Fable about a king's palace

A fabulously rich king decided to build a fabulously magnificent palace. He got his privy council to agree because he argued that doing this project would create many jobs for the five years it would take to build it and for the years beyond that to maintain the palace.

For starters, he took by eminent domain 10,000 acres of prime farmland by the river. People said it would reduce the food the country could grow to feed itself. The king replied that the project would create jobs.

He had 10,000 acres of prime forest cut down to supply the lumber for his palace. People said it would decrease wildlife habitat and increase flooding. The king replied that the project would create jobs.

He hired 1,000 workers to build his palace. People said it would decrease the number of workers to build and repair houses. The king replied that these workers would be paid high wages.

He had a million gallons of water per day diverted from the river to supply all the fountains, to water his extensive lawns, and many other uses. People said it would practically dry up the river reducing the water downstream for drinking, washing, and irrigation. The king replied that the project would create jobs.

He built no sewage treatment system to handle the garden runoff or the flushing of 1,000 toilets. He said it would cost too much money. People said sewage would make the river downstream unsuitable for drinking and washing, and irrigation. The king replied that the project would create jobs.

And so it came to pass that many people were hungry because there was insufficient farmland to feed them.

And so it came to pass that many people became homeless as the cost of existing houses skyrocketed because no new house were being built.

And so it came to pass that many people became sick because of the lack of clean drinking water.

And so it came to pass that many people migrated to lands where there was plenty of farmland and clean water.

And so it came to pass that tax revenues dwindled because there were fewer people to pay them.

And so it came to pass that the banks foreclosed on the king's palace because he couldn't pay back all the loans he had taken out to build the palace.

And so it came to pass that after an unusually heavy rain, a mudslide from the former forest buried the partially built palace.

What's the point of this fable? It can't happen here. Oh, but we are a nation populated by people who immigrated from lands that did not have good governance. Will we follow as we lack the foresight to rein in the indulgences of the wealthy as they create short-sighted projects using jobs as a justification without regard to all the other costs?

Our free market system: Free to lie and cheat

Much of the financial crisis was created by thousands of banks and loan officers throughout the country.  It was getting more important to originate loans and then sell them to others.  The more loans originated, the more money the loan officers and their banks would get.  They didn't have to worry about risk because the buyers of the loans assumed the risk.  Because the loans were packaged and sold again, the end buyers had no idea of the risk.

One of the ways to originate more loans was "stated-income".  Either the borrower was allowed to state any income needed to get the loan or the loan officer encouraged the borrower to overstate the income.  The actual income was not verified in either case.

See "I Worked For A Major Mortgage Company, And What We Did Was Criminal", Michael David White, Business Insider, 2010-04-22.

Many think that any action by government to curb excess is interference in the "Free Market".  Would any professional sports team play without referees and umpires?  I doubt it.  All the teams of a league pay into a pool to pay for the leagues referees and umpires.  Managers and players may complain about individual decisions, but  doubt they would like to settle any disputes themselves.

Let's think about government as a referee in the sport of business.  One branch of government sets the rules.  Another, independent, branch of the government enforces the rules.  A third, also independent, branch settles disputes about the rules.  Corporations and individuals pay taxes to support government as a referee.

What would the "free market" be like without these systems of rules?  Would Apple go to war against Palm if Apple felt Palm was infringing on its patents.  Would the Beatles and their fans go to war against Apple because the Beatles felt Apple was misusing their trademark?

And what about individual citizens, should the "free market" be allowed to defraud, maim, and kill people in the name of bigger profits?  With no recourse to their government for the citizens to redress these grievances?

There is no easy answer to what is too much government and what is too little government.  We have too many people thinking that all government is taking the "people's freedom" away.  And we have too many people thinking that government is not doing enough to protect the "people's freedom" from "rapacious corporations".

We're sorry, Wall Street???

For a marvelous piece of sarcasm, read, "Dear Wall Street, We're sorry" by David Weidner, MarketWatch, 2010-01-26, subtitled "How the Little Guy Ruined Wall Street".

The House of Cards came tumbling down

The newspapers and the blogosphere are filled with commentary pointing blame for the credit crunch all over the place - Federal government forcing banks to loan to high-risk people, greedy investment bankers who gave themselves big bonuses for just moving money around, house buyers signing for loans they couldn't pay in the end, the media, the conservatives, the liberals, and...

I think that, yes, blame can be spread far and wide, but all of these malefactors had the same basic premise: loaned money can be bought and sold.

The beginning premise sounds simple. A local bank lends money to someone for some purpose. At a certain point, the bank has no more money to lend except for what dribbles back in as loan payments. To raise more money, the bank sells its loans to a larger entity. But the larger entity can only do this far so long. In order to buy more loans, it has to raise more money. So it sells its loan to a larger entity. Where does it end?

If house prices keep going up, it never ends. But prices will not keep going up. Either everyone who wants a house has one, or prices go so high that fewer people are willing to buy houses. So, prices go down, sometimes very rapidly.

Sometimes prices drop so rapidly that people would rather stop paying their loans than pay more than their house is worth. Of course, if they walk away from one house, they will have a hard time buying a house of much less worth. That further reduces the number of qualified buyers further reducing the prices of houses.

Tulips, Florida real estate, houses, when will they ever learn?