Archive for the ‘Economics’ Category

In the recent past, economic dislocation led to a flight to quality and Euro/Yen/Foreign problems led to dollar rallies.  The recent Greek crisis, however, has led to a huge gold rally.  The dollar is anemic.  And why?  Well, (a) the federal reserve is secretly and not so secretly helping out Europe to prevent a domino effect and (b) America shares all the same structural defects that have hurt Greece:  overly generous social programs, too much debt, a decline in productivity and manufacturing, and lower skills and work ethic across the board.  So, as a consequence, while the Euro has dropped to about $1.26, Gold has skyrocketed to $1240 this week.

Gold is the last refuge of wealth as paper wealth disappears.  The fact that so much smart money is headed that way is the most worrisome development of recent times.

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Not so cherry post on the way cheap credit has become almost necessary to make ends meet for the “average” American family.  Not so clear how we’re headed to recovery at this rate.  As the author notes:

Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).

And on and on.

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A rather depressing article in the NY Times about how late charges, penalties, post-judgment interest, and garnishments leave many debtors treading water in spite of significant payments towards their obligations on their modest wages. These payments get eaten up by interest charges, late fees, and all the other tricks of the trade.

Whatever happened to the widespread condemnation of usury?  This doctrine of Christianity, widely held by everyone from Hilliare Belloc and Henry Ford to the Pope and FDR 75 years ago, has apparently fallen into complete disuse, even among Catholics and liberals ostensibly concerned with the poor.  Is the fear of being labeled anti-Semitic so great that unjust practices get a pass?  A mealy-mouthed discussion at Catholic Answers suggests the uncertain rates of return in the 13th Century were the root of the condemnation and the condemnation of usury is today rather narrow, viz., “In some market situations—apparently the ones prevalent in the thirteenth century—the likelihood of growing money through investment was seen as greatly uncertain. But in contemporary market situations, investment growth is virtually assured.”  How quaint!  As always with “changing values,” we should never forget that social life and its problems are not new.  People were not simply “mean” or “stupid” in the old days.   The old-fashioned prejudices and attitudes often were borne of hard experience and will re-emerge as modern fads and fashions are discredited by experience, such as our recent collective experiences with “interest only loans,” high levels of debt (labeled “leverage”), low banking reserves, financial “engineering,” moral license, disunity, and all the rest.

Times have not changed for the poor.  The injustice of usury has not changed either.  Modest interest rates in situations of created and secured wealth–as in real estate lending–have long been allowed, even in the Middle Ages.  But charging interest for consumables is economically unwise for the borrowr, morally unjust for the lender, and the high interest rates charged can grind down the wealth and motivation of people too unsophisticated and impulsive to know better.  In other words, the poor and working classes would be better off without the credit cards, payday loans, and all the rest.  And the laws should give them more than the binary choice of paying down their debts or declaring bankruptcy.  Their debts could be paid, but for usury.

Just as condemning usury went out of fashion, the recently dominant faith we all had in banks, experts, money-lending, and markets is fast becoming passe.  On Good Friday in particular, Catholics should remind themselves what the Catechism says about the usury so central to the modern, unstable economic order of the entire world:  “The acceptance by human society of murderous famines, without efforts to remedy them, is a scandalous injustice and a grave offense. Those whose usurious and avaricious dealings lead to the hunger and death of their brethren in the human family indirectly commit homicide, which is imputable to them. (CCC 2269)”

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I thought this column by Peter Geddes captured the complete lunacy of the global warming fanatics, who somehow imagine that we can turn back the clock 100 years or more, maintain roughly the same lifestyle we have, and thereby defeat the phantom menace of global warming:

Policies such as the Kyoto Protocol and U.S. cap-and-trade legislation focus solely on reducing CO2 emissions. But these are symbolic acts, mere posturing, while doing little or nothing to achieve their stated goals. Stubborn reliance on this approach is now the main barrier to an effective climate policy.

The 1,200-page American Clean Energy and Security Act of 2009, known as Waxman-Markey, is an example. It sets an ambitious target of reducing total U.S. greenhouse emissions 83 percent by the year 2050. In 2005, the year chosen as the baseline, the U.S. emitted about 6 billion tons of CO2. An 83 percent reduction by 2050 means that U.S. emissions must be just over one billion tons.

The American Enterprise Institute’s Steve Hayward puts this in context. He writes that the U.S. last emitted one billion tons of CO2 in 1910, when our population was 92 million and total GDP (in 2008 dollars) about $572 billion. (2008 GDP was $14.2 trillion.) In order to reach the target, per-capita CO2 emissions will have to be no more than 2.4 tons. The last time U.S. citizens emitted this low level of carbon was 1875. These kinds of reductions are so absurd they will not even be seriously attempted.

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Pinochet gets a lot of criticism among liberals.  Why?  Well, he killed a few thousand communists extra-judicially to avoid the mass murder of several hundreds of thousands (or more) that has proceeded from every communist revolution worldwide.  And, in the process, he reformed Chile’s economy from the typical Latin American “great man” national socialism of such varied leaders as Peron, Chavez, and Castro to a market-style, limited government regime, with privatization of social security and consistent economic growth.  In the process he secured the fiscal health and economic independence of ordinary Chileans, creating the foundation for a growing middle class, which ultimately lead to the end of military rule through a peaceful election in 1989.

Jose Pinera, Chile’s former labor and social security minister, today explains why the US is now headed towards the bankruptcy all too typical of South America unless it follows Chile’s lead, a lead based on American-style free market principles and the insights of the Chicago School of Economics.

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While efficient capital markets types lack the philosophical tools to question any hustle that arises from the markets, those who have taken a step back from the mortgage backed securities and credit default swap scandals notice something amiss.  Essentially, an elaborate series of hustles, frauds, and money-transferring (rather than wealth-creating) “innovations” have emerged in recent years that are not necessary under free market principles, create great instability, and damage the federally insured commercial banking system.

Jeremy Grantham, a gifted fund manager and very coherent writer, shows why the apologists at the Journal and CNBC don’t know squat:

Clients can’t easily distinguish talent from luck or risk taking. It’s an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity,aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more. As total fees in the past grew by 0.5%, we agents basically reached into the clients’ balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.

This is true with the whole financial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We’re debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.

As yours truly said last year:

I have no problem with people making lots of money, particularly folks that develop, invent, manage, or otherwise run a productive business or invest in the same.  I’m glad someone like Henry Ford or Bill Gates made it big.  I do however have problems with people making lots of money in an industry whose benefit for the rest of the society is dubious, whose chief productive activity in recent years has been making impenetrable instruments that defy honest valuation, and who have now come hat in hand to beg for public funds,  even though they’re balk when they’re told they might have to cut expenses like every other person and every other business in America.  It’s a ridiculous, insulting, crony capitalist style of behavior that is more reminiscent of Mexico or Indonesia.  It should not be defended by those who purport to believe in free markets.

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In response to a jobs-protection provision in a pending amnesty bill, Hispanic chauvinist Ruben Navarette writes:

Why should [as Rep. Luis Guittierez said] “no one born here in this country … ever lose an opportunity for gainful employment at the expense of someone not born here?” Remember, these aren’t illegal immigrants but legal immigrants coming on visas.

Why should U.S. citizens get a benefit not from education or hard work but from something they had nothing to do with — where they were born? If a job is available, U.S. workers should be free to compete for it, but not have it handed to them on a silver platter. Likewise, foreign workers who come here legally should have a shot at competing for that same job.

Of course, protectionists claim that the playing field isn’t level since foreign workers will often accept less money to do the same job, thus putting American workers at a disadvantage.


Pro-immigration activists alternately talk about compassion while saying “tough” to Americans. The only unifying principle is the good of their tribe. Ruben is a Hispanic. He is not a loyal American. He has demonstrated this repeatedly in his writings, which are totally indifferent to the good of other Americans. It matters not where he was born; it’s clear he’s totally indifferent to the common good and can’t even think in such terms. This kind of talk would be intolerable among anyone but minorities.

I suppose if we enforced our laws against border-hopping, stopped fraudulent H1B Visa applications (which supposedly require a company first to hire an American), and generally leveraged US power for the benefit of American citizens, even at the expense low-skilled Mexican workers, “tough,” wouldn’t exactly fly with Ruben. That’s when we’re called to be “compassionate.” Ruben’s column is not a moral statement aiming at justice but a triumphalist one: we’re winning, you’re losing, and you people need to deal with it and stop complaining. “You” . . . Americans that is . . . must be sacrificed for the principles of globalism, for the “economy,” for all the bad things your ancestors did, and for the good of morally exquisite Third Worlders that are trying to make more money at our expense.

Allowing mass immigration is a policy choice. It’s a choice to underenforce the laws, and it’s a choice to let people in with visas. No company or family or individual would behave the way Navarette counsels when dealing with people they genuinely care about. No CEO would say, “Well we can give this business to our own in-house team and save some jobs and keep the money in house or we can save a nickel by sending it to a vendor.” There is a community of interest in a firm, and the firm’s management is supposed to look out for the good of the firm as a whole. This is obvious. No family would shrug its shoulders at a brother or sister or dad’s job loss due to the pressure of low-wage, low-skill competitors. A country is no different. It was obvious, until recently, that its leaders should look out for the good of its citizens.

There is no doubt that Navarette would not be fighting for mass immigration if it did not benefit his group to acquire greater numbers, greater cultural influence, and greater wealth at the expense of native-born Americans. We know this because leftists like him who now prattle about the virtues of globalism spent a good part of the middle 20th Century defending the mass exclusion of “neo-colonialists” (i.e., white Europeans) from places like India, Rhodesia, and Mexico. Leftists swooned with admiration as these countries built up nationalist economic orders, complete with protectionist state-owned monopolies like PEMEX. When will Navarette dare to speak out about this vital feature of Mexican political and economic life? Can anyone imagine Navarette telling South African blacks or Indian nationalists or Mexican protectionists “tough” when they defend their historically nationalist and anti-white policies?

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Gold hits $1,190/ounce. Got Stimulus?

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The “real economy” is still very messed up: a super weak and declining dollar, double digit unemployment, and a housing market saddled with inventory and foreclosures (and soon-to-be foreclosures). So why is the stock market rising? Does this make sense?

When in doubt, consider the possibility of a bubble. Goldman Sachs and Wall Street has been fueled with government money, both directly and through the AIG bailout which prevented any of the MBS bond-holders from taking a haircut on their bad investments. The Federal Reserve balance sheet has exploded, and its exposure to the housing market remains significant. It’s overall asset sheet (which translates into money in supply) is 2X what it was in August of 2008. Incidentally, I don’t believe they’ve taken their MBS assets and “marked them to market”; they’re valued at “coupon value,” which is an implicitly subsidy to the entire housing market.

This seems why we’re finally seeing reality hitting the banks; broke, unemployed people don’t pay their bills, don’t pay back their loans, get kicked out of their houses, and don’t make deposits with which banks can make loans. Citi declared a loss. BofA missed its earnings report. This is called a reality check.

The 10,000 Dow seems to show two things. One, that dollar deflation is masking the real decline in the Dow. And, two, this is an asset bubble driven by cheap, government-subsidized bailout money. Like the housing bubble, it’s all dependent ultimately on a projected robust real economy, investments in real businesses, and cash flows at the consumer level, all of which are in the dumps and will remain so for the foreseeable future.

The huge national deficit and the dubious Keynesian theories of Obama and company likely will slow down the recovery, create additional short-lived bubbles, and I am not encouraged by the good news that so excites the cheerleaders at CNBC.

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The stimulus did not work. Joblessness and misery of all kinds are increasing. The “green shoots” nonsense of the spring has subsided. It’s Nouriel Roubini’s hour, once again.

The question remains, and it is also hard to figure out, whether the recession is so bad we’ll have major deflation, or if the government’s money-printing strategy will devalue the currency and lead to hyperinflation? It’s the most important economic question of the times, and no one really knows the answer.

I lean towards inflation, but the data seems now to point more the other way. I am a crappy prognosticator in any case, but I do think prices will go up and output down in the usual “stagflationary” supply shock, as I said way back when. Whether one or the other factor–i.e., the deflationary or inflationary trend–is dominant, I don’t know. This is another way of saying, even if prices go up, I don’t think it will be signs of or helpful to a recovery, and we’re in for bad times one way or the other. I made this “stagflationary” point about the Bush stimulus way back in early 2008.

I do think it’s become clear (as it did under Carter) that fiscal stimulus and Keynesian ideas won’t work. That’s the meaning of the infamous chart showing the gap of rhetoric and reality on unemployment in the era of the huge Obama stimulus.

The only chart Obama really cares about are his popularity poll numbers, of course. And even that’s starting to slip.

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Medicare and Medicaid are hemorrhaging money. The biggest reason health care costs are constantly rising is that most of the price pressure is not felt by the consumers in the case of both the judgment-proof poor people who use emergency rooms without paying or the well-insured employed who pay small co-pays.

This situation has persisted for decades ever since benefits of all kinds were used during WWII to get around wage controls and have not been taxed as income ever since. Any restoration of cost controls in health care must bring the costs to the consumer, who are quite capable of economizing in every other area of life whether shoes, food, clothes, or housing when they must bear the lion’s share of the cost. In those areas of health care that are market driven–such as LASIK–costs come down over time and access is expanded. The same progress whereby luxuries become necessities works just fine in health care, so long as markets are allowed to work.

Even in a perfect world, it’s not so obvious why an advanced economy such as ours would not have expanded percentage of the economy spent on health care. As an economy develops, various luxuries like appliances, air conditioning, cars, etc. become more widely diffused as they become more affordable. Once those perceived minimum material requirements are met, why wouldn’t we expect people to spend a lot simply to prolong the time and energy with which they can enjoy those already-bought material goods?

Obama sometime suggests digitizing medical records will reduce medical costs and reduce medical errors. This is probably true, but it has nothing to do with the socializing ideas he wants to impose, such as subsidized insurance. What makes no sense with Obama’s plan is the notion that expanding the entitlement to insurance is somehow supposed to reduce costs. Insured people consume more health care. They particularly use more late in life when they bear no cost at all under Medicare, and the marginal utility of these public monies at their death is, for them, zero.

Reducing costs while expanding insurance will be impossible without severe rationing. Such rationing might make sense, but unlike a market regime, consumers may have little opportunity to spend their own dollars directly on health care outside the system, as is the case in such locales as Belgium or Canada. This is un-American and will occasion much grumbling, as too will the prospect of government bureaucrats prolonging wait times, cutting off access to “luxury” and lifestyle medicines and procedures, and other measures imposed to control costs.

Politically, however, this likely is a net advantage for Democrats and that’s why they’ve pushed it for so long. Wealthier people are healthier people, but they’ll spend much more than the actuarial tables dictate in order to finance the loose-living and more physically dangerous lifestyles of the poor (something they and all other insured do now) without the corresponding benefit of higher quality care. At the same time, with a significant government role in health care, every election will be a debate about generosity for the middle class. Republicans can’t win that game, and, as with Medicare and Medicaid, this will be one more nail in the coffin of fiscal responsibility, the spirit of independence among the middle class, and the prospect of constitutionally limited government.

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Foreign creditors are getting pretty concerned about the massive dollar devaluation that Obama’s spendy ways entail. Even the Financial Times is talking about the US losing its AAA rating. (Of course, since all of our government debts are dollar denominated, I think this may only be a de facto condition; the debts will get paid with devalued dollars is all.) Nonetheless, tax increases appear inevitable, particularly if Obama wants to expand entitlements to include health care.

Ace notes that this is not what marginal Obama supporters bargained for:

I had thought that Obama’s speech where he reluctantly and sadly tells the middle class he might have to kinda break his campaign pledge and raise their taxes — which will surely be hailed as “The Greatest Speech on Increasing Income and Payroll Taxes Since Lincoln’s Gettysburg Budget Reconciliation Speech” — would be put off, coincidentally enough, to just after Obama’s second inauguration. But now, with his ability to borrow until that point now threatened, he may have to make it sooner.

Which of course raises the Big Question which no one in the media will ask him. He will explain, sadly, that Bush’s recession and “runaway deficits” were/are much worse than he thought, and therefore he cannot both honor his promises to spend like the wind and his promise not to increase taxes on the middle class. (Actually the middle and upper middle class and lower upper class too, as he promised that no one making under $250,000 per year would see an additional “dime” in taxes.) And therefore, with greatest reluctance, you understand, he’ll have to raise taxes.

And he’ll say he has a mandate for that, because that’s what the people voted for.

But they didn’t. They voted, to the extent they voted for any specific plan, for the idea that Obama would spend more, but based on the predicate that he would not under any circumstances raise taxes on anyone except the top 5%. He had a mandate for A, but only if Not B. Well, if that “but only if” part of it fails, he has no mandate any longer for A, either.

The public gave him to mandate to spend, so long as he could do so without raising taxes; if he wants to spend and raise the middle class’ taxes, he’ll need an actual mandate for that proposition, won’t he? As in: Put your spending plans on hold, and run for reelection on the platform of raising taxes to the hilt. And see if America votes for that Hope and Change.

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Banking by corporations and limited liability companies is not essential to free markets. Like bankruptcy, all of these arrangements involve shifting some of the harm caused by risk-takers onto those who did not take the risks. There may be good reasons to socialize (i.e,. disperse) risk. People may be improvident or need some paternalistic guidance. A certain amount of risk-taking perhaps should be subsidized, i.e., venture capital, homesteading. But there are other means to amass capital and spread risk–not least debt obligations and insurance respectively–without shielding decisionmakers from personal liability to creditors and others in the case of civil offenses and breached contracts. The possible value of tying corporate decisionmakers and stockholders to the downside of corporate risk-taking should be obvious, considering the heads-I-win-tales-you-lose mess we’ve gotten into under the influences of many factors that have spread risk: limited liability, financial engineering, leverage, and the ethos that on the downside these firms (and investors in the same) are simply too big to fail. I wrote something about this many years ago along these lines here and Hillaire Belloc, to his credit, long ago distinguished between the character of real property and the “paper wealth” with which it shares so little in common as far as social benefits goes. Conservatives who are found of free markets should be rethinking their attitudes towards banking, corporations, and the combination of loose money and weak regulation we’ve recently experienced.

An interesting symposium at the liberal-leaning American Prospect discussed the problems of risk, particularly risk with public consequences. It offered an interesting defense of the welfare state along the same lines as the bailouts; namely, that it frees people up to take certain risks. Of course, like FDIC insurance, bailouts, and bankruptcy, that’s part of the problem when it becomes too generous.

The polymath Richard Posner weighs in, concluding that sensible bank regulation failed, and combined with easy money this brought about the recent crisis:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

Finally, in a tour de force, Allan Meltzer eviscerates the continuing inflationary practices of the unholy triumverate of Obama, Geithner, and Bernanke, viz.:

IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

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There is little more lawless than changing the rules of contracts in the middle of the game. Chrysler’s creditors entered into deals with one set of expectations (including their known benefits and risk in bankruptcy) only to have them changed by Obama in order to benefit a politically connected group. Obama has strong-armed secured creditors (even threatening to ruin one firm’s reputation) into signing off on a deal in order to “save Chrysler” and benefit unions, the latter of which gave up little in this process and whose pension benefits are largely unsecured obligations. This is true Bannana Republic territory, where the risk of nationalization and confiscation has long created major premiums on the cost of capital and dampened economic growth. Mexico had its own Obamas one hundred years ago with names like Diaz and Obregon. It has long lagged behind us as a result.

The Founders wrote a great deal about “minorities” in their commentaries on the Constitution, but the minority they had in mind was the minority everywhere and at every time in history most vulnerable to demagoguery and shifting winds: the relatively small numbers of wealthy investors in a given society, whose wealth is a relatively insecure monument to generations-long investments, innovations, and prudence.

Mickey Kaus notes that this whole thing will only delay the pain and prove a costly political failure for Obama. Chrysler produces a medicore product that few want to buy. Unless gas skyrockets (which itself will require swift economic growth), Americans will not be snatching up the death-traps known as Fiats. It’s unclear when Obama will ever allow a big business or connected group to suffer so long as he is at the helm. Instead, the rest of us, who are not so organized or visible, must suffer higher taxes, reduced growth, and an uncertain future so Obama can claim a victory and appear sympathetic and charitable by spending our money. This charade can’t go on forever though. The very thing Obama needs more of to ensure economic growth–predictability and respect for capital–has become increasingly absent from his administration, in spite of his moderate talk during the campaign. You can’t force people to invest, and no one will when government changes the rules in the middle of the game repeatedly.

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Above is an interesting chart. So is this one:

There clearly were many factors in the housing bubble, all of which aligned to create a perfect storm of sorts: higher levels of leverage among investment banks, a trade imbalance, reliance by institutional investors on misleading ratings by ratings agencies, inflationary monetary policy, conversion of housing assets into opaque financial instruments, reduced lending standards, the pressures of the Community Reinvestment Act, the mystique of home ownership, business models that invited fraud, and a pervasive mania of speculation. But one factor that seems increasingly undeniable is the Bush administration’s belief that Hispanics were “natural Republicans” and that the best way to get them into the fold was to give them a stake in the “ownership society” through various housing subsidies. Hispanics’ increasing numbers in the so-called “sand states” had a lot to do with the bubble’s disproportionate influence in those regions, and these subprime borrowers’ low levels of human capital and earnings eventually led to the music stopping as payments were unmade and new borrowers could not materialize to prop up the inflated housing prices. I mean, throughout the boom, no one said, “Does it make sense a sheetrocker from Chiapas making $11/hour can afford a $400K McMansion in Anaheim?”

This is what may be called an “overdetermined” event. In other words, without large levels of Hispanic immigration and Bush’s obsession with cultivating Hispanic political support, the bubble may still have happened. But it seems unlikely that it scale would have been quite so huge and the wave of defaults quite so numerous in the absence of the low-skill Hispanic immigration wave the U.S. has undergone since the 1986 amnesty. A million people per year is a lot of people. As the chart above shows, subprime lending tripled in the boom and the bulk of that expansion was increasing lending to blacks and Hispanics. Even more important, as shown in the second chart, blacks and Hispanics–according to the Boston Fed–have default rates nearly two times higher than white subprime borrowers. Of course, the media, the Democrats, and the Republicans don’t want to discuss such things; it’s not considered polite, and, thus, the greatest demographic and social change of the United States since the Civil Rights movement is thoroughly and deliberately under-analyzed and misunderstood by well-meaning (and not-so-well-meaning) political elites.

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