Thursday, April 21, 2016

Root Cause of the Great Recession - Part 2

Lately I have come across two knowledgeable experts who share my view of what really triggered the financial crisis. As I set forth in Part 1 in my post on the Root Cause of the Great Recession, the financial crisis was not  triggered  by Wall St. and the Big Banks  but rather by subprime lending and political reaction to pressures to increase home ownership for all; even those not creditworthy under traditional underwriting standards.

In the Financial Times April 18, 2016  interview with Jack Guttentag, the 96 year old Wharton professor emeritus and mortgage expert , FT wrote the following:

"He is forthright on the recent boom and bust in US real estate, which he says had little to do with shady practices at Wall Street banks.

Instead, he suggests, it was caused by a broad belief that house prices would keep rising - allied with strong demand created by government agencies, under orders to boost home ownership among lower-income segments.

Lenders and the investment banks that sold their loans through securitization had "every reason" to believe they were doing what the government wanted them to do, he wrote in a recent article.

"None of the congressmen responsible for imposing purchase quotas on the agencies has yet gone to jail," he complained."

When I read that I knew I had found a kindred spirit who was reputable and well regarded in his field. 

 I felt the same way when I read Peter Wallison's book Hidden In Plain Sight. It's  an excellent book which, while critical of the role of Wall Street, powerfully set forth  how the financial crisis leading to the Great Recession really began. The premise of his book is that "the crisis was caused by government housing policies". 

Some day the truth will win out , but not this election cycle!


Monday, April 18, 2016

The Establishment

Just like the term " politically correct ", I have never heard the term "The Establishment " used as anything other than a term of derision.

What I object to is the use of the term itself.

For example,most people against Trump are not just The Establishment, but more accurately should be described as moderates, sensible or even rational (I'm resisting saying "not crazy").

Any such term would be  much less pejorative term and more accurate.

Same is true, even if to a lesser extent, on the Democratic side. Here again The Establishment is somehow sinister as opposed to moderate,centerist or traditional.

It's amazing how certain words get coined by someone and takes over the conversation, irrespective of reality. For example, who invented the term "mass incarceration"? It's clearly lost it's actual meaning, but that's for a future post.

Words matter. How do their actual meanings  become distorted and politicized?


Thursday, April 14, 2016

Too Big To Fail is not the real problem

As I see it, the issue of solutions to address the problems revealed by the financial crisis is not breaking up Big Banks deemed too big to fail, but rather preventing  the risk of contagion once problems arise. Once panic sets in it spreads throughout the interconnected financial world, whether it's 10 big banks or 50 smaller ones.

Example-- securitizations were actually designed and thought to contain and reduce risk through wide spread diversification and broad dissemination of risk across a very wide universe of investors.

In fact when the housing bubble burst those securitizations actually spread the contagion to those many interconnected investors. Rather then reduce the risk as everyone thought,  this interconnectedness actually spread the contagion of the initial  panic.

Once again I go back to my view that the root cause of the financial crisis  was unregulated subprime lending; made by relatively small and under regulated lenders, virtually none of whom were Big Banks.

Of course the banks that securitized those loans are culpable as well , but breaking them up won't solve that problem. Lehman Brothers was actually pretty small.

The whole subprime phenomenon  was allowed to happened based on the political decision ( both parties) to push for home ownership for " everyone", regardless of creditworthiness. "Liar" loans to NINJAS ( no income, no jobs, no assets, and of course no money down). 

Once the collapse started with the subprime loans,  even well underwritten loans went under with the plunge in property values. When that happened the whole global financial market eventually froze. The rest is history. 

As Paul Krugman pointed out years ago, Canada only had 5 Banks in the whole country and they were all too big to fail; yet Canada didn’t have the same financial crisis problem we had. By law, Canada had virtually no subprime lending. Only credit worthy borrowers, who put down 20% , could get mortgage loans there.

That's how you solve a problem ( at least the last one) .  Banks should be more tightly regulated in a way that insures ( to the extent possible) that they make only "good " loans rather than simply be broken up.

 If that reduces their profits , so be it. 


Monday, April 11, 2016

Guaranteed Minimum Income

I have become intrigued with a concept known as "guaranteed minimum income". Everyone would be guaranteed, by the government, to make at least a certain reasonably subsistence level of income.

If you make more than that amount, that's great.   But if you make below it, or indeed don't make anything at all,  the government will pick up the difference.

The result would be that nobody would be really poor, and those who wanted more could still work to become richer.  

The good news is you would then eliminate almost  all social welfare programs and the cost to the bureaucracy to run it . However, the cost savings doesn't quite make up for the amount which the government would have to pay out, so taxes would have to be raised.  Still  we should be a rich enough country to afford doing it.

This isn't a completely new idea ( Google it), but it's' time may be coming, especially  for a rich country like ours.

I know , it sounds like fantasyland but it's worth thinking about.


Income Equality

What are the ramifications of everyone making $75,000 a year?

Nobody rich or poor.

Is that something we really want?

What would society be like?

Where would the money come from?

Be careful what you wish for?

Income inequality- statistics often misleading

As I have written, statistics can often be misleading, and be used for what ever political agenda some one likes.

For example, a case can be made that one of the main causes of US income inequality is the great wealth so many American enjoy. In a sense we are "victims" of the  success of so many Americans. Because so many American are so prosperous the numbers can be misleading.

 Consider the following information I came across from a reliable source:

A Danish family can move from the bottom 10th percentile to the top 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 whose 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.

From this example, it appears that the US has more income inequality than Denmark.  However, is that misleading since more  Americans seem to be doing better than the Danes,  even though Danes enjoy less inequality ?

However, as I've often said statistics can be misleading , so where did I go wrong here?

Root Cause of Great Recession- Krugman confirms my post

My guy Paul Krugman has been reading my blog again!

So happy to read the first part of his Op Ed about how it wasn't the big banks who Sanders wants to break up that started the financial crisis.

I figured it out !

Why don't young people like Hillary, but love Bernie?

She's their parents. He's their grandparents.

He'll give them everything they want.