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Name: Matthew Cole
Email: matthewcole6@hotmail.com
Name: Justin Hayes (L)
Email: gerb2007@yahoo.com
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My 10 Cents (or $700 Billion) on the Bailout

Okay, so its been a long time since I've written a blog, but I am tired of people who don't know what the heck they are talking about trying to explain this current financial crisis. I am not an economist, but I have been doing some reading and thinking about the issue and have come to some conclusions:

  1. Any move that congress makes, whether it be purchasing these bad assets or pumping more money to prop up the system is only putting a band-aid on the situation. A used band-aid that is infected with 700 billion bits of bacteria.

  2. In order to make any headway in fixing this economic crisis, Congress must look at the primary causes of the financial meltdown, instead of trying to patch up the secondary effects.

  3. Although many on the left want to blame this on corporate greed or George Bush, the finger needs to be pointed at the government, in the Community Reinvestment Act of 1977, The Federal Reserves manipulation of interest rates, over-spending in Congress which has devalued our currency, and FDR's creation of the quasi-government monopoly Fannie Mae and later the formation of Freddie Mac.

  4. Unfortunately, I believe the financial system needs to fail so that the market can correct itself which would probably put us in a recession. However we would be avoiding a larger recession or even a Depression if we continue with the same policies.


This crisis can be traced back to the 1930s, where the government started to get involved with housing policy. The Federal National Mortgage Association (Fannie Mae) was created as part of Roosevelt's New Deal in 1938 to provide liquidity to the mortgage market and along with Federal Home Loan Mortgage Corporation (Freddie Mac, which was created in 1970 to create "competition") holds a virtual monopoly on the mortgage-backed securities market. They are also backed by the government as a conservatorship, which basically means that if they fail, then the government is obligated to bail them out. The problem with being backed by the government, besides the socialistic tendencies that follow that idea, is that they are encouraged to make riskier investments, and hold little obligation to the consumers.

In 1977, the housing market became more complicated and the government stepped in again with the Community Reinvestment Act. This act required banks to make loans to lower-income segments of their respective communities, forcing banks to lend to people who normally would be rejected as bad credit risks. The CRA was originally lobbied by radical left groups like ACORN who supported the Carter Administration. They believed that banks were discriminating against lower-class loan applicants and wanted the Federal government to curb "discriminatory lending." The problem with lending to people who are lower-income segments of the community? Well, they are lower-income segments of the community, which means they may not be able to pay back the loan.

With this overflow of lower-income applicants for loans came the lowering of interest rates by the Federal Reserve. This is turn, led to a housing boom. The Fed's lowering of interest rates made it cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly became profitable. When the Federal Reserve cuts interest rates, they have to make it up by pumping more money into the market. The increase in money created the housing boom, instead of consumer demand. This results in investing into sectors of the market where there is insufficient demand, otherwise known as mal-investments. In the housing market, this is an over-building of homes and real-estate. However, when the builders realize that they reacted to a distortion in the market, they drastically lower-prices in order to get back some of the money. The builders are able to equalize supply and demand, bringing the economy back into balance by lowering the prices. At the same time, there are major winners (those who are able to find affordable housing, who normally wouldn't) and big losers (builders and other sectors of the economy that are tied to the real-estate market which suffer set-backs). Unfortunately, the government doesn't like this so it tries to keep the prices artificially inflated. This sort of government intervention occurred during the Great Depression and kept it going so long.

So now the system is suffering from these bad decisions of the past creating so much distortion in the market. And what is the government doing? Trying to buy these bad assets which have been flowing through the market because of the mal-investments. They are seeking to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.

So what's the problem? More money in the market means that things go back to normal right?

Sorry, doesn't work like that. The chance that financial institutions will make riskier investments in the future is increased because they will think that if they are big enough then the government won't allow them to fail and bail them out as well. The businesses who are the least productive, least efficient, and least concerned with customer service will be rewarded. In a true free-market, businesses with these characteristics would fail and another institution would take its place. In the free-market scenario, the best businesses who manage their investments properly succeed and the ones who don't, fail. By continuing these bail-out policies, the government is ensuring further market instability.

More government spending (which causes more inflation) and more government intervention to solve this problem that was created by too much spending or inflationary measures and too much government intervention doesn’t really make much sense at all does it? Government intervention leads to distortion in the markets which then causes the governments to react to the distortion by enacting new laws and regulations which then creates more distortion and so on and so on.

The solution to this problem is not a bailout, but it is not pretty either. The financial market will have to suffer in order for the sector to correct itself and flush the mal-investments out of its system. We will likely face a large recession, but no where near a Great Depression like George W. Bush or Henry Paulson, the Treasury Secretary, would have you believe. The market has natural inevitable ups and downs, and no matter what the government does, they are going to occur. In most cases, when the government gets involved in slowing these downturns, they usually last longer and take on a more gruesome form.

For the future, the government as well as the Fed must act to remove its grasp on the market, if there is ever going to be any financial stability. These bailouts are only prolonging the primary problems and covering up the secondary effects. Spending must be dramatically reduced in Washington and the Fed must stop manipulating interest rates which encourage these bad investments. They also must stop the practice of printing money out of thin air, which inflates the currency, and return to a monetary system that is backed by gold.

In conclusion, this bail out is a used, infected band-aid that will only add more bacteria to the wound and cause a larger, nasty effect on the body that is our financial system.

Justin Hayes

Please Check out my new radio show on Owl Radio, Friday's from 2-4 p.m. at http://www.ksuradio.com , click "listen live."
The Wenk And Gerb Show
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What It Takes to Win


It's been way too long since I have found the time to update this blog, but I will start regularly posting now.

Just recently, a terrorist cell in Canada was discovered. They were planning to siege the Parliament building, take the politicians there hostage, and behead the Prime Minister on TV.

I think this plot just further illustrates the significant danger that our allies are facing because of the War on Terror. Of course, this is to be expected from our NATO allies. NATO is an alliance based on the strategy of peace through mutual defense. If one NATO country is attacked, then it is treated as an attack on all NATO members. This mutual defense arrangement has only been invoked one time throughout the history of NATO. That was on September 12, 2001. Every single NATO country responded by sending in their forces alongside the United States into Afghanistan. Even Iceland, which doesn't have a military, sent security personnel for the Kabul International Airport. Along with our NATO allies, 14 other countries participated in the UN mandated ISAF coalition. In 2003, even the "neutral" country of Switzerland sent soldiers to assist the German forces in Afghanistan (The Swiss withdrew at the beginning of 2008).

Our allies have paid for their assistance to the United States in Afghanistan and Iraq. Spain had the Madrid train bombing in 2004. The United Kingdom had to go through the 7/7 bombings. Germany has so far managed to stop several major attempted terrorist attacks in their country. All of this is no surprise. Al-Qaeda made it clear that any Western powers that dared to intervene in Afghanistan or Iraq would be subject to jihad. Every country that assisted the US in the military operations in Afghanistan were essentially putting themselves on Al-Qaeda's hit list. For this reason, we should be careful when criticizing our allies for not doing enough. This isn't Iraq. They have done much more in Afghanistan than most Americans realize. It is particularly ironic that many Americans direct their criticism specifically at France. They have handled unpopular changes well. The original ISAF mandate was to overthrow the Taliban and secure Kabul so that the Afghan government can function. The mandate was expanded in 2003 to include operations throughout the entire country of Afghanistan. Contrary to the jingoistic rhetoric coming from ignorant and gallophobic US politicians, France has adapted very well to these changes. The US military has been primarily focused on security for Kabul in the eastern part of the country. France has recently deployed more troops to eastern Afghanistan in order to free up American troops to help the Canadians in Kandahar.

Two countries that have had a particularly tough time are the United Kingdom (Great Britain) and Canada. The UK has been operating in the Helmand Province, and Canada has been operating in the Kandahar province. Securing these two provinces is extremely critical. The Taliban began making a comeback in 2006, especially in the south. It appears as if they are regaining their foothold in the country, and the situation has become especially violent in Helmand and Kandahar. Coalition troop casualty rates have been climbing rapidly since 2006. The number of suicide bombings has also risen dramatically. The recent prison break and attacks on the two American military bases demonstrate just how much of a danger there is that we may start losing this war. If anything, it shows that we certainly aren't winning yet, although this war is still winnable. It is just going to take some skillful handling.

One thing that we don't have much of right now is time. This has become much more critical now. Canadian Prime Minister, Stephen Harper, has announced that all Canadian troops will leave Afghanistan by 2011. There are also other key NATO allies whose participation in military operations in Afghanistan is not guaranteed in the near future. These include France, Netherlands, Italy, and the UK. Germany isn't as likely to leave anytime soon, but that doesn't mean that it won't happen if things don't change soon. When Canada leaves in 2011, many of these other key countries are very likely to follow, leaving the United States to handle the job alone. This will mean a shift in the US military from emphasis on security to more active combat operations. Obviously, it has become much more important that we turn things around before 2011. If we don't crush the Taliban and Al-Qaeda in the region before 2011, then it is going to become much harder to do so. US troops make up approximately 50% of the total ISAF forces in Afghanistan. We cannot afford to lose the other 50%.



If we are to succeed in time, the most important thing to remember right now is that victory in Afghanistan is only possible through a victory in Pakistan. These two countries are now inextricably linked in this war. Pakistan screwed up in 2001 during the assault on Tora Bora. They were patrolling the Pakistani side of the border in order to intercept fleeing terrorists. Unfortunately, the ISI (Inter-Services Intelligence: Pakistani version of the CIA), couldn't be trusted. Up until 9/11/01, the ISI had openly supported the Taliban, and many within the organization are still loyal to them. Many top terrorist leaders (possibly Bin Laden) managed to escape into Pakistan because operatives within the ISI probably allowed them to cross into North Waziristan, which is one the Pakistani side of the border. We can't change the past now. We have to adapt our strategy to the current situation.



There is one area in particular that we need to focus on. I am talking about the Federally Administered Tribal Areas (FATA) on the Pakistani side of the border. That is the pink area in the map above. The top Al-Qaeda and Taliban leaders are hiding out in here. Unfortunately, this is a very difficult place for foreign militaries to operate. The British tried a long time ago to conquer this area. They threw more troops at them than were in the rest of the entire British Empire, and the British still lost. Many of these locals, especially in the Khyber Pass, are distant descendants of the armies of Alexander the Great. No foreign military has been able to survive there. That is why the Pakistani government has been unable to control these areas. Despite the fact that Pakistan has one of the most professional military forces in the third-world, they are still walking into a deathtrap any time they attempt to move into these areas. Unfortunately, this is the area that the terrorists are using as a safe haven from which to launch attacks into Afghanistan. This is where we must win if we are to stabilize Afghanistan. The people in these areas are highly supportive of the Taliban, which is due more to Pashtun nationalism than religious ideology. Pakistani Pashtuns are much more supportive of the Taliban than Afghan Pashtuns, who have had to live under their rule, are. This is also why many of the leaders in the Pakistani military are reluctant to intervene. We must also deal with factions of the ISI that are still loyal to the Taliban.

The Pakistani government is in a tough spot to be in. They were supportive of the Taliban until 9/11. Now they are co-operating with the United States, although elements of the ISI aren't. The Pakistani government cannot be seen as being to helpful to the United States. Any Pakistani politician that is perceived to be helping the United States is likely to end up like Benazir Bhutto. That is why when a hellfire missile from a US predator drone (I really like these things) that killed Abu Hamza (a bombmaker, not to be confused with the bomb maker Abu Hamza from the awesome movie, The Kingdom) was discovered, the Pakistani government tried to convince people that Abu Hamza was killed not by a US missile, but rather by one of his own bombs that went off accidentally. That is why the presence of US military in Pakistan must be denied by the Pakistani government (Our troops are there doing logistical functions, not combat operations). That is also why Musharraf has had numerous assassination attempts against him. The current president, Zardari, has already been targeted three times.

We have given $11 billion to the Pakistani government already to help them control these border regions. We have gotten very limited returns on that investment, although the Pakistanis did manage to capture Khalid Sheik Mohammed, who planned the 9/11 attack. Unfortunately, we are going to have to pay these duplicitous people even more. It looks as if both Obama and McCain are willing to do this. It shouldn't be any surprise that Obama likes to spend taxpayer dollars, but it does show that McCain gets it. We are going to have to give the Pakistanis whatever they need. If they can get these areas under control, then we should demand that they do so. If they cannot, then they should not have any problem with getting out of the way so that we can.

Unfornately, we will not be able to continue operations in Pakistan covertly anymore. Bush had given classified orders in July to do just that, and not inform the Pakistani government. The Pakistanis now know about it, so now Bush has said that we will continue to go after Al-Qaeda and Taliban targets in these tribal areas anyway, and tell the Pakistani government about it afterwards or during the operations. As surprising as this may be, Bush actually got this one right. The terrorists have made southern Afghanistan a very dangerous place. We cannot afford to wait on the Pakistanis to do something about it.

Pakistan will not tolerate this without responding. They are even threatening to protect their borders from the United States with military force if necessary. It may just be necessary. I am not eager to have our troops engage the Pakistani military, but it looks like we may have no choice. The Pakistanis are in the position where they must respond if they are to hold onto power in their own country.

That is also why we must be careful not to weaken the Pakistani military too much or destabilize the government. We cannot allow the terrorists to steal any of Pakistan's nuclear weapons, so the Pakistani government must stay in power.

US military presence in these tribal areas WILL result in an extreme surge in Islamic militarism. We WILL encounter fierce resistance, but if we cannot get the Pakistanis to operate in this area effectively, then we will have no other choice but to go in ourselves. This will be much more difficult than what we have encountered in Afghanistan so far, but if we do nothing, then the terrorists will continue to maintain their hold over southern Afghanistan, while Bin Laden and Zawahiri continue to remain safe in Pakistan.

We must also deal with the opium problem in Afghanistan, which funds terrorist networks. Obviously, we could take away alot of this black market funding by simply getting the Afghan government to legalize opium, but that is unlikely to happen. One way we can get around this is to introduce our own CIA trained operatives into the drug trade. If the Afghan government practices selective enforcement against the opium industry, we can create a competitive advantage for our durg runners, who will corner the market at the expense of the drug runners that don't like us very much.

We must also practice tough diplomacy with the dictatorship in Uzbekistan. The oppressive policies of Islam Karimov have led to a surge in recruitment for the Islamic Movement of Uzbekistan, which is allied with Al-Qaeda. We were using an old Sovet airbase in Uzbekistan that Putin allowed us to use. We were asked to leave in 2005, so we have nothing to lose from getting tough with that goverment. We must make it clear to Karimov that his actions are making our mission much more difficult in Afghanistan. If he insists on continuing to be a paranoid psychopath, then perhaps it may be time for his daughter, Gulnara Karimova to take over. This is one instance in which I may be in favor of regime change. Gulnara Karimova seems to be a more rational leader that we can work with, provided things imporve with the Russians.

Hopefully, these policy recommendations will help us succeed in Afghanistan. We must win, and we must win very soon. We are running out of time. There is a high probability that if we don't make significant gains soon, there may very well be another attack on the United States on the scale of 9/11, at the minimum.
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