Short: Midwestern good sense and our deficit

I'm not the only one who likes to look at how we got to where we are. This sensible, very short and humble editorial looks at the Bush tax cuts. With one timely quote and one poignant contrast, the author captures a moment when we made a big mistake. Take a minute to read it.

Update 9/23/14. The original link was busted. In case that happens again. I'll quote from the editorial.

How did we get into the mess of having deficits of $1.5 trillion?

Norm Orenstein, of the conservative American Enterprise Institutes, reminds people he and others said at the time that the cuts in capital gains taxes were going to be a huge drain on federal revenues... This was in and around 2000-2002. Says Orenstein: 'Guess what, it was a huge drain on federal revenues.' [Note: it should say 'Norm Ornstein.']

But we continued to cut taxes...

Here's the poignant contrast:

Another surprise: the report reminded people that Allen Greenspan was saying paying down all our debt would have negative economic implications, would hurt growth.

Who should we have followed--Ornstein or Greenspan? Oh, the regret!

 

The Political Lie Machine: Dems caused the mortgage meltdown

I scoffed at this one at first. The idea that it wasn't the likely suspects (greedy bankers, greedy Wall Street execs, greedy mortgage brokers, useful fraudulent applicants, and pliant bond rating agencies), but those do-gooding Democrats, seemed ludicrous. Perfect for conservatives, since it moved blame off allies and potential donors and onto their favorite scapegoat. But ridiculous. But I heard it so many times, I had to find the truth.

Frankly, I wish someone with better financial chops than me would look into this question and give a definitive answer, apportioning blame fairly and accurately. However, there hasn't been a high-profile 9-11 type commission, so it's been open season for the usual political spin apparatus.

For the Republican lie machine version, let me paraphrase Kevin Hassett: Fannie and Freddie, pushed by the Democrats, sponsored huge numbers of sub-prime mortgages that allowed unqualified borrowers, many being minorities, to buy properties way more expensive than they could afford.

"Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans... Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened."

According to Kevin Hassett, Wall Street banks were just "bystanders injured in the blast" even though they originated sub-prime loans through legions of mortgage brokers and then securitized and sold them to unwary investors. Sure, bystanders. Hassett himself doesn't point out that there were large numbers of minorities, because he's wearing a Republican uniform, but sites like RenewAmerica.com do. Other mouthpieces trace the blame back to Jimmy Carter and the Community Reinvestment Act that tried to reverse banks' practice of red-lining.

For a rare balanced explanation, I had to search a lot, and finally found a readable one at FactCheck.org. They blame a long list, most of them on my suspects list: Federal Reserve, Alan Greenspan, Wall Street firms, Congress, the Bush Administration, Clinton Administration, mortgage brokers, buyers, real estate agents, certain accounting rules, and collective delusion that this wasn't a bubble. They absolve the repeal of Glass-Steagal, and don't even comment on the Community Reinvestment Act.

FactCheck.org doesn't discuss how the mortgage meltdown migrated to affect the entire financial industry, but that's where AIG and other speculators get involved. They sold the slice-and-dice packaged mortgage-backed securities, wrote insurance on the poorly vetted mortgage securities churned out by Wall Street firms, and betted on one or both sides using credit-default swaps.

Based on my research, this is what I think happened:

• The Carter through Clinton Administrations had programs to help lower-income buyers purchase homes. To support these programs, there was some relaxation of lending standards.
• Selling sub-prime mortgages became very profitable. Selling mortgage-backed securities was very profitable. Selling insurance on these securities was very profitable. Buyers of these securities didn't know what was in them, but knew that they paid higher returns than most bonds. Profit motive all around.
• So, these small programs opened the doors a crack, and Wall Street firms rammed their trucks through.
• Yeah, sounds like it was the Dems.

Fairly Balanced Sources: Mortgage Explanation Site, economics paper and Andrew Sullivan
Left and left-leaning: Barney Frank, Southern Poverty Law Center, NYRB, and McClatchey News
Right: Forbes, The Sun, House Republican, FreedomWorks
Non-expert right and far right: Yahoo question and white nationalist

Update 10/7/11: Per a comment from the Atlantic website: "Let's not forget the SEC saying okay to the banks to go with a 30-1 leverage..." Agree! How did FactCheck.org miss that one?

Update 12/18/11: Per a new report, house flippers also had a role.

Update 9/15/12. I'm still reading that it was the Dems' fault. I've had unsettled questions about how much the government was responsible for lowering mortgage underwriting standards. The answer is that government goals for lower income house ownership did loosen standards. However, it was the profitability of securitizing subprime loans that pushed and expanded those loose standards within the private sector:

More sources:  A short, readable summary from Wikipedia; a history of Fannie, and the source of the graph above; a conservative blames Barney Frank again using the same complaint that Fannie invented subprime securitization so everything afterwards is their fault.

Another update on 12/12/12 here. A few more facts, but nothing that shakes up the story. The Dems did more than "opened the doors a crack." But all the other factors are still also to blame.

History for Amnesiacs: Our stolen Social Security taxes

In this lesson, I have to ease off my usual how-could-you-forget tone. I had to do a bunch of research to confirm, and in some cases correct, my own memory of events.

Social Security (SS) was born underfunded. Maybe I should have researched why the founders in 1935 thought 1% per year were adequate savings, but I didn't. However, as far back as I can remember, which goes into the 1960's, SS was in trouble and in need of rescue. The employee contribution rate went from 1% in 1935 to 7.65% since 1990.

(Click to enlarge)

I remember the series of SS crises, as collections failed to keep up with current and projected pension demands. The Greenspan Commission in 1983 was supposed to fix SS for good. I guess politicians and voters bought the story, or maybe just felt that the taxes were as high as Americans could stomach, because the rates haven't been raised since the commission set the rate at 7.65%.

One thing that didn't happen was isolating the surpluses and making sure the money was available when the bulge of retirements started to tax the SS fund in the 2020's. This is where my research went off the rails. I expected to find that because there was no "lockbox" for the surpluses, they had been frittered away through tax cuts and deficit spending during the Bush II years. That's the Democratic narrative, anyhow.

The Twist

What I found instead is that the SS trust fund never had a method of securing its surpluses. It always handed them over to the Treasury in return for IOU's. Unlike a normal pension plan, the SS trust fund not only didn't secure its surpluses, but it never invested them. It was always on the road to relying on US federal dollars for its own deficits when the baby boomers retired in droves.

The SS trust fund also funded most of our modest deficit spending for 3 decades. But starting in the 1980's, we ran significant extra deficits beyond that. So not only does the federal government owe the SS trust fund $2.6 trillion, but it owes non-government creditors nearly $10 trillion on top of that.

(Click to enlarge)

One part of the Democratic narrative is correct. The SS payroll taxes were increased and that provided the federal government with ready money to fund extra spending and tax cuts and buy up yearly deficits, so that money was frittered away.

A more important truth is that, despite creating these surpluses, neither party in the 1980's had a plan that allowed the SS trust fund to use these surpluses. When you think of pension funds losing billions in hedge fund collapses, it's reassuring to know the SS trust fund isn't being used that way. But to find out that the money isn't even being stuffed in a mattress, that none of our top economists have ever figured out how to stash or invest or isolate or protect that much money, that is maddening.

All that time that I was being taxed, I was one of the many baby boomers who said "I'm not going to count on Social Security because it's not going to be there when I retire." However, finding out more of the mechanics now, it really hurts. OUUUUCCHH.

Even when the commission declared that the tax increases would keep the SS trust fund solvent in perpetuity, and it increased taxes ON ME and EVERYBODY to create much larger surpluses, THEY NEVER HAD A PLAN. Those surpluses were just thrown down the same rabbit hole. What the hell was that commission for? Why the f**k didn't the commission work on that part of the problem? My respect for Greenspan, which started dropping after he retracted his "irrational exuberance" comment and kept pumping up the bubble, just hit a new low. It's now tunneling its way to China. How appropriate.