Lulled by Sound of Obama's Voice, Not his Words

In his speech two nights ago, Obama repeated campaign slogans, post election statements and post inaugural statements.. The only new aspect was the tone. Instead of playing Chicken Little/Cassandra and claiming "catastrophe" is at hand, he delivered his latest oratory of utopian slush with a more hopeful fervor. He omitted "catastrophe" from his vocabulary for the evening. But he mentioned "crisis" six times -- a record low. Perhaps someone told him that every time he speaks, financial markets drop.

But if he's mindful of his impact on financial markets, it's odd that he most of his pronouncements of the last few months into a single presentation. However, it was no shock in the morning when the financial markets dropped in response.

Bottom line -- instead of inspiring confidence in the places where it matters, he showed people once again that he is lost in the woods. He's got his Big Three. Energy, Healthcare and Education. In his world of scientific and financial alchemy, the sun, wind and water will supply the energy we will convert into a useful form -- and the conversion will happen in sufficient quantities and at low cost, even though today, oil and gas supply energy at a tiny fraction of the cost of these alternatives. However, he did introduce a contrivance to raise the cost of oil and gas -- for Americans. The carbon cap, which will be ignored by all developing nations and most others as well.

It's a bad sign when oil and gas are cheap but the president says we're going to use other forms of energy anyway. He's determined to increase unnecessary and pointless government spending when we can least afford it. His plan will do little to reduce the aggregate consumption of oil and gas in the US, but it will punish the users -- people who heat their homes with oil and gas, building owners who do the same, and everyone and every business that depends on oil and gas for transportation fuel. That includes airlines, shipping and trucking. Obama wants to force millions of businesses into bankruptcy because they depend on cheap fuel. What a guy.

Healthcare. Yeah. Let the government run it. Sure. The government runs the public school system. Some of it is good and a lot of it is bad. But all of it is expensive. New York City spent over $15,000 per student in the latest fiscal year. But critics say that's not enough. There's a carryover here. New York State spent $45 BILLION on Medicaid in 2006 -- the latest year for which figures are available -- and that works out to about $10,000 per person for the year. But critics say the Medicaid system needs more money. In other words, fraud is out of control and the fraudsters want more because it's so easy to rip off the system. Just imagine the possibilities for fraud in a national system? On top of that, when word gets out that illegal aliens sneaking into the US get free comprehensive healthcare instead of merely free emergency care, the caravans will form at the Mexican border and all sea lanes will be clogged with boats and leaky tubs of every description.

Education. Obama seems to think everyone should go to college. I guess that means the US will depend on unschooled people from other countries to handle all the non-intellectual work that his Stimulus Plan requires. Building all those roads and bridges and all the other stuff he has in mind takes a lot of strong backs and people able to operate tools and equipment, not calculators or word processors. He wants to give tax breaks to parents who send their kids to college. But tax breaks translate immediately into higher tuition. Obama, however, is blind to the obvious.

Meanwhile, Obama wants higher pay for teachers and new school buildings. Okay. But there's zero evidence higher pay or new buildings improve results. Results are mostly a function of the kids themselves. Those who are willing to go through the day and learn a little are the ones who benefit. But those who are disruptive impair the experience for everyone else -- and raise costs a lot. Unfortunately, there are too many of the latter.

Can schools do something about the disruptive kids? Perhaps a little. But not a lot. They bring in all the social pathologies of their lives when they come to school. But no school can reorder the lives of students when they are outside their classrooms.

If Obama had a voice like Dennis Kucinich or Robert Kennedy Jr., voters might have rejected him. Unfortunately he's got a set of pipes that lull listeners into accepting anything he says because it seems like music.

The Savings & Loan Crisis vs Today

In short, the Savings & Loan Crisis occurred because Congress took the worst possible path when deciding how to "help" the S&L industry. In fact, the nature of the S&L mistake was remarkably similar to the mistake made by Congress that led us to our current crisis.

The S&L Crisis was set off by the repeal of Regulation Q. Quick history. S&Ls were created during the Depression to assist homeowners. They were given a legal advantage over commercial banks in the area of mortgage origination. However, as a trade-off for the advantage in mortgage origination, the S&Ls were not allowed to offer commercial loans. Okay. That worked. The concept was good for a few decades.

However, in the 1970s the securities markets changed and the government took a place in the mortgage business -- Fannie and Freddie. The era of Securitization began in 1977. Wall Street was able to package Ginnie Mae mortgages and sell GNMA securities tied to those pools. Thus, the operating environment for S&Ls changed. The secondary market for mortgage loans was created. Thus, the bank or S&L that originated a mortgage was able to sell the loan to another party. Meanwhile, interest rates were rising and the S&Ls began losing money. The S&L industry was in tough shape.

The leaders of the S&L industry went to Congress for relief. They got it. In fact, they got what they wished for. During Jimmy Carter's administration, Congress repealed Regulation Q, which was the law that defined the differences between S&Ls and commercial banks. Suddenly S&Ls could offer the same loans as banks.

However, one barrier remained. It was not possible for banks to buy S&Ls. Big mistake. Suddenly S&Ls were in the commercial loan business competing with banks. At the same time, builders realized it was easy to gain control of an S&L and then get loans for any project imaginable.

Oil prices were rising and fueling a huge building boom in the oil states. Both residential and commercial properties were under construction. The S&Ls were lending to the oil drillers and the home-buyers. When oil prices cracked in 1983, the S&L real estate bubble popped. Things went downhill from there.

However, Congress could have handled things in a different way. It could have removed the obstacles that stopped banks from acquiring S&Ls. If banks had been able to buy them, the economy would have escaped most of the damage.

By the way, another key change that magnified problems was the increase in coverage offered by deposit insurance. Carter raised the coverage offered by the FDIC and the FSLIC to $100,000, up from $40,000. Unscrupulous S&L managements realized the amount of assets available to them for speculative lending activities was multiplied two and one-half times. They had won the S&L lottery.

In the current crisis similar mistakes were made. The worst mistake was opening the door to underwriting loans that were extended to people with lousy credit scores, no downpayment money and poor job prospects. Who opened the door? Congress. The first step was the 1977 Community Reinvestment Act, another time-bomb from the Carter presidency.

If anyone chooses to review that process that got us where we are, the reviewer will see that all laws were met. The documents describing the various troubled securitizations were complete and drawn up as required by the SEC. Moody's, Fitch and Standard & Poors rated the securities, which were then sold to institutional investors. But it seems nobody read the prospectuses and other documents. It seems that everyone put their faith in the ratings from the Rating Agencies. Bad move.

Meanwhile, no one from the Fed, the Treasury or the SEC took a close look at these securities or the markets to which they were tied. Why? Probably because billions of dollars of tax revenue was flowing into Washington as a result, and, at the same time, home-ownership was soaring. Who would tamper with that?