Confused Liberals

On the leftist Think Progress's "Wonk Room" blog, we see a typical misinterpretation of libertarianism by those on the left, that betrays a common inconsistency in the left's attitude toward government. The issue at hand is the debate between different variations of cap-and-trade programs -- whether a "cap-and-auction" program like the one recently proposed by Senators Lieberman and Warner, or a more libertarian "cap-and-rebate" (or "cap-and-recycle", as economist Peter Barnes calls it) program.

In all cap-and-trade programs, the government would auction off carbon-emission rights to companies, granting them the right to a certain amount of carbon emissions. The "cap" in this is the overall industry-wide limit on carbon emissions, and the "trade" is the ability of companies to trade the emissions "credits" between themselves. For example, if Company A's carbon emissions are less than its quota, it can sell the remaining credits to Company B, whose emissions would exceed its initial quota. The idea is that those with lower emissions will make money by trading unused credits and those with higher emissions will have to buy credits from greener companies. This provides incentives for lower emissions, and allows flexibility within industries by allowing some companies to emit more and some to emit less, as needed.

In the variation of this program proposed by Lieberman and Warner, the government would keep all proceeds of the initial auction (in which emission rights were first sold). The issue is that the funds are not reserved for any specific program. This raises the question: what would the government likely do with this substantial influx of funds?

The more libertarian version of this program, as put forth by Peter Barnes, is the same in its fundamentals, except that the proceeds of the initial auctioning would be returned to Americans in the form of rebates. The logic behind this is that, 1) these rebates would help Americans in our struggling economy, 2) Americans would best know how to spend this money for their benefit, as opposed to the government, and 3) the government does not "own" the emissions rights that it is auctioning off, so why should it keep the proceeds? As Barnes puts it, "If you assume the atmosphere belongs to government, then cap-and-auction is your choice. If you assume the atmosphere is a gift to everyone, then cap-and-recycle follows."

Since the proceeds from auctioning these emission credits would likely be on the order of trillions of dollars over the next 40 or so years, the question of where the funds should go is certainly an important one. Libertarians like Barnes realize that if the government keeps the proceeds, they are likely to be spent irresponsibly. Senator Bob Corker called the question of what to do with the funds "the mother and father of all earmarks", referring to the likelihood that the funds would go to legislators' pet projects. Most likely, lobbyists from various industries and special interest groups would determine where most of the funds went.

The leftists at Think Progress find Barnes' ideas to be extremely offensive. They say that Barnes' idea is "founded on the libertarian belief that government shouldn't be trusted with any money." They go further, characterizing Barnes' ideas as "corrosive" and "anti-American" since they imply that the government would not necessarily spend the funds in ways that best benefited the American people.

Coming from the same political group that, upon gaining majorities in the House and Senate in 2004, spoke passionately of the need to fight corruption, earmarks, special interests, and lobbyists' influence, this is truly unbelievable. When Republicans were the ones wasting billions of taxpayer dollars on bridges to nowhere and giving handouts to their favorite corporate lobbyist groups, Democrats rightly cried foul. Apparently, now that Democrats are in power, any implication that the government is wasteful or serves special interests is "corrosive" and "anti-American".

The truth of the matter is that our government is extremely wasteful and very frequently does not represent the interests of the American people. Liberals know this, conservatives know this, and anyone feigning outrage at such a suggestion should not be taken seriously. Obviously, Think Progress just doesn't like libertarians, and was desperate for a way to dismiss Barnes' suggestions.

No doubt they see these funds as the key to establishing one utopian socialist program or another. They also doubtless want the government to keep these funds, because in reality they don't trust Americans to do what is best for themselves. They believe that the best way to help Americans is to give lots of money to politicians and then let these "representatives", in their infinite wisdom, tell Americans what to do.

If this is an unfair assessment of these liberals' ideas, why would they be so hostile to the idea of giving Americans these funds so that they can help themselves? What ever happened to liberal mistrust of government? Do these liberals honestly think that the government wouldn't use the funds, at least to some extent, to support corporate and other special interests? This issue should be one where liberals and libertarians agree with each other, yet these liberals seem so enamored with their vision of the savior-state that they have become wilfully blind to the reality. The reality is that government is wasteful and beholden to special interests. The reality is that Americans know better than Washington politicians and bureaucrats how to help themselves.

Lessons from the "Axis of Evil"

Since President Bush first declared the existence of an "Axis of Evil" comprised of Iran, Iraq and North Korea in early 2002, the world has changed immensely. The American approach to these nations in the intervening years has been vastly different in each case, with the means employed ranging from careful diplomacy to aggressive war. What has happened to this "Axis" in these 6 years, and what can we learn from the results?

Saddam Hussein is no more, hanged amidst gleeful cheers by those he once tortured and killed by the thousands. The seemingly endless war in Iraq has claimed the lives of over 4,000 Americans, and estimates of Iraqi civilians killed range widely, from 100,000 to well over 1 million. It is impossible to estimate how many young men throughout the world were inspired by the war in Iraq to take up AK-47s, RPGs, or suicide belts against America. What is sure is that the insurgency has experienced no shortage of willing "martyrs", and "al-Qaedism" -- an ideology of radical Islamist terrorism -- is now more popular than ever throughout the world.

North Korea continues its nuclear games, most recently testing a nuclear device and test-launching a long-range Taepodong-2 missile in 2006 (both tests were seen as failures). In yet another surprising reversal, North Korea then returned to the negotiating table and indicated possible willingness to abandon its nuclear programs. Only time will tell whether this apparent turn toward peace by the unpredictable nation is sincere.

The most significant change in these 6 years occurred in Iran, due in large part to unintended consequences of America's policies in Iraq. This time has seen significant growth in Iranian power and influence in the region. American conquest of Iraq removed Iran's greatest enemy and rival, elevating the Persian nation to regional primacy with only U.S.-backed Israel remaining to effectively counter the mullahs. Furthermore, Iraq's government is now controlled not by Iran-hating Baathist Sunnis, but by Shiites who are not only friendly to Shiite Iran, but see the neighboring nation as their greatest ally and the most important contributor to Iraq's future.

As Iran's regional position strengthened, America's military is tied up in the mountains of Afghanistan and cities of Iraq, both vulnerable to Iranian retaliation and incapable of presenting a credible deterrent threat. Iran was quick to recognize their favorable position. The mullahs are demonstrating an attitude of defiance regarding their nuclear programs and openly financing Hezbollah and other militant groups throughout the region.

It is hard to tell exactly to what extent rising oil prices are directly attributable to American actions in Iraq. What is sure is that regional instability and greatly reduced oil exports from the warn-torn country no doubt played a significant role in rising prices. Between 2002 and 2008, oil prices skyrocketed from around $20 to almost $120 per barrel, and Iraq's oil-exporting capacity disappeared almost overnight. The resultant windfall in Iranian coffers helped ensure stability for the economically-troubled regime and emboldened the nation's hawkish leaders, especially in their hostility to Israel. Recognizing the dependence of the West on cheap Middle Eastern oil, Iran leveraged its position as the world's second-largest oil exporter to deter its foes.

In the 6 years since President Bush saw fit to identify Iran as among the world's greatest threats, its position has improved greatly. President Ahmadinejad openly derides the United States, threatens the destruction of Israel, hosts Holocaust-denier conferences, aggressively defends his country's nuclear programs, and openly meddles in Iraqi politics. Much of what he says and does seems intended specifically to antagonize America and its allies. That which isn't merely nose-thumbing can be explained as open and shameless pursuit of Iran's ambition to be the foremost power between Cairo and Kabul, if not further.

The reason Iran has assumed this attitude is because they see themselves as virtually untouchable. Any act of aggression by America or U.S.-backed Israel, for example against Iran's nuclear facilities, would likely be met with a crippling barrage of retaliatory measures. The Straits of Hormuz could be mined, bringing worldwide oil shipments -- and much of the world economy with them -- to a grinding halt. Iran could simply cease oil exports, which would send oil prices soaring (some analysts estimate this could cause worldwide oil prices to double).

If we consider more aggressive military measures, Iran could do even more damage. Ahmadinejad could instruct Hezbollah to rain down Katyusha rockets on Israeli cities, sparking a renewal of the 2006 Lebanon War which claimed hundreds of Israeli lives. Iran could inject new life into the Iraqi insurgency with advanced weapons and training. More directly, they could deploy experienced and well-trained Revolutionary Guards to Iraq to direct attacks on U.S. forces. Either means of involvement in Iraq would result in a notable spike in U.S. casualties, which would not be well-received by the war-weary American public.

The ramifications of American policies in the Middle East are most commonly measured with hard numbers and direct results. We consider the number of casualties and the monetary costs, but neglect the wider and more important unintended consequences of U.S. actions. One of the most important and least understood consequences of the war in Iraq -- the geopolitical empowerment of Iran -- will have profound effects on world politics far into the future.

We cannot know if Iran will develop nuclear weapons, attack Israel, or act on any of its other numerous recent threats. If we are to be honest with ourselves, we must recognize the role American decisions have played in the creation the Iranian threat. As the saying goes, if we do not recognize the mistakes of the past, we are doomed to repeat them.

A Clash of Civilizations?

The future belongs to Islam. This sentence -- the title of a 2006 article by controversial Canadian writer Mark Steyn -- sums up the greatest fear of a large and growing number of conservatives. Most "Westerners" agree that Osama bin Laden's brand of jihadist extremism presents a serious threat. What sets Steyn and his ideological fellow-travelers apart is that they see Islam itself, and the majority of the world's 1.6 billion Muslims, as even more dangerous to freedom, democracy, and the whole of Western civilization.

Steyn claims that due to demographic trends, political folly, economic stagnation, and cultural weakness, the West is in the midst of a terminal decline. In most of the "first world" from Europe to Japan, birthrates have dropped below replacement levels and there is a marked shortage of young workers. In order to prop up their lagging economies and feed their vast social welfare systems, elderly European nations have taken in huge numbers of young Muslim immigrants. These claims are not all too controversial, though some would no doubt challenge his view that socialist programs have killed Europe's economies and produced a culturally self-destructive mentality.

What makes Steyn controversial is that he argues that the result of these trends will be nothing less than the conquest of Europe (and eventually all of Western civilization) by barbaric and fanatical Muslims. He claims that virtually all Muslim immigrants are hostile to the nations they adopt, and that decadent modern Europe lacks the will to defend itself against Muslim attack. He claims that using a combination of political pressure, intimidation, and violence Muslims are working to dismantle Western democratic institutions and destroy Western culture from the inside.

In support of his theory, Steyn points to hostile statements by fundamentalist Muslim leaders, the violence surrounding the Danish Muhammad-cartoon controversy and the French riots of 2005 (many of the rioters were young Muslims), and what he sees as pervasive extremist attitudes in the majority of Muslims. Those with ideas similar to Steyn's are also known for unearthing every crime, instance of political pressure, or controversial statement by Muslims -- no matter how minor and inconsequential -- and touting them as evidence of Muslims' barbarism and basic hostility.

Most disturbing are the measures proposed to deal with this "Muslim threat". One popular writer on the "Gates of Vienna" blog (the blog's name references the Muslim siege of Vienna in 1683, which they believe is continuing today) proposed what amounted to the criminalization of Islam:

"We need to create an environment where the practice of Islam is made difficult. [...] Do not allow Islamic public calls to prayer as this is offensive to other faiths. [...] The veil should be banned in public institutions [...] Do not permit major investments by Muslims in Western media or universities."

Ironically, these supposed defenders of freedom and democracy are so caught up in their hostility to Muslims that they frequently propose the wholesale violation of fundamental religious and free speech rights. They of course see no contradiction here, since the conflict they theorize is an existential battle -- it is not only justifiable but totally necessary to use all means necessary to destroy the Muslim threat.

To be sure, the above-mentioned demographic and economic trends, and violent incidents do point to a pattern of friction between the West and Muslims. What Steyn seems to be missing is that such friction has always existed and exists between many different groups in our changing and unstable world. The world is becoming ever more interconnected, and people of vastly different cultural and religious backgrounds are rubbing shoulders more than ever.

The rise of politically-minded Islam, caused largely by the decline of socialism and pan-Arabism toward the end of the 20th century, has in a number of places led to conflicts with facets of secular democracy. Extremist and fundamentalist ideologies have indeed gained a worrisome amount of traction among disaffected Muslim youth throughout the world. There are no doubt significant tensions surrounding the Muslim immigrant populations of Europe, as large-scale immigration always brings tension. These tensions have furthermore been exacerbated in many places by unemployment, poverty, and discrimination.

No reasonable person would deny that there are many such issues that must be addressed, but paranoid theories of Muslim invasion and conquest do nothing to help the situation. In fact, the inflammatory rhetoric of these anti-Muslim conservatives mirrors the hostile pronouncements of their extremist foes.

Among those who view Muslims with such suspicion and hostility, the term "Islamophobia" is widely derided as foolish, meaningless, or nothing but a means to stifle criticism of Islam and Muslims. Their denial that any such thing as Islamophobia exists is more than a little bit ironic. Where else could this fantastical belief -- that virtually all Muslims are hostile to democracy and freedom, and that they are hell-bent on the subjugation of all non-Muslims -- come from, if not a deep-seated and ignorant fear of Islam and Muslims?

Subprime Shenanigans

The Subprime Mortgage Crisis in a Nutshell

Starting in 2001, housing prices in the U.S. increased substantially and without interruption for years, leading to the creation of a "housing bubble" of unrealistically high valuations. This created the false impression that housing prices would keep rising indefinitely. As housing prices continued to rise, financial institutions extended credit to riskier "subprime" mortgage seekers (i.e. those without good credit, those with lower income) through adjustable-rate mortgages (ARMs) on the assumption that, as long as housing prices continued to climb, the risk would be largely mitigated. Wall Street institutions then began selling securities on international markets which were backed by the expected future payments from bundles of such subprime mortgages.

When the bubble finally popped in 2006, the precipitous collapse of housing prices resulted in mass-scale mortgage defaults and foreclosures as millions of Americans found themselves unable to afford their suddenly-high mortgage rates (since they had adjustable rate mortgages). Just as millions of Americans were losing their homes due to inability to make mortgage payments, international markets took a massive hit as well, since subprime-backed securities had circulated all throughout global markets. The subprime-backed securities that had been sold on international markets quickly lost their value, and trillions of dollars were lost by those who had bought the securities.

The reason the crisis has been so immense is due to the way these subprime mortgages were treated as financial assets. Subprime mortgage-backed securities were sold without any guarantees -- a common practice with "prime" mortgages, which are less risky and more likely to yield returns. In this case, however, the mortgages were much riskier and those buying the securities were taking on substantial risk, the extent of which they weren't always fully aware due to over-rating of the securities' values. The whole process served to dilute financial incentives to ensure creditworthiness, since those giving out the loans could pass on the risk to those who bought the securities.

Shabby Media Coverage

The problem with the coverage this crisis has gotten in the media is that most commentators seem to lack even the most basic knowledge of the economics behind subprime mortgages. This ignorance has led to a slew of contradictory and irrational expressions of outrage at Wall Street's conduct. For example, a recent article in the Washington Post by Kathleen Day claims the following:

1. Banks not offering mortgages in low-income (and often minority-populated) areas, known as "redlining", is unfair.
2. Offering subprime mortgages with higher interest rates in low-income areas is "predatory lending" and is unfair.
3. Those who signed up for mortgages that they couldn't afford unless the housing boom continued forever have been "victimized" by creditors.

The first point is not necessarily an unreasonable claim by itself, but when combined with the second claim it becomes very contradictory. Banks often do not offer mortgages or loans to those with low income or bad credit because doing so is very risky. Credit ratings exist so that banks can assess the likelihood of a given person defaulting on a loan, and banks have no obligation to give loans to those who probably won't pay them back. This should be common sense.

The only way to offer loans to those with low income or bad credit without going out of business is to charge a higher interest rate on the riskier loans. By charging more interest, the bank is able to offset the risk of default. The idea is that, on average, they will make more in higher interest payments than they will lose on defaulted loans. In this sense, the interest on a loan is an estimation of the monetary value of the risk taken on by the lender.

Day and many other commentators on the left claim that not giving out high-risk loans is discriminatory, and that giving out those loans with the necessarily higher interest rates is "predatory" and somehow taking advantage of the poor. What they are missing is the fact that banks have no choice but to either charge higher interest rates or abstain from giving out risky loans altogether. If they don't do one or the other, they will go out of business and no one will be able to get loans.

The reality behind Day's third point is a little more complicated. It does appear that many mortgage applicants were told that the housing boom would continue, and that the rates on the ARMs were unlikely to rise as long as house values kept going up. It is also true that these assurances were often given because creditors knew they could pass on the risks of the loans, and had little incentive to properly ensure that applicants could handle the debt.

On the other hand, there were just as many mortgage-seekers who correctly assessed the risks and opted for more expensive fixed-rate mortgages. Those who opted for adjustable rate mortgages did so because they chose taking on the risk of higher future rates in order to secure lower initial rates. Despite any failure by creditors to adequately ensure creditworthiness, those who made a risky decision to get cheap initial rates should not be absolved of responsibility for their choices. It does not take an economist to realize that home values cannot go up forever, and those who did not plan for the inevitable showed poor financial judgment.

That being said, there are no doubt cases in which people were flat-out swindled by greedy and unethical creditors. The point is that many people were simply taking advantage of the market in an attempt to live beyond their means. That is, after all, the nature of economic bubbles -- everyone knows it's too good to be true, but no one can pass up the chance to get something for nothing.

As the media continues assigning blame for this crisis and the suffering of so many Americans, they should consider holding everyone responsible for their actions, not just their favorite punching bags on Wall Street.