clear evidence of both carrots and sticks being used by the government.
• Bush continued and expanded these policies. In 2008, Government Sponsored Entities had extended over five trillion in loans, with a mere hundred million in total assets. They were able to do this via Fractional Reserve Lending, which is an outdated concept from back when banks didn’t want to have to hold on to large amounts of gold, and more recently is used as a way for central banks to regulate the money supply.
• Investors would flee if they saw the banks making such high risk loans, so the banks started bundling risky loans and selling them at bargain prices in order to keep profits up for investors.
• People saw great profit in real estate and started taking out as much debt as they could, figuring they could always just sell some if things got tight.
• A hiccup in the housing prices started a cascade. Housing prices began to drop, and people started to default on homes that were no longer worth as much as the loan.
• As the problem gained media attention, the politicians deflected the blame, blaming the banks for the government-pushed subprime loans. They assured us that they would fix the problem by regulating these wicked banks and doing away with their subprime lending.
• The inability of people to get loans or refinance demolished the housing market, making it even harder for those in trouble to sell, even at a loss. Foreclosures cascaded further. This tanked the housing prices and caused the very foreclosures they were intended to prevent. People who would have gladly sold their homes or refinanced were foreclosed on instead. The banks were nothing but a Ponzi scheme.
• Bush realized his legacy was threatened, and that the collapse of the American banking system would be put at his feet. He abandoned any pretense of free market and crafted the largest corporate bailouts in history.

To unravel the above mess, you have to realize that government financial regulation is an illusion. It creates waste and assures that the booms and busts are larger, last longer, and affect everyone. The bottom line is that we had people borrowing fake money from the central bank, money which was backed up by the government, which is backed up by the people – people borrowed fake money from themselves to buy houses they couldn’t afford, and subsequently lost them. The free market won out and balanced itself, despite the government meddling, but with a loss of productivity caused by the waste of effort. Without government regulation, fractional reserve lending wouldn’t exist on a national scale, nor would subprime loans, and neither would the problem.

From the wiki: “fractional reserve banking benefits the economy by providing regulators with powerful tools for manipulating the money supply, interest rates, and government debt creation. From a Keynesian point of view this debt creation provides governments with much greater latitude to stimulate the economy through government spending.”

On the Federal Reserve: According to the wiki,  “The Federal Reserve System is subject to the Administrative Procedure Act. It is not “owned” by anyone and is “not a private, profit-making institution”. It describes itself as “an independent entity within the government, having both public purposes and private aspects”". The Federal Reserve was created in 1913, by a Democratic Congress and approved by Woodrow Wilson. The Chairman and Vice Chairman of the Federal Reserve are both appointed by the U.S. President.

The very creation of the Federal Reserve gave regulators both the power and the inclination to lengthen booms and then plunder private sector savings (monetize) to ’stimulate’ our way out of the ensuing and ever larger busts.

Lack of oversight? There is a difference between no oversight and bad oversight. The government controls everything from taxes, to laws, trade treaties, tariffs, lending practices. If the regulators were pushing subprimes and Fractional Reserve Lending, then how would additional regulating been helpful? The only idea I’ve heard out of Washington lately is that we should borrow money to make a product we don’t want and then go buy it. We have a sinking boat with one party wanting to bail water out of the front of the boat into the back, and the other party wanting to bail water from the back of the boat into the front. It doesn’t help to shuffle the money around if you don’t make it in the first place.

It isn’t so much the fault of the market or government, but at the point at which the two meld, where government decisions affect the flow of large amounts of money in the private sector, here corruption is inevitable. The banking sector is a tough issue. The way I see it there are three main ways we can deal with this:

1. We can nationalize the banks. It wouldn’t be the first time. Obviously, the government has its own problems with inefficiency and corruption, and this essentially gives a competitive advantage to those banks which are subsidized by the government (as does our current meddling in which we have seen bailed out failures buy up successful competitors).
2. We can do nothing. This is high risk in the sense that if the banks fail, the government is obligated to pay for most of what the banks lose (FDIC guarantee of 250k per account), so if they fall, we pay anyway. As for if they will fail; deflation causes defaults, which causes bank failure; inflation higher than interest rates makes the banks lose money on all of their loans. Due to fractional reserve lending, this means they will fail if the economy is at all unstable. Seeing how we just doubled our money supply last year, this is pretty much going to happen. A failure of the banking industry impacts lending, which is central to the Ponzi schemes that are most modern businesses, and to the housing market. If everyone has to buy their houses with cash, the price is either going to fall a lot farther, or they are going to be bought by China.
3. We can do what we are doing now, which is leave them private and give them money, which they will abuse, both due to human nature and greed, and due to it being in the bank’s best interest to hold the money as long as the dollar is gaining value (which it has been until very recently), because using it causes inflation (if the dollar drops much longer, expect dramatic inflationary action by banks trying to drop dollars which are losing value). This is just meddling, and isn’t healthy for anyone.

The problem is that we are so deep in this Keynesian lunacy, that switching systems guarantees a crash. What are we to do?

I think this highlights a serious flaw in human nature. People have this unshakable feeling that there is a benevolent deity looking out for them, that everything will turn out fine in the end, and that there is a good solution to every problem, that when life gives you lemons, you get lemonade.

Sometimes every solution comes with pain and sacrifice. Sometimes the government can’t fix it, people die, wars are lost, retreat is the best you can do. Sometimes you just have to eat your damn lemons.

The longer you fight the tough decision, the worse the consequences get. We need to deal with the core issue, which is that every day we pay more regulators more money to regulate a shrinking industrial base. It’s time we let go of the micromanaging and let our good citizens keep the fruits of their labor so that they might afford to keep doing it.

The Cost of Criminalization

Mark Kleiman was guest blogging recently over at the Volokh Consipiracy. I’ve been very interested in his posts, which deal less with individual laws than with the philosophy of the justice system. As with most such discussions I find myself agreeing with his goals while taking issue with his proposed methods. His goal? To achieve “half and half”: Half as much crime and half as many people behind bars in a decade. A most worthy goal.

“For three decades, in the face of the great crime wave that started in the early 1960s, we have been trying to solve our crime problem with brute force:  building more and more prisons and jails. We now keep 2.4 million of our fellow human beings under lock and key at any one time, and that number has continued to grow despite the spectacular drop in crime between 1994 and 2004, which took crime rates to 50% of their peak levels.

Imprisonment at five times the historical level in the United States, and at five times the level of any of the countries with which we would like to compare ourselves, has not been sufficient to fully reverse the growth in crime; current crime rates are still at 2.5 times the level of the late 1950s and early 1960s.”

He goes on to promote the idea of removing the vengeance from justice and attempting to reduce it to a cost/benefit analysis between the cost of enforcement and the public benefit received. He estimates the cost of crime in America (excluding white collar crime) to be around ten percent of GDP.

He believes punishment should be swift and certain rather than severe, and he reminds us that punishment is always a cost, not a benefit.

Kleiman proposes starting and ending the school day later to lessen the after school time adolescents have to commit crimes.

“imagine a classroom full of unruly children.  When Johnnie throws a spitball at Suzie, Ms. Jones is too distracted by the need to break up the fight between Dick and Fred to have time to rebuke Johnnie, let alone the six others who are acting out at the same time.  Johnnie and the others learn that they can get away with almost anything in Ms. Jones’s class.”

“Thus both the well-behaved and the ill-behaved classroom are self-sustaining situations.  Indeed, they can be two equilibria of the same system:  the very same children with the very same teacher may wind up either well-behaved or ill-behaved as the result of random accidents at the beginning of the period.”

He proposes a surge in local enforcement to break the criminal mindset and freeing up resources to do it again elsewhere. This goes back to the old theory that if we only had enough cops, there would be no criminals. I have several issues with this.

Our laws are essentially made by politicians. If you look at the creation of legislation, it often seems to revolve less around seeking efficient solutions than trying to appear to have taken strong action. The politician who raises rehabilitation rates by 12% is always going to lose to the one who took another 300 ‘criminals off our streets’ and put them ’safely behind bars’.

On the enforcement side of things, the police can only enforce the laws they are given, which are usually both too broad in their scope (imprisoning productive members of society who have some bad habits) and very limiting (police can’t simply do door to door searches in each town they hit). I expect what we would see with his proposal is large enforcement squads being shipped out of their home town to raid problem areas. Criminals would simply lay low, knowing they can wait it out. The policing forces would know they are expected to show some arrests, which leads to all sorts of problems, from false or trumped up charges to constitutional violations.

I don’t dispute the theory that strong enforcement can break the criminal mindset, we’ve seen that happen with traffic cameras. People knowing that the machine never sleeps makes them less likely to break traffic laws. We have also seen the results: districts cutting yellow lights short, shutting off the enforcement periodically to try and get people back into a gambling mode and breaking laws in order to increase ticket revenue, additional laws invented in order to create new sources of revenue, etc. Increasing enforcement won’t help until we make crime less profitable for legislators and law enforcement. These are people who know they will be out of a job if there is less crime.

“Much crime-avoidance behavior is wasteful from a social perspective, but not from an individual perspective.  If my putting a burglar-alarm sticker on my front door simply leads a burglar to break into my neighbor’s home instead, the victimization loss is shifted rather than avoided, and in effect I incur a real resource cost to make sure that someone else suffered the cost of being burglarized.  But that fact makes putting up the sticker no less rational for me as an individual.”

This brings up a point about the scope of our legislation. The above example works on a city or state scale as well. Very localized legislation may only serve to chase problems to the proverbial neighbor. This is one reason why banishment is no longer a common practice. On the other hand, one of the greatest aspects of These United States is the way the autonomy of the states can serve as testing grounds for new ideas, a market for them to succeed or fail and thus serve as an example. and a way of allowing like minded communities to enact legislations that suit their nature.

An interesting side note on vengeance as a motive for justice, I just noticed the following quote in a file from the department of justice:

“State prisoners had a 19% lower death rate than the adult U.S. resident population; among blacks, the mortality rate was 57% lower among prisoners.”

I guess universal health care does work (universal for them anyway). Back to Kleiman:

“The current total budget for law enforcement and criminal justice, adding together all levels of government, comes to about $200 billion a year.  If a 1% reduction in crime is worth $15 billion, even modestly successful crime-control efforts can easily justify their budgets.”

By this reasoning, the best way of both increasing relative enforcement and decreasing costs would be to pick our battles and reduce our total legislation. Around a quarter of US inmates are in there for drug offenses. By the above statistics, halting the war on drugs would save us something on the order of half a trillion dollars every year, and that’s not counting the positive effect on GDP of having them back in the work force. The key here is figuring out how much it costs society to put someone away as compared to letting them go or to finding them a new opportunity. People who see themselves as having opportunities and who see their path to a good future don’t want to screw it up. A large portion of crime is committed out of desperation.

One of the things I love about Kleiman’s writing on the subject is that he sees crime as something that people commit against others, that crime is something suffered, and arrests are a cost. This brings home the need to reduce both the crime and the need for justice, and also brings up some interesting points about race and class.

“even adjusting for overall lower incomes, African-Americans suffer much more crime than do members of other ethnic categories. Homicide provides the most dramatic example; representing less than 15% of the population, blacks suffer more than 50% of the murders.”

Both the poor and racial minorities tend to be segregated into areas that, due to the lesser opportunities have a much higher crime rate. Even their crimes are segregated (white collar and blue collar). Blue collar crimes tend to be punished more harshly, but who is more morally bankrupt, the criminal who burgles homes in order maintain their basic needs, or the banker who embezzles millions in order to maintain a lavish lifestyle? If the burglar were to be given a good paying job with a future, do you think they would still burgle? Some might, but again I think this may owe more to their upbringing surrounded by crime.

A few excerpts from Kleiman’s crime reduction checklist:

“Identify and target high-rate serious offenders, with the goal of incapacitating them by incarceration.  Don’t neglect domestic violence in this analysis.”

I admit that the whole concept of incarceration is beyond me. I don’t like vengeance as a motive for justice either. What is the purpose of incarceration?

As a punishment, it is a failure because it merely gives the incarcerated a concentrated group of criminals as peers and role models. When you let them out they are worse than before you put them in, not only because of the above, but also because they likely now have no home, no non-criminal friends outside, fewer family ties and job prospects, etc.

If we aren’t seeking vengeance, and prison isn’t a good form of rehabilitation, then why do we have prisons? The only thing that I can think of is just trying to keep people out of society. I say if they have a strong potential for rehabilitation, then focus on it in a way that works. If they have little hope of ever being decent members of society, then why let them out, or keep them alive at all? Severe mental illness is often behind crime, and falls under the same test as far as I’m concerned.

I think we should offer sterilization as an option for the reducing of sentence. It’s the oldest and most tested technique our species has for ensuring that the next generation doesn’t share our failures. Any genetic traits that would lead to criminal activity would be reduced, and we wouldn’t be subjected to the results of their poor parenting skills.

“Move toward “community prosecution” programs where policies are allowed to vary by neighborhood and are made after active consultation with both police and community leaders.”

I’d be very interested to see this tried. There is plenty of potential for problems, but there is also a lot we could learn. The problems are temporary, the knowledge is forever.

“Offer every prisoner a tightly-disciplined therapeutic community as an alternative to a conventional cellblock.”

Another idea with potential.

Since skills such as literacy are portable across the boundary between prison and the community, stress skill acquisition rather than attempts at behavior change such as drug treatment.  Put a computer in each cell.

I like this one a lot. Internet access should be limited of course, but skill acquisition might just be the top choice for fixing crime related to class.

Make recidivism a key performance measure for prison managers.

This one is also great, and if it could be extended to police and politicians, we might have a real solution to the systemic problems.

Abolish the minimum drinking age.

I was a little surprised to see this one. I agree. It isn’t helping create responsible drinkers and is increasing the cost of enforcement. I definitely think the drinking age should be lower than the driving age. Let them get it out of their system before they get keys.

“Allow concealed carry by anyone who passes a gun-safety course, and require every state to recognize concealed-carry permits from other states.”

I like this. I don’t remember anything in the constitution about concealed weapons. I do remember the part about “shall not be infringed”.

From his final post:

“If people who call themselves fiscal conservatives understood that a sentence of life without parole imposed on an 18-year-old represented a present-value expenditure of $1 million, the enthusiasm for “throwing away the key” might be diminished.”

Too many of the things we do in the name of safety are really the government infringing on the rights of the innocent on the theory that they may become guilty.

If you would like to hear more from Mark Kleiman, check out his book:

When Brute Force Fails: How to Have Less Crime and Less Punishment

Israel has Nukes

The Department of Defense has confirmed (pdf) what has long been known by most, but kept officially secret; Israel is a nuclear power. The report was cleared for release after Obama was elected, but before he took power. It  refers to “a growing arc of nuclear powers running from Israel in the west through an emerging Iran to Pakistan, India, and on to China, North Korea, and Russia in the east.”

Israel is estimated to have several hundred nuclear warheads, placing it ahead of the UK, and likely with the third most warheads of any nation in the world. The purpose of these warheads is obvious. In the event of an organized arab attack, Israel would have the option of massive nuclear retaliation. I don’t think we can really say that this has ‘kept the peace’, but it certainly has kept Israel on  the map. I would like to stress that there is no such thing as a defensive weapon. If a nation were to have an impenetrable forcefield, it would allow them to put all of their other forces on offense without worry, which, come to think of it, seems to be not far from what has happened.

According to Wikipedia, “The Foreign Assistance Act of 1961 was amended by the Symington Amendment (Section 669 of the FAA) in 1976. It banned U.S. economic, and military assistance, and export credits to countries that deliver or receive, acquire or transfer nuclear enrichment technology when they do not comply with IAEA regulations and inspections. “ This would seem to be a message from the U.S. to Israel that they are going to have to start following the rules if they want our continued support. This is no small matter, since Israel is in violation of quite a lot of U.N. resolutions, hides their arsenal from the IAEA, and has already been accused of using phosphorus and cluster bombs in civilian areas.

Fed Chief Ben Bernanke on 60 Minutes

It is unusual to see a Fed Chief do a network interview. He makes some interesting statements about inflation and the printing of money. He speaks calmly about the printing of money and thinks it is an important part of recovery. He seems to believe that when the economy turns the corner, he will simply contract the money supply and prevent inflation from increasing. I’ll be interested to see if this works. I get the feeling that inflation is going to be a whole lot easier to create than to prevent once the money is out of the bag.

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