How (I think) it all began

Today the markets plunged, with the major indices falling around 7%. (Usually the Dow and S&P 500 average a 1 or 2 percent change in a day.) The immediate cause of this is the tightening credit markets, but our "real" economy, or our productivity is also suffering and will lead to more long-term problems. I wanted to discuss the immediate cause of the recent volatility, which is the mortgage crisis. How did it happen? The following is what I have pieced together over the last months, and I look forward to hearing your theories as well.

The growth of the global economy has created a great deal of wealth, and institutions and governments need somewhere to put this money that is safe and provides a reasonable return. It used to be US treasury bonds, until Fed Chair Alan Greenspan lowered the federal funds rate to 1% in 2003. After this, the investors needed somewhere else to put their money that was secure and had a good return. Wall street decided that residential mortgages would be a safe bet, and figured out how to sell mortgages to investors. Here is what they did:

1. A citizen wants to buy a home, so he gets a mortgage from his local mortgage broker. Presumably the citizen can afford to pay the mortgage.

2. The local mortgage broker sells this mortgage (essentially an income stream) to another mortgage broker.

3. Mortgage broker number two packages hundreds of mortgages together and then sells them to investment banks. At this point, when packaged correctly, these mortgage-backed securities have a AAA rating (very, very safe).

4. These Mortgage Backed Securities (MBS) were sold to Wall Street and then sold to governments and institutions as a safe place to invest that had a decent return. According to credit rating agencies, it was as safe as a Treasury bond.

5. Insurers, like AIG, insured these securities but didn’t have the cash to pay out. They never expected things to go so wrong.

It is important to note that at every step in this process, almost every player was using borrowed money to carry out these transactions, leveraging themselves at ratios as high as 20 to 1. At Lehman it was 40 to 1. Now everyone was happy, that is until they ran out of mortgages. Once everyone that could afford to buy a home bought a home, the supply of MBSs dried up. Wall street called mortgage brokers demanding more. So, the brokers gave them more, but they had to lower their standards when it came to screening homebuyers. This process spiraled lower and lower until there came into existence the NINA loan: No Income No Assets. An individual could get a loan without any proof of income and without any assets. By the time this loan was packaged and sold to Wall Street, no one knew what the real risk was because all of their risk assessment tools were based on old data, from a time when a homebuyer was carefully screened. There was no data on these new sub prime mortgages.

Even with all of the holes in these investments, the payments from homeowners continued to come in. These securities were working the way that they were supposed to and there was no reason to complain. But, the reason they were working was that home prices continued to increase as demand continued to increase. So, when a homeowner couldn’t afford to make the mortgage payments, he could borrow money on the value of his home in the form of a home-equity loan. Many people were using home-equity loans to pay their mortgages.

Then, in 2006, home prices stopped increasing and homeowners stopped making payments. Once they couldn’t make payments, they defaulted and their home was now on the market. The market flooded with homes and prices started dropping leaving homeowners unable to even borrow money to pay their mortgage. This created a chain reaction that killed all of the middleman mortgage brokers. They died because they never truly had the money in the first place. They borrowed money to buy mortgages, then flipped the mortgages to the investment banks and used the proceeds to pay off their debt. As soon as they couldn’t sell the mortgages and pay off their debt, they went out of business, but not before they had poisoned every major investment bank on Wall Street.

This was the “sub prime housing crisis,” which frightened the global investors and they went running back to investments like treasury bonds. This fear created what we are currently referring to as the “credit crisis.” Now, global investors are afraid to invest in anything that even resembles a potential risk. Because of this, businesses can’t get financing, which they are dependent upon to operate. And borrowed money is the lifeblood of our financial industry, as made evident by the extinction of the investment bank as we knew it.

All of this began with a rational proposition: that investments based on home mortgages would be safe and stable. And they were safe when these securities were invented decades ago. At first, the mortgages were based on a sound investigation of the homeowner’s ability to make the payments. But, a combination of greed and diffusion of responsibility turned what could have been an investment fad of little consequence into a crisis.

Abortion

I wanted to test the waters a bit on this "hot button" issue and get a sense for the opinions of those of us voting for Sen Obama. I had an email fight with a friend about this the other day. She plainly states that she won't vote for Obama because of his stance on the abortion issue.
The voting record of the two candidates on the issue is not unclear. Click here for a voting history.
They're on opposite sides of the issue.
I think this is an issue my right wing friends feel like they have me on. They feel like they're on the moral high ground and in an inarguable position. They've even insinuated that I can't be a good Mormon and vote for someone who supports abortion rights.
Personally, I think this issue is somewhat of a distraction. But I also think the debate about abortion focuses on the wrong thing. I think that whether or not abortion is legal has little bearing on the issue. It's legal in certain circumstances now. What will changing that do? On the other hand, we can look at what I think is a more significant cause of babies dying - teen pregnancy and unwed mothers. The rate of teen pregnancy in our country is among the highest in the civilized world. These women who get pregnant are most often poor, uneducated, and without access to basic health care. The fact that these women don't get prenatal care contributes significantly to the fact that America ranks 41st in the world in infant mortality.
When you look at the voting records you'll see that Sen Obama voted against every piece of legislation that would restrict abortion and that he voted for legislation aimed at increasing education, including abstinence education, and access to pregnancy prevention. Sen McCain voted for every restriction on abortion and against education and prevention.
In my mind, the way to reduce abortion is not to make it illegal, it's to educate and prevent. As with all other issues, we have a clear choice in vision.
I fully recognize and am seriously pained by the moral quandary. Can I really support a man who supports abortion? What I have not seen from my republican friends is an acknowledgement of the moral quandaries presented by their own candidate. How can they support a man who promotes tax decreases for the super-wealthy and a spending freeze on programs that help the super-poor?
I see the moral issues presented by Sen Obama's positions. I would appreciate an acknowledgement of the moral issues presented by Sen McCain's positions.

Education

The current issue of the Economist has a great special section on the election. It's a well-balanced, issue-based look at the candidates. (Why is it that only foreign publications take the time to discuss the issues?) The Economist analyzes the candidates tax proposals, economic policies, foreign policy, approaches to the wars in Iraq and Afghanistan, health care proposals, and more. It's a great credit to Jed that if you've been reading this blog, most of what you'd read in the Economist's special section would be very familiar.

One issue that the Economist covers that we haven't yet discussed here is Education. The article opens with a discussion of how the US education system has been underperforming for years. It then details what the candidates say about education. Having read the article, I decided to check out the candidates' websites to verify what they say about education.

Obama's website offers a number of specific proposals, only a few of which I've excerpted below:

• Increase funding and quality of Head Start programs.
• Reform (but keep) No Child Left Behind (NCLB), including properly funding the initiative.
• Increase funding for the Federal Charter School Program, but make charter schools more accountable and close low-performing charter schools.
• Make math and science education a national priority.
• Increase access of high school students to AP or college-level classes by, for example, providing grants for students seeking college level credit at community colleges if their school doesn't provide those classes.
• Recruit more teachers by offering new college scholarships for students who agree to teach after graduation for at least four years in a high-need field or location.
• Assess, mentor, and train teachers and provide more rewards for successful teachers.
• Offer tax credits to cover college tuition, in exchange for community service.

McCain's website is light on specifics, but mentions these concepts:

• No Child Left Behind has exposed inconsistencies in how we apply standards to students.
• Students in underperforming schools should be able to change schools. Parents should have freedom to choose among schools for their children.
• Schools and teachers should be accountable and responsible.

The Economist summarizes the candidates proposals as follows:

[Obama's] plans run the gamut, from grants for preschool programmes to a $4,000 tax credit for university fees. He is vague about NCLB, but has resisted calls to throw out the law. He suggests improving it through more sophisticated tests, measuring students’ progress over time and giving schools more resources. In September he announced new plans to double federal funding for independent or “charter” schools. A separate “innovative schools fund” would help districts to create a portfolio of successful school types, including charters.

Perhaps most interesting are his plans for teachers. He would give extra money to districts that work with their unions to form “career ladders”. These could include pay increases for a list of achievements, from teaching in hard-to-staff schools to lifting students’ performance. But a good scheme on paper may be diluted in practice. Negotiations over pay are messy at best.

For his part, Mr McCain offers promising opinions but few details. He supports NCLB but has said little about how to strengthen its main tenets. He supports charter schools (like Mr Obama) and voucher programmes (unlike Mr Obama, who is dead-set against them), but has said little about how he might expand them. His boldest ideas centre around using federal money to let parents choose tutors and principals reward good teachers.

But don't take the Economist's word for it and don't take my summary as a detailed analysis. Check out the candidates' education pages (Obama | McCain). They're a quick read, there are some clever ideas, and contrasting the two pages is pretty interesting.

Issue 4: Iraq

Much has been said about the differences between Obama and McCain on Iraq. However, a closer look at the candidates' policies reveals that the two actually agree on the underlying goal of the Iraq War: leave Iraq with a functioning government that can protect itself and promote peace in the Middle East. The main differences between the two candidates lie not in what they want for Iraq, but in how they propose to achieve it. With that in mind, let's look at their policies.

McCain's proposal for achieving stability in Iraq is continued U.S. military support. Obama, on the other hand, proposes a steady withdrawal of military support. McCain's argument is that the "surge" has worked and, if we stick to that strategy, it will continue to work, thus providing the Iraqi government the necessary peace to build a sustainable system. Obama's counter-argument is that, while the surge has worked from a military perspective (lowering the violence in the area), the political objectives for Iraq have yet to see much progress and will not be achieved unless we force the issue by withdrawing military support.

Along with the continued surge effort, McCain has two other proposals to help build a self-sustaining Iraq--boost the Iraqi economy and apply pressure to Syria and Iran. McCain proposes to boost Iraq's economy by encouraging the Iraqi government to invest a portion of it's budget surplus into employing Iraqis in infrastructure projects and projects to restore basic service to Iraq. McCain claims that this will also help "move young [Iraqi] men away from the attractions of well-funded extremists," thus continuing to lower the violence in Iraq. McCain has also suggested that the international community provide micro-financing in Iraq to help bolster local-level entrepreneurship. I should point out that McCain's bottom-up strategy for boosting the Iraqi economy appears to differ from his strategy for the U.S. economy (see Issue 2: The Economy and Issue 1: Taxes). In order to apply pressure to Syria and Iran, McCain's website states that he will do this by getting the international community to "apply real pressure to Syria and Iran to change their behavior" and not by "unconditional dialogues." The website does not currently provide specifics regarding what such "real pressure" would entail.

Obama's strategy for a self-sustaining Iraq is to withdraw 1 to 2 brigades of American troops per month, claiming that such will force the Iraqi government to take ownership of their political system, a point the Prime Minister of Iraq also recently made. However, Obama also proposes maintaining a small "residual force" in Iraq to help train Iraqi military and conduct "targeted counter-terrorism missions," but not to hold permanent bases in Iraq. Along with his military strategy, Obama also calls for "aggressive diplomatic efforts" with Iraq and it's neighbors, including Iran and Syria, in which he includes the possibility of Presidential level talks with Iranian and Syrian leaders without "pre-conditions" but with "preparations." Finally, Obama's strategy for Iraq is largely intertwined with his overall defense and counter-terrorism strategy. Namely, Obama proposes re-deploying many of the troops withdrawn from Iraq to Afghanistan to help fight al Qaeda and capture Osama Bin Laden, an area Obama argues is overlooked as a result of the war in Iraq. Obama also claims that his "diplomatic efforts" will place the U.S. in a stronger position to enlist the help of the international community in fighting the war on terror.

If you'd like to know more about either candidates' proposals for Iraq, you can find them at their respective websites here: Obama | McCain

I can't vote for McCain because...

Since I live in a country where I must fit all of my political views into one of two parties, I decided that supporting Barak Obama is really the same as opposing John McCain. (My third option is not voting at all, or voting for some third party candidate that didn’t have the $1 Billion that the two major parties will spend.) So, this post is in the format of reasons why I can’t vote for McCain.

He isn’t concerned about the economy. “The fundamentals of our economy are strong,” is his mantra. Four days after Paulson distributed his three page bailout proposal, McCain said, “I have not had a chance to see it in writing.” And, after suspending his campaign because of the crisis, he did an interview with Katie Couric, then went to dinner in New York, then spoke at the Clinton Global Initiative, then went back to DC almost 24 hours after suspending his campaign. Before he arrived, republicans and democrats had reached a preliminary agreement about the bailout. After he arrived, the deal fell apart. And, at no point did he suspend television and radio advertising.

His tax policy favors the wealthy. I do agree with McCain, that the American worker is at the heart of the economy (this is his reasoning for saying the fundamentals of the economy are strong), so why don’t we make the American worker the beneficiary of our tax policy instead of the wealthy 5%? My take is obviously biased, so read Jed’s post “Issue 1: Taxes” for an unbiased explanation of the candidates’ tax policies.

He appointed Phil Gramm as his economic advisor, and who is a likely candidate for Treasury Secretary if McCain is elected. In July, Gramm said about those that thought the economy wasn’t so healthy, “We have sort of become a nation of whiners, you just hear this constant whining, complaining about a loss of competitiveness, America in decline.” Denial isn’t a strategy. My favorite Gramm legislation is the Commodity Futures Modernization Act, a bill slipped into a 2000 appropriation bill that deregulated energy trading (see Enron, which helped write the act, and employed Gramm’s wife at $915,000 a year) and credit default swaps, which have played a big role in the recent financial meltdown. This guy will make a great economic advisor! It would be a greater irony if he were appointed Treasury Secretary and put in charge of deciding which credit default swaps and mortgage backed securities the government will buy from failing banks. And don’t forget, he was a lobbyist for AIG after leaving the Senate.

He uses the troops in Iraq to get votes. This is a common republican strategy: speak lovingly about the bravery and sacrifice of our troops, then use it to question the patriotism of democrats. In the debate, McCain told a heartwarming story about a speech he gave in Baghdad to a group of American soldiers who had voluntarily reenlisted: “And you know what they said to us? They said, let us win. They said, let us win. We don’t want our kids coming here. And this strategy, and this general, they are winning. Senator Obama refuses to acknowledge that we are winning in Iraq.” This is brilliant rhetoric: summon the brave and noble troops who want to be successful, and then use them to sell your military strategy. And just for good measure, subtly imply that your opponent doesn’t support the troops. One can support the troops and disagree with the overall strategy, because, as far as I understand, the troops don’t get to choose the strategy.

He won’t set a timetable for leaving Iraq, and he doesn’t seem to acknowledge the deterioration of Afghanistan. If you really support your troops, you will put them where they can do the most good (Afghanistan) and you will at least attempt to get them out of there safely. McCain doesn’t seem to mind the idea of sending generation after generation of Americans over there. And, by the way, we can’t actually afford to be there right now, much less a decade from now.

He selected Sarah Palin as his VP. Read any Associated Press (no liberal bias) article about her and you are sure to find some mention of her corruption. I can’t blame her though, it seems impossible to be a politician in Alaska and not be corrupt.

His election would show the world that the American people agree with the Bush doctrine of foreign policy. (If you don’t know what the Bush doctrine is just ask Sarah Palin.) In the end, the two candidates actually end up agreeing on issues 95% of the time. To be elected they have to be middle-of-the-road. What I believe sets them apart more than anything is how the world views us through them. When we elect McCain, we will be saying to a world that hates us and our foreign policy, “we don’t care.”

I doubt that, if elected, Obama would be able to get much of his policy through congress, but he can renew our standing in the world and give us hope. He can start to get us out of the cycle of fear: for too long America has made decisions based on the fear of terrorism and have thus helped accomplish the goals of Al-Qaeda. Obama reminds me of JFK, who wasn’t necessarily a Washington heavyweight, but inspired us to put a man on the moon. With some inspiration, we did the impossible: we strapped some brave men on top of a missile, sent them to the moon, and brought them back home alive. Every American was right there with Neil Armstrong as he took those historic steps and inspired a generation to grow up to be astronauts and pilots and scientists and, perhaps more importantly, patriots. What is our space race? I hope it isn't conquering middle-eastern nations, because that doesn’t inspire me much at all.

The Economy

While this post is not directly related to either of the two presidential candidates, I think it is still a valid point of discussion. This is an editorial from a professor of economics at Harvard. Professor Miron obviously subscribes to the theory that the economy will take care of itself, if the government will just butt out. While I typically subscribe to the opposing theory, he does make some pretty compelling arguments. Anyone have any opinions about what he says?

I'm Voting for Obama

As promised in my previous post, I'll put my neck out there first in what I hope will be a series of "I'm voting for [CANDIDATE] because..." contributions.

So here goes.

I’m voting for Barack Obama because of a lot of reasons, but most of all because he inspires me. I’ve written a lot on this blog about the importance of the issues and how they should be the driving force behind our voting decisions. I really do believe everything I’ve written. 

And so, make no mistake, I support Barack Obama for the policies that he suggests and his stances on the issues that matter most to me. I agree with most of his ideas for the economy and feel that, of the two candidates, he is the best equipped to handle the challenges that lay ahead--an opinion I personally feel was strengthened by last night's debate. I agree with his tax policies and his assertion that the less fortunate in this country deserve a break. I myself was able to graduate from college and graduate school almost entirely because of student loans and grants provided to me by my government. I also relate to his stance on foreign policy--that we should continue to invest in our military so that it is the strongest and best in the world, but that we should use that military more wisely, and only after we’ve exhausted all other efforts of diplomacy. 

In addition I have been asking myself the question Reagan asked when he ran against Jimmy Carter, “Are you better off than you were four [or eight] years ago?” The answer for me, in some ways is yes, but for my country I feel it’s a resounding no. And personally, I do not see any significant differences between Bush’s and McCain’s policies as McCain has outlined them during the general election.

So yes, I’m voting for Barack Obama based on the issues. But for me, his stances on the issues merely serve to support my feelings about him as an inspirational leader. Here’s what I mean. 

This comes from the epilogue of Obama’s book, “The Audacity of Hope:”

“That’s what satisfies me now, I think--being useful to my family and the people who elected me, leaving behind a legacy that will make our children’s lives more hopeful than our own. Sometimes, working in Washington , I feel I am meeting that goal. At other times, it seems as if the goal recedes from me, and all the activity I engage in--the hearings and speeches and press conferences and position papers--are an exercise in vanity, useful to no one.

When I find myself in such moods, I like to take a run along the Mall. Usually I go in the early evening, especially in the summer and fall, when the air in Washington is warm and still and the leaves on the trees barely rustle. After dark, not many people are out--perhaps a few couples taking a walk, or homeless men on benches, organizing their possessions. Most of the time I stop at the Washington Monument, but sometimes I push on, across the street to the National World War II Memorial, then up the stairs of the Lincoln Memorial.

At night, the great shrine is lit but often empty. Standing between marble columns, I read the Gettysburg Address and the Second Inaugural Address. I look out over the Reflecting Pool, imagining the crowd stilled by Dr. King’s mighty cadence, and then beyond that, to the floodlit obelisk and shining Capital dome.

And in that place, I think about America and those who built it. This nation’s founders, who somehow rose above petty ambitions and narrow calculations to imagine a nation unfurling across a continent. And those like Lincoln and King, who ultimately laid down their lives in the service of perfecting an imperfect union. And all the faceless, nameless men and women, slaves and soldiers and tailors and butchers, constructing lives for themselves and their children and grandchildren, brick by brick, rail by rail, calloused hand by calloused hand, to fill in the landscape of our collective dreams.

It is that process I wish to be a part of.

My heart is filled with love for this country.”

I actually find it ironic that some people use the argument that Obama is unpatriotic as a reason not to vote for him. It’s ironic because, for me personally, Obama’s patriotism is one of the main reasons I am voting for him. When I read passages like this in his book or when I listen to Obama speak, I relate to him in a way that I’ve yet to relate to a political leader since I’ve been following politics. When I hear him speak, I am so proud to be an American. I too have walked the path in Washington of which Obama speaks. I’ve also been to the birth of our nation in Philadelphia. And in those places I find myself struck with an overwhelming sense of both gratitude for the acts of those who have gone before me and pride in my membership in the nation they founded. 

It’s important to me that, based on what I’ve heard and read from him, Obama feels that, too, and makes me feel that there is indeed hope that our democracy can accomplish great things. 

That’s why I’m voting for Barack Obama.

Thanks to all who've contributed to the discussion so far, I hope this helps further the conversation.