Holte's corner

Sharing the Wealth

I've been mostly "counterpunching" this past week because I've had to respond to one sleazy, dishonest attack on Democrats and Obama after another. I have been so busy counter-punching these lies that it's been keeping me from thinking about where to go next.

Voting is the beginning of political engagement not the end. These people would have you stay home and leave the politics to the top 1/2 of 1 percent who already have most of our money and resources, and want the rest. So they accuse Obama of being a Marxist. Lie about his associations. Defame organizations involved in registering voters, or reforming politics....

Even George Will agrees: http://tinyurl.com/JohnTheCareless
...All the while not offering anything that would actually help ordinary folks. With half the money we've wasted on attacking Iraq could have strengthened levies, rebuilt roads and rails, strengthened our highway system, and created a first class health system. With the full amount we could have built wind-farms, natural gas pipelines, water desalination and conservation systems, and defended our border so that those who come to visit come legally. The policies involved in this economic Bubble are the policies of redistributing money to the rich.
Just listen to Barbara West's interview to see both subjects' I'm talking about:
http://www.youtube.com/watch?v=e9wBFnypUqo

One thing both sides of this debate can agree on, is that this election offers real choices.

Building In Regulation -- Division of Powers and Scope

Anyone familiar with business management principles know that there are three sides to managing an effort: Cost/Resources, Time, Scope/Performance. Limiting the scope of an effort is the key to the success of the effort. The principle behind separation of powers is that there is a built in "conflict of interest" when someone wears multiple hats (as in the picture in the previous post). This is because different roles involve different scope of efforts. Scope is a matter of setting boundaries. When corporations or individuals wear more than one hat, the result is inevitably blurred boundaries. A cop who is also a judge cannot be trusted to judge a person he just handcuffed in an unbiased manner because the two roles are different and the risks of blurring those roles are too great. The cartoon illustrates why.

When scope is blurred or expanded, that is risk. Our current economic crisis is the result of people and groups "wearing too many hats" and thus compromising their own roles. We had conglomerates who were wearing both a "financial investor" and a "insurance" hat who rated bonds as AAA that were in fact junk. Regulators and businessmen were "asleep at the wheel" partly because they were unwilling to rationally assess and act on risk.

The solution for this is to apply American principles of "separation of powers." Those who represent the stockholders, cannot be executives of the organization, but should have regulatory, watchdog, and fiduciary responsibilities and related powers. Regulators can't be in bed with the regulated. They need to be trained in the fields of actuarial science, risk management, and regulation.

If we want to "build in regulation" it starts with:

1. Empowering the boards of companies with oversight authority and power.
2. Ensuring that each company Officer is bonded and that at least half of his compensation goes into a fund that is tied to the long term performance of the company, pays into the bond, and that can be used if his function fails.
3. Using the power of anti-trust to ensure that Companies with an insurance or rating function are separated from companies that are purely financial and that companies that use "Other People's Money" are watched like a hawk.

Building in Regulation -- cooperative regulation

Cooperative distributed regulation is the notion that regulation should be a cooperative process as much as possible, and a process distributed across organizations (for independence) and yet with certain authorities. The problem with having too many powers combined in one person can be illustrated by the following joke:

The trouble with regulation is that we have all these commissions where the powers are combined into one person or group. Regulation has to be built with a bottom up "legislature", "top down" executive, and officers with judicial functions at each level. These functions have to be distributed to different officers, or the results will be like the picture -- pure arbitrary injustice and dysfunction. In the picture we see two executive roles (plumber and salvage operator) and one law-enforcement role; all combined in one person with a resulting built in conflict of interest.

It's humorous in a cartoon, but all too common in reality. For example in the current debacle, people were sold bad loans when they could have qualified for a better loan by dishonest companies. When they got into trouble company policy forbade loan officers from even talking to them. Then when they go to court the 2000's "bankrupsy" reform act forbids the judge to negotiate the loan. Result, people who can afford homes, have been defrauded, but are unlikely to be able to prove it, are foreclosed on by an unfair system. People are suddenly finding themselves in the situation of the character with a sunken boat.

Building in regulation involves having empowered officers available to people. This means distributing functions. In reforming the current system, the Congress should reverse the Federal Governments proclivity to "pre-empt" local Government and instead fashion cooperative regulation efforts with the States and Counties; building in regulation by building in oversight at each level of companies.

Risk Officers

The States and Counties, and companies involved in Interstate commerce, would have risk Officers, who would be on councils with the authority, power, and duty, of identifying risk and fashioning proposed guidelines, instructions and regulations. These risk officers would be independent, and would be paid by a levy from the FDIC.

Agency judges

Companies would have "omsbudsmen" or similar, with power to protect the interests of stockholders and consumers. Regulatory agencies would have Agency judges with their own hierarchy, pay scales and supervision. These guys would rule on the legal fairness, appropriateness, and constitutionality of regulatory decisions.

Advisory Offices

For any system to function, there have to be people's whose responsibility is to gather information, share that information, and pass it to decision makers. Every organization should have an "issue reporting system" that involves more than mere complaints about malfeasance or law breaking, but actually allows folks to make suggestions. Those involved in, or observing, risky efforts should have an input into ideas for identifying and mitigating risk. Regulatory Officers should also chair review meetings where they regularly meet with "down chain" officers to report and track trouble, risk and issue reports. If there is formal reporting and management knows about issues, they can't later pretend they didn't know about them when events happen.

Finally, these efforts need to be transparent. The public should participate as much as possible, the states should be explicitly part of advisory, regulatory and enforcement boards at the local level. Each Company or agency should have an "Information Officer" and a requirement to release information to the public as it happens. This would eliminate some of the risk of "insider trading" or other shennanigans by reducing the privilege of executives to keep bad or risky behavior secret. Combine this with an oath of office, bonding, and "Financial Administrative Courts" with real powers, and there will be enough people assets to both keep an eye on and manage the financial system, without those assets being totally segregated from reality.

Chris

Building in Regulation by Empowering Officers

The Constitution allows Congress to define Officers. My proposal is to build in regulation into executive organizations; the Federal Government and Corporations involved in Public Enterprise and Finance. The way this works is as follows. Each organization will have a "Governing Board" and an "Oversight Board." The Oversight board will have control over purse-strings delegated by and overseen in turn by Congress; and in the case of Corporations by their Stockholders. Some of the officers for the oversight board would be a Chief Financial Oversight Officer, An "Outside Auditor" Chief, an "Information Assurance Oversight Chief", a "Rating Authority Chief", a "Guarantor", and others. The Executive board would also have Officers with specific authority.

These officers would have to swear an oath to uphold their fiduciary duty, to give true and honest testimony to stockholders, Congress and the American People, and to protect the integrity of the system or company they oversee. Failure to uphold that oath could expose them to fines, lawsuits, and imprisonment. They'd also be bonded.

Regulation would be layered in in other ways as well. For example the Chief Financial Oversight Officer would be an employee of something like the Office of Management and Budget, or would be appointed by him. Each would have a specific responsibility and would be paid according to how well he/she fills that responsibility. The goal here is to give financial and organizational independence to certain officers so they can do their duty unimpeded.

Executive officers would be compensated through a bonded fund. They'd make bonuses for short term gains, but the majority of their funds would be held in a fund to pay for a bond set at about half the portfolio balance of their exposure to "other people's money." They wouldn't be able to draw on that fund until it matures after 10 years from the date they leave their position or they reach the age of retirement. Any losses due to their malfeasance would be charged to that fund.

The rest of what needs to be done is being proposed by other people to Congress, and I hope gets built into our financial system. This is a brief outline of the Officer idea. Some of the other ideas depend on this idea as a kind of keystone.

Chris

Recap and summary

To Recap and summarize

Every organization involved in Governing an important aspect of American life should follow the principles embodied in our Constitution.
These are
1. Separation of Powers, not just between those established by the constitution (between the States and the Feds, and between the Legislature, Judiciary, and Executive) but by inference, those divisions that make for rational execution of Governing functions.
2. Legislation and similar functions should follow a similar process to that of the Feds or States.
3. Specific functions should be carried out by those who can carry out those functions most efficiently

the concepts established therein and current locus:
a: Purely Executive power:
1. Execution (Executive)
b: Executive, and interpretive powers:
2. Direction and Guidance (Executive)
3. Oversight (Executive and Congress)
4. Policy making (Mostly Executive with some input from Congress)
c: Legislative:
5. Law Making (Congress with Exec Approval)
6. Rules Making (Executive by delegation)
7. Legal Requirements (Executive by delegation)
d: Judicial:
8. Law interpretation, (Executive and Judiciary)
9. Regulatory Decisions (Commissioners)
10. Judging (Judiciary)
A quick look at the above list soon establishes that no one branch has complete control over anything on this list except presently the executive. The only thing the legislature has sole authority over are finances. And, really, much of what the Executive has sole authority over is due to the Legislature delegating or giving up its authority. The constitution delegated many powers currently arrogated to the Executive to Congress. Congress was not delegated the authority to execute them. But it was handed the mission of oversight, rules making, and providing guidance and requirements, which it very wisely delegated to officers in the executive.

Building in Regulation - Principles

The powers of any Government can be analyzed into different elements using abstract concepts. These concepts form a matrix. On one axis is function: Magisterial, Sovereign, Executive, Legislative. On the other are principles and goals: Justice, Liberty, General Welfare.

The genius of our constitution is that it was the first to seek to divide Government function according to such conceptions. The USA was among the first representative Democracies to systematically seek to use the notion of separation of powers to "build in regulation" of overall function. And this notion has been useful.

This ongoing experiment, like all human efforts, is imperfect. And a lot of people look at more recent experiments and, for instance, wish our "Sovereign power" was separate from the "Executive power" as it is in Parliamentary Democracies. This has been looked on as a defect of our constitution by some. But as I analyze the Constitution and its history I start to realize that the current mess is not due to a flaw in its design so much as flaws in its conceptualization and execution. Specifically, we need better officers.

Prior to the 18th Century, the Magisterial, Executive, and Sovereign power were habitually carried in the same person. Legislatures sought to order armies, and Judges sought to make legislation. The result was general confusion and a constant unstable progression from Decrepit Royalty, to revolution, to brief periods of democracy, followed by tyranny and eventually royalty again. Some innovations moderated this progression. The Greeks formally invented Democracy. The Christians invented the notion of "ministry," and various empires separated the Sovereign power from the executive power.

The advantage of democracy is that good ideas don't usually come from the top. The best (and worst) ideas usually percolate from dedicated "cabals" of interested individuals. They have to be vetted by debate, by experience, and generally they require a mix of experts, and people skeptical of experts, in order to pass that process. For example, the best ideas in medicine usually start with local doctors and percolate up to Surgeon Generals and nations. Scientists discover things in small groups. Authority in such situations usually only acts as a break, or worse, as a weight to prevent or retard progress. Progress, good laws, good regulations, require democracy. Consensus decisions often are better than top down decisions.

The disadvantage of democracy, is that without leadership, it can degenerate into factionalism and inactivity. The larger the community, the harder it is to get consensus.

There are benefits to incorporating the organizing principle of Armies into Government. Having somebody in charge makes it harder for individuals to game each other, deceive each other, and mitigates the worst effects of oligopoly and human perfidy. People work best when they are well led. Most Animals have evolved "alpha males" who take charge and make decisions because of these advantages.

On the other hand, that governing principle is the principle of tyranny, and tyranny generally makes those under the thumb of the tyrant suffer unless he is himself subject to checks, and is forced to listen to and respect the opinions of his subordinates and subjects. Tyrants don't listen to people. Even if they do, they end up surrounded by sycophants who don't. Tyranny breaks down when conditions change, which they always do. It also breaks down when the tyrant is no longer healthy or dies. All the decisiveness disappears when people start fighting over which alpha male is going to be "top dog" next, or the little bit of grain stored during a famine. To check this Tyrants usually gave way to monarchs, who often started as tyrants, but passed their "crown" to their children.

Monarchy, also has its advantages. Having a single hereditary family in charge (when it works) is a stable way to transfer power. Even better is "constitutional monarchy" where this stability has its power reduced to a minimum. In Britain the Monarch is limited to accepting new Governments and owning the country. The problem with that is that the Monarch, while theoretically the servant of the people, also is still their owner. This is unstable, because there is always a tyrannical aspect to monarchs. They originate as tyrants and they very easily revert to that aspect. Like hungry dogs reverting to wolf-like traits.

In the case of the United States the "Monarch" or "magistrate" is reduced in power to judicial powers. He can decide whether law is law, and make limited law on the basis of existing law (common law), but he cannot contravene existing law, or make new laws on his own. He also is a minister himself. He's appointed by the President.

The Constitution assigned executive powers to a "president" and then surrounded him with intended checks and balances in order to mitigate the natural tendency of executives to behave as tyrants. In our country, even the President is expected to also embody the notion of "ministry" or "public servant." He doesn't 'own' the country. He's not a king who can pass down a throne to an eldest son. We assigned the "executive power" to him, but he is supposed to carry out the law and not interpret it. He is supposed to appoint officers to assist him.

Our country has grown so large and complex, that the legislature can't supervise or carry out all the powers granted to Congress. Because both the sovereign and executive powers are combined in one person our system is always in danger of devolving into tyranny. The solution envisioned in the Constitution was the appointment of "officers" and the granting of powers to Congress rather than to the President. It is this concept of the "officer" that is key to reforming the Federal Government, and also building in regulation into our society.

The Government of corporations isn't "Federal Government" but it is community Government. And the same principles of checks and balances the founders envisioned for the Nation as a whole should apply. I really believe that when the Constitution says that "The United States shall guarantee to every State in this Union a Republican Form of Government" they really intended for the States to do likewise and thus the principles of "republicanism" be applied at every level (except of course on Jefferson, Mason's and Madison's plantations).

Our country also suffers from Corporatism. US Corporations have no responsibility other than making a profit. Increasingly they have few limits on their behavior. Each corporation is headed by a tyrant, a monarch, or sometimes a person with limited powers like a President, depending on the ownership of the Company. Corporations perform, or execute many functions that otherwise would be performed by Government. The Government often grants them ownership of the commons as if it were giving a title of nobility.

Having corporations perform functions assigned by the Constitution to Government, in and of itself is not bad. Corporatism in itself is not evil. What has become evil is the concentration of so much decisive power in unitary executive hands, without the checks and balances of deliberative process. In short, the problem is that the officers of the companies involved in US commerce, have limited built in checks and balances on their behavior. This is the same problem that the Government has.

What needs to be done is the "building in" of virtue, through the definition, training, and reward/punishment pay of better officer, and organizations that build in checks and balances, and the principles of divided and limited Government at all levels of Government; from the National Level to local corporations and communities.

Continued.

In defense of Post Offices

Ignorant people think that the Federal Government should not be involved in a whole host of projects and efforts on "Constitutional Grounds." But what they are ignorant of is the Constitution. The Constitution is a "high level document." It sets forth a mission statement in the General Welfare pre-amble, and then sets forth requirements for what the Federal Government should do. Detractors parse the meaning of the Constitution to tell people what they believe it should not do. But a lot of what they say is nonsense.

I'll start with the department of Commerce and the Post Office, because the establishment of the Commerce Clause was setting forth a primary mission of the Government. And requirements related to the Post Office, Patents, and Copyrights were setting forth requirements for fulfilling that mission. Requirements that are currently reflected throughout the Federal Government.

http://www.yale.edu/lawweb/avalon/federal/fed42.htm

Madison in Federalist 42:

"The regulation of foreign commerce, having fallen within several views which have been taken of this subject, has been too fully discussed to need additional proofs here of its being properly submitted to the federal administration...."

The Commerce clause is both a high level requirement, and a "mission statement." It says that one of the missions of the Federal Government is to "To regulate Commerce with foreign Nations, and among the several States, and
with the Indian Tribes." In Federalist 42 Madison sets forth why:

"The powers included in the THIRD class are those which provide for the harmony and proper intercourse among the States.... and he enumerates the Commerce Clause and the following list:

"... to coin money, regulate the value thereof, and of foreign coin; to provide for the punishment of counterfeiting the current coin and secureties of the United States; to fix the standard of weights and measures; to establish a uniform rule of naturalization, and uniform laws of bankruptcy, to prescribe the manner in which the public acts, records, and judicial proceedings of each State shall be proved, and the effect they shall have in other States; and to establish post offices and post roads."

The whole reason for creating a new Constitution was because of "The defect of power in the existing Confederacy to regulate the commerce between its several members, is in the number of those which have been clearly pointed out by experience." In other words, the primary purpose of the new Constitution was to unite the United States into a single Commercial entity for the sake of the greater Good. The United States cannot endure without these provisions. Failure to give this power to Congress would have resulted "in serious interruptions of the public tranquillity."

The power to build national roads, and even to link States and Counties by building "post roads" was given explicitly by the constitution as part of its mission to "facilitate the intercourse between the States."

(All Quotes up to this point from Federalist 42 and the Constitution).

So the high level requirements of the Commerce Clause justify a "department of Transportation" and a "Post Office" but just what do the founders mean by a Post Office. What is its mission, purpose, what modern powers do we infer from that former definition?"

Post Offices and Commerce were and are about facilitating "the intercourse between the States." That mission at one time meant that they delivered the news free; they gave free delivery to newspapers. Post Offices are also related to the clause of the constitution that establishes a requirement that "The United States shall guarantee to every State in this Union a Republican Form
of Government." And it is related to the later amendments establishing freedom of the Press and Freedom of Speech. Corruption occurs in places of darkness and can only be fought with the generous application of light and "judicious" applications of high level laws aimed at punishing bribes, treason, and misuse of power.

The Post Office has been whittled down into a Government Sponsored Enterprise, and it no longer serves its primary function as an agency for linking the people of the country. Some of it's functions have been privatized into the Internet, UPS, Fed Express, etceteras. And it's mission [post roads] is also carried out by extension via the Interstate Transport System, the Internet, Telegraphs and Telephones, and the Railroads, Airlines.

This is okay. It has always been a very "privatizeable" execution. Post Offices formerly were often the sites for stores and commercial establishments, their officers at one time were often the local Bartender, Green-grocer, or banker. The exact means by which a high level mission is carried out is always subject to definition and to evolution and redefinition as conditions change. The Post Officer, as Federal official used to collect taxes, work with the militia and other duties. At the beginning of the Country the Post office had a monopoly on mail delivery. That seems to have been more for the sake of protecting the business model of the post offices than out of any intention of making it a solely private endeavor. Benjamin Franklin's post office in Philadelphia was also the place he published his newspaper. This wasn't seen as corruption, this was seen as business.

http://www.ushistory.org/franklin/philadelphia/postoffice.htm

However, the Function of "Post Office" remains a Federal function. That doesn't mean it shouldn't be carried out in cooperation with States and local entities, nor that it can't be privatized. On the contrary this function is so important that it has to be carried out with their cooperation. What it does mean, is that whatever the "agency" decided for the Post Office, the functional mission remains the property of the Federal Government, and we need to guarantee the integrity of the systems and processes involved and that they work for the General Welfare and not merely for the self-aggrandizement of a few.

The FCC, the Department of Transportation, the FAA, and a whole host of Federal and private undertakings all are part of the system establised by "postal roads and postal offices" and it is the mission of the Federal Government to ensure that they are operated for the General Welfare. All those organizations are more than constitutional. It would be unconstitutional for them not to exist.

Chris

Public Trust and private execution

Vote Democrat this fall, but don't close your eyes. There is a lot of work to do.

http://www.slate.com/id/2107894
The Constitution is pretty explicit against conflicts of interest. The article establishing that the Government shall not grant titles of nobility, also forbids persons to serve as officers who are in the pay or service of another State. This rule, at the time would have also forbidden our officers to take pay or be in the service of State organizations like Banks.

The Constitution gives to the Federal Government the charge of printing money and regulating the banking system. The Federal Government has executed that charge traditionally in two ways. One was by sponsoring a Federal Bank, and the other was directly through the Treasury. We currently have a compromise system. We have a special Federal Bank "The Fed" which is a Government Sponsored Enterprise (GSE) under some control of the Government through the appointment of its officials. It's leadership wears two hats. One serves the general public, the other serves the banking system. These two roles sometimes come into conflict.

In the current financial meltdown the Treasury and the Fed have been focusing on Banks, at the expense of Main street. That is why their huge bailout isn't really having any positive effects yet. The cascade is underway, and the values that underlie stock prices are what are melting down. Thousands of companies are finding their value was over-priced, and their current value is risky. People aren't going to invest in companies that won't be around in 5 years, unless they think they can make a quick buck and exit.

All the quick bucks have exited. The Thieves have come and gone. We've been violated, and now we know what that feels like. And now the men involved are playing a game with us and telling us that white is black, and that their Carnival ideology had nothing to do with the outcome.

These are the guys who put the Con, as in Confidence Scheme, in Conservative.

Raines was involved in a scandal that should have incited a round of 'bubble piercing' but instead led to a redoubling of investment. The folks who kicked Raines out, to the howles of his adoring supporters among the Democrats promptly replaced him with the Republican Tool.

Republicans made a big show of sturm and drang of "reforming" Fannie Mae, and then appointed a new CEO who continued business as usual; Daniel Mudd:

"http://investing.businessweek.com/research/stocks/people/person.asp?personId=271139&symbol=FNM"

"Mr. Daniel H. Mudd is the President and Chief Executive Officer of Fannie Mae (Formerly Federal National Mortgage Association of Fannie Mae) since June 1, 2005. He served as the Chief Operating Officer of Fannie Mae from February 2000 until December 21, 2004 and served as its Interim Chief Executive Officer from December 21, 2004 until March 2005 and also served as a Vice Chairman since February 2000."

If Raines made his millions, Mudd made his tens of Millions (below is in thousands):

Total Annual Cash Compensation $50,960(k)
Total Calculated Compensation $60,775(k)

Mudd was a busy guy. He also worked for other companies:

"Prior to joining Fannie Mae in February 2000, he served as the President and Chief Executive Officer of GE Capital, Japan GE's largest operation outside the US. During his career at GE Capital, Mr. Mudd served in business development, international financing, and european fleet services. He began his career at GE Capital in 1991 as the Vice President for Business Development, was a Managing Director for International Financing from 1993 to 1995, and became the President and Chief Executive Officer for European Fleet Services in 1995. He served as the President of GE Capital Asia-Pacific from 1996 to 1999 and managed the operation through the Asian financial crisis. Prior to GE, Mr. Mudd held positions in management consulting and financial services with Xerox Corp., Ayers Whitmore and Company, and the World Bank. "

And here are the "interlocking directorates:"

"He has been a Director of Fannie Mae since February, 2000. Mr. Mudd has been a Director of Ryder System Inc. since July 2002 and serves as a Member of Corporate Governance Committee & Nominating and Audit Committees. He is on the boards of Oriental and General Fund Ltd., Fannie Mae Foundation, Local Initiatives Support Corporation, the National Building Museum, Council on Foreign Relations, Hampton University, and St. Patrick's School."

Nothing terrible there. When he left Ryder he kept one foot on the gas pedal. But for the smart investors this was a wakeup call. Fannie Mae was a big player, but all of Wall Street was involved.

From 2004-2005, the real estate bubble turned into a real bubble. People all over the world were encouraged to get into the market. Prices went up into unreal levels.

In 2006 two phenomena started happening.
http://www.businessweek.com/bwdaily/dnflash/content/dec2007/db20071217_019781.htm

1. The smart operators started getting ready to pull out.
2. The rest of us were encouraged to get in.

It was this that finally led to the collapse of the whole deck of cards. The first Company to Go was Bear Stearns. They might have avoided being the first, but apparently "some insiders pulled money out of Bear's troubled hedge funds, while others were blocked from doing so" and this caused those left out to rat to regulators, who finally had to take some action. All those actions just prolonged the agony and it soon became obvious that there was a lot of risk, and very few assets to back up what were proving to be "toxic securities."

In 2006 the bubble peaked and collapsed about that fast.

http://www.businessweek.com/magazine/content/08_16/b4080071341961.htm

First in Florida;

"January, 2005. My Ivy League-educated cousin, fresh from his stint on a reality show that bombed, decides to ditch his embryonic acting career to study for a real estate license."

"October, 2005. Hurricane Wilma tears across Florida. Property insurance becomes prohibitively expensive for adjustable-rate newbies. The neighbor's subprime startup "winds down" operations."

Then even in my own State and California.

In July this year the Treasury shored up Fannie Mae, after the Bear Stearns Wall Street Company collapsed:

http://www.nytimes.com/2008/07/14/washington/14fannie.html?_r=2&pagewanted=2&th&adxnnl=1&emc=th&adxnnlx=1216030237-4oITSZTbIUtwN64NxM6eug&oref=slogin

The CEO's of Fannie Mae weren't complaining:

http://money.cnn.com/galleries/2008/fortune/0808/gallery.ceos_hotseat.fortune/3.html

"Why they're miserable: Years of pell-mell expansion and lax oversight have left Fannie and its smaller sibling, Freddie Mac, with a staggering $5 trillion in aggregate mortgage exposure, on less than $100 billion of capital. Not good, given the free fall of U.S. house prices over the past year and the associated rise in defaults, though Mudd earlier this year promised Fannie would "feast" on the reduced competiton in the mortgage market."

"Why others are miserable: Mudd and Syron have seen their shares plunge to 17-year lows in the past month, but that's just for starters. President Bush recently signed a housing rescue bill that critics such as Sen. Jim Bunning estimate could cost taxpayers as much as $1 trillion. The Congressional Budget Office, for its part, guesses there's a 50-50 chance a bailout can be avoided altogether."

"What they make: Mudd, $11.7 million; Syron, $18.3 million"

"What shareholders have lost: Fannie, $52 billion (83%); Freddie, $36 billion (85%)"

"Misery Index: Mudd, 95; Syron, 103"

The final CEO of Fannie Mae, also from Wallstreet, is Herbert Allison:

"Herbert M. Allison, Jr. was appointed as President and Chief Executive Officer of Fannie Mae in September 2008 by Director James Lockhart of Federal Housing Finance Agency, as conservator of Fannie Mae."

"Prior to being appointed to Fannie Mae, he was Chairman, President and Chief Executive Officer of TIAA-CREF from 2002 until his retirement in 2008."

And for the rest of us?

http://www.businessweek.com/lifestyle/content/jul2008/bw20080711_257959.htm

Developing viable markets

I was reading an article that Matt Kibbe wrote defending his politics and his attachment to Von Mises economics:

http://www.reason.com/news/show/129218.html

I considered using this post to continue my critique libertarian economics. But the events of the past two weeks have pretty much illustrated my complaints and born out my predictions, so it's time to turn from what is wrong about those idiots to what actually needs to be done. I think that they are stuck in 19th century (and early 20th century) arguments that have no relevance to the real world. Their arguments only make sense when pitted against socialist ideas.

So rather than continue my criticisms I'll start the process of talking about what does work in their ideas and what really needs to happen.

Von Mises was no democrat. His sympathies were Aristocratic, obviously
so, and never changed:

"He believed that he "lived in an age when the appetites and idiocies
of the masses dominated the scene." That "the sole advantage he saw in
democracy was the same one emphasized by Sir Karl Popper, i.e., the
bloodless transition from one government to another." He believed that
Government should be "vertical and patriotic" (not "horizontal and
nationalistic"). He had no objection to dictatorship or to
authoritarian rule -- only to the "collectivist" tendancies that
accompanied such populist movements as Nazism. For him "collectivism
referred to ethnic/nationalist tendencies and cries for democracy
(horizontal). In short he injected an anti-democratic (and thus
Anti-American) strain into American politics under the guise of
"Austrian Economics."

The important thing about this is not that his disciples are consciously monarchist or anti-democratic, but that the notion that "regulation" and "government" are the principle cause of bad economic times comes from an aristocratic and anti-democratic perspective. Businessmen have always felt stymied by regulations, and so they find these ideas very convenient. But the rest of us don't have that excuse. Neither the economics of socialism, nor the economics of "libertarians" make any sense. But some of the ideas are true because they are based on observation, and valid generalizations (principles) that can be tested.

A market is just a place where exchange can occur. That author writes:

"Dirty laundry aside, it strikes me that our current financial crisis has all the characteristics of a classic government boom-and-bust cycle generated by easy money and credit as described by Mises in The Theory of Money and Credit, Human Action, and Interventionism." Von Mises blames Government policy. Government blames greedy businessmen, which comes first the "Chicken or the Egg?" The resolution is the realization that "no government" is impossible. Von Mises is right that money and credit play a major role in boom and bust cycles, but he is wrong in his analysis of the causality involved.

Markets cannot function without freedom and democracy, checks and balances. They don't function well in "command mode" whether the commands come from a monopolist or a Government agency. The mistake is in thinking that "Government" in the abstract is the same thing as the flesh and blood officials and organizations that carry out such government, and excluding such necessities as self-discipline, ethical prescriptions and local governance from the term. Sure some bureaucrat in Washington can't very well have a clue about what is happening in a farm outside of Denver, but neither can some corporate official working out of Wall Street.

The origins of markets were in two places. One was 'market towns' established by local lords to allow their peasants and assets to buy and sell goods. Strattford on the Avon, where Shakespierre was born, was such a town. Kevin Phillips notes that the second origin of markets was the traveling Carnivals/Fairs that went from State to State and country to country in Europe. The Carnivals were where the King would raise his money, and all financial markets since then owe their origins to them. They were allowed to make permanent settlements when Kings finally got enough power to establish permanent sources of income. The kings needed to borrow money (mostly to fight wars) and there were always people willing to sell them. The Kings, and then later dukes and other nobles established market towns to give the carnies a home.

Financial markets have never lost the tendency to revert to Carnie/Fair behavior. Letting them govern themselves is like letting the hucksters in a Carnival Govern themselves. It is bad policy, and will result in the Carnival soon picking up states and running for cover. Economic Anarchism simply is one form of bad Government.

Financial markets need good governance, not economic anarchy, nor oppressive bureaucracy. To get that the Markets have to be in "Market Towns" (literal and figurative) and have Governments that follow the principles of divided Government, oversight, and Federalism. They should neither be owned by one person, nor have a cabal in charge that has the power to limit market entry, nor should the Government run 'for profit' enterprises unless profit isn't the primary purpose of them. But each of these enterprises needs a Government, and that Government has to have officers with specific authority, mandates, and controls. And more importantly it needs to be organized in such a way that Government is invisible.....

To be continued....

Chris