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Posted at Committed to Bringing You Home by Frank Crowley
Oct. 30, 2008
Categorized in: Economy
Enjoy reading my blog entry at RealTown Blogs
Sept. 29, 2008
The Financial Mess during 2008
To resolve the Wall Street financial mess you need to examine and correct what has created the situation. I think asking questions, then examining the answers will lead to the proper solution. Unfortunately, Congress doesn’t work that way. Since I have started writing this, Congress passed the $700 billion bailout legislation, which even before passing they said wouldn’t solve the problem.
So what can the citizens do? Educate ourselves, ask our local representatives complex questions which will show what their actions within Congress will provide.
It isn’t going to be easy, but finding out which representatives will do what is best for the future of America is easier than the consequences of paying off $700 billion of borrowed money.
I will ask my representatives these questions;
What did the Glass-Steagall Act of 1933 do for our financial system?
What will an uncontrollable federal debt do to a nation?
Do you believe America’s public debt is concern for our future?
The internet gives us every form of research imaginable. It’s easy to find the answers. Whether or not our elected officials check them out is another issue. Check them out;
Above all, I am not trying to sway your vote one way or the other. I want you to have a more educated opinion and hopefully you will give me helpful information that I can use to obtain an objective opinion. If you have information concerning this topic, please forward it to me. I am still curious as to the best direction our nation should take.
My argument against the merger of Investment firms and banking is greed. There is the desire to make more money. More money, more money, more money; that is the desire of Wall St. and Republicans. “Let the free enterprise system take care of the market,” they screamed. Well it has and now we are seeing the results of unfettered greed. The Republican excuse of claiming “Obama and the Democrats took campaign contributions from Freddie Mac and Fannie Mae,” is not a reason. They all took payments. The Republican platform is “Let business do what they want and keep government out of the way.” Anyone who argues this point is a liar.
The Democrats have forgotten their ethical and moral principals. They have sold themselves out for a few votes from the center. President Clinton signed the Gramm-Leach-Bliley Act in 1999. Democrats have gone along with the program all too often. As with going along with George W. Bush’s assertion that Saddam Hussein provided a threat to America, they went along, in an attempt to not fall into the accusation of being weak. Somehow, the Republicans have turned possessing education and knowledge into a negative. A little like the Khmer Rouge.
Even libertarian Republicans can no longer claim their platform is for less government. Reagan’s and both Bush’s and the Republican Congress have orchestrated the largest expansions of government in our history. The Republicans of the last 30 years have made FDR look like an amateur governator.
During the Republican Revolution and the Reagan Year’s, Americans believed that government was the problem. Business had America’s best interests at heart. So laws were changed; removing regulations which were “keeping business from doing what was best for America.” Ronald Reagan, Newt Gingrich, Both President Bush’s and John McCain have all promoted and bragged about the benefits of strong unregulated business practice. They were so convinced that unregulated business was so beneficial to America that they started cutting the tax rate of businesses. Naturally, all the companies saving on taxes would reinvest in America. Even President Clinton fell for all the evidence of strong unregulated business during the 1990’s because of the tremendous tax proceeds flowing into the IRS. After all, Clinton signed the Gramm-Leach-Bliley Act into law in 1999.
A lot of people want to place blame upon the Democratic Congress that took office in January of 2007. Wow, they must have tremendous power. Their policies have sunken America’s financial institutions in twenty months.
Fannie Mae and Freddie Mac
The real housing bubble began during 2001. Less than two years after the main regulations were removed. Housing prices began to rise as lending requirements began to shrink. People who truly couldn’t afford homes were given mortgages with the belief that they would be able to sell the home at a profit within a couple years. It was a sure bet. And it was, for four years. Then in 2005, housing prices began to fall, prohibiting homeowners from recovering the amount of their loans with the sale price. That is when the bubble broke, that is when the trouble began.
I hear pundits on television and radio and in print wanting to blame Fannie Mae and Freddie Mac for the present crisis. That may be true but both the quasi-governmental agencies were created and instructed to give out mortgages to as many people as possible. If the government creates a company to perform a task and they carry out that task, isn’t the government that created their existence to be blamed?
Sarbanes-Oxley
I am not certain that this legislation had any causal effect on the present financial meltdown. I am including it because I have heard many republican talking heads make claims that Sarbanes-Oxley has an effect. You figure it out and let me know. Just Google® it.
Mark to Market;
Another topic being spouted by Newt Gingrich and others talking heads as to having the solution to today’s problem. It will certainly change the numbers on the quarterly report but I don’t know how it will help a person adjust their paycheck to the new adjusted mortgage payment. Again you can tell me how.
What has the Bush administration done from 2001 through 2008?
Agency’s ’04 Rule Let Banks Pile Up New Debt
Published: October 2, 2008
The New York Times
“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.
The Federal Debt
I believe America has a much larger problem that we haven’t focused on yet. Eventually we will have to pay off the trillions of dollars we borrowed to keep our nation in its present stature. My question to everyone; what happens when a nation cannot pay its public debt?
Policies for an Aging Society: Confronting the Economic and Political Challenges
By Stuart H. Altman, David Shactman
Contributor Stuart H. Altman, David Shactman
Published by JHU Press, 2002
ISBN 0801869072, 9780801869075
402 pages
From page 89, sub-chapter “Federal Debt and the Economy”
What to do with the near term surpluses has become a contentious political issue. In its budget for 2002, the Bush administration proposes to pay down all the federal debt that can easily be redeemed over the next ten years. The administration would not attempt to redeem nonmarketable debt, such as savings bonds, or long term bonds that would not mature until after 2011. The administration opposes federal investment in the private sector and argues that funds not needed for debt reduction should be returned to the public through lower taxes in the future (U.S. Office of Management and Budget, 2001, 227-28).
In contrast, CBO long-run budget projections assume that the government will invest its surpluses in nonfederal assets after debt held by the public is eliminated. When deficits return, those assets are drawn down. Eventually, the government must resume issuing debt to the public. That result stems from some simple budgetary arithmetic and straightforward economic analysis.
The arithmetic involves a concept known as the primary deficit or surplus-the surplus or deficit excluding interest payments to (or from) the public. If the primary deficit is zero and the interest rate on the debt equals the rate of growth on the economy, both debt and GDP will grow at the same rate, and the debt-to-GDP ratio will remain constant. If the primary deficit is greater than zero (as is projected to occur some time after 2020), however, the debt-to-GDP ratio will rise. If the interest rate also exceeds the growth rate, the debt-to-GDP will grow even faster (CBO 1985, 88-93).
CBO’s long-run analysis is designed to account for the effect of deficits on the economy, and those economic feedbacks greatly accelerate the accumulation of debt. When publicly held debt grows faster than the economy, the federal government places increasing demands on credit markets. The growth of debt drives up interest rates and reduces the share of economic output that is available for private capital formation. As a result the growth of productivity slows and may eventually cease. The rise in interest rates increases the numerator in the debt-to-GDP ratio, and the slowdown in productivity decreases its denominator. Together, these two factors make the accumulation of debt more explosive.
Because even a small primary deficit can lead to an explosion of debt if continued for many years, a projection that the debt will eventually explode provides no information about the size of the policy actions that must eventually be taken to put the budget on a sustainable path. The “fiscal gap” provides a convenient summary of the size of the fiscal problem. That gap is the amount by which spending must be cut or taxes increased, starting immediately, to keep the debt-to-GDP ratio from exceeding its current level over the next seventy-five years. In CBO’s October 2000’s projections, the fiscal gap is 0.8% of GDP or about $74 billion in today’s terms.
My Opinion
The Conservative Republican movement with all their spokespersons keeps repeating a statement that I say is false. They have made it up and believe if they repeat it often enough it will be believed by the electorate. We have seen this trick many times before; Trickle down economics, Government is the problem, Saddam has weapons of mass destruction, New Orleans missed the bullet.
Now I can hear you screaming. All you have to do is show me proof. Let’s choose this one statement repeated frequently by the right, most recently last Thursday by Sarah Palin;
Taxes harm the economy. Traditionally, the tax policy debate centers on whether the economic costs of tax increases are smaller or greater than the social benefits of more government spending. A new approach, the "silver lining" theory, mistakenly suggests that higher taxes may be benign or even beneficial to economic growth.Taken from the Heritage Foundation Website.
I claim it isn’t the taxes, how much or how little, but rather the debt of a nation. No matter how many times you state it, raising and lowering taxes is the result of congressional budgetary discipline. I repeat, what is bad for the economy; any economy, your household economy or America’s; is not paying debt.
The present administration has borrowed, borrowed and borrowed claiming that it is good for the economy. Show me some research that shows evidence of any economy growing and sustaining that growth over years of time while borrowing more than 5% of its GDP. Even Ronald Reagan knew that the 5% mark couldn’t be passed without increased inflation which leads to slower growth. Today, America is pushing 9% of GDP in public debt. Do the math of how much we have to pay out in interest payments to cover the borrowed amounts. What happens when a nation cannot sustain its payments for debt? What will the debtors do? In the worst case scenario, what happens to a nation that doesn’t pay its debts?
The other claim by republican politicians running for election claim that the economy performs better under republicans than democrats. I dispute this and I believe that every statistical study backs me up. Check out some facts.
Some history; candidate Reagan claimed during the debates with President Carter that the $60 billion debt at that time was the cause of the slow economy. President Reagan promptly decided to cut taxes turning the $60 billion into $3 trillion in debt. Because of the spiraling deficits and resulting public debt Reagan raised taxes four times before his term ended.
This led to the great claim by George H.W. Bush, “Read my lips. No new taxes.” With the public debt still spiraling towards 10% of the GDP he raised taxes, but the economy was buried in a recession and Clinton took office in 1993.
President Clinton’s main thrust of governance was to balance the budget and begin paying down the debt. As soon as the financial markets lost their biggest competitor, The Federal Government, the economy took off. True strong investment, for a sustained period (7 years), began in 1994. Thus the Republican mantra that “lowering taxes stimulates the economy” is false. Paying down a nation’s debt stimulates the economy.
The Trickle Down Theory (Reaganomics, Supply Side Economics)
I make $100,000 a year. I pay $33,000 in taxes. The government breaks even, paying out $33,000 in welfare payments. The Republican administration lowers my tax bill to 15%. I pay $18,000 less in taxes and spend that money on a new boat. The boat manufacturer has to higher a new employee (lower taxes make the economy grow) who makes $18,000 in salary. This employee pays $5940 in taxes. (He pays 33% because that’s how the Republicans balance their books, you want him to pay 15%; you do the math) The government is in the negative for $12060. The government borrows that amount and pays it back with 6% interest.
Don’t forget the words of President Reagan’s director of the Office of Management and Budget, David Stockman where he admitted that Reaganomics was truly smoke and mirrors. "None of us really understands what's going on with all these numbers." From “The Education Of David Stockman”, by William Greider in The Atlantic Monthly; http://www.theatlantic.com/unbound/flashbks/classics/stockman.htm
Even though still argued strongly by many; http://www.heritage.org/Research/Taxes/upload/bg_2095.pdf
Reagan raised taxes
Con;
Pro;
Additional information added 10/30/08
derivative
Definition
A financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity or currency. Examples of derivatives include futures and options. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. These techniques can be quite complicated and quite risky.
Derivitives; The New Ticking Timebomb http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7D
60 Minutes; Financial Weapons of Mass Destruction http://www.cbsnews.com/video/watch/?id=4546583n
NPR radio Credit Default Swaps http://www.npr.org/search.php?text=Credit+default+swaps
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