Regarding the neverending mortgage meltdown, Atrios wondered today:
Short version of the story: Fannie offloads its risk onto WaMu, and WaMu offloads its risks onto eAppraiseIT, an independent appraisal company. Of course an entity such as eAppraiseIT likely doesn’t have even an infinitesimal fraction of the assets needed to actually cover potential liability here (or, presumably, sufficient or any insurance), so they may as well have offloaded all their liability onto my cat Gizmo.
…adding, it doesn’t mean that the liability has successfully been disappeared. We’ll have to wait and see who ultimately holds the bag at the end of the day.
A short time later Atrios answered:
Why that would be us.
Not that this counts as breaking news, but once again Republicans prove that they only believe in personal risk for little people. Mommy government can’t possibly allow the country club guys to lose their membership when next year’s taxpayers could shoulder the weight instead.
The crazy part of it is that Republicans are right when they argue that taking away consequences encourages bad decisions. Water flows downhill, behavior follows incentives. If we let the investor class actually lose its shirt over systemic screwups then we would have a lot less of them.
ConservativelyLiberal
No matter how we try, the system keeps getting gamed. We can make every single law possible to plug every single scenario, and they will still find a way around it. I believe it is because once some people have lots of money, they will do anything to get more of it, and greasing the palms of politicians, powerful businessmen and insiders is the way. I believe that the more powerful a politician is, the more they need contributions from corporations to maintain that power, and the less they depend on individual contributions.
One consequence of this is that they become indebted to those who dole out the largess,and less responsive to the voters. The laws that they enact are ones that favor business to the detriment of the general public, but not the rich and powerful who have bought and paid for their services.
Throughout our history, we have gone through scandals over and over again, and the public never learns that you can’t just elect them and hope for the best.
People like to talk about ‘personal responsibility’, but you never hear about ‘corporate responsibility’. It does not exist. Corporations get to have rights, like people. But they do not have to bear responsibility for anything as long as they finagle a way around those pesky rules that keep cropping up.
With the current system, we don’t stand a chance against those in power.
r€nato
hey, haven’t we been here before?
Oh yeah, we have. The S+L debacle. Safe little savings and loans were de-regulated, in order to unleash the powerful forces of
capitalism and free marketscorruption. A real estate bubble ensued, then popped, then thegumminttaxpayers ended up bailing them out.And it all happened on the GOP’s watch.
Look, I hardly think that anyone who wears the Democratic label is automatically a saint. But really… there is a pattern here. Democratic corruption is small-time, tawdry stuff. You know, the good old days of the House bank scandal and Jim Wright using self-authored books as a way of collecting campaign contributions. Oh, and of course that little matter of Clinton and the blow job which made a certain segment of the population lose their fucking minds.
But GOP corruption is in a class all its own…. thousands lose their retirement savings, obscene war profiteering, massive corporate corruption enabled by getting rid of the kind of minimal government regulation that’s necessary to keep markets honest, followed by bailouts of the big boys while the little guy is left to twist slowly, slowly in the wind.
I mean, was there ever any serious discussion AT ALL of bailing out all the people who got taken by Enron? Nope. They get to live out their golden years on Social Security and Alpo.
mclaren
In principle, you and Atrios are right. The problem is that the “let big investors take personal responsibility” argument leads to the kind of crazy policies that gave us the Great Depression.
The central bankers and people running the NYSE in 1929 thought it would toughen up the big investors if they were allowed to lose money. They thought that if CEOs of companies were alloewd to go broke, it would teach other CEOs a lesson. But, unfortunately, people don’t learn from history. (Viet Nam? Iraq? Anyone? Electing the tough-talking Texan LBJ? Electing the tough-talking Texan this time? Anyone?)
If you let big corporations go indiscriminately bust, eventually what happens is that you get a vicious cycle where unemployment cripples spending power, which leads to more unemployment, which leads to less psending, and you get stuck in a trough like the 1930s.
The real answer isn’t personal responsibility, since history shows that no one, big or small investors, behaves rationally or responsibly or ever learns from history. The history is enough government regulation to make sure this kind of crap doesn’t happen.
It should have been illegal in the first place to offload debt onto bogus paper constructions like eAppraiseIT. It should also have been illegal to loan people enough money that they’d have to pay more than, say, 1/3 of their income in mortgage payments, and it should’ve been illegal to do flips — people should be required to hold property for some limited amount of time, say a year or two or three, before flipping it, just the way you can’t sell a stock unless it’s on the uptick.
Dave Irwin
The S & L debacle taught us nothing. Lawyers are currently loading up to provide us with an even bigger scandal: the bail out of the hedge funds.
Real estate flipping is the concentrated essence of the conservative philosophy. It has ruined Florida, and will continue to ruin states as long as it is legal. The corrupt mortgage brokers live on this kind of carrion.
Michael D.
I’m of two minds on this. I really don’t know where I stand.
On the one hand, I get irritated when I hear people talking about their mortgage troubles and I can’t help but thinking, “Idiot! Did you NOT read the fine print on that adjustable rate mortgage?”
On the other hand, I remember a few years back I discovered I had been paying for some crappy insurance on my American Express for at least two years. Why? Becauuse I didn’t read the fine print. I called them every day for about two weeks. I never did get the charges removed. Yeah, it was my fault for not reading the mice type.
So basically, I consider myself a pretty sensible, educated person, and I got screwed. And I’m thinking “Some poor sap was so excited about finally being able to get into a house after never having been able to before.” When a deal comes along that can change your life like that, you take it.
My credit card issue cost me a few bucks a month, so it’s a far cry from paying a few hundred extra a month on a mortgage.
I have a new rule I generally follow after all this:
If there’s a lot of fine print, then chances are, they’re lying through their fucking teeth to you about something.
Decided FenceSitter
McLaren, interesting, I hadn’t contemplated it in quite that light (Economics is NOT my strong suit); any chance you know of some writing discussing this, or is ti just one of those things you puzzled together?
Xenos
Thus the need for steep, Eisenhower-esque marginal tax rates. It leads to resentment on the part of the would-be kleptocrats, but it keeps their numbers down. We need to shrink the Heritage Foundation to the size where we can drown it in a bathtub.
Much more of this the lefties are going to start talking about the last CEO being strangled to death with the intestines of the last televangelist.
RSA
I’m wondering whether you have a mortgage, Michael D.? My memory of buying a house several years ago was that there was a stack of documents a couple of inches thick that needed to be signed, containing an enormous amount of legalese in fine print. I ended up feeling that I just had to trust the various people I’d been working with who had enough expertise and experience to understand it all, either that or spend a few months trying to come up to speed myself. Naive? Yeah, that’s me. But I don’t think I’m much different from the vast majority of people who’ve signed mortgage documents. And I doubt that at house closings anyone in the know ever says, “You do realize that there’s a possibility your monthly payment may double within a few years when your ARM resets, right? And if you can’t afford to pay, you’ll lose your house and whatever money you’ve paid into it at that point?”
RSA
I sometimes read libertarian views that high marginal tax rates will discourage the most productive people from working harder, investing, and so forth. I think that the behavior we see among the hyper-rich suggests that actually nothing will deter them from trying to earn more money than they’ll ever need. What does motivate someone worth hundreds of millions of dollars to work hard? I think it’s “the game”, and little more; higher taxes change the playing field, but they don’t eliminate the game.
sparky
I agree with conservativelyliberal. Glass-Steagall was repealed under Clinton, and IMO that’s a big part of the reason we have this mess–ibankers got to play with mortgages without oversight. Having run out of productive ways to make money (technology aside) the uberclass resorted to cannibalizing the classes below it.
We simply cannot trust ourselves. It’s not really that hard to accept.
As to mortgages, (a) if you don’t know what you are doing, you need an agent who is liable to you (lawyer, for example) and (b) we should have some rules for disclosure–a kind of plain language for mortgages, like consumer loans. After that there isn’t much we can do (assuming decent regulation).
jake
I’d expand a bit on Maclaren’s point and add that some of the shenanigans we already know about were illegal but the SEC and other enforcement agencies were (surprise!) no too bothered about investigating or punishing organizations that broke the rules. I knew something was up a couple of months before this particular period of shit precipitation because suddenly the SEC began to cry “Goodness me, we need to have some rules and enforcement around here!”
Do try to see the bigger picture for five seconds. First of all, your credit card problems aren’t going to fuck up the entire economy. Yes, there were some people who didn’t read the fine print, but there were also people who didn’t get any fine print because the
loan sharkout right lied. In addition, Amex didn’t issue you a credit card as part of a get rich quick and get out of Dodge scheme.The people running this game knew this was going to lead to a huge fucking mess down the road, but they would have made their pile and they knew the chances they’d ever be called to account were about -200.
I also invite you to consider the general state of the economy. Let’s say you can afford your mortgage on Day 1 because you’ve got a job, the cost of living is a certain level and oh, the price of gas isn’t insanely high. Fast forward to Day 1,800. You haven’t had a raise in a few years (or your job’s been cut), gas is a buck more so everything is more expensive. Do you maybe begin to see how this might be a bit more than people not reading the fine print and more a case of people not being able to guess how greedy other people could be or predict how fucking awful things would become?
Michael D.
Yes, I have a $200,000 first and a $37,500 second. In fact my second mortgage would probably be considered sub-prime. I can afford the fluctuations in interest, because it’s relatively small.
Did I mess up somewhere here? I’m pretty much agreeing that there is a major fuck up here and that, while people should definitely read the mice type, the fact that there IS mice type is pretty much an indicator of a con-job in my opinion.
So, I’m actually agreeing with you. And I used my credit card example to illustrate how “fine print” could come back to bite you – not as a comparison between my tiny monthly fee and someone possibly losing a home. I DO believe that mortgage companies have created a huge mess here.
But I will readily admit, I haven’t the first clue how to fix the damage that has already been done.
Cyrus
I agree with you that the complaint is invalid because practically nothing would stop the people who become hyper-rich from continuing to do so. But in addition, if the S&L scandal and the mortgage meltdown is what we get, maybe we should try to deter them a little.
RSA
No argument here. And I wasn’t even considering the corruption angle.
Rudi
On the bright side Neil Bush didn’t have anything to do with the sub-prime mess. He’s just helping the kids learn with a LAME software company that benefitted from
NoChildLeftBehindNoBushieLeftBehind.Xenos
We can confidently predict that in 20 years there will be another massive financial scandal, and that Neil Bush will be mixed up in it to some degree.
RSA: In know (distantly – his brother was a friend of mine back in the third grade) a partner at Goldman Sachs (a/k/a ‘Golden Slacks’). He considers himself to be a failure because he is one of the lower-performing partners and will never break into the big-time super-wealthy at the firm. God only knows what he earns, but it does not matter to him, nor should we expect it to matter.
The phenomenon is known as Hedonic Adaption (not the best link, but a start – I am not an expert, obviously). We measure our happiness not by any rational analysis of ourselves and the world around us, but by how well we seem to be doing wrt our peers. If a lot of people are going to naturally behave in antisocial ways if they select plutocrats and crooks as their peers, the rest of us need to disincentive them.
Social engineering? You Betcha! The Taft wing of the GOP has been social engineering us to a Hobbesian state of nature for over 100 years.
"Fair and Balanced" Dave
Oh yeah, we have. The S+L debacle. Safe little savings and loans were de-regulated, in order to unleash the powerful forces of capitalism and free markets corruption. A real estate bubble ensued, then popped, then the gummint taxpayers ended up bailing them out.
And it all happened on the GOP’s watch.
Look, I hardly think that anyone who wears the Democratic label is automatically a saint.
That certainly applies to the S & L debacle. The S & L mess came about thanks to a piece of legislation called the Garn-St Germain Depository Institutions Act of 1982 named after co-authors Republican Senator Jake Garn of Utah and Democratic Representative Fernand St Germain of Rhode Island (the House co-sponsors included Steny Hoyer and then-Congressman Charles Schumer–neither the first nor last legislative fuck up for either of those two clowns.)
Of course, let’s not forget Ronald Reagan’s remarks when he signed this legislation, “All in all, I think we hit the jackpot.” (I guess it all depends on who “we” are.)
laneman
ARMs are evil
And many of my friends, whom I think are not mouth breathers, have them.
As Michael say, it’s really not quite as simple as ‘yore a noob and deserve to be skrewed’
The system is fucked….ok, stop me from quoting music
Zifnab
Why is it when we’re faced with skyrocketing health insurance rates or collapsing roadways or hurricane evacuation or waging a war on the other side of the planet, the Republicans always suggest we look to privatization and self-determination.
But when the stock market tips over, they start screaming “Bail out! Bail out! Bail out!”
Perhaps this country is in need of a recession? Maybe a bunch of wall street investors deserve to loose their shirts for making ridiculous risky investments? Nah, fuck it. Let’s bump that interest rate down a peg. More free money, horray!
Zifnab
PotD in my book.
Xenos
This deliberate: instead of letting the recession start now, they want to push it forward to a Democratic administration. Just like their Iraq polcy — We screwed up, let Hillary get blamed for the hard decisions made in cleaning up the mess. Then demagogue like hell to start the cycle again in four years. ‘Carterizing’ should be the verb for this. It sure as hell worked last time.
The Other Steve
It’s call the TILA ARM Disclosure. TILA stands for Truth in Lending Act, which was passed in 1968 and requires clear disclosure of mortgage terms.
A handful of lenders did not properly disclose these terms, but it’s rare. As that article points out, if the terms were not properly disclosed, the mortgage is null and void.
The Other Steve
One of the fallouts of this mortgage crisis is the death of correspondent lending and mortgage brokers.
Brokers were the guys that shopped around, supposedly got you a good deal, while they got a plush commission. Correspondent lending were small mortgage outfits that funded the initial loan, and then sold it off to a secondary lender.
The big guys are looking now at cutting out the middlemen. In large part because they found the middlemen were looking out for their own interests, and not those of either the borrower or the lender.
So the market is adjusting.
The next step, IMHO, is to eliminate realtors. They’re the most worthless leaches on the face of humanity. A whole subclass of people who do no work and make a lot of money doing it.
RSA
Thanks for the pointer; I didn’t know it had a name.
Interesting. Until I read past this sentence, I wondered if it was literal, a la 1929.
Cinderella Ferret
Proposed Solution: Most of these
top executivesthieving criminals should be hanged. Those not immediately hanged should be tortured until they admit to having had sex with children. Then hang’em for being perverts.The entire program of bringing these guys to “justice” could be made revenue neutral by putting it on pay-per-view and allowing other folks with the financial wherewithal to bid on the right to hang’em. Kind of like “hunting” on one of the “game ranches” that the Dickless One is so fond of; it would give the uber-wealthy the opportunity to have a “new” experience.
I know its a little draconian and it probably won’t deter the next generation of white collar criminals. But–we won’t have to deal with this group of treacherous thieving rat-bastards anymore. The real plus is that it won’t cost of anything. See how simple and easy economics and personal responsibility are when you look at it through the prism of … the prism of … well it really would be that simple. Heh.
Fool me once once, shame on me. Fool me twice … shame on … shame on … we won’t get fooled again!
P.S. If we can’t give amnesty to some poor bastard coming up from Mexico to work his ass off, then I say NO AMNESTY for these fuckers in suits!
Dreggas
Michael D.,
You probably had the ability to handle the payments. In many markets “modest” homes go for double what your first mortgage was. Fact is many people DID read the fine print and were told, don’t worry you can refi before that ARM resets but the reality is they couldn’t refi to a lower rate because they didn’t qualify.
The people setting them up didn’t give a shit because within 90 days of getting the loan out through and the person set up with a home the loan was out the door being diced up on wall st. I wrote software that setup these ARM’s they were a freaking nightmare if you couldn’t refi to a fix before the reset.
OxyCon
The only time a Repub believes in government is when they funnel trillions of taxpayer dollars to the wealthiest elites.
wingnuts to iraq
guillotine anyone?
STEVEinSC
Turn off the regulators, give money churners access to the saving and loans, raise the FDIC to $100k and loot the thrifts. Get the government to bail out the S&L’s with taxpayer money (your’re fucked twice.) Taxpayers lose, profiteers win. Reagonomics in a nutshell. The same thing is going to be repeated. Who is the sucker? The drooling fools who let this happen and again and again. Deregulation good for the country, my ass!
Ronald Reaganhood: Steal from the poor to give to the rich. The rich will miss it if you take it from them. The poor won’t miss it, they’re used to having nothing.
bago
How is an ARM not a scam? Lets put a big nice shiny low number out in the big font in front, and bury the timebomb in the fine print.
In software that’s generally what we call it when there is a time delay to a major change in the product (usually deactivation). A Timebomb.
ARMs are timebombs.
Dreggas
They were timebombs, they were just like those lovely low introductory rates on credit cards. Yeah you got that low rate but miss one payment and your interest suddenly jumped from say 5% to 30%. But those were the Option ARMS. Adjustable Rate Mortgages have always been around, they just became very popular because of the Option attached onto them.
Xenos
Around the world, ARMs are the norm. The only reason we have fixed rate loans is because Fannie Mae started underwriting them.
Mme Dufarge
I cried when they shot medgar evers
Tears ran down my spine
I cried when they shot mr. kennedy
As though Id lost a father of mine
But malcolm x got what was coming
He got what he asked for this time
So love me, love me, love me, Im a liberal
I go to civil rights rallies
And I put down the old d.a.r.
I love harry and sidney and sammy
I hope every colored boy becomes a star
But dont talk about revolution
Thats going a little bit too far
So love me, love me, love me, Im a liberal
I cheered when humphrey was chosen
My faith in the system restored
Im glad the commies were thrown out
Of the a.f.l. c.i.o. board
I love puerto ricans and negros
As long as they dont move next door
So love me, love me, love me, Im a liberal
The people of old mississippi
Should all hang their heads in shame
I cant understand how their minds work
Whats the matter dont they watch les crain?
But if you ask me to bus my children
I hope the cops take down your name
So love me, love me, love me, Im a liberal
I read new republic and nation
Ive learned to take every view
You know, Ive memorized lerner and golden
I feel like Im almost a jew
But when it comes to times like korea
Theres no one more red, white and blue
So love me, love me, love me, Im a liberal
I vote for the democtratic party
They want the u.n. to be strong
I go to all the pete seeger concerts
He sure gets me singing those songs
Ill send all the money you ask for
But dont ask me to come on along
So love me, love me, love me, Im a liberal
Once I was young and impulsive
I wore every conceivable pin
Even went to the socialist meetings
Learned all the old union hymns
But Ive grown older and wiser
And thats why Im turning you in
So love me, love me, love me, Im a liberal
jcricket
An innocuous theory that there is a marginal tax rate high enough to discourage has instead turned into the unassailable idea that tax cuts are always a good idea and always a tax revenue raiser. Even the most ardent supply-sider would have never thought of arguing that back in the 80s. But now it’s the fucking 11th commandment of the Republican party (right after the other 10 they can’t name).
Sure, I might get behind the idea that if marginal tax rates are 90% (or maybe 80%) it could discourage people from bothering to earn more money (assuming that’s also the effective tax rate). But we’re not anywhere near that and haven’t been for almost 30 years
Is someone seriously going to argue that raising rates from 30 to 35% or capital gains rates from 15-20% is going to make a difference in the behavior of people earning $500k/year or more? Even though I earn less than half of that, a 5% increase in my taxes isn’t going to make a difference in whether I want to earn more money.
Not to mention that not a single person at those marginal tax rates pays anything like that in effective tax rates. As Warren Buffet pointed out recently, the effective tax rates on the rich are often below 20% and more importantly, below that of people paid far, far less.
When recent economic and stock market growth has allowed upper earners to massively increase their share of the money earned in America it’s simply a no brainer that mild tax increases (even just rollback the Bush cuts) would do wonders to improve the Federal deficit outlook with no ill effects on the economy.
Shell Goddamnit
John Engler pretty much did just this to Jennifer Granholm in Michigan. Still dealing with the fallout in fact. Tax cuts, resulting deficits, and a tax-increase stopper in place preventing making up the funds. Well, another tax-increase stopper besides the perennial western MI dutch reformed republicans that is.
TenguPhule
12th commandment.
The 11th is ‘Thou shalt not speak ill of thy fellow Republican, So says God who’s name is Reagan. So it is written, so let it be done.
TenguPhule
My idea was we throw them all in stocks and charge 1 Euro for a person to kick them in the ass (literally).
Two birds, one automatic stone thrower.
Dave_Violence
Just out of curiosity, how much less than $250/year? $250k/year is a heck of a lot of money to be making.
$100k/year is seriously good money to be making, too.
How is the behavior of rich people important to the overall economy? I mean, if we’re going to tax rich pigs like Babs Streisand, Bam Margera, and Hillary Clinton, what will it mean? Instead of making $5 mil a year for skateboarding and beat up his parents, Bam will be chopped down to a meer $450 k/yr.
Hmmm… That would really piss me off.
jcricket
Dave – Depends on the year. Some years close to $250k, some years closer to half that (commission sales, sure is fun for the financial planning). I’m not complaining.
And I have some nice charts from my tax preparer showing that my effective tax rate is all over the board, but has almost never even approached the marginal tax rate.
I think you meant $4.5 million, but still :-) The argument that massive corporations and hugely wealthy people will change what they’re doing because the make 3-5% less/year is just ludicrous. They might start trying ever harder to lobby the government for more tax breaks, or shift their money illegally off shore, but they do that now.
I don’t buy the slippery slope arguments either. Let’s start with raising taxes back to the rates they were at before Bush cut them. Then stop with the unnecessary wars. End some of the massive new subsidies for industries that don’t need it. Clean up the military budget. Boom, everyone doing just fine.
Dave_Violence
No, I meant $450k. That would be what’s left after taxes of just a little over 90% on income of $5mil. That would be a return to the Eisenhower days. I think that’s what’s necessary in order to…?
You’re making good money not matter what, jcricket.
ether
Crap, I just agreed with Tim F.
My walls are gonna start talking.
mclaren
Bago asked, “How is an ARM not a scam?” An ARM is just another financial instrument. It’s a fantastic tool for banks to avoid going broke in periods of high inflation — one of the big issues during the stagflation era of the mid-70s was that banks had loaned out money for 30-year mortgages on the assumption that the inflation rates and productivity gains of the Eisenhower-Kennedy ear would continue into the foreseeable future. When they didn’t, ARMs were created. The ARM didn’t start as a scam, it began as a way for banks to continue to make loans. Otherwise all the mortgage loans would’ve dried up in the mid-70s. So the ARM was originally a big boon to everyone.
The problem arises when ARMs get used in a period of low inflation or deflation in which asset prices are falling rather than rising. You can’t blame banks or other lenders for making the mistake of projecting Kennedy-era inflation rates and interest rates forward into the 1970s, because economic forecasting is a job no one does well. All economists made that mistake in the late 60s. A baboon throwing darts at a wall full of interest rate curves does a better job of long-term macroeconomic prediction than the best economists, and studies have shown that. History is full of too many imponderables, from 9/11 to the Cuban Missile Criss to America’s intervention in Viet Nam, for anyone to make good long-term macroeconomic projections. I vividly recall watching a rebroadcast of the Meet the Press roundtable from December 1964 in which every seasoned expert journalist unanimously agreed that in 1965, American troops would not be sent to Viet Nam. It was the only sane sensible prediction at the time. It just happened to be wrong.
Decided FenceSitter remarked that my comments seem to be insightful, but this stuff is so well known among economists that’s practically taken for granted. If you want to read an excellent discussion of this stuff, read just about anything by Lester Thurow, the Dean of the Sloan School of maanagement at MIT. He’s non-partisan and makes excellent points about all these issues.
Sparky and Conservativelyliberal are dead on target about the repeal of the Glass-Steagal act. That act was created in the wake of the 1929 stock market collapse to remedy the immense corruption that results when banks and brokerage houses are allowed to get into bed together. Repealing that act was a foolish and disastrous mistake, about as stupid as removing the brakes from all newly manufactured cars and then expressing amazement when traffic fatalities skyrocket. Folks, the people in the 1930s knew all this stuff. They watched the mess created by the lack of basic common-sense regulations…and during the 90s, like a bunch of idiots, America’s best and brightest thought they knew better, so they repealed these basic regulations. And corruption and financial chaos resulted.
High marginal tax rates have to be considered in comparison to real GDP growth rates, as well as the balance twixt the parasitic financial sector of the economy and the actual productive goods-and-services sector of the economy. Very high marginal tax rates in the 1950s and early 1960s weren’t nearly as high as they seemed because with the sky-high GDP growth rates of that era, people’s standard of living increased by leaps and bounds even despite high taxes because manufactured goods and services were getting so much better so fast. You can chart this by measuring historic square footage of houses between 1952 and 1972 — it jumps dramatically. Or you can chart the number of TVs in a typical home between the 50s and 70s. Or you can look at the per capita number of college educated adults, or the number of appliances in the average home, or the vast increase in the use of air conditioning, particularly in the southern and southwestern parts of the U.S. During periods of high GDP growth, large marginal tax rates still result in a big jump in standards of living because our economy is actually building and producing new stuff at an incredible rate. Simply put, if you have less money left over after taxes but you can buy much better goods and services with the same amount of cash, you still feel ike life is getting better.
Today, the financial sector of the U.S. economy has taken over the U.S. economy like a cancerous tumor, while the productive sector of the U.S. economy has greatly shrunk. The poster boy for the abusive worthless unproductive financial sector “growth” is payday loans and title loans. These lenders make their money by preying on poor people with interest rates of 300% and 400% per year. That was illegal when I was a kid. It was a felony. Usury laws prevented that kind of criminal financial abuse. But in 1982, we repealed all the usury laws in the United States!
There’s no mystery here, folks. Every civilized society since the Middle Ages has had usury laws to prevent loansharking. But not us! We’ve repealed our usury laws and legalized loansharking — we just call it “variable interest unsecured credit card debt.”! It’s just loansharking under another name, and it’s now legal.
Also, since the 1990s, the quality of manufactured goods has plateaued. Getting a new computer was a big deal in the 70s and 80s and 90s because computers kept getting so much faster and better that it was mind-boggling. But today, getting a new computer isn’t a big deal, because computers are now so fast and the hard drives are so big and the displays are so large with so many millions of colors, it doesn’t make any practical difference. A new version of Windows (Vista, anyone?) doesn’t improve our standard of living because Windows XP is already so good. (Ditto OS X Leopard compared to OS X Tiger. Leopard is good, but not much improved compared to, oh, say, Tiger–versus OS 9.) Same deal with CD players, etc. They’re all so good you can’t hear any improvement in the new models.
So higher marginal tax rates today aren’t the answer. Unless America enjoys another period of huge productivity growth, high marginal tax rates would merely impoverish people. What’s needed is to shrink the parasitic bloated financial sector of the U.S. economy and pump up the actual productive sector of the U.S. economy once again. We can do this simply asd easily, by reinstating usury laws and making interest rates of more than (say) 10% illegal. At the same, time, we can reinstate Glass-Steagall. We should also ban most current derivative financial instruments, especially those so complex that their behavior cannot be predicted. In fact, all quants should probably be banned from high finance. See MIT Technology Review’s lead October 2007 article “The Blow Up” for more details:
https://www.technologyreview.com/Biztech/19529/?a=f
CDOs and interest-rate swaps are a good example of such derivatives that should be banned as illegal. This will require regulation. Slapping a stiff tariff on outsourced labor and shutting down complex financial game-playing like the Enron debacle is just a matter of writing laws that make this crap illegal or unprofitable. Such activities are not productive; they’re essentially parasitic. Making a new CPU benefits America as a whole, but charging 32% interest rates on credit card does not. We should set up our financial rules in such a way that activities which do not benefit America as a whole are discouraged. We did that when we banned child labor. We can do it for the new types of abuses today.
The U.S. economy is a set of rules; it’s not the wild west, you can’t just shoot a CBOE trader and steal his money and ride off into the sunset, it’s governed by a strict Uniform Business Code and financial regulations. The devil is in the details. Which rules do we set up? How do we enforce them? If we change the rules, we can encourage productive socially responsible behavior (manufacturing, innovation, small business startups, worker training) and make other socially irresponsible predatory behavior (Enron, payday loans, CDOs, real estate flipping, quants who generate finnacial derivatives so complex no one can predict their behavior, extortionate bank fees) unprofitable or outright illegal.
During the Gilded Era and the 1920s, the rules got relaxed, and corruption and financial chaos resulted. The Great Panic of 1907 nearly bankrupted the United States. It was what led to the formation of the Federal Resrve bank. Teddy Roosevelt busted the trusts in the early 1900s and a sweeping seris of reforms shut down the scams of the 1920s when FDR got elected. We simply need a new series of rules to reform the system. The deregulation mania of the 80s, spearheaded by a senile ignorant actor, was a disaster. We need to swing the pendulum back toward the center mark and put back in place basic laws like usury interest rate limits. When I was a kid, only Mafia leg-breakers charged 35% interest — now, banks charge that loanshark interest rate on their credit cards. It’s not a startling revelation, folks: if you relax the rules, large institutions will behave like the mafia. The answer is simple — make mafia-like behavior illegal. 35% credit card interest rates is mafia-like behavior. It should be illegal.
Marginal tax rates too high, as in Britain in the 1950s and throught he 60s, are not good, but willy-nilly privatization and deregulation are equally bad.
It’s important to recognize that the claims of economists are not just unprovable balloon-juice — they can be tested scientifically. As this Scientific American aricle shows, the ideas of Friedrich von Hayek have been put to the test scientifically, and they have been proven incorrect:
http://economistsview.typepad.com/economistsview/2006/10/sachs_friedrich.html
Likewise, the claims of Milton Friedman were put to the test in Chile, and they failed disastrously. This is not rocket science. These far-right economic ideologies have been put to the test, and the measured data contradict the predictions of the ideologues who promoulgated these mistaken beliefs. Once a doctrine has been scientifically disproven, there is no excuse for continuing to advocate it. Whether we’re talking about Intelligent Design creation museums or crackpot pseudoscience long disproven like Friedrich von Hayek’s pipe dreams or Milton Friedman’s failed nostrums, you need to throw out the junk science and deal with reality once the scientific results are in.
Financial deregulation in the 1980s and 1990s went hand in hand with creationism and Rapture theology and other pseudoscience. There’s no mystery about this. Kahneman won the Nobel Prize in economics for his studies of how humans fail to behave rationally in an economic setting. This data goes way back. Back during the initial enthusiasm about game theory in the 1950s, for which Nash won the Nobel prize in economics for formulating the Nash Equilibrium, the RAND corporation mathematicians tested out their game theory predictions by letting the secretaries play games and measuring the results. In every case, the behavior of the secretaries in the real world systematically contradicted Nash’s game theory predictions. The economists’ response was to ignore the real world.
Rational Choice Theory economics, which rose to prominence in the 1980s and 1990s, simiarly contradicted the real world. For exmaple, it predicted that MLK’s voting rights march could never have happaned, since the utility function of voting rights wasn’t high enough to offset the risk of dying.
Economics has gradually filled up with junk science over the last 40 years. If we get rid of the crap and junk science like the Chicago School of Economics and the von Hayek nonsense, we get rid of the mania for non-stop deregulation and privatization. The government just does some things (not all, but some) better than the private sector and every sensible person since Andrew Carnegie has realized that. Universal goernment-run public schooling, disaster relief, free public libraries, government-run vaccinations, food safety regulation, FDIC account insurance to prevent bank runs, are all examples of functions that the private sector cannot or will not perform. This is not some shocking revelation. Sensible people have known these basic facts since the 1850s. What’s new is that a group of ignorant crackpots and fringe lunatic kooks, starting with Bonzo the Chimp’s co-star in 1981, have deregulated and privatized and outsourced America to levels not seen since the 1920s.
If we throw out the junk science (von Hayek, Milton Friedman, Laffer) and get back to common sense and scientifically proven economics (Keynes, usury laws, the J-curve, tariffs on predatory imports including outsourced labor), America should do fine.