Wednesday, November 21, 2012

My Favorite Holiday

Thanksgiving is my favorite holiday. Why?  Because it  is the only spiritual, family based, holiday which emphasizes universal values and principles that are not based on any religion.

All Americans celebrate Thanksgiving.

 Even though we also all celebrate the 4th of July and New Years,  they don't  have the spirituality of Thanksgiving;  rather those holidays  are more celebratory  than reflective. Our other major holidays are either  religious based or more of an extra day off from work or school, rather than a real focus on values and principles.

The name says it all. We give thanks, and we do it with family and friends, without the need of religion, presents or  fireworks .

Now, I'm sure turkeys would have another point of view.

Happy Thanksgiving,


Tuesday, October 9, 2012

Reality Check

We keep hearing and reading everyday from our politicians and the media that we are facing unprecedented problems in this country and that things are worse now than they have ever been. In short these are the worse of times for the United States. Given the drumbeat of gloom and doom, we start to believe it.

Nonsense. Let's put things in perspective.

1929- 1939-- the Great Depression, massive unemployment , dust bowls, runs on the banks, Hoovervilles, breadlines, labor union clashes,etc.

1940-43 -- Nazi Germany marching through Europe and advancing on Leningrad, Britain under siege, Pearl Harbor and Japan sweeping through the Pacific. We were losing the war and many thousands of our men were dying.

The 1950's -- The Korean War and the expanding Communist Soviet Union and it's nuclear threat ( remember those drills hiding under school desk), culminating with the Cuban Missile Crisis in 1961. McCarthyism and its fall out.

Racism and bigotry were rampant. Eventually strife arose from the Civil Rights Movement in the 1960s and beyond , including the riots after MLK's assassination.

The Viet Nam War, with so many killed and wounded, and massive demonstrations, protests and civil disobedience in the 1960's and early 70's. The country was torn apart.

Remember all the years when we constantly lamented Urban Decay , the Rust Belt and the loss of our Farm Economy. Don't forget the era of Stagflaion and long gas lines from the Arab Oil Embargo . The Savings and Loan Crisis that we were told would cripple our economy for generations .

Our cities were crumbling , factories were closing and farmers couldn't make a decent living. The "inner cities " were dying.

Women and minorities did not have the rights and opportunities they have today.

We had some very bad recessions in the mid 1970s and early 1980s and 1990s. The stock market crashed in 1987. We had  the bursting of the DotCom bubble in 2001, with the sharp economic down turn that followed. Of course let's not forget 9/11.

Remember that in the 50s the top tax rate exceeded 70% and has been essentially falling since to where we are at today.

If we honestly examine it, the "good old days" weren't all that great.

Our current problems , while very serious, don't compare to some of the problems we have  dealt with in the past.  Maybe that is why we have to amplify the problems we  have today.

Of course the unemployment rate is a terrible problem, and our debt and deficit are very serious problems that have to be addressed.  Foreclosures and housing prices are dreadful after the sub prime lending crisis set off the housing collapse which lead to the financial melt down and resulting Great Recession.

However inflation and interest rates are low.

We are in the painful , but ultimately beneficial, process of de-leveraging our debt levels.

Those who have jobs are doing reasonably well, and are now feeling less worried about losing them.
While home values have plunged most people are secure in their housing situation and the market is finally recovering .

The stock market , where so many Americans ( at least 50%) have their retirement accounts and the like, has come back strongly from it's lows and the main market problems today appear to be from Europe and with our politicians.

Our corporations are operating at very profitable levels and basically are awaiting increased demand ( and the election) to justify new hiring. Reportedly they are sitting on a mountain of cash but need to have confidence in the economy to invest it.

Notwithstanding Standard and Poor's, the world believes that US Treasuries are still the safest investment in the world. The only threat to our credit rating is our Congress.

Our farm economy is so strong that it should be embarrassing to them to still be getting large government farm subsidies.

The wars we are involved in are winding down and are being fought by volunteers who, for a variety of reasons, have chosen to be in the military. Therefore the rest of us really haven't had to sacrifice to fight these far off wars. The risk of a terrorist attack is real but sadly it is the nature of world we live in.

The one thing that really is broken, and is worse than our past,  is our political process.

Our politicians, abetted by the pundits, have created a toxic atmosphere over things that in reality can be relatively easily dealt with by people of good will and reason. For example, Simpson Bowles would do the job on the deficit and the debt, and relatively painlessly.

Why hasn't either party embraced it? The so called Gang of Six are on the right track but partisans on both sides of the aisle block compromise at every turn.

Since our country's strengths are so extensive and our assets are so strong , we can do the things that need to be done, if the political will is there.

We can afford to raise revenue. There certainly are areas where spending can and should be cut significantly. Meaningful adjustments to entitlements can be made in a relatively minor and thoughtful way which would have a major impact on bringing down the debt and the deficit.

Once a program which includes these things is developed and implemented, confidence in our political process will be restored and the economy will start to grow again and finish the job of solving our debt and deficit problems; as occurred in the 1990s when economic prosperity generated increased tax revenues from increased incomes and profits.

We are lucky our problem are so solvable -- think Greece and other countries in Europe .

However, there are too many politicians and pundits who don't want to solve our problems . No , they just want to win elections to gain or retain power.

When will we all wake up to the fact that they care more about winning elections , with all the spoils that provides, than what is in the best interest of the country.

Maybe that has always been true, and is just a part of human nature, but it's so much more apparent these days.

Shared sacrifice through political consensus is the answer. Compared to what we have had to do in the past, it shouldn't be all that hard.


Update : 2015

Housing prices have largely recovered; foreclosures mostly over.
The stock market remains strong.
Unemployment  at 5.5%; millions of new jobs created since date of this original post.
Inflation still tame
Deficit has been cut in half.
US economy leads the world. Dollar strong and oil prices low.
Yes, we still have some serious problems, but to hear the politicians and media ( from all sides) things have never been worse in this country.
How crazy is that. Why must we always beat ourselves up?

Tuesday, June 26, 2012

Things that make no sense to me-part 1

Things that make no sense to me:

1. Cuts in public sector jobs as demanded by GOP  and GOP complaining about high unemployment rate.

2. Lowering retirement age in Europe when people are living longer healthier lives.

3. Fewer teachers when we want to improve education.

4. Fewer cops when we want to reduce crime.

5. Fewer talented immigrants allowed into US when they enhance our country . Quotas should be based on education rather than nationality;  by all means let the better educated ones in.

6. Illegal immigrantes taking jobs from their own fellow legal immigrants , yet they support them. While quite selfless, it still seems illogical.

7. State and local employees with better union rights than federal employees.  Except for teachers, police and fire, it makes no sense to have state and local employees have more collective bargaining rights than federal workers.

8. Why can't government issue anyone who wants one a free picture ID.

9. Euro without a fiscal  union.

10. China without democracy; how long will that last.

11. Islamic separation of state and religion.

12. Hunger in midst of plenty.

13. Lack of universal health care.

14. Fear of nuclear power. How many have died? Very few, none at Fukushima.

15. Terrorist treated as criminals rather than war enemies. Why aren't they enemy combatants?

16. Gold as a valuable medium of exchange. Why is it so valuable?

17. Why not spend for infrastructure ? The companies and workers are private sector not government.

18. Germans who retire at 67 , bailing out Greeks who get to retire at 60.

19. Media that can't separate lies from facts. Being balanced is no excuse for not identifying lies and half-truths.

20. Democrats who want more jobs but are anti-business.

21. Asking banks to make more loans and then criticizing banks for making more loans.

23. US Open golf where they make the course much tougher for the tournament, but reduce par to 70 from 72 or 71.


Monday, June 11, 2012

Income gap action plan update

After the Scott Walker recall  debacle -- if you're going to attack a "king", you'd better kill him-- I went back and pulled out my action plan to actually narrow the growing gap between the haves and have nots ( different from the 1% v.99%) in our country.

I'm pleased to report that shareholder actions have picked up, at least in a very public way, and pressure is growing to rein in out sized executive compensation. While I can't take all of the credit for this , I can only assume people are reading my blog!

As to strengthening unions and thus raising middle class compensation, last night was a real set back, and ill-advised, for the reasons I set forth below regarding public employee unions, as opposed to private sector unions.

The failure to recall Govenor Walker ( people don't like recalls for anything less than malfeasance) really set the whole union movement back. I guess it's remarkable they did as well as they did, but who cares if you lose.

Again I believe that private sector unions must be divorced from public sector.The state and local public employee unions should operate the same way as federal workers unions do.

Doesn't anyone see the irony of pubic employees working for Obama having no greater rights than public employees working for Scott Walker?

We need stronger private sector unions, but being associated with the public sector, where the tax payers are the owners, only makes it harder. Within the public sector we have to look at teachers , police and firemen differently from other government employees. Those three categories of government workers are more vital than the others who are more akin to federal employees who have very limited collective bargaining rights.

 A reformed private sector union movement, which works with management to both increase profits and increase worker compensation and benefits, is needed to strengthen the middle class and narrow the income gap that threatens the very stability of our country.


Tuesday, May 8, 2012

Words and Meanings- European Style

Words and Meaning - European Style

Following on from my last post, where I explored the different meanings of the same words used by Democrats and Republicans, it is interesting to see how those same words are used by Europeans of the Left and the Right.

1. Growth, as opposed to austerity-- Who doesn't want growth. Even those who are pushing austerity also would like growth. However the Left and the Right  differ as to how to accomplish growth.

While the Left today talks about wanting growth , one of way to achieve growth is to cut taxes. However , to Europeans, especially on the Left, that is an anathema.

Another way to stimulate growth is to reduce government regulation and bureaucracy , but the Europeans don't believe in that either.

No, the only thing Leftist Europeans would do to stimulate growth is to increase government spending.

But where would they get the money to spend?

If they try to borrower, who would lend, and at what price? The debt in many countries is already very high and many countries have to pay really high rates of interest. Spain and Italy are hovering around 6%, while the US ( which also has too much debt) is under 2%.

If they raise taxes to increase spending doesn't that just retard growth?

Frankly, I'm at a loss to understand what Europeans mean by adopting a growth strategy, particulary within the Euro zone.

2. Tax Reform -- In Europe they don't talk much about that, other than to raise taxes. However, as I mentioned earlier, I've always thought that raising taxes is not good for growth.

I guess one thing they can do is to get people to actually pay the taxes they owe, which isn't so easy in places like Greece.

3. Debt Reduction-- You'd think that would be a big one; and it is for the Right in Europe. However, the Left just wants to leave it for another day and , in fact , wants to do more spending that will actually increase  debt further.

What to do now that the Left is in ascendancy?  I have no idea , especially given the constraints of the Euro zone;  but that's a whole other issue.

So once again everyone in Europe is  for the same "words" however , just like in the US , they have different "meanings", depending on ones politics.


Monday, April 30, 2012

Words and Meanings

Words that don't mean the same thing.

1 . Tax Reform--

To Democrats it means higher taxes, especially for the rich.

For Republicans it means lower taxes for everybody, but since the rich pay most of the taxes, any lowering mostly help them.

Both agree on fewer "loopholes",  neither agree which loopholes should be eliminated.

2. Economic Growth-- Everyone is in favor, however for :

Dems it means more government spending.

GOP it means lower taxes and less regulation.

3. Cutting the debt and deficit-- Everyone wants to do that ( at least eventually), however for:

Dems it means raising taxes and cutting some spending , mainly military,

GOP it means cutting spending and that's it.

So isn't the solution to pick a bi-partisan group of experts, both in and out of the government, to come up with the best comprehensive solution?

Oh wait, we already did that. It's called Simpson Bowles.

And guess what, both parties rejected it, even the President who set it up in the first place.

I guess we'll just keep on using the same words that simply have different meaning depending on who's using them.

Of course the one word almost no one wants to use, irrespective of it meaning, is compromise.


Monday, April 23, 2012

Financial observations

While I have already covered some of the topics, this is a recap of some unconventional wisdom observations on issues not often commented on in the media of any political stripe.

According to CNN, over 60% of Americans either directly or indirectly own stocks traded on Wall St. Think of all those 401(k)s , mutual funds , union and other pension funds, 521 college plans,insurance annuities and policies , and other retirement and investment funds. In addition some of the biggest players on Wall St are employee benefits or union funds-- like Teachers, Calpers,Nysters and so on.

Therefore to a significant degree a strong Wall St actually benefits Main St.

Lots of ordinary people benefit from Wall St and I think they are the same people who pay all the taxes , because ( also according to CNN)  47% of Americans pay no federal income taxes ( none of those who pay nothing are the "rich" thanks to AMT).

That's why most tax cuts benefit the rich, since it's so difficult to cut lower income earners taxes. However we do actually pay some people who pay no federal income tax.

So when you talk about federal taxpayers bailing out Wall St what does that really mean? Are we to a large degree bailing out ourselves? And just who are those "taxpayers " anyway? Certainly not the ones who pay no federal income taxes.

Also what kind of country are we if our "shared responsibility" as citizens at the federal level is only participated in by 53% of our citizens.

How is it we venerate Joe Six Pack , who pays very little, if any, taxes and treat people who pay taxes in six or seven figure amounts like they were the scum of the earth, if not outright evil. Just once I'd like to hear a politician say "thank you" to those who pay most of the taxes.

Also why is the " blue collar " guy so venerated. I'd rather have the 24/7 hard charging white collar executive or professional who works 100 + hours a week instead of the union guy who stops working when the whistle blows unless he gets paid overtime. When his union contract says he doesn't have to do something, he won't do it even if it is for the good of his company and as such his job.

What does being a a "lunch bucket " guy mean anyway and why is it such a good thing? Don't get me wrong , I'm not knocking the union guy ( I actually think unions saved capitalism in the early part of the last century), I just don't understand why he is such symbol of what's right and good in America.

We have this bias against successful people, even though most of us would like to be one of them. Maybe that's it.

While I too believe, and have written numerous times, that executive compensation, not tied directly to performance, has gotten way out of control, why is no one complaining about professional athletes, entertainers, media stars and the like.

What does it say when a weak hitting second basemen can make millions of dollars a year or when there was a guy sitting on the Bulls bench last year who has never, and will never, play a minute in a game for the Bulls, yet made in excess of $8 million dollars that year and the year before?

Don't tell me that tax payer money isn't involved. Think of all those stadiums and other taxpayer funded amenities (tax breaks, infrastructure, police, etc.) that are lavished on many sports franchises.

And what about movie stars? They can get paid more for one movie than a Goldman Sachs CEO makes in a year.

While we're at it, what about all those TV and radio news people and commentators who lambaste greedy Wall St execs and bankers and who themselves make well into 7 figures. What societal benefits have they given us that merits their high compensation? Yet they complain about the compensation of bankers and other high paid execs.

As I've written before, my purpose in doing these posting is to point out certain anomalies and inconsistencies in what we hear and read everyday form our politicians and media from both the left and the right.


Monday, April 9, 2012

Great Expectations?

We constantly hear about market disappointments arising from not meeting (or the opposite exceeding) the expectations of analysts or other experts. The recent example of the addition of 120,000 new jobs not meeting expectations of experts has given rise to a sharp market decline today.

Maybe the problem is not the number of jobs created, but rather the skill and accuracy of the estimators. If the estimations had been for 120,000 new jobs would the market have reacted any differently?

The same observation is applicable to those company earning reports that either meet, exceed or are below analysts' estimates.

It seems to me that a major problem is how good the estimator analysts are at their jobs.

If analysts started doing a better job of estimating, how would the markets react to that?


Friday, March 9, 2012

The Value of Statistics?

Use of statistics can prove almost anything you want. Just take your political position and you can find, or create, statistics to support your view.

1. According to World Bank economist Branko Milanovic as reported in a recent story by CNN, 48% of the World's 1% Are Americans. According to his study anyone in the US who makes at least $34,000 a year (after taxes) is in the global income 1%, even after adjusting for local cost of living in the various countries around the world.

Wow, how can that be? However, this comes from a respected economist at the World Bank. The subtext of this article was that when Occupy Wall St. folks are complaining about the 1%, on a global basis, chances are most are complaining about themselves!

2. Another recent example, on the other end of the spectrum, is a recent New York Times article about US falling behind in economic mobility versus other advanced countries. They use all sorts of statistics and it sounded bad.

Then I read further in the article and I saw an explanation for the apparent lack of mobility ( buried at the end of the NYT story) and why those statistics may be misleading. European incomes are so compressed. The example given was that a Danish family could move up from the 10th percentile to the 90th percentile with a $45,000 increase in income, whereas an American family would need a $93,000 increase in income to make the same move. It raises the question of whether you'd rather be in the US making $90,000 more, even if that didn't put you into the 90th percentile here, or be in Denmark making only $46,000 more, but now be in the 90th percentile there.

The results were seemingly less upward mobility in the US and more in Denmark. But what does that really mean if those more upwardly mobile Danes aren't actually making more money. By the way all these numbers were adjusted for local cost of living.

I've lost faith in statistics because it's hard to get an unbiased analysis. In my recent research a line that I read struck me -- if opportunities in the US are so bad, why do so many people still want to come here rather than to Finland, Norway, Denmark and Canada who are ranked as the best for income mobility?

3. In addition, comparing the US to Denmark in all events is really like comparing apples and oranges. Our country is very large and very diverse, while Denmark is small and homogeneous. Are there any other "apples" to compare with our "apple"?

That's the problem with most of these US versus other advanced countries comparisons. The US is large and very diverse. Northern Europe and Japan are smaller and much more homogeneous, with many fewer immigrants.

This is true for lots of other country comparison like education that make little sense but are used over and over. The United States of America ( all 350 Million of us) is ranked behind Singapore, Shanghai (that's right a city not a country) Finland, Denmark , Hong Kong, South Korea and the like on various educational testing results.

Give me a break.

What do all of those countries have in common? Small and not diverse, with few immigrants. That's like just including just Minnesota, Iowa or Oregon, or just suburban DC ,Chicago or NY.

The truly large countries, China, India, Russia, Brazil, Indonesia (even France and Germany) rarely, if ever, are on the comparison list stories.

It also amazes me that if our education is so poor why are such a high percentage of the top world universities American? They can't all be foreign students.

Also we have so many more colleges and universities than other countries because we don't shut out student who haven't passed a national entry test, as so many other countries do. It may cost more, but many more American have the opportunity to go to college.

I guess my problem with the use of statistic was summed up by Mark Twain who said, "There are 3 kinds of lies-- lies, damn lies and statistics".


Friday, February 24, 2012

Wage Gap

Monumental change often occurs imperceptibly, and we don't know it's happened until sometime after it occurs.

It appears to me that racial and ethnic discrimination in employment compensation has come to an end. Not everywhere or with respect to everyone , but pretty clearly on a national statistical level. Personal prejudice and bias is impossible to completely eradicate. However things have changed and for the better, even though politicians and advocates will continue with the old narrative that discrimination is endemic and pervasive in the business world.

Anecdotally I've observed that discrimination in the workplace based on race, ethnicity and gender has all but disappeared. Consistent with a developing set of laws and principles, corporations and government have been vigilant in efforts to elimination racial discrimination in the workplace. It's working.

This view was statistically confirmed in a report I recently read by a University of Chicago Nobel Prize winning economist, James J. Heckman. While his report dealt with the importance of early childhood education, he concluded that more than overt discrimination now drives the achievement gap in the US between Whites, Blacks and Hispanics. He argues that skills now determine success. If you factor in skills (meaning "smarts" including conscientiousness, perseverance and sociability), the wage gap between Whites versus Blacks and Hispanics disappears.

For those who have similar skills ,wage discrimination no longer exist. Blacks and Hispanic men and women who have similar academic and personal skills make the same (or in the case of Black and Hispanic women more) than their White counterparts.

His 2011 study showed using all Black men, the wages for Blacks as a percentage of all White men's wages was 75%. However when adjusted for skills that gap closed to 94%. For Hispanic men, the percentage went from 85% unadjusted to 100% after adjustment. Interestingly , as to Black women, the percentage which was 83 % reversed to 112% after adjustment for skills ; and for Hispanic women from 93% to 117%, after adjustment. I wonder if anyone will start complaining about that "reverse" gap.

The struggle still remains to enhance those skills among minorities through education, parenting and mentoring. However, it is real progress that institutional discrimination in wages in the US apparently no longer exist based on race or ethnicity with respect to those with similar skills.

While I have expressed great skepticism over the politicized use of statistic to fit a political agenda, these figures came from a study which focused on early childhood education and not a study of wage discrimination. As such the author presumably had no particular political agenda in mind on this issue.

The conclusion I take away from this study is that educated Blacks and Hispanics who are conscientious and have good people skills will not be institutionally discriminated against based on their race or ethnicity.

While more needs to be done about those without skills, this is quite a positive societal accomplishment in this country and should be recognized as such, rather than just repeating the old litany of endemic and persistent institutional discrimination.


Thursday, January 5, 2012

Good Old Days?

Sure we are going through an economic crisis of monumental proportions; however, I'm tired about hearing how bad things are today, and how wonderful they were for the "Greatest Generation" who returned from World War II and lived in the America we all long for again.

Really? Consider the following and compare them to today:

1. Air & water quality- vastly improved environment-- remember choking smog and really polluted lakes and rivers. We now have a much greater emphasis on conservation and ecology than in the past. The whole US could have looked like Gary once did, if we hadn't paid attention to this problem.

2. Civil rights- tremendous advancements by any measure; politically, economically and socially. While discrimination hasn't been eliminated, and embedded poverty remains, a large Black and Hispanic middle class has arisen.

3. Women's rights- Advances made my women both economically and politically have been dramatic, including reproductive rights and employment and educational opportunities.

4. Gay rights-were they even mention at that time?

5. Social safety net in general much better- not only Social Security, but Medicare and Medicaid. Poverty remains but there are more services available for the poor, both from the government and the private sector.

6. Better access to elite colleges-- There no longer are same barriers based race, religion, gender,ethnicity, social class. Yes, costs are a barrier and the "greased skids" still exist, but there is more financial aid for the really disadvantaged and even well connected kids have to be really qualified to get into the top schools.

7. Auto safety- amazing improvements- safer cars, airbags, fuel efficiency etc.

8.Technology advances- just think about all the work savers and entertainment and recreational enhancements. Advances in electronics, mobile phones, PDAs, computers, the Internet and so on have significantly improved our quality of life.

9. Lower taxes- remember how high they were in the 50s and 60s?

10. Volunteer army- We don't worry about the draft now.

11. Cold War is over, along with threat of nuclear annihilation; albeit replaced by threat of terrorism.

12. Better quality housing-houses just seem to be better built than in the post war 50s,60s. Maybe not as well built as the pre-Depression era, but lots more amenities and space.

13. Crime has been dropping steadily for the last decade or more.

14. More open political process- No longer just for white protestant men. No more "smoke filled rooms", although I must confess I yearn for some of that some times. Money is a problem , but then it always was.

I'm sure I've left out other good examples so let me know.

My views are summed up in the words of the Carly Simon song, "These are the good old days".

It's the same thing in sports where they talk about how much better players were "back in the day" etc. Those players were no different then, and the old timers back then were complaining about them.

My thoughts are not all that original, just go see Woody Allen's movie "Midnight in Paris".

Maybe it's just age and memory as some have suggested, or just the way human nature is.

The point of this post is that if the positives were pointed out more often maybe people would feel a little better things than they do. Rather than dwelling on a steady diet of negativity and how bad things have gotten compared to how they used to be, let's not forget that in so many more respects things have actually gotten better; so enjoy them.


Wednesday, January 4, 2012

Root Causes of the Great Recession- A Tragedy, Part I

The financial crisis which led to the Great Recession was caused by the combination of misguided good intentions and "honest" greed. It had all of the elements of a classic Greek Tragedy. A Hero who is brought low by Hubris and Flaws, aided and abetted both by Villains and Allies.

The misguided good intentions was the imperative for everyone to own a home. The American Dream -(HERO). Home ownership is viewed as a worthy goal which gives people a sense of pride, stability and opportunity to build wealth for the future.

Why shouldn't all Americans have that opportunity? Since home prices only went up (HUBRIS), once a person started on the home ownership path their futures were assured; their kids went to better schools, they lived in more stable neighborhoods and they were a able to build equity for their future and perhaps for the their children. Essentially it was a way out of lower income status; that's why it was called the American Dream.

The problem was that buying a house is such a large expenditure that almost no one is able to do it with all cash.(FLAW) Therefore borrowing through conventional mortgage financing (ALLY) was usually the only way, and in all events the best way, to go. The Government (ALLY) long encouraged mortgage financing by among other things, allowing tax deductions for home loan interest payments, even after dropping tax deductions for all other non- business interest payments. Yes, older readers will remember a time when all interest was deductible; however that was eliminated for everything other than home loans when tax rates were reduced in the 70s.

Also, as I have told my law school finance class, buying a home using mortgage financing was the most common way ,and usually only way, for the average person to utilize the benefit (along with risks) from the customary business technique of leveraging. (FLAW)

A simple example of the benefits of leverage is as follows:

1. If you bought a house for $100,000 with all cash and sold it for $120,000, your return on investment was 20% - not bad, but not great.

2. However,if you bought the same house, but only put down $20,000 in cash (the prudent "old fashion " way), and got an $80,000 mortgage, when you sold it for $120,000, you just paid the bank back it's $80,000 loan ( which likely was less due to monthly amortization payments), and your return on your $20,0000 investment was 100%-- that's great. You then used that profit to trade up for a more expensive house. And so it goes - or I should say "went". (HUBRIS)

The "dark side" of leverage surfaced when home values dropped giving rise to the notion of "being under water" (the value of the home being worth less than what is owed under the mortgage).

The problem of course is many low income people didn't qualify for most of the mortgages they were seeking. (FLAW) That became a serious problem when a disproportionate number of low income mortgage seekers were minorities. The Banks (ALLIES/VILLAINS), rightly or wrongly, were accused of discrimination, either outright or through use of techniques called red-lining. The result was the Government (THIS TIME A VILLAIN) put pressure on the Banks to make loans which they normally would be reluctant to make from a pure credit perspective. The Banks continued to resist making what they viewed as risky loans, except for a relatively small number of Community Reinvestment Act loans

Enter the subprime lenders (VILLAINS),along with their friends and abettors the mortgage brokers.(VILLAINS) For the most part subprime lenders were not conventional commercial banks. As such they were not as highly regulated as Banks, and with the help of mortgage brokers, were willing to make riskier loan for a higher return. They quickly dropped the conventional underwriting criteria of a substantial down payment, good credit history and sustainable income to service the debt.(HUGH FLAW) Many, if not most, low income borrowers could meet few or none of these customary underwriting requirements.

Nevertheless the Government, urged on by community activists (APPARENT ALLIES, BUT REALLY VILLAINS) were willing to allow these subprime lenders to operate with impunity and little or no supervision. Essentially the Government looked the other way or as Barney Frank so famously said , "let's roll the dice". Because, once again, they believed home prices never go down. And no, I'm not pinning the blame on Fannie and Freddie; they were more of big enablers who came relatively late to the game; no matter what some Republicans say.

I'll never forgot a New York Times article I read where community leaders were criticizing a belated crack down on subprime lending. In the article a civil rights leader in supporting subprime lending said,  "you may think a 30% default rate is high ( it's actually astronomical and got even higher), but I see the 70% as my constituents who now own a home".

Subprime lenders funding sources were not so much from depositors or federal reserve borrowings like banks, but rather from Wall St. securitization houses (VILLAINS) who were in the business of taking high return risks. (HUBRIS) They knew there was risk in making these loans, but thought that home prices only go up, and that through the technique of tranching (AAA,AA,A,B etc.) the priority of debt repayment, each tranche sold in the securitization would be priced according to its risk. (HUBRIS/FLAW)

The theory was securitization would diversify the risk over many investors with different risk appetites, and therefore was safe, or at least priced for the risk taken. (ULTIMATE HUBRIS AND FLAW). Of course Wall St would make big fees and profits in the securitization process.

The irony is that securitization rather than spreading and diversifying the risk, and by that I mean reducing its impact after loan defaults, actually spread the contagion and amplified the fall out when loans started to go into default. Investors panicked and the downward spiral began, leading to the Great Recession, the impact from which is still being acutely felt.

Remember, however, that those same Wall St. houses and Banks actually bought those now toxic AAA and AA rated mortgage backed securities. They thought they were safe, but they became toxic when defaults on the underlying subprime mortgage began. As the chairman of Morgan Stanley so inelegantly put it, "we ate our own cooking and it choked us".

Recall as well that the Government strongly encouraged the Banks to buy those securities by given them bonus capital credits under the Basel I Accords. (VILLAIN) They were super safe because of the AAA ratings given by the rating agencies (VILLAINS) and the fact that home prices never go down. It's easy to say now "what were they thinking",but there were not many who sounded the alarm.

Were those who operated these securitization greedy? Of course they were. Were they dishonest in a criminal way; apparently not. Remember greed is not illegal, only dishonest greed is illegal. So far the government (and fortunately it's the Obama administration) hasn't found actual criminal behavior, yet. Our legal system places a very high threshold of proof when it comes to criminal prosecutions. Sadly many erstwhile liberals appear to have forgotten that (did they leave their ACLU cards behind?) in their zeal to attack Wall St and the Banks.

Fortunately we are still a country of laws, and not lynch mobs, witch burners, human sacrifices or McCarthyites. To date the Obama administration, try as I'm sure they might, have not found greedy behavior which rose to the level of dishonesty, and therefore criminality.

If anyone was really at fault it was the Government. Many others were greedy and irresponsible, but it was the Government's policy of pushing home ownership for everyone, including those who were not credit worthy, and its Regulators' failure to rein in subprime lending by requiring (as it was authorized to do) customary underwriting compliance, which were the root causes of the housing mortgage crisis.

The subprime mortgage crisis set off the panic which lead to the broader financial melt down, which ultimately resulted in the Great Recession. Would we have an economic downturn anyway without subprime lending? Probably, but it would have been more of a correction than a collapse in home prices. Take a look at Canada which prohibited subprime lending. They fared pretty well through this crisis.

Subprime lending was a relatively new industry which arose to satisfy an agenda of those who felt that credit was not widely available enough and took advantage of our misguided goal of the American dream of homes for all-- whose prices never go down- alas.