After the Aurora, Colorado incident, there was the usual discussion (i.e., unilateral rants) about the Second Amendment. Some people took the incredible position that if enough members of the movie audience had been armed, the incident would not have occurred (somehow they failed to note that the shooter was wearing body armor) and others railed that the right to own weapons shouldn't include the right to own assault rifles -- or buy thousands of rounds of ammunition. .
It seems to me that the Republican packed Supreme Court was reading a different version of the Constutution than the one I'm familiar with when they held that the Second Amendment prohibits the Federal or State government's denying an individual's right to own a gun. As I read the constitution, the right to bear arms is granted to the people in a recognized militia, not individuals. When the Constitution references individuals, it does so explicitly, as for instance the qualifications to be a Representative, Senator or President, "(n)o person shall be a Representative ...". The Second Amendment explicitly addressed the collective right of the people, not individuals.
But that's beside the point. There's no need to parse words or submit to endless litigation. What's needed is sensible penalties for misusing weapons, not their ownership. What's needed is a draconian punishment for anyone who MISUSES a firearm. For instance, a mandatory 10 year sentence, with no possibilty of parole for anyone who uses a firearm in the commission of a crime, said sentence to be served AFTER any sentence for the crime itself. That should be for the FIRST offense. A second offense should carry a mandatory 30 year sentence, tacked on after the sentence for the crime itself.
That puts personal responsibility at the forefront of individual conduct. I really think we should give it a try.
Sunday, July 29, 2012
Saturday, June 18, 2011
My wife was complaining recently about the failures of the Obama administration. Every candidate she ever voted for, she said, wound up disappointing her. She was also frustrated by the lack of apprent workable alternatives. She found some comfort, however, in concluding, "I guess it will be OK, the system pretty much runs itself anyway."
She really hit on the truth there. If there's an American genius, it's the ability to make things
work, even when they seem hopelessly broken. The system "runs itself" because fundamentally, we all agree about what things are essential and we know to get there, even though it seems we never agree about anything.
Obama's signature issue was health care. He had a plan. The Republican's didn't like that plan. They had a different plan. Or, they liked the plan we already had. Everyone said they knew how to fix health care and the other guys didn't. What we got was a power play, not real agreement.
In civil law, there's a procedure known as "summary judgment" to bring a lawsuit to an end without a trial. A summary judgment requires an agreement between the plaintiff and the defendant as to relevant facts, or an admitted inability by one party to dispute facts alleged by their opponent. Once there's no dispute as to facts, the Court will apply the law to those
facts and make a ruling. Trials are only needed when relevant facts are in dispute: that is, the purpose of a civil trial is to establish what the facts actually are. The basic way to avoid a summary judgment motion by one side is for the other side to show that relevant facts are in dispute.
Congress is supposed to be the greatest fact finding body in the world. They can subpoena any witness, compel the production of any document, and inquire of the greatest thinkers in any field to aid them in framing legislation. Republicans and Democrats had all that power at their fingertips, but evidently never used it. What Obama should have done was to call the leaders of Congress to the White House and said, "I want you to find out why it costs so much to be sick in this country and after you know that, jointly propose legislation to reduce those costs or figure out a way to pay for them". Once Republicans and Democrats uncovered the real facts, workable solutions could have been reached with far less partisan grandstanding. We might have learned stuff we didn't know, or disproved what everyone thought they did know.
Passing health care laws without a joint investigation was the equivalent of a judge ruling on a lawsuit without agreement on the facts. What we got was a partisan plan, based on what the Democrats thought were the facts.
My wife was right-- the system runs itself. It just doesn't run very well.
She really hit on the truth there. If there's an American genius, it's the ability to make things
work, even when they seem hopelessly broken. The system "runs itself" because fundamentally, we all agree about what things are essential and we know to get there, even though it seems we never agree about anything.
Obama's signature issue was health care. He had a plan. The Republican's didn't like that plan. They had a different plan. Or, they liked the plan we already had. Everyone said they knew how to fix health care and the other guys didn't. What we got was a power play, not real agreement.
In civil law, there's a procedure known as "summary judgment" to bring a lawsuit to an end without a trial. A summary judgment requires an agreement between the plaintiff and the defendant as to relevant facts, or an admitted inability by one party to dispute facts alleged by their opponent. Once there's no dispute as to facts, the Court will apply the law to those
facts and make a ruling. Trials are only needed when relevant facts are in dispute: that is, the purpose of a civil trial is to establish what the facts actually are. The basic way to avoid a summary judgment motion by one side is for the other side to show that relevant facts are in dispute.
Congress is supposed to be the greatest fact finding body in the world. They can subpoena any witness, compel the production of any document, and inquire of the greatest thinkers in any field to aid them in framing legislation. Republicans and Democrats had all that power at their fingertips, but evidently never used it. What Obama should have done was to call the leaders of Congress to the White House and said, "I want you to find out why it costs so much to be sick in this country and after you know that, jointly propose legislation to reduce those costs or figure out a way to pay for them". Once Republicans and Democrats uncovered the real facts, workable solutions could have been reached with far less partisan grandstanding. We might have learned stuff we didn't know, or disproved what everyone thought they did know.
Passing health care laws without a joint investigation was the equivalent of a judge ruling on a lawsuit without agreement on the facts. What we got was a partisan plan, based on what the Democrats thought were the facts.
My wife was right-- the system runs itself. It just doesn't run very well.
Wednesday, June 8, 2011
AYN RAND AND THE CONSERVATIVES
Ayn Rand's lofty perch in the ideology of American conservatives continually amazes me. It's hard to believe anyone takes her seriously, but clearly, many people do. Among them are people holding high public office, powerful business executives and policy makers. Prominent examples include the current conservative stars Ron Paul, his son, Rand Paul and financial luminaries like Alan Greenspan.
I thought that after years of not hearing about her, she had been forgotten, but I was wrong. The depth of her continuing influence was recently suggested by the surprising financial success of "Atlas Shrugged," a movie critics dismissed as a turgid, wordy mess. I'm pretty sure no one went to that film for the special effects, for the romance, the suspense or the drama.
In 1968 after securing an MBA, I was a loan officer trainee at a major midwest bank. Among my fellow trainees and the loan officers we worked for and among the intellectual set I sometimes rubbed up against after work, Ayn Rand was the hot guru: Krishna concsciousness had not yet made itself fully felt.
Intrigued by Any Rand's books and by expressions of admiration from my co-workers, I attended a few of her lectures. Rand was the perfect Republican "philosopher." She held that that the only legitimate functions of a government were maintaining armed forces to protect the nation, operating a police department and a court system. Anything else was unnecessary, and worse, a calculated infringement of one's god given rights to be left the hell alone. Of course, as an avowed athiest, Rand would never use the term, "god-given." She held that taxes levied to fund anything outside of the permissible three constituted outright robbery by the government and it was every thinking citizen's duty to vigorously defend themselves from theves. All of which dovetail perfectly with popular conservative doctrine.
I believe that unless you know where someone comes from (emotionally, intellectually or politically) any criticism of them will be wide of the mark because your own perspective is probably inadequate. To us, Communism is odeous, but if you lived in Russia under the Tzar, Communism would look wonderful. If you lived under Communism (as opposed to just reading about it) laissez-faire capitalism would look pretty good.
Ayn Rand escaped communist Russia in the 1920's. Being subject to the arbitrary imposition of absolute power in the pursuit of goals you didn't understand or share would make anyone paranoid about government control. In fact, her one really good book, We the Living, is a vivid picture of how scary life could be under the dictatorship of the proletariat. As an escapee from absolute control it was no suprise that she embraced its polar opposite - no control at all - as an ideal.
In Rand's view, once government control got started, "mission creep" was inevitable. Before long, faceless bureaucrats would have you by the throat. So, I can understand why she took the view that government should get off everyone's backs. She also rejected altruism as an ethical obligation. I'm pretty sure she viewed Social Security as government imposed altruism, and thus, evidence of a moral disease.
But, what most people who embrace Rand's philosophy don't know, is that as a student in Russia, she was heavily influenced by Neitsche. His influence is clearly evident in Rand's two famous novels, The Fountainhead and Atlas Shrugged. Her protagonists (each of which has a some great benefit to bestow upon an unappreciative society) are Nietszschien Supermen; brave, and by artistic necessity beautiful or handsome, ready (compelled instincitively) to go against the crowd and willing to nobly suffer for the principles they believe in. Those who oppose her heroes and heroines are clearly lesser men, allied with the loathsome, unthinking masses, and richly descrve the calamities ultimately meeted out to them.
In Atlas Shrugged the Superman/Innovators withdraw from society, denying the world the progress their untrammeled vision would otherwise bestow. Sequestered and inspired by the one person with the vision and courage to shelter and guide them, John Gault, they commune and learn from one another. In Gault's Valhalla, they grow and flourish, each in full appreciation of one another's contributions and special gifts, while the larger society collapses in confusion and anarchy, belatedly realizing that they have driven away the "engines" which kept them going.
In The Fountainhead, the architect protagonist, who, rather than compromise his vision, works for years as a stone quarry laborer, finally secures a desirable commission. But he blows up the nearly completed project because someone made changes to his design he could not endorse. He is arrested and tried, but of course, the jury acquits him (Rand, a succcessful screen writer and playright, crafted at least two jury thrillers before Fountainhead) because they recognize that as the creator, he was entitled to absolute control of his creation. By the way, Rand's faith in juries is entirely at odds with her scorn for "ordinary" people.
In Rand's view, the ideal society needs no regulation (remember, she's a laissez-faire capitalist). If everyone were left to their own devices, she argues, rational self interest would provide all the regulation and balance necessary. Amazingly, wide swaths of the "educated" public swallow this bullshit like fresh truffles in season. Thus, Rand seemingly provides intellectual depth the conservative's core values.
The Nietzchean undertone of Rand's "philosophy" gives her novels staying power. Readers are deeply moved by her heroes and heroines' romantic suffering and, more importantly, inspired by their ultimate triumphs. Once readers buy into her mythos, they are hooked, usually for life. But, just like the Force in "Star Wars," Nietzchean philosophy has a dark side. The Superman mythos inspried Nazi Germany. Swallowd whole, the myth can easily lead to disaster on a grand scale.
Romantic art is the anthises of the realistic. When Rand's noble protagonists fail, only they are harmed, and they bear their suffering nobly. Their failures don't drag down entire economies, but that was real laissez-faire capatilism can do. The economic melt down of 2008 was a perfect demonstration, but with an ugly twist Rand would never have contemplated.
The twist is, of course, that when our Innovator/Supermen make mistakes we bail them out because they are "too big to fail." Even worse, they get the keep the profits they made before the entire thing went into the toilet, while you and I pay for their mistakes. What's more, conservatives argue we shouldn't tax the "engines" of our economy, because they might pull a John Gault and decide not to endow us with more progress.
The conservatives (here, read the GOP) consistently pull off a magic trick: they convince hard working blue collar types that any hint of government control is the first step down the road to to totalitairian communism, including of course, seizure of guns. And of course, that road is paved with a progressive income tax. So those who can barely earn a living wage are willing to live in squalor and penury to have the chance that one day, they too will be Supermen and keep every penny they make, and further, pass it down to their children. Some philosophy!
I thought that after years of not hearing about her, she had been forgotten, but I was wrong. The depth of her continuing influence was recently suggested by the surprising financial success of "Atlas Shrugged," a movie critics dismissed as a turgid, wordy mess. I'm pretty sure no one went to that film for the special effects, for the romance, the suspense or the drama.
In 1968 after securing an MBA, I was a loan officer trainee at a major midwest bank. Among my fellow trainees and the loan officers we worked for and among the intellectual set I sometimes rubbed up against after work, Ayn Rand was the hot guru: Krishna concsciousness had not yet made itself fully felt.
Intrigued by Any Rand's books and by expressions of admiration from my co-workers, I attended a few of her lectures. Rand was the perfect Republican "philosopher." She held that that the only legitimate functions of a government were maintaining armed forces to protect the nation, operating a police department and a court system. Anything else was unnecessary, and worse, a calculated infringement of one's god given rights to be left the hell alone. Of course, as an avowed athiest, Rand would never use the term, "god-given." She held that taxes levied to fund anything outside of the permissible three constituted outright robbery by the government and it was every thinking citizen's duty to vigorously defend themselves from theves. All of which dovetail perfectly with popular conservative doctrine.
I believe that unless you know where someone comes from (emotionally, intellectually or politically) any criticism of them will be wide of the mark because your own perspective is probably inadequate. To us, Communism is odeous, but if you lived in Russia under the Tzar, Communism would look wonderful. If you lived under Communism (as opposed to just reading about it) laissez-faire capitalism would look pretty good.
Ayn Rand escaped communist Russia in the 1920's. Being subject to the arbitrary imposition of absolute power in the pursuit of goals you didn't understand or share would make anyone paranoid about government control. In fact, her one really good book, We the Living, is a vivid picture of how scary life could be under the dictatorship of the proletariat. As an escapee from absolute control it was no suprise that she embraced its polar opposite - no control at all - as an ideal.
In Rand's view, once government control got started, "mission creep" was inevitable. Before long, faceless bureaucrats would have you by the throat. So, I can understand why she took the view that government should get off everyone's backs. She also rejected altruism as an ethical obligation. I'm pretty sure she viewed Social Security as government imposed altruism, and thus, evidence of a moral disease.
But, what most people who embrace Rand's philosophy don't know, is that as a student in Russia, she was heavily influenced by Neitsche. His influence is clearly evident in Rand's two famous novels, The Fountainhead and Atlas Shrugged. Her protagonists (each of which has a some great benefit to bestow upon an unappreciative society) are Nietszschien Supermen; brave, and by artistic necessity beautiful or handsome, ready (compelled instincitively) to go against the crowd and willing to nobly suffer for the principles they believe in. Those who oppose her heroes and heroines are clearly lesser men, allied with the loathsome, unthinking masses, and richly descrve the calamities ultimately meeted out to them.
In Atlas Shrugged the Superman/Innovators withdraw from society, denying the world the progress their untrammeled vision would otherwise bestow. Sequestered and inspired by the one person with the vision and courage to shelter and guide them, John Gault, they commune and learn from one another. In Gault's Valhalla, they grow and flourish, each in full appreciation of one another's contributions and special gifts, while the larger society collapses in confusion and anarchy, belatedly realizing that they have driven away the "engines" which kept them going.
In The Fountainhead, the architect protagonist, who, rather than compromise his vision, works for years as a stone quarry laborer, finally secures a desirable commission. But he blows up the nearly completed project because someone made changes to his design he could not endorse. He is arrested and tried, but of course, the jury acquits him (Rand, a succcessful screen writer and playright, crafted at least two jury thrillers before Fountainhead) because they recognize that as the creator, he was entitled to absolute control of his creation. By the way, Rand's faith in juries is entirely at odds with her scorn for "ordinary" people.
In Rand's view, the ideal society needs no regulation (remember, she's a laissez-faire capitalist). If everyone were left to their own devices, she argues, rational self interest would provide all the regulation and balance necessary. Amazingly, wide swaths of the "educated" public swallow this bullshit like fresh truffles in season. Thus, Rand seemingly provides intellectual depth the conservative's core values.
The Nietzchean undertone of Rand's "philosophy" gives her novels staying power. Readers are deeply moved by her heroes and heroines' romantic suffering and, more importantly, inspired by their ultimate triumphs. Once readers buy into her mythos, they are hooked, usually for life. But, just like the Force in "Star Wars," Nietzchean philosophy has a dark side. The Superman mythos inspried Nazi Germany. Swallowd whole, the myth can easily lead to disaster on a grand scale.
Romantic art is the anthises of the realistic. When Rand's noble protagonists fail, only they are harmed, and they bear their suffering nobly. Their failures don't drag down entire economies, but that was real laissez-faire capatilism can do. The economic melt down of 2008 was a perfect demonstration, but with an ugly twist Rand would never have contemplated.
The twist is, of course, that when our Innovator/Supermen make mistakes we bail them out because they are "too big to fail." Even worse, they get the keep the profits they made before the entire thing went into the toilet, while you and I pay for their mistakes. What's more, conservatives argue we shouldn't tax the "engines" of our economy, because they might pull a John Gault and decide not to endow us with more progress.
The conservatives (here, read the GOP) consistently pull off a magic trick: they convince hard working blue collar types that any hint of government control is the first step down the road to to totalitairian communism, including of course, seizure of guns. And of course, that road is paved with a progressive income tax. So those who can barely earn a living wage are willing to live in squalor and penury to have the chance that one day, they too will be Supermen and keep every penny they make, and further, pass it down to their children. Some philosophy!
Sunday, December 12, 2010
Tax Policy and the Environment.
Governments use taxes to advance diverse goals. Manipulating taxes can stimulate portions of the economy Congress wants to advance, or effectively shut down portions of the economy Congress wants to discourage. In an earlier post, I gave the example of Congress ending the long standing policy of allowing individuals to use real estate depreciation (a non-cash accounting technique) as a deduction against personal income, to reduce taxes. Congress (rightly) concluded that too much money was being directed into real estate and wanted to re-direct those funds.
Congress ineptly handled the change, and as a result, caused the collapse of the Savings and Loan industry, which cost billions of dollars to rectify. Thousands of individuals were also injured by being thrown out of work, or losing the value of the investments they made.
Now, pressed to reduce the deficit, Congress is considering ending the ability of homeowners to deduct mortgage insurance from their income before their tax liability is calculated. The deduction was long allowed to encourage home ownership. Clearly, such a change would discourage home ownership, but it would raise additional revenues.
Apparently, Congress has never considered tax policy as an aid to environmental protection, or to avoid the Government's having to step in when industry fails, as happened earlier this year with when BP's well in the Gulf of Mexico spewed millions of gallons of crude oil into what had, up to then, been a pristine ocean.
I propose that Congress should impose a tax of say, 15% of any revenue produced by such wells every year and hold that tax in a special fund. When the well is depleted, or effectively shut down and a decent interval has passed to stand as proof that the well does not leak, then the well owner should be allowed to withdraw the majority of that fund, and the remainder should revert to the government as a tax.
The oil company could show the fund on its books as an asset, and even borrow against it. If however, the well discharges oil into the environment, the fund could be tapped to pay for the costs of clean-up. A similar system could be imposed on any industry with long-term pollution potential, such as refineries, strip mines, and manufacturers which use toxic substances as an unavoidable part of their process. One example: I understand the metal for dry wall screws and certain other fasteners are hardened with arsenic.
By providing companies with an incentive to monitor their own long term environmental risk, they would be far more diligent than is now the case.
Just a suggestion. GYL
Congress ineptly handled the change, and as a result, caused the collapse of the Savings and Loan industry, which cost billions of dollars to rectify. Thousands of individuals were also injured by being thrown out of work, or losing the value of the investments they made.
Now, pressed to reduce the deficit, Congress is considering ending the ability of homeowners to deduct mortgage insurance from their income before their tax liability is calculated. The deduction was long allowed to encourage home ownership. Clearly, such a change would discourage home ownership, but it would raise additional revenues.
Apparently, Congress has never considered tax policy as an aid to environmental protection, or to avoid the Government's having to step in when industry fails, as happened earlier this year with when BP's well in the Gulf of Mexico spewed millions of gallons of crude oil into what had, up to then, been a pristine ocean.
I propose that Congress should impose a tax of say, 15% of any revenue produced by such wells every year and hold that tax in a special fund. When the well is depleted, or effectively shut down and a decent interval has passed to stand as proof that the well does not leak, then the well owner should be allowed to withdraw the majority of that fund, and the remainder should revert to the government as a tax.
The oil company could show the fund on its books as an asset, and even borrow against it. If however, the well discharges oil into the environment, the fund could be tapped to pay for the costs of clean-up. A similar system could be imposed on any industry with long-term pollution potential, such as refineries, strip mines, and manufacturers which use toxic substances as an unavoidable part of their process. One example: I understand the metal for dry wall screws and certain other fasteners are hardened with arsenic.
By providing companies with an incentive to monitor their own long term environmental risk, they would be far more diligent than is now the case.
Just a suggestion. GYL
Sunday, February 7, 2010
The Mortgage Debacle, Part 2
In my first post, I discussed the current real estate collapse and its predecessor in the late 1980s. This post will add some background and venture into commentary. Just to review, the real estate market collapse in the mid 80s was directly attributable to Washington’s implementing two policy goals: first, to redirect investors away from real estate, and second, to end persistent inflation. The tool Congress used was a radical change in tax laws which upset two generations of precedent.
Congress’ goals were rational and well-intentioned, but their methodology was flawed. Had Congress applied changes in the tax laws to new real estate projects only, the market would have gradually adjusted. Instead, Congress’ wholesale revision of fundamental tax structure quickly destroyed the wealth of thousands of taxpayers who, following long established rules, had been investing in real estate "tax shelters." They could do so because S&Ls made the loans that made that possible.
When prices began to fall, the collateral supporting the S&Ls' loans disappeared, and when loans went bad, the properties couldn’t be sold for enough to pay off the debts. At the same time, the Federal Reserve Bank set interest as high as 16% and private money was available only at rates exceeding 18% at the peak. Bank and S&L portfolios couldn’t earn enough money to pay depositors, and the banks bled money until credit became unavailable. Everyone went broke, which does indeed discourage taxpayers from investing in real estate.
Congress successfully blamed the S& L debacle on "greedy" and "incompetent" S&L operators. There were indeed some badly run S&Ls owned by greedy operators, but the underling cause of the disaster was Congress’ good idea.
So, we can chalk up that debacle to the inability of Congress think through a complex problem, or to anticipate what the effect of the changes they put in place would be.
The disaster we are living through now was only partly created by Congress: the rest was caused by greedy, opportunistic individuals. Congress decided, in accordance with fundamental precepts of the Republican party, that federal regulations were holding back the true profit potential of the individuals who made generous political donations to the senators and congressmen. And if de-regulating airlines was good, de-regulating banks and financial institutions such as investment banks was even better, because the people who ran that fun-house were the best and the brightest. Free-market dogma holds that such institutions will be "self -regulating".
People were offered, and took, loans they knew they could never hope to repay without selling the property, but since property prices were shooting up like fireworks, they figured that if they didn’t get on the band wagon, they’d be left behind.
The comedian Lewis Black describes Democrats as the party of no ideas and Republicans as the party of bad ideas, and warns us that when Democrats and Republicans agree on something, that's when we're in real trouble. He’s absolutely right.
Before "deregulation," banks kept the loans they made and worked with their borrowers if they ran into trouble. But the new methodology was for banks to make loans and sell them in bundles as investments, so they can get more money to make more loans. Banks began looking to the origination fees as their principal source of profit, not the long term collection of well made loans. When they focused on the short term profits they set an inevitable train wreck in motion and no one in Congress noticed.
What Congress failed to consider was that "the people" would get the wind of real estate profits in their sails, and would conclude that prices would always go up. Only suckers didn’t risk buying houses they couldn’t really afford, because before the loans came due, or before the interest rates went up, everyone could sell at a profit and pay off those goofy loans.
And, when the excrement hit the fan, we were told that the banks were "too big to fail" and we the people had to save them with money we didn’t yet have (government deficits). So the bankers got to keep their bonuses and everyone else got to pay to make that possible.
What happened is we privatized profits and socialized risks, and nobody will ever be held to account for the debacle. The public voted the Republicans out and now criticize the Democrats for not being able to quickly fix the problem. If the American public had any real self interest we would have voted every sitting representative and senator out of office and started fresh. Just who’s crazy?
Congress’ goals were rational and well-intentioned, but their methodology was flawed. Had Congress applied changes in the tax laws to new real estate projects only, the market would have gradually adjusted. Instead, Congress’ wholesale revision of fundamental tax structure quickly destroyed the wealth of thousands of taxpayers who, following long established rules, had been investing in real estate "tax shelters." They could do so because S&Ls made the loans that made that possible.
When prices began to fall, the collateral supporting the S&Ls' loans disappeared, and when loans went bad, the properties couldn’t be sold for enough to pay off the debts. At the same time, the Federal Reserve Bank set interest as high as 16% and private money was available only at rates exceeding 18% at the peak. Bank and S&L portfolios couldn’t earn enough money to pay depositors, and the banks bled money until credit became unavailable. Everyone went broke, which does indeed discourage taxpayers from investing in real estate.
Congress successfully blamed the S& L debacle on "greedy" and "incompetent" S&L operators. There were indeed some badly run S&Ls owned by greedy operators, but the underling cause of the disaster was Congress’ good idea.
So, we can chalk up that debacle to the inability of Congress think through a complex problem, or to anticipate what the effect of the changes they put in place would be.
The disaster we are living through now was only partly created by Congress: the rest was caused by greedy, opportunistic individuals. Congress decided, in accordance with fundamental precepts of the Republican party, that federal regulations were holding back the true profit potential of the individuals who made generous political donations to the senators and congressmen. And if de-regulating airlines was good, de-regulating banks and financial institutions such as investment banks was even better, because the people who ran that fun-house were the best and the brightest. Free-market dogma holds that such institutions will be "self -regulating".
People were offered, and took, loans they knew they could never hope to repay without selling the property, but since property prices were shooting up like fireworks, they figured that if they didn’t get on the band wagon, they’d be left behind.
The comedian Lewis Black describes Democrats as the party of no ideas and Republicans as the party of bad ideas, and warns us that when Democrats and Republicans agree on something, that's when we're in real trouble. He’s absolutely right.
Before "deregulation," banks kept the loans they made and worked with their borrowers if they ran into trouble. But the new methodology was for banks to make loans and sell them in bundles as investments, so they can get more money to make more loans. Banks began looking to the origination fees as their principal source of profit, not the long term collection of well made loans. When they focused on the short term profits they set an inevitable train wreck in motion and no one in Congress noticed.
What Congress failed to consider was that "the people" would get the wind of real estate profits in their sails, and would conclude that prices would always go up. Only suckers didn’t risk buying houses they couldn’t really afford, because before the loans came due, or before the interest rates went up, everyone could sell at a profit and pay off those goofy loans.
And, when the excrement hit the fan, we were told that the banks were "too big to fail" and we the people had to save them with money we didn’t yet have (government deficits). So the bankers got to keep their bonuses and everyone else got to pay to make that possible.
What happened is we privatized profits and socialized risks, and nobody will ever be held to account for the debacle. The public voted the Republicans out and now criticize the Democrats for not being able to quickly fix the problem. If the American public had any real self interest we would have voted every sitting representative and senator out of office and started fresh. Just who’s crazy?
Thursday, January 14, 2010
Some Thoughts About the Current Mortgage Foreclosure Glut
Home foreclosures are being filed at a record pace here in Chicago and around the Country. A wave of commercial foreclosures will be arriving soon. An underlying problem is that the overall real estate values have fallen to the point that properties are worth less, in many cases, than the loans against them -- in everyday terms, the loans are "under water".
The last time this happened was in the late 1980's. You may remember the "S&L Debacle". Then, Savings and Loans (specialized banks set up to make home mortgages), failed at an alarming rate. Congress and the press attributed the catastrophy to greedy, inept S&L owners. There were some greedy, inept S&L operators, to be sure, but actually, two miscalculations by the federal government were the real cause of the disaster. First, in 1986, the IRS ended the practice of allowing tax payers to deduct real estate depreciation from their personal income tax returns. For years, the real estate business grew like wildfire as promoters designed "tax shelters" -- real estate projects structured to maximize investor's tax benefits. There were other tax shelters, too, like investing in movies, but the economic impact of those was microscopic compared to real estate.
When congress ended real estate depreciation deductions, they didn't do so only for new projects, they applied the change retroactively, so that taxpayers who invested in shelter deals in prior years lost the benefits immediately.
At the same time, Congress decided to "Whip Inflation Now" (the "WIN" incentive). To do that, they pushed interest rates up so that people would not be tempted to invest in new business ventures, including real estate projects, with borrowed money. The unintended effect was to place banks and S&L's in a situation where they had to pay 16 - 20% and more to attract deposits -- which they needed to support loans already outstanding, while carrying loans they made when interest rates were much lower. Banks and S&L's hemoraged money until they had none left.
With no money to lend to those who might want to buy real estate and with the value of the real estate falling each day, so many banks and S&L's failed that the government set up the Resolution Trust Company, a government agency to take over failed financial institutions. It took years for the real estate market to recover.
Then, in the late 1990's Congress struck again, along with a weird social movement. First, Congress decided that it was every American's inalienable right to own a home. Then, Congress de-regulated the Banks.
People began buying homes, not just to have a place to live, but so they could "flip" them and make a profit. In fairly short order, individuals who a few years earlier couldn't qualify to finance a used car were signing "no documentation" loans and buying homes they couldn't possibly afford. Loans with low initial interest rates flooded the market, encouraging individuals to buy bigger and bigger homes and sell them before interest rates adjusted upward.
Stories began to circulate about the fabulous money otherwise marginal individuals could make, and "flipping" became a social movement. Churches assured parishioners that Jesus wanted everyone to be wealthy. Real estate investing became a mania. It was like musical chairs with money.
When the music stopped, lots of people couldn't find seats. When the value of real estate stopped climbing, the whole house of cards collapsed. Now, as the economy continues to contract, real estate values shrink further and further and those who can't service their loans through income, face the loss of everything they once had.
Next: What to do now?
The last time this happened was in the late 1980's. You may remember the "S&L Debacle". Then, Savings and Loans (specialized banks set up to make home mortgages), failed at an alarming rate. Congress and the press attributed the catastrophy to greedy, inept S&L owners. There were some greedy, inept S&L operators, to be sure, but actually, two miscalculations by the federal government were the real cause of the disaster. First, in 1986, the IRS ended the practice of allowing tax payers to deduct real estate depreciation from their personal income tax returns. For years, the real estate business grew like wildfire as promoters designed "tax shelters" -- real estate projects structured to maximize investor's tax benefits. There were other tax shelters, too, like investing in movies, but the economic impact of those was microscopic compared to real estate.
When congress ended real estate depreciation deductions, they didn't do so only for new projects, they applied the change retroactively, so that taxpayers who invested in shelter deals in prior years lost the benefits immediately.
At the same time, Congress decided to "Whip Inflation Now" (the "WIN" incentive). To do that, they pushed interest rates up so that people would not be tempted to invest in new business ventures, including real estate projects, with borrowed money. The unintended effect was to place banks and S&L's in a situation where they had to pay 16 - 20% and more to attract deposits -- which they needed to support loans already outstanding, while carrying loans they made when interest rates were much lower. Banks and S&L's hemoraged money until they had none left.
With no money to lend to those who might want to buy real estate and with the value of the real estate falling each day, so many banks and S&L's failed that the government set up the Resolution Trust Company, a government agency to take over failed financial institutions. It took years for the real estate market to recover.
Then, in the late 1990's Congress struck again, along with a weird social movement. First, Congress decided that it was every American's inalienable right to own a home. Then, Congress de-regulated the Banks.
People began buying homes, not just to have a place to live, but so they could "flip" them and make a profit. In fairly short order, individuals who a few years earlier couldn't qualify to finance a used car were signing "no documentation" loans and buying homes they couldn't possibly afford. Loans with low initial interest rates flooded the market, encouraging individuals to buy bigger and bigger homes and sell them before interest rates adjusted upward.
Stories began to circulate about the fabulous money otherwise marginal individuals could make, and "flipping" became a social movement. Churches assured parishioners that Jesus wanted everyone to be wealthy. Real estate investing became a mania. It was like musical chairs with money.
When the music stopped, lots of people couldn't find seats. When the value of real estate stopped climbing, the whole house of cards collapsed. Now, as the economy continues to contract, real estate values shrink further and further and those who can't service their loans through income, face the loss of everything they once had.
Next: What to do now?
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