quote author=Steve Lapper link=topic=38731.msg808935#msg808935 date=1235836400]
I cannot sit here and read this drivel without adding some economical history perspective, the kind that is less driven by party or ideological line, and more strongly rooted in fact and timeline.
If we look back over the last quarter of a decade, as far back as 1980 (early Reagan), the economy was in a recession, led by high unemployment, severe inflation (although abating under Volcker's stern rate medicine), an harmfully strong dollar and the prospect of rising federal deficits. The American consumer did not carry high amount of debt, housing or personal, and saved (even in inflationary times). Money supply, as measured by contemporary metrics was very low (choked by inflation and slow exports).
This was a crisis that provided, in essence, a perfect storm...setting the stage for an unlocking of an enormous monetary and productivity boom that was unleashed with the Fed easing of the discount rate, M1 & M2 growth, a set of Reagan tax cuts, and market prognosticators (Henry, aka Dr. Doom Kaufman) turning tide to bullishness. The stock market soared, Reagan gave great press and Paul Volcker's war on inflation had worked. Unemployment fell, real & median incomes rose, and productivity began to rise. The cold war was won, globalization of trade flourished. Americans bought homes with 20% or more down financed by local & regional banks.
Throughout the early 80's there was NO large scale securitization instrument markets for debt and little, if any, excess leverage within any financial system, save for a sneaky and ominous trend of specious lending by S&L's, created years back by competition with newly created money-market funds. Free-market de-regulation allowed these S&L's to depart from their original mission, borrow larger sums of $$ and begin OWNING (instead of just lending to) real estate and other tangible assets. Still these were great economic times for our country. The stock market went up and everyone bought new cars and new homes and most, if not all, assets continued to appreciate dramatically. Trees grow, but not to the Ozone layer!
1987 gave us the instantaneous risk adjustment of an over-heated equities market with Black Monday, but the American economy shook it off, led by a sharp uptick led by US consumer spending. Most of our historically close trading partners were not so lucky and fell into sharp recessions. We trudged on, though red ink was beginning to fill the balance sheets of banks and the US Treasury.
Around this time though, US Savings & Loans revealed their toxic pattern of large, highly levered, poorly-collateralized lending practices over the past decade. They had been pushed by regulation over the last decade to consolidate, get larger, ultimately leading to collapse, thus requiring a $170 bailout by the gov't and the establishment of the RTC.
1990 through 1992 serves up a plate of the newly expensive Gulf War, a concurrent oil price shock and marked a period of sharp, but short-lived recession. Unemployment rose, government spending accelerated and Germany & Japan became dominant global trade machines outpacing US growth and competing with the USD for prominence. Budget deficits, mostly due to a bloated defense spending spree grew near exponentially. Our politicians explain it away as the cost of winning the cold war and becoming the world's police force.
1993 sees Clinton/Rubin gets credit for new fiscal discipline, reducing the national budget & trade deficits, adding jobs, and pushing new home construction and ownership. Greenspan lowers rates, re-igniting the capital markets and by 1998 there is a budget surplus (for the first time since 1969), low unemployment, income growth, GDP expansion and savings rates drop nearer to 1% (by 2000). He may have been busy under the Oval Office desk, but the economy flourished.
By 1998, we've stopped savings, begun speculating in equity and housing markets and have the tacit endorsement of the FRB (by Greenspan's easy money). We share a delusional belief that the good times will go on forever. Little worry is ascribed to the now-prescient collapse of LTCM(caused by massive leverage and disconnect of market correlation's). Emerging markets, now a hotbed of capital investment, demonstrate their ability to instantaneously combust and the NY Fed successfully orchestrates a Wall Street-led quasi public-private bailout. Nobody thinks twice about resuming the party. The kool-aid continues to flow freely, and again the $$ spigot is dialed wide open.
It is right here that the securitization markets for debt begin their exponential growth, further fueling debt expansion (now with other people's money) and we expand the ability of larger financial institutions to take risk by repealing the Glass-Steagall Act, (essentially inviting the larger banks to the party's keg and letting the free-market decide who will make the most coin!). Again, trees don't get to outer space.
The Nasdaq/Internet bubble is but another blip as financial engineers outweigh risk managers and the once provincial and local nature of the US housing market is given the wholesale endorsement by both political parties, the FRB, and the President. Concurrently (as a tonic for the short-shock of 9/11), our government endorse the idea of expanding personal credit and excessive (read: borrowed) consumer spending to lead our economy higher! Most interestingly, median income growth stagnates, becomes the most dichotic between the upper and lower economic strata since the 1920s...hmmmm!!
Market oversight is abandoned and abhorred, accounting standards loosened, and the quest for the holy grail of sequentially higher (albeit specious) earnings becomes the new mantra as we embark on a several trillion-dollar, questionable, war in Iraq. Again, federal deficits soar, the USD tanks but that can't stop the daily fixation on more wealth, little or no savings, and an ever-rising DJIA. Don't forget the then-common(and Presidentially-endorsed) mentality that every red-blooded American should pursue his/her dream of buying a home and has a nearby mortgage-banker with a pal at a GSE to make this a reality. The amount of leverage in the US financial system is nearly 3X it's GDP
Onto this shaky mix add the liquid oxygen combustibility of CDOs, CDSs, and the always false premise that housing (the underlying for most all of these derivatives) will go up forever. Allowing these to go on the books of our most critical financial institutions was the directly akin to lighting a fuse to a fiscal neutron bomb. Guess what...it went off and we are now seeing how well we can contain the poisonous radioactivity.
WHAT THE HELL DID ANYONE EXPECT TO HAPPEN
All the political and ideological bullshit expounded here should take a very long look at their respective parties, their ideologies, and recognize their roles in bringing us to the brink of historic disaster (the edge of the back of one of Cape Kidnapper's cliffside fingers). Both parties have failed us miserably.
All of you spout off about taxes, spending, slanted and false histories and blame and credit, blah..blah...blah...Politicians aren't alone in contributing to this mess. The media has played a large and non-constructive role in this as well and deserve a lambasting. They conveniently go from giddiness and celebrity worship to never-ending gloom and prognostication of fault.
HOWEVER,WE LET IT HAPPEN OURSELVES!!! Pat, Dave, Kalen, Lou, Craig everyone...take some damn responsibility. I know I do. Break this chain of ascribing blame.
We've allowed our collective conscience to take a hiatus in the name of personal gain, greed, avarice and excessive comfort. We went from a nation of strong, often Purtian-like values, to one of weak thought and ignorance of consequence. We have lost our ethical and moral compass.
The only thing worth loudly advocating, IMHO, is a wholesale surge (and then purge) of Congressional reform. Let's use the American spirit and will to demand the very real abolition of lobbying by term limits, federally-financed elections (cheapest government fix I can see), and the end of the seniority system. I didn't vote for either Nancy Pelosi or Mitch McConnell and I resent their ability to dominate the potential legislation for the world they'll leave my daughters. My generation is probably screwed, but theirs doesn't have to be. Let's have legislators who make the office responsible to us, not their financial benefactors (be they corporations, unions, think-tanks, or other political ideologies).
We may not like the medicine we are about to take and it won't taste good, but without some of it (and I don't pretend to sit here and tell anyone what will work and what won't...wtf knows just yet???) we are doomed to watch this accelerating spiral of deflationary pressure sink us into a morass that might take multiple decades to recover from! Let's stop arguing over what's right and wrong with every bailout and every piece of legislation...they are mostly attempts at short term fixes. Stop worrying over what taxes you will have to pay and start thinking about where this country has to get to. We need real and dramatically different solutions to successfully extract us from this mess.
They won't come from the stale monotony of ideologic bullshit.
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Steve Lapper,
Okay, since yours appears to have resonated with some, I'll take a stab at a few things you state. But at the outset, I am assuming that you are not including your screed as part of the "stale monotony of ideologic bullshit" you alluded to above.
You make a lot of assertions, throw in a few buzz words I haven't heard since B school, and don't really say what the solutions are other than they must be "real and dramatically different". Is a summary of your summary something to the effect that it is everybody's fault so it is nobody's fault, so quit pointing fingers and get behind the program though we don't know what the program is or whether it can work?
But where to start. How about at the beginning. I thought Reagan took office in Jan. 1981 following the disastrous Carter presidency that was accurately caricatured by the misery index. BTW, by the mid to late 1970s the traditional measurement of money aggregates focusing on 1 and 2 had lost much credibility as a means to control or affect the money suppy. Was this a gratuitous inclusion to gussy up your piece?
Oh, I bought a home with conventional financing in 1979 and I think I put 10% to 15% down. Did it again in 1984 with around the same down. I recall a renovator (Alan Cash) in the 1980s who bought 30+ distressed homes annually, fixed them up, and resold them to fairly modest people with third party financing and little to no money down. My recollection is that there were a number of federally insured or guaranteed mortgage products that required as little as 3% down. At times Alan left the buyer complete some of the renovation in exchange for the downpayment. I didn't know many people with the kind of savings to put 20% down, and I doubt that things were different in NY after Carter. The bottom line is that your characterization of how Americans bought homes during that time is not very accurate, is it?
You sort of gloss over the S & L mess, and if I am understanding you, suggesting that deregulation may have been the cause of it. Perhaps you would like to explain disintermediation, why regulation Q was finally killed, and the problem with borrowing short while lending long. While you are it, why don't you impress your readers with a brief summary of how and why S & Ls were created- like by govenrment to make buying a house easier and more affordable for the masses, how they were pampered and protected from competition from commercial banks, and how when the government could no longer control the flow of money across institutions and borders, it had to find a way- this time with real risk- for the S & L industry to survive. S & L's got into riskier investments like commercial lending and equity participation to increase earnings in order to stave off insolvency. It really is much simpler than you are trying to make it. One can jam a square peg into a round hole only for so long without serious repercussions. Something about chickens coming home to roost?
As to the1993 timeline and your Clinton/Rubin fiscal austerity, that's simply nonesense. Did you forget the Clintons' failed attempt to nationalize as much as a third of the economy? And how many times did Clinton veto welfare reform before he was finally forced to sign it, all along winking to the left that he would change it back in the remaining years of his administration? Two or three times, right? Do you think that maybe spending the peace dividend by lopping off nearly one million military personnel might have a little bit to do with this so called austerity? (No connection at all, of course, to the poor condition Bush found the military and intelligence services when he took office in late Jan. 2001.) As I recall, the 1994 election did usher the first Republican control of the House in 40 years and a so-called "Contract With America". Do you suppose that this might have had something to do with the small eventual budget surplus (after segragating the social security surplus) of the latter year of Clinton's second term? Nah, it was Rubin's genius and Clinton's courage and pragmatism. Yeah, and you are not a partisan!
NOTE TO BOGEY- I read Laffer's newest book and though he says some nice things about Clinton, he is less complimentary than your report from the recent meeting.
In your discussion on when people stopped saving, 1998 I think you state, did you take into consideration any wealth effect? Or is savings only the excess of earnings to consumption? If my total portfolio goes up 10% and I don't add additional cash to it, am I not still 10% better off? Or conversely during the 1970s, the lost decade of equitities. Is a 1% savings rate when the market was losing money somehow making people wealthier and more confident? Do you think that there might be at least a tiny connection between wealth, consumption, consumer confidence and a good economy?
It is my understanding- disclosure: I don't work on the Street nor am I an industry "insider"- that CDSs have been around for some time, and that there are different types. I've also heard or read somewhere that the only ones that have been in trouble thus far are those tied to subprime and Alt-A mortagages. If this is true, do you suppose that the nature of the guarantees underlying these mortagages- namely, Fannie's and Freddy's implied U.S. government backing- might be the problem as opposed to securitization as you suggest?
Mr. Lapper, tell me with some specificity how it is that I am to blame? Did I default in my obligations? Have I asked you and all other American taxpayers to bail me out? Have I ever asked the government to subsidize my mortgage so I could buy a house I couldn't afford? And how is it that by me not ascribing blame going to correct the problem?
A far better solution is for people to identify the bad actors as I have and scream loud and often. That your prescription is to engage in happy talk, to disregard who's going to pay for all these mistakes, and to shoot blindly as we did in the Great Depression is greatly depressing. I don't want to wait a decade then have a devastating war to get the economy rolling again. To be bold and audacious with someone else's money is hardly responsible or honorable.
I am not good with aphorisms or cute little bits of wit, but isn't there one about a frying pan calling a kettle black? Drivel, BS, etc. Give me a freaking break!
Boy, I am in a foul mood!
Mike Sweeney,
While I am at it, I could care less who you vote for or who you support. I am not a Republican- never have been- though I've never voted for a Democrat for national office. I hope this changes some day, but it won't happen until a candidate moves away from the highly destructive tax and spend, class warfare populism that is the hallmark of FDR's Democrat Party.
Craig Sweet,
If you are going to associate my name to statements or positions, at least have enough respect for yourself if not me to do so with a modicum of honesty. I never said that 40% of Americans don't pay any taxes. I specifically said that 40%+ of Americans do not pay FEDERAL INCOME taxes. That is hardly a myth unless you are suggesting that the IRS is making up the data to exploit little people like you (dig fully intended).
Jim Kennedy,
As you wish. But to suggest that Republicans are as responsible as Democrats for CRA, Fannie and Freddy, Reno's DoJ going after lenders for not lending in poor neighborhoods, etc. is intellectually dishonest. If you want to take it personally, so be it. Contrary to what Mr. Lapper states, and borrowing out of context from AG Holder's admonition on courage, it is time we start identifying the bad actors and their actions clearly and ensure these politicians can't do additional harm.
If it is the "consumer" who is the culprit, then it seems that tightening up credit and jacking up interest rates might be in order- Goodale's conumdrum. The worst thing we can do is to increase taxes on the productive, kill the energy industry, and grow the least productive sector of the economy, the government at all levels. This is Obama's plan and I'll be damned if I am going to take it lying down.
Ed Getka,
My reference to Obama's destruction of the oil and gas industry comes from a front page article in the Dallas Morning News this past Friday, and one in the Business section, page 1 of the same edition. Essentially, in Obama's recently submitted budget he is stripping away so-called tax preferences from the industry including depletion. The industry says it's dead if the package goes through. Obama says it is time to go a different direction. I am sure you can Google the relevant part of the budget proposal for "learning" purposes.
Even if you believe in man-made global warming (by spewing CO2 into the atmosphere) while choosing to disregard that over the last decade world temperatures have decreased slightly at the same time that CO2 concentrations have increased greatly (sort of a reverse cause and effect, wouldn't you think?) is now the time to wreck the industry? Is decimating the economies of TX, OK, and maybe LA okay when the rest of the country is suffering? They say that misery loves company. Or should the residents there be happy with extended unemployment benefits and a moratorium on the foreclosure of their homes? As Rham might have paraphrased "a crisis is a terrible opportunity to waste".