Two people whose views are quire different, The Wizards of Paris, and Ed Friedman, have both pointed out to me that when considering the effects of previous United States Presidents and their administrations' policies on the current crisis in the US economy, President Reagan's policies and their effects must be included. Let's start with those and look for additional root causes in policies of other Presidents and their administrations.
President Reagan's administration did four main things that have had lasting economic effects that qualify as major causes of the current crisis. They are fundamental or root causes, not the immediate or proximate causes. We shall see that sometimes they merge.
What are those relevant and significant things the Reagan administration did?
1. It cut taxes.
2. It raised defense spending dramatically, leading to
(a.) a rapid rise in employment,
(b) a rise in the national debt, and,
(c) the intended collapse of the Soviet Union which realized it could not keep up with the Reagan defense spending levels.
3. Treasury Secretary "Tall Paul" Volker raised interest rates dramatically to reduce price increases inherited from the Carter administration. This added to the cost of doing business, which was offset by 1. and 2. above, i.e., the dramatic increase in Reagan's government spending and reduction in taxes, that also lead to a significant increase in the national debt.. That made it harder to deal with a future crisis, should it occur.
4. The Reagan administration accepted the views of the "freshwater economists" (Chicago School of Economics) that manufacturing jobs should be exported to countries with the lowest labor rates in the name of "efficiency." Where efficiency is unbelievably narrowly defined. Freshwater economists also believed in no taxation, so the companies that exported jobs picked up two quick and major advantages over those that still manufactured goods in this country:
(a) They paid no US taxes, and,
(b) they paid the world's lowest feasible labor rates.
Needless to say such corporations and the countries to which the transferred their manufacturing operations may have funded that school and hired it's professors as advisors! When I first heard the Chicago School's mantra that we should export manufacturing jobs, and I actually knew people who did export their own company's jobs to China, I said to myself. This will eliminate a major portion of jobs in the US and will ultimately and unavoidably lead to a very large US unemployment rate, possibly a collapse, and a decline in the power of the nation. It was obvious to me that there was no mechanism whereby jobs would be magically created as needed, I often say, by the tooth fairy, to pick up the slack. They said it would happen as needed. it was an article of faith, a religious dogma. I said they were mentally challenged. The disaster that would ultimately and inevitably follow was obvious.
It is very important to note that increasing government spending, as was done by Reagan, nowadays has less of a positive effect on US employment figures since so many goods purchased will be manufactured elsewhere. That needs to be change. That change is crucial.
The Clinton Administration pushed hard to implement actualize, and instantiate, the freshwater economist dogma. They said exporting manufacturing would increase US jobs and reduce unemployment. I said show me the mechanism. They said displaced US workers could be "retrained' to higher skill levels. I said to do what? When Vice President Al Gore came to MITRE and recommended that Barry Horowitz get rid of his "grey beards," my good friend and colleague Joe Cynamon said what do they want to retrain us to do? It was a funny line, since they never identified the new, and vastly superior skill set.
And what of the 50% of the people whose abilities are well suited to manufacturing work, and perhaps are not ready for or capable of a skill upgrade. Do we just throw them on the discard pile? Yes we do, we just raise the Core Unemployment number. Mission accomplished by academics! How brilliant a solution, and so elegant. No?
The Clinton administration was rescued by the rise in productivity due to the widespread introduction of personal computers into the business world. Skilled engineers could now do the work of secretaries, technical editors, and data entry technicians. So the number of employees shrank and skilled labor could now do much more menial tasks. There's a new skill set, right? Clinton's advisors felt the new personal computer industries would never export their jobs. Wasn't that a great assumption. Is there a single personal computer made in this country? (As of a few years ago there was one assembled here for gamers,) The freshwater group had obviously never sledded on a slippery slope when they were kids. An additional wonderful effect was the need for the economists to redefine the natural base level of core unemployment from less than 2 percent to 5 percent. They are now talking about 6 to 7 percent. Will it ever occur to them that exporting jobs leaves people unemployed or under employed? Hasn't occurred to them yet.
The Bush administration actuated a new national policy to eliminate all governmental oversight, regulation, and control of business and financial activity. That encouraged implementation of wild get rich quick schemes of the banking and energy industries which lead directly to the current collapse. We are approaching proximate causes.
Under Clinton and Bush, the internet bubble masked the decline of real wages, and the effects of rising core unemployment. Clinton exited just in time to avoid recognition for causing the reduction in real wages due to his push to export our manufacturing jobs. NAFTA for example.
A major root cause of the current disaster is the lack of oversight and regulation of the derivatives market under the Clinton and Bush administrations.
Regulation by the Commodity Futures Trading Commission (CFTC) was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretaries Robert Rubin and Lawrence Summers. On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the brilliant and effective Brooksley Born's CFTC’s concept release. Their response dismissed Born's concerns out of hand and focused on the possibility that CFTC regulation of swaps and other OTC derivative instruments would increase legal uncertainty of such instruments, potentially creating turmoil in the markets, and reducing the value of the instruments.
Further concerns voiced were that the imposition of new regulatory costs would stifle innovation and push transactions offshore. Bur pushing jobs offshore where labor is cheaper was AND IS part of their religious mantra. So why not these jobs? Oh, yes of course, these were jobs in their own fields. Don't forget, this is an industry near and dear to these non-regulation minded Federal "regulators." Only MANUFACTURING JOBS should be pushed offshore! (Prior posts I address the feasibility of keeping design jobs Onshore when the manufacturing has gone Offshore. That's another one of the absurd freshwater economists' religious dogmas.
The Bush administration added a number of additional proximate causes to the present debacle. Its mantra of deregulation is a primary proximate cause. The repeal of Glass-Steagell was a major proximate cause. The repeal, engineered by Senator Phil Gramm, of the second Glass–Steagall Act (the Banking Act of 1933), see below, lead to the energy, housing, banking and derivative instrument "manufacturing" and trading bubbles that masked the decline in US real wages and GDI.
The lack of oversight and regulation of derivatives by the CTFC morphed into a proximate cause from it's original status of a root cause when AIG was revealed to be insolvent. The survival of the pension plan of a dear friend of mine, and many others I imagine, depends on the survival of AIG, which basically insured the crap they bought.
The Bush administration could no longer hide the decline of real wages, taking into account real, not "core," inflation. To deal with the drop in US gross domestic income, they encouraged the banking industry to engineer a rise in housing prices. That way, most people's apparent wealth and the GDI would appear to rise as along with the amazing rise in the "value" of their house.
This was supported and encouraged by Senator Barney Frank who saw it as a way for more people to realize the American dream. He was not an expert on deregulation effects. It is not clear that he could have anticipated the resulting, totally fraudulent securitization industry in which Henry Paulson and other bankers, mortgage initiators, and financial houses played a dominant role. That was another proximate cause.
The Bush administration apparently encouraged credit rating firms like Moodys, and Standard and Poors, to rank worthless securitization garbage as AAA. I often wondered about the seemingly inexhaustible supply of credit available to fund ill-considered (stupid?) mergers and acquisitions. Those sources of credit were in fact totally fictitious, non-existant, and fraudulent. Another proximate cause identified.
Ain't deregulation grand?
Note: I really should go back and add a list of bullets on the proximate cause of the collapse, and I may do that in a follow up post. However, my main purpose in writing this was to address a good friend's underlying assumptions of Reagan's role and effects. I loved Ronnie!!!! I have not addressed the positive effects of some of his ideas and style.
Chic
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Interesting Note: April 21st: Moody's was slapped with a subpoena since the credit rating agency is not cooperating with Crisis Investigators
The panel created to investigate the roots of the financial crisis slapped credit rating agency Moody's Corp. with a subpoena Wednesday for failing to turn over key documents.
It's the first subpoena issued by the Financial Crisis Inquiry Commission to compel compliance, the panel's chairman, Phil Angelides, said during a conference call with reporters. The commission faces a December deadline to produce a report documenting and explaining the causes behind the worst financial crisis since the Great Depression.I am very pleased this committee's work.
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A major root and proximate cause of the current disaster is the lack of oversight and regulation of the derivatives market.
http://en.wikipedia.org/wiki/Brooksley_Born
Commodity Futures Trading Commission (CFTC) regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretaries Robert Rubin and Lawrence Summers.[4] On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the Brooksley Born's CFTC’s concept release. Their response dismissed Born's concerns out of hand and focused on the possibility that CFTC regulation of swaps and other OTC derivative instruments would increase legal uncertainty of such instruments, potentially creating turmoil in the markets, and reducing the value of the instruments. Further concerns voiced were that the imposition of new regulatory costs would stifle innovation and push transactions offshore.[7]
An economic and financial crisis affected US and world markets in 2008. As it gained momentum, newspapers began reporting on some of its possible causes, including the rejection of the CFTC's proposals and the adversarial relationship Greenspan, Rubin and Levitt had with Born.[8][4] The disagreement has been described not only as a classic Washington turf war,[6] but also as a war of ideologies as Greenspan and highly placed Clinton administration officials believed that, in large measure, the capital markets could be trusted to regulate themselves.[9]
Born declined to publicly comment on the unfolding 2008 crisis until March 2009 when she said: "The market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been."[6] She also lamented the influence of Wall Street lobbyists on the process and the refusal of regulators to discuss even modest reforms.[6]
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The effects of repealing Glass-Steagall - One or More Proximate Causes
Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision -- lobbied for by Enron, a major campaign contributor to Gramm -- that exempted energy trading from regulatory oversight. Basically, it enabled the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm's wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act.
In 2003, Gramm left the Senate to join UBS, which had acquired investment house PaineWebber due to his deregulation bill. At UBS, Gramm lobbied Congress, the Fed and the Treasury Department. During Gramm's tenor at UBS and as a lobbyist, Congress passed the Responsible Lending Act, billed as an anti-predatory-lending measure, but was called the "Loan Shark Protection Act" by consumer advocates, as it was designed to preempt stronger state laws against anti-predatory lending. The Fed largely ignored the underlying and growing problems within the subprime mortgage/housing markets, as Bernanke famously acknowledged the housing market in April, 2007 as, "[showing] signs of softening," but said that a "sharp slowdown," is unlikely. Henry Paulson former head of Goldman Sachs became the Treasury Secretary in July, 2007, when, In 2005, Goldman [he] securitized $68 billion in residential mortgages and $23 billion in 'other assets' primarily related to CDOs," With such self-interest, and a lack of the nation's interest, we can see how this subprime mess was allowed to escalate to such great proportions.
Monday, April 26, 2010
Wednesday, July 8, 2009
Should Congress or President Obama Restore The Funds Earmarked For Social Security?
In a comment On July 07, 2009, at 7:50 PM re the Motley Fool article I discussed in my prior post, "LessGovernment" detailed a useful timeline. I need to compare it to the one in an earlier post of mine:
However, I believe the author of the comment makes a few incorrect points and confuses "less government" with honest government:
With respect to Social Security Insurance the author writes "You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded."
The writer goes on: "It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history..."
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I disagree. Social Security was sold as an insurance plan. The premiums were originally kept track of as a unique item within the general fund. The plan worked properly until President Clinton removed the special label of Social Security account funds to make his budget look like it had less of a deficit. To preserve the Social Security Insurance's ability to pay into the future, we must restore the earmarked funds and their compound interest over the years that were removed by the Clinton administration and the Bush administration. Of course, that will increase the current budget shortfall, but Social Security will be honestly and better funded, thank you. Thieves have robbed the capital from our Social Security insurance policies. Your policy, my policy, and our children's and grandchildren's... Those stolen monies should be repaid today. I will be happy to help calculate how much was stolen and how much compound interest for each year's stolen funds must be returned to the Social Security account forthwith.
In my opinion, "LessGovernment" is wrong about needing less government. All the rules put in by the Roosevelt Administration were essential to the preservation of our economy and of our social fabric. What we do need is honest government.
Below is a good portion of the comment by LesGovernment..
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HOW WE GOT INTO THIS MESS
by LessGovernment
July 07, 2009, at 7:50 PM
...
Following the last great depression, Congress met and discussed the root causes of what killed the economy way back there in 1929. The result of their findings was that reckless behavior and speculative buying on wall street created a bubble that was not supportable by balance sheet assets. Stocks, banks, and life savings crashed as a result.
In 1933,
to keep this problem from occurring again, Congress created some support for the bank depositor in the form of the FDIC (Federal Deposit Insurance Corporation) and also mandated through the Glass-Steagall Act that banks that were federally insured would not be allowed to engage in insurance and other high risk businesses. If the government was going to insure your deposits at the local bank for your benefit and security, the local bank was going to behave and not engage in risky activities. We had learned a lesson in 1929 at great cost for the education, and this legislation was going to prevent the depression from happening again.
In 1971,
Congress passed the Federal Election Campaign Act which permitted Political Action Committees to make larger contributions to Congressional candidates than what was allowed by law for individuals. In short, Congress passed their own version of campaign finance reform that created the ability to have unlimited funding since there is no limit on the number of PAC's that can be created and nothing to prevent multiple PAC's from contributing to the same candidate. This (bad) legislation was intended to give the incumbent a definite edge over any challenger and help insure political dynasties.
In 1974,
Congress passed legislation called ERISA (Employee Retirement Income Security Act) through which the taxpayer would guarantee retirement expenses for any defined benefit plan that went into default. With this legislation also came the mandate for Congressional oversight through sub agencies that would require businesses to fully fund their plans. Well, oversight did not occur and plan administrators were allowed to use wildly optimistic assumptions to show the plans were funded when in fact they were not fully funded. These assumptions went something like this "The assets in the plan next year will earn 18% in the stock market, so we don't have to invest earnings into the plan and in fact, can remove money from the plan because based on our assumptions, the plan is over funded". As a result of the lack of oversight and enforcement, under funded retirement plans are now common. The Pension Benefit Guarantee Corporation (the fund now guaranteeing these plans that was created under ERISA) lacks sufficient funds to perform its function of guaranteeing these under funded plans. As a result of the lax oversight and the regulators allowing the use of the wildly optimistic assumptions as to funding needs, this Act will claim more and more taxpayer monies as more and more plans that have not been funded as required by law will have to be funded by the government (taxpayers). What has been set in motion is taxpayers with drastically reduced discretionary incomes for now and well into the future will now be the source of funding for the under funded plans that have on average much higher benefits than anything the average taxpayer now providing the funding will ever receive. Just another of the many unintended consequences of government run amuck as government drives headlong into socializing corporate losses to the taxpayer.
In 1977,
The Community Reinvestment Act (CRA) was passed. This act, as stated in its own words, "intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound banking operations". What was intended, and what occurred through enforcement are two entirely different results. This Act would later become instrumental in the economic disaster of 2007, some 30 years after passage of this act, because this Act enabled Congress and at least one President to "manage" (socialize) banking, mortgages, and credit which directly caused an overall lowering of quality of the mortgages used to back securities sold around the world. This was especially true during the Clinton administration from which pressure was applied to Fannie Mae and Freddie Mac to ease the credit restrictions on the mortgages they were buying. This was done to allow those without sufficient credit to still have access to a mortgage with only a slight increase in the interest rate to be paid. In other words, under enforcement of this act, the higher risk of loaning money to less credit worthy applicants was not to be offset with higher potential rewards in the form of a much higher interest rate. In fact, the interest rate differential for the much higher risk of default was only 1 percentage point and even then for only two years if the loan was paid on time. This "socialist" approach to the mortgage industry was obviously dangerous, and accordingly, the alarm was sounded by New York times writer Steven A. Holmes in an article entitled Fannie Mae Eases Credit To Aid Mortgage Lending dated September 30, 1999 (Google it to read it). Unfortunately, few if any of those that read the article (including all members of Congress) understood the ultimate scope and horrific impact this credit easing would eventually have. Few if any also understood how this very credit easing would ultimately lead to a major problem in the banking industry due to the failure of derivatives based on the mortgages created using these lax credit standards. This act, as enforced and regulated, actually lowered the mortgage standards for the entire mortgage industry and helped create the atmosphere of lax enforcement that also allowed shoddy appraisal work, little or no verification of ability to repay the loan, sloppy ratings of collateralized debt instruments, and what later became known as "predatory lending". In addition, enforcement of this act time and again caused banks to pay what amounted to extortion in order to gain regulatory approval for a new branch or an acquisition of another bank. This Act, and its socialist enforcement severely weakened the banking and credit industries.
In 1997,
Congressional oversight allowed Citi Bank to buy Travelers Insurance even though this transaction was in total violation of the Glass-Steagall Act passed by Congress in 1933. Thus the illegal birth of the era of "Financial Services" in which banking businesses insured by the government through the FDIC and other agencies were now to be allowed to get involved in the riskier aspects of financial services such as insurance and investment banking while still being federally insured.
In 1997,
Congress granted the illegal new business entity now called Citi-Group an exemption to the Glass-Steagall Act so it could operate in the temporary legal status of violating the Glass-Steagall Act but do so with permission from Congress. This is about as close to a Congressional "Get out of jail Free" card as you will ever see. PAC's were at the heart of this exemption being granted.
In 1999,
the Graham-Leach-Bliley Act was passed basically repealing the Glass-Steagall Act altogether. Citi-Group, as well as many, many others, could now legally operate without the Glass-Steagall Act exemption granted by Congress. The doors were now wide open to mix federally insured banking with risky investment banking, insurance, and "insurance like" businesses such as credit default swaps. Out the window went the knowledge and lessens learned from the great depression, and the stage was now set for a repeat of history as PAC's applied pressure to Congress for more and more deregulation in exchange for more and more campaign funds. The only thing now standing between loosely regulated banking and federal insurance and total banking failure is the requirement to hold sufficient amounts of capital to backup the "insurance like" promises of credit default swaps and debt instruments and derivatives. The exact wording in this legislation as to these important aspects follows:
Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.
Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities.
Oddly, this act did ask for a study to be conducted on derivatives and their risk, but apparently, no one got the message or if they did, they either performed a bad study (surprised?) or they failed to share it with anyone. This act also shows that as early as 1999, there was growing concern over the Frankenstein of banking "sort-of-banking" that this legislation was bringing to life. Frankenstein would later be known as "to big to fail". The exact wording in this legislation as to this important aspect follows:
Provides for a study of the use of subordinated debt to protect the financial system and deposit funds from "too big to fail" institutions and a study on the effect of financial modernization on the accessibility of small business and farm loans.
This piece of legislation, not yet harmful enough, also reinforced the Community Reinvestment Act (CRA) of 1977 in a couple of significant and harmful ways. This was done by withholding Federal Reserve permits for a new branch or to form a new bank holding company if the entity applying for the permit did not rate "high" enough during the latest CRA compliance exam. CRA compliance regulators now had the power to stop a bank's growth or even withhold its permit to operate. This provision is referred to in the 1977 CRA paragraph above as having "…caused banks to pay what amounted to extortion". The exact wording (and it is despicable) in this legislation that did this follows:
The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.
If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.
My Explanation of the above- If any single branch of your thousands of branches (if you are a large bank) did not "earn" a satisfactory rating from the CRA examiner, the entire banking operation had a big problem. The CRA examiner at this point has too much power, the CRA exam is too suggestive, and the CRA exam has absolutely nothing to do with sound banking practices, and in fact, throws sound banking out the window as the CRA forces banks to be politically correct at the expense of sound banking. This is where the banks were forced to pay "extortion" in the form of knowingly making bad loans in order to survive and prosper under CRA. This is a world gone mad and the entire world will pay a dear price for this in 2007-2008-2009-2010-2011 and beyond.
In 2000,
The Commodity Futures Modernization Act was passed with support from Fed Chairman Alan Greenspan and mostly Republican support in congress. It and was introduced and supported in the House as H. R. 5660 by Thomas Ewing (R-IL), Thomas J. Bliley, Jr. (R-VA), Larry Combest (R-TX), John J. LaFalce (D-NY), Jim Leach (R-IA), and was introduced and supported in the Senate as S. 3283 and was sponsored and supported by Sen. Richard Lugar (R-IN), Sen. Peter Fitzgerald (R-IL), Sen. Phil Gramm (R-TX), Sen. Chuck Hagel (R-NE), Sen. Thomas Harkin (D-IA), and Sen. Tim Johnson (D-SD).
This Act was signed into law by President Bill Clinton (the same president that had been pushing Fannie and Freddie to lower credit standards on the loans they would buy) in December 2000
What this Act did that was so bad was simply to make most over-the-counter derivatives contracts outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.
With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.
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The reader should take note that Congress has at this point:
Removed the banking industry safeguards put in place following the great depression
Forced banks to make what amounts to bad loans
Forced Fannie Mae and Freddie Mac to lower their credit standards
Forced Fannie and Freddie to buy the bad loans banks and other loan originators were being forced to make under the Community Reinvestment Act
Allowed Fannie and Freddie to securitize and sell to the world AAA rated securitized debt that used bad loans as collateral
Forced (through CRA enforcement policies) the entire banking industry to become politically correct regardless of risk and potential cost
Failed to regulate the banking industry adequately
Placed regulation responsibility of international banks onto states for the insurance like activities of the banks (an impossibility)
Failed to regulate and enforce ERISA law
Failed to ensure pension plans were adequately funded as required by law
Allowed government insured banks to get more and more involved in the riskier banking functions regardless of the risk being transferred to the taxpayer.
In short, Congressional legislation and lack of oversight had at this point put the entire economy on a course to disaster. This disaster could still have been avoided, but people, especially those in Congress, had to listen to the warnings. They didn't.
In 2002 and 2003, with the stage set as described above, Congress failed to listen to the testimony in Congress, on the record, from experts that Fannie Mae and Freddie Mac now represented huge systemic risk to the entire financial system through the "assumed" risk that the GSE's were backed by the government. Keep in mind that at this point in time, the GSE's were, by act of Congress, NOT backed by the federal government. All that was being asked of Congress in this testimony was to simply make that fact clear, that no government guarantee existed.
Instead, Congress (under the leadership of Barney Frank and others) pushed even harder for the GSE's to increase home ownership through purchasing even more risky mortgages with little or no money down and other obviously bad practices. In the process, the balance sheet exposure (risk to the taxpayer) increased from 132 billion of exposure in 1990, to 1.5 trillion in 2005, to 5.2 trillion in 2007. When the housing bubble began to pop in late 2005 or early 2006, Fannie and Freddie immediately fell into desperate financial condition due to the accounting irregularities on their books and their low grade collateral that was being used to back the trillions of dollars of securitized debt.
Now, with the stage completely set for economic catastrophe, that is exactly what America got.
There is only one reasonable reaction at this point in time and that is to Fire Congress. Do not vote for an incumbent ever in the future. Do not re-elect anyone. This, and only this, will remove the power and influence of the PAC's (bad legislation) and curtail the need to write ear marks to benefit special interests in exchange for campaign funds.
...
...
...
We have now reached the point where the Federal Reserve Bank itself is giving IOU's to the Treasury for the Treasury debt it is purchasing. In other words, we are now at the point of selling our debt on credit. This is simply nuts.
ERISA funds are over committed, the FDIC is running low on funds and will need more from the Treasury, the federal highway fund is broke, Social Security is unfunded, Medicare is unfunded, federal retirement is unfunded, and now states are coming forward and asking to be bailed out of their own multi-billion dollar problems.
We will most likely add over five trillion dollars of debt and exposure (guarantees) to our 9 trillion dollar November 2007 national debt before the end of 2011. Our unfunded obligations of Social Security, Medicare, federal retirement, and others now exceed 80 trillion dollars. And what is the government now trying to do? Are they cutting spending? Are they trying to get the financial house in order? No. They are trying to create yet another plan called government provided health care that they will also not be able to fund.
If they want this plan, we should first insist that social security is put on a track of being totally funded first, and the same for Medicare, and the same for government retirement, and the same for the federal highway fund, and the same for PBGC, and the same for FDIC, and the same for FSLIC, and the same for all the others, or kill one or more of these plans if they can not be fully funded. Once all these unfunded obligations are totally funded or killed, then and only then should we proceed with any new entitlements. However, judging from the careless and reckless legislation from the past, and the speeches and promises of today, there is little hope that the new administration and Congress will be this logical.
You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded.
It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history. And with the government tax bite growing all the time, the taxpayer due to tax creep is now nearing the position, or is already in the position of not being able to save. This is the quandary we now face. The government won't save and the taxpayer can't save so we borrow the money we need to run our lives from countries around the world and commit yet more tax dollars to debt service making the matter worse. This is ridiculous. What is even more ridiculous is the president wants to add yet another plan...
...
...
...
However, I believe the author of the comment makes a few incorrect points and confuses "less government" with honest government:
With respect to Social Security Insurance the author writes "You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded."
The writer goes on: "It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history..."
_________________________________
I disagree. Social Security was sold as an insurance plan. The premiums were originally kept track of as a unique item within the general fund. The plan worked properly until President Clinton removed the special label of Social Security account funds to make his budget look like it had less of a deficit. To preserve the Social Security Insurance's ability to pay into the future, we must restore the earmarked funds and their compound interest over the years that were removed by the Clinton administration and the Bush administration. Of course, that will increase the current budget shortfall, but Social Security will be honestly and better funded, thank you. Thieves have robbed the capital from our Social Security insurance policies. Your policy, my policy, and our children's and grandchildren's... Those stolen monies should be repaid today. I will be happy to help calculate how much was stolen and how much compound interest for each year's stolen funds must be returned to the Social Security account forthwith.
In my opinion, "LessGovernment" is wrong about needing less government. All the rules put in by the Roosevelt Administration were essential to the preservation of our economy and of our social fabric. What we do need is honest government.
Below is a good portion of the comment by LesGovernment..
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HOW WE GOT INTO THIS MESS
by LessGovernment
July 07, 2009, at 7:50 PM
...
Following the last great depression, Congress met and discussed the root causes of what killed the economy way back there in 1929. The result of their findings was that reckless behavior and speculative buying on wall street created a bubble that was not supportable by balance sheet assets. Stocks, banks, and life savings crashed as a result.
In 1933,
to keep this problem from occurring again, Congress created some support for the bank depositor in the form of the FDIC (Federal Deposit Insurance Corporation) and also mandated through the Glass-Steagall Act that banks that were federally insured would not be allowed to engage in insurance and other high risk businesses. If the government was going to insure your deposits at the local bank for your benefit and security, the local bank was going to behave and not engage in risky activities. We had learned a lesson in 1929 at great cost for the education, and this legislation was going to prevent the depression from happening again.
In 1971,
Congress passed the Federal Election Campaign Act which permitted Political Action Committees to make larger contributions to Congressional candidates than what was allowed by law for individuals. In short, Congress passed their own version of campaign finance reform that created the ability to have unlimited funding since there is no limit on the number of PAC's that can be created and nothing to prevent multiple PAC's from contributing to the same candidate. This (bad) legislation was intended to give the incumbent a definite edge over any challenger and help insure political dynasties.
In 1974,
Congress passed legislation called ERISA (Employee Retirement Income Security Act) through which the taxpayer would guarantee retirement expenses for any defined benefit plan that went into default. With this legislation also came the mandate for Congressional oversight through sub agencies that would require businesses to fully fund their plans. Well, oversight did not occur and plan administrators were allowed to use wildly optimistic assumptions to show the plans were funded when in fact they were not fully funded. These assumptions went something like this "The assets in the plan next year will earn 18% in the stock market, so we don't have to invest earnings into the plan and in fact, can remove money from the plan because based on our assumptions, the plan is over funded". As a result of the lack of oversight and enforcement, under funded retirement plans are now common. The Pension Benefit Guarantee Corporation (the fund now guaranteeing these plans that was created under ERISA) lacks sufficient funds to perform its function of guaranteeing these under funded plans. As a result of the lax oversight and the regulators allowing the use of the wildly optimistic assumptions as to funding needs, this Act will claim more and more taxpayer monies as more and more plans that have not been funded as required by law will have to be funded by the government (taxpayers). What has been set in motion is taxpayers with drastically reduced discretionary incomes for now and well into the future will now be the source of funding for the under funded plans that have on average much higher benefits than anything the average taxpayer now providing the funding will ever receive. Just another of the many unintended consequences of government run amuck as government drives headlong into socializing corporate losses to the taxpayer.
In 1977,
The Community Reinvestment Act (CRA) was passed. This act, as stated in its own words, "intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound banking operations". What was intended, and what occurred through enforcement are two entirely different results. This Act would later become instrumental in the economic disaster of 2007, some 30 years after passage of this act, because this Act enabled Congress and at least one President to "manage" (socialize) banking, mortgages, and credit which directly caused an overall lowering of quality of the mortgages used to back securities sold around the world. This was especially true during the Clinton administration from which pressure was applied to Fannie Mae and Freddie Mac to ease the credit restrictions on the mortgages they were buying. This was done to allow those without sufficient credit to still have access to a mortgage with only a slight increase in the interest rate to be paid. In other words, under enforcement of this act, the higher risk of loaning money to less credit worthy applicants was not to be offset with higher potential rewards in the form of a much higher interest rate. In fact, the interest rate differential for the much higher risk of default was only 1 percentage point and even then for only two years if the loan was paid on time. This "socialist" approach to the mortgage industry was obviously dangerous, and accordingly, the alarm was sounded by New York times writer Steven A. Holmes in an article entitled Fannie Mae Eases Credit To Aid Mortgage Lending dated September 30, 1999 (Google it to read it). Unfortunately, few if any of those that read the article (including all members of Congress) understood the ultimate scope and horrific impact this credit easing would eventually have. Few if any also understood how this very credit easing would ultimately lead to a major problem in the banking industry due to the failure of derivatives based on the mortgages created using these lax credit standards. This act, as enforced and regulated, actually lowered the mortgage standards for the entire mortgage industry and helped create the atmosphere of lax enforcement that also allowed shoddy appraisal work, little or no verification of ability to repay the loan, sloppy ratings of collateralized debt instruments, and what later became known as "predatory lending". In addition, enforcement of this act time and again caused banks to pay what amounted to extortion in order to gain regulatory approval for a new branch or an acquisition of another bank. This Act, and its socialist enforcement severely weakened the banking and credit industries.
In 1997,
Congressional oversight allowed Citi Bank to buy Travelers Insurance even though this transaction was in total violation of the Glass-Steagall Act passed by Congress in 1933. Thus the illegal birth of the era of "Financial Services" in which banking businesses insured by the government through the FDIC and other agencies were now to be allowed to get involved in the riskier aspects of financial services such as insurance and investment banking while still being federally insured.
In 1997,
Congress granted the illegal new business entity now called Citi-Group an exemption to the Glass-Steagall Act so it could operate in the temporary legal status of violating the Glass-Steagall Act but do so with permission from Congress. This is about as close to a Congressional "Get out of jail Free" card as you will ever see. PAC's were at the heart of this exemption being granted.
In 1999,
the Graham-Leach-Bliley Act was passed basically repealing the Glass-Steagall Act altogether. Citi-Group, as well as many, many others, could now legally operate without the Glass-Steagall Act exemption granted by Congress. The doors were now wide open to mix federally insured banking with risky investment banking, insurance, and "insurance like" businesses such as credit default swaps. Out the window went the knowledge and lessens learned from the great depression, and the stage was now set for a repeat of history as PAC's applied pressure to Congress for more and more deregulation in exchange for more and more campaign funds. The only thing now standing between loosely regulated banking and federal insurance and total banking failure is the requirement to hold sufficient amounts of capital to backup the "insurance like" promises of credit default swaps and debt instruments and derivatives. The exact wording in this legislation as to these important aspects follows:
Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.
Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities.
Oddly, this act did ask for a study to be conducted on derivatives and their risk, but apparently, no one got the message or if they did, they either performed a bad study (surprised?) or they failed to share it with anyone. This act also shows that as early as 1999, there was growing concern over the Frankenstein of banking "sort-of-banking" that this legislation was bringing to life. Frankenstein would later be known as "to big to fail". The exact wording in this legislation as to this important aspect follows:
Provides for a study of the use of subordinated debt to protect the financial system and deposit funds from "too big to fail" institutions and a study on the effect of financial modernization on the accessibility of small business and farm loans.
This piece of legislation, not yet harmful enough, also reinforced the Community Reinvestment Act (CRA) of 1977 in a couple of significant and harmful ways. This was done by withholding Federal Reserve permits for a new branch or to form a new bank holding company if the entity applying for the permit did not rate "high" enough during the latest CRA compliance exam. CRA compliance regulators now had the power to stop a bank's growth or even withhold its permit to operate. This provision is referred to in the 1977 CRA paragraph above as having "…caused banks to pay what amounted to extortion". The exact wording (and it is despicable) in this legislation that did this follows:
The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.
If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.
My Explanation of the above- If any single branch of your thousands of branches (if you are a large bank) did not "earn" a satisfactory rating from the CRA examiner, the entire banking operation had a big problem. The CRA examiner at this point has too much power, the CRA exam is too suggestive, and the CRA exam has absolutely nothing to do with sound banking practices, and in fact, throws sound banking out the window as the CRA forces banks to be politically correct at the expense of sound banking. This is where the banks were forced to pay "extortion" in the form of knowingly making bad loans in order to survive and prosper under CRA. This is a world gone mad and the entire world will pay a dear price for this in 2007-2008-2009-2010-2011 and beyond.
In 2000,
The Commodity Futures Modernization Act was passed with support from Fed Chairman Alan Greenspan and mostly Republican support in congress. It and was introduced and supported in the House as H. R. 5660 by Thomas Ewing (R-IL), Thomas J. Bliley, Jr. (R-VA), Larry Combest (R-TX), John J. LaFalce (D-NY), Jim Leach (R-IA), and was introduced and supported in the Senate as S. 3283 and was sponsored and supported by Sen. Richard Lugar (R-IN), Sen. Peter Fitzgerald (R-IL), Sen. Phil Gramm (R-TX), Sen. Chuck Hagel (R-NE), Sen. Thomas Harkin (D-IA), and Sen. Tim Johnson (D-SD).
This Act was signed into law by President Bill Clinton (the same president that had been pushing Fannie and Freddie to lower credit standards on the loans they would buy) in December 2000
What this Act did that was so bad was simply to make most over-the-counter derivatives contracts outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.
With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.
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The reader should take note that Congress has at this point:
Removed the banking industry safeguards put in place following the great depression
Forced banks to make what amounts to bad loans
Forced Fannie Mae and Freddie Mac to lower their credit standards
Forced Fannie and Freddie to buy the bad loans banks and other loan originators were being forced to make under the Community Reinvestment Act
Allowed Fannie and Freddie to securitize and sell to the world AAA rated securitized debt that used bad loans as collateral
Forced (through CRA enforcement policies) the entire banking industry to become politically correct regardless of risk and potential cost
Failed to regulate the banking industry adequately
Placed regulation responsibility of international banks onto states for the insurance like activities of the banks (an impossibility)
Failed to regulate and enforce ERISA law
Failed to ensure pension plans were adequately funded as required by law
Allowed government insured banks to get more and more involved in the riskier banking functions regardless of the risk being transferred to the taxpayer.
In short, Congressional legislation and lack of oversight had at this point put the entire economy on a course to disaster. This disaster could still have been avoided, but people, especially those in Congress, had to listen to the warnings. They didn't.
In 2002 and 2003, with the stage set as described above, Congress failed to listen to the testimony in Congress, on the record, from experts that Fannie Mae and Freddie Mac now represented huge systemic risk to the entire financial system through the "assumed" risk that the GSE's were backed by the government. Keep in mind that at this point in time, the GSE's were, by act of Congress, NOT backed by the federal government. All that was being asked of Congress in this testimony was to simply make that fact clear, that no government guarantee existed.
Instead, Congress (under the leadership of Barney Frank and others) pushed even harder for the GSE's to increase home ownership through purchasing even more risky mortgages with little or no money down and other obviously bad practices. In the process, the balance sheet exposure (risk to the taxpayer) increased from 132 billion of exposure in 1990, to 1.5 trillion in 2005, to 5.2 trillion in 2007. When the housing bubble began to pop in late 2005 or early 2006, Fannie and Freddie immediately fell into desperate financial condition due to the accounting irregularities on their books and their low grade collateral that was being used to back the trillions of dollars of securitized debt.
Now, with the stage completely set for economic catastrophe, that is exactly what America got.
There is only one reasonable reaction at this point in time and that is to Fire Congress. Do not vote for an incumbent ever in the future. Do not re-elect anyone. This, and only this, will remove the power and influence of the PAC's (bad legislation) and curtail the need to write ear marks to benefit special interests in exchange for campaign funds.
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We have now reached the point where the Federal Reserve Bank itself is giving IOU's to the Treasury for the Treasury debt it is purchasing. In other words, we are now at the point of selling our debt on credit. This is simply nuts.
ERISA funds are over committed, the FDIC is running low on funds and will need more from the Treasury, the federal highway fund is broke, Social Security is unfunded, Medicare is unfunded, federal retirement is unfunded, and now states are coming forward and asking to be bailed out of their own multi-billion dollar problems.
We will most likely add over five trillion dollars of debt and exposure (guarantees) to our 9 trillion dollar November 2007 national debt before the end of 2011. Our unfunded obligations of Social Security, Medicare, federal retirement, and others now exceed 80 trillion dollars. And what is the government now trying to do? Are they cutting spending? Are they trying to get the financial house in order? No. They are trying to create yet another plan called government provided health care that they will also not be able to fund.
If they want this plan, we should first insist that social security is put on a track of being totally funded first, and the same for Medicare, and the same for government retirement, and the same for the federal highway fund, and the same for PBGC, and the same for FDIC, and the same for FSLIC, and the same for all the others, or kill one or more of these plans if they can not be fully funded. Once all these unfunded obligations are totally funded or killed, then and only then should we proceed with any new entitlements. However, judging from the careless and reckless legislation from the past, and the speeches and promises of today, there is little hope that the new administration and Congress will be this logical.
You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded.
It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history. And with the government tax bite growing all the time, the taxpayer due to tax creep is now nearing the position, or is already in the position of not being able to save. This is the quandary we now face. The government won't save and the taxpayer can't save so we borrow the money we need to run our lives from countries around the world and commit yet more tax dollars to debt service making the matter worse. This is ridiculous. What is even more ridiculous is the president wants to add yet another plan...
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Tuesday, July 7, 2009
The New Subprime
Morgan House wrote an interesting article that appeared recently on the Motley Fool Website.
http://www.fool.com/investing/general/2009/07/07/the-new-subprime.aspx
The causes are more fundamental than those identified by the author in the following two paragraphs of the article:
1. "In short, many "prime" borrowers might just be subprimers with inflated credit scores. This is also true for people who used the proceeds from home equity loans on one property as a down payment for another. The big down payment made the borrowers look financially fit, but it was all an illusion that didn't reflect their true creditworthiness. They were simply moving debt from one inflated house to another."
2. "In addition, the housing bubble's income distortion also made millions appear more creditworthy than they really were. According to noted economist Mark Zandi, 23% of all new jobs created during the 2003-2006 recovery were housing-related. This includes everyone from mortgage bankers at Citigroup (NYSE: C) to construction workers at KB Home (NYSE: KBH) to (ostensibly) checkers at Home Depot (NYSE: HD). To some degree, the prosperity of all of these jobs was artificially magnified. In a wildly extreme example, Faber's book describes people who went from delivering pizza to working as mortgage brokers making $20,000 a month. (I'd assume they ultimately wound up in the unemployment line). All of this created a stunning short-term illusion of prosperity that allowed armies of borrowers to qualify as "prime" when they were far, far from it."
Due diligence, or should I say Honest Due Diligence, on the part of the lender would not permit granting any high rating to these borrowers. As of last week, the Hudson City Bancorp which is good sized, has six (6) defaults in New Jersey. Yes, six, not six thousand. All of these six are due to second mortgages issued by large "Banks." Hudson City Bancorp (HCBK Quote) Chairman, President and CEO, Ron Hermance, has noted that he realizes a good profit from each of these defaults, because he underwrote, if memory serves me correctly, only a fraction of the current actual value today!!! He and his mortgage writers just did their homework and loaned on value. ALL of the phony reasons cited for lending to people whose property had much lower values were fraudulent.
This was ALL the same scam. The scam is turning in phony information with inadequate documentation. I have bought and sold lots property over the years. In the last twenty years I had to provide proof of everything. That included two years of Federal tax returns!!! That was true when I bought my current house in Tucson in 2000. The need to prove ability to pay went away in the last few years.
Phony credit scores are irrelevant. Where was the due diligence on the part of the issuing lender and on the part of the receiving lender?
There was a lot of fraud because the fees and bonuses for being a conspirator in this large scale conspiracy to commit fraud were so large.
OK, the "Writers" at mortgage companies of the low or no documentation mortgages and the bank officers who purchased them were crooks. We can identify further the appraisers who asked "what number are you looking for"?
Let us not forget the folks at the rating agencies who rated the credit worthiness of these sliced and diced phony "financial instruments" as AAA when it was clear they were intrinsically worthless. If you are lending to those who will not be able to meet the payment in 39 months, then you know there is no one who will be left to buy from them at that time in the future. That means prices will have to fall. That means refinancing at higher prices will no longer be possible. The rating agencies should have flagged that! However, the rating agencies were paid by the lenders, often big banks., The government encouraged the phony ratings so it could say the Gross Domestic Product was rising, as it was actually falling.
Stupidity did play a role, but this had nothing to do with stupidity on the part of all the conspirators I have mentioned.
This appears to be grounds for prosecution under the Rico Act. We just need to find an aggressive and relentless prosecutor who can be guaranteed protection for himself and his or her family by the same folks who guard the President. "POTUS is moving" would then mean Prosecutor Of the Undeserving Sleaze-bags is traveling.
I really am simply pointing out the causes stated in the articles, while interesting, are not the actual root causes, which are the ones I have noted.
http://www.fool.com/investing/general/2009/07/07/the-new-subprime.aspx
The causes are more fundamental than those identified by the author in the following two paragraphs of the article:
1. "In short, many "prime" borrowers might just be subprimers with inflated credit scores. This is also true for people who used the proceeds from home equity loans on one property as a down payment for another. The big down payment made the borrowers look financially fit, but it was all an illusion that didn't reflect their true creditworthiness. They were simply moving debt from one inflated house to another."
2. "In addition, the housing bubble's income distortion also made millions appear more creditworthy than they really were. According to noted economist Mark Zandi, 23% of all new jobs created during the 2003-2006 recovery were housing-related. This includes everyone from mortgage bankers at Citigroup (NYSE: C) to construction workers at KB Home (NYSE: KBH) to (ostensibly) checkers at Home Depot (NYSE: HD). To some degree, the prosperity of all of these jobs was artificially magnified. In a wildly extreme example, Faber's book describes people who went from delivering pizza to working as mortgage brokers making $20,000 a month. (I'd assume they ultimately wound up in the unemployment line). All of this created a stunning short-term illusion of prosperity that allowed armies of borrowers to qualify as "prime" when they were far, far from it."
Due diligence, or should I say Honest Due Diligence, on the part of the lender would not permit granting any high rating to these borrowers. As of last week, the Hudson City Bancorp which is good sized, has six (6) defaults in New Jersey. Yes, six, not six thousand. All of these six are due to second mortgages issued by large "Banks." Hudson City Bancorp (HCBK Quote) Chairman, President and CEO, Ron Hermance, has noted that he realizes a good profit from each of these defaults, because he underwrote, if memory serves me correctly, only a fraction of the current actual value today!!! He and his mortgage writers just did their homework and loaned on value. ALL of the phony reasons cited for lending to people whose property had much lower values were fraudulent.
This was ALL the same scam. The scam is turning in phony information with inadequate documentation. I have bought and sold lots property over the years. In the last twenty years I had to provide proof of everything. That included two years of Federal tax returns!!! That was true when I bought my current house in Tucson in 2000. The need to prove ability to pay went away in the last few years.
Phony credit scores are irrelevant. Where was the due diligence on the part of the issuing lender and on the part of the receiving lender?
There was a lot of fraud because the fees and bonuses for being a conspirator in this large scale conspiracy to commit fraud were so large.
OK, the "Writers" at mortgage companies of the low or no documentation mortgages and the bank officers who purchased them were crooks. We can identify further the appraisers who asked "what number are you looking for"?
Let us not forget the folks at the rating agencies who rated the credit worthiness of these sliced and diced phony "financial instruments" as AAA when it was clear they were intrinsically worthless. If you are lending to those who will not be able to meet the payment in 39 months, then you know there is no one who will be left to buy from them at that time in the future. That means prices will have to fall. That means refinancing at higher prices will no longer be possible. The rating agencies should have flagged that! However, the rating agencies were paid by the lenders, often big banks., The government encouraged the phony ratings so it could say the Gross Domestic Product was rising, as it was actually falling.
Stupidity did play a role, but this had nothing to do with stupidity on the part of all the conspirators I have mentioned.
This appears to be grounds for prosecution under the Rico Act. We just need to find an aggressive and relentless prosecutor who can be guaranteed protection for himself and his or her family by the same folks who guard the President. "POTUS is moving" would then mean Prosecutor Of the Undeserving Sleaze-bags is traveling.
I really am simply pointing out the causes stated in the articles, while interesting, are not the actual root causes, which are the ones I have noted.
Wednesday, May 6, 2009
The Data Show A Collapse of US Imports and Exports
There are a number of reasons that i am spending a lot of time in this post on Menzie Chinn's train of thought and his readers' responses via comments.
1. It's extremely fascinating.
2. It indicates a window of opportunity for the US to go about recapturing our valuable manufacturing jobs with their intrinsically high "value added" to the economy. (We still need to cover that more deeply in another post.)
3. Because there are a number of valuable conclusions it supports. These are crucial to a rebuilding of the US economy that will work and become self sustaining. Some of these have been stated by individual comments in Menzie's article. What Does the Collapse of US Imports and Exports Signify?
4. It's exciting to see a number of like minded people who have had similar realizations that the local, state, regional, and national economies can be rebuilt only with the return of a manufacturing base! i first decided this was the case in the eighties when I heard the ridiculous assumption set of the "Chicago Genius Economics School Standard model." It depends on a constant stream of new miracles occurring as often as needed to replace whole industries and their lost jobs with better ones. Belief in the tooth fairy comes to mind. The words "efficient" and "low margin" were freely sprinkled in their assumptions.
Please read the comments at the end of Menzie Chinn's article from Menzie's well informed readers. I have reproduced them below with my highlighting and comments.
Many of his readers strongly support my thesis about the importance of Governmental action to restoring manufacturing jobs in rebuilding the severely damaged, yet HOPEFULLY not totally and irrecoverably destroyed US economy.
This is a rough draft. Not finished, but it will have to do as duty calls.
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In his blog, of April 27th, Menzie Chinn showed The Decline in US Imports.
On his blog yesterday, May 4th, Menzie goes much further. He poses the following question: What Does the Collapse of US Imports and Exports Signify?
He calls attention to the very unusual collapse in both US imports and exports for the last two quarters, 2008Q1 and 2009Q2. His observation, based on earlier work, is reinforced with a similar observation using data from the Organisation for Economic Co-operation and Development (OECD)
It shows that "This decline is not restricted to the United States, as noted in an OECD report "Trade flows collapse in Q4 2008 but signs of falls easing in early 2009" released last week (h/t Torsten Slok):" The report states:
"G7 exports fell 9.5% while imports were down 5.6% quarter-on-quarter in the final quarter of 2008. Year-on-year exports dropped 7.9% and imports fell 6.4% in the fourth quarter.
In the United States, export volume growth dropped 7.8% and imports fell 5.1%. Compared with the previous 12 months, exports declined by 2.3% for the first time since the last quarter of 2006. The 8.4% fall in import volumes accelerated the downward trend from the first quarter 2008.
Japan’s exports plunged 19.3% in the fourth quarter 2008, about twice the rate of the G7, while imports fell 4.6%. This pattern was also reflected year-on-year with a 20.1% drop for exports and a 6.8% decline in imports.
German quarter-on-quarter exports dropped by 9.0% and imports by 6.1% in the fourth quarter. On a year-on-year basis exports fell 7.8% while imports were down 1.8%: the first falls for Germany since the fourth quarter 2006.
EU15 Extra-EU quarter-to-quarter exports dropped with 6.3% less sharply than G7 exports, while the fall in imports was more pronounced with 7.3%. This pattern was also reflected year-on-year with a 5.2% decline for exports, while imports were down 5.7%.
Menzie Chin notes a strong, and highly unusual, correlation between imports and exports for the last two quarters. This is not typical of previous recessions. He proposes reasons this may be happening.
Menzie writes about Causes
"So, we come to the question of what is causing this correlated and deep decrease in trade flows. A recent VoxEU post The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz documented the decline in US and European trade flows, arguing that this decline is more likely associated with depressed economic activity and diminished access to credit, rather than to trade protectionism. I agree that thus far, this characterization seems correct. So, this leads to the other possibilities."
Menzie Chinn asks:
"Is it trade financing?
Is it inventory decumulation?
Is it vertical specialization?
(By the way, I don't have a definitive answer; and these explanations are not mutually exclusive)
I think the downturn is in large part due to the lack of trade financing. But box 1.2 in the most recent OECD Economic Outlook Interim Report notes that it is difficult to explain the decline in trade growth using proxy measures for credit problems."
In the above cited article, The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz evaluate the causes: "Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness."
What did his clearly knowledgable readers have to say about Menzies article? See the article and loook for the comments at the end. I have singed aout a few that resonate with me...
My Favorite Comments
"So, we come to the question of what is causing this correlated and deep decrease in trade flows."
Is it TOO MUCH CONSUMER DEBT on the lower and middle class in the high wage countries because they are trying to make up for negative real earnings growth due to a globally oversupplied labor market?
Chicbee adds: "Negative real earnings growth" can be corrected by bringing the manufacturing jobs back to the Good Old USA
Is the money supply mix out of whack too?
Did something similar happen right before or during the Great Depression?
Are central bankers to blame for too much debt?
Other Brad Setser articles:
http://blogs.cfr.org/setser/2009/03/23/financial-de-globalization-illustrated/
http://blogs.cfr.org/setser/2009/04/06/charting-financial-de-globalization-private-capital-flows-are-falling-faster-trade-flows/
Posted by: Get Rid of the Fed at May 4, 2009 11:54 PM
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Chicbee adds: This type of actual observation and counting is worth its weight in platinum. I would prefer a real sit down and count exercise, to establish trends, as exemplified by my hardware store counting of inventory to see what's made in the US.
I watch trains, to evidence the vitality of the export/import trade with Canada. Lately, I've noticed trains are tending to be full, though shorter heading north and often empty heading south. Reasons by priority of impact:
1) American consumer demand (low to middle class) is a freefall, no relief for 48 to 60 mos.
2) Credit is tight, even for the imort/export folks
3) Inventories are being burned off due to lack of demand and ability to get credit for restock.
I also watch the shelves at the local stores. The inventory level in some stores has reached the point where there are empty spots between products and in some cases, for the first time in my life, age 52, product is not in stock.
Chicbee adds: Excellent job!!!
Real world thus suggests America's chickens have in fact come to roost. The good news is we are now saving at an astounding rate!!
Posted by: Steve at May 5, 2009 07:02 AM
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Since the Asian mercantilists refuse to trade, wanting only to export and refusing to import, and to enforce that state manipulate their exchange rates such that goods from other nations cannot be exported to them at competitive prices, consumers in other nations can buy the Asian exports only if they themselves, or their governments on their behalf, are willing to go evermore into debt to the Asians.
Chicbee adds: Excellent point... Yes, they control imports, why can't we learn from them?
As credit-worthy Western consumers have more debt than they want, and the mechanisms of the housing bubble for lending to un-credit-worthy consumers have ceased to function, the only entities left to do the borrowing are Western governments. Clearly, those governments have not stepped up to the plate. Unless they do, it's over.
We are not going to return to the status quo ante in which Western consumers' debt loads rose every year, seemingly without limit.
There was a limit. Western consumers not only reached but went over it, and are now deleveraging back down to it.
Posted by: jm at May 5, 2009 07:41 AM
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So much for the myth of "free trade," That is only practiced by the US in favor of other nations.
My first inclination was to go with Joseph - its just nobody's buying. The data disagree.
Imports as a share of personal consumption expenditures declines by 6 percentage points between third quarter 2008 and first quarter 2009 (from 25% to 19%).
When we compare goods imports to goods consumed by personal sector it is even worse. 16 point decline in goods imports as a share of personal consumption of goods. Goes from 55% (I checked these numbers twice) to 40%.
I realize that maybe a third of imports go to production rather than consumption, nevertheless, imports are suffering.
I think fear and panic has a lot to do with this. Imports have a long lead time. US companies that import goods did not want to be caught with a lot of goods in transit while the economy was still in freefall.
Chicbee adds: Excellent point
There must be a silver lining in every cloud. I hope that problem will remain unsolved long enough to jumpstart production in the U.S. Maybe being able to get some goods in a hurry, if need be, will become more important than costs and the trade deficit will remain low.
Chicbee adds: Excellent point
My personal bias is for the U.S. government to reject free trade and use its power to reduce imports to a level near exports - PERMANENTLY.
Chicbee adds: Excellent point
Posted by: ReformerRay at May 5, 2009 03:30 PM
_________
Perhaps lending credence to the argument that there is a shortage of trade credits, I have noticed that for some time the DOW futures market has been below the spot, and by significant margins (20-40 points). Arbitrage flows should reverse this gap.
Posted by: don at May 5, 2009 05:16 PM
_________
For some time neocons have been, under the guise of so called free trade which is really one way trade with jobs only going the other way, taking $50K chunks out of world economic demand and replacing them with $0 - thereby shrinking the basis for global economic demand and the global economic pie by $50K increments.
We have been unemploying the champion consumers of all time , N. American middle class workers making roughly $50K/yr, and replacing them with 1.5 Asian subsistence slave wage workers hardly capable of feeding and clothing themselves never mind contributing to global economic demand - $0 addition to world economic demand.
Chicbee adds: Excellent point
How can anyone expect N. American economic recovery when the neocons have gotten us to think that exporting all of our manufacturing jobs is a good thing? It also sucks for China because they are destroying the consumers responsible for their economic growth - they are busy killing the goose that has laid the golden egg.
Chicbee adds: Excellent point.
How, under this neocon trade regime, can either N. America or Asia ever recover economically? Even if we develop new 'green' products and technology, under current conditions the manufacturing jobs will go to Asia and the subsistence workers and N. American workers will continue to be unemployed!
Chicbee adds: Excellent point. However its not just "neocons," but all who have been convinced by the ideology of the Chicago School Economics Standard Model. It's all politicians of the left and right persuasion. (;-)
Posted by: Michael Warhurst at May 5, 2009 05:17 PM
_________
Related to Ray's point, given that trade is collapsing at such a level, does it become more sensible now to put up some barriers to encourage level standards of trade and keep the manufacturing sector from completely slipping out of sight in the U.S.?
Chicbee adds: Yes it does seem eminently sensible.
The damage from any kind of trade war would be extremely small compared to a few years ago, and the groundwork could be laid to keep trade imbalances from springing up once (if?) the economy picks up again. The higher standards and wages can combine with dollar depreciation to keep export-driven businesses afloat for a time when they will be needed in recovery.
Chicbee adds: Excellent point.
A lot of these trade problems are due to lack of demand world-wide, so wouldn't maintaining higher wages (albeit artificially) more than offset the cosmetic gains from lower prices (the alleged "gains from trade")? And couldn't the raised demand from maintaining wages spark the need for more production in industries that are sorely lacking in the U.S. right now?
Chicbee adds: Excellent point. This provides the kernel of a viable approach to keeping manufacturing and other jobs here, and rebuilding the middle class that in many communities is dependent on a local base of stable manufacturing industries
Posted by: J. Miller at May 5, 2009 05:17 PM
_________
Speaking of inventory, I went to the outdoor shop last week and they were completely out of 9mm ammo of any and all types.
Posted by: mrrunangun at May 5, 2009 08:59 PM
_________
DickF wrote:
I agree with you that the change in imports/exports is not due to protectionism.
Menzie,
I would like to qualify this statement a little. Prior to Nixon pulling us off of the gold standard it was much more difficult to manipulate currencies. Protectionism was almost totally engaged through tariff policy and so was easy to detect.
Nixon pulled us off of the gold standard primarily to allow the US to engage in monetary battles against Japan under the theory that by manipulating the value of the dollar we could counter their economic gains.
Today China has taken the place of Japan in out monetary attacks, but the US monetary authorities also engage others in monetary battles. This has created a condition that greatly hinders international trade. This is especially true in a country appreciating its currency.
That said, US currency manipulation has been used to attack China, then congress threatens trade war against the Chinese for pegging their currency to the dollar. This is in fact protectionism. The rhetoric has slowed recently - even though one of Geithner's first announcements attacked the Chinese monetary authorities as has Sec. of State Clinton - so I believe that international protectionism has slowed. But do not be deceived. Protectionism no longer resides in tariffs but in currency maniputlation.
Chicbee adds: Excellent point
Posted by: DickF at May 6, 2009 08:41 AM
_________
"Murky Protectionism" is the use of subsidies of all kinds (in the U.S., France and other nations), tax policy (Germany and most other European countries) and well trained customs agents who can delay imports indefinitely, to reduce imports into a country. Everybody should know that Murky Protectionism is widespread. However, less imports will go to poor countries, regardless of the degree and kind of protectionism.
I would like to see all nations agree on this matter. Rather than trying to root out protectionism, which is impossible, we should all just agree that our goal, for every nation, is equal trade and that EACH NATIION SHOULD ADOPT EXPLICITY POLICIES WHICH LEAD THAT NATION TOWARD EQUAL TRADE.
Chicbee adds: Excellent point
There is no reason why a trade deficit country should be ashamed to adopt actions which move the imports toward a balance with exports sold. I want the U.S. to be explicit, up front with import restrictions. If every nation adopted the same kind of import restrictions, all the nations of the world would benefit, not just the U.S.
Chicbee adds: Excellent point
"protectionism" is a scare word, to stop people from thinking.
Chicbee adds: Excellent point
I am torn between being ashamed that I keep harping on this same theme, which is really tangential to the topic of the day and proud that I am one of the people who can see clearly where the U.S. has gone wrong and what should be done about it.
Posted by: ReformerRay at May 6, 2009 11:52 AM
1. It's extremely fascinating.
2. It indicates a window of opportunity for the US to go about recapturing our valuable manufacturing jobs with their intrinsically high "value added" to the economy. (We still need to cover that more deeply in another post.)
3. Because there are a number of valuable conclusions it supports. These are crucial to a rebuilding of the US economy that will work and become self sustaining. Some of these have been stated by individual comments in Menzie's article. What Does the Collapse of US Imports and Exports Signify?
4. It's exciting to see a number of like minded people who have had similar realizations that the local, state, regional, and national economies can be rebuilt only with the return of a manufacturing base! i first decided this was the case in the eighties when I heard the ridiculous assumption set of the "Chicago Genius Economics School Standard model." It depends on a constant stream of new miracles occurring as often as needed to replace whole industries and their lost jobs with better ones. Belief in the tooth fairy comes to mind. The words "efficient" and "low margin" were freely sprinkled in their assumptions.
Please read the comments at the end of Menzie Chinn's article from Menzie's well informed readers. I have reproduced them below with my highlighting and comments.
Many of his readers strongly support my thesis about the importance of Governmental action to restoring manufacturing jobs in rebuilding the severely damaged, yet HOPEFULLY not totally and irrecoverably destroyed US economy.
This is a rough draft. Not finished, but it will have to do as duty calls.
_________
In his blog, of April 27th, Menzie Chinn showed The Decline in US Imports.
On his blog yesterday, May 4th, Menzie goes much further. He poses the following question: What Does the Collapse of US Imports and Exports Signify?
He calls attention to the very unusual collapse in both US imports and exports for the last two quarters, 2008Q1 and 2009Q2. His observation, based on earlier work, is reinforced with a similar observation using data from the Organisation for Economic Co-operation and Development (OECD)
It shows that "This decline is not restricted to the United States, as noted in an OECD report "Trade flows collapse in Q4 2008 but signs of falls easing in early 2009" released last week (h/t Torsten Slok):" The report states:
"G7 exports fell 9.5% while imports were down 5.6% quarter-on-quarter in the final quarter of 2008. Year-on-year exports dropped 7.9% and imports fell 6.4% in the fourth quarter.
In the United States, export volume growth dropped 7.8% and imports fell 5.1%. Compared with the previous 12 months, exports declined by 2.3% for the first time since the last quarter of 2006. The 8.4% fall in import volumes accelerated the downward trend from the first quarter 2008.
Japan’s exports plunged 19.3% in the fourth quarter 2008, about twice the rate of the G7, while imports fell 4.6%. This pattern was also reflected year-on-year with a 20.1% drop for exports and a 6.8% decline in imports.
German quarter-on-quarter exports dropped by 9.0% and imports by 6.1% in the fourth quarter. On a year-on-year basis exports fell 7.8% while imports were down 1.8%: the first falls for Germany since the fourth quarter 2006.
EU15 Extra-EU quarter-to-quarter exports dropped with 6.3% less sharply than G7 exports, while the fall in imports was more pronounced with 7.3%. This pattern was also reflected year-on-year with a 5.2% decline for exports, while imports were down 5.7%.
Menzie Chin notes a strong, and highly unusual, correlation between imports and exports for the last two quarters. This is not typical of previous recessions. He proposes reasons this may be happening.
Menzie writes about Causes
"So, we come to the question of what is causing this correlated and deep decrease in trade flows. A recent VoxEU post The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz documented the decline in US and European trade flows, arguing that this decline is more likely associated with depressed economic activity and diminished access to credit, rather than to trade protectionism. I agree that thus far, this characterization seems correct. So, this leads to the other possibilities."
Menzie Chinn asks:
"Is it trade financing?
Is it inventory decumulation?
Is it vertical specialization?
(By the way, I don't have a definitive answer; and these explanations are not mutually exclusive)
I think the downturn is in large part due to the lack of trade financing. But box 1.2 in the most recent OECD Economic Outlook Interim Report notes that it is difficult to explain the decline in trade growth using proxy measures for credit problems."
In the above cited article, The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz evaluate the causes: "Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness."
What did his clearly knowledgable readers have to say about Menzies article? See the article and loook for the comments at the end. I have singed aout a few that resonate with me...
My Favorite Comments
"So, we come to the question of what is causing this correlated and deep decrease in trade flows."
Is it TOO MUCH CONSUMER DEBT on the lower and middle class in the high wage countries because they are trying to make up for negative real earnings growth due to a globally oversupplied labor market?
Chicbee adds: "Negative real earnings growth" can be corrected by bringing the manufacturing jobs back to the Good Old USA
Is the money supply mix out of whack too?
Did something similar happen right before or during the Great Depression?
Are central bankers to blame for too much debt?
Other Brad Setser articles:
http://blogs.cfr.org/setser/2009/03/23/financial-de-globalization-illustrated/
http://blogs.cfr.org/setser/2009/04/06/charting-financial-de-globalization-private-capital-flows-are-falling-faster-trade-flows/
Posted by: Get Rid of the Fed at May 4, 2009 11:54 PM
_________
Chicbee adds: This type of actual observation and counting is worth its weight in platinum. I would prefer a real sit down and count exercise, to establish trends, as exemplified by my hardware store counting of inventory to see what's made in the US.
I watch trains, to evidence the vitality of the export/import trade with Canada. Lately, I've noticed trains are tending to be full, though shorter heading north and often empty heading south. Reasons by priority of impact:
1) American consumer demand (low to middle class) is a freefall, no relief for 48 to 60 mos.
2) Credit is tight, even for the imort/export folks
3) Inventories are being burned off due to lack of demand and ability to get credit for restock.
I also watch the shelves at the local stores. The inventory level in some stores has reached the point where there are empty spots between products and in some cases, for the first time in my life, age 52, product is not in stock.
Chicbee adds: Excellent job!!!
Real world thus suggests America's chickens have in fact come to roost. The good news is we are now saving at an astounding rate!!
Posted by: Steve at May 5, 2009 07:02 AM
_________
Since the Asian mercantilists refuse to trade, wanting only to export and refusing to import, and to enforce that state manipulate their exchange rates such that goods from other nations cannot be exported to them at competitive prices, consumers in other nations can buy the Asian exports only if they themselves, or their governments on their behalf, are willing to go evermore into debt to the Asians.
Chicbee adds: Excellent point... Yes, they control imports, why can't we learn from them?
As credit-worthy Western consumers have more debt than they want, and the mechanisms of the housing bubble for lending to un-credit-worthy consumers have ceased to function, the only entities left to do the borrowing are Western governments. Clearly, those governments have not stepped up to the plate. Unless they do, it's over.
We are not going to return to the status quo ante in which Western consumers' debt loads rose every year, seemingly without limit.
There was a limit. Western consumers not only reached but went over it, and are now deleveraging back down to it.
Posted by: jm at May 5, 2009 07:41 AM
_________
So much for the myth of "free trade," That is only practiced by the US in favor of other nations.
My first inclination was to go with Joseph - its just nobody's buying. The data disagree.
Imports as a share of personal consumption expenditures declines by 6 percentage points between third quarter 2008 and first quarter 2009 (from 25% to 19%).
When we compare goods imports to goods consumed by personal sector it is even worse. 16 point decline in goods imports as a share of personal consumption of goods. Goes from 55% (I checked these numbers twice) to 40%.
I realize that maybe a third of imports go to production rather than consumption, nevertheless, imports are suffering.
I think fear and panic has a lot to do with this. Imports have a long lead time. US companies that import goods did not want to be caught with a lot of goods in transit while the economy was still in freefall.
Chicbee adds: Excellent point
There must be a silver lining in every cloud. I hope that problem will remain unsolved long enough to jumpstart production in the U.S. Maybe being able to get some goods in a hurry, if need be, will become more important than costs and the trade deficit will remain low.
Chicbee adds: Excellent point
My personal bias is for the U.S. government to reject free trade and use its power to reduce imports to a level near exports - PERMANENTLY.
Chicbee adds: Excellent point
Posted by: ReformerRay at May 5, 2009 03:30 PM
_________
Perhaps lending credence to the argument that there is a shortage of trade credits, I have noticed that for some time the DOW futures market has been below the spot, and by significant margins (20-40 points). Arbitrage flows should reverse this gap.
Posted by: don at May 5, 2009 05:16 PM
_________
For some time neocons have been, under the guise of so called free trade which is really one way trade with jobs only going the other way, taking $50K chunks out of world economic demand and replacing them with $0 - thereby shrinking the basis for global economic demand and the global economic pie by $50K increments.
We have been unemploying the champion consumers of all time , N. American middle class workers making roughly $50K/yr, and replacing them with 1.5 Asian subsistence slave wage workers hardly capable of feeding and clothing themselves never mind contributing to global economic demand - $0 addition to world economic demand.
Chicbee adds: Excellent point
How can anyone expect N. American economic recovery when the neocons have gotten us to think that exporting all of our manufacturing jobs is a good thing? It also sucks for China because they are destroying the consumers responsible for their economic growth - they are busy killing the goose that has laid the golden egg.
Chicbee adds: Excellent point.
How, under this neocon trade regime, can either N. America or Asia ever recover economically? Even if we develop new 'green' products and technology, under current conditions the manufacturing jobs will go to Asia and the subsistence workers and N. American workers will continue to be unemployed!
Chicbee adds: Excellent point. However its not just "neocons," but all who have been convinced by the ideology of the Chicago School Economics Standard Model. It's all politicians of the left and right persuasion. (;-)
Posted by: Michael Warhurst at May 5, 2009 05:17 PM
_________
Related to Ray's point, given that trade is collapsing at such a level, does it become more sensible now to put up some barriers to encourage level standards of trade and keep the manufacturing sector from completely slipping out of sight in the U.S.?
Chicbee adds: Yes it does seem eminently sensible.
The damage from any kind of trade war would be extremely small compared to a few years ago, and the groundwork could be laid to keep trade imbalances from springing up once (if?) the economy picks up again. The higher standards and wages can combine with dollar depreciation to keep export-driven businesses afloat for a time when they will be needed in recovery.
Chicbee adds: Excellent point.
A lot of these trade problems are due to lack of demand world-wide, so wouldn't maintaining higher wages (albeit artificially) more than offset the cosmetic gains from lower prices (the alleged "gains from trade")? And couldn't the raised demand from maintaining wages spark the need for more production in industries that are sorely lacking in the U.S. right now?
Chicbee adds: Excellent point. This provides the kernel of a viable approach to keeping manufacturing and other jobs here, and rebuilding the middle class that in many communities is dependent on a local base of stable manufacturing industries
Posted by: J. Miller at May 5, 2009 05:17 PM
_________
Speaking of inventory, I went to the outdoor shop last week and they were completely out of 9mm ammo of any and all types.
Posted by: mrrunangun at May 5, 2009 08:59 PM
_________
DickF wrote:
I agree with you that the change in imports/exports is not due to protectionism.
Menzie,
I would like to qualify this statement a little. Prior to Nixon pulling us off of the gold standard it was much more difficult to manipulate currencies. Protectionism was almost totally engaged through tariff policy and so was easy to detect.
Nixon pulled us off of the gold standard primarily to allow the US to engage in monetary battles against Japan under the theory that by manipulating the value of the dollar we could counter their economic gains.
Today China has taken the place of Japan in out monetary attacks, but the US monetary authorities also engage others in monetary battles. This has created a condition that greatly hinders international trade. This is especially true in a country appreciating its currency.
That said, US currency manipulation has been used to attack China, then congress threatens trade war against the Chinese for pegging their currency to the dollar. This is in fact protectionism. The rhetoric has slowed recently - even though one of Geithner's first announcements attacked the Chinese monetary authorities as has Sec. of State Clinton - so I believe that international protectionism has slowed. But do not be deceived. Protectionism no longer resides in tariffs but in currency maniputlation.
Chicbee adds: Excellent point
Posted by: DickF at May 6, 2009 08:41 AM
_________
"Murky Protectionism" is the use of subsidies of all kinds (in the U.S., France and other nations), tax policy (Germany and most other European countries) and well trained customs agents who can delay imports indefinitely, to reduce imports into a country. Everybody should know that Murky Protectionism is widespread. However, less imports will go to poor countries, regardless of the degree and kind of protectionism.
I would like to see all nations agree on this matter. Rather than trying to root out protectionism, which is impossible, we should all just agree that our goal, for every nation, is equal trade and that EACH NATIION SHOULD ADOPT EXPLICITY POLICIES WHICH LEAD THAT NATION TOWARD EQUAL TRADE.
Chicbee adds: Excellent point
There is no reason why a trade deficit country should be ashamed to adopt actions which move the imports toward a balance with exports sold. I want the U.S. to be explicit, up front with import restrictions. If every nation adopted the same kind of import restrictions, all the nations of the world would benefit, not just the U.S.
Chicbee adds: Excellent point
"protectionism" is a scare word, to stop people from thinking.
Chicbee adds: Excellent point
I am torn between being ashamed that I keep harping on this same theme, which is really tangential to the topic of the day and proud that I am one of the people who can see clearly where the U.S. has gone wrong and what should be done about it.
Posted by: ReformerRay at May 6, 2009 11:52 AM
Monday, May 4, 2009
Flat, But Clearly Tilted Offshore: Slowing and Reversing The Rush to Export US Jobs
Different societies, nations, regions have very different economies. Duh. That's pretty obvious right? Given modern communications, many people would like to change or shape their economies to support a Western Industrialized way of life. The only way I am aware that this can be accomplished on a large scale, and not just for a city state with a relatively small population, is to industrialize. That generally means to manufacture items to sell to that culture's, or economic unit's own people. And, the possibility to export quickly surfaces. If the economic unit's population is "large," exports are not absolutely necessary, but they definitely speed up the transition process to a Western Industrialized model economy. We can discuss this at length, but let's, for the moment, assume its validity.
Problems and frictions arise when the different economies attempt to export the same manufactured goods to each other. The resulting competition can be good if the competition is only between different designs, quality, and intellectual properties. This serves to increase the overall quality of goods and services. However, as is frequently the case, the cost of production in different countries differs due to historical processes, and on the ground facts. That provides an unhealthy and unfair competition that does not take these accidental and temporary realities into account. Accidental, because they are accidents of history. Temporary, because as the industrialization continues, costs to manufacture, including labor costs, change. It makes no sense for the United States, to allow an existing manufacturer in the US, with strong and stable local ties to a community of loyal workers, to be driven out of business because of an accidental and temporary advantage held by a manufacturer in another industrializing society. It makes no sense to encourage the US manufacturer to move his production "offshore." It makes super duper no sense at all to grant him a reduction in taxes to do so. If you are a supply sider, such as Jack Kemp, you know that lowering taxes is a compelling way to encourage behaviors, just as is raising taxes. It pays to change taxes carefully and wisely with specific local consequences in mind.
I will be adding to this blog entry today and over the course of next few days.
Problems and frictions arise when the different economies attempt to export the same manufactured goods to each other. The resulting competition can be good if the competition is only between different designs, quality, and intellectual properties. This serves to increase the overall quality of goods and services. However, as is frequently the case, the cost of production in different countries differs due to historical processes, and on the ground facts. That provides an unhealthy and unfair competition that does not take these accidental and temporary realities into account. Accidental, because they are accidents of history. Temporary, because as the industrialization continues, costs to manufacture, including labor costs, change. It makes no sense for the United States, to allow an existing manufacturer in the US, with strong and stable local ties to a community of loyal workers, to be driven out of business because of an accidental and temporary advantage held by a manufacturer in another industrializing society. It makes no sense to encourage the US manufacturer to move his production "offshore." It makes super duper no sense at all to grant him a reduction in taxes to do so. If you are a supply sider, such as Jack Kemp, you know that lowering taxes is a compelling way to encourage behaviors, just as is raising taxes. It pays to change taxes carefully and wisely with specific local consequences in mind.
I will be adding to this blog entry today and over the course of next few days.
Sunday, May 3, 2009
Should We Expose Everyone To The H1N1 Flu Virus Right Away?
I just read an article about the University of Pennsylvania's separate graduation for Education Majors who had done practice teaching in Mexico. The selflessness of the students who agreed to this was wonderful. They put the welfare of their classmates above their own desires to graduate together.
However, I am beginning to wonder if we shouldn't try to expose everyone possible to the H1N1 flu virus now, since this strain appears to be quite mild in the US, and in the world as a whole. That might well include Mexico, since Mexico has not revealed their full exposure, only the deaths, so it could have been a mild flu there too. That is beginning to appear increasingly likely.
When the N1H1 virus returns to the northern hemisphere during our usual flu season around next October, it might have mutated in countries in the southern hemisphere to a more virulent form, possibly via transmission to and from an animal vector. Having been exposed previously to a milder form could then prove to be a blessing.
In an article in the Dallas morning News titled John M. Barry: What's next for swine flu? John M. Barry points out: "What's important to keep in mind in assessing the threat of the current outbreak is that all four of the well-known pandemics seem to have come in waves. The 1918 virus surfaced by March and set in motion a spring and summer wave that hit some communities and skipped others. This first wave was extremely mild, more so even than ordinary influenza: Of the 10,313 sailors in the British Grand Fleet who became ill, for example, only four died. But autumn brought a second, more lethal wave, which was followed by a less severe third wave in early 1919."
"The first wave in 1918 was relatively mild, many experts speculate, because the virus had not fully adapted to humans. And as it did adapt, it also became more lethal. However, there is very good evidence that people who were exposed during the first wave developed immunity – much as people get protection from a modern vaccine."
Later in his article, Barry points out:
"In all four instances, the gap between the time the virus was first recognized and a second, more dangerous wave swelled was about six months. It will take a minimum of four months to produce vaccine in any volume, possibly longer, and much longer than that to produce enough vaccine to protect most Americans. The race has begun."
That might argue for the wisdom of encouraging exposure to this "first wave."
However, I am beginning to wonder if we shouldn't try to expose everyone possible to the H1N1 flu virus now, since this strain appears to be quite mild in the US, and in the world as a whole. That might well include Mexico, since Mexico has not revealed their full exposure, only the deaths, so it could have been a mild flu there too. That is beginning to appear increasingly likely.
When the N1H1 virus returns to the northern hemisphere during our usual flu season around next October, it might have mutated in countries in the southern hemisphere to a more virulent form, possibly via transmission to and from an animal vector. Having been exposed previously to a milder form could then prove to be a blessing.
In an article in the Dallas morning News titled John M. Barry: What's next for swine flu? John M. Barry points out: "What's important to keep in mind in assessing the threat of the current outbreak is that all four of the well-known pandemics seem to have come in waves. The 1918 virus surfaced by March and set in motion a spring and summer wave that hit some communities and skipped others. This first wave was extremely mild, more so even than ordinary influenza: Of the 10,313 sailors in the British Grand Fleet who became ill, for example, only four died. But autumn brought a second, more lethal wave, which was followed by a less severe third wave in early 1919."
"The first wave in 1918 was relatively mild, many experts speculate, because the virus had not fully adapted to humans. And as it did adapt, it also became more lethal. However, there is very good evidence that people who were exposed during the first wave developed immunity – much as people get protection from a modern vaccine."
Later in his article, Barry points out:
"In all four instances, the gap between the time the virus was first recognized and a second, more dangerous wave swelled was about six months. It will take a minimum of four months to produce vaccine in any volume, possibly longer, and much longer than that to produce enough vaccine to protect most Americans. The race has begun."
That might argue for the wisdom of encouraging exposure to this "first wave."
Sunday, April 12, 2009
St. Louis County's Action Plan for Sustainable Economic Recovery
I just read a significant part of the report - Action Plan For Sustainable Economic Recovery It's for St. Louis County, "The Economic Engine of the State of Missouri and the St. Louis Region" by Charlie A. Dooley, St. Louis County Executive, dated December 19, 2008. Subtitle: “The Change We Need To Strengthen Our County, Our Region, Our State, Our Nation" I believe that is true, but the evidence for sustainability is not clear. Check out pages 48-51 describing two of the projects planned. Nothing describes the parts to be purchased for the projects and where they are manufactured. What are the chances that the overwhelming majority are manufactured neither within the county, the state, the region, or the nation? Quite high I suspect.
I went back and did a search on "manufacture." There are only two relevant hits, see pages 96 and 119, Their approach involves aiding the US automobile industry including their suppliers through the purchase by St. Louise County of American made hybrid cars. A desired outcome: "Maintain good paying jobs for the auto manufacturers and their suppliers." This makes perfect sense. It should be a major focus of this plan. Unfortunately it is not. But it wouldn't take too much additional work to make it so!
The plan does focus on reducing energy usage, and increasing research and development jobs. Both are very positive and needed. However, they are not sufficient.
The big gap in this plan is there is no planned approach to bringing manufacturing jobs back to the county, region, state and nation. Without that, the linchpin and major generator of wealth for any major modern society. including revenues to all the above organizations, is missing. A linchpin, or lynchpin, is a fastener used to prevent a wheel or other rotating part from sliding off the axle upon which it is riding. We have slid right off our economic axles, and we need to get back on board. It's really a sine qua non for sustainable economic growth for St Louis County, St Louis, Missouri, and the Good Old USA.
To get a gut feel for what has happened to us, and how important it is to change it, just spend a half hour in your local hardware store and count all the Made in USA labels you find as you go slowly down any aisle. See my earlier post on that very topic. It's really scary.
Remember, the exporting of the enormous number of jobs did not happen by accident, It was pushed upon us by a particular group of economists, who became well paid advisors to industry. Larry Summers, just as one example, made a few million dollars, last year alone, from the financial firms he is tasked with "controlling" (and aiding} using trillions of dollars of your money and mine. The corporation they advised and aided when in government service were major beneficiaries of the removal of control and regulation in economic activity that removed any and all tariffs on imported goods. Our government also stopped taxing the companies that moved their production offshore. A real double whammy, if you are old enough to know what "double whammy" means. These firms and the Chicago group of economic advisors, still lobby the government which has gone along with them since the days of President Reagan. President Clinton was a Rhodes scholar at Oxford University Oxford is a major proponent of the Chicago plan for redistributing our "wealth" to the rich. We can go into the spin engines required to make all this seem palatable as our middle class American Dream jobs were actively pushed out of our borders. But, let's leave that aside for now. Assume for the moment, that it is what happened. Yes Virginia, it really is.
If that is really the case, what could St Louis County do to bring back manufacturing jobs in general? And what about all the other formerly "low margin" manufacturing cities, counties, regions, states in a formerly "low margin" manufacturing nation, that had many tens of millions of "low margin"manufacturing jobs that was the major engine of prosperity for us all? Of course, that was before they all became glorious "High Margin Post Industrial" Cities and Counties, "High Margin Post Industrial" Regions, and "High Margin Post Industrial" States in a glorious "High Margin Post Industrial" Nation? What can any of them, or any of us actually do to bring back those dismally middle class "low margin" manufacturing jobs? That is the subject of my next blog, I hope. We will go into what suddenly made them "low margin" and beneath contempt in the eyes of the Chicago school of economists. Also we will address why they didn't appear to be low margin until the Chicago economic and social redistribution of wealth geniuses opened our eyes.
Your ideas are welcome. You may agree or disagree, politely of course.
I just remembered, there are at least two other analysts who agree with these thoughts. I will research that and get back to you. Have a great evening and week.
Chic Bressel
I went back and did a search on "manufacture." There are only two relevant hits, see pages 96 and 119, Their approach involves aiding the US automobile industry including their suppliers through the purchase by St. Louise County of American made hybrid cars. A desired outcome: "Maintain good paying jobs for the auto manufacturers and their suppliers." This makes perfect sense. It should be a major focus of this plan. Unfortunately it is not. But it wouldn't take too much additional work to make it so!
The plan does focus on reducing energy usage, and increasing research and development jobs. Both are very positive and needed. However, they are not sufficient.
The big gap in this plan is there is no planned approach to bringing manufacturing jobs back to the county, region, state and nation. Without that, the linchpin and major generator of wealth for any major modern society. including revenues to all the above organizations, is missing. A linchpin, or lynchpin, is a fastener used to prevent a wheel or other rotating part from sliding off the axle upon which it is riding. We have slid right off our economic axles, and we need to get back on board. It's really a sine qua non for sustainable economic growth for St Louis County, St Louis, Missouri, and the Good Old USA.
To get a gut feel for what has happened to us, and how important it is to change it, just spend a half hour in your local hardware store and count all the Made in USA labels you find as you go slowly down any aisle. See my earlier post on that very topic. It's really scary.
Remember, the exporting of the enormous number of jobs did not happen by accident, It was pushed upon us by a particular group of economists, who became well paid advisors to industry. Larry Summers, just as one example, made a few million dollars, last year alone, from the financial firms he is tasked with "controlling" (and aiding} using trillions of dollars of your money and mine. The corporation they advised and aided when in government service were major beneficiaries of the removal of control and regulation in economic activity that removed any and all tariffs on imported goods. Our government also stopped taxing the companies that moved their production offshore. A real double whammy, if you are old enough to know what "double whammy" means. These firms and the Chicago group of economic advisors, still lobby the government which has gone along with them since the days of President Reagan. President Clinton was a Rhodes scholar at Oxford University Oxford is a major proponent of the Chicago plan for redistributing our "wealth" to the rich. We can go into the spin engines required to make all this seem palatable as our middle class American Dream jobs were actively pushed out of our borders. But, let's leave that aside for now. Assume for the moment, that it is what happened. Yes Virginia, it really is.
If that is really the case, what could St Louis County do to bring back manufacturing jobs in general? And what about all the other formerly "low margin" manufacturing cities, counties, regions, states in a formerly "low margin" manufacturing nation, that had many tens of millions of "low margin"manufacturing jobs that was the major engine of prosperity for us all? Of course, that was before they all became glorious "High Margin Post Industrial" Cities and Counties, "High Margin Post Industrial" Regions, and "High Margin Post Industrial" States in a glorious "High Margin Post Industrial" Nation? What can any of them, or any of us actually do to bring back those dismally middle class "low margin" manufacturing jobs? That is the subject of my next blog, I hope. We will go into what suddenly made them "low margin" and beneath contempt in the eyes of the Chicago school of economists. Also we will address why they didn't appear to be low margin until the Chicago economic and social redistribution of wealth geniuses opened our eyes.
Your ideas are welcome. You may agree or disagree, politely of course.
I just remembered, there are at least two other analysts who agree with these thoughts. I will research that and get back to you. Have a great evening and week.
Chic Bressel
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