“James, You are kidding us, right? When has any conservative administration benefit America and Americans?”
Nope. MAC governing philosophy does not discriminate as to political party. The guiding principle is less government, period. But the Reagan admin seems to have benefited the American economy overall while the Bush admin and the republican Congress definitely forgot those principles both I and MAC’s, support. Bush’s Medicaid part D seemed an attempt to head off liberal attempts at National health care by using market based methods involving the private sector. This actually worked quite well. I remember being at a Pharmaceutical convention where one of the speakers discussing all the initial problems of its implementation and final form intimated that it ended up costing almost 25% less than they thought it would. The competition between the private insurance companies had brought down the cost.
“Do you really believe the lowering of taxes is good for our economy? Please explain this with some evidence in reality.”
MAC principles address this in an elegant and indirect way: smaller government requires less of the people’s money (capital) to run, so fewer tax revenues are needed. Your real world evidence can be found by retro-examining ever more previous years of smaller and smaller government attended by ever decreasing government expenditures. Why would increasing taxes help our economy? Capital is a limited resource and the more the government takes out of the economy the less efficient its use becomes. People who spend other people’s money do so less efficiently and frugally then those who have earned it.
Given those who earn the capital are better at finding its most efficient use why would taking more of their capital away from them via “legal plunder” (taxation) be better for our economy? If your argument is that the government can spend the money better than some people, MAC’s would not have any problem with that scenario. But since this is America they should have a choice. If they feel that Obama, Nancy Pelosi, or Barney Frank is the better one to spread their wealth around then so be it, otherwise they should be able to spend, save, or invest their capital as they see fit.
Seriously and with all due respect, we here on A2K seldom know the economic background or life experiences of our interlocutors and perhaps this is a source of misunderstanding. So, we could equate the efficient use of capital (say, the money we get in our paycheck) to buying a car or just renting it on vacation in a distant locale. Let’s say the location is Needles, Ca where it gets really hot in summer. In one case you have bought (with cold hard cash), after much saving and self denial for 12 years, a nice shiny black BMW 535i--it’s your baby. In the other you have rented the same car in the same exact condition. You drive each to the Mall on a sunny 103 degree day (Needles probably doesn’t have a Mall but…). You pull into the parking lot and see a spot open right across from the front door of the Mall, a walk of 5 yards .The spot is plagued with people constantly pulling in and out with all kinds of trucks and vehicles the ages of which vary widely. But on the way in you saw the back of the lot was completely empty, problem is the back lot is 200 yards away. Where would you park the car in each particular instance? When people earn their money, it is perceived, rightly, a limited resource and must be husbanded carefully. Run this thought experiment with the rented car being yours and the renter a government employee and we have governments’ stewardship of your hard earned money. Where will you park your money?
“Do you really think Americans knows best how to handle their own finances? Is that why the majority never saved for the past decade or so? Don't forget, that also includes conservatives - not just liberals
Excellent point and as you may or may not have observed this behavior has been fostered by government policies past and even present that have distorted pricing of Housing, money (credit), and even the price of gasoline. Gasoline prices are subject to demand and supply and to government fiscal policy (taxation, especially the constant threat of so called “Windfall Profits Tax”"a favorite political red herring, American oil companies see little reason to invest in more refining capacity (this is not to mention EPA regulations which raise similar questions regarding further investment). Additionally, recent government monetary policy (lowering interest rates) has led to a decline in the value of the dollar thereby leading to where we must use more dollars to buy a given barrel of oil. The price of gas just dropped because demand is way down (globally) and the dollar recently strengthed.
Housing I will leave to last but government monetary policy (specifically the Fed’s cheap money policy has, since the late 90’s led essentially to a negative interest rate. This policy made chumps out of savers so that one would be a fool not to borrow and spend. Why save the 30G’s to buy a big SUV while paying government taxes on the interest, what little there was, when you could use GMAC’s money at O% interest for 5 Freakin years? . Hell, at one time (2003) if you owned a business you could receive a Tax credit for buying a large SUV. If that’s not government picking favorites what the hell is? But I digress. Government monetary policy (the FED) was considered relatively neutral back then-- don’t think we can say that now and for the next 5-10 years. The danger is the FED suffers the very real danger of increased political influence in the future.
C.I. wrote: Who are you blaming for this financial crisis?
Well...“The debate about the cause of the current crisis in our financial markets is important because the reforms implemented by Congress will be profoundly affected by what people believe caused the crisis.
If the cause was an unsustainable boom in house prices and irresponsible mortgage lending that corrupted the balance sheets of the world's financial institutions, reforming the housing credit system and correcting attendant problems in the financial system are called for. But if the fundamental structure of the financial system is flawed, a more profound restructuring is required.
I believe that a strong case can be made that the financial crisis stemmed from a confluence of two factors. The first was the unintended consequences of a monetary policy, developed to combat inventory cycle recessions in the last half of the 20th century, that was not well suited to the speculative bubble recession of 2001. The second was the politicization of mortgage lending.
The 2001 recession was brought on when a speculative bubble in the equity market burst, causing investment to collapse. But unlike previous postwar recessions, consumption and the housing industry remained strong at the trough of the recession. Critics of Federal Reserve Chairman Alan Greenspan say he held interest rates too low for too long, and in the process overstimulated the economy. That criticism does not capture what went wrong, however. The consequences of the Fed's monetary policy lay elsewhere
In the inventory-cycle recessions experienced in the last half of the 20th century, involuntary build up of inventories produced retrenchment in the production chain. Workers were laid off and investment and consumption, including the housing sector, slumped.
In the 2001 recession, however, consumption and home building remained strong as investment collapsed. The Fed's sharp, prolonged reduction in interest rates stimulated a housing market that was already booming -- triggering six years of double-digit increases in housing prices during a period when the general inflation rate was low.
Buyers bought houses they couldn't afford, believing they could refinance in the future and benefit from the ongoing appreciation. Lenders assumed that even if everything else went wrong, properties could still be sold for more than they cost and the loan could be repaid. This mentality permeated the market from the originator to the holder of securitized mortgages, from the rating agency to the financial regulator.
Meanwhile, mortgage lending was becoming increasingly politicized. Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market.
As Mr. Greenspan testified last October at a hearing of the House Committee on Oversight and Government Reform, "It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of CRA." It was not just that CRA and federal housing policy pressured lenders to make risky loans -- but that they gave lenders the excuse and the regulatory cover.
Countrywide Financial Corp. cloaked itself in righteousness and silenced any troubled regulator by being the first mortgage lender to sign a HUD "Declaration of Fair Lending Principles and Practices." Given privileged status by Fannie Mae as a reward for "the most flexible underwriting criteria," it became the world's largest mortgage lender -- until it became the first major casualty of the financial crisis.
The 1992 Housing Bill set quotas or "targets" that Fannie and Freddie were to achieve in meeting the housing needs of low- and moderate-income Americans. In 1995 HUD raised the primary quota for low- and moderate-income housing loans from the 30% set by Congress in 1992 to 40% in 1996 and to 42% in 1997.
By the time the housing market collapsed, Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. The second targeted families with incomes at or below 60% of area median income, set at 27% of their holdings. The third targeted geographic areas deemed to be underserved, set at 35%.
The results? In 1994, 4.5% of the mortgage market was subprime and 31% of those subprime loans were securitized. By 2006, 20.1% of the entire mortgage market was subprime and 81% of those loans were securitized. The Congressional Budget Office now estimates that GSE losses will cost $240 billion in fiscal year 2009. If this crisis proves nothing else, it proves you cannot help people by lending them more money than they can pay back.
Blinded by the experience of the postwar period, where aggregate housing prices had never declined on an annual basis, and using the last 20 years as a measure of the norm, rating agencies and regulators viewed securitized mortgages, even subprime and undocumented Alt-A mortgages, as embodying little risk. It was not that regulators were not empowered; it was that they were not alarmed.
With near universal approval of regulators world-wide, these securities were injected into the arteries of the world's financial system. When the bubble burst, the financial system lost the indispensable ingredients of confidence and trust. We all know the rest of the story.
The principal alternative to the politicization of mortgage lending and bad monetary policy as causes of the financial crisis is deregulation. How deregulation caused the crisis has never been specifically explained. Nevertheless, two laws are most often blamed: the Gramm-Leach-Bliley (GLB) Act of 1999 and the Commodity Futures Modernization Act of 2000.
GLB repealed part of the Great Depression era Glass-Steagall Act, and allowed banks, securities companies and insurance companies to affiliate under a Financial Services Holding Company. It seems clear that if GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass-Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified.
Moreover, GLB didn't deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB.
When no evidence was ever presented to link GLB to the financial crisis -- and when former President Bill Clinton gave a spirited defense of this law, which he signed -- proponents of the deregulation thesis turned to the Commodity Futures Modernization Act (CFMA), and specifically to credit default swaps.
Yet it is amazing how well the market for credit default swaps has functioned during the financial crisis. That market has never lost liquidity and the default rate has been low, given the general state of the underlying assets. In any case, the CFMA did not deregulate credit default swaps. All swaps were given legal certainty by clarifying that swaps were not futures, but remained subject to regulation just as before based on who issued the swap and the nature of the underlying contracts.
In reality the financial "deregulation" of the last two decades has been greatly exaggerated. As the housing crisis mounted, financial regulators had more power, larger budgets and more personnel than ever. And yet, with the notable exception of Mr. Greenspan's warning about the risk posed by the massive mortgage holdings of Fannie and Freddie, regulators seemed unalarmed as the crisis grew. There is absolutely no evidence that if financial regulators had had more resources or more authority that anything would have been different.
Since politicization of the mortgage market was a primary cause of this crisis, we should be especially careful to prevent the politicization of the banks that have been given taxpayer assistance. Did Citi really change its view on mortgage cram-downs or was it pressured? How much pressure was really applied to force Bank of America to go through with the Merrill acquisition?
Restrictions on executive compensation are good fun for politicians, but they are just one step removed from politicians telling banks who to lend to and for what. We have been down that road before, and we know where it leads.
Finally, it should give us pause in responding to the financial crisis of today to realize that this crisis itself was in part an unintended consequence of the monetary policy we employed to deal with the previous recession. Surely, unintended consequences are a real danger when the monetary base has been bloated by a doubling of the Federal Reserve's balance sheet, and the federal deficit seems destined to exceed $1.7 trillion.”:
Mr. Gramm, a former U.S. Senator from Texas, is vice chairman of UBS Investment Bank. UBS. This op-ed (from WSJ Feb 20, 2009 page A17) is adapted from a recent paper he delivered at the American Enterprise Institute. Gramm received his doctorate in economics from the University of Georgia in 1967. He then taught economics at Texas A&M University from 1967 to 1978. In addition to teaching, Gramm served as a partner in the economic consulting firm Gramm & Associates (1971"1978).
Note: I do not blame greed. Greed is a human foible that we all share. It is only when the rules are changed by government to pick favorites that allows certain individuals or entities to profit and others to suffer. It is government meddling in the economy that creates imbalance, distorts prices (including that of money), and favors excessive behavior of economic actors (See reference to CRA, Fannie Mae , and Freddie Mac above).
Looking forward the simplest and quickest path for the U.S. government to instill confidence in the markets and shorten the recession is to leave the capital that remains in private hands (The government hasn’t had any capital for years which wouldn’t be a problem if it didn’t have so many future obligations.) First pass laws allowing for the repatriation of corporate profits (Capital earned outside the U.S. and owned by American Corps that sits overseas because of current U.S. tax laws) and extend Bush tax cuts if not make them permanent (If necessary rename them to make the Democrats feel better. They seem to like the obfuscation of names such as “Pay Go” or AMT: Alternative Minimum Tax " Which grants no alternative and maximizes one’s federal tax liability.). Then Congress should promptly recess for the next year and a half while collecting only 10% of their salaries the balance going towards paying off Chris Dodd’s sweetheart mortgage deal from Country Wide’s Anthony Mozilo. Any excess can be grudgingly applied to those who bought Florida Condos right before the end of Chris and Barney's Ponzi scheme and missed the ”Flipp’n” opportunity of a lifetime.