Deficit Spending, Too Big to Do Anything About,
Sub-Prime Mortgage Securities and Running Off Fiscal Cliffs
Could it be that multiple concussions are affecting our judgment? How else do
you explain the heedless determination of our elected representatives
to head straight for the same economic abyss and the American people's
propensity for tolerating it?
In the wake of the Republican success in Congressional elections last November and President Obama's new found Executive Branch activism, a few disturbing economic decisions came to pass.
Case I: If You Don't Got It, Spend It
How is it, that after six years of "steady recovery" and the latest State of the Union victory lap that we don't have at least our projected federal deficits under control?
Case II: Too Big to Vote Against
First, the banking industry (and by this I really mean the Big Banks) brought some NRA-type lobbying pressure to bear, resulting in the enshrinement of the "Taxpayer Insurance" language for TBTF banks making bets on the derivatives market in the December $1.1 trillion must-pass "cromnibus" spending bill. I mean why wouldn't we want these critical institutions getting back into the riskier side of the derivatives market - where else are they going to get the funds to bankroll their most cooperative candidates? The Republicans pushed hard for this rider, and President Obama accepted it, even engaging his Chief of Staff to lobby Democrats for support. This was exactly the opposite of what was intended in the Dodd-Frank legislation. Senator Elizabeth Warren made valiant attempts to drum up some righteous umbrage (click on video link/picture below - or here) but to little avail, as the bill passed with bipartisan support including the President's approval.
The Federal Reserve has been putting on a good show as of late. The sixth or so round of annual stress testing of large banks has been widely touted as successful - most banks have made it through the quantitative and qualitative rounds with a representative set of failures and a couple put in time-out. The problem is not that the banks aren't better prepared to withstand the rigors of an economy turning south like it did in 2008-09, but to draw upon a 2015 medical analogy, it's that we are building lots of walls and clinics to treat the symptoms of ebola and not going for a cure. Ebola will return in some form, probably more virulent, no matter how well we isolate it today - a vaccine is required to avoid potential disaster. Acute financial crises will recur, but in some new way that the Fed hasn't contemplated. We need to inoculate the national (and international) economy by drastically reducing the size of these huge financial institutions, so that the loss of one or more of these in the case of risk-taking gone wrong is but a step on the road to recovery. If the high flyers in the financial world knew they were making risky leaps without a government safety net, just like every small institution, perhaps they would venture more cautiously and fewer Americans would become homeless and/or bankrupt as a result of their folly.
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| Don't look now, but we've been here before |
Case I: If You Don't Got It, Spend It
How is it, that after six years of "steady recovery" and the latest State of the Union victory lap that we don't have at least our projected federal deficits under control?
The case can be made, and indeed was made, that deficits were not the priority during a national recession (which officially ended June 2009). It can be seen from the graph above that President Obama took this to heart as spending outpaced receipts markedly, only recently arriving back at President Bush's war-heavy (Afghanistan, Iraq, post-2001 Homeland Security) levels as a percentage of GDP. Still, per the graph below, it wasn't just what the government wasn't taking in, but what it was spending above and beyond the increasingly extravagant budgets of the Bush years through 2012.
But casually ignoring the sea of red ink with which we've already mortgaged the country, it's worth noting that nothing has effectively been done to stem the tide of mandatory spending - most notably medicare, medicaid and social security. This has become an increasingly larger portion of the annual budget and, as is evident from the deficit graph at the top, will surge back in the next decades like a slow moving tsunami. Add to that the effect of interest on the debt when rates eventually go up, and we have ourselves a dubious legacy for the next generation to inherit.
“The problem is, is
that the way Bush has done it over the last eight years is to take out a credit
card from the Bank of China in the name of our children... — $30,000 for every man,
woman and child.
That’s irresponsible.
It’s unpatriotic.”
It's almost double that now - what would Senator Obama have to say about the current
record spending and deficits?
Case II: Too Big to Vote Against
First, the banking industry (and by this I really mean the Big Banks) brought some NRA-type lobbying pressure to bear, resulting in the enshrinement of the "Taxpayer Insurance" language for TBTF banks making bets on the derivatives market in the December $1.1 trillion must-pass "cromnibus" spending bill. I mean why wouldn't we want these critical institutions getting back into the riskier side of the derivatives market - where else are they going to get the funds to bankroll their most cooperative candidates? The Republicans pushed hard for this rider, and President Obama accepted it, even engaging his Chief of Staff to lobby Democrats for support. This was exactly the opposite of what was intended in the Dodd-Frank legislation. Senator Elizabeth Warren made valiant attempts to drum up some righteous umbrage (click on video link/picture below - or here) but to little avail, as the bill passed with bipartisan support including the President's approval.
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| Senator Warren gives impassioned appeal for financial protection |
"I agree with you, Dodd-Frank isn't perfect," Warren told the banks,
"It should have broken you into pieces ... If we want to open up
Dodd-Frank,
let's do it and really end too big to fail rather than just
saying we did."
Instead, despite causing untold trillions of dollars in damage to the people of America by making leveraged investments it could not pay for, these financial institutions were able to convince our federal government to have the American taxpayer indefinitely backstop their future risky investments.
The Federal Reserve has been putting on a good show as of late. The sixth or so round of annual stress testing of large banks has been widely touted as successful - most banks have made it through the quantitative and qualitative rounds with a representative set of failures and a couple put in time-out. The problem is not that the banks aren't better prepared to withstand the rigors of an economy turning south like it did in 2008-09, but to draw upon a 2015 medical analogy, it's that we are building lots of walls and clinics to treat the symptoms of ebola and not going for a cure. Ebola will return in some form, probably more virulent, no matter how well we isolate it today - a vaccine is required to avoid potential disaster. Acute financial crises will recur, but in some new way that the Fed hasn't contemplated. We need to inoculate the national (and international) economy by drastically reducing the size of these huge financial institutions, so that the loss of one or more of these in the case of risk-taking gone wrong is but a step on the road to recovery. If the high flyers in the financial world knew they were making risky leaps without a government safety net, just like every small institution, perhaps they would venture more cautiously and fewer Americans would become homeless and/or bankrupt as a result of their folly.
Case III: A Sub-Prime Mortgage-Backed Security by any other Name...Still Stinks
Way back in 'aught-7 America experienced the result of financial companies gone wild, peddling mortgages to totally unqualified candidates, bundling these toxic packages, and unburdening themselves of these "investment opportunities." These august institutions were not just unregulated by government, but actively encouraged on both sides of the aisle, ultimately plunging us into the Great Recession.
It hurt. Everybody was politely contrite (without admitting blame, of course), and lip-service was paid to address these weaknesses so that never again.... And then we made:
Fannie’s goal in 1994 and today is to take market share from the FHA, the main competitor for loans it and Freddie Mac need to meet mandates set by Congress since 1992 to increase loans to low- and moderate-income homeowners. The weapons in this war are familiar—lower pricing and progressively looser credit as competing federal agencies fight over existing high-risk lending and seek to expand such lending.
Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers."
Even having directly experienced the costly aftermath of irresponsible mortgage lending, the knee-jerk progressive policies and conservative unbridled deregulation that helped put us there are kicking back in as soon as the dust cleared. What will be the excuse this time?
It hurt. Everybody was politely contrite (without admitting blame, of course), and lip-service was paid to address these weaknesses so that never again.... And then we made:
- The Too-Big-To-Fail banks bigger
- Sure they were still taxpayer-protected
- New mandates to Fannie and Freddie Mac to loosen up credit
"Déjà vu: Fannie launched its first price war
against the FHA in 1994 by introducing the 30-year, 3% down-payment mortgage.
It did so at the behest of its then-regulator, the Department of Housing and
Urban Development. This and other actions led HUD in 2004 to credit Fannie
Mae’s 'substantial part in the "revolution" ' in 'affordable lending' to 'historically underserved households.'
Fannie’s goal in 1994 and today is to take market share from the FHA, the main competitor for loans it and Freddie Mac need to meet mandates set by Congress since 1992 to increase loans to low- and moderate-income homeowners. The weapons in this war are familiar—lower pricing and progressively looser credit as competing federal agencies fight over existing high-risk lending and seek to expand such lending.
Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers."
Even having directly experienced the costly aftermath of irresponsible mortgage lending, the knee-jerk progressive policies and conservative unbridled deregulation that helped put us there are kicking back in as soon as the dust cleared. What will be the excuse this time?
As I've written previously, given the pure greed and ingenuity of the greatest minds on Wall Street, America is undoubtedly headed for some clever new economic apocalypse in the distant future. But it doesn't take a rocket scientist, or even a vapid smiling Congressional representative working at 20% capacity between elections, to anticipate the looming financial problems of making the SAME MISTAKES AGAIN.
But that doesn't mean our politicians can't at least recognize and head off the causes of this last Great Recession when they see us headed for a repeat performance.
But that doesn't mean our politicians can't at least recognize and head off the causes of this last Great Recession when they see us headed for a repeat performance.
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| It's almost like we've been down this road before |
