More on the Mortgage Crisis of 2008

I've heard many views about the crisis and how government responded. There is general disgust that it happened and how government squandered money solving it. My view is a little different. But, for this post I offer two things: one is the link to a movie on YouTube (perhaps uploaded improperly) and a link to the Wayback Machine's archive of a government web page which details a program Pres. George W. Bush signed into law to make home purchase easier. Yes, government has done some things which made the crisis possible or worse.

First, a link to the government web page: American Dream Downpayment Initiative - Affordable Housing - CPD - HUD

 And then, the movie link: Overdose: The Next Financial Crisis

There were many factors behind the crisis: someone created the idea of bad mortgages with a low interest rate up front, a small or non-existent down-payment, and a higher loan rate later, someone allowed mortgage lenders to sell them to larger banks to eliminate their own risk, someone allowed them to be bundled together (not criminal at all), someone enabled them to be rated incorrectly to suit the sellers, someone enabled betting on those bundled securities, someone did all those things. There were thousands of individuals or companies involved.

One of the biggest complains I read or hear is that nobody was put in jail and punished for what was done. That's largely true, but they had so skillfully changed the laws beforehand, so that most of what happened was NOT illegal. There were also so many people involved that to remove them from the financial system might have caused the crash to be much worse. Still, the complain is valid and individuals should pay the price. Some of those are politicians, not just bankers.

So, check out the Affordable Housing web page and watch the movie to see the worst and hear the awful commentary on the situation. Then notice that the economy recovered as Pres. Obama said and the economy, now regulated better, has performed very well since 2010.

This year 2020, we've had an awful downturn for a short time in the Spring because of the COVID-19 pandemic, but the economy will fully recover from that as soon as we have a vaccine which enables people to get back to normal activities. Even Republican President Donald Trump didn't do enough to pull the economy down. He was counting on a strong economy to help his re-election bid.

Update: Here's a link to The Big Short on Crackle. It's free, but there's an advertisement at the beginning.

This movie is Hollywood at tis best, but it is surprisingly informative. It's also incredibly entertaining with a big group of stars.

The Economic Crisis -- Documentarian View

There is a terrific documentary series (4 parts of 44 minutes each) called "Meltdown" about the crisis. Here is a link to the four parts (from YouTube).

https://www.youtube.com/playlist?list=PLUbZez7C8LKwnYGLwv0mk0xQfz2euM_8i


Near the end of the last part the narrator says, "Now that we know what caused this crisis ..." and my reaction was that "No, we don't know". After all, why did the mortgages go bad? Who created them? Were they legal or were laws changed to let them be used? Who created Credit Default Swaps (which were the private insurance policies providing for the mortgages which went bad to be paid off and which brought down AIG)? Why were small mortgage lenders allowed to sell their bad mortgages to larger banks rather than keeping (some of) them (and their risk) on their books? Why did the rating agencies of Wall Street not downgrade the mortgages and the Mortgage-Backed Securities made from them? There are many questions.


I see many aspects to this story which are a step back from the actual mortgage and Wall St. businesses.

There is the interplay of Wall St. and the politicians and the fight between Democrats and Republicans for power and the fact Wall St. is a big funding source in politics and that the Conservative Supreme Court chose to make it legal for corporations to contribute money to political campaigns. This intermingling of interests and the fights between various parties is a huge factor in what has happened and what continues to happen with the economy and the political fights.

There is the contest between Wall St. and London to be the "capital of the world economy". There is the money from Russian oligarchs moving into the U.K. and America (especially just after the 1989 collapse of the Soviet Union). There is Asian and Middle-Eastern money all trying to buy properties as a kind of "bank account" to hold the value of their money. Over-building homes, apartments, and business office space was a key indicator of the problem and it may happen again. What do the wealthy do with all their money? There's apparently too much money in the world and few ways to safely invest in real businesses. So instead, there are schemes doomed to failure.


At the heart of this it can be said there is an economic system which is enabling tremendous amounts of wealth to go into the hands of few people around the world and there are some very greedy manipulative people (not all bankers) who are trying to get their hands on it. When a an uninformed or uneducated person is placed in a system which enables them to become wealthy, there is bound to be someone smarter who will try to con them out of their wealth. This greed is usually at the heart of our economic problems. Put another way, there is a lack of morality and character in some people and when they are in charge everything is likely to collapse. Consider Donald John Trump. As the French economist Christine Lagarde said, this is human nature and there is a constant struggle to restrain the worst effects of the greed and corruption.


I won't delve too far into the mortgage crisis. It's done and we've recovered pretty well. Key to the recovery was tighter regulation, less leveraging, removing bad mortgages from the marketplace, and allowing some companies and individuals to leave the "playing field". On to the next thing.

The American Economy: Trump's Stock Market Miracle

How well is America doing? Pres. Trump raises that question by pointing to the DJIA (Dow Jones Industrial Average).

Looks good, huh? No wonder Trump is crowing. ...... But, let me show some other things that may clarify what's really happening.

How about this one showing the DJIA ?

https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

Obama took office in 21 Jan 2009 with the Dow tanking badly. But, from mid-2009 it turned up and, as you can see, it has only turned down once because of the virus in 2020. Seems Obama should get some credit.

Here is U.S. GDP per capita from 1960 - 2019 (the last date for which the numbers are available).

It's been growing consistently regardless of who is president or which party is pushing its ideology. Primary seems to be the relative freedom for our people to do business. This reflects all wealth and that is skewed toward the wealthier members of society. One billionaire and I add up to $500,000,000 per capita, but I'm personally not that rich.

Corporate tax rates aren't stopping great national GDP growth. Following are some graphics showing it.

Lower tax rates and taxes paid means corporations get to keep more of their revenues.

We even collect less business taxes than the Europeans.

How are the typical individuals doing?

"FRED" is the Federal Reserve Bank of Dallas.

GDP (blue line above) is growing. Corporate tax rates have been going down and federal tax revenues from corporations are down. But, the red line shows individuals aren't doing so well.

Individual tax rates seem to be within the 15% - 20% range forever, so why are individuals failing to do better? 

Let's look at the big picture on U.S. tax structure for some clues. Here are two graphics to explain what is taxed and who is taxed.

It appears the Payroll Tax is huge until the "Top Quintile", when the Individual Income Tax becomes the largest factor. Most workers are paying payroll taxes, but the rich are paying income taxes.

 

Who pays taxes and how much of the total?

There is some progressivity (where higher incomes pay a higher rate).

 

Despite a progressive tax system, the rich are getting much richer and the poor are not. Despite a reduction of corporate tax rates and a growing economy (see GDP) the workers of America are not getting a lot more benefit. The rich are taking the benefits of the growing economy and available tax deductions to make and keep the lion's share of the new wealth.

Clearly this has to do less with the political party in charge or the tax structure and more with who controls the wealth and decides how to use it.

For example, how is it possible the rich are getting richer while the poor aren't?

It appears wealth is simply being earned differently for the rich, producing more income.

 

Does this mean individuals are earning more because their corporate stock is producing tremendous dividends and that the corporations are producing tremendous profits because sales are up and new products are being produced? In some cases that is all true. But there are other factors at work. Why is the "Top 1 Percent" doing so much better than the "99th percentile"? Why aren't the workers at these corporations also benefiting?

 

Maybe they earn more capital gains because the tax rates decreased and they shifted their income to capital gains to get the lower tax rates?

 

The maximum capital gains rate is lower than the maximum ordinary income rate. Thus, if a Top 1 Percent income earner simply earns capital gains income rather than earned income, they pay the lower rate. That's an easy way to lower your tax burden, but it hasn't dramatically shifted over the decades.

 "Most transactions subject to the capital gains tax consist of investments such as stocks and mutual funds. In 2012, the latest year for which data is available, 75 percent of taxable transactions were from stocks and mutual funds." --  Peter G. Peterson Foundation

Let's also look at "tax expenditures" (deductions and exemptions).

It seems the federal tax code offers wealthier individuals more opportunities to shield income and assets from taxation and they use it extensively. It bears the title of that graphic: "The top 20 percent of income earners receive over half the value of major tax expenditures". Is it a good thing?

The biggest ones (in dollar value) are: a lower tax rate on capital gains and dividends, charitable contributions deduction, state & local taxes deduction, mortgage interest deduction, exclusion of net pension contributions, capital gains tax break on assets at death, and exclusion of health insurance.

 So, the top 1% of income earners are earning much more of their income on capital gains and  the tax code allows lower tax rates for "capital gains/dividends". Yet revenues from capital gains fluctuates and aren't (probably) greater than 12% of revenues.

It isn't likely this one thing has gradually shifted the nation's economic landscape so dramatically? But it could be a significant element, along with higher CEO pay, lower corporate taxes, more job off-shoring, higher cost of living, of education, and healthcare.

Conclusion: We see American corporations are doing very well and the Top 1 Percent income earners are doing very well too. So, why aren't everyone else doing well? Why aren't their incomes going up more and what expenses may be dragging them down?

 

Why?

 

Why has it decreased until about 2006 and then began to rise again?

 

As our population is enabled by medicine to live longer, the costs are rising. Why so fast?

 

Similarly, all kinds of healthcare costs have been rising. The slight leveling-off in 2009 might be attributable to the Affordable Care Act (aka ObamaCare). It needs to remain strong to restrain costs.

 

 

 Student debt and automobile loans are killing people's budgets.  How can that be restrained?

The Cost-of-Living and slow income growth from corporate jobs is destroying the median income earner.

Tax deductions and lower tax rates are helping the Top 1 Percent of income earners.

I haven't even touched on federal government debt due to spending being higher than revenues. One key to the recovery when Obama was president was to reduce the deficit year after year to give everyone confidence in the economy. The same occurred in the 1990s when Bill Clinton was president and he reduced the deficit to zero and had a booming economy.

And I haven't discussed the effort to destroy unions or other changes in the economy which require workers to produce more work at lower wages.

If there is a proper conclusion, it is that the problems we face are varied and will require a multi-faceted response. Slightly higher tax rates on corporations may help. A financial transactions taxes could help. Tighter rules on corporate executive use of stock options and benefits from capital gains transactions might be good over the longer-term. Less incentive in the tax code for off-shoring of jobs combined with a higher minimum wage and an elimination of efforts to harm unions could help many workers.