As I and others have pointed out, the polls are suspect.  Most polls that have Obama up by more than the margin of error assume there are far more Democrats that will vote than in any prior election.  The polls suggest that Obama wins the Democrats, McCain wins the Republicans and they split independents.  The only way for Obama to be leading, then, is for there to be more Democrats than Republicans.

This is important because the poll’s “horse race” number (i.e., who voters will vote for) is adjusted to fit this model. For example, if you poll 100 people and 45 say Obama and 44 say McCain, that may or may not be the reported result.  If, out of those 100 people, let’s say 30 identified themselves as Democrats and 30 were Republicans and 40 were independents.  If you believe there are more Democrats than Republicans, you weight the poll, meaning the 30 Democrats get counted more than the 30 Republicans.

Historically, there have been about 3-5% more Democrats than Republicans.  But many polls this year are assuming far more of a difference than that.  The ridiculous Pew poll that has Obama up by 15% is the perfect example.  Below is a chart of the party identification for the last 20 years of Pew Polls.

Year	Republican	Democrat	Independent
2007	25%	33%	34%
2006	28%	33%	30%
2005	29%	33%	30%
2004	30%	33%	30%
2003	30%	31%	31%
2002	30%	31%	30%
2001	29%	34%	29%
2000	28%	33%	30%
1999	27%	34%	34%
1998	28%	33%	32%
1997	28%	33%	32%
1996	29%	33%	33%
1995	31%	30%	33%
1994	30%	32%	34%
1993	27%	34%	34%
1992	28%	33%	36%
1991	31%	31%	33%
1990	31%	33%	29%
1989	33%	33%	34%
1987	26%	35%	39%
Average	29%	33%	32%
Difference		4%
	Min: 25%	Max: 35%
Late October 2008	24%	39%	32%
Difference		15%

So Pew is telling us that it adjusted its actual results to reflect the “fact” that there are 15% more Democrats than Republicans, even though the historical average differential is 4%, and the maximum differential over the last 20 years was 9% (1987).  In fact, even the difference between the minimum percentage of Republicans (25% in 2007) and the maximum percentage of Democrats (35% in 1987) is only 10%, only 2/3rds of the alleged difference this year.

I wondered what would happen if we used Pew’s 20 year average and reworked the poll.  I assumed Democrats go for Obama 90-1 over McCain and Republicans go for McCain 90-1 over Obama (9% are undecided in this poll), and Independents go 47% for Obama and 44% for McCain (these are the numbers that give us the 53% to 38% lead for Obama).  Let’s also lump in “others” with Independents so we have 100%.

If we now re-weight the polls to be 33% Democrat, 29% Republican and 38% Independent (or other), Obama leads 48% to 43%.  A 5 point lead, nearly within the polls 3.5% margin of error.  A far cry from the quoted 15%.

It occurs to me that we have two scenarios brewing, neither of which are good. The first is that Obama wins next Tuesday.  As I pointed out earlier, this is the texbook definition of a parade of horribles. The second option is, with Obama with a (Real Clear Politics average) lead of 6-10% going into election week, Obama loses.

Why is this bad? Because instead of the horrors of four more years of Jimmy Carter, we will have four more years of “You stole the election” along with heaping helpings of “you racist bastards.”

This is just pathetic.  Obama, speaking in Philly says he’s a Phanatic.  Now in Florida, he says he’s “showing the [Tampa Bay Devil] Rays some love.”

I don’t mean to single out Obama, many politicians, especially those running for president, have claimed a sudden, unexplainable rooting interest for teams then in the national spotlight, but come on-at least pick one team per championship.

Are we really that stupid?  I mean, I am a huge New York Giants fan.  Their Superbowl victory over the Patriots will live in my mind as long as I remember by own name.  Does that preclude me from running for office outside of New York/New Jersey and Connecticut?  It shouldn’t.  What’s wrong with saying, “Look, I’m a life-long Yankees fan, so I don’t have an interest in the outcome, but I hope it’s a good, well played game.?”  Or, even more ambitious, what about “I like the Phillies because the Devil Rays are a league rival?”

The point is, do politicians really believe voters are either (a) so stupid they won’t see through this or (b) so vain that they won’t vote for a politician that doesn’t kowtow to the local sports franchise?  I don’t know, if voters believe Obama won’t raise their taxes (yes, even those making less than $250,000 per year), maybe voters are that dumb.

Some have asked why I think it’s alright to spend $700 billion bailing out banks, but it’s not okay to spend even one dime bailing out people who bought a house they could not afford.  The answer, surprisingly for some, is not that I’m a heartless capitalist with no compassion for the poor (or, if you’re Barney Frank, poor=minority).  It’s all about incentives and accountability.

There are actually three distinct crises going on right now.  They are connected, but each could stand alone without the other.  The first is the housing crisis, the second is the banking crisis and the third is the credit crunch crisis.  Taking them in order:

The Housing Crisis:
What is it? Housing prices are collapsing and (less than 5% of) homes are being foreclosed on.

Who does it effects? Anyone trying to sell a house.

What caused It?  Housing crisis was chiefly caused by Congress’s wanton desire to pander to people who otherwise could not afford housing.  The flood of cheap credit encouraged the market to oversupply the market with new housing.  When the credit began to run dry and some borrowers defaulted, the foreclosed properties added to an already flooded buyers market.  That created a vicious cycle where those who planned to buy a big house with a 2 and 28 ARM and sell it for a profit within 3-5 years found it impossible to sell and impossible to pay the jacked up payment.  They defaulted, and another foreclosed property hit the market.  This, combined with the baby boomers (it always comes back to them) all began to retire and sell the McMansion for a quiet bungalow, swamped a struggling buyers market.

Why money won’t help? As heartless as it may sound, spending money here will make the problem worse.  The best and most efficient way to clean up a buyers market is to let prices stabalize naturally.   If the government jumps in and buys houses, that may reduce supply, but how and when will the government offload them?  If you believe prices are still over-inflated today (they are at 80% above historic, inflation-adjusted levels), a government purchasing program will be “stabilizing” the price at an inflated level: in other words, supporting another bubble that will collapse.  What about McCain’s plan to buy the troubled mortgages and refinance them?  Same thing.  Your sticking people with a new mortgage at a still-inflated price.  You’re just delaying the inevitable.

The Banking Crisis:
What is it? Banks are failing.

Who does it effect? Anyone who loans money to banks.  (Don’t laugh, that includes you if you have a savings, checking or investment account at a bank.)

What caused it?  Three things; subprime lending, bad regulations and implicit government guarantees.  Some banks followed through on the government’s promise of “affordable housing”.  Others bought derivatives sponsored by those banks or Fannie Mae and Freddie Mac.  In the first case, banks are mostly on their own.  They made a bad business decision (listening to the government often is).  In the second case, here is where it gets sticky.  First, the government imposed a smart-sounding, dumbass rule called marked to market accounting.  This means that banks that are publicly held have to value their investments at the then current value for which they could be sold.  This is fine if there’s a market.  When the housing crisis started, however, the market for these derivatives collapsed.  No one wanted to buy an investment when they didn’t know if it was a good bet or not.  The investments, however, are not worthless.  They still generate revenue and they still have some nonzero value.  But banks cannot use that value thanks to this marked to market accounting rule.  (Remember, a bank fails when its assets (investments and loans) are less than its deposits.  When one huge portion of its investments are ruled to be worthless, a bank will probably fail).  Second, and this is where the government steps in it, securities issued by Fannie Mae and Freddie Mac had an implicit government guaranty.  Investors believed that, should Fannie or Freddie fail, the government would step in.  It did, but not to the extent necessary to revive the market for asset-backed securities.

Why more money won’t help?  The FDIC now guarantees most deposits up to $250,000.  This should prevent most runs on most banks.  Removing the marked to market rules will also help, as would the complete dismantling of Fannie Mae and Freddie Mac.

The Credit Crunch Crisis:
What is it? Banks are afraid to lend other banks money.

Who does it effect?  Anyone who gets money from banks.  Contrary to the cartoon world view, banks don’t keep gobs of cash in a vault so Scrooge McDuck can swim through it.  If you own a company and bank with your local bank, every Friday you need to make payroll.  You probably have a line of credit that allows you to draw down on each Friday to cut the checks to your employees.  You then pay off the line of credit as your customers pay you.  The bank (say Citizens), however, may not have enough cash on hand, so it will have to get an overnight loan from another bank (say Wells Fargo) .  If Wells Fargo doesn’t believe that Citizens is solvent, it will refuse to lend Citizens any money.  Citizens then cannot lend you the money.  Your employees don’t get paid.  How long will you stay in business with that going on?

What caused it? Two things: the Banking Crisis and Hank Paulson’s failure to save Lehman Brothers.  Had Lehman been saved as Bear Stearns and AIG were, banks would have had more faith in lending money overnight.  There would still be a tightening, but it would not be so severe.

Why more money will help?  Credit markets run on good faith and crave stability.  If the market knew that the government would not allow Lehman to fail, they might react more favorably to a lending request.  Having seen Lehman fail, most banks are being extremely conservative with capital (how much money they keep in the vault) and lending (to whom they lend) requirements.  Injecting more capital into the system will allow banks to take on more risk.  Moreover, unlike housing prices, stock prices are undervalued (just ask Warren Buffet).  The government, for once in history, is buying something at a discount.

One of the really frustrating things about McCain is that he never seems to follow through on the political points, nor does he defend himself adequately against false attacks.  Last night’s debate certainly provided a few counter examples, but here is what McCain should have said:

Ayers
Obama says he was 8 years old when Ayers tried to kill innocent people with nail bombs.  McCain should fire back, “really?  Well I was three when Hitler invaded Poland, but I never had him over for afternoon tea.”  It wouldn’t hurt to add “you sanctimonious bastard,” once in a while either.

Healthcare
Obama and Biden like to point out that the average cost of healthcare is $12,000 and McCain wants to tax it, and replace it with a $5000 tax credit.  Obama even said last night that “For the first time in history, you will be taxing people’s health care benefits.  By the way, the average policy costs about $12,000. So if you’ve got $5,000 and it’s going to cost you $12,000, that’s a loss for you.”

McCain should say “Is that the kind of backwards drunken donkey math they teach at Harvard now?  My plan would tax $12,000, true, but the taxpayer receives a $5000 tax credit.  Let me say that slowly tax credit. Unlike you, I do not favor a 100% tax bracket, so the taxes on $12,000, even at the highest tax bracket would be less than $4,000.  My plan would give taxpayers a net tax decrease of at least $1,000.”

Negative Ads
McCain keeps saying that the ads would not be so negative if Obama would have agreed to the townhall debates.  Fair enough, but this is getting old and it’s pretty thin to begin with.  Instead, McCain should say, “Look, I’m sorry if you cannot take criticism well.  I know you’re unaccustomed to it, as the media has given you a free ride over the past two years.  Now, I may lose this election, but the American people need to know who it is they are electing.  If the media won’t address these issues of character, judgment and whom you chose to associate with, I have to.  Today there is a story in the Washington Post claiming that AT&T and Verizon did favors for me by putting up cell towers on my ranch.  Are you kidding?  Obama has acknowledged ties to ACORN, Fannie Mae, Freddie Mac, Antonin Rezko, William Ayers and Jeremiah Wright, and these people are investigating cell phone towers in Arizona.  If you’re going to be president, Senator, you need to grow a pair.”

Recently, many commentators in the mainstream media here in America and abroad have gleefully announced the death of Capitalism and Conservatism.  We are to believe that the Reagan Revolution has been routed like Ewoks without Luke, Leia and Han.

Conservatism and Capitalism, I can assure you, are both alive, though not so well.  These twin pillars saved America and the free world from feckless impotence of Jimmy Carter and the very feckled and potent ambitions of the Soviet Union; they will not crumble in the face of Barney Frank, Barack Obama, Nancy Pelosi or any other mental midget on the Left.

Conservatism, while not dead, is homeless.  It was run from its home by Republican greed, avarice and incompetence.  I don’t agree with John McCain on much, but we do agree that Republicans came to change Washington, but Washington changed Republicans.  Spending has run unchecked, earmarks and wasteful programs have run rampant.  These new toys have led Republicans to lose their way and compromise their principles.  Perhaps four years in exile will focus the party’s attention and lead to meaningful reform.  It will at least lead to new blood.

Capitalism is not dead, but it has been framed for murder.  Capitalism did not kill your 401(k), Barney Frank did.  Had he, Chris Dodd, Barack Obama and others not allowed (nay, encouraged) two government created behemoths to flood the mortgage market with billions in subprime loans, everyone would have been better off.  Housing prices would have stayed low, banks would have stayed solvent and retirement accounts would have stayed fat.

Laissez faire capitalism remains the most efficient economic theory.  Consider the following: whom would you trust to advise you and negotiate a transaction on your behalf: Warren Buffett or Nancy Pelosi?  Donald Trump or Barney Frank?  Michael Milken or Mark Foley?  Those who have the mental tools to understand the economy make money.  Those who don’t, run for office.  It is the nature of our world that some politicians will be among the dumbest, least informed, greediest, most incompetent of us.  Almost everyone else will do better things with their talents.  This is not to say every politician is completely out of their depth, but I would not bet on a majority of them being smarter than my dog.  The less the government interferes with your life, your business and your finances, the better.

Nonetheless, it is not yet time to “go John Galt.”  This is not the beginning of the end of our way of life, it is end of the beginning.  Together, we have destroyed slavery, fascism, communism and socialism.  Our task now is to destroy modern liberalism.  We must destroy political correctness and nihilism before it destroys us.  We will overcome the soft bigotry of lowered expectations and restore accountability and common sense to the economy, the legal system and the government.

Conservatism and Capitalism are wounded, but they will return stronger than ever.  Patience is a virtue; capitulation is a sacrilege.  In time, we will see the end of the Democratic majority and the Obama administration.  In time, we will see an end to the forced charity of “patriotic” taxes.  We will see the last welfare check cashed.  We will see an end to the tortured twisting of the words in the storied document that governs us.  We will see a government that knows its limits, recognizes its enemies and aids only its allies.  We will see a strong, proud America leading the world, the entire world, into a free, peaceful and democratic future.  We will once again be a shining city on a hill.

Below is a chart depicting the real and inflation-adjusted (median) average price of a home in the United States from 1975 through 2008.  You can clearly see the housing bubble developing, beginning in 1997.  The historical, inflation adjusted price of a home is about $150,000.  During the 10 year period starting in 1997, housing prices nearly doubled, peaking about two years ago at 183% over the norm.

So, what happened in the late 1990’s that could have caused such a bubble?  Some Democrats point to Gramm Leach Bliley, this is because these people are either idiots or naked opportunists.  As I pointed out earlier, GLB has cushioned the blow from this crisis as it allows healthy banks to bail out (i.e., buy) struggling investment banks and vice versa.  Some banks (Wells Fargo, Goldman Sachs) were not so incredibly stupid to invest in a bubble twice in one decade.  In addition, GLB was passed in 1999 when the bubble was clearly already underway.

In 1995, however, Democrats decided they wanted to encourage home ownership among people who, frankly, could not afford it.  We heard speaches about “everyone has a right to affordable housing.”  The government authorized and encouraged Fannie Mae and Freddie Mac to issue subprime loans.  Subprime loans are loans to borrowers with “subprime” credit, usually meaning a FICO score of less than 620 or 660, depending on the lender.  In order to have credit score that low, the borrower probably either (i) missed two or more payments in the last year; (ii) declared bankruptcy or been foreclosed on recently, (iii) really pissed of one of the credit rating agencies.  Put simply, a subprime loan is a loan to someone who probably cannot pay it back.  (I know, I’m being mean or racist, but frankly, if you’re going to ask that I pay for your mistakes, you can expect me to point them out.)

As an aside, note that the peak was in 2006, two years before the current crisis.  Why?  You can thank the 2 and 28 ARMs.  These are Adjustable Rate Mortgages where the borrower pays interest only for two years, then the payments jump (sometimes by 200-300%) for the remaining 28 years.  Why would anyone agree to that?  They expected housing prices to keep going up.  “Honey, we’ll pay interest only for two years, then sell the house at a profit!  What could go wrong.”  There’s a reason some people have a 620 credit rating.  The banks, on the other hand, reasoned that, “if they default on the mortgage, we’ll foreclose and sell the house at a profit.”  There’s a reason some banks fail.  The point is, if you bought a house two years ago and took a 2/28 ARM, the reaper came calling this year.  When you couldn’t pay, the bank foreclosed, adding tons of cheap housing to an already overcrowded market.  That, combined with the baby boomers retiring (and looking to sell that four bedroom colonial for a two bedroom bungalo) precipitated the bursting bubble two years ago.  Once the housing bubble burst, banks had two years of interest only payments until their problems started.  Now, not only are banks not receiving all of the mortgage payments, they also cannot offload the houses on which they foreclose.

The irony (and thus the title of the post) is that this behavior, forcing banks to make risky loans, is what made owning a home such an unattainable goal.  Congress decided that we need more home ownership, so what happened?  The price of homes went up.  (This is known to some as the Law of Supply and Demand.  To others it is a fact to be avoided at all costs.  I’m looking at you Barney Frank).  Had Congress left well enough alone, the prices may have peaked, as they did in the late 1980s, but certainly nothing like the spike we saw over the last 10 years.  Put simply (for the benefit of Congress, especially Mr. Frank), had they done nothing, more people would have owned homes at lower prices.

Lesson learned, right?  No.  Saturday Night Live may have gotten the message, but Congress is still struggling with reality.  No harm, though, right?  I mean, it’s not like they can make the same mistake again, right?  No.  Now they’re clammoring about how everyone needs affordable healthcare.

Barring a major collapse or a terrorist attack, Barack Obama will be the next president.  He will be aided by a Democrat-controlled Congress, and soon enough a Left-leaning supreme court.  For his ascention, we can blame John McCain; for Congress, we can blame Republican leadership who allowed corruption and greed to infect the Reagan Revolution.  But looking forward, here are some predictions for the coming four years:

Free Speech

The Fairness Doctrine will be re-enacted, driving radio, the last bastion of conservatism, Leftward and, ultimately, into bankruptcy.  President Obama will encourage prosecutors to investigate “unfair, biased and untruthful” comments about government policies.  Conservative bloggers and talk radio show hosts will quietly slip away, and Daily Kos and the Huffington Post will become “mainstream.”  Fox News ratings will initially climb, but President Obama will again deny them access and will continue to slander the network until it becomes marginalized.  If things get really bad, “Sedition” will rejoin the lexicon.

Financial Markets

Reeling from the recent subprime collapse, Wall Street will struggle for several years.  With their pay and benefits curtailed by Congress, Wall Street firms will be unable to hire or retain talented executives.  Those who do take the jobs will be tempted to make money in other, less ethical ways.  Goldman Sachs and Morgan Stanley will merge into the banking sector and the innovative products and ideas that put America at the forefront of finance will dry up.  Some firms will move out of New York, or significantly reduce their presence.  Without the tax revenue from these firms, New York City will begin to collapse as it did in the 1970’s.  The city may be nationalized.

The Broader Economy

Without risk taking on Wall Street, the credit crunch will tighten.  Firms will have little or no incentive to take large risks, and any rewards will be taxed mercilessly.  Several large corporations will fail.  If the government steps in, intervention will be used as an excuse to raise taxes again, just as Clinton did in the early 1990’s.  Layoffs and unemployment will become common place as American companies struggle to meet the demands of President Obama and his union-endorsed wish list.  Higher corporate taxes and increased labor demands will drive manufacturing jobs off-shore.

Taxes

Obama will raise your taxes.  At first, he will work with Congress to avoid a squeeze of the middle class.  Ultimately, we will be told that taxes are not being raised, we are merely returning to “pre-Bush” levels.  We will also be told that, most Americans will “pay the same as they did under President Reagan.”  This will be a lie, but it will be unchallenged by the press.

Energy & Environment

Offshore oil drilling will be blocked.  Obama has already said that he does not object to $4 per gallon gas, only that the increase occurred so rapidly.  Under the guise of “Global Warming”, oil and gasoline prices will steadily increase as windfall profits taxes and other taxes are passed on to the consumer.  Congress will pass stimulus bill after stimulus bill to offset the cost of heating oil in the winter, and gasoline prices in the summer.  Redistribution of wealth will become a reality.  Meanwhile, $7 per gallon will be the new normal.  What the government doesn’t spend in stimulus packages, it will use to distort the market for alternative energy sources.  These new projects will make Ethanol look like a brilliant idea.  (Incidentally, the next four years will set cold temperature records.  Crops will fail and the price of food will skyrocket.  We will be told that this “climate change” is due to human activity.)  If owning an SUV is not strictly illegal, only Hollywood elites and politicians will be able to afford them.

Terrorism & Foreign Affairs

We will suffer a major terror attack on U.S. soil within the first two years.  This would likely be the case in a McCain administration, but the response will be markedly different.  The Obama response, if there is one, will embolden al Qaeda, who will move from hiding in Aghanistan to ruling Pakistan.  Iran will continue to grow in strength and President Obama, will indeed meet with Ahmedinijad or his successor. Russia will invade Ukraine or Latvia and NATO will fail to react.  Obama will call on the UN to impose sanctions, which they will not.  Our image in Europe will at first grow, but the Obama bounce will be fleeting.  As America’s status as a superpower wanes, we will become West England: tolerable to much of Europe, but not included in their reindeer games.

Healthcare

Obama and Congress will enact comprehensive healthcare reform.  Premiums will first fall, then rise as health insurers begin to first compete with a government program, and then the government program becomes all consuming and yet irrelevant.  There will, indeed, be two Americas as there are two UK’s when it comes to healthcare.  The broader population will be covered by Obamacare, a form of Medicare and SCHIP on steriods.  The premiums will be next to nothing, but the covereage will make people long for HMOs.  Instead of arguing with your insurance company (who can be bullied by the market, Oprah, 60 Minutes and others), you will have to argue with a government bureacrat for whom accountability is as foreign a concept as quantum chromo dynamics.  The rest of America will continue to pay for health care through their employer or directly.  The coverage will be better, but the lack of competition and the government program will raise prices.  Good doctors will become harder to find as government mandates, malpractice claims and insurance headaches drive smart people out of the profession.  Without a profit motive, new drugs are fewer and further between.

Social Issues

Gay marriage will become the law in all 50 states, either by federal fiat or through the Full Faith and Credit Clause.  Whether you agree or disagree, the issue will inflame opinions just as Roe v. Wade has for over thirty years.  A new Supreme Court case will enter the public lexicon, just as Roe did.  Abortion will also continue to be a contentious issue.  Crime and unethical behavior will grow and a “malaise” will infect the country.

Nancy Pelosi, who is Tracy Flick without boundaries, intellect or shame, had a deal to bailout the Freddie & Fannie mess until she decided to blame Republicans.  Republicans were never going to vote in large numbers for a government blank check (unless, of course, you view six of the last eight years of history as indicator).  The fact that the Speaker of House was unable to sway more than 60% of her own party to vote for her own bill is beyond pathetic.

On the issues, I am opposed to any government intervention in free markets.  (I am also opposed to cod liver oil; sometimes medicine doesn’t taste good).  Capitalism is an economic form of Darwinism.  It is designed to encourage failure as well as success.  The failure of bad ideas is often the only way to discover great ideas.    In theory, then, intervening in a free market will allow weaklings to survive (and pass along their weaknesses).  When this is done by the government with tax dollars, it is, by definition, done at the expense of those who are strong enough to survive on their own.

The problem, of course, is that the government intervened in this market decades ago.  The final straw was in 1995, when the government allowed Fannie and Freddy to intervene in the subprime mortgage market.  Since then, this day was only a matter of time.  The government sponsored entities have implicitly put the government on the hook, and now the taxpayers are being asked to rescue the idiots who allowed this to happen, lest their monster eat us all.

So we have two choices, follow through or fall short. The bailout would ratify the implicit government guaranty that so many have railed against.  In order to save the broader economy, this is probably the better option.  The problem, however, as so brilliantly (but unintentionally) pointed out by Speaker Pelosi, is that Congress is not willing to learn from this mistake.  Fannie and Freddie are in no risk of being cut off from the federal teat.  Indeed, much of this bailout bill would encourage more of the same behavior.

Perhaps the better of the two options is to allow the credit markets to collapse.  In the future, financial institutions will (one would hope) ignore the government backing of Freddy and Fannie.  Without that insurance, banks would follow the fundamental tenet of capitalism: caveat emptor.  So too, should voters.

Chris Dodd and Barney Frank need to resign in disgrace for their reality-blind protection of Fannie Mae and Freddie Mac, the root cause of the current financial crisis.  The fact that these two submorons are allowed to walk free is a textbook definition of abuse of the public trust.  As recently as two years ago, Dodd and Frank were claiming that their owners, Fannie and Freddie, posed no risk to the financial industry.  Before taxpayers are asked to pay one dime, these sanctimonious pricks need to go.

After that, I would prefer any bailout go to the housing industry, not to bailout the banks that decided to take risks without kicking the tires.  I can’t say I blame them completely as the government implicitly guaranteed the obligations of Fannie and Freddie.  The bill has come do, and Chris and Barney want you to pay while they “investigate” which Republican is responsible for their malfeasance.

The recent market turmoil has produced an astonishingly predictable wave of populism.  Even McCain and Palin are blaming corporate greed and abuse of the public trust.  (To be fair, corporations cannot fairly abuse the public trust as they are formed for the benefit of their own shareholders, not the public.  Somewhere, Ayn Rand is rolling over in her grave.)

The most idiotic line of attack, not surprisingly, is coming from the Democrats.  In an effort to pin the market’s problems on Senator McCain, Obama has pointed to the 1999 Gramm Leach Bliley Act.  The wholly uncontroversial act was passed by nearly unanimous vote and signed into law by Bill Clinton.  Of course, as the lead sponsor, Senator Phil Gramm’s connection with Senator McCain’s campaign gives Barack Obama some Hope® to link the two to the current market problem.

Obama, having no economic experience beyond the begging for, squandering and doling out of tax dollars, is perhaps not familiar with the purpose and history of the Act.  (One of the more entertaining aspects of the last several days has been watching the mental midgets at Daily Kos, the Huffington Post and elsewhere espouse their opinion on GLB.  If asked before the recent market crisis, I would bet most of these people would think Gramm Leach Bliley was professor of Dark Arts at Hogwarts.)

I never thought this would come in handy, but as it turns out, I work with GLB every day, so I do know a little about it.  Which is to say, a great deal more than apparently what Obama and the Democratic party know about it.

GLB overturned a depression era law known as Glass Steagall (and no, that’s not a magical transparent bird from Harry Potter).  Glass Steagall prohibited retail banks (banks that make their money by holding deposits and lending money to consumers) from engaging in insurance and commercial and investment banking (like Goldman Sachs, these banks make their money mostly from investing in and lending money to corporations).  The rationale was simple: during the market crash of 1929, which precipitated the Great Depression, many retail banks failed because their assets were tied up in the stock market.

Glass Steagall did two things: (i) it created the FDIC to insure deposits at retail banks up to now $100,000 and (ii) it prevented banks from exposing themselves to market risks that could again crash the entire system.

Over 60 years later, the economy and the markets had changed.  The Securities Act of 1933 and the Securities Exchange Act of 1934 had developed strong, robust markets that were, for the most part, self-correcting.  In addition, the Savings and Loan crisis had shown that restricting diversification was not necessarily the best way to prevent bank failures.  In addition, retail banks and large investment houses wanted to be a one-stop shop and compete with one another for the savings and investment accounts of their customers.  All of this lead to the repeal of the second major prong of Glass Steagall.  In a sense, that is all the GLB did: it allowed your checking and savings account to be held at the same place as your insurance policy and your mutual fund.

Obama, however, is now claiming that GLB should be repealed.  He’s flatly wrong.  Repeal of GLB would lead to disaster.  In fact, GLB is operating as the savior today.  Who saved Merrill Lynch from bankruptcy?  The largest bank in the world, Bank of America.  Glass Steagall would have made that illegal.  Who is rumored to be buying Morgan Stanley?  Wachovia, another retail bank that would have been prohibited by Glass Steagall from intervening.  Who is picking up the pieces of Lehman Brothers?  Barclays Bank, a UK bank known primarily for retail banking and credit cards.

Obama’s claim that GLB is the cause of the problem is even more idiotic.  The root cause of the current problem is over aggressive lending by mortgage banks like Fannie Mae, Freddie Mac, Countrywide and a slew of others.  These banks, after being pressured by Congress and President Clinton, made loans to lower income families that everyone knew could never be repaid by their income alone.  The buyers, to the extent they knew what they were doing, were thinking, “I’ll buy a $200,000 house I can’t afford.  I can pay interest only for a few years, then the house will increase in value and sell it at a profit and buy a new house for more money.”  The banks were thinking, “worst case scenario, we foreclose and sell the house for a profit.”  In essence, the banks and the homeowners were betting that housing prices would go up.  They were wrong.  In fact, the fast and loose credit rules further exacerbated the problem by artificially driving up home prices.  If more people can afford a home, home prices become less affordable.  (Note to Dems, this is where the Law of Supply and Demand meets the Law of Unintended Consequences).

So, you may ask, but only if you’re still paying attention, how does this bring down Lehman Brothers, who doesn’t have a mortgage brokerage?  Well, Fannie, Freddie and Countrywide were not content to hold these bad mortgages themselves.  A mortgage is just a promise from some putz to pay over 30 years.  If you’re a mortgage lender, you prefer your money up front (who doesn’t).  So the banks devised a new product called mortgage or asset backed securities (ABSs).  These are a bundle of thousands of mortgages, each with the same or similar terms.  The bank then sells interests in each of the ABS’s to investment banks like Lehman (and Merrill and Morgan Stanley).

The problem is, the ABS’s are only as good as the aggregate credit of the underlying homeowners.  If one or two in a thousand default, no problem.  The losses are offset by the payments from the others.  The only way this could fail is if a lot of buyers started defaulting on their home loans at the same time.  Well, guess what?  When you systematically extend credit to people who can’t afford it, you create systemic risk.  The bottom falls out when the first person can’t sell their home.  The next person to try to sell is facing a buyers market and we race to the bottom.  The fact that baby boomers are all retiring and trying to sell their homes at the same time compounds the problem.

To further complicate matters, the ABS’s were further divided and picked apart and merged with other instruments (like credit default swaps and other derivatives).  All of this means that even the whizkids at Lehman couldn’t figure out what their real risk was.  (Like John McCain, first Lehman, and now the taxpayers don’t know how many homes we all actually own.)  This led to a panic and a run on the investment bank.  Shares plummeted and investors in Lehman products bailed out.  In a sense, this is the exact opposite of the bank failures that lead to the Great Depression.  It wasn’t market speculation that lead to a run on retail banks, but retail banks’ speculative lending that lead to a run on investment banks.

The take home point here is that Gramm Leach Bliley is not the culprit.  Nanny state regulation and do-gooder intentions in the mortgage market are the culprit.  The sooner we realize that altruism is not a valid economic policy, the more we can avoid these messes.