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The Lighthouse is the weekly email newsletter of the Independent Institute.
Subscribe now, or browse Back Issues.

Volume 10, Issue 34: August 25, 2008

  1. Fannie and Freddie Fleece the Taxpayers
  2. Social Security Increases Poverty
  3. More on the Conflict in Georgia
  4. This Week in The Beacon

1) Fannie and Freddie Fleece the Taxpayers

By September of 2007, two government-sponsored enterprises—the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)—guaranteed or owned about half of all home mortgages in the United States, totally a staggering $5.2 trillion worth of debt. Investors acted as if the federal government would bail out these behemoths if the value of their assets fell too low—and the government hasn’t disappointed them. The housing rescue bill, passed by Congress in July, reinforced the belief that Fannie and Freddie are “too big to fail” by allowing the Treasury Department to extend unlimited lines of credit to Fannie and Freddie and, if necessary, to buy their stock. This legislation puts taxpayers at greater risk than before, argues University of Mississippi economist and Independent Institute Research Fellow William F. Shughart II in his latest op-ed.

“In a worst-case scenario, the two companies would be taken over by the federal government,” writes Shughart. “Taxpayers would then be fully responsible for their combined $5.2 trillion in debt, instantly increasing the national debt by 50 percent.”

Fannie and Freddie say they will raise new capital privately and take steps to slow down defaults and foreclosures, but it’s hard to see how they can reassure taxpayers, given the federal government’s willingness to bail them out. Continues Shughart: “Although Fannie claims to have tightened requirements for liar loans [i.e., loans requiring little or no documentation to corroborate a borrower’s claimed income or assets], it will keep buying them until year’s end. Stay tuned for more bad news.”

“Fannie and Freddie Fleece the Taxpayers,” by William F. Shughart II (Urbana Daily Citizen, 8/18/08)

Purchase Taxing Choice: The Predatory Politics of Fiscal Discrimination, edited by William F. Shughart II

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2) Social Security Increases Poverty

Social Security is often touted as a crucial safety net that protects American retirees from abject poverty. In reality, Social Security has made it harder for retirees to grow wealthier by reducing their ability to save and thus has contributed to poverty in old age, argues Texas A&M economist and Independent Institute Research Fellow Edgar K. Browning in a new op-ed based on his article for the summer 2008 issue of The Independent Review.

For those retiring in 2008, Social Security returned an average of slightly less than 3 percent on retirees’ contributions, adjusting for inflation. Had they invested their contributions in a balanced portfolio (60 percent stocks, 40 percent bonds), those retirees would have earned, on average, 5.5 percent—a huge difference when compounded over a lifetime. “In fact, the annual retirement income provided by a 5.5 percent return is double than that provided by the 3.0 percent return of Social Security,” writes Browning. “Even more compelling, an investment in the stock market averages a 7 percent real return, which would mean an annual income of three times what Social Security provides.”

The yield from Social Security looks even worse when you consider that savings fuel investment and economic growth. “When this cost is taken into account,” Browning continues, “the real return from Social Security to those retiring today is actually negative!” Social Security’s low returns will fall even lower after policymakers cut benefits or raise payroll taxes to deal with the growing number of retirees compared to the number of Social Security contributors. “The elderly poor, as well as the rest of us, are ill served by politicians who systematically downplay the huge costs of Social Security and delay confronting what is indeed a true crisis,” concludes Browning.

“Social Security Increases Poverty,” by Edgar K. Browning (8/22/08)

“The Anatomy of Social Security and Medicare,” by Edgar K. Browning (The Independent Review, Summer 2008)

The Independent Review: A Journal of Political Economy, edited by Robert Higgs. Subscribe through the website and save!

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3) More on the Conflict in Georgia

Three new op-eds written by Independent Institute scholars examine the conflict in Georgia and the growing tensions between the United States and the Russian Federation. In “Russia, Georgia, and the Kosovo Connection,” Research Fellow J. Victor Marshall argues that U.S. support for Kosovo’s independence from Serbia helped set the stage for the recent conflict in Georgia. “Just as NATO justified its intervention in 1999 as a humanitarian defense of Kosovo’s ethnic Albanians against Serbian atrocities,” writes Marshall, “so Russia said it came to the defense of South Ossetia, which suffered terrible atrocities at Georgian hands in the early 1990s, after Georgian troops shelled its capital earlier this month.” Marshall quotes several analysts who warned that U.S. support for an independent Kosovo could set a risky precedent for other countries.

Senior Fellow Ivan Eland looks at the effects of the unilateral U.S. abrogation of the Anti-Ballistic Missile Treaty in Poland, in “Missile Defense May Cause Downward Spiral in U.S.-Russian Relations.” Among other things, U.S. defense policymakers plan to deploy Patriot missiles in Poland, modernize Poland’s armed forces, and strengthen the U.S. commitments to defend Poland. “This unnecessary deployment will merely dump gasoline on the fire and will probably cause Russia to take more anti-Western actions in response,” Eland writes. “Russia has already said that by agreeing to house the system, Poland has opened itself to targeting by Russia.”

Finally, Senior Fellow Robert Higgs looks at how Georgia became a cause célèbre of the U.S. defense establishment in “A Funny Thing Happened on the Way to the Georgian Forum.” Although ethnic feuding in the South Caucasus would scarcely register on the U.S. radar screen but for its proximity to the Caspian oil basin, the U.S. government and its allies in the media have turned the story into a simplistic morality play of “good Georgia” versus “bad Russia.” Not to be overlooked is the bull market in defense stocks—especially fighter-jet and destroyer manufacturers—since Russia’s invasion of Georgia. “When the Russian bear growls, U.S. defense-sector investors break out the champagne and frolic along Wall Street,” writes Higgs. “[Georgia’s] GDP is about $20 billion, not even enough to buy a dozen B-2 bombers,” he continues. “But a tense confrontation between the Russians and the U.S. government is worth hundreds of billions to investors and other stakeholders in the military-industrial-congressional complex.”

“Russia, Georgia, and the Kosovo Connection,” by J. Victor Marshall (8/22/08)

“Missile Defense May Cause Downward Spiral in U.S.-Russian Relations,” by Ivan Eland (8/22/08)

“A Funny Thing Happened on the Way to the Georgian Forum,” by Robert Higgs (8/25/08)

Purchase The Empire Has No Clothes: U.S. Foreign Policy Exposed (Updated Edition), by Ivan Eland

Purchase Depression, War, and Cold War: Studies in Political Economy, by Robert Higgs

Center on Peace & Liberty (Ivan Eland, Director)

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4) This Week in The Beacon

The Beacon—the blog of the Independent Institute—invites your comments. Among last week’s Beacon posts are the following:

“Libertarian Paternalism,” by Peter Klein (8/22/2008)

“School Choice: Really Free, Semi-Free, or Flee as Fast as You Can?” by Jonathan Bean (8/21/2008)

“Police to Track All Vehicles into New York City,” by David Theroux (8/20/2008)

“Robert Higgs on Antiwar Radio,” by Anthony Gregory (8/20/2008)

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