DawgTalkers.net Forums DawgTalk Tailgate Forum No quick fix for the economy

I found this to be an interesting read. I find it quite ironic that in most elections the number one priority is the economy; but the one thing the government likely has little control over is the economy. It gets too much credit when it is high (Clinton), and too much blame when it is low (Bush/Obama).

Also, JMO, but I do think the government can have very long term effects on the economy, by performing functions such as regulation of corporations (which has been lacking in recent history) to prevent the sort of money grabs that have led to the housing crisis, but the short term effects (like tax cuts) are usually minimal.

http://money.cnn.com/2010/10/14/news/economy/no_fix_economy_full.fortune/index.htm

Probably nothing earth shattering here for most everyone, just found some useful info in there for someone like me who doesn't always understand all the macroeconomics.

Every conservative on this board could have told you there was no quick fix... yet we kept on spending like drunken sailors to try to get that quick fix.

All we've done is we've racked up more debt and made a recovery that much more difficult.

One area the government does exercise control over the economy is in the way it treats business and economic development.

Many parts of the country are still doing quite well today. Unemploment is low .... the infrastructure is solid ...... taxes are under control ..... and you can look for common factors ...... but I'll leave that to the reader to discover for himself/herself.

The federal government can impact the economy, but in different ways. Some of these ways, like monetary policy, can impact the economy for a quick leveling effect. Others like tax policy impact the underlying bedrock of the economy, and influence business for years to come.

As an example .... let's say that business is unsure as to what they will be paying per employee as various taxes, so they hold off on hiring.

Why would they be unsure?

Well, let's look at the case of a $20/hour, 40 hour per week employee.

The employer pays $800 to employ this person.

However, it does not stop there.

They also pay Social Security and Medicare tax on each employee. Social Security is 6.2% of the employyee's wages for the employer's share. Medicare is 1.45% of the employee's wages. There are unemployment taxes on top of that, but they run through a convoluted system where this can be about $100 per employee per year. You also must provide for Worker's Compensation, either by paying a tax, or by self insuring. There are costs involved either way, even if the employer self insures. Let's call this another $100 per year. (probably light)

So, now this $800 per week employee costs the employer about $865 per week.

Now add in the uncertainty over what healthcare reform will cost. If it is for a single employee, depending upon pool size and a variety of other factors, it could be anywhere from $100-200 per week, per employee. We'll go midpoint for our purposes, but no one, no matter what they say, is 100% sure what it will wind up socting employers.

$865 plus $150, and now this $800/week employee costs $1015 per week.

Then add in uncertainty over what tax rates will be in effect next year. Not a big deal you might say? Well, for an S-Corp with a gross profit before taxes of say maybe $300,000 ..... there could be as big a difference of 4% in tax. That's another $12,000 of uncertainty.

How does that effect the economy? Well, if I might, or might not have $12,000 in profit next year, I might, or might not expand my business. I might, or might not invest. I might, or might not, hire aqdditional people. There are a lot of things that might, or might not happen ..... but when there is uncertainty, businesspeople tend to become more conservative with their spending. No one wants to get into a situation where they put their business at risk by overinvesting and then seeing tax and employment structures change to the point where the scale tips from making it to a successful year ............ to crashing and burning in bankruptcy court.

So .... government can have little direct impact on the economy (for good) but can destroy hiring, growth, and investment by employers if they let uncertainty and high taxes reign.

Tell that to the bankers who just had to get their 700 billion dollar package to start this mess out. It's a shame their blackmail that would have tanked the economy combined with rumblings about martial law has brought us here.

Well .. to be fair you then also have to look at the trillion dollar economic stilumus package, which included "bailing out" GM and Chrysler, so that jobs wouldn't be lost, dealership and factories wouldn't be closed ... and so the company could survive.

Then they filed bankruptcy .... created new unions contracts ..... closed every money losing aspect of the company .... paid off the union to take over retiree benefits .... closed dealership while voiding dealer contracts, (even for some people, like Bob Frederick, who had just built a brand new dealership within the past year, and who met the supposed sales criteria)

In the end, the big bucks poured into GM and Chrysler had only 1 effect ..... it kept the company afloat and capable of creating a new union agreement, as opposed to seeing GM and Chrysler go bankrupt, and risk them re-opening their facilities as non-union ventures.

In many ways, the "Stimulus" bill was a payoff to the unions, and helped maintain some degree of union employment, and added union members under other curcumstances. (firefighter and police incentives, etc)

In many ways, just about anything that comes out of Washington pays someone back. I just wish that someone would remember those who pay the bills once in a while.

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by performing functions such as regulation of corporations (which has been lacking in recent history) to prevent the sort of money grabs that have led to the housing crisis,

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We can debate this all day but the mortgage collapse was caused, in part, by the government pushing banks to lend money to unqualified people.. then when the banks started to collapse, THAT is when the government started crying and saying that if they had more oversight it wouldn't have happened.. which is crap.

My undergrad degree is in finance, I think one of the biggest areas that the government impacts the economy is in consumer confidence.. Right now upper middle class people are, for the most part, making the same amount of money they were making before.. rich people still have a lot of money... and corporations are sitting on a BOAT LOAD of cash... but nobody is spending any because they have no confidence in the economy.. I believe you CAN talk yourself into a recession and I think that is part of what is holding back a recovery..

The other part is the uncertainty the Obama administration brings. For example, you mentioned companies are sitting on cash. One of the reasons they are sitting on cash is because of the policies. Congress refused to vote on the Bush tax cuts before the election. How is a business supposed to make a budget for next year if they have no clue what they will be paying in taxes? They will just sit on the money until the government tells them what the heck is going on.

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if they had more oversight it wouldn't have happened

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If the Gov't hadn't relaxed the laws to allow it in the first place, it wouldn't have been an issue.

They cause the problem, then use it as justification for even greater influence.

Heres a copy of an article (one of many) that I used back in my undergrad days ...

http://www.realclearmarkets.com/articles/2008/10/the_long_road_to_slack_lending.html

And here's a link to the copy of the Boston Federal Reserve's report .. that specifically stated that "minorities" as they put it were discriminated against and were not given a "fair" means to credit ... and this is basically the summary of their study ... and also their means to "force" banks to lend to those who otherwise wouldn't be able to secure mortgages and loans ...

http://www.bos.frb.org/commdev/commaff/closingt.pdf

Take it for what its worth ...

While I do have a side that I could help support ... Im not jumping in on this one ... Im saving my fingers for the Game on Sunday

That was good stuff.

I do recall the government at the time, stating that it would help with opening up the market for minorities.

Obviously, the never performed any risk analysis on the recommendations.

And they never set a cap on amount.

The hinge pin is how many bank adopted the practice in order to avoid the appearance of having discrimatory practices.

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No one ever told a bank, or mortgage broker that the "had to" lend to unqualified people. The street goes both ways. The ones who really profited were the brokers.

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Actually ..... yeah, they (FHA Lenders) did "have to" lend to anyone who met the most basic of criteria. It was this mad push to put people of all income brackets into homes of their own that was legislated from on high.The way FHA works, or at least worked, is to guarantee the principle amount of the loan. Borrow $50,000 and the lender is guaranteed to never lose that $50,000 investment. They could lose their profit (interest) but never what they actually put into the property. (This is also why points were so big during this time ... as they could be capitalized, and lenders built in a guaranteed profit over and above the home value) It started during the Bush years (or maybe even the Clinton years) and progressed, and expanded, and took people who should have had trouble financing a candy bar and put them in homes.

When homes were on a continuous and predictable upward value curve, this was no problem. Bought a house for $50,000 and bust out 3 years later. No problem, the house goes on the market for $60,000 and no one's the worse for wear. FHA doesn't have to pay off the difference on bad loans, banks aren't losing any profits from loans going bad. The market gets homes back on the market, many of which had improvements made by other programs designed to help poorer people with home ownership ....... it was a win/win/win all the way around.

Then the home value merry go round stopped .... the roulette wheel stopped on 0 .... and the Vegas style mortgage crap table crapped out. Without constant increases in home values fueling the cycle, lenders couldn't afford to merely recoup their investments. While lenders who participated in the FHA program did so voluntarily, they would have been crazy not to during the10 years prior to the housing crash. They would have fallen so far behind their competitors that they never would have caught up.

Anyway ..... is it just me or does it seem like our economy is increasingly built on stuff that it bound to crash?

Manufacturing, tech, stock market, housing ....... all pushed economic expansion,and all crashed. They never did so all at the same time either .... which is strange .... because you would expect a crash in one area to kill other areas. Manufacturing drops because of outsourcing and technological advances in automation .. and tech jobs increase. Tech blows up because of the dot.com bubble bursting, yet the underlying stock market is still mostly strong. Sure overvalued tech stocks blew up and paper wealth turned to ashes .... but most long term stocks were solid. Then housing blows up ..... then big auto blows up ....... man it's a wonder we even have an economy left.

Anyway .. I've gone far enough off subject. Bottom line is that o one really had to "tell" lenders that they "had to" lend money to bums .... because they didnt have to tell them. The way the rules were written, in conjunction with the structure and shape of the housing market mandated that they be involved or miss out on massive profits. No bank could afford to do that, especially when their capital investment was never at risk.

It would be akin to me telling you .... go play the stock market. Invest in anything you want within these very loose guidelines. I will guarantee that you never lose a penny. You can keep any profits you make on individual deals, and if a deal goes bad, I'll make sure you don't lose a penny.

What would you do under those terms and conditions? Me? I know that I'd be investing.

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Actually ..... yeah, they (FHA Lenders) did "have to" lend to anyone who met the most basic of criteria. It was this mad push to put people of all income brackets into homes of their own that was legislated from on high.The way FHA works, or at least worked, is to guarantee the principle amount of the loan. Borrow $50,000 and the lender is guaranteed to never lose that $50,000 investment. They could lose their profit (interest) but never what they actually put into the property. (This is also why points were so big during this time ... as they could be capitalized, and lenders built in a guaranteed profit over and above the home value) It started during the Bush years (or maybe even the Clinton years) and progressed, and expanded, and took people who should have had trouble financing a candy bar and put them in homes.

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First off, at the height of the crazy lending in 2006, FHA loans made up less than 3% of all mortgages. Second, the vast majority of FHA loans are not of the subprime variety.

http://www.realtor.org/fedistrk.nsf/files/testim_approps_040209.pdf/$FILE/testim_approps_040209.pdf

http://money.cnn.com/2008/03/10/news/economy/fha_reform_upcoming/index.htm

As far as the Community Reinvestment Act, the evidence shows that only 9% of subprime loans came from banks inside CRA assessment areas, 37% from banks outside of CRA assessment areas (outside of regulation), and 54% from independent mortgage firms (completely outside of regulation).

http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf

Most subprime loans came from unregulated banks and independent firms; and these types of loans, connected to the stock market via financial products like mortgage backed securities, were the biggest culprit in the housing crisis. This argues that a lack of regulation in the subprime market was the main government failing, rather than a "forcing" of loans.

If you think about it, the FHA loans has been around for 70+ years (they innovated the 30 year fixed rate mortgage), and the CRA for 30+ years with none of these problems. The only thing that changed was the rise of unregulated independent mortgage firms and mortgage backed securities connecting the mortgage market to the stock market, which turned the mortgage market into a huge game of chance. The unregulated firms bet big, and lost.

FHA, Fannie Mae, and Freddie Mac are all government sponsored entities. Fannie and Freddie bought all kinds of crappy mortgages because that was their function. You are right that I mispoke about FHA. I did mix up their roles. Itw as late, and I'm gonna blame the pain meds. lol

Regardless, government sponsorship (the term I should have used) of all kinds of crappy loans under a certain dollar amount was the main reason for many lenders making loans they did. They had no risk. If they did loans outside of the programs, their risk was also limited because of the fact that the "anyone and everyone gets a home loan!" mentality kept pushing home prices higher and higher, so risk was minimized.

IIRC, at their peak, Fannie and Freddie had over $4 trillion in debt, today often secured by overvalued assets. Guess who is on the hook for the difference when these loans default?

My point is that the crazy lending preceeding the housing crash would never have happened if the Federal Government hadn't opened the gates to anyone with a pulse so they could get a home loan. The whole sub prime market would never have materialized if the government hadn't gotten involved in social engineering through home ownership for those who could not afford to own a home, and who were not responsible enough to own a home.



It's funny. When I bought my current home, I looked at a bunch of houses. I wanted to look at some foreclosures, and my realtor said that she would show me any house I wanted, but that buying a foreclosed property was usually a pain in the ass, and the properties were usually distressed.

Man was she right. I went to lok at one house in particular that I will never, ever forget. The people must have been really pissed when they got tossed, because there were holes in damn near every wall .... at least 4 or 5 windowsd were broken ... the carpet looked like toxic waste had been spilled on it .... it was just disgusting. The bank was asking more than other "similar" (in size and location) homes. That wasn't the only foreclosed house we looked at, and all were really pretty horrible. I guess that's what happen when you give something to an irresponsible person.

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My point is that the crazy lending preceeding the housing crash would never have happened if the Federal Government hadn't opened the gates to anyone with a pulse so they could get a home loan. The whole sub prime market would never have materialized if the government hadn't gotten involved in social engineering through home ownership for those who could not afford to own a home, and who were not responsible enough to own a home.

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I'm not going to argue that the government had no role. Fannie and Freddie did provide the backstop that allowed subprime loans to happen. I don't think we are that far off in our arguments.

My contention is that Fannie and Freddie were also available to the banks that fell under the regulation of the CRA as well as the unregulated banks. Also, the new, looser underwriting guidelines (that places like the Boston Fed pushed for) were sent to the regulated banks as well as to the unregulated banks. The GSEs as well as the looser underwriting were absolutely pushed for by the federal government. But when used in the proper context (under CRA regulation), risky loans were still given out, but not at such high rates, and not to just anyone. The problem clearly arose in the unregulated firms (90% of the subprime loans). If that doesn't make a case for tighter regulation, then I don't know what does.

You are arguing that the federal government helped loosen standards. I am arguing that these loosened standards, when used under appropriate regulation, actually weren't that dangerous. I think we can both be correct on this one. And we can both agree that the government played a role as much as irresponsible lenders and borrowers did.

The only exception I make is the "forcing" language. Forcing implies that the government would have taken some kind of action against firms for not giving loans out to everyone; I think you are more correct when you say that the government simply helped create a bad environment that unregulated firms took advantage of. Look at the example of Third Federal. They were not penalized for not loosening their credit standards, and they survived the crisis. If there was some kind of proverbial gun to the head, why weren't they forced?

It seems like we are about 90% in agreement ..... and I'll take that any day. lol

Free markets ... but Freddie and Fannie were a huge part of the housing market, and a huge part of that crash. That was regulation and government intervention with the desire to put damn near anyone who wanted a home in one.

Tech was tech. It was a house of cards built on hopes and greed. I'm not sure how you regulate hopes and greed. Total up a company's stock and it damn near always exceeds the value of its material holdings. How do you regulate startups and IPOs to competely prevent a repeat ... and should you take that much venture capital out of the hands of legitimate startups? You can require better documentation at an initial stock offering .. but in the end, if someone chooses to invest in a new venture, it's their money bthey are putting at risk, and I don't know how you can tell people that they can't risk their own money.

The auto industry has been regulated to an enormous degree. Everything from safety to emmissions to plant requirements and zoning requirements. I don't know how a lack of regulation applied there.

The banking crisis was largely tied to the housing mess. I am still, to this day, not sure that we needed to out $1 trillion in taxpayer money into fixing that problem, and I bet that there are billions and billions that will never be accounted for. I don't know that I could call banking under-regulated. maybe inappropriately regulated ..... but not under-regulated.

In the end, it is hard for me to agree that more and more regulation can allow our system to flourish. Regulation is like the brakes on a car. It can be a safety feature, and is absolutely necessary under particular circumstances, but if you get some jackass on the freeway slamming on his brakes every quarter mile you'll have pileups and accidents all over the place. All too often, our government has been that regulatory jackass.

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Anyway ..... is it just me or does it seem like our economy is increasingly built on stuff that it bound to crash?

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We are very consumerism based economy. I don't know all the particulars but no matter how bad our economy has been Boardman always seems to be busy.

A few weeks ago I walked into Best Buy and there were some people gathered around a new 3D TV and were just soaking it all in. I couldn't help but wonder, price aside, why I need a 3D TV to watch the crap that's on tv now! Seems ridiculous actually.

I know people who buy Verizon texting phones and whatnot, have a bill with that and have a home phone? Why? Pick one.

I know people who have to have a two thousand dollar laptop, I bought one for 500 bucks and it does, basically, the same thing.

I went to buy a brand new car some years ago, to finance 28K they would give me a 6 year loan. If I bought a house for twice that value, they want to give me a 30 year loan. Why not a 15 year fixed, no sir we don't do that . . . .

My point is this, I am not the smartest or most financial savvy person, and I made plenty of mistakes in my lifetime but our whole society is geared to consumerism and debt, be it home loans, Best Buy credit cards or Capital One.

People that make 30K a year want to live a 70K a year lifestyle. People who make 70K a year want to live a 100K a year lifestyle. We don't live within our means.

I have seen people who claim to be poor drive nice cars, have nice toys, nice jewelry, nice cars and nice clothes. But then complain about their debt. It's really slavery of another kind when you think about it.

We are a society where our wants have become our needs and our needs have become a god-given right. We need to spend more time teaching people the value of a buck and good ole fasioned economics, God knows I'll be first in line.

Bingo.

We can argue all we want about politics and who can do this or that ... but at the end of the day, government is just an agent of a larger institution that cannot sustain itself. We shifted from producing to consuming a long time ago, and our consumption is based around spending money that we don't have.

We often cite the easy examples -- people being given loans they know can't be paid back. Often those examples are blamed on the government -- they "forced" the banks to give out these loans ... but in reality, the banks were fine with that. They wanted that. Let the schmuck pay until he can't and then we repo the property or sell the debt for dimes on the dollar ... problem is, they went a little too far, and they didn't expect folks to toss the keys in the mailbox and give up so easily.

But beyond that ... there were problems even with those who reasonably qualified ... not many banks were apt to say "Well, Mr. Johnson, you check out just fine, but do you really think it's a good idea to open a pizza shop in a town with twenty-five pizza shops?"

Our markets are over-saturated, and our consumers are spending money they don't have ... our economic system is doomed to failure ... and while they certainly contributed to it's ills, the government isn't solely to blame nor can it do anything to fix it.

I don't think it is doomed to fail. It's the best system out there.

It is however doomed to adjust. Governments can prop up a stale economy....which really creates a bubble.

Sooner or later that bubble is going to burst.

Right now the government is not so much trying to prop things any longer...they are just trying to let the air out as slowly as possible.

When all of this settles there are going to be some tremendous opportunities out there. In my view this is a great time to be a 20 something as the world will be at your doorstep. A world of vast riches that can be plucked.

I am far from 20 something, but I am about to do some plucking myself. I have always wanted a home/cabin in the Tn/Carolina mountains, and soon might be the time to make that a reality.

Don't fix blame; fix problems (Japanese business tenet I agree with on a personal level). I think things are moving up; I am hoping as somebody who pays bills, taxes, is on fixed income, and retired, that my wife and I could get a fair shake at the bank. We also are committed to trying to help those in real need and those who have less. Weare concerned about the deficit. We would like banks to pay us a reasonable return for our money, at least in CD's and money markets. But we are concerned about our schools (retired teachers, both of us), and about the lack of social conscience in America and the heightened hostility beyond red and blue. Our discussions usually mention Congress more than our President. I think we need some sensible folks to address the deficit. Specifically, a lot of what can be done is sacrificed to service that debt. We have a modest proposal that won't cure it all, but in spirit, even if it is not a substantial cure, it is unselfish and is a start to where we want to be and where we want to see our government.

A set amount right off the top of every taxpayer's return, whether paying tax or off their return individually or jointly is to be applied to the debt to retire it. Every business pays a small amount that also goes right to the debt. A penny per gallon is dedicated and applied. It can be small, $10 per individual, $100 per business per whatever criteria work. But it retires debt and acknowledges it is a problem, and starts to fix it, or at least address it. Also, we decided every political ad will pay $10 dollars every time it airs. Right to the debt. As it goes down, the money used to service it becomes available for purely American interests, national. The earmarks and crazy amounts of spending need addressed. Congress helped create the mess, and those insipid and seemingly eternal ads could add up on a national basis. It would represent more good than any politician has provided us in our opinion. But the discretionary spending and entitlement stuff needs to change top down. Rooling back salaries, no pension for legal problems in office, etc. seem reasonable. It is not all of the problem, and we admit it is only a start. But to refuse to do something because we can't do all of it, or we want to wait and study and prolong the status quo is illogical by our lights in the least, and the height of hypocrisy. We have money for politicians' priorities. We think those priorities need to be Americanized, pro-citizen, and go forward with an emphasis on us for awhile here in the USA, until things improve. We are not the enemy; we are why the government exists. And we are still dumb enough to pursue happiness and prosperity. For what it's worth. JOHO

Fannie and Freddie have already cost taxpayers $148 billion, and will cost taxpayers between $221 and $363 billion through 2013.

Yea.

http://www.fhfa.gov/webfiles/19409/Projections_102110.pdf

FHFA Releases Projections Showing Range of Potential Draws
for Fannie Mae and Freddie Mac
Washington, DC – The Federal Housing Finance Agency (FHFA) today released projections of the financial performance of Fannie Mae and Freddie Mac (the Enterprises) including potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury. To date, the Enterprises have drawn $148 billion from the Treasury Department under the terms of the PSPAs. Under the three scenarios used in the projections, cumulative Enterprise draws range from $221 billion to $363 billion through 2013.

FHFA worked with the Enterprises to develop consistent, forward-looking projections across three possible house price paths. The approach taken in developing these projections is based roughly on the approach taken by the federal banking agencies last year in the Supervisory Capital Assessment Program, which produced potential, not expected outcomes. “These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” said FHFA Acting Director Edward J. DeMarco. “These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the Enterprises.”

The projected credit losses in each scenario primarily reflect possible further losses on the Enterprises’ pre-conservatorship mortgage business. As time passes, Enterprise dividend payments on Treasury preferred stock make up larger portions of the draws. Under the scenarios used in the projections, if dividend payments on preferred stock were excluded, cumulative Enterprise draws range from $142 billion to $259 billion.

“Much like the recently published Conservator’s Report, FHFA is releasing these projections to enhance public understanding of Fannie Mae’s and Freddie Mac’s financial performance,” DeMarco said. FHFA will periodically update and refine these projections and will report the pdates as part of its Conservator’s Report.

Gets back to that bubble I was talking about.