Did Tax reform act of 1986 cause this depression?

[Oveja_Slayer]

@Voyager

Bush the elder actually increased taxes when necessary - remember the outrage? Reagan did too at the end of his term, not enough, though.

Let’s talk about Bush the younger. In 2001, with a recession (which was not his fault, to be clear) he wanted a tax cut, which was appropriate. What he did wrong was to propose the wrong type of tax cut. In 2001 the problem was not lack of investment, but lack of consumption. Silicon Valley companies were writing off inventory in the billions of dollars ranges, and contract manufacturers went from full production to almost nothing. Bush’s tax cut, targeted to the rich, would have been great if more investment was required, which it wasn’t. Since most Americans got very little, consumption rose only slightly, which was the cause for the slow recovery in terms of jobs, and the even slower recovery in terms of income.

The problem was that the tax cuts did not go away when the economy recovered and they were no longer needed for stimulus. Instead, they remained as the cost of the wars and Medicare exploded. So we had a big deficit when it was not required to stimulate the economy. Notice how the Clinton-era tax increases and a booming economy went hand in hand. Somehow, even at the old higher tax rates for the rich, there was plenty of money for investment - too much, actually, since I think a bit less money in venture capital would have made them examine start-up business plans a bit more closely.

If we had an essentially balanced budget the necessary Obama deficit wouldn’t be a big issue. Piled on top of the unnecessary Bush deficits, it becomes more painful. The right is hypocritical, to say the least, to cheerlead the unnecessary deficits and oppose the necessary ones. Read Hellestal’s post to correct your misunderstanding of the impact of these on inflation.

Say your car dies, and you need to borrow $15 K to buy a new one. Isn’t it better to have no debt at this time as opposed to massive credit card debt from partying and buying junk? And what would you say to a so-called friend who encouraged you to run up credit card bills for partying, and then criticized you for borrowing to pay for the car?

Great stuff, I agree with you on the tax cuts bit and your general sentiments, but I still am unclear why Obama’s massive spending plan is “necessary” as you keep saying. Maybe we should start another thread on it? We’re already way off topic, but no reason not to at least try to keep order eh?

[sleestak]

@Voyager

sleestak is not connecting the dots. The goal of making mortgages more obtainable for lower income people goes back quite a while, and Bush was for it also. There are many good reasons for this policy, not the least that neighborhoods are better when full of homeowners.

Actually I am connecting the dots. Making mortgages more obtainable has been a goal for a long time by a lot of politicians. However, the perfect storm of CDO’s and government pushing for home ownership for those who should not have qualified had a large amount to do with the whole mess. Also the guy who wrote the equation that everyone used to value CDOs gets some blame along with everyone who took the equations results without question.

The government pushing to give mortgages to people who cannot afford them is simply stupid, whomever is pushing the idea. Fannie and Freddy did a lot of that. There is much more but that is a huge chunk of it.

Slee

[Voyager]

@sleestak

Actually I am connecting the dots. Making mortgages more obtainable has been a goal for a long time by a lot of politicians. However, the perfect storm of CDO’s and government pushing for home ownership for those who should not have qualified had a large amount to do with the whole mess. Also the guy who wrote the equation that everyone used to value CDOs gets some blame along with everyone who took the equations results without question.

The government pushing to give mortgages to people who cannot afford them is simply stupid, whomever is pushing the idea. Fannie and Freddy did a lot of that. There is much more but that is a huge chunk of it.

Slee

Please give some evidence that the government was doing that. Fannie and Freddie, before the subprime boom, anyhow, had pretty good restrictions. As I said, the main culprits in selling mortgages to people who couldn’t afford them did not even have obligations to write mortgages in low income areas. The reason for that law was the perception, true or not, that banks were not selling mortgages to people who could afford them in certain neighborhoods. And, as already mentioned, Fannie and Freddie don’t even sell mortgages.

So, on one hand we have a dubious claim that the government was forcing or encouraging banks to sell bad mortgages, and on the other we have the fact that subprimes got higher interest rates, that mortgage brokers were incented to sell them, that mortgage companies dumped them, and that the rating agencies somehow were convinced that if there is only 5% pee in the soup the soup is fine. Who needs the government? The government did screw up by not regulating this mess, to be sure.

[Voyager]

@Oveja_Slayer

Great stuff, I agree with you on the tax cuts bit and your general sentiments, but I still am unclear why Obama’s massive spending plan is “necessary” as you keep saying. Maybe we should start another thread on it? We’re already way off topic, but no reason not to at least try to keep order eh?

Just look up Keynesian economics. This isn’t the right forum to learn something from first principles - everyone butts in with what you should be learning, so things get out of order and you start getting contradictory data.

[Algher]

@suranyi

And in any case, as has been mentioned, the mortgage interest deduction was not introduced in the tax reform of 1986, but many years earlier.

Yep - back in 1983 per wiki (and Liars Poker by Michael Lewis - he was there):

Collateralized mortgage obligation

The banks have been bundling up debt and selling it for awhile. Can’t blame that aspect alone either.

[Spectre_of_Pithecanthropus]

@emacknight

I disagree. Dozens of other countries have a Federal Reserve Bank that adjusts the interest rate in the exactly the same way the US Fed does. Why would that cause a different result in the US?
.

It didn’t really. The mortgage banking business was shaky and foreclosures on the increase in several European countries as well. I remember hearing NPR stories about these things happening in England and Spain, perhaps a year ago. When I first discovered the joys of German media on the Internet, around the beginning of 2008, the first news video I saw was about a financial bailout package being worked out in their parliament. It sounded so much like what was going on in the U.S. that I initially thought it was about us.