Lois & Clark Forums Forums General Discussion Off Topic Possible reason for Wall Street crisis

Here's another take on how government is responsible for the mess we're in.

After Enron, the government changed the accounting rules in regards to assets. There's a term called mark-to-market where a company must value an asset at how much it can be sold at immediately versus the old way where a company can value an investment in more realistic terms; when it can be sold when markets calm down. Many of these bad mortgages under the new rules were forced to be valued at 0 since no one is buying those properties now. Anyone with a lick of common sense knows real estate is not truly valueless, so the accounting rule makes no sense.

Yet it caused the devastation among the Wall Street investment banks as they had to write down the value of their mortgages to zero. As a result, their credit was downgraded by S&P and Moodys. Investment banks have to maintain assets as a certain percentage of debt. With a lower credit rating, the ratio skyrockets. These banks, as a result, had to increase their assets to maintain a higher asset-to-debt ratio because of the credit downgrades. Unable to summon up the additional cash, these banks became immediately insolvent the second their credit ratings were downgraded.

Under the old accounting rules, none of these banks would have been insolvent since they would have had far different mark-to-market values.


Bad Accounting Rules Help Sink AIG

I don't have time to look up those links about the reasons for the Wall Street crisis. But I agree that the question is not so simple that it can be reduced to a question of Republicans versus Democrats. The problem is not so much who did something, but what was done.

A couple of days ago in my own local newspaper, there was an interview with somebody who talked about the present financial crisis. I don't remember who it was, or even whether he was Swedish or, say, American. But to me, the interesting thing was what he said. According to this man, bubbles and crashes are what you are going to have in a deregulated economy.

This man said that after the Western economies recovered after the crash of 1929, politicians and bankers agreed that a similar scenario must not be allowed to happen again. The solution was tight regulation. And because these regulations worked so well, there were no more crashes until the Savings and Loans crash in the 1980s. But by then, the banking sector had been deregulated. I very recently googled the S&L crash, and according to Wikipedia the roots of that crash could be traced back to Jimmy Carter in the late seventies, since he was the one who started deregulating the banks. And after that there have been three bubbles and crashes: the S&L bubble-and-crash, the IT bubble-and-crash, and now, the housing, mortgage and subprime bubble-and-crash.

So let's not talk about Democrats and Republicans, or at least, let's not say that Democrats have always been die-hard regulators. That's not a fair description of them at all. Let's talk about regulation and deregulation instead. There were no really severe or dangerous financial fluctuations during that long period of the twentieth century when banks were tightly regulated. But those regulations began to be lifted by Jimmy Carter in the late 1970s, and since then we have had one crash per decade: one in the eighties, one in the nineties and one in the 'noughties', as the British jokingly say.

So in hindsight it would seem that deregulation was the culprit, not primarily Democrats of Republicans.

Ann

Has anyone posted this yet?

Sadly, I think MOST voters are ignorant of history and will buy into the distortions - no, make that outright lies - that I'm hearing as I listen to the nightly news...

This crisis didn't happen over night... and if you want to get a better CLUE as to who is at the root of the matter, this article from 2003 is VERY telling:

September 11, 2003
"New Agency proposed to Oversee Freddie Mac and Fannie Mae"
by Stephen Labaton from the New York Times.

"The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. ... The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session. ...

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies. ... Significant details must still be worked out before Congress can approve a bill.

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

For the full article go here:
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&scp=1&sq=%22barney+frank%22&st=nyt

Thank you Mr. Frank.



The Dems. have been very tenatious in their efforts to block Bush's attempts to "fix" problems like this... like Social Security...

And now Fannie and Freddie are the plutonium core of the economic meltdown...

According to the Wall Street Journal, "How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse."


Seems kinda obvious which side of the aisle is MOSTLY responsible for this mess.

Exactly.

Great links BTW!

I know the administration's not perfect but hearing the "blame" repeatedly placed at Bush's feet gets REALLY maddening, doesn't it?

Politics... I think the Dems were SO hell bent on regaining power that they didn't WANT to fix anything... Now they are reaping what they sowed and STILL trying to blame Bush.

See here . Thanks for the support!

Concern has been expressed about the tone of the thread over recent posts and some of the insults being bandied around.

So, polite warning - do try to rein yourselves in, don't let your personal allegiances go overboard and get out of control in the midst of passionate debate and do try to keep it respectful when arguing your point, huh?

Thanks.

LabRat
Boards Admin Team

Well, since I have been saying that George W. Bush has not done anything to make the world a better place, let me revise that assessment!

This is from today's The Guardian, a British newspaper:

Well, wow! I have to applaud Bush for that decision!

The entire Guardian article is here .

Ann

I realize this thread has gone off on a couple of different topics during various comments rather than just Wall Street, but most comments still contain some semblance of what the discussion was about, so I'm confused why nothing about Wall Street is mentioned here, and I'm kind of wondering how this instance of bad judgement on Dubya's part has to do with the topic of the thread ? Will Wall Street recover if Israel doesn't nuke Iran?


TEEEEEEJ

LOL!! In the meantime I found something amusing in regards to responsible saving and lending!

</font><blockquote><font size="1" face="Verdana, Helvetica, sans-serif">quote:</font><hr /><font size="2" face="Verdana, Helvetica, sans-serif"> The Ant and the Grasshopper, 2008 edition
by Michelle Malkin
Creators Syndicate
Copyright 2008

With what looks like imminent passage of the Mother of All Bailouts (following on the heels of a year’s worth of government-funded rescues of private homeowners, lenders, insurers, and the automakers), Washington has turned Aesop’s famous fable about prudence and hard work on its head. The time is ripe for a revised 2008 edition of “The Ant and the Grasshopper:”

In a meadow on a hot summer’s day, a Grasshopper was chirping and carousing his time away. He watched scornfully as an Ant nearby struggled to store up large kernels of food and build a secure nest. The Ant pulled overtime shifts to pay off his loans and accumulate retirement funds for the future.

“Give it a rest,” the Grasshopper said. “Why bother saving and slaving and toiling and moiling? Let’s party!” The Ant demurred: “I am planning ahead for winter and you should do the same.” The Grasshopper blew off the Ant, squandered his supplies the rest of the season, and abandoned his home while on vacation (paid for by tapping every last cent of his home equity gain) instead of holding down a job.

When winter came, the Grasshopper’s pantry was empty and his shelter ruined from neglect. The Ant, weary from planting, harvesting, and stocking up for months, was dining comfortably in his nest.

Cold, hungry, jobless, facing foreclosure, and up to his two pairs of eyeballs in debt, the Grasshopper limped to the Association of Community Winged Insects for Rescue Now and demanded recourse. The office was swamped with thousands just like him. ACWIRN immediately put the Grasshopper to work registering dead ants as new voters.

Funded with tax dollars from the rest of the meadow’s residents, ACWIRN organized mass protests at the Bank of Antamerica, ambushed its top officials at their private homes, harassed their children, and demanded that the meadow’s politicians halt all foreclosures (”We must keep Grasshoppers in their houses!”) and outlaw discriminatory lending practices against starving, homeless Grasshoppers (”Well-stocked shelters are basic insect rights!”)

The banking industry capitulated; the Orthoptera Lobby secured hundreds of millions of dollars in housing earmarks and grants and counseling subsidies to support the Grasshoppers with the shadiest credit and employment histories. Antie Mae, the meadow’s government-backed home lending giant, fueled the push for increased insect homeownership in the name of biodiversity. Its executives cooked the books and headed for the hills. Katie Cricket and the Mainstream Meadow Media joined the grievance-for-profit circus, profiling Grasshopper sob stories and drumming up ratings as bewildered Ants wondered who was looking out for them.

The banks drowned in toxic debt. More Grasshoppers fell behind on their mortgage payments. Bailout mania and panic gripped the meadow.

Our little Ant, minding his own business, heard a knock on his door one late winter night a year later. It was his old, sneering Grasshopper neighbor. With ACWIRN’s presidential candidate, Barack Cicada, now in office, the Grasshopper had been hired by the meadow as a tax collector.

“I’m here to take your provisions,” the Grasshopper cackled.

But it was the Ant who had the last laugh. “I’ve learned my lesson,” he told his shiftless friend. “Why bother saving and slaving and toiling and moiling? I’ve spent all my savings. I’m walking away from my mortgage. Thrift is for suckers,” the Ant said as he headed out the door, leaving the Grasshopper empty-handed.

Good question, TEEEJ. The reason why I posted it is that a while back, Roger asked me to heap some praise on George W. Bush. I said that I couldn't do it, and the reason was that I felt that Bush hadn't done anything to make the world a better place. But when I read that article in the Guardian, I had to change my assessment of the younger Bush. If he discouraged Israel from making an unprovoked attack on Iran, then I definitely think that he did the whole world a favour by saying no to another war.

Ann

Yes, it's me again, and this time it is about the $700 billion bailout plan. I'm not going to try to rate it or say if I think it is good or bad. The important thing is that the plan has been okayed both by the Senate and the House, and it has also been signed by the President. In other words, the bailout is going to happen. And it is going to cost an additional $700 billion in federal money.

Now this is what I'm wondering about. Where is that additional $700 billion in federal money going to come from? Unless I misheard both Senator Obama and Senator McCain, both of them favor tax cuts along with this bailout.

The thing is that the United States already has a very big budget deficit. Quite simply, the U.S.A. can't pay for the bailout itself. It lacks the federal funds needed to pay for it, purely and simply. Its government hasn't got that much money. And both Obama and McCain propose additional tax cuts, which means, all other things being equal, that the federal funds available to pay for the bailout will shrink even further.

So how will the bailout be paid for? The answer is simple. Someone else will have to pay. Someone, or someones, outside of the United States. Other countries. China. Russia. The Middle East? Saudi Arabia?

The United States will have to go to other countries and ask them for loans. Again. It is not as if the U.S. hasn't been doing that kind of thing before. Which is precisely why America has such a huge budget deficit. Precisely because America has kept going to other countries and asked them for loans, again and again. Loans to pay for the Iraq war, loans to pay for Medicare, loans to pay for tax cuts.

In Time magazine a little while ago, Justin Fox wrote this column about America's debt:

America\'s Number One Export: Debt

Here is a quote from of Justin Fox's column:

As you may have noted, Justin Fox claims that the United States has borrowed $700 billion a year since 2005, just to pay for ordinary expenditure. Now the United States is going to have to borrow another $700 billion, on top of the ordinary $700 billion needed in fresh loans every year to keep America going.

If the United States keeps lowering taxes, then it is quite logical that it will need to borrow more and more money from overseas. What if a tipping point is reached when other countries are not willing to finance America's spending any more?

Ann

I, personally, do not know if the bailout is a good idea or not. There is precedence for such a move. Back in the early 1990's when the S&L's (Savings and Loans) began to go bankrupt after the first real estate balloon popped, the government created a GSE (Government-Sponsored Enterprise) known as the Resolution Trust Corporation whose job was to buy bad investments from the S&L's to get them off the books of those S&L's to make them solvent again and to get the credit markets going again. Sounding familiar, anyone?

In the end, the RTC held those investments for several years until the markets stabilized and began to heal at which point, the RTC began to slowly sell off its investments. By the time the RTC had dissolved itself, the government had actually realized a significant profit, so the S&L bailout didn't cost taxpayers a dime.

Normally, my free market senses tell me this idea is a really bad one, but the fact that the RTC did exactly what it was intended to do and solved the S&L crisis at no cost to taxpayers and then dissolved itself tells me that this bailout may not be such a bad idea after all. What I would strongly oppose is if the government kept its shares in the bailed-out banks after the new RTC dissolved since the government has no business owning commercial banks or investment banking companies. For example, as a condition for bailing out AIG, the government took an 80% equity stake in the company. That is socialism, which I will oppose with every fiber of my being. Seeing as the government caused this whole crisis to begin with because of the interference in the banking industry through the Janet Reno Justice Department's attempts to eliminate red-lining through its enforcement of the Community Reinvestment Act and the involvement of Fannie Mae and Freddie Mac in creating and encouraging the sub-prime mortgage market, government's future involvement should be kept at a minimum to keep this from happening again.

Yes, it'll cost taxpayers potentially up to $700 billion up front that will have to be borrowed and will go straight into the national debt. But if all goes according to plan, and there's no reason to think it won't with the precedent set by the RTC, in the end the taxpayers will wind up with a profit which will go towards retiring that $700 billion debt and then some. Does anyone doubt that the real estate market will eventually recover? As President Bush said in his address to the nation, government is the one entity that can afford to wait for the market to recover while sitting on these bad properties, at which point we will begin recovering all of the $700 billion and then some.

One of the arguments House Republicans had with the original bill was that Democrats wanted to divert half the proceeds into government housing trusts instead of 100% of the proceeds going to retiring the debt. That was where the whole ACORN discussion came from. One of the chief beneficiaries of the housing trust funds is ACORN, a far-left entity best known for conducting massive voter fraud, but which also participates in the low-income housing market.

There are certainly a lot of outrageous riders that went into the final bill that should never have been there. Instead of a three-page bill, it turned into a 450+ page novel full of special interest provisions as is typical of Congress. I'm rather upset that John McCain didn't come out and name names of those who added those ridiculous riders as he promised to do when he is president. Why not start now with such a great example? Another outrageous provision is that judges will decide in bankruptcy court how to renegotiate interest rates AND PRINCIPAL owed on defaulted loans. What bank will loan money when they can't even be guaranteed principal when a judge can just wave his hand and make the whole loan disappear?

By the way, Ann, you're still falling back on the old canard that lowering taxes somehow always reduces revenue when it's not the case. Revenue is directly tied to the health of the economy, which always swamps changes in rates. So if the economy is healthy, tax revenues rise at a dramatic rate while tax revenues fall dramatically when the economy is not healthy. Both McCain and Obama propose tax cuts for the simple reason that it stimulates growth in the economy. Once the economy starts to grow, the deficit will begin falling again. Up until this current economic slowdown, the deficit had been falling very rapidly despite a tax cut, only to reverse the trend when the economy began to slow due to the real estate crash. Remember that Kerry and Bush had both proposed in 2004 halving the deficit by 2010? The deficit had been cut in half by 2006, far ahead of schedule, because of the health of the economy which at that point was growing at about 4% annually. People seemed to have forgotten that during the entire middle of the Bush Administration, we've had a pretty good economy with very low unemployment dropping all the way down to 5.1%. We had the lousy economy at the beginning due to the dot com bust and 9/11, and again near the end of the administration when the real estate bubble burst.

If you want to cut the deficit, you have to get the economy going again as the only way to raise revenue. Even a socialist like John Maynard Keynes would agree with tax cuts at this point. Keynesian economics says to cut taxes during an economic slowdown and to raise taxes during an economic expansion. So at this point in time, socialist Keynes and supply-sider Arthur Laffer would agree with each other. Note that neither Obama nor McCain are supply-siders. McCain opposed most of the Bush tax cuts.

As for whether the supply of borrowed money will eventually dry up, that is always a risk. It has never happened, though, so the likeliness of it happening now is slim unless the credit markets seize up entirely as banks fear further collapse of other fellow banks. That's what the bailout plan is intended to solve. It's to prevent the seizing up of the credit markets.

One of the most important things we can do is to get ourselves more towards energy independence. The main reason the administration supported a weak dollar was because that boosts exports while holding down imports. It didn't work to reduce the trade deficit for the simple matter that oil quadrupled in price. The largest component of our trade deficit is oil, costing us more than $500 billion a year. While the US is setting records every month for exports, our imports continue to increase in price because of oil, leading to even larger trade deficits. If we were energy independent, our trade deficits would have nearly disappeared over the last few years. Granted, that's a big "if."

One of the largest untapped supply of oil in the world is actually sitting right smack dab in the middle of the United States, though it's locked up in shale. When oil was costing $20/barrel, it was unreasonable to tap those energy supplies. With oil at $95/barrel, it becomes profitable for companies to do so. Yet, it's Harry Reid who snuck in a provision into the last energy bill that would prevent any exploration of shale. And even with the lapse in the ban on off-shore drilling, Democrats are relying on their allies in the environmentalist lobby to use the courts to stop any actual drilling. So while the American people are clamoring for more oil supplies from our own territories, Democrats are doing their best to make sure we get nothing at all. No off-shore, no shale, no ANWR.

It's also ridiculous whenever Democrats say it'll be five years before we ever see a drop of oil from these new oil fields. Well, Republicans have been trying for decades to allow for drilling in those areas, only to be stopped every single time. Now if they hadn't opposed drilling for twenty years, we'd have been producing oil from our own supplies for decades. Each time they say no, that five year time frame moves out even further. If they had only said yes, five, ten, fifteen, twenty years ago, those fields would be producing now.

They clamor for alternative energy. Well, nobody opposes alternative energy. To rely on it, though, is sheer folly. It may take ten, twenty, thirty years before we produce even a small amount of energy from those alternative sources to make them worthwhile. So what's the problem with allowing real oil that we know WILL give us energy to be produced until such time that alternative energy becomes useful?

Because of this resistance to drilling, we've gone from 40% dependence on foreign oil to over 60% now. Without additional domestic supplies, that figure will continue to creep even higher, continuing to balloon our foreign trade deficit as well as making the Middle East even more prominent than it is today.

And you keep repeating that tax cuts will increase tax revenue, because when taxes are lowered it means that so many more jobs are created and so many people put in so many more working hours and earn so much more money that tax revenue will increase anyway. You keep repeating this, Roger, but you offer little or no evidence to bolster your case.

How about this alternative scenario? Let's try on this saying, TANSTAAFL. And then let's add, BYCBNAPLM. Or, There Ain't No Such Thing As A Free Lunch. But You Can Buy Now And Pay Later, Maybe.

In other words, the economic boom that has been going on, interrupted by a few hiccups, pretty much since the day of Reagan, may have happened because Reagan and the younger Bush made such drastic tax cuts. And then they borrowed from abroad to fill the holes in the federal budget and make sure that the spendingfest could continue.

Hmmmm... let's see... the housing market implosion... didn't someone say that it happened because a lot of people borrowed beyond their means to be able to spend on housing, and then when somebody asked these borrowers to pay up, they were unable to do so and they lost their homes?

If somebody grants you loans and don't mind too much if you pay back or not, then surely your standard of living is going to improve. If your taxes are lowered and your government keeps spending as if it had the same tax revenue as before, then surely lots and lots of people are going to be better off than they were before.

Until somebody asks them to pay up, that is.

In the latest issue of Newsweek, there is commentary or report on the present crisis written by Francis Fukuyama. I agree with those who consider Fukuyama's reputation as a soothsayer somewhat suspect. In 1992, he published a book called The End of History and the Last Man, where he basically argued that Western liberal democracy and capitalism had triumphed over all other ideologies for all time. That was sixteen years ago, and while the United States is certainly still the only superpower of the world, it is not as if there are no signs of any future contenders.

It seems to me as if Fukuyama is a man who tends to be carried away by the power of the moment and
read more into it than what is necessarily there. So it should perhaps come as no surprise that Fukuyama is now highly critical of the capitalist system that is right now under severe stress. For all of that, it doesn't follow that Fukuyama is necessarily wrong about his analysis of what caused the present crisis. In his Newsweek commentary, he praises the positive and corrective power of Reaganomics when it arrived in 1980. But, Fukuyama writes,

It was I and not Fukuyama that added the italics in that quote. Fukuyama's point, however, is that the tenet that tax cuts are always self-financing is a belief, not a fact. And, Roger, I have yet to see you present strong evidence suggesting that tax cuts always lead to increased or at least sustained tax revenue, all other things being equal.

Fukuyama points out that the belief that tax cuts increase tax revenue is a new idea put forth by neocons and neoliberals, not a traditional belief traditionally embraced the Republican party. Fukuyama writes:

Well, in hindsight and with the 20/20 vision that comes from knowing how things turned out (at least until now), how should we judge the idea that tax cuts increase and not decrease tax revenue? Fukuyama answers,

Fukuyama offers the following evidence to show that the traditionalists were right and the Reaganomics people were wrong:

Roger, I have yet to reply to a claim you made in a post from September 21. There you said,

In my opinion, this is blatantly and obviously wrong. Aren't there jobs that are created from tax money? Federal jobs? Or jobs created from taxes levered by states?

I saw a figure in a Swedish newspaper that every third job in Governor Palin's state, Alaska, is paid for by tax money. I have no idea if that figure is correct. It wouldn't surprise me at all if it is exaggerated. But obviously very many jobs in Alaska are paid for by tax money, and obviously Alaska would hurt rather badly if that tax money disappeared.

In another commentary in Newsweek, written by Robert J. Samuelson, a comparison is made between the Wall Street crash of 1929 and today's situation. Samuelson, who, by the way, is a conservative as far as I know, says that today's situation is definitely better than the situation of 1929. One of the most important reasons, according to Samuelson, is that the government is a so much bigger actor in today's economy than it was in 1929:

Samuelson argues that the government's much bigger role in today's economy helps to lessen the crisis. So if Samuelson is right, then not only is it not true that rich people create all the jobs, but it is also a good thing that they don't, since we may all be much worse off if they did.

Ann

And the deficit got cut in half how, exactly, between 2004 and 2006? Spending certainly didn't go down.

It seems you have a double standard. When the deficit goes up, it's got to be because of tax cuts. When the deficit goes down, it must be because of tax hikes. Oh wait, there weren't any, only more tax cuts. How can that be? Don't you need to raise taxes to get more revenue? Maybe the economy is dynamic in reality instead of static according to government projections, which never take a dynamic reaction to taxes into account. People change their behavior because of the tax code. The collapse of the S&L's in the early 1990's should be all the proof you need that people react to tax changes. Tax loopholes caused all those investments in bad commercial real estate. Tax simplification eliminated those loopholes, directly leading to the collapse of those S&L's.

The health of the economy is the most important reason for tax revenues rising or falling. The best way to get the economy going is through tax cuts, not tax increases. Even Obama admits it himself. He admits that because of the bad economy, he may not be able to raise taxes immediately.

That admission should tell you something. He knows his economic plan is no good for the economy and that only a healthy economy can have a chance of withstanding his tax hikes. So why's he willing to postpone his tax hikes in a bad economy? I thought his economic plan was supposed to save the economy? If his plan were so great, he should be saying we need to raise taxes as soon as we can!

No, the only reason he wants to raise taxes is the same reason all liberals want to. It's not to help the economy. It's to fund his outrageous spending that he's proposing in order to buy more votes. He knows tax hikes are poison to the economy. Anybody who's taken Econ 101 knows that. So he's just proposing killing the economy later, rather than right now. Obama's change isn't change. It's just more of the same tax and spend liberalism that we've all seen before and have rejected numerous times. Republicans get tossed out of office whenever they start acting like Democrats and spend like drunken sailors.

Liberals promise tax cuts during elections but somehow never seem to follow through when they get elected. Remember Bill Clinton who promised a massive tax cut for the middle class? How'd that turn out? It turned into a massive, retroactive tax hike on just about everybody after he'd "worked as hard as he could to give you a tax cut but just couldn't." He even raised taxes on poor seniors by lifting the taxable portion of their Social Security from 50% to 85%. Right after his tax increase, the 4.8% growing economy he was handed by George H.W. Bush turned into a stagnant economy that didn't begin rising until the seating of the GOP Congress in 1995.

Raise your hand if you believe Obama will actually give anyone a tax cut.

I'm not counting his proposal to give cuts to people who don't pay taxes. That's welfare, not a tax cut. Liberals believe in welfare, not tax cuts, so I'm quite willing to concede he will do exactly what he promises here.

Oh on the comment that the rich supply all the jobs, that's true for the private sector. You wanted me to respond to that, so I will.

The point is that you don't get jobs from poor people. By taking money away from the rich, you're killing jobs. Even you have to concede that because it's simple common sense. If an employer has less money, he'll spend less and that means fewer jobs. And that's the point I'm making.

Sure, the government does supply jobs. But no one in a capitalist country will say that the health of the government sector at the expense of the private sector is what's needed to keep an economy going. It's the private sector that matters, not government. I don't have a problem with government getting additional revenue due to growth in the economy, but by taxing it away by raising taxes, you're hurting the private sector.

Or would you be happier if government supplied all the jobs and the private sector withered away? You are from Sweden, though, so who knows? Seeing I go to Sweden every year and know a ton of Swedes who believe government is the end-all, be-all of everything, I wouldn't be at all surprised if you did, but I won't assume you do.

Would you use that kind of argument when it comes to stopping crime, Roger? It's no use trying, because people will find other ways to cheat the law?

I think not. The difference is that there appears to be such an incredibly broad consensus in the United States that taxes are evil, and that governments are only going to steal your money and waste it on stupid things. So cheating on your taxes is not seen as a crime, not something you should be ashamed of, but rather something you should be proud of and something that serves the government right.

Well, look at Wall Street. That was the free market and financial capitalism in all its glory. It didn't levy taxes on people, no. But I doubt that its actions are not going to cost people a lot, in the United States as well as abroad.

Why are taxes so poisonous? Why? Governments collect taxes to use that money for the common good. What is so incredibly bad about it?

A probable reason for the decreasing deficit between 2004 and 2006 is that America's loan-powered economy crested about then. Those were the boom years, so less money had to be borrowed from abroad. Those were the days. Now the United States needs to borrow more than ever.

There you go again, repeating your claim that tax hikes are always bad. But not offering any proof.

To me, Obama is not the Messiah. Just because he says or admits something about the economy doesn't make it the truth. If you say something, that doesn't make it the truth. If I say something, that doesn't make it the truth. If Obama says something, that doesn't make it the truth. Each of us have to try to find supporting evidence to bolster our claims, if we want to be taken seriously.

But I absolutely agree that Obama will not be able to raise taxes as he should, assuming he is elected. The reason is that Americans hate taxes so much that it has become a sort of conditioned reflex to oppose tax hikes in every situation. Say 'tax hikes' and millions of Americans will react as if they have been told something absolutely horrible. What is a Wall Street crash? What is a $700 billion bailout that will have to be paid for mostly by loans from abroad? To so many Americans that's nothing, compared with tax hikes. Because so many Americans believe that they themselves won't have to pay for the Wall Street crash or the $700 billion bailout. So many Americans seem to believe that taxes are the only things that they will have to pay for themselves, and taxes are unfair and harmful. And the reason why so many Americans believe it is, I think, that they have been told so for many years now, particularly by the GOP. And the Democratic party has chosen not to voice any real dissent.

So Obama can't do much in the way of raising taxes, because that is so wildly unpopular in America. It is not quite as unpopular and shocking as it would be to most Iranians to be told that girls should be allowed to walk around in Teheran with no headscarfs and in short skirts, but the gut reactions of tax-loathing Americans and immodesty-loathing Iranians are similar. The ideas of tax hikes in the United States and skimpy dresses for girls in Iran go so deeply against the grain of what people believe in the United States and in Iran.

The United States has borrowed and borrowed and borrowed for most of the time since Reagan became President in 1980, and most Americans have not felt inconvenienced by their country's debt. They have not been told, certainly not by leading Republicans, that this debt is any sort of problem. After all, someone else pays. Why is something a problem if you don't have to pay for it yourself?

So Obama will not raise taxes because he can't. The American people will not let him. That doesn't mean it would not be the best thing to do, if it was possible. It would, but it isn't.

We had a severe financial crisis here in Sweden in the early nineties. It was a housing bubble that threatened our banks. The government bailed us out, because it had to. But how did it do it? Not by borrowing huge amounts from abroad, because that was not possible. Who would be interested in lending huge amounts of money to a small country with then eight million people and a small national currency?

There was only one thing to do. The government had to raise taxes to get the money it needed for the bailout. So it did. It was painful, but it worked. The banks were saved and the economy recovered.

America has the largest economy in the world. Its currency is the world's currency, which is good everywhere. It has been in the interest of other countries, not least China, to buy huge amounts of American debt in order to keep their own currency low and make it easier for their own manufacturers to export their goods to the United States. This has been a solution that both China and the United States were happy with: America got the spending money it needed now that its tax revenue wasn't enough to pay for its needs, and the Chinese made huge export profits. But there is no guarantee that the Chinese will keep up their part of the deal, particularly if America reduces its import of Chinese goods.

You say that sort of thing, Roger. But just because you say it doesn't make it the truth. Just because Econ 101 says it doesn't make it the truth. Because Mulder and Scully were ultimately right. The truth is out there. It is not there in beliefs or ideologies or in things you have been told for as long as you can remember. It is out there, in the real world. And refusing to see the real world, and sticking to Econ 101, will ultimately send you plunging.

Ann

I'm glad to hear that you don't think so of me, Roger. Because I don't. I believe in checks and balances, and a healthy private sector is a good thing to balance the government's influence with.

Ann

Now where to start. Hmm.

It seems that no evidence will be convincing to you that cutting taxes will generate additional revenue. The fact that revenues doubled during Reagan's eight years (about $500 billion to over $1 trillion) will, of course, be discounted by you by external mitigating factors. Even if I were to present a graph with tax rates going straight down and revenue going straight up wouldn't be enough, I see. Fair enough. None of our rules require that you believe me.

Now here are two questions that go to the heart of the matter. Excellent questions, btw. The answers will require digging into Econ 101 which you've essentially tossed out the window as not true seeing as you've said that just because Econ 101 says it's true doesn't mean it is. But we'll have a go at it anyway.


Let's tackle the second one first. It seems from your statement that you believe government only does good. I'll answer why it's actually bad for the health of the economy. Remember a while back while presenting the theory of supply-side economics when I went through the calculations for Gross National Product (GNP)? The following is what you'll find in pretty much any economics textbook, not just one that discusses supply-side.

GNP = C + I + G + EX - IM
C = Consumption
I = Investment
G = Government
EX = Exports
IM = Imports

Let's take a look at that G component. Government, at least in a capitalist economy, produces nothing at all. Every dollar it spends is taken directly from the private sector. So you basically subtract from the C and I components to get G. So G is a net zero gain. Most of government spending is transfer payments, which also adds nothing to GNP because the definition of GNP is the total value of goods and services produced by an economy. This has always been the best measurement at determining the health of an economy, and in turn, highly correlates with the tax revenues generated. Again, that's Econ 101. Ignore it if you wish but these theories exist for a reason.

The parts of G that add the most to GNP are defense spending and infrastructure (roads and bridges) expenditures. But again you can't have any of those without taking something from C and I. Welfare, entitlements, and such, add zero to the G component. Recipients of such welfare do add to C, though. But that's a wash since you have to take away from C and I to indirectly add to C through transfer payments.

Government cannot spend a nickel without taking it from the private sector. So as G gets bigger, I and C get smaller. It's a zero-sum game. You may bring up deficit spending. Isn't deficit spending going to make G bigger while taking away less from I and C? By and large, borrowing has a crowding out effect, making the supply of capital less for the private sector. So deficit spending has an effect of boosting G but making I and C smaller as credit is less available and more costly. If you borrow from abroad, that would be the case where the additions to G would outweigh the losses in C and I, but we are in agreement that heavily borrowing from foreign investors isn't a good thing. What we disagree upon is the impact of tax cuts on tax revenues. Whereas I say the best way to balance the budget is to cut spending and reduce taxes, your prescription is to raise taxes. But we'll see why raising taxes is such a bad idea in a short while.

Let's take a look at the I component. Investment is the most important component of this whole equation and this is where tax rates have a great impact. The basic question is how do you get an economy to grow? Government cannot do it since whatever government adds to GNP is subtracted by what it takes out. Consumption is consumption, adding close to $1 for every $1 spent. Investment, on the other hand, is where growth actually occurs.

In Econ 101, there is the term, the "multiplier effect." The multiplier effect occurs when "money begets money," essentially that the spending of money in turn allows the economy to generate even more money. How is this done? Investment is the expenditure of monies on capital equipment and new businesses. When additional capital is available, more goods and services can be produced. Hence the multiplier effect. Spending a dollar on capital equipment has a return of far more than $1. That $1 creates the ability to create even more goods and services than existed before, so the capacity of the economy grows. With higher capacity, the output of the economy grows. Heavy expenditures on the I component, therefore is really the optimal way to grow an economy. C can't do it alone. G doesn't help the economy grow. The multiplier effect actually has the result of boosting all three components. C is boosted because of the job-generating effects of increased investment. G is boosted by higher tax revenues brought on by higher output.

This leads into the answer for question 1. Why are taxes so poisonous? Companies decide on investments based solely on one calculation, the return on investment, or ROI. ROI is based on the amount of expected revenue subtracting the initial investment AND ALSO SUBTRACTING ANY TAXES PAID ON THE GROSS ROI. When taxes are low, ROI grows and becomes very attractive. When taxes are high, ROI falls. If ROI falls, companies have less incentive to invest and therefore higher taxes result in a drag on investment and reduces the capacity of the economy to grow. Growth slows and net tax revenues fall. So when ROI grows, that's when the I component grows the most and thus, the multiplier effect has a greater impact on the economy.

So lower taxes equal a far faster growing economy. A higher tax rate and higher rate of government spending equals slower growing I component and therefore a slower economy.

I mentioned this earlier; both supply-siders and socialists agree on the stimulative effect of tax cuts. John Maynard Keynes is the economist socialists respect the most, seeing as he was one of them. His theory was to cut taxes during an economic downturn because that would stimulate the economy to grow and get out of recession. During an economic expansion, he advocated raising taxes as a way to slow down the economy to prevent overheating. Overheating economies run the risk of inflation. On the other side of things, Keynes also advocated increasing government spending and running a deficit during economic downturns and also cutting spending during economic expansions.

Roger, you argue from your theory. Basically you say, This is what our theory says, so, ergo, this is what reality is like.

As most of you know, I am an astronomy fan. So let me argue from an astronomical theory and and not from the best available observations of the cosmos. Let me introduce the Ptolemaic model of the solar system and the cosmos:



Ptolemy, who died in 165 AD, taught that the Earth was the center of the universe. According to Ptolemy, the other bodies in the solar system orbited the Earth. The body orbiting closest to the Earth was of course the Moon, and then followed Mercury, Venus, the Sun, Mars, Jupiter and Saturn. They all wandered in circles around the Earth, the center of the universe. Beyond the orbit of Saturn lay the celestial firmament and the fixed stars. These, too, slowly, majestically, wound around the Earth in their yearly cycle.

So don't tell me that the Sun is in the middle of our solar system or that the Earth orbits the Sun, Roger. Can't you see from the model that it is the other way round?

Let's talk about your economic theory. You say this:

Government produces nothing at all? That is an interesting statement. I fully agree that Communist states have never proved themselves really successful, but would you really say that during the circa seventy years that the Soviet Union existed, when the government at least in principle controlled every aspect of the economy, that country produced nothing at all?

So tell me, Roger. I am a teacher, and my job is paid for by tax money here in Sweden. Would you say, therefore, that because I get my pay through tax money, I produce nothing at all? But if I got myself a job at a private school, I would suddenly generate a lot of value, doing exactly the same thing as I do now?

Oh, wait, now I get it. I do the same thing as before, and my students get the same things out of it as before, but the definition of what GNP is says that I produce nothing when I work for tax money, but I do indeed produce something when I work for private money?

You argue from the model, Roger. You don't ask yourself if your model agrees with the real world.


The map said we should row this way!

What we see right now at Wall Street is how unregulated capitalism has destroyed incredibly huge assets. It has almost been like watching a magician perform: Look, here we have a trillion dollars! And look, poof, suddenly it is all gone! But for all of this amazing vanishing act, I suppose that only private interests can generate wealth, because that is what your model says.

I don't have the strength to look it up, but I believe that the Communist Soviet Union crumbled in around 1993 or thereabout, and gave way to capitalist Russia. I do remember what happened in Russia. Suddenly, a lot of people grew immensely richer, while the country as a whole sank into poverty. Alcoholism, which had been a bad problem in the Soviet Union, skyrocketed in the new Russia. Nativity plunged. Life expectancy plunged, from perhaps 75 years to 65, even though there was no new raging disease taking a measurable toll of the population. Everything was just down.

A few years later, I saw an interview with a former Communist official, whose job during the Communist time had been to oversee the production of something and to make sure that the products were distributed according to the orders of the government. When Communism fell, this woman had become a free entrepreneur, and thanks to her various contacts and general position she had become immensely rich. In the interview with her, she said this:

And while she was saying this, Russia was drowning in alcohol and despair.

When I was nineteen years old, a really long time ago, I took a university course which required me to study the basics of Marxism. I don't remember very much of the basic tenets of Marxism, except that it says that capitalists own production plants and use workers to generate wealth. But in order to maximize their own profit, the capitalists will pay the workers as little as possible and put as much money as possible in their own pockets. And according to Marxism, the only way for the workers to liberate themselves was to take control of the production plants themselves.

When I had just read that book on Marxism, I remember thinking that it sounded all very convincing. At the same time I knew that there must be a mistake somewhere, something that Marx hadn't foreseen or realized. What was it?

I couldn't ask anyone what was wrong about Marx' theory. I couldn't ask my parents, because they would be horrified that I believed that Marx could be right about anything whatsoever. And if Marx couldn't be right about anything at all, it was pointless to ask what he was wrong about, wasn't it?

I also couldn't ask the people I took that university course with, because they were all communists and would tell me that there was certainly nothing wrong at all with Marxism. This was in 1974, by the way, when the media and the universities were very left-leaning.

So I couldn't ask anyone and had to think about it myself. I thought long and hard, and finally I thought I knew what the problem was. Marxism seemed to argue for a solution where the workers took over the production plants. In the countries where Communism existed for real, it was not the workers who controlled the production plants, but it was the government. The government in a Communist country controlled all the economy. But it also controlled the law, the courts, and the prisons.

Who would stop the government in a Communist country from abusing their vast power? No one would, that was the answer. In a Communist country, the government was all-powerful, and therefore it could do as it pleased. And it could crush its opponents as it pleased. It could crush anyone it didn't like as it pleased.

And that was what was wrong with Communism. Because it put all its eggs in one basket. That way it gave all the power in the country to the government.

Well, Roger, it seems to me that you want to put all the eggs of the economy in the free market basket. But when the market drops its basket, we are all left with a rather disgusting mixture of raw eggs, pieces of egg shells, and dirt.



I believe in checks and balances. I don't believe in the totalitarianism of the government. I don't believe in the mad and unchecked reign of the free market. And, for the record, I don't believe in tax hikes for their own sake. I believe in tax hikes when the government can put that money to good use.

Ann

You've misinterpreted what I've written. When I said that government produces nothing at all, I qualified that with "at least in a capitalist economy." In a capitalist economy, government does not own the means of production but rather pays the private sector to produce things. When I mentioned that defense and infrastructure account for most of the G component, yet they produce nothing, is because they pay private defense contractors and construction companies to build the products. The government merely acts as a conduit by taking money from the private sector and giving it to contractors. So you misread the intent of that statement. It sounds like you thought I was saying that to be derogatory towards government, which is actually not true. The statement is intended to show the differences between capitalist governments and socialist/communist governments. Since I was speaking of the United States, I didn't bother to explain further with regards to other types of economies.

In socialist or communist economies, governments DO own a large part of the means of production and therefore DO produce things. Since in a capitalist economy, the government DOES NOT own the means of production, that is why I said government produces nothing. That is not the case with socialist or communist governments where a large part of production is controlled by the government. If I were in France or Russia, for instance, I would never have made that statement. In socialist economies, government plays a large role in the I component and do contribute to the growth of the economy. In the United States, the government's contribution to the I component is negligible.

Without investment, the economy simply cannot grow.

I find it interesting your refutation is that the basics behind National Income Accounting are wrong and that all economists are dead wrong. Do you dispute that taxes play no part in businesses determining whether they should invest? If you do, you're on very shaky ground by basically saying all businesses are wrong in making their investment decisions. That businesses use ROI is not theory. That's fact.

You also are terribly wrong by blaming deregulation for the collapse on Wall Street. The only thing the Democrats can point to, in order to deflect blame from themselves is to blame Phil Gramm for the Gramm-Leach-Bliley Act, which permitted commercial banks to get into investment banking by repealing a restriction put in place during the Great Depression, the Glass-Steagall Act. The bill passed in 1999 in the Senate by a vote of 90-8, including a yes vote from Joe Biden, and passed the House with a 352-57 vote with over 150 Democrats voting yes. Bill Clinton signed the popular measure into law. Even the Democrats can't come up with anything else when asked for specifics on what they mean when they accuse Republicans of deregulation. If they could come up with something better to deflect blame, you can be certain they would have found something a lot less flimsy, and one that doesn't implicate themselves as well since Democrats overwhelmingly supported Gramm-Leach-Bliley. The only reason they do use this is because they know the sycophant press isn't going to call them on it and that most people won't know any of the details.

A large number of sources, including Bill Clinton and Bob Rubin, Clinton's Treasury Secretary, have said that the deregulation has actually softened the impact of the disaster. The main companies affected by the bill were commercial banks which bought investment banks. Yet it's the commercial banks that are rather healthy and the investment banks that are collapsing. One reason why Clinton and Rubin say that deregulation has actually helped is that it diluted the impact on the affected companies since their companies are more diversified. Second, commercial banks are able to buy troubled investment banks that they wouldn't have been able to without the law.

See this entry by Clinton Treasury official Brad DeLong .

Here's the quote from Bill Clinton in an interview by Maria Bartiromo on CNBC:

So even Bill Clinton doesn't agree with you. He still blames Republicans but never says why.

You simply have no proof, and neither does anyone else, that deregulation has been the problem. The closest thing you can get to is the Democrats blocking increased oversight over Fannie Mae and Freddie Mac whenever the Bush Administration tried to do so. And that article from the New York Times on how Democrats tried to block the Administration's radical overhaul on oversight has already been posted twice in this thread.

By the way, your analogy of putting everything in one basket is flawed in that capitalism puts its eggs in millions of different baskets. For every failed bank, there are dozens of others that are not failing. For every failed business, hundreds of others exist. With communism and socialism, government is one big basket with very few other little baskets.

The lessons of this crisis are the negative impacts government can have when it distorts the markets.