What caused the recession? Government.

If you've watched the mainstream media recently, you know that our current recession was caused by laissez-faire economics, and that this meltdown marks the end of all credibility to the free market system.

In reality, though, the direct cause of this recession was Big Government--a point that is laughed at by the media and the Democrats, and completely ignored by the Republicans. No one seems to be willing to confront the truth.

It was Big Government that caused the current financial crisis. Congress abused its oversight powers over Fannie Mae and Freddie Mac to exercise influence over Fannie Mae policies. The Congressional Democrats used their influence to cause the appointment of a Clinton crony, Franklin Raines, as CEO of Fannie Mae. Then Mr. Raines did the bidding of the Congressional Democrats by diverting hundreds of billions of dollars in Fannie Mae assets to the purchase of mortgages to unqualified homeowners in the name of "affordable housing," all the time receiving the accolades of Congress for his efforts.

But a system that is even partially based on free market principles will not take such abuse indefinitely. Eventually, the market-oriented elements of the system revolt and refuse to swallow more of the crap generated by the political system. And that is precisely what happened here.

After the financial system meltdown, the malaise spread to the entire economy. The first to suffer a collapse has been the auto industry.

The Congressional fools, never willing to take the blame for their own mistakes, of course blame Detroit's problems on the auto companies themselves. And they make a plausible case that the automakers have made mistakes. The media is only too willing to portray the Detroit disaster as a failure of the free market system and capitalism. Your average guy does not fully understand the key role that Big Government played in causing this collapse. The so-called "experts" have only a simplistic understanding of the problem Detroit faces, but they are quite active in giving their opinions anyway. Even the automakers' management does not fully understand how they've been screwed by Big Government. Either that, or perhaps they don't want to say for fear that an accusatory demeanor will make things worse, or that they simply do not have the needed debate skills to take on the arrogant fools in Congress.

But the reality is that it was Big Government that caused the financial crisis and recession that now threatens the viability of the US auto industry. It was Congress that wrote the labor laws that have resulted in the Big 3 having a 50% cost disadvantage vis-a-vis the foreign makers. And it was the Congress that opened the door to free trade and forced the US makers to compete against companies that have a big cost advantage over US makers.

Now some of you might say, simplistically, "What about the fact that the US makers simply don't produce the cars that people want? That's not the fault of the union or of Congress."

But you would be wrong about that. When you have a 50% labor cost disadvantage relative to your competition, you can't produce the same kind of vehicle that your competition produces and stay in business. If you try, you can produce vehicles that are very similar, but they will cost a lot more, and you won't be in business for long. Your only hope is to cut corners and produce a cheap imitation of the foreign vehicle, and sell it for less than the foreign company sells its higher quality vehicles for. And that is precisely what Detroit has done for decades.

Of course, you can understand why the Big 3 management doesn't want to come out and make that point, though. They don't want to admit that they are selling a cheap imitation of the foreign vehicles.

The proof of what I am suggesting is very clear. First, Ford has in recent years greatly improved the quality of their vehicles. They bought into the endless complaining about quality and made quality job one. Now they produce a vehicle that is on par with what Toyota produces, and in fact their vehicles line up very well against Toyota's in every category. Yet, they are still showing an eye-popping loss while Toyota has a company wide profit.

So why is this? The answer is simple: Ford has a huge cost disadvantage against Toyota because of the union wage scale it must pay. While Toyota makes money on a Camry, Ford loses money on a Taurus, which is very similar to a Camry.

If you still aren't convinced, then consider this: As late as the 3d quarter of 2008, Ford was losing money in the US, but it was making money over seas, where it must presumably compete even more directly with the foreign makers. GM is also doing much better overseas than it is in the US. But how can this be? The answer, again, is simple: In the US, the Big 3 must contend with the huge union-induced cost disadvantage that they have, while overseas they are not at a disadvantage because there is no UAW.

So the Big 3 can compete with the foreign makers, they can sell vehicles that people want just as the foreign makers do. They just can't do so in the US because of the labor laws forced upon them by Congress.

Of course, I am not saying that Big 3 management has not made mistakes. Everyone makes mistakes. Even the management of the foreign companies makes mistakes--big ones. The difference is that when you are a foreign company that has a 50% labor cost advantage, you can afford to make more mistakes, and bigger mistakes and yet still make a profit. When you are a US manufacturer with a 50% labor cost disadvantage, you can't afford to make mistakes--you've got to be perfect.

I refuse to believe that US managers are somehow less competent than Japanese managers. That is not consistent with what we see in other industries. If so, then how did we win WW II? How is it that the US has a higher standard of living than Japan? The managers in the auto industry do have one characteristic that is not admirable, namely they are selected because they are deferential to the labor union, but that is entirely understandable given the Congressional policies that have been forced upon them. In other respects, they are no less competent that managers in other industries, they simply have a more difficult landscape to navigate due to the handicaps set up by Big Government.

My view is that any auto bailout should force a reduction of the pay scale to the same levels that the foreign makers pay. And management should be told that they will also be paid at the union scale until the loans are repaid. But this idea of imposing greater Congressional oversight on the industry is just plain insane. It was Congressional oversight that resulted in the collapse of Fannie Mae and Freddie Mac. Congress is not a constructive force in running our industry. It is destructive.

The fact is that this problem is not Detroit's mistake so much as it is Washington's mistake. Washington must fix it, but Washington must also be held accountable for it. Unfortunately, I don't see either of those things happening because even those of us who are free market capitalists are not doing what we can to expose the real problem. The problem is not that industry is inefficient. The problem is that Big Government is inefficient.

Yes, forcing banks [via legislation, community organizer pressure, or congressional pressure, or all in concert] to make snarky loans incentivizes (if not forces) banks to offload their risk. (The truth is, the banks generally don’t want to hold mortgages anyway) Fannie/Freddie provided the ready offload mechanism for those risks. All well and good so far, even with default rates rising from appx 3/4 of 1% historical to 3-4% = now, at least anecdotally.

So, with an implied (since made explicit) govt guarantee, FNM debt was attractive in the post 9/11 era of VERY low ROIs, brought on by Gspan dropping rates so low and for so long. Still OK. OK in the sense that if you, as an investor, are looking for secure rates a tad above Tsys debt but instead come out with a 3-4% loss, this shouldn’t be the end of the universe as we know it. But this problem was made quite a bit worse by the real estate valuation bubble brought on such low rates, and yes, the desire to bloat the GSEs to house everyone and anyone in a suburban home. Left alone, the RE crash might have made debt investors lose 8%-10%-12%, nothing to be happy about, but not TEOTWAWKI.

But now, we take the financial engineering aspect; the tranching, the extreme levering, the creating of hierarchies of debt grades and the resulting need to attach massive amounts of default insurance to the lower grades of debt. The wizards of Wall St simply outran the regulators (however you wish to characterize them; either deliberate aiders and abettors; flat-out idiots; or, only-able-to-respond-to-crisis reactionaries) AND the raters (Moody’s, Fitch, et al) with the financial engineering necessary to achieve the gearing that WAS and WOULD HAVE BEEN in excess of banking regs before Glass-Steagal was repealed.

***NOW***, a 3-5% default problem multiplied by 30-50-80 becomes potentially an “over 100%” problem truly suggesting the whole affair could be sucked into a black hole of impossible, defaulting debt. That’s where we are.

So, generically, I would agree with you that it was a gov’t “failure”. It was a failure in the “write mortgages to any person w/a pulse” sense but it was also a failure in the “remove any restraints on the masters of financial fraud” sense. Because it must be noted that in the tranching scheme, the “hot potato” you mention was cut up ten ways and every holder got 15% of the total!

Barney and Dodd may have been flaming socialists in their desire to mansionize everyone. But the turbocharger was really the securitization mechanism brought to a fine art by Wall St. Meanwhile, the entire world deleted the word “risk” from their collective dictionaries. It DID start with morts; and those WERE defined as sub-1% defaulters. Yet without the leverage engineered by Wall St, the problem(s) would be at most 1/20th as big as they actually are.

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