We need to restore confidence in the US financial institutions

Tonight, the President addressed the joint session of the Congress. Unlike the typical State of the Union addresses, the President spoke directly to the American people, trying to explain why the $800B stimulus spending is necessary when the private sector spending is right now in retreat, and why the government needs to do whatever it takes to shore up the nation's financial institutions, to get the credit flowing again.

I think the President was articulate and made a strong case. In contrast, the Republican response, delivered by Louisiana governor Bobby Jindal, was so poor that it sounded like a botched Saturday Night Live skit.

The old Republican argument that "the government is not the solution, but the problem" sounds so irrelevant these days. If the Republicans don't believe government can ever work, why do they seek to be elected to public offices? To prove that government indeed does not work? Yeah, we got plenty of proof in the Bush administration. Bush's cynical view about the role of government led to massive outsourcing of critical government functions to private contractors run by those who put him in office. The end results were terrible and deadly (in both Iraq war and Hurricane Katrina).

OK, I don't want to go back talking about Bush nightmare anymore. It is past. Now the critical task is how to restore investors' confidence in the US financial institutions.

There are concerted efforts to undermine the financial institutions. Some cried for "nationalization of the banks", while others screaming "No more bailouts. Let the banks fail".

Do US financial institutions have adequate capital? The answer is an emphatic yes. Then you ask what is the problem? The problem isn't banks having insufficient capital. The problem is investors' confidence. Majority of the financial institutions need access to the debt market for financing. In normal time, there are plenty investors willing to lend money to the banks. But this is not normal time. Investors have doubt in banks' balance sheet. I think these doubts were healthy. For a long time investors risk premium was too low. But now, there are those short sellers out there trying to create panic among the investors. They claim that "the entire US financial institutions have ZERO equity", without needing any facts to substantiate the claim. And they pay the debt rating agencies to downgrade credit ratings of the banks. They went on the TV, masquerading as libertarian capitalists speaking on behalf of regular people against government help bailing out "Wall Street thieves". But their ulterior motives are to instigate a run-on-bank of the US financial institutions, create a self-fulfilling prophecy of doom-and-gloom.

In my previous post, I have argued that the bad asset issue related to subprime lending is a tiny tinny problem. The big problem is that investors losing confidence and refuse to lend. That is why investors are piling cash into treasury securities, considered risk-free. In this circumstance, the Fed, and the Treasury have to step in to be the lender of last resort. That is what they are doing. And that is why I believe they should continue doing that, and communicate their determination to the public, so that confidence may gradually be restored.

Bernanke today did some of that during his testimonies in front of the Congress. I need more forceful pronouncement from the government more often and more clear.

I am hopeful that today's >4% rally in the stock market is the beginning of an end of the current financial crisis.

Is subprime mortgage problem really the cause of current financial crisis?

I have come to the realization that subprime mortgage problem was just the trigger, not the true cause of the current financial meltdown.

Consider this analogy: there was a man smoking in a theater full of people (back in those old days when smoking was still allowed inside). He inadvertently burned his pants with his cigarette. The lady next to him shouted: "fire!". Then the next a few other also shouted: "fire!". some people started to run for the door. People in the back did not know what was happening, but heard "fire". Then they all started to run for the door. That created a stampede, and people pushed each other trying to get to the door. Children were crying, and ladies screaming. The theater door collapsed, many injured, and some even killed by the stampede.

This is what is happening now in the global financial system. The "fire" here was the subprime mortgages. But it was a small fire that could have been put out easily. The people who first called out the problem was right. Indeed we had a serious problem with the bad assets in subprime mortgages that the banks and financial institutions are holding on their balance sheet. But the scope of the problem was grossly exaggerated, sometimes deliberately by some people who could profit immensely from the problem.

These days it is a heresy to say subprime mortgage problem wasn't a big deal. But look at the facts: according to the Fed, at the end of Q2 2008, the total mortgages outstanding (both residential and commercial) was $14.8 trillion, 10% of which can be considered subprime. Residential mortgage delinquency rate was 6.41%, and foreclosure rate 2.75% (commercial mortgage delinquency rate was much much lower, less than 1%). Even we assume that ALL subprime mortgages were worth NOTHING, the money needed to completely stop subprime problem would be only 10% of the $14.8 trillion, which would be $1.48 trillion. How much money the Fed, FDIC and the Treasury have spent to rescue the banks and financial institutions? MORE than $7 trillion so far!
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What's the problem here? We have a classic run-on-bank situation here, triggered by subprime problem, but more importantly instigated by the hedge fund community and the short sellers. There has been a concerted effort to undermine the US financial institutions and create panic among investors.

Because of the constant bashing of the US financial institutions by characters like Peter Schiff, investors got really confused, and did not see that the real scope of the subprime mortgage problem was actually very limited. Then you had those credit analysts, who paid by their hedge fund clients, kept pushing down the credit ratings on banks and financial institutions in an attempt to instigate a run-on-bank. What you got in the end was a self-fulfilling prophesy.

Financial institutions are built on trust. When trust was gone, these institutions could no longer exist.

Fannie and Freddie were great cases in point. There weren't much problem with their mortgage assets. Fannie's mortgage delinquency rate was a little above 1% and Freddie was still below 1%, before they were rescued by the government and put into conservancy. Either institutions had much exposure to subprime mortgages at all. What happened was that Fannie and Freddie's capital market dried up, because investors simply did not want to lend money to any financial institutions at the time, not even Fannie and Freddie. The securitization market was completely frozen (thanks to Hank Paulson who let Lehman go under). In that circumstance, no matter how money good the assets were, the companies could not survive. That was a typical run-on-bank!

We have to stop all those stupid doom-and-gloom talks. We have to restore people's confidence in our financial system. If you understand what I put forth above, you would agree with me that there IS NO fundamental problem with the US financial institutions! There was a crisis of confidence problem. We need to restore that confidence.

The theory of evolution is seriously flawed

This year marks 200th year of the birth of Charles Darwin. There are many commemorations right now going on around the world. More than 150 years since the publication of his revolutionary thesis, "the origin of species", the whole world almost entirely accept his theory of "evolution through natural selection" as a matter of fact. Even the Vatican accepts Darwin's theory of evolution.

But if you carefully study the theory of evolution, and are intellectually honest, you will come to the conclusion, as I did, that the theory is seriously flawed.

Natural selection has supplanted God as explain-it-all. Whatever we cannot explain in biology, we attribute that to the result of natural selection. For example, why do dogs have extremely sensitive olfactory function (sense of smell)? Oh, it is the result of natural selection. Because this trait gives dogs survival advantage in nature. But why human did not attain such a trait? Or why not every animal attain such a trait, if this trait confers survival advantage?

Before Darwin, God was the ultimate answer to every question. After Darwin, natural selection gradually took the place of God.

I plea, for the sake of science, we have to break the shackle of the "natural selection" dogma. Let's probe deeper. Let's not be hindered by any presumed dogma. Let's be honest with our intellect and reason. The theory of evolution in its current form is completely erroneous.

Yes, I am a Christian, and I believe in God. But that is not the reason I question evolution. I used to be a complete atheist, growing up in an atheist country. In my first year in college, I took Biology 101. Towards to the final part of the course, the topic was evolution. I had a huge debate with my classmates, which lasted to the wee hours of the morning. And the next day we would have a final test for the class. I would rather fail the test than accept a flawed (stupid, as I called it at the time) theory.

I wasn't a Christian at that time. I never heard about God. But I was honest to myself, and to reason.

Natural selection simply cannot explain the diversity of species. In order for the nature to select certain traits, you have to have the traits to begin with. But aren't we trying to explain the ORIGIN of these traits? How can natural selection PRODUCE so many different traits? Later evolution theorists postulated that random mutations somehow happen to produce many features. Then the force of natural selection would only allow those desirable traits to survive.

But that is inconsistent with the fact. Let me give you a simple example: evolution theorists believe that amphibians were evolved from fish, because nature favors animals that can both live in water and on land. If that is true, then we would see only amphibians, no fish now, because nature has selected out fish in favor of amphibians. You have to have this selection pressure in order for species to evolve, right? If there weren't "negative natural selection" pressure on fish, how can fish evolve into amphibian when fish was perfectly fine being just fish?

Let's assume for a moment that random mutations actually were lucky enough to produce certain traits. But we are talking about extremely lucky. Let's consider the trait of vision for a moment. This trait is the result of coordinated work of multiple tissue functions: the eyeball (the "lens"), the muscles that adjust the "lens", the iris that regulates the input of light, and the nerve cells that transmit light signal to brain, and the brain cells that interpret the signal, and many many more. In order for such a complex trait to evolve out of nowhere, you have to have coordinated random mutations involving multiple tissue cells, and in a series of steps, to finally and luckily result in perfect vision. What a miracle! It is like you put a heap of metal fragments together, and suddenly there is a hurricane, and after the hurricane, alas, a new Boeing 747 was right there! Yes, this could happen, mathematically possible. But it may be easier to believe in God.

Archeological evidence does not support evolution, either. Species tend to spring out from no where in very short periods of time, and then you do not see emergence of any new species for a long long period of time. It seems that the emergence of new species occurred sporadically within very short periods. Darwin theory would have predicted gradual evolution of species, which means we should see emergence of new species all the time. But the fact is different from what Darwinism predicts. Later evolution theorists noticed this glaring contradiction. Some of them proposed a modified theory called "punctuated equilibrium". How punctuated was the process of evolution? Maybe six periods, like the six days in the book of Genesis?

It takes more faith to believe evolution than to believe God!

Who are against the stimulus plan?

There are three groups of people who are against the economic stimulus plan:
The first group are the ideologues. These people are inherently against any form of government intervention. They stick to their ideology and dogma, refuse to consider facts and practical matters. They are like the pharisees in Jesus time, who were against doing anything on sabbath day, even rescuing someone from drowning.

The second group are the short seller. They have a lot to gain financially if the economy continues to flounder and stock market languish. They bet against US economy, equities, mortgage debts, and US financial assets. These people care nothing else other than money. They have no ethics, no moral, no trace of human decency.

The third group are idiots, who knows nothing about economics or anything. They are simply against anything supported by Obama or the Democrats.

Any reasonable person would realize that it is imperative that the US government pass an economic stimulus plan.

Demand is shrinking. Initially the decline in demand was justified, because people over spent in the past few years. But now the decline in demand is spiraling down out of control, not because of the financial health of US household, but because of pure fear and lack of confidence. Because of the shrinking demand, businesses are cutting back production capacity and laying off massive number of workers. The massive job losses are further crimping demand and consumption. The vicious cycle is feeding on itself. If nothing is done to increase demand, stop factory closings, and stem the job loss, we will definitely go into a sustained period of depression.

In this case, one obviously would prefer businesses/private sector to step up, increase investment, stimulate demand and create jobs. But that is not happening. The private sector is holding backing, quite understandably. They are not willing to take risk to invest, not knowing when the economy would improve.

Given this reality, government HAS to step in, to increase demand for goods and services. With increasing demand, businesses will stop closing factories and laying off people. Then gradually consumer confidence will be restored. A normalized demand level will be established. Once demand stabilizes, business confidence will be restored. Risking taking and private investment will come back. New jobs will be created. As a result, consumer confidence will rise. Then demand will further improve, and the loop of positive feedback will result in gradual recovery of the economy.

At which point, the government stimulus can be removed. Increased tax revenue can be used to pay down the debt borrowed for the stimulus spending.