Warning to the West–Part II

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The first review about this book discussed the speeches given by Alexander Solzhenitsyn to the AFL-CIO union and the U.S. Congress. This review is about a speech he gave to the members of the Senate and House of Representative on July 15, 1975 and both an interview and a speech on the BBC. His first comment in the speech to Congress was to thank the Senate for “…twice endeavoring to declare me an honorary citizen of the United States.” He quickly transitioned to his warnings to the West. He pointed out that in 1973, the year the United States embarked on detente and “…was precisely the year when starvation rations in Soviet prisons and concentration camps were reduced even further. He then mentions that the United States had the burden of leadership “…for at least half the world.” “We do not look upon you as Democrats or Republicans…we see statesmen, each of whom will play a direct and decisive role in the further course of world history, as it proceeds toward tragedy or salvation.”

The next entry in the book is the text of an interview, which I read to be contentious at times, on the BBC March 1, 1976. Solzhenitsyn responded to a question as to why the Soviets had exiled him instead of sending him back to the concentration camps. He observed that this was an instance where the West took a strong stand, and “…the Soviet Politburo simply took fright.” “I think now …they do regret it–we must remember they …had no choice. This was a rare moment when the West demonstrated unprecedented firmness and forced them to retreat.” However, Solzhenitsyn expressed dismay about the West’s reactions in most circumstances. Russians believed that the West would help raise them from slavery, but the West separated their own freedoms from the fate of the Russians. The press is accused of participating by not understanding their responsibility to publish the truth instead of mediocre headlines. He accuses that the West stood by while several countries fell to Communist rule. Continue reading →

Financial Crisis–Part III

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Parts one and two gave a historical perspective about government actions that paved the way for the crises that brought the economic system to the brink of collapse in 2008. In the spirit of “never let a crisis go to waste,” Congress reacted by passing the Dodd-Frank law after accusations such as, “See what happens when businesses aren’t adequately regulated.” The Dodd-Frank law requires 387 rules to be developed by 20 different regulatory agencies. The regulators have finalized 24 rules and have missed deadlines on 28. An article in ProPublica by Jesse Eisinger and Jake Bernstein details what the law was intended to accomplish and the problems that are being faced in developing the regulations. A few things the law was intended to accomplish have been at least partially put in place. A Consumer Financial Protection Bureau has been created, although the Obama administration hasn’t appoint a person to head the agency.  Outrage over executives being rewarded for taking risks that pushed their companies near or to failure resulted in rules that give shareholders a say on executive pay. The larger problem is in the 363 rules that remain to be developed and imposed.

Baring “proprietary trading” was central to the passage of the Dodd-Frank law. Banks leveraged heavily to speculate in bundled packages of subprime mortgage-backed securities and derivatives. The collapse of the value of those securities was central to the crisis. However, the rulemaking process for regulating derivatives has generated wide opposition. The Treasury Department has proposed some to be exempted from the regulations and the Securities and Exchange Commission (SEC) has issued an initial rule that will allow derivative trades under certain conditions. The rulemaking process has been so flawed that it “…has sparked a barrage of opposition, even from previously supportive legislators.”

Some believe that erroneous credit ratings given to mortgage-backed securities by the rating agencies was the root cause of the crisis, and losses from investments that had been given high ratings resulted in billions of dollars in losses. The Dodd-Frank law created a new regulatory structure for credit rating agencies, but the SEC has not fully staffed the new office. They also have indefinitely tabled a provision that holds the credit rating agencies legally liable for their ratings.

Regulators are dealing with complex issues while facing severe budget constraints, and many are saying they may not be able to carry out some key provisions. Wall Street is lobbying to blunt provisions it failed to defeat in the legislature. “Some wonder if Congress ordered regulators to do more than they could feasibly and legally accomplish.”

It is tempting to hope that the budget problems of the regulators and the intensity of lobbying will succeed at blunting the effects of the law, since there is a growing chorus of warnings that the law could damage American competitiveness. I would argue with the phrase “could damage.” I would replace it with “has damaged.” To fully appreciate how effective the government is, I only need to quote Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there will be a shortage of sand.”

Go For Broke

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The term means to risk everything for a potentially large gain. The result is “gone broke,” or bankrupt if the risk fails. Money lenders in the 15th Century worked on benches, and their bench was literally broken if they lost all their money. The term “broken bench” was shortened to “broke,” and was first recorded in the 1550s. The U.S. Army 442nd Infantry unit was formed from Japanese Americans during WWII, and many of them were from Hawaii. The unit adopted the motto “Go For Broke,” from Hawaiian gambling slang popular at the time. They were awarded the largest number of medals ever awarded to a single unit.

Warning to the West–Part I

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This book contains the texts of speeches given by Alexander Solzhenitsyn in the United States and Britain after his expulsion from the Soviet Union in 1974. The first two in this review will be were given to the AFL-CIO. Solzhenitsyn condemned the Soviet Union and “…its intolerable policy of repression, yet also sharply criticizes those complacent Westerners who support their government’s misguided policy of detente and timidly fear to take up the obligations that freedom-hungry people expect from the leading democracies of the world. ‘Interfere more and more, he pleads…We beg you to come and interfere’.” As an aside from the speeches, Ronald Reagan was campaigning against Gerald Ford for the Republican Presidential nomination in 1974-1975 with warnings about detente with the Soviets. Solzhenitsyn said in one of his AFL-CIO speeches that the USSR was “the concentration of world evil.” Detente with the Soviets did not end until Reagan replaced Carter and declared the USSR to be “The Evil Empire.” 

Solzhenitsyn begins his first speech to the labor leaders with a short history of the Russian Revolution and tells them “…only four months after the October Revolution…all the representatives of the Petrograd factories were denouncing the Communists who had deceived them…” The Communists had fled from Petrograd to Moscow, and had given orders to open fire on the crowds of factory workers demanding election of independent officers. A lathe operator named Alexander Shliapnikov led the Communists before the Revolution: Lenin wasn’t even in the country. Shliapnikov charged in 1921 that the Communist leadership had betrayed the interests of the workers, and he disappeared.

Solzhenitsyn thanked the AFL for publishing a map of Soviet concentration camps to counteract charges by Liberals in the U.S. who were claiming the camps did not exist. He points out that Liberals weren’t the only group supporting the Communists. Capitalists were encouraging business dealings with the Soviets, which of course gave badly needed economic support. He mentions Armand Hammer by name. Some American businessmen arrange an exhibit of criminological technology in Moscow. The KGB purchased the equipment, copied it, and used it to spy on citizens. Solzhenitsyn tells a story about Lenin predicting that Western Capitalists would compete with each other to sell the Soviets everything they needed without any concern for the future. He predicts that “…when the bourgeoisie a rope and the bourgeoisie will hang itself.” Lenin is asked where they would get enough rope for that, he replied, “They will sell it to us themselves.” Continue reading →

The Financial Crisis–Part II

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Eamon R. Moran has written a comprehensive and well-referenced, 97-page article for the University of North Carolina School of Law’s North Carolina Banking Institute Journal about the causes of the crisis.  In Part I of this blog I focused on the role of the Community Reinvestment Act (CRA) of 1977.  This entry will focus on other regulations and acts that contributed to the mortgage meltdown.

Congress enacted many measures between 1980 and 2003 to make home ownership more attainable for moderate and low income borrowers.  Some of those measures included:

  • An act that preempted state ceilings on home mortgage loans and encouraged subprime loans
  • Another act that allowed adjustable rate mortgages, the loan of choice for subprime loans
  • Tax law was revised to made interest on home loans the only consumer loan that is tax deductible
  • HUD changed regulations so that borrowers no longer had to prove their incomes would remain stable
  • CRA was strengthened to impose fines and business penalties on banks that refused home loans to low income borrowers
  • Tax law was revised again to exempt most home sales from capital gains taxes

The outcome of these actions was that a borrower in California with an annual income of $14,000 was approved for a $720,000 home loan.  An investor in Minneapolis borrowed $2.4 million to buy ten properties, and all would go into foreclosure.  Financial institutions began bundling loans into complex packages, the rating agencies gave the packages AAA ratings, and the packages were sold around the world.  Millions of other examples such as these led to the eventual collapse of home values and created the crisis.

Congress leapt into action and passed a massive financial regulation while studiously ignoring the history of government’s role in creating the crisis.  The new laws will undoubtedly impede an economic recovery, and Congress will be given the opportunity to pass even more laws.


Going Bananas

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Wiki Answers speculates that the origin of this idiom, which means acting crazy, was from a rumor passed around in the Love and Drug generation of the 1960s that inhaling the smoke from burning banana peels would cause a high. The expression swept through the streets and made it onto the television show “Laugh-In” despite the fact that numerous people proved by experimentation that it didn’t work.