Wednesday, January 29, 2014

Income Mobility in the United States

A new comprehensive, and apparently highly credible, study came out that contrary to conventional belief (another words what we've been told by our politicians and the media) income mobility in the United State has remained the same for the last 40 years. While this was barely covered in media reports for some reason,and has been generally absent from the political talk show conversations,I noticed that the President in his State of the Union address did modulate his words and referred to economic mobility having "stalled" rather than "declined" which is what I'm sure he would have said before the release of this study. The conclusion of this study did not fit the narrative of the Left, and indeed some on the Right, who take the position that economic mobility in the US has gotten worse over the years,and was much better in the past. However, the study did mention that income mobility in the U.S. was behind most developed countries. The study I read didn't go into detail about this issue and I'd like to see if the comparisons are really apples to apples. I've done a little digging myself and here's an example of how statistics often don't tell the whole story and can be used to distort political points of view. As mentioned, we hear that income mobility is so much better in other countries, such as Denmark, than in the United States. Put aside the lack of diversity of this small country, and other factors, compared to the US, we are told that income mobility is much better there than here. However what does that mean? Consider the following information I came across from a reliable source: A Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000 to move from the bottom to the top. As best as I can tell both countries have similar costs of living. If so, who is better off; a Dane who's income has gone up $45,000, thus moving her into the top from the bottom percentile; or an American whose income went up twice as much as the Dane's ($90,000), but went up from the bottom to only the second highest percentile? Those who deprecate US economic mobility would say the Dane is better off. I don't think that Dane would agree; she'd rather have the increased income the American got, I assume. However, as I've often said statistics can be misleading , so where did I go wrong here?

Friday, January 17, 2014

Too Big to Jail?

This is an excerpt from a January 9,2014 New York Review of Books article by Judge Jed S. Rakoff of the Federal District Court in New York on why no high level executives have been prosecuted . It mirrors the points I made in my blog post The Root Causes of the Great Recession- An American Tragedy- Part 1 (posted two years ago). Judge Rakoff is a highly respected liberal jurist.

 Among other points, Judge Ratoff concluded as follows ( emphasis added) :

But a second, and less salutary, reason for not bringing such cases is the government’s own involvement in the underlying circumstances that led to the financial crisis. On the one hand, the government, writ large, had a part in creating the conditions that encouraged the approval of dubious mortgages.

Even before the start of the housing boom, it was the government, in the form of Congress, that repealed the Glass-Steagall Act, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the SEC but also of such diverse banking overseers as the Office of Thrift Supervision and the Office of the Comptroller of the Currency, both in the Treasury Department.  It was the government, in the form of the Federal Reserve, that kept interest rates low, in part to encourage mortgages.

 It was the government, in the form of the executive, that strongly encouraged banks to make loans to individuals with low incomes who might have previously been regarded as too risky to warrant a mortgage. Thus, in the year 2000, HUD Secretary Andrew Cuomo increased to 50 percent the percentage of low-income mortgages that the government-sponsored entities known as Fannie Mae and Freddie Mac were required to purchase, helping to create the conditions that resulted in over half of all mortgages being subprime at the time the housing market began to collapse in 2007.

  It was the government, pretty much across the board, that acquiesced in the ever-greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay. Indeed, in the year 2000, the Office of Thrift Supervision, having just finished a successful campaign to preempt state regulation of thrift underwriting, terminated its own underwriting regulations entirely. The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations. And what did the government care, since it was helping to create a boom in the economy and helping voters to realize their dream of owning a home?

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of, among others, Bank of America with Merrill Lynch, and of J.P. Morgan with Bear Stearns. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault? One does not necessarily have to adopt the view of Neil Barofsky, former special inspector general in charge of oversight of TARP, that regulators made almost no effort to hold accountable the financial institutions they were bailing out, to wonder whether the government, having helped create the conditions that led to the seeming widespread fraud in the mortgage-backed securities market, was all too ready to forgive its alleged perpetrators.

  Please do not misunderstand me. I am not suggesting that the government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a CEO who might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do."