I echo Greg Mankiws feelings.
"The AIG bonuses now being debated in Congress and everywhere else represent about .001 percent of annual GDP. If a typical Congressman spent that fraction of a 2000 hour work year on the topic, it would consume only about 1 minute of his or her time.Yes, I know, that calculation is silly in many ways, but here is my point: Regardless of how outraged you are about the AIG bonuses, it is probably not an optimal allocation of resources for our elected leaders to spend large amounts of time and energy on the topic. The economy has bigger problems right now, and it would be better to focus attention on those.Unless, of course, you think that our elected leaders are more likely to make things worse than better. In that case, jabbering on about the AIG bonuses may be the perfect activity to keep them busy."
Wednesday, March 18, 2009
Monday, March 16, 2009
I am MAD as HELL
I AM MAD AS HELL, AND I AM NOT GOING TO TAKE THIS ANYMORE. Sound Familiar. This quote from the Network (1975) has been coming into my mind a lot lately. The quote especially hit me when I was watching Jim Cramer on the Daily show with Jon Stewart. If you haven't seen it I would recommend it. It brings up interesting issues with the media but it does it in a way that I found to be a misguided and irrational. Jon Stewart was saying that it is the media's fault for the financial collapse. Since they have a mic they should have screamed from the rooftops that the sky was falling before it happened. These people on CNBC can predict the future. And when they get it wrong it is because they were helping out their friends on Wall Street. Hey John, Isn't it possible that they were wrong. This interview was a way for Jon Stewart to talk about how upset he is that he lost money in the Market. Well grow up Jon, everyone lost money. Your dissatisfaction for the status quo is well known but you going to your window and yelling, "I am mad as hell and I am not going to take this anymore," is not really going to accomplish anything. Cramer has substantive suggestions while you offer only ideological hopes. You don't seem to have actual suggestions of specific rules to change.
I think the real point of this interview was to bring out populist unrest. Yes people are upset about their finances, jobs and lives. But what I don't understand is why people trust financial advisers. Jim Cramer advocates people doing their own homework. Jon Stewart is upset that his mother had a buy and hold strategy since 1950 (which she still would have mad a killing if she had bought the index as a whole) and has recently lost about ten years of growth. Well I say that people should not trust others to do everything for them. People need to make individual decisions. Some lie and deceive to get ahead. I don't know why that's a news flash. People will do what they can to get around the laws in place. Others should recognize that fact and acknowledge it. In the end of the day trust yourself and think and reflect on what you do. If everyone really thinks about what they do on a daily basis then they will not be taken advantage of. What are the odds of that happening?
I think the real point of this interview was to bring out populist unrest. Yes people are upset about their finances, jobs and lives. But what I don't understand is why people trust financial advisers. Jim Cramer advocates people doing their own homework. Jon Stewart is upset that his mother had a buy and hold strategy since 1950 (which she still would have mad a killing if she had bought the index as a whole) and has recently lost about ten years of growth. Well I say that people should not trust others to do everything for them. People need to make individual decisions. Some lie and deceive to get ahead. I don't know why that's a news flash. People will do what they can to get around the laws in place. Others should recognize that fact and acknowledge it. In the end of the day trust yourself and think and reflect on what you do. If everyone really thinks about what they do on a daily basis then they will not be taken advantage of. What are the odds of that happening?
Thursday, March 12, 2009
Patriotic Arson
It seems the worse the economy gets the more economists come out of the woodwork with different miracle cures for the problems that face the economy. The economic policies of the Bush and Obama administrations have not yet shown any signs of fixing the major problems that the economy is facing. The United States faces problems with its banks, industries and markets, but the problem that seems to have started it all was the overproduction of housing during a period of inflated demand due to government incentives relating to home ownership and the era of easy credit. Policies that began under the Clinton administration and continued under Bush and Obama promoted home ownership in a way that eventually made it possible for janitors who made $20,000 per year to buy a $400,000 house. This idea that the government could help almost every American own a home turned out to be wrong. In addition to these flawed government policies, the era of easy credit came out of the large rise in home values that the country experienced.
So I started thinking about new ideas that fell outside of the Bush and Obama plans for economic stimulus. I started thinking about potential solutions to this housing glut which has greatly lowered housing values across the country which, in turn, has decreased the amount of homes selling in the market. This cycle is picking up steam. A very important measure of housing prices is the Case-Shiller index which measurer housing prices across the twenty largest metropolitan areas. Over the past two years the average decline across the country has been a stunning 16.265% decline with only Charlotte North Carolina seeing a positive change in housing values. The hardest hit areas have been Las Vegas and Phoenix which has seen housing prices fall by 36% over the past two years. So if you bought a house at the peak of the market for $300,000, your house would only be worth $192,000 now, which places the owner $108,000 in the hole. These are the types of losses that average people are seeing in the former high population growth areas. The simple fact is that there are too many houses in the United States right now due to the previous policies to stimulate home ownership. Economists are not sure how long it will take the markets to sort itself out. I have a modest proposal that will speed up the process.
My proposal is to call on Americans to break into foreclosed houses, determine whether or not anyone still has possessions in the house, if they do then leave $50 for the broken window and move on to the next foreclosed home. However if there are no possessions and no people in the house I would suggest burning the house down or setting explosives. It is the quickest way I can think of to literally burn off inventory. To anyone seriously considering my offer I would suggest that you start off small by burning down one house a night, but when you get comfortable please do as much damage as you can. We have well over 1 million homes in foreclosure so we should get started soon. And a final word of advice to people considering my plan; please call the fire department 2-3 minutes after you light the house on fire. We don’t want the flames getting out of control. You could also help out by leaving a note for the firefighters telling them there is no one inside.
If that plan doesn’t float you boat. How about habitat against humanity? Instead of sending Americas college students on service learning trips to New Orleans like we have every year since Katrina we send them to the worst hit areas of the country to tear down these houses. It might be a harder sell to get kids to enlist if you tell them they are going to tear down houses 40 miles east of Cincinnati rather than party in New Orleans so it might just be better not to tell the rest of the crew until you arrive. I understand that building homes for the poor is a “moral” and “altruistic” thing to do. However the last thing we need is more houses no matter who they are for. We need to start thinking methodically about our problems. There are plenty of carved out foreclosed houses that the poor could live in anyway.
Ok. Some of you might be thinking that we shouldn’t tear these houses down if people could live in them some day. How about we let people live in them now. We could load up all the foreclosed houses, one by one, onto large barges and ship them to Africa. This way we are doing “good things for the world” and “helping the poor” while still fixing our problem of a supply glut. We could have an “off to Africa program” with our distressed houses and do the world some good. I am still looking for suggestions about how to get these houses in one piece from Phoenix and Las Vegas to any large body of water. If you have any suggestions please feel free to let me know at stephenmcnamee.blogspot.com. We can save the world one foreclosed house at a time.
The benefits of this plan would be to decrease the supply of houses in a quick and dirty way. Housing prices will stabilize once the excess of homes has been worked off. For those who think this is a little over the top. Why not just have the government set up a fund to buy these properties much like the TARP. Physically buying houses would be easier to explain to the American people then complex mortgage backed securities and collateralized debt obligations. The problem in housing prices is what is affecting the consumer. So let’s get started solving the route of the problem. And if the government won’t step in and buy these properties we know what some Americans will have to do for their country.
So I started thinking about new ideas that fell outside of the Bush and Obama plans for economic stimulus. I started thinking about potential solutions to this housing glut which has greatly lowered housing values across the country which, in turn, has decreased the amount of homes selling in the market. This cycle is picking up steam. A very important measure of housing prices is the Case-Shiller index which measurer housing prices across the twenty largest metropolitan areas. Over the past two years the average decline across the country has been a stunning 16.265% decline with only Charlotte North Carolina seeing a positive change in housing values. The hardest hit areas have been Las Vegas and Phoenix which has seen housing prices fall by 36% over the past two years. So if you bought a house at the peak of the market for $300,000, your house would only be worth $192,000 now, which places the owner $108,000 in the hole. These are the types of losses that average people are seeing in the former high population growth areas. The simple fact is that there are too many houses in the United States right now due to the previous policies to stimulate home ownership. Economists are not sure how long it will take the markets to sort itself out. I have a modest proposal that will speed up the process.
My proposal is to call on Americans to break into foreclosed houses, determine whether or not anyone still has possessions in the house, if they do then leave $50 for the broken window and move on to the next foreclosed home. However if there are no possessions and no people in the house I would suggest burning the house down or setting explosives. It is the quickest way I can think of to literally burn off inventory. To anyone seriously considering my offer I would suggest that you start off small by burning down one house a night, but when you get comfortable please do as much damage as you can. We have well over 1 million homes in foreclosure so we should get started soon. And a final word of advice to people considering my plan; please call the fire department 2-3 minutes after you light the house on fire. We don’t want the flames getting out of control. You could also help out by leaving a note for the firefighters telling them there is no one inside.
If that plan doesn’t float you boat. How about habitat against humanity? Instead of sending Americas college students on service learning trips to New Orleans like we have every year since Katrina we send them to the worst hit areas of the country to tear down these houses. It might be a harder sell to get kids to enlist if you tell them they are going to tear down houses 40 miles east of Cincinnati rather than party in New Orleans so it might just be better not to tell the rest of the crew until you arrive. I understand that building homes for the poor is a “moral” and “altruistic” thing to do. However the last thing we need is more houses no matter who they are for. We need to start thinking methodically about our problems. There are plenty of carved out foreclosed houses that the poor could live in anyway.
Ok. Some of you might be thinking that we shouldn’t tear these houses down if people could live in them some day. How about we let people live in them now. We could load up all the foreclosed houses, one by one, onto large barges and ship them to Africa. This way we are doing “good things for the world” and “helping the poor” while still fixing our problem of a supply glut. We could have an “off to Africa program” with our distressed houses and do the world some good. I am still looking for suggestions about how to get these houses in one piece from Phoenix and Las Vegas to any large body of water. If you have any suggestions please feel free to let me know at stephenmcnamee.blogspot.com. We can save the world one foreclosed house at a time.
The benefits of this plan would be to decrease the supply of houses in a quick and dirty way. Housing prices will stabilize once the excess of homes has been worked off. For those who think this is a little over the top. Why not just have the government set up a fund to buy these properties much like the TARP. Physically buying houses would be easier to explain to the American people then complex mortgage backed securities and collateralized debt obligations. The problem in housing prices is what is affecting the consumer. So let’s get started solving the route of the problem. And if the government won’t step in and buy these properties we know what some Americans will have to do for their country.
Monday, March 2, 2009
Ratings Agencies caused trouble
Here is some Info about a regulatory change that should be instituted by the SEC. The real questions that we should be asking now are how to set up an effective regulatory structure for the financial system so we can move on and stop the panic.
The Securities Exchange Commission began working directly with ratings agencies when its Net Capital Rule took effect in 1975. The primary purpose of the net capital rule was to create capital requirements for regulated broker dealers in the United States. The rationale behind this rule was to limit the leveraging ratios that these dealers could take onto their balance sheets. In order to limit risk even further the act required that debt be rated by newly designated nationally recognized statistical ratings agencies (NRSRO’s). Prior to the net capital rule the government was not involved in ratings. Ratings agencies sold their information to its clients and that accounted for the ratings agencies profits.
Net Capital Requirements were added to the Securities & Exchange Act of 1934 through new legislation in 1975. The purpose of the legislation was to create a maximum rate at which financial institutions could leverage their assets and create a system for determining reserve requirements. This act mandated that financial institutions could not leverage more than 1500 percent of its net capital assets at any point. This section of the Securities Exchange act of 1934 also specifies reserve ratios that are based on the risk inherent in the debt kept on their books. Firms that held safer assets, like treasury bills, could use more of their cash and hold fewer reserves than firms that held common stock. To determine this risk, NRSRO’s were used. Investments that got a sufficiently high rating (lower risk) from the ratings agencies required a lower reserve ratio. This legislation truly incorporated the NRSRO’s into the regulatory framework.
Another critical change that was brought about by the net capital requirement standard was the idea that all debt would now need to be rated by NRSRO’s for reserve calculating purposes. This change is critical because it shifted the way that ratings agencies made money. In the original framework investors bought the reports that were generated by ratings agencies. In this framework the interests of the ratings agency and the investors were in line. The ratings agency tried to rate the bonds and other debt in a way that was beneficial to the investors who were paying them. Under the new framework, the companies issuing debt would have to pay the ratings agencies to have their debt rated. Now, NRSRO’s best way to maximize profit was to get companies to come back to have more of their debt rated. The best way to get companies to continue using a certain NRSRO was for the NRSRO to issue high ratings.
The Securities Exchange Commission began working directly with ratings agencies when its Net Capital Rule took effect in 1975. The primary purpose of the net capital rule was to create capital requirements for regulated broker dealers in the United States. The rationale behind this rule was to limit the leveraging ratios that these dealers could take onto their balance sheets. In order to limit risk even further the act required that debt be rated by newly designated nationally recognized statistical ratings agencies (NRSRO’s). Prior to the net capital rule the government was not involved in ratings. Ratings agencies sold their information to its clients and that accounted for the ratings agencies profits.
Net Capital Requirements were added to the Securities & Exchange Act of 1934 through new legislation in 1975. The purpose of the legislation was to create a maximum rate at which financial institutions could leverage their assets and create a system for determining reserve requirements. This act mandated that financial institutions could not leverage more than 1500 percent of its net capital assets at any point. This section of the Securities Exchange act of 1934 also specifies reserve ratios that are based on the risk inherent in the debt kept on their books. Firms that held safer assets, like treasury bills, could use more of their cash and hold fewer reserves than firms that held common stock. To determine this risk, NRSRO’s were used. Investments that got a sufficiently high rating (lower risk) from the ratings agencies required a lower reserve ratio. This legislation truly incorporated the NRSRO’s into the regulatory framework.
Another critical change that was brought about by the net capital requirement standard was the idea that all debt would now need to be rated by NRSRO’s for reserve calculating purposes. This change is critical because it shifted the way that ratings agencies made money. In the original framework investors bought the reports that were generated by ratings agencies. In this framework the interests of the ratings agency and the investors were in line. The ratings agency tried to rate the bonds and other debt in a way that was beneficial to the investors who were paying them. Under the new framework, the companies issuing debt would have to pay the ratings agencies to have their debt rated. Now, NRSRO’s best way to maximize profit was to get companies to come back to have more of their debt rated. The best way to get companies to continue using a certain NRSRO was for the NRSRO to issue high ratings.
Stimulus Info
I wrote this Op-Ed for the Gettysburgian last week.
Now that the $789 billion stimulus package has been passed by congress and enacted into law what will happen to the economy? Will this solve all of America’s financial problems and set the country on the right path? These are the questions that everyone seems to be asking. The stimulus package was passed February 13, 2009 by the House of Representatives and the Senate with only three Republican Senators crossing party lines to vote in favor of the bill. The three Republican Senators that crossed party lines were Arlen Spector (PA), Susan Collins (MI), and Olympia Snow (MI) who all come from somewhat moderate states.
The process that gave us this final incarnation of the American Recovery and Reinvestment act, referred to as the stimulus package, was complicated and involved in depth debate about specific provisions. Both the congress and the senate voted to approve their own versions of the bill weeks ago which then required the bill to be sent to a conference committee which was responsible for synthesizing the bill into a single act that would be voted on by both the House and Senate which would then be ratified by President Obama.
The Stimulus package was primarily divided into tax cuts and spending programs. The tax cuts and tax relief programs have an estimated cost of $211.8 billion while the mandatory and discretionary spending programs will increase by $575.3 billion. The tax highlights can be broken down into a few major categories. The largest tax cut relates to creating a tax credit for social security. This tax credit is estimated to cost $116.2 billion over the next eleven years and somewhat resembles the parameters of the Bush tax rebate. So, families making under $150,000 per year and individuals making under $75,000 will qualify for tax credits up to $800 and $400 respectively. This section, however, makes no special provision for single parents which make over $75,000 and under $150,000.
Another major form of tax relief that people will benefit from will be in Alternative Minimum Tax relief. The AMT is separate from the income tax system and couples who earn over $45,000 per year might be required to pay this tax. This tax was originally meant to tax the rich who sheltered their taxes from normal income taxes, but has been affecting more and more people over the years since the tax is not indexed for inflation. This provision of the stimulus act will significantly decrease the amount of people paying this tax by raising the AMT exemption to $70,950 for couples and $46,000 for individual filers. This increase in the exemptions will cost the American Government $69.8 billion over 11 years and constitute the second largest tax change. In addition to these two major tax credits the stimulus package also includes tax changes to retiree assistance, the earned income tax credit, child credit, education credit, and homebuyer credit in addition to business tax credits.
In addition to these major tax breaks the Democrat government will be engaging in large public works and spending programs. The large spending programs fall into categories like jobless benefits, increased education, transportation construction, low income assistance, energy reform, environmental protection, health care reform and various other programs. These spending provisions will be expected to create most of the three million jobs that the Obama administration is expecting to save or create as a result of this bill.
This stimulus package appropriates almost $100 billion for education expenditures in various types and levels of education. This bill allocates $39.5 billion to local municipal school districts for average students in elementary, middle and high schools. The stimulus also gives $13 billion in grants for disadvantaged students and $12.2 billion for special education programs. College students may also benefit from the stimulus through the increase in Pell grants by $500. Obama has placed a large focus on education which he is trying establish through the first bill of his presidency.
Infrastructure makes up a second large part of the stimulus package and can arguably include transportation expenditures, mass transit, railway systems, public housing, and energy infrastructure improvements. The conventional infrastructure like road and railway construction totals approximately $45.2 billion to be spent as soon as possible. The stimulus package also provides for new energy transmission systems which are commonly viewed as similar to the rural electrification program. This section of spending is smaller the some would have initially expected and is reminiscent of the programs that Franklin Roosevelt passed as pieces of the new deal during the great depression.
The effects of this stimulus package will take years to figure out and many economists are currently very unsure whether or not this stimulus package which has been signed into law by president Obama will create as many jobs as are predicted. However, if the stimulus package does not create the amount of jobs predicted it is hard to imagine this package causing immense harm to the struggling economy.
Now that the $789 billion stimulus package has been passed by congress and enacted into law what will happen to the economy? Will this solve all of America’s financial problems and set the country on the right path? These are the questions that everyone seems to be asking. The stimulus package was passed February 13, 2009 by the House of Representatives and the Senate with only three Republican Senators crossing party lines to vote in favor of the bill. The three Republican Senators that crossed party lines were Arlen Spector (PA), Susan Collins (MI), and Olympia Snow (MI) who all come from somewhat moderate states.
The process that gave us this final incarnation of the American Recovery and Reinvestment act, referred to as the stimulus package, was complicated and involved in depth debate about specific provisions. Both the congress and the senate voted to approve their own versions of the bill weeks ago which then required the bill to be sent to a conference committee which was responsible for synthesizing the bill into a single act that would be voted on by both the House and Senate which would then be ratified by President Obama.
The Stimulus package was primarily divided into tax cuts and spending programs. The tax cuts and tax relief programs have an estimated cost of $211.8 billion while the mandatory and discretionary spending programs will increase by $575.3 billion. The tax highlights can be broken down into a few major categories. The largest tax cut relates to creating a tax credit for social security. This tax credit is estimated to cost $116.2 billion over the next eleven years and somewhat resembles the parameters of the Bush tax rebate. So, families making under $150,000 per year and individuals making under $75,000 will qualify for tax credits up to $800 and $400 respectively. This section, however, makes no special provision for single parents which make over $75,000 and under $150,000.
Another major form of tax relief that people will benefit from will be in Alternative Minimum Tax relief. The AMT is separate from the income tax system and couples who earn over $45,000 per year might be required to pay this tax. This tax was originally meant to tax the rich who sheltered their taxes from normal income taxes, but has been affecting more and more people over the years since the tax is not indexed for inflation. This provision of the stimulus act will significantly decrease the amount of people paying this tax by raising the AMT exemption to $70,950 for couples and $46,000 for individual filers. This increase in the exemptions will cost the American Government $69.8 billion over 11 years and constitute the second largest tax change. In addition to these two major tax credits the stimulus package also includes tax changes to retiree assistance, the earned income tax credit, child credit, education credit, and homebuyer credit in addition to business tax credits.
In addition to these major tax breaks the Democrat government will be engaging in large public works and spending programs. The large spending programs fall into categories like jobless benefits, increased education, transportation construction, low income assistance, energy reform, environmental protection, health care reform and various other programs. These spending provisions will be expected to create most of the three million jobs that the Obama administration is expecting to save or create as a result of this bill.
This stimulus package appropriates almost $100 billion for education expenditures in various types and levels of education. This bill allocates $39.5 billion to local municipal school districts for average students in elementary, middle and high schools. The stimulus also gives $13 billion in grants for disadvantaged students and $12.2 billion for special education programs. College students may also benefit from the stimulus through the increase in Pell grants by $500. Obama has placed a large focus on education which he is trying establish through the first bill of his presidency.
Infrastructure makes up a second large part of the stimulus package and can arguably include transportation expenditures, mass transit, railway systems, public housing, and energy infrastructure improvements. The conventional infrastructure like road and railway construction totals approximately $45.2 billion to be spent as soon as possible. The stimulus package also provides for new energy transmission systems which are commonly viewed as similar to the rural electrification program. This section of spending is smaller the some would have initially expected and is reminiscent of the programs that Franklin Roosevelt passed as pieces of the new deal during the great depression.
The effects of this stimulus package will take years to figure out and many economists are currently very unsure whether or not this stimulus package which has been signed into law by president Obama will create as many jobs as are predicted. However, if the stimulus package does not create the amount of jobs predicted it is hard to imagine this package causing immense harm to the struggling economy.
You call that a stimulus?
The goal of the stimulus package seems relativly clear. Stimulate the economy. There is little doubt that in the short run there will be some effect of a $787 Billion dollar spending package on the economy. But whether or not the uses that this money has been earmarked for will be the most effective way of spending the money is the real question. The major expenditures of the package are not focused on new investments in the classical keynesian sense nor is the stimulus a Republican measure. We have a massivly complicated spending bill that earmarks funding for different things but does not even attempt to solve the housing problems that lead to the current problems along with the overleveraging of banks. Today the stock market droped below 7,000 points at least in part due to the uncertainty that the increased activity of the government in market interactions. Rick Santelli of CNBC today made a case for an organized bankruptcy of AIG which insured far to many assets without enough reserves. This seems like the way to approach these institutions that were to large to fail. Let them deflate and then fall.
Friday, February 20, 2009
First Post
The purpose of this blog is going to be to examine Economic and Political policies and problems from a student perspective. I have been reading other econ Blogs for a while now and I thought that I would give my own a try.
Subscribe to:
Posts (Atom)