Saturday, November 27, 2010

Great Minds Think Alike

I am constantly disappointed to find that what I thought were my own original ideas have already been deeply explored by other, far more expert, minds. If the experience were not so frequent, I might even be surprised. Oh, well... if I am not being original, I can take solace that at least I am on the right track.

In the linked paper below, Dean Baker, co-Director of the progressive think-tank Center for Economic and Policy Research in Washington, DC., discusses the concept of a Financial Transaction Tax (FTT), an idea I had been mulling over since the first causes of the Great Financial Meltdown of 2008 began coming to light. I must have not been paying attention at the time, but apparently there was even some consideration given to doing just that in policy circles around the globe, as recently as November 2009. It was short-lived, apparently beaten back by the special interest lobbyists on the payroll of Goldman Sachs, JP Morgan et al, at least for the time being. I am hopeful the idea will be resurrected soon, perhaps once we begin once again tackling comprehensive tax reform?

An FTT is essentially a sales tax on financial asset transactions. The idea is to impose a very small tax on trades of [virtually all] types of financial instruments - stocks, bonds, mortgage- & other asset-backed securities, mutual funds, exchange-traded funds (ETFs) & notes (ETNs), commodity-/currency-/index-contracts, options, futures, forwards, interest rate swaps, credit default swaps and all the other kinds of derivatives & other infinite varieties of complex Wall Street financial instruments - for a number of potentially useful reasons:
  1. To discourage the kinds of excessive and socially useless speculation that resulted in the recent cases of "irrational exuberance" in various markets (e.g., the tech stock bubble of the late '90s ~ early '00s; the housing bubble of the mid '00s), which, in turn, ended in burst asset bubbles that nearly caused the collapse of the global financial system, which, in turn, exacerbated the Great Recession of 2007-09, generated severe unemployment & continues to threaten deflation;
  2. To broaden and deepen the tax base and thereby (arguably) increase "fairness" of the distribution of the overall tax burden;
  3. To provide additional sources of revenues to the government to reduce deficits & the national debt, and/or to provide funding for a kind of social insurance program to protect from the impacts of potential future dislocations from speculative asset bubble bursts.
[Not to mention that there is a certain sense of sweet, ironic justice to imposing such a tax on the sector that is largely responsible for our current difficult state of affairs... especially one that benefited so greatly from government's willingness to use public funds to stave off their self-induced imminent demise.]

FTTs are not a new idea. As Baker writes:
There has been a long historical experience with FTTs in both the United States and around the
world. Substantial transactions taxes were imposed in most financial markets until the last two decades, when political pressure from the financial sector, coupled with the threat from increased global competition, led most countries to substantially reduce or eliminate their taxes {my emphasis added}. Nonetheless, many taxes still remain in place, most notably the 0.5 percent stamp tax imposed on each trade on the London stock exchange. This tax raises more 4 billion pounds annually, the equivalent of almost $40 billion in the U.S. economy.
Somehow, despite The Who's anthemic assurance that "We Won't Get Fooled Again", the financial industry pulled the wool over our leader's eyes - no doubt through a toxic combination of unsubstantiated fear-mongering assertions about the loss of global competitiveness and a steady, mountainous stream of campaign contributions. When will we learn?

Of, course, I don't pretend that there are not problems to overcome with this basic idea, nor that such a tax is sufficient, on its own, to address all of the issues that lay at the root of our current economic mess.
But, it's a start.

financial-transactions-tax-2008-12.pdf (application/pdf Object): "- Sent using Google Toolbar"

Baker's paper highlights a number of areas that require aggressive research:

1. As Baker notes, whether an FTT is efficiency-enhancing is arguable. Mark Thoma, in his Economist's View blog posting of Sept. 2, 2009, sums it up succinctly:
The efficiency properties of the tax depend upon how speculation is viewed. If you believe speculation is efficiency enhancing, and it can be, then reducing speculation would reduce rather than increase efficiency. But if you believe speculation is destabilizing, and it can be this too, then reducing speculation would be beneficial. I am not as negative toward speculation as many, and believe that while it can be both good and bad from a market efficiency perspective, on net, it does good. A general tax would reduce both the good and bad types of speculation, so it is not clear to me that this would be beneficial. I would prefer a mechanism that targets that bad speculation, but leaves the good type alone, but since it is difficult to tell the two apart, even ex-post, it is not practical to levy a tax on just the bad transactions while giving the good ones a free pass.
Hmmm... cause for pause, but hardly rigorous or convincing research. I would like to see something more thorough than a couple of sentences of gut-level thought experiments before conceding on the premise.


Reforming Corporate Taxation in a Global Economy: A Proposal to Adopt Formulary Apportionment - Brookings Institution

I think this makes sense:

Reforming Corporate Taxation in a Global Economy: A Proposal to Adopt Formulary Apportionment - Brookings Institution

Tuesday, November 23, 2010

A Suggested Reading List

A friend of mine, who wanted to debate the "fairness" of a flat (Proportional) tax proposal, was surprised to hear me cite Adam Smith as to why an overall progressive income tax structure was "fair". He asked me to send him links to various economists & moral philosophers, which I did (drowning him in a deluge of fully commented suggestions, including some names who I believe to be ultimately flawed).

Thinking about it sometime later, I started pasting together a more organized, ordered list. Here it is:

Leviathan Thomas Hobbes
Two Treatises on Government John Locke
The Social Contract Jean-Jacques Rousseau
Treatise of Human Nature David Hume
An Inquiry into the Nature and Causes of the Wealth of Nations Adam Smith
A Treatise on Political Economy Jean-Baptiste Say
Principles of Political Economy and Taxation David Ricardo
Principles of Political Economy John Stuart Mill
Elements of Pure Economics Leon Walras
Capital: A Critique of Political Economy Karl Marx
The Protestant Ethic and Spirit of Capitalism Max Weber
The Division of Labor in Society Emile Durkheim
Money, Credit and Commerce 
The Debt Deflation Theory of Great Depressions

Alfred Marshall
 Irving Fisher

The Theory of Credit and Money Ludwig von Mises
The General Theory of Employment, Interest and Money John Maynard Keynes
The Road to Serfdom Friedrich A. Hayek
Human Action: A Treatise on Economics Ludwig von Mises
Capitalism, Socialism and Democracy Joseph A. Schumpeter
The Economics of Information George J. Stigler
The New Industrial State John Kenneth Galbraith
The Affluent State John Kenneth Galbraith
A Theory of Justice John Rawls
Capitalism and Freedom Milton Friedman
The Conscience of a Liberal Paul Krugman
Stabilizing An Unstable Economy Hyman Minsky
Debunking Economics Steve Keen
Crisis Economics Nouriel Roubini
Irrational Exuberance Robert J. Shiller
Freefall Joseph E. Stiglitz
The Predator State James K. Galbraith
Animal Spirits George A. Akerloff
Predictably Irrational Dan Ariely
Neuroeconomics Ernst Fehr
The Conservative Nanny State Dean Baker
Fault Lines Raguram G. Rajan
ECONned Yves Smith

There are, of course, others that I would include on a fuller list.  What others would you include?  Suggestions welcome.

Thursday, November 18, 2010

Unequal countries did worst – some stats on inequality and economic performance « Real-World Economics Review Blog

I have been wondering about the correlation - if there is any (and I believe there is!) - between macroeconomic performance and wealth/income inequality. My theorem is that high and increasing levels of inequality lead to economic difficulties and eventually Minsky moment instabilities - asset bubbles, for instance.

Recently, I stumbled across some empirical evidence that I am on to something:

Unequal countries did worst – some stats on inequality and economic performance « Real-World Economics Review Blog: "Unequal countries did worst – some stats on inequality and economic performance
October 4, 2010 merijnknibbe

from Merijn Knibbe

Do western countries with an unequal distribution of income do better, economically?

One might think so when he or she listens to neo-classical economists. Welfare has to be cut, shareholder value has to increase, and managers should get more power to sack employees.

But what do the statistics tell us? Are these economists right? Well, they do have something to explain. Below, I have lumped (in a quick and dirty way) some western countries together in regional groups. As inter group variability is low (except for unemployment in Spain and Belgium), the ‘quick and dirty way’ is acceptable when we compare different groups. It can be argued that of these countries the most Anglo-Saxon ones, the United States and Great-Britain, at least tried to be the most neo-liberal ones. And they do not do well. The next questions can be asked:

1. Were Anglo-Saxon countries more unequal? Yes they were. Also, according to the LIS Gini indices, inequality increased fastest in these countries after about 1980.

Table 1. Gini indices, LIS data, latest figure.

Anglo-Saxon 0.37

European offshoots 0.32

Northern Europe 0.27

Southern Europe 0.31

2. Did high and increasing inequality lead to a more efficient economy, characterized by a positive current account? No, it did not. Especially countries with relatively low inequality had positive current accounts.

Table 2. Current account, % of GDP

Anglo-Saxon - 2.9

European offshoots – 2.8

Northern Europe + 5.2

Southern Europe – 3.2

3. Neo-liberal theory emphasizes low budget deficits. Did unequal countries have a low budget deficit? The opposite was the case!

Table 3. Government deficit, % of GDP

Anglo-Saxon – 9.2

European offshoots - 3.9

Northern Europe – 3.6

Southern Europe – 7.6

4. Neo-classical theory emphasizes flexible labor markets which increase productivity: the right man or woman on the right job. Did this have happened? Yes, on one hand it might: Total Factor Productivity increased fast. When we look at (un)employment there however seems to be a somewhat one sided flexibility: out: yes, in again: no. Remember also that neither the USA or Great Britain have, at the moment, any kind of ‘super productivity’ which is clearly higher than that of any of the other countries.

Table 4. Growth of factor productivity, compound growth rate, 1995-1997

Anglo-Saxon 1.4

European offshoots 0.9

Northern Europe 1.1

Southern Europe 0.3

5. Neo-liberal ideas emphasize a win-win situation: productivity growth leads to increased production and employment. Did this happen? No, it did not. In fact: historically the most remarkable phenomenon of the 2000 – 2010 period. Indeed, somewhat longer than the data from the tabel is the dismal growth of jobs in the USA (compared with other countries as well as other periods in the USA post 1939 history). An absolutely alarming fact.

Table 5. Total employment growth, 2000 – 2009 (%)

Anglo-Saxon 0.1

European offshoots 16.0

Northern Europe 6.2

Southern Europe 11.2

6. Did low growth of jobs lead to high unemployment? Demographics or a changing culture can lead to a low growth of the labor force. Might this be a reason for a low increase in employment? No, it is not. Unemployment has increased, there is plenty of labor, surely when we add ‘discouraged’ workers to unemployment. Remarkably, southern European countries had a high increase in employment and have, despite this high unemployment. Fortunately, productivity did not increase too much, which meant that many more people could be employed in these countries!

Table 6. Unemployment rates

Anglo-Saxon 9.3

European offshoots 7.1

Northern Europe 7.0

Southern Europe 12.1

Summarized: it seems that countries like the USA and the U.K. have embarked upon a path of intensive growth, where more extensive growth still is needed. In this perspective, neo-liberal ideology (and its economic counterpart: neo classical economics) might overrate the economies of ‘The west’. Also, the ‘neo-liberal’ experiment does not seem to be very downturn proof. Also, it might literally pay off to regard labor as a valuable resource again, instead of as a disposable factor of production.

Sources: Current account, government deficit en unemployment: latest data according to The Economist, Gini index latest data according to the Luxemburg Income Study, Productivity growth according to the OESO, employment growth according to OESO, CBS, Eurostat.

Anglo Saxon: Great Britain, USA. European offshoots: Canada, Australia. Northern Europe: Germany, Netherlands, Belgium, Sweden, Norway, Austria, Denmark. Southern Europe: France, Italy, Spain, Greece

Things make you go "Hmmm..."

Monday, November 15, 2010

Economist's View: Why No Financial Transactions Tax?

Economist's View: Why No Financial Transactions Tax?:
Saturday, November 13, 2010

Why wasn't a financial transaction tax part of the Bowles-Simpson deficit reduction proposal?

It would raise substantial revenue and has desirable properties in terms of cooling speculative money flows.

I guess the problem is that the tax falls largely on the wrong people -- those who can afford to pay it.

Posted by Mark Thoma on Saturday, November 13, 2010 at 09:09 AM in Budget Deficit, Economics, Politics
Comments (52)

Reply Saturday, November 13, 2010 at 10:20 PM
don said...

If (as I suspect), the effect on quantity of transactions would be large, the standard economic analysis would indicate that it would have a bigger welfare deadweight loss attached to it than most other taxes.

To offset this, one could argue that the financial transactions are somehow 'evil,' that those who 'trade' add less to society than those who 'invest.' This may have some validity when the trading is pernicious, but I am unconvinced that this describes more than a minimum of transactions. For example, the recent oil price 'speculative' bubble can be seen as a reasonable guess that the future value of oil would be much greater than the present and that we should conserve more now (so prices should change to encourage such behavior).

Speculators win when they are right, in which case they reduce price swings and produce a more efficient outcome for society. If they exacerbate price swings, they lose along with society. I see no need to throw sand in the market mechanism that brings these results. If you say rank speculation helped bring us the financial crisis, I would counter that the crisis was the result of other forces that created huge imbalances, and that speculators brought it to a head more quickly than would otherwise have occurred.

Reply Saturday, November 13, 2010 at 05:17 PM
johnchx said in reply to don...

Don wrote: the standard economic analysis would indicate that it would have a bigger welfare deadweight loss attached to it than most other taxes.

No, the analysis you're thinking of applies to taxes which reduce the output of the taxed good or service. Asset swaps -- such as the exchange of cash for financial instruments -- are not analogous to the purchase of real goods and services. The volume of asset-swap transactions is not a measure of the quantity of goods and services created. So a transaction tax could lead to a drastic reduction in trading volume with minimal loss of welfare.

Reply Sunday, November 14, 2010 at 01:33 AM
don said in reply to johnchx...

? I take the production decline to be the reduction in financial services provided to effect the transactions, including commissions, book keeping costs, etc. The net profits and losses to the traders from asset price changes cancel each other, so they should never be confounded with the social benefit provided by speculative trading ...

While I'm at it, the IRS treats speculation more harshly than other income producing activities. For example, capital gains from futures transactions are marked to market for gains, whereas losses cannot be recognized against most other income, such as interest income. Thus, there is a net taxation of the capital gains from speculative activity, even though the net gains are zero (futures trading losses cannot be netted against most other income, such as interest income). This already discourages futures speculation relative to other income producing activities. It's as if the IRS agrees with those who think 'investing' is a superior social activity to 'trading' (on some quasi-religious grounds not clear to me).

Reply Sunday, November 14, 2010 at 08:18 AM
Bozat said in reply to don...

johnchx gets it right, don wrong.
Applying std econ analysis
to assert welfare deadweight loss,
inappropriate here.

[Nevermind std econ analysis
flawed anyway
re: rational actors,
perfect & symmetric information,
Minsky, Stiglitz,
Akerloff, Fehr,
Loewenstein, Baker,
Galbraith, Ariely
unclog their noses
in Don's general direction.]

Maybe not 'evil', but
to extent 'trading' = speculation
(as opposed to 'investing' or even hedging);
certainly doesn't contribute
to productive output.

'When trading is pernicious... unconvinced'???
With support offered equal
to that offered for your view
(to wit, none... at least so far),
I say systemically calamitous
and positively persuaded.

Ballooning trading volumes,
ballooning weight of Fin sector
in S&P 500 index,
ballooning derivatives'
(CD swaps & otherwise)
notional values greater than
real global GDP,
too many clown-crafted
balloon animals to cite...
particularly while
real economy sputters
and median household income suffers
and income/wealth inequality concentrates
[Gilded Age blossoms again... Huzzah!].
Suggest checking your dictionary again
for definition of 'pernicious'.

'Speculators win when they are right'...
or just plain lucky.
But 'reduce price swings'?
Interesting how VIX correlates
to bubble growth & bursts
and ensuing recessions.
Efficient outcome for society is
explosively carbonated fluid dynamics?

'If they exacerbate price swings,
they lose along with society.'
Unless of course they exit
the trade before the bubble pops,
and the greater fool - society -
is left holding the bag.

'Trading' is a net zero sum game?
Ready, set, debate:
Most evidence suggests it is,
some suggests sub-zero.
Hard to find empirical
(or even logical)
evidence it is above-zero.
Open-minded to proof otherwise,
just don't see it yet.

'... the crisis was the result
of other forces
that created huge imbalances...'
Including 'rank speculation'
or exclusive of such?
Can't tell which is your view?
The latter is pure turd-polishing.

What 'other forces' and why
are these alone culpable?

When speculators all make
the same mistake(s)
in the same direction,
they don't just
'bring it to a head more quickly',
but rather exacerbate it
[the crisis]

Who says speculative bets
are nicely normal distributed
around a Pareto optimal
equilibrium price?
Behavioral econ suggests otherwise.

And why is
'bringing it to a head
more quickly'
an efficient, socially utile
macro result?

Allowing air to escape
from bubbles
more slowly, not faster,
seems more socially utile
than increasingly frequent
and increasingly precipitous
chaotic concussions
of irrational exuberance.

Markets fail
and fail to self-correct.
Sand in gears not full answer,
but better than
c'est la vie, c'est la guerre.

Especially considering
cost/benefit equation.

Agree that unintended consequences
need to be factored
and properly structured around.
But, so far, the only
secondary/tertiary effects
raised to date
have been from parochial self-interests
wringing their hands
over the fate of their
dubious business models.

Reply Sunday, November 14, 2010 at 06:58 AM
don said...

The coloring of speculation as somehow 'evil' relative to good christian 'investing' reminds me of nothing so much as the ignorance Alexander Hamilton had to battle in the debate over establishing a 'modern' system of banking and financial markets. In one notable episode, Jefferson and others wanted to deny the profits to speculators who had bought up Continental script from the soldiers who were paid with it during the Revolutionary War. When the new government honored the script, its value soared. I suppose there are a good number of people visiting this board who would have agreed with Jefferson. I fear the result if they ever start to get their way.

My view - a special tax on speculation will do little more than give markets a case of arthritis, causing them to lurch from one equilibrium to the next with discrete movements after pressures build up sufficiently to overcome the tax. Sort of like friction that prevents movement of the earth's crust until pressure build up sufficiently for an an earthquake.

Reply Sunday, November 14, 2010 at 08:44 AM
Bozat said in reply to don...

Nice piece of history,
will have to read for myself.
Thanks for interesting anecdote.

Don't, however, mistake anecdotes
for evidence.

If proposed FTT rate(s)
were sufficiently high
your view might have
(some) merit.

If, say, they were
so high as to bring
trading volumes to
screeching halt.

But, as presently proposed,
they are not.
Most analyses I've seen
suggest return to
pre-dot com bubble levels.
Don't recall seeing threat
of systemic melt down then.

More like impedance circuit
than tectonic friction.

Heat given off by such an
'impedance' tax
might generate $70B/year;
would help provide resources
for recovery and/or resolution authority,
which is needed given tough
fiscal/political constraints
government faces now.

Especially if deliberately reserved
exclusively for such purposes.

Speculation not 'evil',
just socially non-utile, at best.
Investment IS socially utile
(raises capacity for productive output),
hedging less so
(neutral to marginal positive),
but not objectionable.
Speculation can/does distort
real capital formation,
and offers nothing for
the common weal.

Not 'evil', per se,
but clearly not 'good' either
from a social perspective.

has nothing to do with it.
Stop proffering the red herring.
Like pagan sacrifice of same name,
your straw man is already in ashes.

Reply Sunday, November 14, 2010 at 12:22 PM
don said...

'Heat given off by such an
'impedance' tax
might generate $70B/year;
would help provide resources
for recovery and/or resolution authority,'

Agreed. But I think there are more efficent ways to do this. In particular, requiring insurance payments for implicit insurance now received by the TBTF's.

'Speculation not 'evil',
just socially non-utile, at best.'

Here, we disagree strongly. The classic arguments on this issue were made by Milton F in the context of currency markets. The arguments cross over nicely to most financial markets, and almost certainly to large commodity markets such as oil.

Reply Sunday, November 14, 2010 at 05:03 PM
Bozat said in reply to don...

Glad we agree on something. ;@)

TBTF institutions' assessments
fine idea IMHO,
'tho why we allow TBTF
in the first place
is Bizzarro world logic.

Expand anti-trust
to include systemic risk,
not just monopoly/anti-competition et seq...
Volcker Rule appropriate, too,
tho it seems destined
to be emasculated
by Spencer Bachus
and/or gamed by TBTF institutions.

Haven't seen numbers...
How much would/will
such additional assessments
generate in receipts to fund
resolution authority?

Is it enough
(frankly, would $70B+ from FTT be enough)?

Comparative efficiency analysis
would be nice, too.
Curiouser and curiouser!

Yes, we do disagree strongly
re: social utility of pure speculation.

I don't dispute
price stabilizing function.
Just see crowd behavior
& positive feedback loops
creating ever larger
bubbles, bubbles everywhere
more rapidly & frequently.

Last one triggered
10+% peak unemployment
and 18% underemployment
and massive bailout
and risk of deflation
and so on and so forth.

At the end of the day,
net net,
scales tilt towards
social non-utility.

Anyone done
an inter-temporal,
infinite horizon
study that calcs
and compares
the NPVs?

Til then,
I will remain skeptical...
open to being persuaded,
but classical arguments
fall short (so far).

I love Uncle Miltie!
Slept with 'Free To Choose'
under my pillow
as a young man.
Then I grew up.

Problem is, MMT
- like classical, neo-classical,
neo-liberal, et al schools -
suffers from faulty first principles:
Assumes perfectly rational actors
and symmetric information,
among other things.

Behavioral econ refutes the first,
Information econ refutes the second.
Where's that leave Uncle Miltie?

Not wrong, at least completely.
But not entirely right, either.
MMT works within limits,
but can burp wildly at the extremes.

Above the entrance
to the temple of Phoebus Appollo
at the Oracle of Delphi
was inscribed:
μηδέν άγαν (mēdén ágan = 'nothing in excess').
True then, true now.

A minuscule FTT
is an attempt to set
a reasonable limit.

The goal is not
to sound the death knell
for speculative trading.
Witness the LSE's stamp duty:
Trading not dead in London.

Finally, I'm not dead set
in favor of an FTT.
Just more in favor of such
than I am
of classical econ logic.

Reply Sunday, November 14, 2010 at 08:39 PM
derangedlemur said in reply to don...

Given that the swings in price caused by speculation are observably faster than the underlying produciton can react to, the theory you quote is plainly bollocks.

Reply Monday, November 15, 2010 at 07:23 AM
don said in reply to derangedlemur...

It is precisely the limits of production that give speculation its greatest potential social benefit.

The notion that speculation is destabilizing is highly suspect. It is possible, but it requires that the (weighted) sum of speculators must lose, which would make the endeavor a curious economic phenomenon.

Yes, I know that the vast majority of speculators (by number) who participate in the Chicago market lose on net - the answer must lie in the utility of wagering in a venue with much, much fairer odds than offered by Vegas. And no, I can't see the majority of these markets being gamed by insiders - certainly not currency markets or those of major commodities.

Bubbles don't require speculators. Our housing bubble could have appeared with only home owners making what they viewed as 'investments.' In fact, I doubt true speculation played much of a role in the housing market - those buying with intent to sell short term (flip). In the first place, the opportunities for taking naked short positions were lacking (I know - I was looking for them since in 2005, 2007 and 2007).

Reply Monday, November 15, 2010 at 09:43 AM
Bozat said in reply to don...

'Potential' social benefit
is not actual social benefit.
don speculates again
- clearly it's in his make-up -
apparently believing
that the possible
better represents true value
than the actual.
I think he ignores
big externalities.

'The notion that speculation is destabilizing is highly suspect.'

You seem to conflate
'is' with 'is always'.
How very Clintonion.
Do we really have to debate
what the meaning of 'is' is?
Change the first 'is'
to 'is sometimes'
and the second 'is'
becomes 'is not'.

'It is possible, but it requires that the (weighted) sum of speculators must lose, which would make the endeavor a curious economic phenomenon.'

So close, yet so far,
and so stubborn.
If 'is possible' = HAS happened
then '(weighted) sum' = HAS lost,
n'est-ce pas?
Then curious but real nonetheless.
Curiouser and curiouser, indeed.

[Some] Bubbles don't require speculators,
that's true,
but on the other hand
some do, too.
Your housing market analysis
is incomplete.
Credit default swaps
on mortgage backed securities
totaling $70 Trillion (notional)
more than entire global GDP
all based on models
that assumed *and then magic happens*
(i.e., housing price growth always > 0%)
at the center of all their equations.
CDS are derivatives,
but not 'true' speculation?
Maybe you have a different definition?

To whatever extent
speculation contributed
to the financial meltdown
and ensuing real economic recession,
I doubt John Paulson's winning bets
or Goldman's or whoever's
compensate for the externalities
imposed on the rest of us.

As Jack Sparrow said,
'Ah-ha! So, we’ve established my proposal
[in this case, an FTT]
as sound in principle.
Now, we’re just haggling over price.'
I'll even stipulate to tailoring
rates by type/category.
Number of bips worth
of sand in the gears
needed to adequately compensate
and/or to mitigate is debatable
and worth quantifying.

Reply Monday, November 15, 2010 at 05:21 PM
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Saturday, November 13, 2010

President Obama Should Back Simpson-Bowles Budget Report ? Er... NOT!!!

In response to Roosevelt Institute Senior Fellow Bo Cutter's post about the recently released draft from the deficit cutting commission (here: President Obama Should Back Simpson-Bowles Budget Report » New Deal 2.0:), I wrote:

"I’m hoping Bo's “early substantive and political perspectives” don’t turn out to be what he actually believes after he shakes out the cobwebs and really takes a look. Have some coffee, Bo, you seem sleepy.

No real detail has been provided, but…”??? Umm, ya think?!?

There’s hardly any detail AT ALL, not to mention complete punts on some of the most serious issues and a mystical ‘and then magic happens’ at the center of their proposed solution - if it can be called such - to the health care costs problem.

Bo, you seem to have blown right through the all red flags and alarm bells that “no real detail” should have triggered in your brain. Let’s hope your access rights & privileges on Warburg Pincus’ trading system have better control logic, lest you absent-mindedly hit the wrong key and send a blizzard of nonsensical proposed trades out the door that are destined to reject & perhaps cause another ‘Flash Crash’?

As folk wisdom goes, I suppose the notion that pissing off both sides of the Left-Right divide is a positive indicator that this chairman’s mark is “fair and right down the middle.” But, as Sarah Palin has taught us, folk wisdom - and its cousin, “common sense solutions” - seems to mean little more than antagonism towards intellect and the hard work of rigorous analysis.

Bo, you are right that both the left and right will/do hate it. But, what you overlook is that even those of us “in the middle” hate it too!

Sensible, rational, fair…”???

What is sensible or rational about assuming away spiraling medical costs by fiat?

What is sensible about claiming to simplify the tax code by proposing fewer tax brackets, when the real complexity stems from an unnecessarily narrow tax base that is mostly gamed by large corporations and the ultra-rich?

What is fair about further flattening what little remains of the progressivity of the tax system in favor of upper income brackets, thus further shifting the incidence of the tax burden onto lower income households?

What is fair about extending the retirement age, or reducing SocSec benefits, or leaving a cap on incomes subject to the SocSec payroll tax?

What is fair about a ‘balance’ that is 75% spending cuts that target the most economically challenged in our country, with only 25% from tax revenue increases… especially when the tax revenue increases are spread across all income groups, despite record levels of income & wealth inequality? The rich have benefited disproportionately over the last 30 years, and it is long past time they stepped to the plate and shouldered a greater, not lesser, burden.

Third, that does not mean this is dead on arrival.”???

Perhaps true, if only because it should be more appropriately called “stillborn.”

“This is the only full budget proposal out there that makes significant progress in solving the long-run deficit problem.”

Bo, put down the crack pipe and back away from the ledge, man. I’m starting to worry about ya. What full budget proposal?

It doesn’t make any significant progress as, among other things, it does not even begin to address health care costs which are the only true long-term driver of future projected deficits. Let me know when they’ve stopped punting on the issue - or at least committed to automatic triggers for a robust public option and/or single-payer system if & when their magically-assumed GDP+1% health cost growth targets are missed, as they surely will be.

It is not smoke and mirrors.

What part of punting on health care costs is non-smoke and anti-mirrors? You’ve got it completely wrong. It is exactly a smoke-screen to disguise the continuing effort of triumphalist modern day Know-Nothing conservatives to roll back New Deal 1.0 and impose their plutocratic laissez-faire free market fundamentalism & government-is-bad minimalism on the rest of us. Ignore the man behind the curtain, said the giant floating pseudo Wizard head.

Fourth, President Obama should back this strongly and work to achieve it. The White House should not, but will anyway, over-think this… I believe, as I will write later, that supporting this proposal is the right thing to do, is decidedly not some dreadful compromise with the devil, and ought to be one of the pillars of President Obama’s comeback platform for the next two years.

And I’m hoping you’re not on any of the speed-dial buttons of Obama’s political consultants. Backing anything closely resembling this chairmen’s mark would be political suicide. If the electorate has truly gone so far right of center (and I doubt that very much), then they’re going to vote for a genuine conservative, not a phony one. Again, Bo, you’ve got it exactly backwards. The danger here is if Obama were to under-think this one, which seems to me exactly what you have done.

Friday, November 12, 2010

Ask & You Shall Receive: Saez's Median Voter Query Answered?

In my very first post to this blog, I referenced Emmanuel Saez' observation that:
"... in contrast to the standard political economy model, the progressivity of the current tax system is not being shaped by the self-interest of the median voter."
 How Progressive is the U.S. Federal Tax System? A Historical and International Perspective
by Thomas Piketty & Emmanuel Saez
Journal of Economic Perspectives - Vol. 21, No. 1 - Winter 2007 - ppg. 3-24

I wondered if the standard political economy was flawed. I concluded it very probably was. Albeit without much evidence or logical support.

I further postulated that there was some sort of distorting effect coming from the camp of the billionaires, Wall Street and Big Business, aided and abetted by conservative Republicon lackeys & front organizations.

Since then, I stumbled across an interesting paper dating from circa 2007 by Emanuele Canegrati, then a student at the London School of Economics. Entitled A Contribution to the Positive Theory of Indirect Taxation, it both answers my question and lends support to my speculation.

In summarizing, Canegrati explains:

The introduction of a probabilistic voting model characterized by the presence of single-minded groups overrules the classic results achieved by the median voter theorem, because it is no longer the position on the income scale to drive the equilibrium policy but the ability of groups to focus on their most preferred goods, instead. This ability allows them to achieve a strong political power which candidates cannot help going along with, because they would lose elections otherwise.

Some academic meat on my speculative bones? I don't know. It's an interesting theory.
As Kurt Vonnegut says [in "Slapstick", anyway]:  Hi ho!

Thursday, November 11, 2010

Deficit Panel's Leaders Push Cuts -

First, I would like to see an analysis of the income & wealth distributional effects of the proposed reforms before committing to anything. Maybe Emmanuel Saez & friends will take a crack at it?

That said, my off-the-top-of-my-head take? Well, how about...
  • First, given that both organized labor (AFL/CIO) -and- Americans for Tax Reform are already harping about the proposals, it is at least a reasonable starting point for discussion. Nothing like pissing off all sides to confirm you're on the right track.

  • Cap - at 68 years - and slow the raising of the SocSec retirement age. The deomgraphics trends and changes since the inception of the program probably DO warrant a rethinking of the future retirement age. I just do not believe an age of 70 is merited, particularly in light of the availability of other reforms to pay for maintaining the already modest SocSec benefit levels.

  • Forget about cutting SocSec benefits... except maybe means testing for retirees with non-SocSec earnings over $X (e.g., over $200K)?

  • Remove the income level caps on salary + wages subject to the SocSec payroll tax.

  • Broaden the tax base even further, by - among other things - eliminating nearly all corporate special exemptions, allowances, credits, etc., except for some very specific, targeted incentives for both near- and long-term job creation.

  • Elimination of loopholes in the treatment of foreign taxation of corporate income. Doing so would help disincent off-shoring of American jobs, improve tax fairness (Profitable Fortune 500 corporations paying little, if any, US federal income tax? That's absurd & morally repugnant!), and help resolve the repatriation of retained earnings problem.

  • A Financial Transactions Tax, especially for derivatives. Maybe also an Excess Reserves Tax on banks?

  • Simplify & index the AMT, instead of outright repeal.

  • Provide MORE individual marginal tax brackets, NOT FEWER. Instead of the proposed three brackets - 9%, 15% & 24% - I would prefer a structure more like:  6%, 9%, 12%, 15%, 21%, 27% and 33%. [Note: I need to do more research before identifying specific income levels for these brackets.] The number of tax brackets has little, if anything, to do with simiplication of the tax code. How hard is it, really, to either refer to a pre-computed table or implement a standard linear equation in the form of y = m + bx?  Real simplication - i.e., shrinking the size the tax code from a near-mountainous paper pile to something more like a mere ant hill - is about broadening the tax base and eliminating the dizzying aray of exemptions & complicated credits, vastly reducing the need for advice from or expertise of professional tax accountants & lawyers. These guys may not appreciate the near-term dent in their practices, but presumably their education, experience & skills translate rather easily to other, more productive uses.
  • Enable Medicaid/Medicare spending constraints by allowing the government and/or private exchanges to collectively negotiate prescription drug prices, including from cheaper Canadian (or other forign) sources.

  • Automatic triggers for implementing a public option for health care insurance if Medicaid/Medicare spending benchmarks are missed... and an additional automatic trigger for a single-payer system in the event that public option savings benchmarks are also missed.

  • Tying the proposed 10% federal workforce reduction to reduced private sector unemployment levels.

  • A "Balanced Budget" Amendment requiring rough balancing of the budget (within +/- tolerance ranges) over the course of long-term business cycles (not individual fiscal years, or even Presidential administrations).

  • Rebalancing the mix of spending cuts vs. tax revenues closer to 50%/50%, rather than the proposed 75% spending cuts/25% raising of tax revenues... particularly in ways that reduce & reverse the after tax income inequality trends.
I am certain that there are many others to consider. Suggestions welcome.

Deficit Panel's Leaders Push Cuts -

Chart of the Day: It Could Have Been Worse

The Dollar's New and Old Rivals - Room for Debate -

The Dollar's New and Old Rivals - Room for Debate -

CraigieB's comment quoting William Jenning Bryan's famous "Cross of Gold" speech is fabulously appropriate here:
"If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns.
You shall not crucify mankind upon a cross of gold."

As an aside:

I am constantly astounded by the ironic mutuation that characterizes the history of the major political parties in America. The modern day inheritor & exemplar of Bryan's "common man" populist rhetoric can be none other than Sarah Palin: so alike, and yet so different. The Great Commoner, Bryan, and the Common Sense Solution-ator, Palin, are both committed supporters of popular democracy, firebrand rhetoricians, devoutly religious and Creationist refuseniks of the Theory of Evolution. But Bryan was the archetypal liberal big D Democrat, and Palin an avatar for the hard-right conservative wing of the Republicons.

Now that she's ostensibly climbed the learning curve of macroeconomic policy - e.g., see her Twitter & Facebook inveighing against the Fed's QE2 program - how long before we can expect Sarah Palin to invert Bryan's "Cross of Gold" speech on its head?

Beat the Press

Beat the Press: "According to the Fed's own projections, the collapse of this bubble is likely to lead to more than $4 trillion in lost economic output, more than $13,000 for every person in the United States."

So, on top of:
having to wait another decade to recover my once and future home equity, and
being paid less, in real terms, than I was 15 years ago, and
expecting to ave to work until I'm 70, and
that I have limited job opportunities and flat salary expectations for the next 2 ~ 5 years,
... now I have a $13,000 loss to shoulder?

Do I get a tax write-off for it, at least?

Statement on Deficit Commission Proposals | Press Releases

Statement on Deficit Commission Proposals | Press Releases: "Statement on Deficit Commission Proposals
For Immediate Release: November 10, 2010
Contact: Alan Barber, (571)306-2526

Washington, D.C.- Dean Baker, Co-Director of the Center for Economic and Policy Research (CEPR) released the following statement on the proposals offered by Erskine Bowles and Alan Simpson, co-chairs of the President's deficit commission:

'Senator Alan Simpson and Erskine Bowles appeared to have largely ignored economic reality in developing the proposals they presented to the public today.

'The country is suffering from 9.6 percent unemployment with more than 25 million people unemployed, underemployed or who have given up looking for work altogether. Tens of millions of people are underwater in their mortgage and millions face the prospect of losing their home to foreclosure.

'This situation is not the result of government deficits, contrary to what Mr. Bowles seemed to suggest at the co-chairs' press conference today. The downturn was caused by the bursting of an $8 trillion housing bubble. This bubble was the basis of the construction and consumption demand that drove the economic expansion through 2007.

'The large government deficits are the only factor sustaining demand following the loss of this bubble wealth. If today's deficit were smaller, we would not be helping our children; we would just be putting their parents out of work. Simpson and Bowles somehow think they have covered this concern by delaying their cuts until fiscal year 2012, 11 months from now. Virtually all projections show the unemployment rate will still be over 9.0 percent at the point when the Simpson-Bowles cuts begin to slow the economy further. This leaves the economy like a plane with one engine already out and Simpson Bowles prepared to knock out the other engine as well.

'The failure to understand current deficits contributes to a misunderstanding of the debt burden. For example, Simpson and Bowles raised fears of an exploding debt reaching 90 percent of GDP by the end of the decade. There is no reason that the Fed can't just buy this debt (as it is largely doing) and hold it indefinitely If need be, the Fed can use other tools at its disposal to ensure that this expansion of the monetary base does not lead to inflation.

'This creates no interest burden for the country, since the Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country's net interest burden.

'This means that the country really has no near-term or even mid-term deficit problem, just paranoia being spread by many of the same people who led the economy into its current disastrous situation.

'Over the longer term, the country is projected to face a deficit problem but this is almost entirely attributable to the projection that private sector health care costs grow at an explosive rate. This projected growth rate of health care costs would eventually lead to serious budget problems in addition to leading to enormous problems for the private sector. However, the underlying problem is the broken health care system, not public sector health care programs. For some reason, though, Simpson-Bowles never directly addresses these of the health care system.

'Simpson and Bowles apparently never considered a Wall Street financial speculation tax (FST) as a tool for generating revenue. This is an obvious policy-tool that even the IMF is now advocating, in recognition of the enormous amount of waste and rents in the financial sector. Through an FST, it is possible to raise large amounts of revenue, easily more than $100 billion a year, with very little impact to real economic activity. The refusal to consider this source of revenue is striking since at least one member of the commission has been a vocal advocate of financial speculation taxes. It is also worth noting that Mr. Bowles is a director of Morgan Stanley, one of the Wall Street banks that would be seriously impacted by such a tax.

'Finally, it is striking that the Co-Chairs felt the need to address Social Security, even though it was not part of their mandate. The commission's mandate was to deal with the country's fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit. Their proposal would cut benefits for tens of millions of middle class workers who are overwhelmingly dependent on Social Security for their retirement income. It would also raise the retirement age for lower income workers who have seen little increase in life expectancy.

'While there are some positive items in the report (it would limit the mortgage interest rate deduction get rid of the deduction for cafeteria benefit plans), it suffers from the fact that the co-directors never reflected on their basic economic assumptions. It is hard to avoid the conclusion that this exercise was a waste of time and that we should go back to having Congress determine our budgets through the normal process rather than secret commissions.'

- Sent using Google Toolbar"

Wednesday, November 10, 2010

Quote of the Day

Howard Scott (April 1, 1890–January 1, 1970)
A criminal is a person with predatory instincts who has not sufficient capital to form a corporation.

A controversial engineer who had an interest in technocracy, and helped to form the Technical Alliance, Committee on Technocracy, and Technocracy Incorporated.

Monday, November 8, 2010

Dan Ariely » Blog Archive 2008 was a good year for behavioral economics «

Dan Ariely » Blog Archive 2008 was a good year for behavioral economics «:

... in early 2008, the financial world blew to smithereens, like something in a science fiction movie. Alan Greenspan, the formerly much-worshipped chairman of the Federal Reserve, told Congress in October 2008 that he was “shocked” (shocked!) that the markets did not work as anticipated, or automatically self-correct as they were supposed to. He said he made a mistake in assuming that the self-interest of organizations, specifically banks and others, was such that they were capable of protecting their own shareholders. For my part, I was shocked that Greenspan, one of the tireless advocates of deregulation and a true believer in letting market forces have their way, would publicly admit that his assumptions about the rationality of markets were wrong. A few months before this confession, I could never have imagined that Greenspan would utter such a statement. Aside from feeling vindicated, I also felt that Greenspan’s confession was an important step forward. After all, they say that the first step toward recovery is admitting you have a problem.
Still, the terrible loss of homes and jobs has been a very high price to pay for learning that we might not be as rational as Greenspan and other traditional economists had thought. What we’ve learned is that relying on standard economic theory alone as a guiding principle for building markets and institutions might, in fact, be dangerous. It has become tragically clear that the mistakes we all make are not at all random, but part and parcel of the human condition. Worse, our mistakes of judgment can aggregate in the market, sparking a scenario in which, much like an earthquake, no one has any idea what is happening. All of a sudden, it looked as if some people were beginning to understand that the study of small-scale mistakes was not just a source for amusing dinner-table anecdotes. I felt both exonerated and relieved.
While this is a very depressing time for the economy as a whole, and for all of us individually, the turnabout on Greenspan’s part has created new opportunities for behavioral economics, and for those willing to learn and alter the way they think and behave. From crisis comes opportunity, and perhaps this tragedy will cause us to finally accommodate new ideas, and-I hope-begin to rebuild.

I agree. Again.

Dan Ariely behavioral economics «

I lifted this directly from Dan Ariely's blog. It tidily explains [some of] my objections with classical & neo-classical economics.

Conservatives & Republicons preferred economic policies (lower taxes, unfettered free markets, minimal business regulation, minimal government) are defended by reference to the authority of classical/neo-classical economic principles. Which tidily explains [some of] my objections to conservatives and Republicons.

Dan Ariely behavioral economics «: "* Blog

Three questions on Behavioral Economics
Jul 10

1.) What is behavioral economics? How is it different from standard economics?

In general, both standard and behavioral economics are interested in the same questions and topics. The choices people make, the effects on incentives, the role of information etc. However, unlike standard economics, behavioral economics does not assume that people are rational. Instead, behavioral economists start by figuring out how people actually behave, often in a controlled lab environment in which we can understand behavior better, and use this as a starting point for building our understanding of human nature. As a consequence of this different starting point, behavioral economists usually come to different conclusions about the logic and efficacy of almost anything, ranging from mortgages to savings to healthcare in both the personal and business realms.

2.) Even if consumers make mistakes from time to time, wouldn’t the market fix these?

I always found the appeal to the market gods a bit odd. Why would the market fix mistakes instead of aggravating them? When the Chicago economists sometimes (reluctantly) admits that people make mistakes, they claim that people make different types of mistakes that will eventually cancel each other out in the market. Behavioral economics argues that, instead, people will often make the same mistake, and the individual mistakes can aggregate in the market. Let’s take the subprime mortgage crisis, which I think is a great example (but a very sad reality) of the market working to make the aggregation of mistakes worse. It is not as if some people made one kind of mistake and others made another kind. It was the fact that so many people made the same mistakes, and the market for these mistakes is what got us to where we are now.

3.) Isn’t behavioral economics a depressing view of human nature?

It is true that from a behavioral economics perspective we are fallible, easily confused, not that smart, and often irrational. We are more like Homer Simpson than Superman. So from this perspective it is rather depressing. But at the same time there is also a silver lining. There are free lunches!

Take the physical world for example. We build products that work with our physical limitations. Chairs, shoes, and cars are all designed to complement and enhance our physical capabilities. If we take some of the same lessons we’ve learned from working with our physical limitations and apply them to things that are affected by our cognitive limitations—insurance policies, retirement plans, and healthcare—we’ll be able to design more effective policies and tools, that are more useful in the world. This is the promise of behavioral economics – once we understand where we are weak or wrong we can try to fix it and build a better world.

Take again the sub-prime mortgage crisis. Imagine that we understood how difficult it is for people to calculate the correct amount of mortgage that they should take, and instead of creating a calculator that told us the maximum that we can borrow, it helped us figure out what we should be borrowing. I suspect that if we had this type of calculator (and if people used it) much of the sub-prime mortgage catastrophe could have been avoided. This of course is one idea to fix one problem, and there are many ways to think about how to improve our lives along many of the decisions we make every day. This is why I think that behavioral economics is so optimistic, useful, and important for our personal life and for society.

A quick observation:
Classical/neo-classical schools of economics - Chicago, Austrian, etc. - seem to think that the volume and magnitude of market decisions are Gaussian 'normal' curve distributed.

But are they?

What if mortgage affordability decisions in the market distribute 'unbalanced' way?

You would think empirical evidence would be persuasive. How rational is it to continue to believe that mistaken market decisions will tend to balance each other out when the observable fact is they do not [always, at least]?

Saturday, November 6, 2010

False Equivalency: Responsibility for the Great Recession

[Re-written @ 11/8/2010 into shorter sentences, in response to popular demand.]

I have a Tea Party-leaning friend. He says the Community Reinvestment Act (CRA) is an important contributor to the housing bubble. He believes the CRA "pushed" banks to lower their lending standards in order to allow otherwise unqualified borrowers (usually minorities) to pursue the American Dream of home ownership. Thus, this 33-year old law is significantly culpable for the ensuing Great Recession. 

I spent literally half of my adult career in the commercial banking industry. I have extensive experience in understanding and complying with the requirements of CRA as a:
  • commercial lender, 
  • an assistant chief credit policy officer, and 
  • a loan workout manager. 
And I disagree - strenuously.
It is, of course, just silly.

CRA does not impose or even encourage ANY reduction in credit underwriting standards. It actually requires banks to operate in a safe and secure manner. CRA merely requires fairness in the application of the bank's credit underwriting, and an effort to try to serve the legitimate commercial & consumer credit needs of low-income and minority communities within the bank's markets. Mostly, CRA simply prohibits the practice of "redlining". Mark Sumner writes:
The Community Reinvestment Act and other red lining laws weren't passed to force banks to make loans to African-Americans and other minorities. They were there to make the rules consistent. Previous to the passage of the CRA, minorities were often required to have better credit, and make larger down payments to get loans equivalent to those awarded whites. Nothing in these laws required that banks lower their lending standards, only that they be fair, consistent, and operate in a "safe and secure" way. There was no evidence then, and no evidence now, that minorities with the same initial credit rating as whites tend to default on their loans at any greater rate.

The assertion is further refuted by American economist & professor Janet Yellen, currently the Vice Chair of the Board of Governors of the Federal Reserve System. In her foreword to "Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act", she unequivocally states:

There is no empirical evidence to support the claim that the CRA is responsible for the crisis, as several authors in the volume make clear. First, former Federal Reserve Governor Randall Kroszner argues in a speech included in this volume that the CRA did not contribute to any erosion in safe and sound lending practices. He specifically cites an analysis by the Federal Reserve Board that revealed that 60 percent of higher-priced loans went to middle- or higher-income borrowers or neighborhoods not covered by the CRA, and only six percent of all higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas. Moreover, a research paper by the Federal Reserve Bank of San Francisco in this volume finds that loans originated by CRA-covered lenders were significantly less likely to be in foreclosure than those originated by independent mortgage companies not covered by the CRA.

Randall Kroszner details the facts more fully in "The Community Reinvestment Act and the Recent Mortgage Crisis". Prof. Kroszner states:

Two key points emerge from all of our analysis of the available data. First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together, as I stated earlier, we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.

If CRA is not responsible for the mortgage crisis, then what is?

There were a number of contributing factors. The CRA is not one of them.

In a nearly 2-year old posting to the Daily Kos (Down the Republican Rabbit Hole), award-winning author Mark Sumner points to unregulated Wall Street financial engineering:
... the banks have some self-inflicted problems that make those mortgages an afterthought.

For example, the wonderful credit default swap. In essence, credit default swaps are (or were) nothing but insurance policies for loans. And yet in 2007 the total number of credit default swaps traded far exceeded the value of all loans. In fact, it may have touched $70 trillion dollars, which puts it above the gross domestic product of the entire planet.

His summary of the evolution of credit default swaps is funny as hell. And right on. 

He concludes:
Now that people are paying attention, it turns out that the value of most credit default swaps is not just bupkis, it's Bupkis Plus. More computer power went into modeling these things than has been invested in predicting climate change, but everyone overlooked the giant "and then a miracle occurs" at the center of all the equations that allowed credit default swaps to generate revenue ex nihilo.
Trying to blame the 1977 Community Reinvestment Act for the current fiscal crisis is like blaming a spot on your windshield for engine failure while ignoring the gaping wound in you head gasket. Republicans are scribbling hard to create their new version of reality, and you never know what's going to sell. After all, people bought a "Book of Virtues" authored by Bill Bennet.
But in this case, even the Mock Turtle and the March Hare think the GOP line is too outlandish.

Read it and weep, oh spewers of factless turd-polishing conservative opinion commentators. Opinions are great, but facts sweep away cognitive dissonance (or should, eventually). When that happens, be welcome back into the light. 

Until then... To Tea Party sympathizers who are willing to consider evidence: Stop drinking the Kool Aid. There are real problems to deal with, and we need your help to solve them.



Update: 11/10/2010

Other significant contributing factors (not in any order of priority, degree or significance):
  • [Moderate to Major Factor?] Lax Regulatory Oversight: A recklessly "hands off" regulatory philosophy - primarily Republican-driven, but abetted by the Clinton administration - led to:
    • Rrepeal of the Glass-Steagall Act. 
    • Larry Summers' stifling Brookslee Born @ CFTC from considering regulating derivates. 
    • An empirically-unjustified belief that rational self-interests would make markets self-correcting caused policy makers to avoid even considering systemic risks until near the brink of financial system collapse. Earlier consideration & investigation of the potential magnitude & inter-dependency of the derivatives markets would [I hope] have led to earlier intervention.
  • [Minor to Modest Factor?] The Greenspan 'Put': Excessively low interest rates for too long, encouraged banks & investors to seek superior returns in riskier asset classes. Low debt rates simultaneously incentivizes more borrowing/debt. 
    • Had interest rates been higher, perhaps more capital would have remained out of riskier speculative asset classes? 
    • If so, to whatever extent it did, reduced demand for "emerging bubble" assets should take some air out of the bubble...
      • And reduce the impact of the landing.

  • [Moderate to Major Factor?] Moral Hazard: Privatization of profits combined with making losses public, allowed Fannie Mae & Freddie Mac executives to take excessive risks - risks they would not otherwise take - to satisfy shareholders' desires for returns."Too Bid To Fail" belief encouraged Wall Street to gamble with leverage, something they would do relatively less if only because of higher capital costs in the event no government-guarantee were inferred.

  • [Major Factor?] Incomplete and Asymmetric Information: Market participants did not have co-equal information (the price is not all that matters!). 
    • Mortgage-backed securities investors believed the investment-grade credit ratings, but were not fully aware of the flaws in ratings agencies' models. 
    • Ratings agencies were not aware of flaws in the underwriting investment banks' default models, and had/have an inherent conflict of interest in getting paid to rate the debt of the party who is paying for the rating. 
    • Banks unloaded reams of packaged mortgage loans to investment banks without adequate documentation, faulty credit underwriting, and just plain stupid products (no doc? really?).
    • Mortgage originators sold fraudulently originated & clearly inappropriate/unaffordable loans to the banks, and convinced inexpert home buyers they could afford the debt. 
    • Naive, ignorant and/or gullible home buyer-wannabes foolishly assumed more debt than they could afford. 
    • Better information, disclosure, better ethics & ethics enforcement, better underwriting, better products, better incentives.

  • [Major Factor?] Irrational Expectations: By all actors in the market place. 
    • Irrational Confidence. Consumers, bankers, ratings agencies, and financial engineers all assumed that residential real estate would continue to appreciate in value indefinitely. Having all made the same mistake favoring an unsustainable run up in housing prices over a short term, the bubble was bound to form and burst (they always do!).
    •  Irrational Ignorance:  The bursting of the smaller dot com bubble at the very beginning of the decade should have been a warning to speculation-chasing investors. Invest, not speculate. And to government: Markets are not always rational.
      • This is Mark Sumner's big miracle in the center of all the equations.
  • [Moderate to Major Factor?] Wealth Inequality: Excess accumulation of financial capital assets increasingly concentrated in the hands of the very wealthiest segment of society (esp. American society). 
    • The result is excessive capital allocated to speculative financial activities offering above-normal returns. 
    • Not allocated for widespread consumption or investment in productive capacity. [Stagnating middle-class household wages during the decade is [partial] confirmation, IMO; record income & wealth inequality is further [partial] confirmation.] 
    • Excessive money chasing a narrowed band of higher risk assets causes  those assets to inflate rapidly. 
      • Especially in conjunction with the [false] belief that risk was overstated because housing values would always grow ad infinitum.
I am sure I am missing some. I will have to patrol the blogosphere and report back. Suggestions welcome.