Bernanke Spreads the Blame

During his appearance before the Congressional Joint Economic Committee earlier this week, Federal Reserve Chairman Ben Bernanke said that there is plenty of blame to go around for the financial crisis that is wreaking havoc on global markets. He identified the collapse in housing prices as the root of the crisis, since this collapse effectively erased trillions of dollars' worth of value in mortgage-backed securities held by Wall Street institutions. This explanation, while partially correct, ignores the more fundamental basis of the crisis, which was the practices that led to an unsustainable housing bubble in the first place.

As housing prices continued to rise in the early-to-mid 2000s, lending institutions came to believe that the risk of lending to homebuyers was mitigated by the continually-rising value of houses. That is to say, they came to believe that the risk of default on these loans was minimized because a home could always be sold for more than the value of the mortgage.

In this environment, two dangerous things happened. First, credit institutions began giving out riskier mortgage loans, often without proof that the debtor was able to pay for the mortgage. Second, the risk associated with these loans was further disguised by trading in subprime (riskier) mortgage-backed securities. These securities -- essentially bundles of subprime mortgages -- were internationally traded by the original loaning banks, passing on the risk associated with the loan to others. This system created a moral hazard in which no one felt that they were assuming the risk of lending or borrowing. The problem was further exacerbated by the extreme difficulty of ascertaining the true value of these mortgage-backed securities.

There is no doubt that these events represent a massive failure in the market, but this is not the whole story. What is not being discussed is the role of the Federal Reserve in causing the housing bubble. Federal Reserve and Treasury Department officials are pointing fingers wildly -- at short sellers, mark to market practices, and countless other incidental factors in the crisis. The truth is that, coming out of the "dot-com" collapse, the Greenspan Fed's irresponsible policies held interest rates artificially low when the market needed higher, corrective rates. The cheap credit that this foolish policy created allowed the initial malinvestments that then exploded into the housing bubble.

Federal Reserve policies held down the price of borrowing money in a time when, according to basic economic principles, borrowing should have been more costly as a result of the dot-com bust. Seeing a deal, borrowers exploited this cheap credit by taking on huge amounts of debt in a way that ultimately proved unsustainable. Had interest rates more closely approximated natural market rates, there would have been no cheap credit that fueled the housing bubble. With no housing bubble, the moral hazards that further fueled the bubble would not have arisen, and there would have been no subsequent crash.

When Bernanke says that the housing crash is the cause of this crisis, he is telling the truth, but only a small part of the truth. As long as the Federal Reserve is allowed to arbitrarily set interest rates, manipulate market tendencies, and create credit out of thin air through irresponsible money printing, we will continue to see unnatural booms and catastrophic busts.

Any attempt to fix our faltering economy must be based on an honest assessment of how things got so bad in the first place. Bernanke will no doubt continue to point fingers at everyone but those responsible, but it is our responsibility to tell the troubling truth -- that the biggest finger should point squarely at those now entrusted to save our economy.

Forgetting the "War on Drugs"

An article in the Birmingham News titled "Police Shouldn't Profit from Drug Raids" details an unacceptable situation in which police departments are allowed to profit from drug raids:

" On the streets, where illegal drugs are still easy to get at affordable prices, Alabama's police chiefs are losing the decades-long drug war. Ironically, back in their precinct headquarters, many of these officers depend on drug raids to fatten their operating budgets.

While the drug trade still enriches the bad guys, police chiefs now get a piece of the action.

State and local police departments, working with U.S. agents, "federalize" money and property seized during local drug raids. The federal government gets at least 20 percent of the seized assets, but the feds give back up to 80 percent of the seizure - now exempt from state law - to state and local police agencies.

According to federal statistics, the share going to Alabama law enforcement agencies went from $1.8 million in 2000 to $8.5 million in 2007. Nationally, state and local agencies collected $416 million in 2007, up from $212 million in 2000. "

Although many states stipulate that assets seized in raids be used for education or other "nonpolice purposes", this type of legalized corruption is still allowed in many places. With a faltering economy, numerous threats abroad, and concerns over energy, important issues surrounding the War on Drugs have been largely forgotten. It is tragic that one of the most disastrous aspects of American society -- the hugely damaging effects of the failed "War on Drugs" -- has been completely ignored by Democrats and Republicans alike during this election season.

For most Americans, the "War on Drugs" is seen as a noble effort by police to keep dangerous drugs off America's streets. In the minds of Americans, this "war" conjures images of SWAT raids on filthy crackhouses and explosive meth labs, as well as efforts to keep gun-toting drug dealers off the streets. According to the narrative offered by the government, anti-drug enforcement programs were largely responsible for the nationwide decrease in crime in the 1990s, as most notably seen in New York City and Los Angeles. The War on Drugs is widely supported by Americans, and is generally viewed as a success.

This common view of the War on Drugs, however, is far from reality. As anyone who has taken the time to research the reality can tell you, this "war" is a costly and destructive failure. Contrary to the claims of the government, virtually all kinds of illegal drugs -- from marijuana to heroin -- are cheaper and more widely available than ever before. Despite spending tens of billions of dollars every year on interdiction, enforcement, incarceration, and education, there is no indication that drug use in the United States has decreased at all since the beginning of the War on Drugs.

The term "War on Drugs" was first used by President Richard Nixon in 1971, and since that time the national program has ballooned into a $45.5 billion complex of thousands of laws, police programs, and international operations. Corruption and systematic abuse of police power increased drastically under the War on Drugs. Drug enforcement laws have dramatically expanded police powers, resulting in widespread searches, seizures, wiretapping, and other encroachments on civil liberties, with little regard for constitutional principles. Current "civil forfeiture" laws even allow police to permanently seize the assets of any "suspect" without proving that a crime was committed.

Drug enforcement provided the justification for widespread militarization of U.S. police forces that has led to an increase in police shootings and other forms of abuse. All too often, police forces armed to the teeth with military-grade weapons kill unarmed, nonviolent drug suspects and even wrongfully assault innocent citizens.

The above-mentioned Birmingham News article gives this example of how corruption and police abuse can combine with deadly results:

" Donald Scott owned a valuable, 200-acre ranch in Malibu, Calif. One October morning in 1992, 30 agents, led by the Los Angeles County Sheriff Department, conducted a raid based on faulty rumors that Scott was growing marijuana plants. During the raid, Scott was shot and killed by sheriff deputies.

A Ventura County district attorney's report on the raid concluded: "The Los Angeles County Sheriff's Department was motivated, at least in part, by a desire to seize and forfeit the ranch for the government ... Based in part upon the possibility of forfeiture, the sheriff's deputy obtained a search warrant that was not supported by probable cause. The search warrant became Donald Scott's death warrant." "

Worst of all, the drug war profoundly harmed our civil liberties, and continues to undermine the foundational freedoms of American democracy. The war on drugs has flooded American prisons with non-violent drug offenders, making the United States the #1 jailer of its citizens -- both per capita and in absolute terms -- in the entire world. Since the escalation of the War on Drugs in the 1980s, the U.S. prison population has quadrupled despite substantial decreases in violent crime and property crime. This means that Americans are stealing less and harming each other less, and yet are being incarcerated in record numbers.

As of Februrary 2008, more than 1 in 100 adults in the United States was imprisoned. At the end of 2006, 2.2 million Americans were imprisoned, another 5 million people were either on parole, or on probation. To put this in context, the totalitarian government of communist China imprisons only 1.5 million of its citizens, out of a population over four times larger than that of the United States.

That a system so glaringly unjust, corrupt, and harmful to freedom is allowed to survive unchallenged by those aspiring to the presidency indicates a profound failure in American politics. The American people deserve better from their leaders.

Sources:
http://www.al.com/opinion/birminghamnews/index.ssf?/base/opinion/1221380253174560.xml&coll=2
http://www.npr.org/templates/story/story.php?storyId=91555835
http://en.wikipedia.org/wiki/War_on_drugs
http://www.theagitator.com/
http://www.militantlibertarian.blogspot.com/
http://en.wikipedia.org/wiki/Prisons_in_the_United_States

Offshore Drilling

The House of Representatives on Tuesday passed a bill ending the moratorium on offshore oil drilling. The bill, which was proposed by Democrats, was strongly opposed by House Republicans and could be vetoed by President Bush if it is passed by the Senate in similar form. A Senate version of the bill is expected to be even more restrictive and more strongly opposed by Republicans.

Democrats claim that the bill provides for sufficient development, clearing the way for drilling in "319 million to 404 million acres off the Atlantic and Pacific coasts," which they consider a fair compromise. The important issue, however, is not the number of acres opened to development, but whether the areas opened are likely to yield substantial amounts of oil.

Republicans are unhappy with the bill for a number of reasons, including the lack of a revenue sharing plan that would provide an incentive to states to encourage development. Another complaint is that the bill only allows drilling to take place at least 50 miles from the coast -- a stipulation that excludes many possible drilling sites closer to the coast.

While Republicans are correct in asserting that this bill seriously limits opportunities for offshore drilling, their statements do beg the question of how useful such drilling would be as a solution to America's energy needs. Experts are agreed that even the most extensive offshore drilling would not yield results for at least another decade. Furthermore, the reserves off America's coasts are not large enough to cause much change in global oil prices if they are exploited. At most, extensive offshore drilling could replace some of the decrease in U.S. production that is expected in the near future.

The unfortunate reality is that even with unlimited offshore drilling, the U.S. does not have sufficient oil resources to meet anything but a small fraction of the nation's current demand. John McCain has made energy independence a central issue of his campaign, but it is misleading for him to imply that any amount of drilling in the U.S. -- either offshore or in Alaska -- can satisfy America's energy needs.

There is simply not enough oil left in the U.S. or off its coasts to make much of a difference in global supply and pricing. Though this is not necessarily an argument against offshore drilling, it does mean that other solutions to America's energy needs must be found.

Offshore drilling can contribute -- even if only in a small way -- to stabilizing America's energy supply. Offshore drilling would also decrease the share of American dollars going to petro-dictatorships and extremist kingdoms in the Middle East. Also, given the potential instability of global markets, it is never a bad idea to maximize domestic production of oil. There are a number of reasons to allow offshore drilling. However, we should not think that doing so will magically bring us lower gas prices or energy independence.