TCS Daily


Bernanke Also to Blame

By Desmond Lachman - February 1, 2008 12:00 AM

As the United States' worst housing market bust since the Great Depression raises the specter of a nasty recession, a serious reappraisal of Alan Greenspan's 17-year chairmanship of the Federal Reserve is underway. Justified as this reappraisal might be, it should not be allowed to detract from Ben Bernanke's role in today's US housing market debacle, especially since Mr. Bernanke assumed the Federal Reserve chairmanship in February 2006 a full year before the worst of the sub-prime lending excesses were to be made.

To be sure, Mr. Greenspan must assume the major part of the responsibility for having sown the seeds of the largest US housing and credit market bubbles in the post-war period. He did so in part by lowering interest rates to abnormally low levels in the aftermath of the 2001 bursting of the NASDAQ bubble and then by maintaining interest rates at artificially low levels for far too long. As if this were not enough, Mr. Greenspan also presided over an unprecedented loosening of mortgage lending standards as epitomized by the explosion of sub-prime mortgage lending.


Far from using the Federal Reserve's regulatory authority to reign in the non-bank mortgage loan originators, which were responsible for more than half of all sub-prime loan originations, Mr. Greenspan is on record for having seen merit in sub-prime lending. He did so in the belief that such lending offered a viable route to expanding home ownership. Mr. Greenspan is also on record for having enthusiastically embraced financial market innovations, like the securitization of mortgage loans and the increased use of Adjustable Rate Mortgages, which were only to compound the problems in the financial system.


Worse still, Mr. Greenspan never tired of arguing that it was not the job of the Federal Reserve to attempt to identify asset price bubbles. Nor did he believe that the Fed should pay attention to asset price inflation in setting monetary policy. He did so in total disregard of the United States' own untoward experience with the bursting of the NASDAQ bubble as well of that of the Japanese experience with the bursting of their asset price bubbles in the late 1980s. Rather, he left it to his successor Mr. Bernanke to deal with the consequences of having created outsized housing price and credit market bubbles.

While one has to sympathize with Mr. Bernanke's present predicament, which is hardly of his own making, one has to ask why was he as passive as he was in 2006 as the worst of the sub-prime loans were made under his watch. During that year, a total of around US$600 billion in sub-prime mortgage lending, or around one half the total amount of sub-prime lending presently outstanding, was made on conditions that were materially more lax than earlier vintages of sub-prime lending. Indeed, it became commonplace for banks to extend loans up to 100 percent of the value of the underlying property and to make such loans to borrowers without incomes, without jobs, and without assets.

Mr. Bernanke also needs to be held accountable for totally misjudging how serious would be the bursting of the housing market bubble and how large would be the losses to the financial system from imprudent sub-prime lending. In April 2007, when he first identified that something was amiss with sub-prime lending, he assured Congress that the sub-prime problem would be limited in size and that any fallout would be confined to the housing sector. A few months later he was forced to concede that sub-prime mortgage lending might result in losses to the financial system of the order of US$50 billion to US$100 billion, only to have to modify these estimates again to something in the ballpark of US$150 billion. He did so even though current market estimates of sub-prime mortgage lending losses are anywhere between US$200 billion to US$400 billion.

Mr. Bernanke's misjudgment of the severity of the housing bust blinded him to the need for early and decisive monetary policy action. Indeed, it was as late as the middle of August 2007 before the Federal Reserve started the current interest rate cutting cycle. This was long after it had become apparent to most market observers that large sub-prime losses and a lack of transparency in the new fangled debt instruments were leading to a seizing up of the international banking system. And even when the Fed did begin cutting interest rates, it did so gingerly and it repeatedly underestimated the downside risks to economic growth from the housing market debacle.

The Federal Reserve's dramatic 75 basis point inter-meeting cut on January 21 suggests that at last the Federal Reserve is grasping how serious is the threat to the economy emanating from a lethal combination of a major housing market bust, an acute credit crunch, and international oil prices at close to US$90 a barrel. While this latest cut is too late to prevent a recession in the first half of 2008, it does give hope that the Federal Reserve will at least not repeat the mistakes of the Great Depression or of Japan's lost decade, when monetary policy was kept too tight for too long in the face of the bursting of large asset price bubbles.

The author is resident fellow at the American Enterprise Institute.

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26 Comments

Let's sort this out
Lachman gives us a mixture of fact and fancy. Let’s sort this out.

“Greenspan must assume the major part of the responsibility ... by lowering interest rates to abnormally low levels.”

True. As Lachman notes Greenspan wasn’t adequately worried about asset inflation. But he chides Greenspan for failing to limit the subprime business and for fostering securitization. The subprime business is mid-way between credit card lending (high interest rates for uncollateralized loans) and prime mortgages (low interest rates for low risk loans). If you hate subprime you must logically hate credit cards since these are far riskier. Secondly, the securitization aids asset liability management and the mismatch in duration that makes it risky for banks to hold mortgages against demand deposits.

“…why was he [Bernanke]as passive as he was in 2006 as the worst of the sub-prime loans were made under his watch?”

Give me a break. Delinquencies only started to show the problem in late 2006. At that point the market started to punish weak lending practices. The ABX shows this starting at the end of 2006 and lasting through 2007. You expect Bernanke to be smarter and quicker than people who have their money on the line? That’s what the socialists used to argue.

“…the Federal Reserve will at least not repeat the mistakes of the Great Depression.”

Yes, but the liquidation of mal-investment is still required. A recession is corrective medicine for mal-investment. The problem is the “abnormally low levels” of interest rates during Greenspan reign.

There are other elements:

http://libertyandculture.blogspot.com/2007/03/what-subprime-crisis-shows.html

Fed IS to blame for both dot-com meltdown and current housing debacle
First, it was the tight credit under Greenspan that led to the dot-com meltdown. Business couldn't get credit, so the house of cards crashed. Other factors may have caused a later crash if credit crunch didn't, but the credit crunch did. This was AFTER Greenspan complained about the unwise condition of the market. He put the brakes on too hard.

Second, Bernanke complained about the housing market being too hot and raised interest rates. OOOPS. Too much brake again.

So, in 2 instances we have a Fed leader who didn't like what was happening in a distinct part of the market. Complained about it, put on the brakes, and then precipitated a crash in that area he disdained. Coincidence?

And, let's not forget that the genesis of the sub-prime "problem" was the US Congress telling lenders to extend credit to more 'risky' borrowers.

Fixing the Real Estate Market
The MARKET can and should fix the underlying problem precipitating the housing bubble.

The underlying problem is the METHOD in which adjustable interest rates are set. Most are tied (in the end) to the overnight rate set by the FED. It makes no sense to tie long term rates directly to overnight rates. A better business practice would be to tie real estate collateralized adjustable rates to long-term market rates. This can be effectively accomplished by simply indexing ARM real loan rates to fixed 30-year rates. A yearly first mortgage ARM might be set to ½ point less than the current 30-year rate being offered at the time of adjustment. A sub-prime or second ARM rate might be set to ½ point (or greater) than the current 30-year rate.

In the last 8 years or so, borrowers were often being qualified at unsustainably low interest rates and entered agreements which nearly guaranteed that their rates would adjust to a level much higher than prevailing market long term rates. Is this the FED’s fault? The FED should have been unequivocal in warning about the dangers of these practices. But most of the blame is in the market…with the lenders who created and the borrowers who agreed to these inappropriate and risky instruments.

The solution is NOT another Sarbanes-Oxley fiasco. The solution is for lenders and borrowers to negotiate long-term mortgage rates based on long term market conditions.
If this had been the case these past 8 years or so, the real estate market would not likely have inflated unsustainably in the first place, only to deflate and precipitate a recession in 2007/2008.

Recession?
We have a few more months to go before we know whether or not we're in a recession.

Ahhhh, The logic of Keynes. Note it is not economic logic at all.
Where to begin? How about the Beginning:
Nixon (Who spawned Ford, Bush and Bush, call them country club Republicans, also McCain, Romney, Rudy and the Huckster) stopped payments of loans in coin for currency. (This caused Ron Paul to run for Congress in the first place.) This one act gave the Fed Carte-Blanche to lower rates at will as it no longer mattered what the value of the currency was relative to GOLD.

So the Fed dropped rates creating the recession of the early 1980s. Fortunately the Fed then reversed and raised rates rapidly which made for a SHORT but bad recession.

Then Greenspan took over and lowered then raised then lowered then raised then lowered. All the time keeping average rates low and gold prices (also ENERGY PRICES) rising.

Enter Big Ben. He seems to be worse. He had raised rates to try to help the mortgage business and this sub prime mess but is now lowering them aggressively.

The core issue is that a handful of people can set the short term price of money. This has long term effects of lowering the currency value and distorting the picture of the future that investors have. Keynes said that in the long term we are all dead. If that is true then the average life expectancy would be about 14 years.

recession?
But I thought the American system was that you can't have a recession in an election year? They always keep the printing presses running to make it all seem right.

Fed to blame
What about the line from Nixon's time when he wanted the FED charman to do something, and they told him the FED was supposed to be independant, and he replied something like: "yeah, and I expect him to independantly do what I want"?
And apparently an earlier president when asked where the new FED should stand he anserewed something like: " below the Fire Deptarment. "
The FED is an organ of the governement no matter what they pretend. Their chairman is a prez appointee, and none of them will give up such a cushy job feeding at the public trough to go against the prez. They are just more snivveling beaurocrats who have their own agendas a la 'Public Choice' theory.

Govt meddling
Agreed.

The Federal Reserve is a branch (twig?) of the US Federal government whether politicians admit it or not.

Operating expenses paid by our taxes and neither policy impact nor long term costs are ever reviewed by the Congress.

Accountability is in name only.

It's much like the teachers union. Arrogant, interested only is maintenance and increase in political power. Dishonest to its core. Negligent to grossly negligent in completing its primary function.

In a private company, "gross negligence" will often win a plaintive millions. With the Fed, it's at worst a "reputation reevaluation."

Continually printing fiat money backed by nothing but the reputation and an attitude of "we know how to smooth out the bumps and valleys of the market." The market being the collective wisdom of _billions_ of people trading stuff for money and then money for other stuff. The "trust us" mentality at the Fed sounds a lot like the other departments of the Federal government.

Couple the Fed's economy tinkering with the far, far worse pandering, protecting the stupid, the lazy, the greedy-needy and all out cathartic arrogance of the political class aka Congress, we have a companion to the law of unintended consequences: the law of government meddling - sometimes government makes things worse, usually it makes things much worse.

TS

Choosing the right target
Dr. Bernanke and Alan Greenspan have been well criticized in the press for the financial turmoil that now exists. This is to be expected as they are the most visible of the public figures who are supposed to insure financial stability in the nation. I'll bet that far more people know the name Bernanke than can even name who is Secretary of the Treasury. So be it.
This article does not address the simple truth that whenever the bankers manage to throw off the yoke of government regulation we have a big boom followed very shortly by a bigger bust. How, you ask, can I say that the bankers threw off the yoke of the government? I am a bit to tired to do your research for you, but here are some things that Google can tell:

Commodity Futures Modernization Act - aka "Enron Loophole" - Signed Dec 21, 2000 by Bill Clinton
Note: This act directly enabled the unregulated OTC securities trading that drove the housing bubble as well as the Enron debacle.

Gramm-Leach-Bliley Act - Repealed Glass-Steagall Act which prohibited a bank from offering investment, commercial banking, and insurance services. Signed Nov. 12, 1999 by Bill Clinton

BAPCA - which one court even declared Congress passed the statute as part of "an agenda to make more money off the backs of the consumers in this country." Hat tip Credit Slips. http://www.creditslips.org/creditslips/2006/10/one_year_after.html

If you don't mind listening to a lefty tell the story try this link - $100 Billion and Counting: How Wall Street Blew Itself uphttp://www.alternet.org/story/74510/?page=entire

I am not sure that everything Pam Martens says in the above article is true but it does give pause.

The next link is for the heavy lifters, be forewarned that if you really want to know the truth you are going to have read this whole site and it will take you a long, long time:
http://calculatedrisk.blogspot.com

Give your power away and you deserve what happens
Our governmental system is a representative democracy. We give our power to others in the hopes they do what's in OUR best interests. Is it any wonder that those in government do what's in THEIR best interests?

The only recourse is structuring your life so 1) you don't expect anything from THEM, and 2) you are as protected from their actions as possible. If you expect something good from them, you'll always be disappointed (at best) and might actually be harmed.

amen to that
Even on the Democrat side, I heard Chuck Schumer on the radio the other day demand Bush respond with tax cuts and stimulus to stave off recession. What!?

Tax cuts are a downright foolish idea right now, and the stimulus they're discussing is foolish too. Our government is in just as bad or worse debt than consumers are, and their response is to lead by example and show we need more debt to get through economic trouble!

When things are "normal", taking on debt can be a good response to stimulate things. Things are not normal.

I'm sure we've all heard Bush and other politicians say energy prices are high right now... WRONG. I think he even said it in the State of the Union. Energy prices are low right now. In 5 years we will be dreaming of the good old days when gas was $3 a gallon.

I wonder if the only thing keeping the people from starting a revolution is the fact the politicians have us divided against each other by political party/ideological lines. That and most people are ignorant about politics and anything that doesn't make them uncomfortable RIGHT NOW.

But unemployment is pretty low so far, if that starts upward we're in trouble. A net loss of jobs last month is a good start to that. A sizable number of foolish people speculated on the market and got into homes over their heads, mortgage lenders were greedy and also speculated on the market so made cheap money availabe to those foolish people, our government started a war then paid for it with credit so they could give rich people a tax cut. Now they're bailing out lenders using even more credit. Bush's legacy (and thats just the tip of the iceberg). Reduce revenue and balloon spending, thats a sure way to make a strong economy... Bush doesn't represent America, he represents weathly people (his friends) and corporations. Everyone else who voted for him are suckers. But we all in America are paying the price. Its not fair to blame Bush directly for everything, but this is his culture. America is down to a 2 prong economy- Wall Street and consumer spending. Thats all that matters in this culture. This isn't the America I know and love.

Lets say it together- "Worst. President. Ever." Politicians suck.

Uhhh
"Tax cuts are a downright foolish idea right now, and the stimulus they're discussing is foolish too. Our government is in just as bad or worse debt than consumers are, and their response is to lead by example and show we need more debt to get through economic trouble!"

1) Proper tax cuts (those that stimulate investment) work every time they are implemented. Tax simplification works too. Economic growth is what we need -- and more investment in sectors that were starved during all the over and mal-investment into real estate. Ireland slashed its corporate income tax rate down to just 12.5% and its economy boomed. On a per capita basis, the Irish are one of the richest folks in Europe now. Before, they were the poorest.

2) The government is not in as bad or worse debt than consumers are. The debt load for consumers is far more burdensome. What's a problem (technically) are the liabilities that are yet to come. But the government can just renege on those, hence why they are just 'technical' problems.

"so they could give rich people a tax cut"

What is the number one economic factor that is sensitive to low unemployment and rising wages? Answer: The Capital-Labor ratio. That is, the amount of capital investment a worker has available to do his job (produce goods/services). Where does that capital come from? The rich people you love to bash. Unlike the workers, they have choices so we would be crazy to not suck up to them.

Representative government .... those folks represent US
The folks in the congress are reflections (representations) of us, the people.

If we the people mostly live beyond our means, who are we to expect our reflections (representatives) to do otherwise?

Silly expectation.

January 2008 commercial and industrial lending breaks record

...of $760 million for the month. Not only is commercial lending at an all-time high for volume, but also the year-to-year growth rate has been phenomenal: double-digit growth in commercial bank loans for almost 6 months now, and close to 20% growth for the last 4 months, stronger growth in commercial lending than at any time in at least 20 years.

Looks like the banks have plenty of money to lend after all.

http://mjperry.blogspot.com/2008/02/commercial-lending-growth-shows-ongoing.html

giving it away
yes, that's right. I've been saying for ages around here how harmful governments are. I've never had any problem with people like Tony Soprano, or the Hells Angles, but have only been victimized by various states in my long life.

Not really
"Proper tax cuts (those that stimulate investment) work every time they are implemented. Tax simplification works too."

I'm down for simplification. Its hard to say it works when it hasn't happened - ever as far as i know. But I am onboard for a change like that.

Tax cuts in this environment might temporarily provide a crutch to support the economy from falling as quickly, but its foolish in this environment of extreme debt. The money comes from somewhere. Its foolish to take on more debt for a band-aid. And what happened with Bush's tax cuts? Bush's tax cuts haven't worked so well, apparently they don't work every time. When will it end if your answer every time is to get more money into the pockets of rich people?

"Economic growth is what we need -- and more investment in sectors that were starved during all the over and mal-investment into real estate."

I don't think so. You sound like a Democrat pushing for socialism. We just need MORE government intervention to fix the problem government caused. We just need MORE growth to fix the problem that our irrational quest for growth caused. No, we need to bite the bullet and accept a contraction, a correction of the markets. Trying to grow ourselves out of it will only make it more extreme, the high points may be higher, but the low points will be lower and last longer. Its exactly where we are right now, or heading quickly in that direction, but your answer is to do the same thing we did before that led us here.

"Ireland slashed its corporate income tax rate down to just 12.5% and its economy boomed. On a per capita basis, the Irish are one of the richest folks in Europe now. Before, they were the poorest."

I would ask what was Ireland's debt load at the time. And what was their budget like- balanced, debt, surplus? Circumstances matter. Don't you think it might be better to look at reality and experience to guide economic policy, rather than theory?

I might support a move to lower corporate income tax rates, but not right now.

"The government is not in as bad or worse debt than consumers are. The debt load for consumers is far more burdensome. What's a problem (technically) are the liabilities that are yet to come. But the government can just renege on those, hence why they are just 'technical' problems."

I think I agree with you, I may have overstated it. But I'd need to look at the numbers. $30,000 per person in the country needed today to pay off our national debt is close to what the average person has in personal debt, I would think. Thats if we remove mortgage debt from the equation. Mortgage debt is different than a car loan, student loans or credit card debt, etc. A mortgage is an investment, and we'd be paying rent anyway if we have no mortgage debt.

The liabilities yet to come are not even on the radar at this point. We have enough to deal with as it is. You may be ok with letting the government renege on SS promises, dismissing it as "technical" problems. I am not, I think that should be #2 on our economic issues to deal with. Before anyone gets another tax cut, I would require the government stop stealing our money for the general fund. Thats after they reduce spending to the point the budget is balanced. Then Bush's gift to the rich should be repealed, that money can start to pay down the debt, and then we deal with SS with more cuts in government spending.


"What is the number one economic factor that is sensitive to low unemployment and rising wages? Answer: The Capital-Labor ratio. That is, the amount of capital investment a worker has available to do his job (produce goods/services)."

If thats the case, why have worker wages been stagnant the last 5 years as capital flowed to corporations and the wealthy?? The theory is that all boats rise with the rise of the water, but that has not been the reality these last 5 years. The theory even makes sense to me, but reality is a different lesson.

"Where does that capital come from? The rich people you love to bash. Unlike the workers, they have choices so we would be crazy to not suck up to them."

That capital comes from consumers.

And thats the problem with conservative economic ideology. Automatic respect and to "suck up" to rich people. Supply-side economics doesn't always work. Can't you hear reality screaming that at us right now?? Judge a person by his character, not his pocketbook.

The days of defending failed ideology and political partisanship to the last breath need to end. The Fed and our politicians need to learn this lesson. Conservatives need to learn it. McCain could win this thing! What more evidence do you need to begin to accept reality?

I agree, the stimulus package is bull
...because it does nothing really at all to change peoples behaviors. Windfalls never do.

As for where it is going to come from, the Chinese will foot a lot of the bill at the next Treasury auction, I assume.

Yes really
"Bush's tax cuts haven't worked so well, apparently they don't work every time. When will it end if your answer every time is to get more money into the pockets of rich people?"

I don't know what planet you've been on, but the Bush tax cuts worked just splendid. The economy boomed, unemployment went down. Tax revenue amounts surged ABOVE what we were getting before the tax cuts. Where have you been?

"We just need MORE growth to fix the problem that our irrational quest for growth caused"

You don't understand economics. You need to educate yourself. Or rather, you need first to divest yourself of the biases and myths you believe so you can learn economics. Our 'quest for growth' didn't cause any problems -- except for those that exist in your perceptions not founded in economic fact.

The economic sectors that had the bubble WILL contract. Why does the entire rest of the economy have to? Doesn't make any sense.

"I would ask what was Ireland's debt load at the time. And what was their budget like- balanced, debt, surplus? Circumstances matter. Don't you think it might be better to look at reality and experience to guide economic policy, rather than theory?"

THAT proves you don't know anything about economics right there. You know the buzzwords, but not how to use them. Their tax revenues went up as the economy boomed, period. What the Irish did on the spending side doesn't disprove any of that (nor is it relevant). What is important is that they kept it up for 20 years and became wealthy doing so. Oh, and it is not theory. EVERY time taxes are cut on investment, economic growth booms, jobs are created and more (not less) tax revenues come in. German and Japanese tax policies during the 1950s-60s were similar to the Irish, and their economies boomed. Eastern European countries likewise have adopted such polices and are booming.

And that is despite the corruption and other problems those places have.

"Thats if we remove mortgage debt from the equation. Mortgage debt is different than a car loan, student loans or credit card debt, etc. A mortgage is an investment, and we'd be paying rent anyway if we have no mortgage debt."

No, for the purposes of calculating debt, debt is debt. Else, Roy can come in here and argue that all the government's debt is likewise an 'investment'. Besides, given the correction in the real estate market right now, its not really much of an investment by your own criteria, is it?

"If thats the case, why have worker wages been stagnant the last 5 years as capital flowed to corporations and the wealthy??"

Total worker COMPENSATION went gone up. The take home pay hasn't, that's for sure. Guess why? Health care and taxes is the reason for the middle and upper-middle classes. Immigration for the working classes. The threat of outsourcing is 'remote immigration' for the same purposes of discussion.

But, they would go up even when it comes to take home pay if we didn't double-tax investment income like we do, to name just one example of where we can improve things dramatically. That's because a lot more investment would go on and more jobs will be created. Employer competition for workers will rise, so wages will rise.

"That capital comes from consumers.">

Uh...no it doesn't. It comes from investors who got the money from consumers because THEY CHOSE not to delay consumption and invest the money themselves instead. And since there are a lot fewer investors than consumers in America, well..."he who has the Gold makes the Rules" is in full play, no matter how you would want the world to work.

That's really funny how you don't see that when you do with regards to the difference between Rent and Mortgages. Interesting.

"Supply-side economics doesn't always work."

When properly enacted and no other government idiocy is at work (like regulations against red-lining, which led directly to the sub-prime lending snafu), supply-side economics works EVERY time.

Oh, and it is not about 'giving to the rich', it is about 'giving to people who want to take the actions to become rich/richer'. That's what you don't understand about the process.

"McCain could win this thing! What more evidence do you need to begin to accept reality?"

Oh, I acknowledge that he can win...and the country will go to hell because of it. He's admitted openly to not understanding a thing about economics himself, so I can see how he's your guy.

Time to bring back the term- useful idiot
I read that post and think about you the same thing you said to me, "You don't understand economics".

Your comments are somewhat correct, they just comprise a third of the total picture. You tell me I don't understand things repeatedly, hard to accept from someone clearly enslaved by limited ideology.

"I don't know what planet you've been on, but the Bush tax cuts worked just splendid. The economy boomed, unemployment went down. Tax revenue amounts surged ABOVE what we were getting before the tax cuts."

Wall Street boomed, certain sectors of the economy boomed. It was not a boom that benefited everyone, not even proportionally. The wealthy experienced a huge boom, the bottom improved some and the middle was stagnant, if not moving backwards. Exactly how the tax cuts were designed, except giving more to those who already have much didn't translate to helping everyone. Supply-side didn't work. The job recovery was lackluster, below average compared to historic norms and almost always below expectations. Tax revenue did surge, I've read its up 20%. But thats rather meaningless when the growth in spending happens like it has. Thats the point I left out before that you could've pummeled me with. If Bush didn't spend like a drunken Democrat and start a war, we wouldn't be in such a tight spot. You didn't mention our national debt once. How can you say our economy is going splendidly when we use credit to pay for so many things? Is a person doing "spendidly" when he has to pay his car payment and electric bill with his credit card?

"The economic sectors that had the bubble WILL contract. Why does the entire rest of the economy have to? Doesn't make any sense."

Thats a good point, the entire economy shouldn't have to contract. It will because the financial and housing sectors affect everything else, because we don't have money to smooth things out- we'll try to do it with credit, on top of the massive credit bill we already have, because our economy is dependent on consumer spending and the boom in wealth has gone to so few people that consumer spending also can only keep pace through the use of credit.

The economy you think was booming the last few years was a facade built on a foundation of debt. Wall Street looked great, Bush's tax cuts fueled that. Corporate earnings and executive pay soared. You have to look at more than that.

If Wall Street is the dog sled team and the country is the sled, we cracked the whip and the dogs started running. But the harness was made of elastic, the sled has moved a foot and dogs have moved a mile. The dogs didn't pull the sled at pace, supply side economics didn't work (again). Now we're at the limit of the elastic, the dogs will either snap backward closer to the sled, or the sled needs to start moving forward faster to catch up with the dogs. Thats why Congress wants to pump money into the hands of consumers, to get that sled going. The mistake here is that they think giving people more money to spend on more crap is the answer. And the deadly mistake is that we're on thin ice. The government doesn't have money to give to people, they're going to take a cash advance on the credit card to do it. Its not a rebate, its a loan. And we will pay interest, or our kids will. Our interest payments are $400 billion a year now, for fiscal year 2006 anyway. And I'd say $400 billion isn't THAT much money in the big picture, but its INTEREST ONLY, and its still going up. We're still heading in the wrong direction.

On Ireland: "Their tax revenues went up as the economy boomed, period. What the Irish did on the spending side doesn't disprove any of that (nor is it relevant). What is important is that they kept it up for 20 years and became wealthy doing so."

Spending isn't relevant? And you say I don't know anything about economics. Take off the blinders Zyndryl.

"No, for the purposes of calculating debt, debt is debt. Else, Roy can come in here and argue that all the government's debt is likewise an 'investment'. Besides, given the correction in the real estate market right now, its not really much of an investment by your own criteria, is it?"

Again, take off the blinders. Can you at least recognize that a mortgage is not the same as a car loan? There are some benefits to having a morgage? Buying a home IS an investment. Our tax code is structured to reinforce that. And you'll pay rent anyway, thats not a debt, so may as well make it a mortgage.

Actually, right now is a great time to get into the real estate market, you can find some real bargains. And if you're already in it, just hold on a few more years and it again will be a good time to sell. Real estate is still a great investment, you just have to be smart, and flexible.

Zyndryl the useful idiot - second half
"Total worker COMPENSATION went gone up. The take home pay hasn't, that's for sure. Guess why? Health care and taxes is the reason for the middle and upper-middle classes. Immigration for the working classes."

The first part is half-true, if you prefer to twist reality that way. Total worker compensation went up if the company you work for absorbed some or all of the increase in health care costs. But when you factor in stagnant or even small increases in wage, rising health care costs for the employee, and inflation- I could see a valid argument the total worker compensation went down. Taxes were a very minor factor for most people. Have you heard Hannity's totally bull statistic? The average is $1,800 per taxpayer that Bush tax cuts made. That is sooooo misleading, and proof of just how extreme the benefits of Bush's tax cuts went to the wealthy. Lets see the median tax savings, is my response. Its a much more accurate number. I'd venture a guess its at... $320. The average is that high BECAUSE wealthy people got a huge savings and everyone else got a pittance. A person making $40,000 year got about $450-$500 a year savings. So $42 a month on the high end. Thats not much of a mover for total worker compensation.

How does immigration make total worker compensation increase for the working classes? Do immigrants drive wages up?

"But, they would go up even when it comes to take home pay if we didn't double-tax investment income like we do, to name just one example of where we can improve things dramatically. That's because a lot more investment would go on and more jobs will be created. Employer competition for workers will rise, so wages will rise."

What does take home pay have to do with investment income? The average wage earner doesn't have investment income. Well, thats not true, a good savings account will earn you, say, $70 a year. A smart wage earner might have a CD or two, another $150 a year.

Your point here is back in your ideological rut. Average workers don't have investment income. What you're arguing is more tax breaks for people who already have wealth, therefore are able to earn investment income. We've learned again from the last 6 years that giving more money to the wealthy does not equate to an increase in wages. You even said yourself take home pay didn't go up, so why do you still argue it will if we give more money to the wealthy? Look beyond ideology and theory.

"It (Capital) comes from investors who got the money from consumers because THEY CHOSE not to delay consumption and invest the money themselves instead. And since there are a lot fewer investors than consumers in America, well..."he who has the Gold makes the Rules" is in full play, no matter how you would want the world to work.

Way to clear that up, the money didn't come from consumers, it came from investors who got the money from consumers.

The rest of that first sentence contradicts itself. You can't choose to not delay consumption and invest it instead. Isn't it one or the other? Freudian slip maybe?

Agreed on the last part. People with money make the rules. Its what is wrong with our society. So, unless you have a lot of money, why would you support it?

"When properly enacted and no other government idiocy is at work (like regulations against red-lining, which led directly to the sub-prime lending snafu), supply-side economics works EVERY time."

Yes, absent other government idiocy, like extreme deficit spending and starting wars. Red-lining? Wow, you really drink the kool-aid don't you. Supply-side does work to increase tax revenues and boost Wall Street, it doesn't help the economy overall. More money in the hands of the wealthy does not "trickle down" to everyone else.

"Oh, and it is not about 'giving to the rich', it is about 'giving to people who want to take the actions to become rich/richer'. That's what you don't understand about the process."

Really?? Then give me some of it, I want to get rich. I might not start a business but I will invest it. But alas, no, I don't make enough money to be included in your giveaways. It is exactly about giving money to the rich, several of your other comments support that.

"Oh, I acknowledge that he can win...and the country will go to hell because of it. He's admitted openly to not understanding a thing about economics himself, so I can see how he's your guy."

Hell no! McCain is not my guy. I used to like him, but then he sold his soul to get conservatives' support. I have zero respect for the guy anymore. I'm just enjoying watching him disintegrate Republican/conservative unity. Its especially fun to watch the talking heads blow gaskets and eat each other over it. And the potential that so many right-wing idiots may vote for him, after years of hating him and bashing him at every opportunity. And it doesn't matter anyway, the Dems will win no matter who the R's nominate, so the drama is inconsequential anyway. Its a very interesting election year. But a very small respite for suffering through 8 years of W.
Actually, ts incorrect to say the R drama is inconsequential overall. Its just inconsequential to the election. Its very consequential to the state of Republican politics. Its the healthy friction necessary when your ideas are no longer palatable, its the change that needs to happen to lead you to being relevant again. And its fun to watch among people who don't accept they need to change to stay relevant, who in fact predicate their values on a "strong will" that refuses to change. Deal with reality, or reality will deal with you.

Uh-huh
"Spending isn't relevant? And you say I don't know anything about economics. Take off the blinders Zyndryl."

Uh..no, because it doesn't repudiate the supply side policies that delivered as promised (more investment, more tax revenues than before). It's like you repudiating a successful diet because after the person losing 100 lbs on it then decides to commit suicide afterwards. So, how does Congress spending like a drunken sailor discredit supply-side tax policies that brings more revenue in regardless of whether Congress goes sober or not, Bob? It doesn't.

"The economy you think was booming the last few years was a facade built on a foundation of debt...Can you at least recognize that a mortgage is not the same as a car loan? There are some benefits to having a morgage? Buying a home IS an investment."

Sorry, but housing debt is still debt. You ***** about the economy booming as a facade because of the debt then you have to apply the same standards to housing. You don't get to pick and choose. I'm only enforcing anti-hypocrisy here, Bob.

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"But when you factor in stagnant or even small increases in wage, rising health care costs for the employee, and inflation- I could see a valid argument the total worker compensation went down."

No such thing happened. That is total crap and I am sorry you believe in it with the rest of your populist excuses to remain ignorant, Bob.

I'm not in any ideological rut, Bob. I am on the side of proven facts.

"Way to clear that up, the money didn't come from consumers, it came from investors who got the money from consumers."

I'm sorry if your comprehension skills are bit off, but see...consumers spending money CONSUME things with it. The money goes to the producers, who then give a profit to the investors, who then INVEST it even more! (Woo! Hoo!). That is, unless the reward for doing so is yanked out from under them, as they would be in your World.

"Really?? Then give me some of it, I want to get rich. I might not start a business but I will invest it. But alas, no, I don't make enough money to be included in your giveaways. It is exactly about giving money to the rich, several of your other comments support that."
Sorry, but you actually do understand what I said even though you try to contradict it. By investing, you are trying to become richer. The money so invested goes to creating jobs, purchasing new equipment, etc. in the chosen investment, either directly or indirectly.

Lets try it this way

BJ: "But when you factor in stagnant or even small increases in wage, rising health care costs for the employee, and inflation- I could see a valid argument the total worker compensation went down."

Which part is total crap? We agree on wages and rising health care costs, based exactly on your comments. I assume we agree inflation went up, you do agree thats true right? I wasn't saying total worker compensation went down, but I would need to look at the actual numbers to make a conclusion. I'm saying because of those factors (we agree on) I could see its possible total compensation went down. If you disagree, fine, but bring the numbers or you're going to remain ignorant with me. What are the proven facts?


"I'm sorry if your comprehension skills are bit off, but see...consumers spending money CONSUME things with it. The money goes to the producers, who then give a profit to the investors, who then INVEST it even more! (Woo! Hoo!). That is, unless the reward for doing so is yanked out from under them, as they would be in your World."

Wow, such arrogance from someone so obviously wrong. See those words you typed toward the beginning? "...consumers spending money...". Doesn't that mean the money comes from consumers? You said so yourself right there.

What am I missing? I understand this circle of transactions just fine. The reward to investors is profit. Why should this profit not be taxed as all other profits are?


"The money so invested goes to creating jobs, purchasing new equipment, etc. in the chosen investment, either directly or indirectly."

Is that really how it works? If I buy stock that money goes to the corporation to buy equipment and pay people, etc.? I think an IPO is what you're describing there. If I buy stock, unless its an IPO, the money goes to the person selling the stock. An established corporation pays its employees, etc. with the money it gets from selling its products/services. And who pays for those products/services? Consumers!

Investors take on risk for the gain of profit. They own a piece of the company, if the company goes under they lose their money. If the compnay succeeds, they may get a dividend, likely the value of their stock goes up. A stock can also go up because it becomes popular, that raises the value of the company but it doesn't contribute to the pay employees receive or new equipment. This is why stocks are so risky, its a game we create in our heads. The only real value being created is in the producer to consumer relationship. Investing is a way people can make money for doing no work.

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