A tiny percentage of bad loans were promoted with government backed money. The overwhelming majority of loans, 94% of subprime (and subprime loans were a small section of the overall dollar value of bad loans made during the bubble period) were made by unregulated private firms who then sold them to unregulated securities firms. You can continue to blame “government” but the facts and the evidence show otherwise. Six percent of subprime loans made by CRA lenders. That’s a fact.
It wasn’t government interference in banking practices that was the problem, it was the lack of interference. Ever since FDR set up the SEC, deposit insurance, the other financial regulatory bodies and the rest of it after the last meltdown we’ve had eighty years ofno serious meltdowns, easily the longest in history, before that there was a crisis every deade or two. But then we deregulated ourselves back to 1928 again and got the same result.
Fannie Mae is the second largest company in the US and the largest purchaser of mortgages. It’s function has has been politicized to encourage loans to higher risk people. The risky loans they purchased would not have been made otherwise.
Got a cite for that? There was a huge international demand for commoditize US mortgages. I don’t think “politicization” was the major cause of the housing collapse.
I already went through this up-thread. Loan mandates were attached to membership in the FDIC program. This was expanded under Clinton. Attempts were made to reign it in under Bush. This was backed up with poorly regulated derivatives/credit default swaps. Bad loans were backed up by bad paper.
I’ve got news for you - your posts are so filled with nasty ad-hominem attacks that I rarely read them. I never read that one, because it was a response to a different poster. I’m not sure why you expected a response from me in the first place.
But since you asked:
I’m with you so far.
And here we run into a problem. If the recession is due to a real phenomenon - people suddenly having vast amounts of wealth wiped out and as a result discovering that debt is a major problem, just why would you think that simply throwing borrowed money into the mix is going to fix anything?
It seems likely that what is going to happen is that you are simply going to create more debt. Oh, the money spent will have a temporary effect on the economy, but there will be no multiplier. You’ll just be borrowing money and using it to maintain the economy in some sort of steady state of low growth and no job creation - until the debt gets so big that the whole house of cards collapses. That’s what seems to be happening in Japan, and it may in fact be the story of the 2000’s - the Bush administration injecting stimulus upon stimulus into the economy, which simply racked up debt without fixing any of the underlying fundamental problems.
if people aren’t spending because they are heavily in debt and worried for their futures, it seems to me that the correct policy is for government to implement stabilization policies that make the future more predictable (that means a credible plan for attacking the debt), while letting the economy fix itself slowly over time. In other words, you’re going to have a contraction whether you like it or not. Your choice is whether to have it now and then get a recovery under way, or keep propping up the economy with borrowed money until you run out, and then watch the contraction occur anyway, except twice as severe because of the debt load.
I would add that the public is perfectly capable of distinguishing income that comes from permanent improvements in the economy from income that comes from the government frantically throwing borrowed money at everyone. They’ll spend the former income, and they’ll sit on the latter income.
You know, we keep going over this: there has been NO big redistribution of wealth upwards. Wealth held by the top 10% of the people was about the same in 2008 as it was in 1964 or any number of other years you want to pick EXCEPT for the outlier that you continue to use as your starting point. This has been pointed out to you many times, but you continue to use it. It renders your entire point invalid.
By waiting. By keeping the government from constantly meddling in the economy so capital can find its own path to productive uses. Let the contraction happen (if it does), and use government simply to provide aid to those most hurt. The signs are there that the economy is slowly healing - savings rates are up, for example. At some point, balance sheets will be restored. Let real estate fall instead of constantly trying to prop it up with gimmicks, and at some point it will be cheap enough that people will overcome their desire to save and will start buying houses again.
It’s not going to be pleasant. But it’s necessary. Bubbles and government stimulus cause vast malinvestments in the economy. The U.S. economy has gone from bubble to stimulus to bubble to stimulus for almost two decades now. And finally the crap hit the fan. Like it or not, there are no magic wands you can wave to ‘fix’ the problem. And the business community has been yelling at government to stop meddling. Time to listen for a change.
You always act like you’re so certain as to what the answers are. It’s always clear to you, and you act like anyone with a differing opinion must be lying or a moron because it’s impossible for you to believe that perhaps the economy is too complex to be amenable to simple fixes. You should learn some humility.
For example, last year’s Romer and Romer paper found that some forms of tax increases cause major decreases in GDP. As in, a 1% GDP tax increase could cause a 3% GDP reduction in output. However, they also found that tax increases that went to deficit reduction didn’t have this problem.
That one paper should give any good Keynesian pause. Specifically, are deficits such a drag on the economy that a 1% of GDP reduction of the deficit is worth three percentage points of GDP growth? If so, then borrowing as a fiscal stimulus is a bad idea. But maybe something else is going on that we don’t quite understand. Maybe it’s not just that the deficit is going down, but that the psychology of the marketplace changes when it looks like government is behaving conservatively. But we really don’t know.
The key phrase there is “we don’t know”. Another recent peer-reviewed paper found that deficits above 90% of GDP result in an additional 1% cut in GDP growth. How come? We don’t know.
Christina Romer’s original models predicted a major reduction in unemployment from the first stimulus. But unemployment instead got significantly worse. How come? We don’t know.
Every day it seems that economic reports bring ‘unexpected’ results that don’t match economists’ predictions. How come? We don’t know. If we did, they wouldn’t be unexpected.
It turns out, there’s a hell of a lot we don’t know about how the economy will respond to inputs, be they supply side or demand side. My personal belief is that we can’t know, because the economy is a complex adaptive system, and is therefore always mutating and evolving. Its response to inputs is always changing. The right answer for good government may be for it to not attempt to steer the ship, but simply to be prepared to help people if the ship hits a rock.
I understand that attitude doesn’t play well with social engineers and economists who think they can steer the ship through treacherous waters if only the people would give them control for a while.
Fannie Mae created the first Mortgage-Backed Security. Fannie Mae legitimized the subprime mortgage market by entering it in 1999. In 2004, the Congress liberalized mortgage rules for Fannie Mae and Freddie Mac.
At the start of the mortgage meltdown, Fannie Mae and Freddie Mac held over 6 trillion dollars in mortgages - 57% of all mortgages in America.
But even that understates the impact of Fannie and Freddie. The biggest effect they had was on liquidity - because banks could package their mortgages and sell them to Fannie and Freddie, they could free up the capital they would normally have tied up in the mortgage and use it to provide more loans. And because Fannie and Freddie absorbed all the risks, this was a very profitable model for the banks, and they had little incentive to make careful loans. Fannie and Freddie were only supposed to buy ‘conforming’ loans that met minimum standards, but these regulations were repeatedly watered down over the years - by politicians in both parties.
Fannie and Freddie then turned around and sold those securities on the secondary mortgage market. And because they were GSEs, people felt that the securities had the full faith and credit of the U.S. government behind them, and downgraded their risk accordingly. That allowed F&F to sell the securities at a higher price, and that was their business model - buy up mortgages, securitize them, sell them on the secondary market for a profit by trading on the association with the U.S. Treasury.
It’s also important to note the psychological effect on investors of having the government involved in the subprime racket - it legitimizes it just as FDA approvals tell people they don’t have to be very careful about the drugs they take.
So Fannie and Freddie multiplied the liquidity in the mortgage markets, they gave the government imprimatur to the whole subprime mortgage market, they subsidized the risks of banks, they packaged up mortgages and sold them off, and yet still directly held more than half the mortgages in the United States at the time of the mortgage crisis.
Clearly the effect of Fannie and Freddie should not be handwaved away by anyone. I find it amazing that so far these agencies and the politicians who defended them and ignored calls for more oversight should completely escape any blame for the meltdown in the mortgage industry.
That’s just a silly semantic argument. You could just as easily say that businesses can not create wealth unless a product is sold. When the govt built the Hoover and Bonneville dams they created wealth. When they dredge a harbor they create wealth.
If the government sold the dams for a profit they would be creating wealth. building a bridge doesn’t create wealth, otherwise we could just build a million new bridges and solve the deficit problem. The reality of it is that a million new bridges would add tremendously to the debt (remember the bridge to nowhere?)
You’re confusing jobs with wealth. Government can create jobs but it takes private wealth to fund the endeavor.
Apologies for the delay. Real life job and an autistic kid can cut into Dope time. I also stand corrected that the OP should have read that “***a ***cornerstone is that the rich will ***invest ***tax cuts and lead to direct and/or indirect job creation.” I was sloppy and not intentionally baiting. Mea culpa.
Specifically addressing the OP, there is a consensus that the 2001 cuts don’t really count given all the other economic issues going on.
2003 has not been addressed.
I personally would be interested to see how the data maps out for the Reagan/Bush Sr years. That would add weight or discredit the premise depending.
One thing I’ve noticed is an awful lot of “supply side economic theory” being throw out in this thread versus what has been sold politically as “supply side.” Throw in a generous helping of multiple economic levers going at once. Of course, in real world economics, you can’t just change one lever. And a lot of hair cutting.
Quid pro quo, hair cutting works both ways. I’ve seen supply siders on this board say you can’t seperate out the cyclical uplift that Reagan got at the start of his term and you have to stop the clock when Reagan left office as opposed to Bush. Well, ok. I would be very happy to take part in a debate where we can use a general haircut and then debate the real effects. We probably agree more than we disagree if the partisan bullshit is set aside and commonsense haircuts are applied. For example, we both probably agree that Greenspan was pretty good up through irrational exuberance and sucked donkey dick after that. We both probably are appalled that Hanky Panky Paulson got away with bailing out the big banks for 100 cents on the dollar and making the too big to fail problem worse (of course after engineering the JPMorgan Bear Stearns takeover but JPMorgan already finance that balance sheet, and letting Lehmans die because if you’re gonna kill someone on the street we all know it had to be my alma mater Lehmans).
Sam, just curious if you’re saying now that overall Bush Jr was economically irresponsible? Does that fiscal responsibility include prosecuting 2 wars, and if not why not?
I thought Bush was economically irresponsible from almost the day he was elected. Have a look at that 2005 thread. I was pretty savage with Bush and the Republicans in multiple messages in that thread.
My issues with Bush have more to do with his big government tendencies, his unwillingness to deal with the deficit in a meaningful way, his inexplicable push for Medicare Part D entitlements, and numerous other ways in which he screwed around with the economy and spent money like a drunken sailor.
My support for the war in Iraq has nothing to do with this, btw. I would have supported WWII despite the fact that it was paid for by racking up huge debt. Some things just can’t be measured that way. If a war is right and just and inevitable, then it doesn’t really matter how much it costs. If a war is unnecessary or wrong, then it doesn’t matter if it costs a trillion dollars or whether you profit from plundering your invadee. Its rightness or wrongness is simply not a financial issue.
You’ve got to be kidding. Hows about you start the correcting process by fixing your OP? Then, hows about you give us some cites for what is being sold “politically” as SSE theory?
Absolutely not! Everyone in Soviet Russia had absolutely no wealth! All those apartments, pensions, food: utterly illusory. In fact, even lower than a third world country. Those Ethiopians may have starved to death in hovels, but at least they were wealthier than the Commies!
It disappears and never stimulates the economy. That’s why conservatives are so eager to make sure they don’t have any. We’d be better off if all money were invested and none of it was being spent.
Yes, Fannie is a huge company. And right when the housing bubble got going, Fannie’s business started to collapse. In 2005 alone Fannie Mae, the biggest mortgage buyer on the planet lost over half her business, just like that. Why was that? Surely the biggest mortgage company in the world losing half its business overnight meant that there was a major change happening in the US mortgage market? What was that major change? This :
In 2003 the Bush administration regulators literally took a chainsaw to mortgage regulations and the newly unregulated mortgage industry industry went hog wild. And the unregulated securities industry did the same thing.
Fannie and Freddie didn’t make one single solitary bad mortgage loan. Not one, not even one mortgage for one house anywhere in America. What they did buy were bundles of mortgages made by newly unregulated mortgage firms who were suddenly able to write as many mortgages as they wanted with no documentation, credit history, credit checks or employment history needed to get them. And they were competing to buy those mortgages as private companies in a free market.
And like I said, F and F were basically bypassed in the whole process with the mortgage originators like Countrywide bypassing F and F and selling the mortgages directly to Wall Street securities firms. If F and F had never existed the exact same mortgages would have been written and sold on to securities firms. F and F are just the only way that conservatives can try and put the blame for the meltdown onto the Democrats or “government”. That and some bill Jimmy Carter passed thirty years ago, which shows how desperately out of straws they are to grab on this.
Right now the government can borrow money at basically zero cost. It can sell ten year treasuries at 0.12% above projected inflation over that period, and produce GDP grwoth with the borrowed money that will more than pay for itself. Even the IMF have just changed tune and said that while borrowing costs are so low the US should think about increased fiscal stimulus.
And wealth inequality is increasing, and that’s straight from the mouth of the most-referenced expert on wealth in America and a guy you mistakenly cited as backing up your claim that wealth inequality wasn’t happening. Here’s what he says verbatim :
***MM: What have been the trends of wealth inequality over the last 25 years? *
Wolff: **We have had a fairly sharp increase in wealth inequality dating back to 1975 or 1976.
Prior to that, there was a protracted period when wealth inequality fell in this country, going back almost to 1929. So you have this fairly continuous downward trend from 1929, which of course was the peak of the stock market before it crashed, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.
Income inequality has also risen. Most people date this rise to the early 1970s, but it hasn’t gone up nearly as dramatically as wealth inequality.
*MM: What portion of the wealth is owned by the upper groups? *
Wolff: The top 5 percent own more than half of all wealth.
In 1998, they owned 59 percent of all wealth. Or to put it another way, the top 5 percent had more wealth than the remaining 95 percent of the population, collectively.
The top 20 percent owns over 80 percent of all wealth. In 1998, it owned 83 percent of all wealth.
This is a very concentrated distribution.
http://multinationalmonitor.org/mm2003/03may/may03interviewswolff.html
You can continue to claim that your own analysis of that guy’s data show that wealth inequality hasn’t budged and people can make up their own minds whether to believe the expert or the guy on the internet with a storied and much-remarked-upon history of posting disingenuous garbage.
As for the economy recovering.
We’re still going to have the recovery’s increase in wealth going to the wealthy and the wealthy continuing to increase their share of income even if we do recover, and end up with another bubble because of it. But let’s say because the other 90something % country is in so much debt that they can’t get spending again and can’t increase their incomes enough to get back to acceptable levels of debt, and so the economy doesn’t recover but goes sideways/we have a growth recession, which is probably what’s going to happen. Would you agree that redistributing the existing wealth in the economy would be the best way of getting a proper recovery going again? If not, exactly how do you expect the 90something %'s financial situation to recover enough for them to start spending again?
F and F have always increased liquidity in the mortgage markets, they’ve always been implicitly backed by the government. But everything was fine until 2003 when the mortgage market was changed dramatically, and in the loans that actually went bad F and F played a smaller and smaller part, Fannie for instance losing over half her business in 2005 as the newly unregulated mortgage originators sold their mortgages direect to securities firms.
Given that now the entire financial system is explicitly backstopped by the government, are you going to blame reckless lenders/risk takers like Goldman Sachs and other banks/investment banks when the next financial meltdown happens?
Not quite sure what you’re looking for RE fixing the OP? Moody’s Analytics came out and said that emprical evidence from the Bush Jr era showed that tax cuts for the rich did not translate into increased investment. And I mistakenly wrote “spend” instead of the more accurate “invest.”
Are you seriously asking for cites that “tax cuts for the rich” has been sold politically as SSE? You can search on “extending bush tax cuts supply side” and get an awful lot of hits.
Here’s a good headline. And here’s the architect of ReaganomicsDavid Stockman throwing out his 2 cents on NPR that “Reagan would never support extending the Bush tax cuts.”
