Forget Shorting Mortgage Bonds: Short the Whole Country
William L. Anderson, Ph.D

Having become a fan of Michael Lewis’ The Big Short (after watching the movie on DVD), I am fascinated at how some savvy Wall Streeters found a way to short mortgage bonds which were on their way to becoming toxic securities. Granted, anyone with a brain should have known that the go-go mortgage market of a decade ago was unsustainable, but I’m not sure that many people with brains, economically speaking, still reside in the United States.

(For the record, I told members of the Allegany County, Maryland, board that assess houses for property tax purposes in May 2006 that the housing market they presently were experiencing was a bubble that was not going to last much longer, and that they should not make future revenue projections based on the present experience. Board members told me I didn’t know what I was talking about. Unfortunately, I did not buy into any investments that allowed me to make money from my predictions.)

After reading the self-congratulatory release from the White House on President Barack Obama’s recent executive order, this one allegedly created “to ignite corporate competition,” one realizes that the powers that be in Washington are so out of touch with terms like competition and free markets that it really has become hopeless. The government foists, at best, crony capitalism on the rest of us, calls it “competition,” and then blames free markets when the various crony capitalist ventures go belly-up.

That is why I say that Americans, who through voting continue to put economic illiterates into the office while rejecting people like Ron Paul, who give sound advice and demand sound economic policies, really have become their own economic saboteurs. Claiming they want prosperity, Americans demand to be governed by people who do everything in their power to undermine prosperity and who create bureaucratic monsters that swallow things that are productive, all the while claiming that they are creating more wealth.

For sheer arrogance and ignorance, this latest salvo from Obama truly demonstrates that the government intends to destroy free markets, all the while claiming to “save” them from monopolies. Right off the bat, the White House’s press release invokes the rotary phone, trying to convince readers that it was the government that “modernized” telecommunications:

Millenials are often defined as the generation born after 1980. But they could also be described as the generation that doesn’t remember what it’s like to be forced to rent a big, overpriced, basic phone from the phone company.

Until the early 1980s, the phone company had a monopoly—not just on the wire to your house but, in many cases, on the phone, you plugged into that wire.

And the result wasn’t pretty.

Phones had a little variety, evoking the famous Henry Ford quote — “You can have any color, so long as it’s black” — and only the most basic functionality. Worse yet, households had to pay a fee each month to rent these phones that added up over time to many multiples of what they would have paid to purchase a similar (or fancier) phone themselves.

Then, all that changed when the Federal Communications Commission (FCC) and others took action to open up phones to competition. This competition and the technological progress it helped drive, led to a proliferation of digital dialing, built-in answering machines, a panoply of styles, cordless phones, and other innovations.

Something this breathtakingly dishonest deserves an entire volume, not a few paragraphs I can give it, but here goes. First, and most important, telephone service in the United States did not lack competition because of free markets; rather, it lacked competition because the U.S. Government granted AT&T monopoly power, making it illegal for other firms to compete with the government-protected giant.

The so-called AT&T antitrust suit from the U.S. Department of Justice essentially was the government arguing against itself, and even the famed AT&T “breakup” involved the government creating smaller government-protected monopolies. (In fact, the current labor union strike against Verizon, one of the firms created by the “breakup,” is about trying to force Verizon to stick with the modern version of the rotary phone in the face of the wireless communications revolution. Not surprisingly, Obama’s political allies, Bernie Sanders, and Hillary Clinton, support the strike. So much for the political classes supporting competition and technological innovation.)

Second, let us look at the example the White House gives us: Henry Ford’s Model T. It is true that Ford resisted changing his car that truly revolutionized automobile transportation, but it was not the government that made Ford change his strategy; it was General Motors, which gave consumers choice on color, body style, and financing the purchase of a new car.

Likewise, we should not forget that the development of MCI and cheaper long-distance alternatives created a breach in the AT&T long-distance monopoly fortress, signaling the beginning of the end to the company’s dominance for that particular product. Furthermore, the development of fiber optics, which could carry millions more calls than the same volume of copper wire, which AT&T was using, also changed the face of telecommunications.

So, what is this great new world of competition that Obama claims to be creating? It is ordering changes in cable boxes, which are used by cable and satellite television companies to allow users to sort through the various channels. Cable boxes cost consumers about $230 a year, according to the White House press release, and that needs to be changed:

That’s why today the President announced that his Administration is calling on the FCC to open up set-top cable boxes to competition. This will allow for companies to create new, innovative, higher-quality, lower-cost products. Instead of spending nearly $1,000 over four years to lease a set of behind-the-times boxes, American families will have options to own a device for much less money that will integrate everything they want — including their cable or satellite content, as well as online streaming apps — in one, easier-to-use gadget.

But we’re not stopping there. In many ways, the set-top box is the mascot for a new initiative we’re launching today. That box is a stand-in for what happens when you don’t have the choice to go elsewhere—for all the parts of our economy where competition could do more.

And, as they say on late-night infomercials, “Wait! There’s More!”

Alongside that announcement, the White House Council of Economic Advisers (CEA) released a new issue brief that describes the many benefits of competition, highlights recent work by the independent antitrust authorities, and argues that consumers, workers, entrepreneurs, and small businesses would benefit from additional policy actions to promote competition within a variety of industries. These new steps will build on the pro-competition progress we’ve made—from cell phone unlocking to net neutrality, from cracking down on conflicts of interest in retirement advice to efforts to free up essential technologies so that big incumbent companies can’t crowd out their competitors.

Where does one begin when confronted with outright deceptions? So-called net neutrality is putting the Internet into a New Deal-style organization which essentially turns the once-competitive web into the same kind of cartel that characterized banking and transportation – creating problems that led to deregulation of those industries.

Regarding the government’s recent order for “cracking down on conflicts of interest in retirement advice,” the Wall Street Journal recently editorialized that this new government initiative is little more than a ploy to drive small investors into government bonds:

The Department of Labor says its so-called fiduciary rule will make financial advisers act in the best interests of clients. What Labor doesn’t say is that the rule carries such enormous potential legal liability and demands such a high standard of care that many advisers will shun non-affluent accounts. Middle-income investors may be forced to look elsewhere for financial advice even as Team Obama is enabling a raft of new government-run competitors for retirement savings. This is no coincidence.

The notion that Barack Obama and his fellow Washington minions love free markets and want only the best for consumers is breathtakingly dishonest. Furthermore, the notion that by forcing business firms to hire more lawyers to deal with more government litigation against them is going to result in a new cornucopia of goods and services is so demonstrably false that one is surprised that not even the political classes recognize the outright deception. (Actually, my guess is that the political classes do recognize what they are doing, but since lawyers are an integral part of those classes, anything that makes lawyers wealthier is a good thing, at least to those who gain wealth by sucking it out of productive people.)

This nonsense is not going to stop. Given the implosion of the Republican Party – which has done much to create the current chaos – either Bernie Sanders or Hillary Clinton will occupy the White House a year from now. One is a Trotskyite who truly seems to believe that if government destroys the production and sale of goods and drives up production costs, that out of that “new order” will arise prosperity that no one even could imagine in which “income and jobs would soar.”

The other is someone who has become fabulously wealthy through crony capitalism and who sits astride a “foundation” that is little more than a political slush fund. Neither candidate is someone who is going to open new markets and end the government’s hostility toward wealth-creating entrepreneurs.

As noted at the beginning of this article, I noted that a number of entrepreneurial investors realized that the housing bubble was not sustainable and made money by shorting the very “investments” that were driving the bubble. Given the current political climate, I would recommend shorting the whole damned country. We are not climbing out of this mess, as there are too many politicians and too many interests groups that have a vested interest in the status quo.

And the status quo is not sustainable upward. It only can take us down into economic depths that none of us want to see, but are in our future because the political classes – and the voters – have willed these things to be.

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services. Visit his blog.

www.lewrockwell.com