Fannie And Freddie Bailout Designed To Save The US Dollar Standard System

``Over the past few years, the Agencies were central to the process that brought the emerging world’s savings to the US housing market. And governments were involved every step of the way. When the world’s central banks (and other big bond investors) decided that the implicit US government backing for the Agencies wasn’t enough, the US government had to make the backing explicit.”-Brad Setser, Council of Foreign Relations, So true …

 

It was a highly volatile market out there this week.

 

The initial salvo was wild cheering from global equity markets on the recent action by the US Treasury to take its Government Sponsored Enterprise (GSE)-Fannie Mae and Freddie Mac- into “convervatorship” (quasi-nationalization). However, the festiveness quickly dissipated when the realities of “a weakening global economy”, the ramifications from the credit event of the F&F takeover on the Credit Default Swap Market and concerns over the persistent deterioration of US financial conditions as manifested by the lackluster capital raising quandary by Lehman Bros, which until recently, was the 4^th largest investment bank in the US, sunk into the consciousness of global investors which resulted to a retreat from most of the earlier gains.

 

The conservatorship program includes the taking over of management control of Fannie and Freddie (F&F) by its regulator the Federal Housing Finance Agency (FHFA), where common and preferred stock would be diluted and not eliminated. The takeover now alters the corporate objective of the GSEs to “improving mortgage financing conditions” from “maximizing common shareholder returns”.

 

The program also includes capital injection into the GSEs by US Treasury and FHFA to maintain the positive net worth of these agencies in order to fulfill its financial obligations, where in exchange the US Treasury receives “senior” preferred equity shares and warrants aimed at securing solvency.

 

Aside, a new credit facility designed to secure liquidity concerns will be introduced to backstop F&F and Federal Home Loan Banks, and which is set to expire on December 2009. Lastly, a temporary program will also be put in place to acquire GSE Mortgages in order to secure market liquidity of mortgage securities also slated to expire on December of 2009.

 

For starters, Agency securities are one of the world’s most widely held securities by both private and the public sectors (Sovereign Wealth Funds and Central banks).

 

Morgan Stanley’s Stephen Jen has a great breakdown on these (highlight mine),

 

`` Total foreign holdings of long-term USD securities increased from US$7.8 trillion in 2006 to US$9.8 trillion in 2007, with US$1.3 trillion of this annual increase from increased foreign holdings of US long-term debt securities, including US Treasuries, agencies, agency ABS and corporate bonds.  Foreigners are dominant in some of these markets.  For example, some 57% of the marketable Treasury securities are held by foreign investors. 

 

``Foreign investors’ appetite for US agencies – both straight agency debt and agency-backed ABS (also called agency pass-throughs) – has risen sharply.  (Fannie Mae and Freddie Mac (F&F) are government-sponsored enterprises (GSEs) with two main activities.  First, they securitise mortgages by converting conforming mortgage loans into tradable mortgage-backed securities (MBS).  Second, they have an ‘investment portfolio’ business, whereby they issue AAA rated agency debt to finance the holding of MBS or other assets.  The latter is a ‘carry trade’, capitalising on the then-implicit government guarantee.  One key part of the policy discussion regarding F&F is whether their second activity is justified.)   Of close to US$7.5 trillion in outstanding US agency debt and agency-backed ABS, some US$1.54 trillion (according to Fed flow of funds data, June 2008) is held outside the US, with China, Japan and AXJ being the largest holders of these securities, with US$985 billion of this latter figure held by foreign central banks. (The share of total US long-term securities held by foreign investors has more than doubled since 1994 (from 7.9% of the US$16 trillion in securities back then to 18.8% of the US$49 trillion outstanding as of 2007).” 

 

We featured a chart on the composition of foreign holdings of the F&F in Inflation: Myths And Beneficiaries. Nonetheless, private ownership of Agency backed papers appears to have stagnated since 2005 while foreign public ownership has steadily increased as shown in Figure 2.

Figure 2: Northern Trust: Foreign Public-Private Exposure On F&F

 

In perspective, aside from foreign holdings GSE debt securities are likewise owned by US households and institutions or financial entities as commercial banks, savings banks, credit unions, pension funds, life insurance companies mutual funds, brokers, ABS issuers and REITs.

 

However, as % of total outstanding debt, in 2007 ownership of GSE debt in pecking order: foreigners comprise 19.92%, followed by commercial banks 13.87%, households 12.06%, mutual funds 7.67% and ABS 5.13% (Northern Trust).

 

So when US Secretary Paulson was asked of the US government’s takeover of F&F, his reply as quoted by the Washington Post,

 

``"The U.S. government had no choice," he said.

 

``Mr. Paulson, in an interview with CNBC on Monday, said foreign pressure was not the "major driver" of the takeover, but acknowledged that "there's no doubt that there's fragility in the capital markets."

 

``"These companies are so big, and they are owned by investors all around the world. You are obviously going to get concerns," Mr. Paulson said. "It was definitely concerning overseas, but there was concern in this country. I tell you, my phone is ringing the most from investors here." 

 

This means the US financial system have reached a near calamity. 

 

However many had been quick to lash at the “conservatorship” program as virtually a bailout of foreign owners of agency securities.

 

While this perception seems partly correct, I think most of these critics ignore the fact that these actions basically signify a remedial patchwork to the emerging cracks at the Fiat Paper Money “US Dollar” standard system. The massive current account imbalances a common feature in today’s world tends to amplify on the systemic flaws especially amidst today’s heightened volatility.

 

At present, countries with current account surpluses at one side of the ledger need to be offset by countries with current account deficits at the opposite side. As an example, deficits of the US have been more than sufficiently covered for by capital flows from mostly emerging markets paving way for the unorthodox pattern of “Poor countries Financing The Rich”.

 

Yes, while various politicians and experts from around the world have boisterously decried about “social inequality”, unknowing to most is that such inflationary “inequality” mechanism appears to be the imbedded on the US dollar standard platform. Think of it, while profits are privatized, losses are socialized! Wall Street’s politically connected gets rescued, while the masses pay for the mess created by the former. The failed F&F model was demonstrative of the Keynesian brand of capitalism and not of the laissez faire genre. (Please don’t associate the fiat paper money standard as epitomizing laissez faire or free markets too. Same with currency markets, interest rate markets or even oil markets! These markets are controlled heavily by governments notably on the supply side. As an aside, the “anarchy” in the Shadow Banking System wasn’t symptomatic of a free market mess, but one of going around banking regulations or taking advantage of “regulatory loopholes” in order to take on added leverage by assuming more risk to magnify returns by the establishment of off-balance sheet Structured Investment Vehicles (SIV). Going around loopholes do not signify free market paradigms).

 

Going back to the unorthodox pattern of “Poor countries Financing The Rich”, during the gold standard, current account imbalances had effectively been curtailed by the shifts in the gold reserves by nation states engaged in trade. This essentially accounted for as an automatic adjustment mechanism, which is absent today under the digitalized and unlimited printing capabilities of central banks to churn out money “from thin air”.

 

And as we noted above, current account imbalances today need to be offset. During the recent past, the nations with current account surpluses signified as subsidies to domestic export-oriented industries but came at the expense of domestic consumers, i.e. China, Asia and other emerging markets. On the other hand, current account deficit nations run subsidies on domestic consumers via expanding domestic debt (financed by current account surplus countries) at the expense of domestic production. From which the transmission mechanism had been mainly via currency pegs or dollar links.

 

The foreign buying of agency papers or US debts were meant to sustain mercantilists’ policies by frontloading currency and interest rate risks in order to keep the exchange rate undervalued and thus promote domestic export oriented industries in order to expand employment. Hence, the currency manipulation policies that led to the current account imbalances had primarily been meant as a tool to manage domestic political risks.

 

In other words, the US dollar standard system paved way for political imperatives over economic goals, see figure 3.

Figure 3: Asianbondsonline.com: China-US yield curve

 

What sense would it make for a current account surplus country as China to buy or load up on assets of a depreciating currency, thereby suffer from currency loss? What sense too for current account country as China to buy assets whose yield is less than what is offered domestically, thereby suffer from opportunity cost of low interest rate spreads (assuming holding bonds until maturity)? And this has been going on for years!

 

The same for deficit countries, domestic consumers had been financed to go into a debt driven asset buying binge which resulted to overleveraged driven massive speculation, again for political goal of sustaining finance driven economic booms, where the demand from domestic consumption boom has greased the industries of current account surplus countries as China and emerging countries.

 

The US dollar, functioning as the world’s de facto currency reserve currency, has fundamentally been used by the US government to freely load up on debt, given its special privilege to underwrite from its own currency, by selling almost unlimited financial claims to international investors to finance such speculative unsustainable booms.

 

And as the US real estate and financial boom has basically unraveled, all these seem to be in a transition.

 

Recently there had been some signs of reluctance of nations with current account surpluses to stack up into agency papers. Of course, the recent actions by the US Treasury may seem to have assuaged the concerns of repayment by buying more into US treasuries instead of agency papers.

 

So what can we see from all these?

 

One, current account surpluses nations or foreign central banks seem to have the tolerance bandwidth, given their accrued currency reserves, to suffer from the risks of currency and interest rate losses provided they get repaid for holding these securities until maturity. I guess the actions by the US treasury may have answered such “repayment” concerns.

 

Two, foreigners which have been formerly financing the US real estate securitization boom appears to be bailing out, if not help tacitly ‘nationalize’ the structurally beleaguered industries by buying into agency papers until recently.

 

It also reveals of the extent of overdependence or vulnerability of the US on relying on foreign financing. The risk seems such that if foreign central banks or state owned Sovereign Wealth Funds or affiliated institutions would deem to have accumulated more US dollar reserves than what they might think is required, and change their priorities by reducing finance exposure to the US, which can even lead to more volatility in the US. Political factors can also hold sway to the appetite of foreign financing of US deficits.

 

In addition, understanding its present predicament and limitations, the “capital short” US government seems to be working feverishly to attract or to intermediate for foreign capital participation into buying out its besieged financial institutions. Example, a syndicate led by UK’s 3^rd largest bank, Barclay’s along with a “club rescue” team of “Temasek of Singapore and China Development Bank, was reportedly have shown willingness to back a deal that would put Barclays in the top tier of financial institutions.” (timesonline.co.uk)

 

Three, it’s all about the increasing integration of geopolitics or the decreasing hegemony of the US, as seen in the “Poor financing the Rich” aside from “Autocratic and non-democratic states financing democratic countries”!

 

Some Poor but Autocratic/non democratic nations that have been a beneficiary to the ongoing wealth transfer appear to have accumulated enough political clout as to weigh on the internal political policymaking of the US. 

 

Remember this quote from Yu Yongding, a former adviser to China's central bank quoted last in our Will King Dollar Reign Amidst Global Deflation? ``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic, if it is not the end of the world, it is the end of the current international financial system.” The recent political actions employed by the US government appeared to underscore such circumstances and Mr. Yu’s prayers seems to have been answered.

 

Or how about Russia’s recent military offensive against Georgia (as discussed in Toynbee’s Generational War Cycle: In Mindanao or In Georgia/South Ossetia?) which has practically left the US as a political nonparticipant to a besieged ally?

 

This only goes to show how the US looks to be losing its imperial edge over the global geopolitical economy and how the US dollar standard system appears to be in greater jeopardy. 

F&F Mix Results: Narrowing F&F Spreads But Defaults from F&F Credit Default Swaps

``In traditional finance, borrowers borrow and lenders lend. The only firms exposed to, say, home mortgages, are the banks that issue them. Thanks to derivatives, a firm with exposure can pass it off, and a firm with no exposure can assume it. Markets thus have less information about where risk lies. This results in periodic market shocks. Put differently, derivatives, which allow individual firms to manage risk, may accentuate risk for the group. Markets were stunned to discover that Long-Term Capital owned outsized portions of obscure derivatives. They dealt with that shock in typical fashion: they panicked.” - Roger Lowenstein, Long-Term Capital: It’s a Short-Term Memory

 

With the US government’s recent action to preserve the global monetary system, we find that aside from the undefined cost to taxpayers, the US treasury has now assumed the responsibility for the $5.3 trillion of mortgage securities aside from its outstanding $5.3 trillion of treasury securities as of March 2008.

 

So far, the US Treasury’s action has partially eased the yield spread of the F&F papers from its risk-free counterparts as shown in Figure 4.

Figure 4: Danske Bank: Before and After Spread of F&F vis-à-vis Fed Rate and 10 year Treasury

 

 

Even as the Federal rates had been lowered rates by 325 basis points as shown in the left panel in figure 4, the F&F rates have not equally responded. However, after the action taken by the US Treasury, the F&F rates dropped steeply as displayed in the right panel.

 

By lowering of the mortgage rates, the US government hopes to ease the burdens of homeowners smacked by a perfect storm of lack of access to credit, falling asset prices (real estate and stocks), rising unemployment, slowing economy and still high but fast declining energy/ fuel prices. 

 

And by narrowing the spreads from US treasuries, the US government hopes to provide cushion to the fast deteriorating financial and economic conditions by allowing investors access to cheap money which could feed into the mortgage market and buy F&F papers and thus restoring liquidity and confidence, aside from the credit ratings of the F&F papers.

 

But this doesn’t take away the fundamental problem of having too many houses for sale at prices buyers can’t seem to afford.

 

Moreover, the spreading of the mortgage woes to the level above the subprime market seems to be the next wave of credit concerns. The Alt-A mortgages covering about 3 million US household borrowers totaling some $1 trillion in mortgage papers with about $400 billion issued during the height of the boom in 2006 where an estimated 70% of borrowers were said to have exaggerated income (Bloomberg).

 

Aside the recent actions by the US government appear to have triggered a “credit event” in the CDS market of the F&F papers. A Credit Default Swap (CDS) is a credit derivative functioning as an insurance contract that pays if a company or “counterparty” defaults on its liabilities.

 

However unlike an insurance contract, the CDS market is many times more than size of the actual bonds referenced. The unregulated CDS market is estimated to be at around $62 trillion. The problem of which is if an outsized default occurs a contagion of non-collection from losses may lead to a systemic loss.

 

The recent “conservatorship” of F&F by the US Treasury has triggered defaults on some CDS contracts referencing to the F&F securities. The contracts affected were estimated at $250-$500 billion which should to result to some $10 to $25 billion in additional losses (Financial Times).

 

And perhaps some of these losses had been accounted for the recent volatility in the global markets.

Fannie & Freddie’s Conservatorship’s Possible Implications To Asia

``The US doesn’t just need US government money to support the US housing market: It needs money from foreign governments as well. And no one more than China. China’s central bank borrows RMB from the state banks (whether by selling sterilization bills or by hiking the reserve requirement) and then uses those funds to buy large quantities of Agencies. The flow of Chinese savings into the US housing market is entirely a government flow.”-Brad Setser, Council of Foreign Relations. So true … 

It’s nothing new from what we have been saying all along or from what we have been saying earlier.

The problem of the US deleveraging isn’t likely the same problem of Asia. Although much of the world’s tightened financial and economic linkages has unduly put to a strain on Asia’s financial markets. Aside from the slowdown in most of the OECD economies, which has likewise added to some pressures on the economic front.

Asia’s exposure to toxic papers remains modest as shown in figure 5.

Figure 5: IMF: Asia’s Exposure To Toxic Papers and External Debt

Next to the low exposure of Asian banks (as measured in % of equity) to toxic papers, the structure of external debt has been mostly long term except for Hong Kong, Singapore and Taiwan, which means financing woes have not been much of a significant concern.

 

Although we recently featured Korea as one of the apparent victims of the Fannie and Freddie’s where a foreign broker claimed the return of a currency crisis and a potential meltdown of Asia in Sequel To Asian Financial Crisis?, Costly Bailouts and Bernanke Buys Time, Figure 6 seem to dispel such concern.

Figure 6 IMF: Credit and Money Growth in Indonesia (left) and South Korea (right)

 

In short, much of the credit crunch in the OECD economies could have translated to a meaningful slowdown of liquidity growth in Asia, but this isn’t happening yet.

 

Broad money growth remains robust in South Korea (red) as shown in the right pane amidst a negative real interest rate (blue). In fact, money supply gained 13.2% last July (eastday.com). Yes, following the F&F takeover, Korea’s Kospi recovered by 5.24% while the won bounced from the streak of losses up 1.6%.

 

Meanwhile despite the 10% plunge in Indonesia’s JKSE index last week which had been linked to a sharp downturn in commodity prices. Credit growth seems to remain robust (left pane) courtesy of the IMF.

 

Funny how many of experts dug deep into the investing public’s psyche peddling the myth of how high “inflation” have caused the recent market rout. In terms of Indonesia, now that falling oil and commodity prices should equate to lower “inflation”, the rally in its market which should have happened seemed to have vanished altogether opposite the justifications by mainstream analysts.

 

Considering the dearth or selectivity of global liquidity much of the risk dynamics becomes more of micro than macro.

 

In the same way, these experts created the impression that the cutting of interest rates by the Bernanke’s Federal Reserves would lead to a rally global markets late 2007. It never happened.

 

In the same plane, local experts bruited about how remittances drove the Peso stronger. Where remittances remain at record levels, yet Peso has gone bust.

 

True, we can’t be wildly bullish on Asia because of the prevailing climate of uncertainty across the pond, but we should view this slack as an opportunity to accumulate than as an opportunity to run!

 

We believe that most of the selling that had accrued in Asia had been due to the ongoing deleveraging process (which includes unwinding of pair trades of the US dollar-commodity, momentum driven, aside from covert government support on the US dollar) which has importantly been the key link to most of the infirmities in Asian markets as shown in Figure 7.

Figure 7: US Global Investors: Declining Trend of Foreign Outflows

 

It is funny too how analysts screaming for us to run for the hills would use different data time frame references to prove or support their views. This cognitive bias is called “framing”.

 

Last August, we pointed out in Phisix: Knocking At The Exit Gates of the Bear Market! that 80% of the money which came into Asia in 2007 had been redeemed. Last week’s panic stricken analyst alluded to the size of foreign inflows from 2001 as a measure to portray a potential stampede amidst the gloomy outlook.

 

Well good enough, a chart provided by US Global Investors gives us a balance perspective. It reveals of almost the same pattern as we had been seeing in the Phisix: declining trend of foreign outflows!

 

According to US Global Investors, ``Net foreign selling in the emerging Asian markets since mid-2007 has exceeded more than half of the investment inflows seen in the 2003-2007 bull market. Capitulation among investors in the region might signal a rebound in stocks ahead.” (highlight mine)

 

Moreover, the recent actuation from the US government appears to give some light to Asian equities. This from the New York Times,

 

``But the takeover of the companies also reinforced concerns about troubles of the American economy and highlighted its significant reliance on foreign investors, particularly in Asia.”

 

If US policy actions had indeed been directed at Asia as caviled by some, then it is a blatant admission of dependence on Asian capital for the survival of the US dollar standard system.

 

Moreover, it also shows how much political capital Asia has generated enough exert influence on US policymaking to favorably act on its interests as in the case of F&F.

 

With the writing on the wall, how could one be bearish on Asia unless for short sighted reasons?

 

Finally I’d like to share this quote from Director of Research Robert J. Horrocks, PhD of Matthews International Capital (emphasis mine),

 

``The recent moves by the Treasury may help the process by which Asia reflates relative to the U.S., and this environment may be helpful for Asian financial stocks. They have been seen for too long as carrying the same kinds of credit risks as the Western banks, and Asian financial stocks suffered as their counterparts in the U.S. fell. Moves to reduce risk in the U.S. and global financial systems seem likely to favor Asian banks, which have clean balance sheets and strong underlying economies. Reducing risk in the U.S. debt market may also take pressure off regional currencies as investors worried that much of the official foreign exchange reserves were held in Fannie and Freddie debt.”

 

Now with the “inflation” scare and the “Fannie and Freddie” woes off the hook, would Asia find its legs and commence on a gradual recovery?

 

We’ll soon find out.

LHC Particle Collider/Black Hole Machine: Doomsday Deferred or Fears Unwarranted?

Mission Accomplished. Large Hadron Collider (LHC) successfully launched.

From BBC,

``Three decades after it was conceived, the world's most powerful physics experiment has sent the first beam around its 27km-long tunnel.

 

``Engineers cheered as the proton particles completed their first circuit of the underground ring which houses the Large Hadron Collider (LHC)...

``On Wednesday, they sent a proton beam around the full circumference of the LHC tunnel.

 

``Technicians had to be on the lookout for potential problems: "There are on the order of 2,000 magnetic circuits in the machine. This means there are 2,000 power supplies which generate the current which flows in the coils of the magnets," Steve Myers, head of the accelerator and beam department, told BBC News.

 

``If there was a fault with any of these, he said, it would have stopped the beam. They were also wary of obstacles in the beam pipe which could prevent the protons from completing their first circuit."

Has the fears been exaggerated? Or has doomsday simply been deferred?

The LHC controversy seems to me like a page taken out of the debate over "Global Warming".

Will Tomorrow Be Doomsday? “Black Hole” Machine Switches On

For our apocalyptist pundits, here is another good fodder; we should probably SELL because…

it is the END of the world!

 

But I guess it would be too late for that because the supposed date for the “end of the world” is said to happen tomorrow, Wednesday September 10^th!

 

How?

 

Because of this…

From Popsci.com: Large Hadron Collider: A machine that would “give birth to microscopic black holes”

 

A brief description from Newsky.com

 

``The Large Hadron Collider (LHC) is 12 stories high and cost £5b. It is buried more than 300ft under the Alpine foothills in a 17mile tunnel along the Swiss-French border.

 

``When the giant machine gets going, the LHC will blast protons - one of the building blocks of atoms - at a velocity just shy of the speed of light, generating temperatures of more than a trillion degrees centigrade.

 

``Each proton beam will pack as much energy as a Eurostar train travelling at 150 kilometres per hour.

 

``In layman's terms, the LHC will take protons and smash them together at high speeds.

 

``The resulting collisions will hopefully replicate conditions found in the moments following the Big Bang - or the beginning of the universe - and scientists will study the fallout.”

 

The Hadron Collider is scheduled to be switched on tomorrow.

 

Critics say that such experiment runs the risks of creating unwieldy “black hole” that might devour earth!

 

This from the BBC, ``But there are a small but significant group of naysayers who worry that the LHC is not 100% safe. Opponents say it is possible the collider could produce micro black holes and dangerous "strangelets", and that catastrophic effects from these cannot be ruled out.”

 

Some people think the risks are serious enough to bring it to court.

 

This from the Guardian

 

``If you think it's unlikely that we will all be sucked into a giant black hole that will swallow the world, as German chemistry professor Otto Rössler of the University of Tübingen posits, and so carry on with your life as normal, only to find out that it's true, you'll be a bit miffed, won't you?

 

``If, on the other hand, you disagree with theoretical physicist Prof Sir Chris Llewellyn Smith of the UK Atomic Energy Agency, who argues that fears of possible global self-ingestion have been exaggerated, and decide to live the next two days as if they were your last, and then nothing whatsoever happens, you'd feel a bit of a fool too.

 

``Rössler apparently thinks it "quite plausible" that the "mini black holes" the Cern atom-smasher creates "will survive and grow exponentially and eat the planet from the inside". So convinced is he that he has lodged an EU court lawsuit alleging that the project violates the right to life guaranteed under the European Convention of Human Rights.”

 

However most experts say that we shouldn’t be alarmed and that the experiment will run smoothly and that many information about universe could be uncovered to benefit us. Again from the BBC, `` However, the consensus of physicists is that the collider is perfectly harmless. Micro black holes would vanish almost instantaneously.”

 

We just pray that things will turn out fine as the consensus expects. Otherwise, doomsayers would be proven right for the wrong reasons-we should have sold early to enjoy our last days as running for the hills won’t do any good.

The Tragedy of Political Mascotism

``It is our moral and rationally selfish obligation to help others understand that freedom is not free.  And one of the biggest costs of freedom is an end to government handouts.”-Robert Ringer

 

Political mascotism is when incumbent political leaders use the underprivileged to dramatize or “put a face” on the predicaments of the society and to represent the “deprived” sectors supposedly meant to benefit from their proposed political programs.  This showcase of symbolism has been a conventional feature for almost every incumbent President of the Philippines during their SONA (State of the Nation Address).

 

Unfortunately for Mang Pandoy (Felipe Natanio), who served as the model of “courage and dedication to improve life” for the 1992 SONA of former President Fidel V. Ramos, passed away last week in the same destitute and disadvantaged conditions prior to his ascension as a political icon. RIP Mr. “Mang Pandoy” Natanio.

 

While media seemed quick to pounce on the opportunity to imply of the personality based “failure of leadership” attributes, what appeared to have been lost in the tragic Mang Pandoy experience is the most important lesson of all: the failure of government intervention through the patron-client based political economy.

 

We learned that following FVR’s SONA in 1992, Mang Pandoy was accorded with a television show “Ang Pandayan ni Mang Pandoy” (inquirer.net)which he co-hosted in a government owned TV station. Unfortunately, because of the lack of continued appreciation from the public, the show lasted for only 3 years. Although at the same time he was also appointed with a short-lived job at the House of Congress which likewise came to a close as his “popularity” faded.

 

But there had been other opportunities which he reportedly have also wasted; he was said to have been given livelihood projects which included a hog raising package, aside from scholarship grants for his children-from which none of his children availed to its fullest because of “lack of allowance and daily fare.”

 

UP professor Randy David quoted by the Inquirer.net poignantly encapsulates Mang Pandoy’s hapless living conditions (highlight mine), ``He had ended up expecting the government to help him all the time. But help was not always there.”

 

So instead of a role model for social and economic upliftment as the former President had envisioned for Mang Pandoy, he turned out to be a paradigm of unintended consequences for government welfare programs.

 

Apparently Mang Pandoy and his family’s utter reliance on government support have cost them numerous opportunities to progress. Applied on a multiplier scale, this is what I decry as the “dependency culture”, where absolute dependence on welfare programs or from gratuity of politicos translates to bigger government spending which takes a toll on the productivity aspects of the society. 

 

And lost productivity means higher costs of doing business which extrapolates to higher hurdle rates or lesser investment opportunities needed to boost the capital stock of the economy. Yet, without investments we can’t get the Mang Pandoys of the society out of poverty.

 

Remember, governments are essentially consumers of capital.  That’s the reason why they tax and use the coercive arm of its institutions to enforce collections. And when governments spend more via intervention in order to provide the Mang Pandoys their share of the economic pie, it also means that someone else would have to fund these activities. Funds, which should have been efficiently allocated to productive sectors and thus expand the labor pool and incomes, ends up subsidizing non-productive jobs or activities.

 

As the illustrious Ludwig von Mises of the Austrian School of Economics wrote in Socialism, ``All almsgiving inevitably tends to pauperize the recipient” aptly describes on the conditions of the Mang Pandoys of our society.

 

Yet lamentably our Mang Pandoys elect for the illusion of perpetual government sustenance instead of living on the ideals of having “courage and dedication to improve life”-the slogan ironically contrived by the former President Fidel Ramos for our Mang Pandoys. Noble sounding political slogans almost always end up as empty rhetoric.

 

Paradoxically too, the Mang Pandoys are the very constituents from where most of our politicians derive their innate strength for expanded political power. By pandering on the masses and to media by catering to the abstractionisms of “guiltism, envyism, villainism, covetism, and angerism” to quote self development author Robert Ringer, by encouraging more economic and financial dependence and by peddling the charade of simplified cure all solutions or elixirs to the society’s complex problems so they can arrogate for themselves more control over our lives and expand access to financing to whimsically bankroll programs for political or personal reasons.

 

In the words of conservative economist Thomas Sowell, ``Politics is largely the process of taking credit and putting the blame on others-- regardless of what the facts may be. Politicians get away with this to the extent that we gullibly accept their words and look to them as political messiahs.”

 

And while corruption has been a popular political issue, it has hardly been dealt by the media and our experts as a symptom to a systemic disease but one of personality based disorders which seem to always recur, if not deeply rooted in the bureaucratic culture. Hardly anyone tells you that the systemic corruption is an offshoot to BIG government. You reduce chances of corruption by minimizing their political power and by slashing wasteful and nonproductive discretionary spending.

Yet day in and day out we hear politicians offer themselves as the solutions to our problems. At the end of the day, we all end up as losers with the Mang Pandoy’s enduring most of the brunt. Headline stuff indeed. Unfortunately we never seem to learn.