As the current financial crisis unfolds, the left has consistently tried to pin the blame on “deregulation” amorphously and President Bush specifically. So, for example, on the campaign trail Barack Obama blames the financial crisis on “ the Bush administration, Republican party and John McCain for pushing a culture of deregulation.”

But as powerful as President Bush is, he is not the ‘President of the World’. Europe’s banks, for example, are much more heavily regulated than their U.S. counterparts and they are often even state owned. So how are things fairing over in heavy-regulation paradise? The Washington Post reports:

In Italy, officials suspended trading in Unicredit — the country’s biggest bank, with more than $1.4 trillion in assets — after its stock price lost almost a quarter of its value. In Germany, officials fretted over the health of a subsidiary of Commerzbank as well as several state-owned regional banks that have posted heavy losses. … [In France] President Nicolas Sarkozy … was forced to negotiate a $9.2 billion emergency bailout Monday for Dexia, the troubled Franco-Belgian bank.

So what happened? Why did the awesome European regulators fail?

As European taxpayers absorbed the rapidly escalating expense of bank bailouts, lawmakers on the continent toned down their criticism of Wall Street as the origin of the problem and started to blame their own lenders for gorging on subprime loans and other risky investments.

Seems the root cause of this problem is not banking regulation at all, but bad housing loans. And we know who caused that crisis.

By Conn Carroll - Cross Posted on the Foundry

The left really has no idea what free markets are. Witness Washington Post columnist Harold Meyerson who wrote a column last week blaming the current credit crisis on ‘unregulated capitalism’ and ‘laissez faire’ policies. According to Merriam-Webster, ‘laissez faire’ means: “a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights.” Keep that in mind as you read this transcript from CNBC between Becky Quick and Warren Buffett:

QUICK: Let’s talk about Fannie Mae and Freddie Mac, specifically. These are two stocks that it seems like every time you turn around are touching new low levels. There’s a lot of concern out there on the market about these two stocks right now. What’s your general take on how they got here and what you think’s going to happen next?

Mr. BUFFETT: Well, how they got here was they had two businesses, basically.

QUICK: Mm-hmm.

Mr. BUFFETT: They insured mortgages on a huge scale, trillions, and then they ran sort of a hedge fund, a carry trade where they bought mortgages and borrowed extensively against them. And because they had really the backing of the United States government–and everybody assumed they had the backing. I assumed it. And the truth is they do have the backing of the United States government in terms of their debt, not in terms of their equity–they were able to borrow without any normal restraints in terms of capital or margin requirements or anything of the sort. They had a blank-check from the federal government.

QUICK: Mm-hmm.

Mr. BUFFETT: And they also had an added problem in that they had a dual mission. The government expected them to promote housing and the stockholders expected them to raise the earnings substantially every year. And as the years went by, they mphasized the latter more and more. They started talking about “steady Freddie,” and Fannie Mae said, `We’re going to increase the earnings at 15 percent a year.’ Any large financial institution that tells you that sort of thing is giving you a line of baloney. I mean, they may do it for a while, but when they can’t do it with operations, they do it with accounting and they cheat. And that’s what happened at both those places on a huge, huge scale.

By Conn Carroll - Cross Posted on the Foundry

Automobile sales have plummeted across the board for the month of September. Not only were sales down for Chrysler (33%), General Motors (16%) and Ford (34%), but Asia-based brands Toyota, Honda and Nissan fell 30% over the course of the month. Sales in European and Asian markets are down as well. Can we blame the credit crunch?

That’s certainly part of it.

Todd Greenbaum, general sales manager for Castle Hyundai in New Castle said,

We’ve had people with what seemed like OK credit, but we still couldn’t get them a loan.”

The pool of money consumers need to borrow in order to purchase a vehicle has all but dried up. But let’s not forget, auto sales have been in decline – the credit crunch merely exacerbated the problem. In fact,

U.S. auto sales were down 11 percent year-to-date through August, which marked the 10th consecutive month of declining sales on a year-over-year basis, the longest streak since the 2001 recession.”

Let’s not forget $4-a-gallon gas and Detroit’s bad business practices either. Detroit’s choice to stick with gas-guzzling vehicles as consumers shifted their demand towards more fuel efficiency certainly played a role. Their business model, along with high labor costs from unions and excess dealerships all contribute to a failing industry.

It’s also important to point out that companies like Honda thrive when Detroit doesn’t adapt its business model:

Earlier this year, Honda was able to steal market share by touting its more fuel-efficient cars as gas prices kept rising. Sales actually rose from January through July.”

But as mentioned above, even companies like Honda had a rough September – a 24% drop in U.S. sales. Given the current state of the economy and the uncertainty of its future, it’s unlikely consumers will be rushing to dealerships anytime soon. Whether a financial bailout package will restore consumer confidence and rejuvenate sales (and how expeditiously this will occur) remains to be seen.

One thing’s for sure: the auto industry shouldn’t have its own separate bailout. Last week the House approved a new $25 billion loan program for Detroit automakers, and the Senate followed suit. The loans are to develop alternatives to conventional fossil fuel powered vehicles as well as more fuel-efficient cars. The Congressional Budget Office (CBO) estimates that the loans will cost the federal government (a.k.a. taxpayers) $7.5 billion – double what the initial estimates were.

And it’s debatable as to whether these loans will actually have an effect, as written by the Wall Street Journal’s Heidi Moore: It’s not clear that the $25 billion will even help the automakers very much. Their cost for reaching energy efficiency may be as much as $100 billion. And the timing is fuzzy on the crucial question of when the automakers will actually get the money. Friedman Billings Ramsey research analyst Andrew Parmentier wrote this week “government sources have privately echoed our concerns that the restrictive language will slow the ability of the auto industry to draw down these funds.” It may take the industry five years to even get enough energy-efficient infrastructure in place to accept the loans, he explained. That could be a rude awakening to Wall Street investors who bought stock on the assumption that the automakers would get the money as a true lifeline.

Moore concludes:

If the government is in the business of cheap money, then, perhaps it should be shelling it out to an industry that needs it more urgently.”

By Nick Loris - Cross Posted on The Foundry

If you thought passage of last week’s $700 billion Wall Street bailout meant Congress would get out of Washington, you’re not that lucky. Determined to pin the credit crunch on free markets, Chairman Henry Waxman (D-CA) has announced a whole month’s worth of hearings in the House Oversight and Government Reform on the “financial meltdown.” For Waxman and his fellow travelers on the left, the past two weeks mark the collapse of capitalism due to deregulation. Nothing could be further from the truth.

First of all, by every quantifiable measure, regulation has increased under President Bush:

• Money spent by federal regulatory agencies is up to $44.9 billion in 2007 from $27 billion in 2001, a 44% increase.
• Total people employed by federal regulatory agencies is up to 244,000 in 2007 from 172,000 in 2001, a 41% increase.
• Total number of pages in the Code of Federal Regulations is up more than 4,500 pages since Bush took office.
• Cost imposed on Americans is more than $28 billion in new regulations since Bush took office.

In total, the federal government imposes a nearly $1.1 trillion regulatory burden on the American people every year. Many of these regulations are justified. Providing transparency and creating information are value-added government functions. Regulation is not per se inconsistent with market principles. Some reinforce property rights and market mechanisms.

But creating a massive government duopoly in the residential real estate market does not reinforce market mechanisms. It perverts them, and it perverts them to such a degree that some estimate that Freddie Mac and Fannie Mae purchased more than a third of the $3 trillion in junk mortgages created during the housing bubble. They did so because heavy government regulation required them to push as much money into questionable mortgage buyers as possible. As Ronald Reagan said in his 1981 inaugural address: “Government is not the solution to our problem; government is the problem.”

The free market needs defenders like Reagan now more than ever. As Washington Post columnist Sebastian Mallaby writes today:

[B]laming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis. Even before finance went haywire, the Doha trade negotiations had collapsed; wage stagnation for middle-class Americans had raised legitimate questions about whom the market system served; and the food-price spike had driven many emerging economies to give up on global agricultural markets as a source of food security. Coming on top of all these challenges, the financial turmoil is bound to intensify skepticism about markets. Framing the mess as the product of deregulation will make the backlash nastier.

The American people still believe in this message. According to Rasmussen Reports, 59% of Americans agree with Reagan’s verdict that government is the problem. But that does not mean we should abolish government; just keep it limited to a smaller role. In that same address, Reagan also said: “Now, so there will be no misunderstanding, it’s not my intention to do away with government. It is rather to make it work — work with us, not over us; to stand by our side, not ride on our back. Government can and must provide opportunity, not smother it; foster productivity, not stifle it.”

By Conn Carroll - Cross Posted on The Foundry