The housing market will crash again.  There are simply too many vacant and at-risk houses and not enough buyers.  The math is simple.

The Obama administration recently proposed the "Financial Crisis Responsibility Fee", a tax on big banks, which will raise about $100 billion over the next 10 years to pay back the US taxypayer for the cost of TARP and other government bailout programs.  The tax is on uninsured bank assets of 0.15%, and only applies to banks with assets over $50 billion.  Sounds like a great idea, right?

In fact it's a terrible idea, but not for the reasons you might expect.  The Law of Unintended Consequences will come into play, again as it inevitably does.  And the taxpayer will have to foot the bill for multi-billion dollar losses caused by it.

The Fed has pumped $2 trillion into the banking sector and housing market over the last year and a half (see the Bailout Scorecard) to keep the banks running smoothly and to jump start the housing market.  These initiatives are unsustainable and will fail.  It may be next month or it may be next year.  But the Fed is running out of weapons in its arsenal.  The housing market will crash again, and when it does, we'll be in a new financial crisis.  Banks will cut off lending, businesses and people will panic.  The politicians will demand action.  And the Treasury and Fed will relaunch their 'scare the s**t out of them strategy' that worked so well last time: if we don't take immediate multi-trillion dollar action right now, there will be economic Armageddon.

Here's my response: I'll take Armageddon.

You've probably seen the Ally Bank commercials.  In one of them, a child is given a new bike, but then is not permitted to ride it anywhere.  In the others, the children are teased variously with a toy truck and a pony.  The commercial ends by touting one of the benefits of Ally Bank, such as its 'No Penalty CD' or high interest rates on savings accounts.  Then, "Ally Bank.  It's just the right thing to do." The implication, of course, is that other bank customers are suckers.

The bailout so far totals nearly $2 trillion in aid and guarantees to banks and housing market support.  Here is an accounting of all the main bailout programs, along with the possible potential loss of each.  If the housing market falls modestly, the taxpayer stands to lose at least $1.1 trillion, not just from the bailout funds, but from losses from government mortgage guarantees.

Ben Bernanke was Time's Man of the Year in 2009 for supposedly saving the world economy from Armageddon.  He's also the most powerful man in the world.  Now King Bernanke wants more power.  If he hasn't already sowed the seeds for the Great Depression II, with even more power, it is all but inevitable.

Arianna Huffington, Rob Johnson and colleagues recently created the "Move Your Money" campaign (moveyourmoney.info), the idea of which is to encourage people to move their money from the big banks into smaller, healthier banks, in an effort to stabilize the financial system.   It's a really clever idea, and certainly the right thing to do, given that it takes power away from the 'Too Big to Fail' zombies.  The campaign is coupled with a video montage from "It's a Wonderful Life," the Jimmy Stewart movie about how he saves his local building-and-loan from a big bank that comes in to the community and nearly destroys it.  Unfortunately, however, the campaign is only a short term fix to a deeper underlying problem: the moral hazard of FDIC insurance.

Rating agencies were one of the biggest contributors to the Financial Crisis of 2008.  By stamping a 'AAA' grade onto low quality subprime Morgtgage Backed Obligations (MBOs), they turned them into investment grade securities.  Trillions of dollars' worth of these securities were sold around the world, to commercial and investment banks, hedge funds, and pension funds.  Government and financial institutions alike relied on the trusted names behind these ratings - Moody's, Standard & Poor's, and Fitch.  The money from the sale of these bonds often went right back into the housing market, inflating prices further.  But once the housing price bubble finally collapsed and people started defaulting on their mortgage payments in huge numbers, many of the bonds became worthless. The buyers of these products suffered huge losses, threatening the solvency of many financial institutions, and initiating the federal bailout for hundreds of billions of dollars.

The Mortgage Interest Tax Deduction (MITD) is one of the most destructive and unfair pieces of tax policy ever created.  It disproportionately hurts poor people and renters, and it is in large part responsible for the current financial crisis.  This tax policy must be repealed.

Financial regulation can't work.  No matter how you try it's bound to fail.  Here's why.

How government regulations, guarantees, and special-interest tax policy systematically undermined the free-market economy and created the current financial crisis.

Government regulations and special-interest tax policies enacted over the past 80 years, although created with the best of intentions, have systematically weakened the US economy to the point of near collapse by paralyzing the 'invisible hand' that normally would keep abuses in check and prevent corporate greed from taking down the financial system. Many people would say that in fact the current crisis was caused by the lack of proper government oversight, and would recommend increased government regulation. As Obama said on Letterman (9/22/09): "Because of the lack of regulation, for example, we ended up having to pony up hundreds of billions of dollars to banks. And that if we had some good regulations in place, we wouldn’t have had to do that."

Most people think of the FDIC as a the friendly Federal agency that insures your money if your bank goes belly up.  You can stash your money away safely, up to $250,000, and not worry about it because if anything happens, the FDIC will be there if things go bad.

That's how the fairy tale begins.

Too Big To Fail by Andrew Ross Sorkin is a fascinating and intricate play-by-play account of the events leading up to the Economic Crisis of 2008, culminating in the Credit Crisis in September, from the perspective of the leaders of all the big banks and government officials. The book is so richly detailed that it reads almost like fiction. One gets to know the personalities of all the main players, with their strengths and quirks, and experiences the roller coaster emotional atmosphere as this group of people creates history in the face of crisis.

In his recent New York Times Op Ed, Disaster and Denial, Paul Krugman argues that deregulation was the cause of the recent financial crisis, and that Republicans are simply in denial when they oppose increasing regulation. Krugman is wrong on both counts. The cause of the financial crisis was the housing bubble which was created by US government policy. And while there was deregulation, it had little effect on the financial crisis.

Rethinking Bank Regulation: Till Angels Govern (Book review)

Contrary to the common view that banking regulations improve the security of bank deposits and reduce risky and careless behavior by bankers, the actual evidence is to the contrary: regulation and government supervision actually reduces the stability of the banking system. We can make conjectures as to the reasons for this: government supervision lulls the public into a false sense of security and allows bankers to behave recklessly. Or the regulatory agencies eventually become overly influenced by self-interested political powers. Or even the proponents of regulation actually have sinister motivations (certainly true in some countries). Regardless of the reason, the fact remains: regulations don't work.

In their pioneering and comprehensive study of 150 banking systems around the world, internationally known banking experts James Barth, Gerard Caprio and Ross Levine contradict the conventional wisdom and show that regulations actually have adverse consequences on the banking industry, and probably always will, at least "till angels govern" (quoting from the political philosophy of James Madison).

The history of the US banking system is in part the history of attempts to prevent bank runs. It's almost inconceivable now: you hear a rumor that your bank might fail and you run to the bank to withdraw all your cash, hoping that they'll even have it on hand to be able to give it to you. You find a long line of people waiting outside, or a scene of people demonstrating and even panicking. You might feel lucky even if you get back some of your deposits.

The purpose of government is to protect the population.  And while our government has served this purpose well over the last 200 years, it has now gone too far.  It's time that we take back the responsibility to protect ourselves.  We no longer need the government to watch out for us.  In the past we were too busy or ignorant of banking systems and healthcare to make informed decisions for how to spend our money.  These days, with the level of education that most of us have, and the widespread use of the internet in which information flows freely, we are more than capable of protecting ourselves and our families without big government 'help'.  In fact, the problems that our nation faces today in banking, healthcare, and other areas are a direct result of our desire for government to take care of us.

Advocating for the financial decoupling of government and business.

No more bailouts.  Let the free market function.  Educate, not regulate.