Over the past year we’ve seen our financial markets uncomfortable sway until in recent months we’ve seen the stock market plunge downward. Mistakes have been made and most people in the United States, and likely even the world, will experience the consequences of these mistakes. When discussing possible causes of the financial crisis, National Public Radio, CNN, MSNBC, and many more have repeatedly discussed the role of deregulation and greed as a cause of the crisis. I pose a question to them: “Do you really think that there was a sudden increase in the amount of pervasive greed in Wall Street in the past decade?” It is extremely unlikely that human nature among a specific group of people could have systematically changed without cause. Deregulation could certainly be a cause; however, one convinced of this cause should take an objective step back and examine the evidence.

Research has shown that low interest rates stimulate investment. (1) This is likely the reason the Fed kept the rate low for so long. However, much research has shown that interest rates artificially kept low also tend to encourage mal-investment. Harvard’s Joint Center for Housing Studies also explained in The State of the Nation’s Housing 2008 (2)  report how the Fed’s low interest rates encouraged the housing market bubble, an expansion of risky loans in subprime mortgage market, and ultimately lead to a derivation of complicated and very risky mortgages repackaged and purchased by large banks. In addition, an prevalent ideology existed (and still exists) among policy makers and legislatures that homeownership creates wealth. Thus, they create policies which incentivized banks to lend to people who the bank might not normally lend to because of risk. For example, the Community Reinvestment Act of 1978 mandated that banks lend to families that in many cases couldn’t afford the loan payments. Thus, the combination of government policy making and encouragement of home ownership among those who could not afford homes and artificially low interest rates ultimately lead to the bad investments (3) which are highly contributing to the economic problem our country currently faces.

The bailout plan was indeed deliberated over, which is good. However, given the urgency and the emotional pressure put on government “to act” may indeed have prevented policy-makers from analyzing the true causes of the crisis. In addition, regulation enacted through the bailout passed this morning may in not at all decrease the likelihood of mal-investment and instead create new unforeseen problems that will prevent the economy from competing globally.

In conclusion, I hope voters will recognize that the economic problems we face today may in fact be a result of poor government policies. In addition, we should be not allow our fear and emotion detract from our ability to see evidence clearly. In efforts to “do something” we may in fact not be doing what is in our best interest in the long run.

BLUE: Real Yr/Yr GDP Growth
RED: Real Effective Fed Funds Rate

Source: Compiled by Robert P. Murphy, http://mises.org/story/2728

1 The New York Federal Reserve http://www.newyorkfed.org/education/level.html
2 Harvard’s  Joint Center for Housing Studies,  The State of the Nation’s Housing 2008, at http://www.jchs.harvard.edu/son/index.htm
3 Sechrest, LJ. 2006. “Explaining Malinvestment and Overinvestment,” Quarterly Journal of Austrian Economics 6, 4:27-38.

..Yet another example of the unintended consequences of government meddling (and yet another way the government shares in the blame of the housing bubble).

The problem, laid out in two new studies in the journal Science, is that it takes a lot of land to grow biofuel feedstocks such as corn, and as forests or grasslands are cleared for crops, large amounts of CO₂ are released. Diverting land in this fashion also eliminates “carbon sinks,” which absorb atmospheric CO₂. Bottom line: The government’s ethanol mandate will generate a “carbon debt” that will take decades, maybe centuries, to pay off…

Now, consider the government’s role in bringing about the financial crisis of the era: the Subprime Mortgage problem:

The crisis has its roots in the Community Reinvestment Act of 1977, a Carter-era law that purported to prevent “redlining” – denying mortgages to black borrowers – by pressuring banks to make home loans in “low- and moderate-income neighborhoods.”…But to earn high ratings, banks were forced to make increasingly risky loans to borrowers who wouldn’t qualify for a mortgage under normal standards of creditworthiness…The financial fallout has hurt investors around the world. And all of it thanks to the government, which was sure it understood the credit industry better than the free market did, and confidently created the conditions that made disaster unavoidable.

And now Clinton wants to get the government involved in improving baseball. Yet another one of Hillary’s pipe dreams the country can certainly do without.

“A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money. From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.”

Read more about the seemingly antiquated monetary regime that our constitution prescribes and politicians ignore here.

America needs not simply more soldiers but more soldiers with the skills necessary to help friendly governments and their security forces resist common foes. I will create an Army Advisory Corps with 20,000 soldiers to partner with militaries abroad, and I will increase the number of U.S. personnel available to engage in Special Forces operations, civil affairs activities, military policing, and military intelligence. We also need a nonmilitary deployable police force to train foreign forces and help maintain law and order in places threatened by state collapse.

It is ideas such as these that spawn such seemingly oxymoronic groups such as Libertarians for Obama. Apparently, socialism appeals to some libertarians more than empire building. It is truly a tragedy that the politics of the day demand that such a choice be made.

“THE US occupying army in Iraq (euphemistically called the Multi-National Force-Iraq) carries out extensive studies of popular attitudes. Its December 2007 report of a study of focus groups was uncharacteristically upbeat.

The report concluded that the survey “provides very strong evidence” to refute the common view that “national reconciliation is neither anticipated nor possible”. On the contrary, the survey found that a sense of “optimistic possibility permeated all focus groups … and far more commonalities than differences are found among these seemingly diverse groups of Iraqis.”

This discovery of “shared beliefs” among Iraqis throughout the country is “good news, according to a military analysis of the results”, Karen deYoung reports in The Washington Post.

The “shared beliefs” were identified in the report. To quote deYoung, “Iraqis of all sectarian and ethnic groups believe that the U.S. military invasion is the primary root of the violent differences among them, and see the departure of ‘occupying forces’ as the key to national reconciliation.”

So, according to Iraqis, there is hope of national reconciliation if the invaders, responsible for the internal violence, withdraw and leave Iraq to Iraqis.” (link)

The Iraq situation is a complicated one. Those who respect the constitution (though few they may be) say we had no right to go in, but there may be something to be said for fixing what we’ve broken. Perhaps the issue would be a bit clearer if we included the voice of the Iraqis in our decision making. After all, it’s their lives on the line.

When designing a tax system and evaluating tax proposals, policy analysts have at least four goals in mind:

1. Efficiency: The tax system should distort incentives as little as possible (and, in the case of externalities and Pigovian taxes, correct incentives when necessary).
2. Intergenerational equity: The tax system should raise enough revenue so current generations do not unduly burden future generations.
3. Egalitarianism: The tax system should try to achieve a more equal distribution of after-tax incomes.
4. Stabilization: The tax system should help maintain the economy at full employment.

The current debate over fiscal stimulus involves trading off these goals. The stimulus package being discussed is mainly aimed at achieving goal 4, but it does so at the cost of sacrificing goals 1 and 2 to some degree. Efficiency is sacrificed because the phase out raises effective marginal tax rates and because the higher future taxes that result from the extra government debt will likely be distortionary. Of course, the phase out is there in order to achieve goal 3: This is the classic tradeoff between efficiency and equality.

Differences of opinion arise when policy analysts weight these goals differently. Advocates of fiscal stimulus put a large weight on goal 4. Critics of fiscal stimulus come in two varieties. One type of critic discounts goal 4 entirely because they are skeptical of Keynesian theories that underlie this goal. A second type of critic admits that goal 4 is legitimate in principle but believes that in the current environment macroeconomic stabilization is best left to monetary policy so fiscal policy can focus on goals 1 and 2. I am in this latter category.

Romney supporters, add this to your list of Romney’s conveniently adopted views (hint: abortion, gay rights, and federal education policy should already be there). Of course, he could really believe all the things he claims to– the political convenience of his changes in position could just be a coincidence…

“There are a number of issues here. First, aid to Israel. It has been obvious for a long time that Israel does not need this aid. Israel’s GDP per capita is at European levels and rising. The aid itself is a form of corporate welfare in that it must be spent in America. It comes with many strings attached.“It allows the government to avoid sorely needed economic reforms.

“Along with the aid Israel receives, potential or actual enemies receive several times more. That aid doesn’t just allow the recipient nations to avoid reforms, it actually props them up and allows them to continue to maintain a bellicose stance against Israel (this certainly includes Egypt, with whom Israel has a peace treaty in place).

“When the entire world condemned Israel, including President Reagan on down in America, Dr. Paul supported Israel’s right to act in its own self-interest (and preemptively, I might add) in its bombing of the Osirak reactor in Iraq. He had absolutely nothing to gain by taking this position, and nothing to lose by following the herd in its condemnation of Israel.

“America has imposed its will on Israel for decades. President Eisenhower forced Israel to withdraw from the Sinai after the 1956 war turning a military victory into a political defeat. According to Wikipedia, in 1973, the American Secretary of State, Henry Kissinger directly ordered Golda Meir, the Prime Minister of Israel to not strike Egypt and Syria preemptively, despite growing evidence that they planned an attack. Had Israel struck first, it would not have received “so much as a nail” in arms, a serious threat. The first President Bush famously, and insultingly, through his proxy, Secretary of State James Baker, told Premier Shamir to call the public White House phone line when he was serious about peace. In the aftermath of the first Gulf War, America most decidedly imposed its will on Israel by forcing it to participate in the Madrid conference. It influenced the outcome of the Israeli elections by turning down the request for loan guarantees (in principle the loan guarantees are unconstitutional, but Bush declined to reject the request on such lofty terms; it was rank interference in Israel’s internal affairs that drove the decision). In the run-up to the 1996 election between Shimon Peres and Binyamin Netanyahu, President Clinton overtly favored Peres. Clinton also imposed heavily on Netanyahu during the Wye Plantation negotiations. When the government fell as a result, he overtly favored Ehud Barak and even sent in his campaign team, including James Carville, to help. After the second Intifada started in 2000, first Bush, and then Clinton, imposed heavily on Israel to restrain its response until the casualties became so overwhelming that the Israeli government finally had no choice but to respond. Even then, America prevented Israel from achieving an overwhelming victory.

“However, the American relationship with Israel is more dangerous than most people even understand. It wasn’t Clinton, however, who initiated or imposed the Oslo process or Camp David negotiations on Israel. And the current Bush president, despite his many faults, has maintained a relatively hands-off stance regarding Israeli action. What should be a concern is not what a President Paul might do, but what an Israeli government does do now. Since Oslo, governments of Israel, left and right, have adopted dangerous and even suicidal policies detrimental to the security and survival of the state. The government then drafts America, often reluctantly, into supporting these policies, and imposes them on an unwilling public, claiming that if something goes wrong, America will protect Israel.”

Read the rest of the post here.

The Economist quotes Elizabeth Edwards expressing her fear of Mike Huckabee and Republicans in general:

“[Mike Huckabee] doesn’t believe in evolution and has some nutty views about what it is we should do about ending violence in our inner city—we should make sure all of our young people are armed. Republicans scare me.”

While there are legitimate reasons to fear, or at least disagree with, Mike Huckabee (e.g. his tax reform legislation that doesn’t actually eliminate any existing taxes) and Republicans (e.g. their determination to make criminals of people who use or prescribe medical marijuana in accordance with state laws), the right to bear arms is not one of them. Reading Edwards’ quote above does make gun ownership seem like a silly answer to ending violence, but if one looks at the empirical evidence, there is little reason to believe that making it a crime to own a gun does anything but ensure that the only people who own guns are criminals. Consider the following examples of gun ownership deterring crime:

1. In 1966 the police in Orlando, Florida, responded to a rape epidemic by embarking on a highly publicized program to train 2,500 women in firearm use. The next year rape fell by 88 percent in Orlando (the only major city to experience a decrease that year); burglary fell by 25 percent. Not one of the 2,500 women actually ended up firing her weapon; the deterrent effect of the publicity sufficed. Five years later Orlando’s rape rate was still 13 percent below the pre-program level, whereas the surrounding standard metropolitan area had suffered a 308 percent increase.
2. During a 1974 police strike in Albuquerque armed citizens patrolled their neighborhoods and shop owners publicly armed themselves; felonies dropped significantly.
3. In March 1982 Kennesaw, Georgia, enacted a law requiring householders to keep a gun at home; house burglaries fell from 65 per year to 26, and to 11 the following year.
4. Similar publicized training programs for gun-toting merchants sharply reduced robberies in stores in Highland Park, Michigan, and in New Orleans; a grocers organization’s gun clinics produced the same result in Detroit.

Although the above anecdotes do not establish the case for unrestricted gun ownership, they should at least give reason to question what has sadly become the conventional wisdom regarding gun ownership.

Perhaps the most alarming aspect of the gun control debate is the frequent disregard for the constitution’s mandate that the government cannot restrict people from owning firearms:

“A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.”

Given the voice of the constitution on the matter, any advocate of gun control who has any respect for the constitution should be an advocate for amending the constitution, not simply ignoring it and banning guns anyway (which unfortunately, is what has happened in D.C.). Perhaps one of the primary reasons legislatures of the same persuasion as Elizabeth Edward choose to ignore the constitution and pass gun control legislation anyway is that the available evidence on the interaction between gun ownership and violent crime suggests that gun control laws do not prevent violent crime, for the simple reason that people willing to break laws against murder are more than willing to break laws against gun ownership in order to commit such murders. There are many good articles to read on the subject, but here’s a good one.

Perhaps the debate over how to reduce violent crime should focus more on our country’s misguided drug policies than on banning guns– particularly since we need only follow the constitution to realize that the feds have no more authority to enforce drug prohibition without a constitutional amendment than they did to enforce alcohol prohibition without a constitutional amendment.

Second Amendment

The 2008 presidential election is rapidly approaching, and Republicans are going to have a difficult time holding onto the presidency after the Bush administration. Prediction markets like Intrade provide a fairly accurate assessment of the probability of each candidate winning the primary nomination, as well as the probability of each candidate becoming president. In determining which candidate to send to a general election, however, primary voters should choose the candidate most likely to win the general election, given that they receive the primary nomination.

Although Intrade does not provide conditional probabilities, they are easy enough to compute*:

Given a probability space and two events with P(B) > 0, the conditional probability of A given B is defined by

Using the above formula, the probability of Ron Paul winning the presidency, given that he wins the Republican nomination is as follows:

P(Presidency | Primary) = P(Presidency ∩ Primary) / P(Primary)

Plugging in the current probabilities according to intrade, you get:

P(Presidency | Primary) = .035 / .052 = 0.673

Therefore, the probability of Ron Paul winning the presidency, given that he wins the primary is roughly 67%– hardly a sure thing, but the highest of any other Republican candidate. This is in line with my speculation that Ron Paul may be the most “centrist,” or have the broadest appeal across the political spectrum. Dan at Ron Paul Graphs has been tracking the Intrade data, and you can see that Ron Paul is the most electable (i.e. most likely to win the general election, given victory at the primaries) of all the Republican candidates, and is becoming more so:

Republicans clearly need to start thinking more about winning the general election, and decide whether they are willing to hand the presidency to Hillary, in order to continue supporting the neoconservative war-mongering of the Bush era.

*To illustrate, suppose I draw a card from a complete deck of cards (without Jokers). I ask you to tell me the probability that I am holding the Jack of Spades. Knowing that there are 52 cards in the deck, you tell me 1/52 or 1.92%. Now suppose that before asking you the question, I told you I was holding a Spade. Since you know a quarter of the cards are spades, you know that there is a 1 in 13 chance I am holding the Jack of Spades, or 7.69%.

Though this may seem obvious intuitively, you could also calculate the odds of my holding a Jack given that I am holding a Spade using the definition of conditional probability:

Let A = I am holding the Jack of Spades.

Let B = I am holding a Spade.

Then P( A | B) = the probability that I am holding the Jack of Spades, given I am holding a Spade,

and P( A ∩ B) = the probability that I am holding the Jack of Spades and I am holding a spade.

Setting up the equation as outlined above, you get:

P( A | B) = (1/52) / (1/4) = 1/13

…which is what we calculated before.
Ron Paul