A similar housing crisis in the late 1980s led to stronger federal regulations in many areas of the real estate industry. One of the strongest holds the government took was upon independent appraisers. Mitch Weiss’ in-depth AP article this week gives a good overview of that history. However, the rest of Weiss’ article was lost on the lament that the regulation is basically a paper tiger, lacking any teeth in bringing “rogue appraisers” to justice. Questions a thinking reader must pose include: What is such an appraiser cheating on? Whom is he cheating? According to what standard is such an appraiser deviating? Who says he is acting fraudulently? The reader’s questions may be endless in this respect.

Correctly understanding the principles of prosperity will enable even the most casual looker on to recognize the trouble and to take appropriate measures to right this sinking ship. Namely, one must begin to understand the relationship between agency and stewardship.

Key Points

• Regulation means discipline and well measured action. Regulation means maintaining honesty in transactions. Regulation is attached to stewardship.
• Stewardship properly lies in the parties involved in a given transaction.
• In the 1980s real estate crisis, the federal government has erroneously yet effectively assumed stewardship of nearly every real estate transaction in the U.S. This happened progressively over the decades, first with the founding of the twin debacles of Freddie Mac and Fannie May; then with the Savings and Loan Bailouts where the government finally got a hold of the real estate agents and the appraisers.
• This erroneous assumption of stewardship simply is not within the government’s proper role.
• This has robbed the buyer, seller, and lender of their agency, in that they have been unable to determine their own values in a given transaction—they must now seek government permission for the transaction.
• Government regulation begets black markets. Because the human soul is autonomous and yearns for that freedom, it will search for it and achieve it in any way possible. This has created a system that is broken and a bureaucracy unable and unwilling to enforce itself.
• Stewardship is very closely tied to self-interest. One who lacks self-interest will not do his due diligence in a given transaction; but one who recognizes much self-interest will seek to establish the truth regarding the transaction he wishes to engage in.
• Mortgage lenders also have a stewardship in real estate transactions because if a borrower defaults on a mortgage, mortgage lenders will want to make sure they are adequately collateralized. They have surrendered their stewardship because government agencies have guaranteed nearly every loan. This has robbed the lender of his self-interest so he feels no need to do due diligence.
• In the end, the entity that is defrauded in a given real estate transaction is ultimately the government because of those loan guarantees.
• No one, however, is willing to take responsibility of the due diligence.

Conclusion

On the John Pendleton show on the Accent Radio Network this morning, the author of Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis explained that to eradicate all regulation would make this problem worse. This introduces the question: Is it good to regulate? The answer is shockingly: Yes. However, what was missed on the radio and is also missed in Weiss’ article is that regulation must accompany stewardship. The regulation is the individual’s personal adherence to correct principles. As this problem illustrates, the government, ultimately, is unable to enforce such regulations unless it is willing to bring out the big guns to force its hand. Fortunately, this country has not seen the veritable bloodbath of its appraisers, real estate agents, and mortgage brokers. However, to continue down this path of ever tightening government regulation would ultimately result in such a bloodbath. Nothing short of a full-scale overhaul of the system will remedy itself of these problems. And when that overhaul takes place, the government must not be invited to the party.

Action Items

1. Evaluate your own life. Are there stewardships that you willing hand over to someone else, hoping that everything goes alright? Resolve to reinsert your own human life value (HLV) into the equation. Take back the stewardship and do your due diligence.
2. Write to your Congressman and express your opinion that the govern should remove itself from all real estate activity and allow the marketplace to overhaul itself.
3. Search for alternative solutions to the real estate crisis, including methods which do not require a mortgage for a lending institution.

MRFC Principles: (2, 3, 6, 11)

Sources

Mitch Weiss, AP IMPACT: Weak rules cripple appraiser oversight, Yahoo! News, August 17, 2008.

John Pendleton, The Tom Pendleton Show, August 19, 2008.

Paul Muolo and Mathew Padilla, The Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis, Hoboken, NJ, John Wiley & Son’s, Inc., 2008.

Overview:

Bear Stearns is one of the largest global investment banks and securities trading firms in the world. Its primary clients are corporations, institutions, governments and high net worth individuals. Between 2005 and 2007 the firm was widely recognized as one of the “Most Admired” firms in Fortune magazine’s “America’s Most Admired Companies” survey.

While anyone can read the headlines, most average folks just have no idea how this company might affect them personally. One of the major investments of Bear Stearns has been mortgage backed securities. Or in other words, when you get a mortgage from a normal bank – they probably sell that mortgage to someone with more money than they have. The “asset” that they are selling is your promise to pay. Your promise is collateralized by the value of your home. Bear Stearns was highly invested in this section of the market. This means that many governments and corporations had substantial portions of their portfolio depending upon the performance of Bear Stearn’s investment in this area. With the real estate crisis, the mortgage/credit crisis, and the collapse of the sub-prime mortgage industry Bear Stearns was unable to maintain a substantial degree of liquidity of its investments. To make it more simple, they would put money in, but could not get money out of their investments. This means that they can’t pay their bills, can’t pay investors, etc. It basically means they can’t operate. Now, I’m not exaggerating. On March 10, 2008 the company denied it had cash liquidity problems, but on March 14, 2008 the AP reported that JP Morgan Chase, in conjunction with the Federal Reserve Bank of New York, would provide temporary funding because “its liquidity significantly deteriorated over the past day.” So, in a nut shell, the company has no cash but has huge obligations to major corporations and governments across the globe. If the company were to just close its doors besides the catastrophic loss to its investors the affect would ripple across the industry causing other investors in similar companies to want to pull out (a.k.a. “run on the bank”) because of fears similar things may happen to them. So, the Federal Reserve steps in and provides the cash needed to run the business for 28 days. But, the situation is even worse. 28 days from now is about April 11th. Look for more shocking developments in the financial sector as this loan comes due.

Now, let’s look at a few main points in the article.

Key Points:

• In January 2007 shares in Bear Stearns traded as high as $170. Today the stock is trading at just over $4.
• Basically the entire portfolio value of this stock has been eliminated overnight. This is far worse than any real estate depreciation.
• JP Morgan has offered to buy the company for pennies on the dollar ($236 million) when the company was estimated to be worth $3.54 billion.
• Why would JP Morgan be buying? Are they dumb? What are you doing?

“Government regulators, including Federal Reserve and the Office of he Comptroller of the Currency, having given their blessing to the transaction.”

• Isn’t it interesting that the Federal Reserve employees are considered “government regulators?”
• Also, isn’t it interesting how quickly the government can give its approval in a situation like this.

“Still, unwinding Bear Stearns could be a nightmare because of the plethora of Wall Street firms with which it has dealings.”

• Self interest: who has self-interest in keeping this entity from collapsing entirely?

“Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearn’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say. Investors’ concerns that the flight of worried Bear Stearns customers last week might spread to other firms is likely to make for a tense opening today on Wall Street. Yesterday, Mr. Paulson said in a TV interview that the government “would do what it takes” to protect the integrity of the financial system. On several occasions over the weekend, Mr. Paulson spoke about the Bear Stearns negotiations with Federal Reserve Chairman Ben Bernanke and New York Federal Reserve Bank President Timothy Geithner, according to people familiar with the matter.”

• Is this a private company or a public company ? (remember “public” these days means “government”).
• Where is the government when small business America is having “liquidity problems.” Is it principle or expediency?
• How is JP Morgan benefited? Compare this to Iraq war rhetoric in February of 2003.
• Is the integrity of the “financial system” built upon one company?

“One of Bear’s biggest attractions for J.P. Morgan is its prime brokerage business which caters to hedge fund clients. J.P. Morgan doesn’t have such a business and executives there have long said that they would like to add those operations to the bank’s portfolio…Over time, Bear Stearns’s misfortune could bear fruit for J.P. Morgan. Bear Stearns’s investment-banking unit, which underwrites stocks and bonds and advises on mergers, and its fixed-income and capital-markets trading businesses have been badly bruised by the credit crunch but still have some value.”

• Do you think that the government is protecting you? Or perhaps someone else?
• When “Banks” collapse, it is a public sales job for government / corporate action that is essentially a corporate redistribution of wealth.
• Would “Banks” fail in the unregulated marketplace? What would that look like?

Action Steps:

1. Research your own portfolio. Do you have a 401(k) or other fund based investment? Find out which companies are central to your funds performance.
2. Are you buying high and selling low or are you buying low and selling high? Research investment options for “wholesale buying.” Use your own pretend dollars and practice trading in situations like this – there is much more to come.
3. Are you holding “cash” as investments where the “liquidity” of the cash is controlled by someone else? Consider what options you might have to convert your cash based investments to commodity based investments.
4. At times like this, the public is being sold fear and insecurity to justify government intervention, most want to withdrawl in scarcity from the market. Fight scarcity by creating a master-mind group with licensed financial advisers, experts, friends, family members etc., and brainstorm how you might “benefit” from the current situation.
5. Keep your brain on, and keep reading.
6. Commodities, gold, commodities, silver, commodities, commodities, commodities. Did I say commodities?

Reference(s):

Date: Monday March 17, 2008
Source: Wall Street Journal – “J.P. Morgan rescue Bear Stearns”
Author: Dennis K. Berman, Susanne Craig and Kate Kelly
MRFC Principles: (2, 4, 7, 9, 10)

The new group at the Fed is not equal to the problem that faces it…They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their won failures in letting this happen. This is what is needed to restore confidence…There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for.”

Professor Schwartz and the late Milton Friedman revolutionized thinking on the causes of the Great Depression in 1965 with their bombshell publication convincingly persuading Americans high and low that it was not the much maligned free-market system that had failed in the 1930’s but instead that it was “incompetent government bureaucrats at the Fed” who bore responsibility for the financial crisis. In the second article referenced above Evans-Pritchard hypothisis along the lines of what Free Capitalist radio listeners have been hearing for over a year now, that the present “crisis may make 1929 look like a walk in the park.”

Key Points:

• It took Friedman and Schwartz, 30 years later, to unmask the real culprit that caused the Great Depression (incompetent bureaucrats).
• The false theory advocated by the bureaucrats and politicians was that it was the “free market, unscrupulous capitalists, and speculating investors” that caused the Depression.
• Despite Friedman and Schwarts seminal work, the false theory is still advanced, taught and believed by American BOC culture today. This has made Americas vulnerable.
• Today’s bureaucrats and politicians are up to the same old tricks, blaming freedom, entrepreneurs and investors. See Yaron Brook’s “The Morality of Moneylending: A Short History”
• When a speculative home borrower loses a home to foreclosure, that is the “punishment” from the marketplace. Losing liberty is far more subtle.
• Laws that make “lenders” more responsible for borrowers decisions cannot increase productivity and therefore credit extensions will tighten and the market worsen

Lawmakers have recently started down the path to make it illegal for lenders to make loans where the borrower does not have “the reasonable ability to repay the loan.” However, this puts the lender in a sticky situation. Who decides, for the borrower, if he has the reasonable ability to repay the loan. Without defining key “terms” like this legislation contemplates the formula sets the stage for bureaucrats to decide arbitrarily and this makes the lenders more cautious. Credit tightens. However, the Fed is pumping more money into the market. So, excess supply of money (means cheap dollars), no or substantially less new lending means lower velocity of money (lower productivity).

Conclusion:

Alert and educated citizens should be aware of the storyline endlessly defended by bureaucrats and politicians and be on the lookout for attempts to blame our economic problems on everyone except those who were elected and those who were hired to manage the affairs of the government. Productivity not legislation or bureaucratic involvement is how America will recover from potentially the worse economic crisis in modern history. Those who keep their efforts focused on productivity will be well situated, those who do not will be consigned to telling victim stories.

Action Steps:

1. Read Yaron Brook’s “Morality of Money Lending” essay.
2. Read current Fed Chairman Ben S. Bernake’s address at Milton Friedman’s Ninetieth Birthday conference where he openly agrees with Freidman that the Fed caused the Great Depression.
3. Have a family council discussion about productivity. Openly brainstorm how your family can focus on productive, revenue creating activity.
4. Speak openly, even write letters to the editor or post online in opposition to government based solutions that seek to soften the impact of unwise borrowing.
5. Contact your Congressman or Senator’s office and make your position known about government intervention and incompetent bureaucrats being entrusted with more power.
6. Research & identify private capital alternatives as sources for items such as home purchases, car purchases, student loans, etc.
7. Consider alternatives to holding “cash” based long term investments, seek advice from a competent financial professional who understands proven principles of wealth and productivity.
8. Avoid speculation, avoid fear mongering, avoid panic -by staying informed and actively engaging in the marketplace in sound, principle based investments that are creating value for those who have been unwise in the easy money market of the late ’90s and early 2000s.
9. Commodities, gold, commodities, silver, commodities, commodities, commodities. Did I say commodities?

Resource(s):

Date: Friday March 14, 2008
Source: Telegraph.co.uk – Anna Schwartz blames Fed for sub-prime crisis
- Crisis may make 1929 look like a ‘walk in the park’
Author: Ambrose Evans-Pritchard
MRFC Principles: (2, 3, 4, 9, 10, 12)

“The very first amendment to our Constitution include the freedom of speech and the freedom of religion. Founders believed these unalienable rights were endowed to us by our Creator. They are vital to a healthy democracy, and we must never let anyone take those freedoms away. I mention this because there’s an effort afoot that would jeopardize your right to express your views on public airways. Some members of Congress want to reinstate a regulation that was repealed 20 years ago. It has the Orwellian name called the Fairness Doctrine. Supporters of this regulation say we need to mandate that nay discussion of so-called controversial issues on the public airwaves includes equal time for all sides.”

Key Points:

• Radio Broadcasting is already heavily regulated, with licenses (government permission slips) themselves being worth millions.
• Talk Radio as we know it did not exist BECAUSE of regulation 20 years ago.
• Radio station owners and broadcasters are self-interested and seek a profit.
• There are no “public” airwaves, their are government controlled airwaves. This is part of the problem. How the American people have tolerated government “owning” the airwaves for the people is mind boggling.
• Who decides if “all” sides of an issue are “adequately” represented. Do all “issues” have discernible sides?

Commentary:

Tribe mentality aka collectivism sees contradictory ideas as threats, their expression as assault, and force as the remedy. Persuasion is not in the mental conceptual framework of brain-off, emotionally driven lawmakers who want to “make everything fair.” Of course, they don’t have the faintest idea of what fair is. “Fair” to a collectivist means getting what they want. This is what the legislation is all about.

There is no real chance of the “fairness doctrine” coming back today, but it could happen in the near future. More than likely this is a political threat to certain broadcasters to carry more “liberal” talk shows that are desirable in the minds of certain lawmakers. The threatened financial burden on broadcasters just to lobby against the legislation is enough to change radio.

Conclusion:

President Bush’s rhetoric is nice, but the real problem here is that the FCC and congress have any control over the speech on the airwaves. Additionally, his worn out reference to the “public airwaves” is insulting to free men and women who know that this is simply modern vernacular for “government airwaves.” Thank goodness for talk radio, thank goodness for talk radio listeners.

Even conservatives get this one wrong. Its not just that the idea of the “fairness doctrine” is wrong, the government’s approach to the entire subject of broadcasting is wrong. There is no fairness in letting government bureaucrats decide what is fair speech content in any medium. Productivity, and it alone is the standard for business survival.

Recently I had a government regulator suggest that if I wanted his highly questionable, oppressive and likely illegal tactics to end, I should stop criticizing the government on the radio. Of course, this is the purpose of political speech and mediums such as broadcast, print, film, etc. Should we have a “fairness” doctrine for movies and magazines and newspapers and while we’re at it – would these same lawmakers suggest that we have a fairness doctrine in elections – making sure there is always an opponent to their re-election representing every side of every issue?

Action Steps:

1. Read Ayn Rand’s 1964 Essay, “The Property Status of Airwaves.”
2. Listen to more talk radio. Refer your friends.
3. If you are interested, post your opinion online, and while you do realize that some commissar (commie-czar) might be advocating in the near future that you ought not to be able to do that unless your adversaries are given equal time and access.

Reference(s):

Date: Tuesday March 11, 2008
Source: Austin American-Statesman – Bush: ‘Fairness Doctrine’ unfair
Author: Ken Herman
MRFC Principles: (8, 10, 11, 12)

There are bigger issues at stake in this story, they too are omitted.

Key Points:

• Only 1,000 cases of polio are reported world wide. (Source: CDC/WHO)
• In Belgium, Dr. Victor Lusayu (head of Belgium’s international vaccine centre) claims that polio has been entirely eliminated from Europe. (Source: Cheng Article)
• In the US, all cases of paralytic polio since 1979 have been caused by the oral polio vaccine. (Source: DHPE)
• In the last 10 years, “vaccine caused” outbreaks have occurred in Nigeria, Dominican Reublic, Haiti, Phillippines, Madagascar, China and Indonesia. (Source: AP)
• It appears that the only substantial cause of polio in the civilized world is now – the vaccination.
• Dr. David Heymann, the World Health Organization’s top polio official admits, “It would be nice if we had a more stable oral polio vaccine, but that’s not the way it is today.
• Despite the emotional content this issue is not about whether or not its a good idea to have children vaccinated. that is a separate discussion. The issue is whether or not the government ought to be authorized to use force to override a parents choice for their children.
• Parents have self-interest in their children’s well being. Certainly no government bureaucracy is going to have more self-interest in children than parents. Government workers don’t get some magic new formula for wisdom and sound decision making just because they get a paycheck from the government.
• The marketplace of ideas cannot be controlled by force. Freedom and liberty made it possible for the discovery, development and implementation of the vaccine 50 years ago – there was no “law” required.
• Health professionals admit they “want” a better vaccine, but if you are in the business of producing the current vaccine, what is your motivation to innovate, take risks, etc., when its a criminal offense not to buy your product?

Commentary:

It may be a good idea or a bad idea to have your child vaccinated, but it is certainly an unprincipled and therefore bad idea to empower the government (any government) to use force to compel parents to inject a dangerous disease into the body of their child. The only defense of the ‘tribalist’ mentality (which always argues that individual choice is dangerous to the public – as if the public is something besides the aggregate of individuals) is that the government “knows better” how to care for children. While this may be the case in a few isolated circumstances, it is certainly not the case in general and the law does not and cannot exercise rational judgment – only people can, and the people most interested in the health and well-being of children are their parents.

Conclusion:

Should the government encourage awareness? Sure. Promote education, yes. Provide protection of individual civil rights? That is the less obvious implication of the issue – but the answer is obviously, “of course.” Oh, by the way, if you were in charge of selling the polio vaccine – do you think you could sell a lot or a little in the “free” market? It seems to me it would be like selling shoes, pencils, shirts, towels, hammers, nails, or even cell phones – not exactly a hard sell. To a well trained participant in the BOC – thoughts like these never come to mind. To the BOC, no law requiring vaccine’s means instant mass stupidity, rapid disease spread, and the abandonment of reason and self-interest.

The Point:

It’s not about polio. It’s not about vaccines. It’s not even about parental choice (though that’s close). This issue is about liberty and the proper role of government. Government is force, and force is only rightly used to protect rights, not to advance social change.

The tools of a Free Capitalist are persuasion, long suffering, ingenuity, innovation, vision and often patients. The socialists draw the gun, point it at your head and give ultimatums where their view is challenged. In which camp are you?

Action Steps:

1. Research the legal requirements for vaccinations in your community / state. Identify your options.
2. Identify individuals or groups in your community concerned about the issue. Learn their positions.
3. Discuss the issue with interested community members, your State Representative and/or State Senator.
4. Post your opinion online or write a letter to the editor of your statewide newspaper.
5. Discuss the issue and your legal options with your spouse and mature children. Decide in advance how you will respond if this becomes an issue that ever directly affects you and your family.
6. Suggest a Community Action Item to your local Free Capitalist Community Council.
7. If appropriate, suggest an amendment (in writing in detail) to the existing law to your state legislature.
8. Calendar a time to review / revisit the news on this issue in 90-days.
9. Keep your brain on, ideas flowing, and remain engaged in your community.
10. Email your friends and associates about your thoughts and planned action items.

Reference(s):

Date: Wed March 12, 2008
Source: Yahoo News – Parents may be jailed over vaccinations
Author: Maria Cheng, AP Medical Writer
MRFC Principles: (3, 4, 11, 12)