How to Never Repeat the Mortgage Mess

The mortgage industry needs to be overhauled. Here is how to do it.

Currently, mortgages are written by banks or mortgage brokers who often sell the mortgages immediately on the secondary market to other banks or to Freddie Mac and Fannie Mae. These companies then bundle the loans into a bond called a mortgage backed security.

This system needs to change for one reason. The people that write the mortgages do not have skin in the game. In other words, they assume none of the risk. 

There are three possible solutions to get skin in the game for those that write these mortgages.

1. Banks should have to hold the mortgage for a minimum of one year. And, or...

2. Banks should be required to have a "foreclosure interest" in the loan, which would be 20% of the loan amount. This would discourage banks to write risky loans and would make mortgage backed securities safer investments. And, or...

3. All mortgages should be written in two parts. The first should be written to 80% of the appraised value and should be eligible for selling into a mortgage backed security. The second portion should be written and kept by the bank writing the mortgage.

The New World Odor

There are telling signs of a new alliance that is a greater threat to Western Civilization than we have seen since the buildup of Nazi Germany and Imperial Japan in the 1930's.

The players in this new alliance are oil rich and nuclear powered Russia, a nuclear powered China and Pakistan, third world countries with oil money procured over the last 5 years, and Muslim extremists who specialize in guerrilla warfare. 

The difference between this war and others is this will be the first world war without uniforms, and the first war in a politically correct Western world. The battle is financed by traditional nation states opposed to Western Civilization, but waged by Muslim extremists using terrorist, suicide style civilian attacks on vulnerable Western targets.

Someday, we will be ready to fight this war, but as of today, we are only prepared to strengthen our enemies and invite them into our open society. They will use our strength against us. They will use our universities, our financial system, and Hollywood to push an ideology of tolerance in order to destroy our resolve. And they will almost succeed.

But just as we are about to lose, we will learn how to fight. How bad it gets will be determined by how soon we take this threat seriously. Every day we wait to confront Muslim extremism, we empower the alliance and make it more difficult to defeat.

Here is Newt Gingrich talking about the threats we face. This is a must watch..

Free Market Capitalism is not High Finance Capitalism

My new term, reality free market economic capitalism, is a term to explain my belief in a system that is getting pummeled by all of these socialist bailouts. Make no mistake about it, the banking system has turned into a Las Vegas style craps table, no more pegged to free market capitalism than a baseball game is pegged to competition when one pitcher has been paid to serve up meatballs.

The world of high finance is failing. Today, Citibank was bailed out by the United States Treasury because a large portion of banking is no longer about receiving deposits and making loans. Banking today is more about betting with other companies that still other companies are going to fail. Since when is that banking?

The bets are derivatives such as credit default swaps which are simply side bets that another company is going to fail. In the name of insurance, these bets are unfunded, unregulated and untenable. In today's shaky financial environment, these derivatives are now being subsidized by our federal government by bailing our companies exposed to them. The first major player was AIG. Today, it is Citibank. In between, these derivatives unravelled nearly every investment bank in the country.

The basis for reality free market economic capitalism is that common sense can not be tranched out of the system. Risk can not be leveraged and eliminated out of the system. But this is exactly what investment banks and derivatives traders tried to do. By packaging risk products and selling risk broadly throughout the market, high finance capitalists have tried to make loads of money by eliminating risk. This flies in the face of reality. Now the Federal Treasury is asked to bail out these risk-eliminating derivatives. 

Instead of bailing out companies that practiced such stupidity, what should happen is that these banks should be forced to sell off their assets to the highest bidder and whole companies should be broken down and restructured. Banks and investment companies should not be allowed to write bets on other companies' failure, whether you called them credit default swaps or what they should be called, unregulated gambling liability instruments yielding stupidly high investment toxicity, or UGLYSHIT, for short.

UGLYSHIT is not a free market product. They are products created to circumvent free markets. Free markets are risky as a necessary part of them is there are winners and losers. UGLYSHIT was a way to eliminate risk. In the end, they have become the most risky products ever invented by man.

The most amazing thing about UGLYSHIT is that they were created by incredibly arrogant, highly educated Wall Street Bankers who went to schools like Wharton Business School and Harvard Business School, and worked at places like JP Morgan and Goldman Sachs. 

Incredibly smart people, right? Maybe we should teach them about reality free market economic capitalism.

Reality Economics vs. Entitlement Economics

Every exchange of a good or service must include a necessary, and some say an evil component called profit.

In every market, there are two players, the buyer and seller of a good or service. Open competition between multiple buyers and multiple sellers create a reality economy. Government interference to help the buyer or help the seller in a market creates an entitlement economy. 

An active competition between buyers and sellers determines the fair market price. When there isn't competition between sellers, the price of the good and service will be too high. Likewise, if there isn't competition between buyers, the price will be too low.

When competition between buyers is low, prices will be low and the market doesn't provide an incentive to improve the product or service. Sellers will choose to leave the market and slowly the prices will rise to a point where there is an equal number of sellers and buyers.  This is called a market equilibrium. 

When competition between buyers is high, meaning buyers outnumber sellers, prices go up. As prices rise, more sellers will be attracted to the market. If the competition between sellers is high, there is an incentive to improve the product or service.

When a person goes to work, they exchange their labor for a common currency. The purchaser of that labor, in turn, sells that labor in the open market. If they sell that labor for the same, or less than the amount as they paid for it, they lose money. They price their labor on the open market by only one qualification, the amount the market is willing to pay for it.

Why is this important?

Every economic bubble, such as the housing bubble we are experiencing today, was created by non market economics. The market of buyers was artificially stimulated by forces other than a reality market economy. By creating more buyers than sellers, prices rose to meet the increased demand.

How can demand be created by other than market forces?

One way is for speculation to enter the market. Speculation is a market driven phenomenon which takes away market economics. For example, the dot com bubble was created by speculators in an economic system where market economics temporarily didn't exist. Speculative markets will self correct when businesses do not make money.

Government artificially creates demand by subsidizing the buyer or seller or mandating a marketplace where one didn't previously exist. In the housing bubble, government made it easier for buyers to get access to money. They did this buy creating government programs to guarantee mortgages written in the free market. Government agreed to take out the risk of lending using government sponsored entities such as Fannie Mae and Freddie Mac. They owned or guaranteed half of the home loans in the United States. 

Further demand was created by creating competition between government entities and the private sector companies. When the private mortgage industry competed with a government industry, an entitlement economy was created and the law of unintended consequences took over. Sub prime mortgages were made to people who could not meet market economic realities. Loans were given to people who could not afford homes because government encouraged businesses to make loans to them. In an effort to get more people to qualify, loans were created that didn't meet reality market conditions. Adjustible rate mortgages, 100% financing, and interest only loans were encouraged.

What should we learn about this housing bubble?

If it sounds too good to be true, it generally is. A free market reality economy exists when a buyer assumes the risk of taking out the loan, and a seller assumes the risk of making the loan. A buyer must have something to lose, which means they need to put up a down payment. A seller must have something to gain, a profit. Anything else is simply a state controlled economy and it will never work long term.

Can we apply these lessons to other markets?

Absolutely. Take the ethanol industry. The government guaranteed the demand for ethanol by creating a 5 billion gallon mandate. This is an entitlement economy, not a free market economy. This was done first to "create another market" for corn. Second, the market was created to "eliminate pollution," Finally, it was sold as a way of "lessening our dependance on foreign oil."

It needs to be stressed that there has never been buyers of ethanol because it was cheaper or better than the alternatives. The entire market was created by an artificial government demand. Incredible amounts of money must be spent by private companies in order to invest in infrastructure to accommodate this mandate. Oil companies must expend resources to mix gasoline with ethanol. Transportation companies must ship this gasoline with extra equipment, mainly separate rail cars and tanker trucks. Gas stations must install extra holding tanks and pumps to distribute this product. Auto manufactures must invest money in research and design of engines and technology to utilize ethanol and the myriad of products. State governments give up tax dollars from gas production. Millions of dollars must be spent on government lobbyists and trade associations dedicated at proving the necessity of the subsidy. Increased amounts of demand corn increases production acres for corn, which either adds more acres in production, or a transfer from other crops. An increased acreage for crops increases the demand for fertilizers, herbicides, pesticides, seed corn and a myriad of other services, as well as the cost of land, driving up prices for production. 

One simple mandate creates a bunch of unintended consequences that are difficult to quantify. How much has the increased demand for corn increased the price of corn? How much more does the cost of corn affect the cost of beef, poultry and pork? If you listen to the corn lobbyists, the cost of food has not gone up because of ethanol. If you listen to the animal producers, you will hear a different story.

One thing is certain. The first reason ethanol producers wanted to produce ethanol, was to create more demand for the product. They wanted to increase demand in order to increase prices for corn. For them to now say ethanol doesn't increase prices of food goes against the reason they wanted ethanol in the first place-that it would increase demand for corn.

Any time entitlement economics is employed, the long term unintended consequences will cause an improper investment of resources and the costs will be greater than the initial benefits. Whether I am for or against ethanol is immaterial. What is important is that people understand that the same economic problems will be created by ethanol as the housing bubble.

Free Market Capitalism: RIP

It might be time to bury the cold, dead corpse of free market capitalism and finally embrace the comforting love of state sponsored socialism. 

It will be so much more efficient to deliver services without having the extra expenses of competition spending billions on advertising, marketing, profit, speculation, duplicitous administrations and budgets.

Imagine our new economy and how efficient it will be.

With only one bank, the Bank of the United States Treasury-Goldman Sachs, all people in the country will be required to open up a single checking account. All savings will be fully insured (no more $100,000 limit) with the full faith and credit of the United States Treasury, ensuring that deposits from around the world will end up here. Without greedy capitalist bankers, hard working, honest, unionized government bankers will be able to make loans to businesses that focus on social consciousness, not solely on profit.

With only one insurance company, the United States Treasury--AIG, our politicians will finally offer universal insurance. With the cost savings, we no longer will have to worry about multi line discounts--home, auto, life, flood, tornado, crop, etc. Regardless of the tragedy, everything will be covered because the pool will be so large it will be able to absorb the costs. In the unfortunate event your boyfriend breaks up with you, with an insurance pool this big, there should be plenty of room to pay for a week of shopping and ice cream to help you feel better.

And what an efficient system it will be, as we will be able to direct deposit payments from the checking account directly to the insurance premiums. More importantly, we will be able to provide the same level of service to all citizens, regardless of income. No longer will we have to hate large insurance companies, because they will no longer exist. No more pre-existing condition riders. And we should be finally allowed to introduce preventative medicine measures, too. I do believe there should be enough room in the budget to make water taste like cream and granola taste like fat.

Having one large bank has its advantages, too. We will make it illegal to open any other banking accounts oversees thereby eliminating tax cheats and illegal money laundering. The rich will finally pay their fair share of taxes. Another advantage is to provide loans to people in inner cities and minorities who have been left out of the capitalist system. 

When the government needs money, it will be easier to find out who has most of the money and devise a more efficient system to transfer it. Instead of an income tax, we can just levy a savings tax. This seems to be a more fair system while creating a fair society. For this to work, we will need to close down the stock market, as it involves too much risk and it would be easier to levy the wealth tax if everyone had their wealth in one location.

And it would be important to have the government own other industries as well, namely the automobile and energy industry. If the government owns the auto industry, we could finally be able to build energy efficient, non-polluting cars. One simple piece of legislation should guarantee profit for the new United States Treasury--GM auto company. Simply creating a mandate that half of all cars bought in America must be purchased from the state owned auto company will ensure success. 

If the government owned all the oil companies, we could eliminate the obscene profits and return that money back to the people. Congress could outlaw oil in 15 years transitioning from oil, coal and even nuclear to solar panels, compressed swamp gas. With such a timeframe, it is important to create new technological research.  We should plan on studying such energetic possibilities as inorganic matter energy farms using the heat from desert silica sand and to harness wind in with my new invention, the sailcar. With a well-written application to the Bank of the US Treasury-Sachs, I plan on securing a grant based on the idea of getting everyone going in the same direction (unless the wind isn't blowing that day).

It is time to completely take over the agriculture industry with the new Department of Agriculture-ADM, Tyson Food Company. No more need for subsidies. Our country is too reliant on protein. All of this corn production which goes to feed livestock such as cattle, pork and chicken is a very inefficient way to feed a population. It simply takes too much energy. When we nationalize the agriculture industry, we could move to a more healthy diet of fruit and vegetables, saving money and lowering the average weight of the population by 15%, thereby reducing the medical costs of the population by 25%, an amazing savings.

We know this will work, because we have seen the government perform very well in the past. Just look at the Social Security System, the VA Hospital System, and the education system. 

It may be true that not a single state owned economy in the world has really worked that well, but we can learn from their mistakes. Anyone who disagrees with this must die, you capitalist pig!

Free Enterprise-part one

"I love people with soft hearts. But the problem with those people is their condition extends to their heads."--Milton Friedman, defending free markets and capitalism to a socialist.

The rebuilding of the Republican Party must begin with the rebuilding of the meaning of free markets and capitalism.

Nobody articulates free market capitalism better than Milton Friedman, economist and advisor to Ronald Reagan and Margaret Thatcher. We have much to learn from Friedman, including the way he defends his methods using the Socratic method. 

Watching the following video of Milton Friedman defending the free market system is a critical first step to understanding the debate between free markets and socialism--between the liberal policies of Barrack Obama and that of a free market capitalist. Unfortunately, very few Republicans really understand the core of capitalism.

Today, we are faced with a financial and free market crisis unseen by most Americans alive today. This crisis is an opportunity. Watch the first 50 seconds of this video and you will see the opportunity we have today.

Republicans today have an amazing opportunity to help educate another generation of the values of free markets. Although Milton Friedman has passed away, the ideas he espoused, and the effectiveness by which he espoused his ideas, can live on. The next two years will be an amazing educational opportunity.  

Let's all be a part of it.

A Lesson in Free Enterprise

The next several posts are to educate people on the value of free enterprise. In this time of government bailouts, many people are finding it easy to blame the free enterprise system for our current global financial crisis. Others call for more government involvement in private business while still others blame Republicans for lax regulation.

But we need to understand what free trade and free enterprise does for each of us. Milton Friedman sums up the power of free enterprise by this simple illustration of the economy of a pencil.

Hundreds if not thousands of people worked together to produce a simple lead pencil, a pencil than not a single one of us would be able to produce by ourselves. Amazing.