Fannie, Freddie, and the Pending Taxpayer Bailout
Fannie Mae and Freddie Mac, the two giant quasi-public housing lenders that together own or guarantee about half the $12 trillion in home loans outstanding, are heading into insolvency. No surprise. As housing prices continue to drop, more and more middle-class homeowners who got their loans from Fannie or Freddie are under water -- owing more on their homes than their homes are now worth. And as the economy continues to go south, more and more of them can't meet their loan payments.
While it's true that most of their home loans were made before 2006 when lending standards were tighter, that doesn't really matter because the rip-tide of this sinking economy is now hitting a much broader group of home owners.
Fannie and Freddie may not be technically insolvent yet, but I'm betting that if their lending portfolios reflected the true market prices of their loans they would be. That's why their own investors are bailing out.
So who gets stuck with the tab? Investors in Fannie and Freddie have always believed that the loans issued by the two giants were guaranteed by the federal government but technically they aren't. The guarantee has always been assumed but has never been put into law explicitly, and the liabilities have never been carried on the federal books. Yes, the companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default, and the two companies have access to the Fed's so-called Fedwire payments system allowing them to access funding if needed. But these won't keep the two afloat for long.
As a practical matter, we're facing a Bear Stearns squared. Fannie and Freddie are way too big to fail -- especially now. There's no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again.
Here we have another example of socialized capitalism. The executives of Fannie and Freddie have been among the best paid in all of corporate America. We're talking tens of millions a year in CEO pay alone. Fannie and Freddie are treated like giant investor-driven entities as long as they're healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, the rest of us have to bail them out.
While it's true that most of their home loans were made before 2006 when lending standards were tighter, that doesn't really matter because the rip-tide of this sinking economy is now hitting a much broader group of home owners.
Fannie and Freddie may not be technically insolvent yet, but I'm betting that if their lending portfolios reflected the true market prices of their loans they would be. That's why their own investors are bailing out.
So who gets stuck with the tab? Investors in Fannie and Freddie have always believed that the loans issued by the two giants were guaranteed by the federal government but technically they aren't. The guarantee has always been assumed but has never been put into law explicitly, and the liabilities have never been carried on the federal books. Yes, the companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default, and the two companies have access to the Fed's so-called Fedwire payments system allowing them to access funding if needed. But these won't keep the two afloat for long.
As a practical matter, we're facing a Bear Stearns squared. Fannie and Freddie are way too big to fail -- especially now. There's no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again.
Here we have another example of socialized capitalism. The executives of Fannie and Freddie have been among the best paid in all of corporate America. We're talking tens of millions a year in CEO pay alone. Fannie and Freddie are treated like giant investor-driven entities as long as they're healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, the rest of us have to bail them out.
posted by Robert Reich | 11:05 AM
109 Comments:
Uh, why can't they be allowed to fail?
The mortgage industry needs accountability! They have been using predatory practices to "lure" homeowners into loans for upgrading to larger homes. They hire their own appraisers that inflate values. They neglect income validation for loan applications. They have built a subversive Ponzi scheme under the noses of neutered oversight agencies.
Once the mortgage lenders find an unsuspecting homeowner, they package a questionable loan into a market security and offload this "risk" onto American tax-payers.
My son benefited from this, but was lucky to sell at the right time.
He bought a commercial building 5 years ago based on "gross income" of his business, then sold it 4 years later at 100% profit. He did not do this intentionally, but was a "positive" victim of the system.
His deal should have never been approved and that is an example of a bad system without appropriate accountability.
A third party oversight should be brought in to assess a loan packages risk before it is allowed to be sold as a security. rating agencies need reform also.
Nationalize them.
If I, the taxpaying voter, am paying for it... I own it.
Yeah! Nationalize them! NOT!
B. Dewhirst sounds like a typical Massachusetts Marxist.
My bet is that the hysteria Mr. Reich seeks to stir up here has no more substance than his imaginary recession.
All of this housing hysteria is blown way out of proportion.
The real (and incredibly minor) recession of 2001 was initially triggered by the bursting of the single largest speculative bubble in the entire history of humanity (the dot.com bubble). From top to bottom, the NASDAQ lost over 70% of it’s value. But, even then, it took the attacks of 9/11 to actually turn 2001 into a (really minor) recession.
If anybody thinks median home values will decrease by a similar amount (over 70%), then we MIGHT be in for another (incredibly minor) recession.
Me? I doubt it!
But, the hysteria pimps will, undoubtedly, continue to play to their target audience.
sbvor doesn't think we're in a recession?
What a droll troll.
Anyone who posts a link to
http://thepeoplescube.com/images/Brain_Socialist_550.gif
sure must be dumb. What do you think, sbvor?
Sbvor! haven't heard from you in awhile. What happened? Did the Sbvor link-O-matic break down? Run out of crazy right wing blogs to link to? Or maybe none of the other right-wingers posted anything new you could copy.
Anyway, it's no surprise at all that Freddie and Fannie are going in for the big bail-out. The line is getting longer everyday. Heck, Bernanke and Paulson pretty much said today that the gov is going to do a lot of bailing in the future.
Who else is lining up at the public trough? My money is on Lehman as the next to go. Everytime that stock rallies I start selling calls and buying puts on it. My pick for a close second will be Citi or Merrill.
And just what is a bankrupt country that is heading into a depression, with a $10 trillion debt, a $500 billion defecit, declining revenues, and a McBush presidential candidate who wants to do more of the same conservative crap that got us into this mess going to bail these bankers out with?!
Got gold? you better have.
Anonymous,
Contrary to what your preferred propagandists have been force feeding you, it is a fact that by any historical measure, most especially by the standards of the NBER, we are NOT currently in a recession! The objective, non-partisan, quantitative data prove it!
The fact that the only rebuttal offered by your comrades all over the net is to concoct yet another wild conspiracy theory in a pathetic attempt to smear and slander the data is only further proof that we are NOT currently in a recession!
P.S.) I find this illustration both painfully accurate and (very darkly) amusing.
Our pseudononymous friend is taking advantage of some cooked accounting practices in the way official data is determined.
The folks over at Calculated Risk have a series of posts over the last year or so establishing why it is reasonable to believe we're in a pronounced recession.
I told you!
See paragraph 2 of my previous comment.
Pathetic! And, sadly, typical.
When half the country is this easily propagandized, the future could be very, very grim.
I hope I get the chance to own a house some day. It feels so grim right now. I wish people would be more responsible all around.
This is a tough call. I'm generally a fiscal conservative and don't like this sort of thing, but this Fannie/Freddie thing could get ugly fast.
The sad thing is that most of the aggressive price increases occured in a few relatively concentrated areas...Frisco, LA, Boston, NY metro, Vegas, DC...and not so much in many other parts of the country. This was compounded with easy money and then predatory (and downright fradulent) practices by shady dudes. Now, the contagion is spreading and the solid, hardworking guy in Kansas City is underwater on his house. It wasn't just an asset bubble (at least we could deal with that), but an asset bubble combined with really stupid business behavior.
So, what do we do? A lot of good people are going to end up paying for the mistakes of others either with their houses or with their taxes. I just don't know.
I do know that if Bear was too big to fail, then Fannie/Freddie are WAY to big to fail. I'm still not sure it's right to bail them out though. The potential fallout from a failure might leave us no choice.
last one from anonymous Matt
Dalas,
You’ve been listening to too many so-called “journalists”.
Your odds of home ownership have seldom been higher.
And, the mortgage rate you’re likely to pay has seldom been lower:
Historic Rates
More Recent Rates
But, you’ll have to present a better attitude than you do at your blog page before you’ll succeed at anything.
As I understand it, the Bear Stearns deal was not a bail out. It was a buy out at a bargain basement price using a loan backed by the Fed. Have the tax payers lost ANYTHING in that deal?
yeah, is there any way to make sbvor just go away? What a pathetic dittohead....
sbvor:
too soon to tell on Bear. You're right, though. It was a shotgun marriage with a guarantee by the Fed.
My point was that Fannie/Freddie would have to be a bailout if it comes to that.
AM
A friend of mine once commented: "there's one kind of recession for rich people, and another for everyone else".
sbvor must be among the rich.
And he's right, life's great for them right now, with valuable Euros, huge oil profits, and cheap Chinese labor.
Anonymous (4:43PM)
I am retired.
I live on an annual budget which is less than a first year teacher makes in an inner city public school.
Obama’s proposal to raise the capital gains tax would hit me and my fellow retirees especially hard.
Under Obama, my tax rate would almost double (with the first dollar I make). The worst of it is that the government would then actually collect FAR LESS revenue! But, I’m sure so-called “Liberals” would find it emotionally satisfying to “stick it” to me and my fellow struggling retirees.
SBVOR,
Actually, I'd like to "stick it to you" because you're a troll.
StinerMan,
I’m not a troll, I am a beacon of light operating deep in the bowels of the heart of darkness.
Okay, here is a question to all you extremely well informed folk who "seem" to understand the whole economic deal. Am I just a big scaredy cat to be worried about the whole FDIC thing. Seems to me, if push really comes (as it looks like it might) to shove,there is no way those promises are keepable.
In the event of nationalization, the equity holders are going to get a big, fat donut in return for their stock. All those well-paid executives will see dramatic reduction in their net worth. They've already gotten hit hard.
The holders of this so-called agency debt, though, foreign governments, pension plans, endowments--what seems like the entire investing community--unfortunately, will probably get more of their money back than they should.
Who exactly is to blame? How can it only be the lenders? What about the borrowers and speculators who got greedy? Hello? Of course, there are many, many more foolish, greedy, financially illiterate borrowers than lenders (the degree of ineptitude is the same in both) and now that the populist revolt has started, it's become a numbers game. Democracy, gotta love it.
Isn't it a kind of class warfare when people renege on their mortgages, jingle mail the keys, and blow up all the mortgage backed securities and their related derivative cousins like CDOs, CDO squared, etc etc? They are blowing up the financing scheme that allowed them to get the mortgages in the first place. Once the banks and investors realize their tremendous losses on this paper, and we get back to conservative, very tight, lending standards, the number of people owning property will fall.
Maybe encouraging home-ownership so broadly was a mistake, too? Can we say that now?
Who says I have a problem with class warfare?
The wealthy wage class warfare all the time... they only cry about it when those beneath them attempt to retaliate.
"No war but the class war" as they say.
Anon 5:37
From what I can find, it looks like about $6.7 trillion in deposits in all banks. During the last great depression about 1/2 the banks failed, and they weren't involved in ponzi scheme loans. So, can a government with a $500 billion/year deficit which is now trying to bail out Freddi, Fanni and investment banks come up with another $3 trillion? Not likely.
Just as many people are technically bankrupt long before they realize it, the U.S. just doesn't realize it yet, so there's time. Time to start accumulating some gold and silver and looking for small banks in rural areas that are immune from the housing and financial crises crippling the rest of the country.
They don't call me we_are_toast for nothing!
Dr. Reich:
I think we have all had enough of "sbvor". Could you remove his postings. He is not contributing any value and is a distraction to this blog.
We are toast:
A closer analogy, at least at this point, is probably the Japanese recession of the early '90s.
Anonymous (4:36PM),
I still think this Fannie/Freddie media hype is (as usual) overblown.
But, if they were to fail, I would rather see a private sector buyout (even if it meant something along the lines of the Bear Stearns deal).
Government never had any business getting involved in mortgage lending to any extent. The LAST thing we need is for government to take over Freddie/Freddie in toto.
B. Dewhirst,
Are you an avowed Marxist?
You sure sound like one.
SBVOR:
No, I'm a libertarian socialist. Are you an avowed fascist?
B. Dewhirst,
Anybody who describes themselves as a “libertarian socialist” clearly has zero comprehension of either ideology. The two are mutually exclusive. You strike me as a Marxist who has very little understanding of his own ideology or where it comes from.
I abhor Fascism, Marxism and all other forms of totalitarianism.
To better understand how fascism relates to our current political environment, I recommend this post.
Toast:
You are such a pessimist. $3 trillon? Piece of cake! What is that Chinese phone number again?
Apologies for feeding the troll, everyone.
sbvor:
Truth is beginning to come out:
I’m not a troll, I am a beacon of light operating deep in the bowels of the heart of darkness.
Since your first appearance here I have envisioned you as associated with bowels and the products therefrom.
Art,
Every colon needs an illuminating proctoscope.
It’s a dirty job, but somebody has to do it (for the well being of the larger organism).
sbvor:
My vision was less a scientific tool and more that of the effects of a bowel cleansing as takes place in the prep for a colonoscopy.
Even if a tool, in your case manipulation would be difficult for your head would always be in the way.
Here's the analogy; In approximate numbers.
In 2007 the U.S. gov took in $2.4 trillion.
The gov spent $2.8 trillion;
Total deficit $345 billion;
Total debt about $9.5 trillion;
Lets translate this to what this would be for an average American.
Median household income of $48,000 -taxes, approx $35,000
Equivalent gov spending, $40,000;
Equivalent excess spending, $5000;
Equivalent total debt, $138,500;
Now, the problem here is that the debt is equivalent to low interest credit card debt. The government doesn't have much in the way of assets that it can sell off.
Now walk into a bank and tell the banker; I have almost no assets, I spend about 13% more than I earn, there's very little room for me to cut back on spending, I have $138,000 in credit card debt of which not only am I not paying any principle, I'm actually adding to the debt, and If I keep listening to people Like Ronald Reagan, George Bush and John McBush, I'll be asking my company to cut my salary by about 10% and that somehow is suppose to increase my income. And Oh, by the way, I promised my kids I would pay about $300,000 for their college and medical needs in the next 20 years(medicare, SSI).
Now ask that banker for a loan! After he stops laughing long enough to call security, he'll probably offer to get the bankruptcy paperwork started. Not even Bear Sterns would take on a loan to this person.
Got gold?
Toast, the problem with your analogy is the power differential.
A mafia don doesn't worry about his credit card debt, because he knows he can always send a few boys over to his creditors to straighten things out.
So too with the United States.
Our credit is backed by our nukes, and advantageous international legal position. (Most countries are strong-armed into adopting the trade policies we set for them, etc.)
I will never understand why people decide to come down on one side or the other of an issue and then as an after thought find data to back up their point of view conservative and liberal.
It seems every statistic and study contrary to sbvor's assertions is concocted and wrong, how fortunate for him.
anonymous 9:38:
First lesson in reading Dr. Reich's blog:
Ignore sbvor!
His prattle is the result of his limited mental capacity.
Anonymous (9:38 AM),
I am using the official, non-partisan government numbers.
My opposition is using partisan conspiracy theories in a pathetic attempt to smear and slander the official, non-partisan government numbers.
Take your pick and make your bed.
dewhirst:
One of the problems I have with economics, other than it being an Alchemy science, is that people get caught up in the details and never step back and look at the fundamental principles.
But you Sir; have taken economics back to to it's utmost basics and placed it squarely with the most primitive characteristics of human nature itself! If I find your approach to economics to be anywhere near correct, I most certainly will have to reevaluate my strategies and move in your direction. :)
About Sbvor; Please leave him alone! He's not the whacked-out, factless, nut case he portrays himself as. He REALLY is representative of the conservative mind set.
I really hate it when clueless people say we need more bipartisanship and compromise in congress. The Dems in congress have to deal with SBVOR types all day! How do you reason with them? How can you compromise? Their policies have proven to be total failures and are destroying America. Should we compromise and implement policies that are 1/2 failures and will only 1/2 destroy America?
No! don't chase SBVOR away, watch what he says, understand that he is the conservative norm, and realize what we are up against!
"Maybe encouraging home-ownership so broadly was a mistake, too? Can we say that now?"
Yes, for sure, the gov't via tax and other incentives to the building, mortgage and indivual taxpayers have created a situation were large portion of the current mortgage holders either cannot make their monthly payments nor maintain the property or both. Fannie and Freddie are full of loans generated by countrywide with little or no down payments and various creative payments plans that provide not a path to home ownership but BK and foreclosure. Its time people understood that owning a home is a liability not a financial asset nor is it a path to financial security.
Since the gov't has been the leader in creating the American Dream option its only fitting that the final bill for this comes back to the Congress and both major political parties.
The political consequences will be that in order to have any kind of gov't bailout, Congress will not be able to off load onto Fannie and Freddie, rather they will have to be straight and tell the American people that they the taxpayers will foot the bill directly.
Toast, perhaps we should take a page from their book.
Rather than talk with Conservatives... I think water boarding is a suitable persuasive tool.
After all... they're the ones who insist it isn't torture.
What's good for the goose...
(And, for what it is worth, the Republican rhetoric surrounding the war on terror would be much more convincing if they weren't harboring and funding so many terrorists...)
Dewhirst said:
"Rather than talk with Conservatives... I think water boarding is a suitable persuasive tool.
"
I tend to be a VERY skeptical person that requires a well reasoned argument and/or strong supporting evidence before I can be persuaded.
I find your argument to be overwhelmingly convincing!
“Rather than talk with Conservatives... I think water boarding is a suitable persuasive tool.”
Spoken like a true American Liberal. Shades of things to come.
Whatever became of Classical Liberalism?
P.S.) There is no evidence that waterboarding has been used more than three times (and with great results).
Heaven help us if the P.C. crowd continues to prevail.
Fundamental to your argument is this statement:
"How can this be? Simple. In order to be eligible, most states require you to have been working in the job you lost full time, and for a certain number of years."
You qualify this statement with the word "most". I assume to accomodate states like Arizona where, for example
https://www.azdes.gov/esa/uibenefits/clmt.asp#elig
unemployment benefits are not based on employment status (e.g., ft/pt) rather or earnings.
Do you happen to know how many states in fact pay out benefits in the manner you describe? Is it in fact the majority/most?
Is there no way to block sbvor? He's clearly bored and only comes here to antagonize.
This blog was so much better without him.
"Dramatic (or tragic) irony is a disparity of expression and awareness: when words and actions possess a significance that the listener or audience understands, but the speaker or character does not."
sbvor, by that definition, it's tragically ironic that you try to link liberals to fascists, when Republicans are the true fascists. Clearly, you do not understand either George Bush Republicans or fascism.
"Fascism, especially once in power, has historically attacked communism, conservatism and parliamentary liberalism, attracting support primarily from the far right or extreme right."
"Former Columbia University Professor Robert O. Paxton further defines fascism's essence as: a sense of overwhelming crisis beyond reach of traditional solutions..."
9/11 and the War on Terror. Check.
"...belief one’s group is the victim, justifying any action without legal or moral limits"
Imprisonment without trial; torture; Guantanamo, Abu Ghraib, and other secret prisons. Check.
"...need for authority by a natural leader above the law, relying on the superiority of his instincts;"
An admistration that believes itself above the law; that is guilty of illegal wire tapping, illegally firing US attorneys and revealing the identities of CIA agents for political reasons, then pardoning the supporters who committed such crimes. Check.
"...right of the chosen people to dominate others without legal or moral restraint;"
Imprisonment without trial; torture; Guantanamo, Abu Ghraib, and other secret prisons. Check.
In short, you don't know Jack. And you didn't recognize Adolf when he introduced himself.
That said, I too wonder "Whatever became of Classical Liberalism?". I wish there was a political party like that, but it isn't the modern Republican party.
Anonymous (3:35 PM),
1) When directly quoting Wikipedia (or any other source), it is customary to cite the source.
2) Read the book and learn the similarities between Fascism and American Liberalism.
Heck, start by reading the reviews.
3) I have no love for the Republican Party. But, it is, in my view, FAR less evil than the Democratic Party.
If the synopsis is any indication of the quality of the book, I'll skip it.
One "example" of the "similarity" between liberals and fascists: "How the Nazis declared war on smoking; supported abortion, euthanasia, and gun control; and maintained a strict racial quota system in their universities -- where campus speech codes were all the rage"
Did you notice they're comparing voluntary abortion and affirmative action to forced abortion and Aryan superiority?
Or: "How fascism, Nazism, Progressivism, and modern liberalism are all alike in principle, in that all believe that government should be allowed to do whatever it likes, so long as it is for 'good reasons'"
They've clearly forgotten to include Republicans and neocons in that list. The sad fact is, every major party in every country today believes in "totalitarian" government. Classical liberals, now called Libertarians, are everywhere powerless.
Laughable, biased, and once again, tragically ironic.
First off, please don't repeat my mistake by feeding the trolls.. mea culpa, but he'll get bored and his little hate-chubby will go limp sooner if we ignore him.
Secondly, the third largest political party in the UK, the Liberal Democrats, are an exception to the trend you cited. Doubtlessly, there are more such parties.
This post has been removed by the author.
Anonymous (7:50 PM)
The founder of Planned Parenthood was an avowed Socialist.
She was also a proponent of eugenics.
Is it then mere coincidence that:
“black women are three times more likely to have abortions than white women, and Hispanic women are 2.5 times more likely”
Socialism + Eugenics Advocacy + Eugenics Outcome = Fascism
Next?
I think the Libertarians are the third largest party in America too. But where are they first or a strong second?
"Everywhere powerless" was a slight exaggeration, but AFAIK Libertarians are not in power anywhere.
To Toast,
It's stunning to see how exponential was the rise in Fannie Mae (founded in 1938 and made private in 1968))and Freddie Mac (founded as a private firm in 1968) mortgage-backed securities between 2001 and 2007. Both firms now own or guarantee half of the total $12 trillion in U.S. home mortgages, so their combined exposure is $6 trillion. Over half of this exposure was built up over the 2001-07 period.
Fannie Mae's outstanding guaranteed mortgages almost TRIPLED from $700 billion year-end 2000 to $2.1 trillion year-end 2007or 17.5% annually! Freddie Mac had a similar explosion in mortgage-backed securities during this period. So 2000-2007 may well go down in history as the worst U.S. DEBT EXPLOSION in 75 years since the Great Depression.
A bailout of Fannie and Freddie would make the Bears Stearns bailout look like small peanuts. It would involve at least another $5 Trillion in U.S. governmemt obligations above $9.4 trillion, presently. Such an increase in obligations to over $14 trillion would severely compromise the government's ability to borrow around the world to finance Deficits and Investments in social-infrastructure, health care, education, alternate fuels, etc.
Alternatively, as one analyst noted, a modest 10% write down of only Fannie Mae's assets would cost taxpayers $150 billion for a year or more. Hopefully, this is the extent of the damage.
But I'm afraid not as a Freddie potential 10% writedown would cost another $380 billion that taxpayers and/or private investors would have to pick up.
Our government can't afford to sit by here and wait until confidence rebounds in some magical way or private buyout mechanisms totally come to the rescue.
Dilly-dallying too long while stock prices continue to fall could set off a spiraling panic where people (unrealistically, most likely) lose faith in Fannie and Freddie, with result housing lending market comes to a screeching halt and entire housing market collapses.
We have to trust the Fed and Treasury are watching this development Daily and are prepared to take immediate, preferably pro-active, supporting actions... because (for better or worse) our system of mortgage packaging and selling to investors is the capital liquidity lifeline to all banks and financial institutions.
It´s a lifeline our financial system has become so dependent on also because of the complete deterioration of U.S. Savings to ZERO as a % of GDP.
This Savings decay -- in addition to a a financial deregulation climate run amok by the Fed and Republican administrations and further exacerbated by a very weak, succumbing Democratic opposition --has helped escalate our overall Debt situation to very dangerous proportions.
sbvor<
Are you insane?
Frank:
Have a conundrum. You constantly reference the US poor savings rate and the published statistics support your premise but in cursorily researching the issue I get confused.
Savings is determined in government reporting as personal disposable income (PDI) minus personal consumption expenditure (PCE). Although simplistic that makes sense. My first question would be if more and more PCE is being made with credit then PDI minus PCE has to produce negative savings when in fact that may not be true.
My biggest question in this malaise regards 401Ks. As of the end of 2004 there was $2.1 trillion invested in 401Ks. Given the matching rules of many companies the rate of return on these accounts is far greater than that of a bank savings account so it seems the wiser option. The growth of mutual funds enables many more to invest in them with hopefully greater returns than bank savings accounts.
Given just these two options it is logical that those looking to save would employ one of them as opposed to a bank savings account. Granted this sequesters money away from the normal money supply creation process but from an individual perspective is a wiser financial decision. With these options available I would see few interested in long term savings growth choosing bank savings accounts.
I can't seem to figure out how these are factored into the GDP or the Savings calculation. Perhaps, if not too much trouble you can enlighten me.
anonymous 10:35:
Insane is such a harsh term. sbvor is simply severely demented.
This post has been removed by the author.
Just the facts ma’am, just the facts.
But, I’m sure you find the facts to be “inconvenient”.
Can you imagine the media drumbeat if any Conservative institution had THAT sort of history (and present)?
Socialism + Eugenics Advocacy + Eugenics Outcome = Liberal Fascism.
Art,
I recall you mentioned this to me before some time ago, and I never properly replied to your sensible question. Will try to get back to you tomorrow.
Art,
Finally, I can address your questions about U.S. Savings. I ask for your patience, as I digress around your concerns. In an amateurish but dedicated way, I have followed this whole subject of our Economic Model with curiosity for many years.
I think Martin Feldstein of Harvard comes close to my understandings of the historical and critical importance now of SAVINGS to our Economic Model in his excellent May-June 2006 Foreign Affairs writing entitled, "The Return of Saving."
His conclusions, written before recent skyrocketing oil-commodity prices, need some refinement to reflect the explosion in these prices and the hyper-sensitive interrelationship with the Dollar's value. But I couldn't agree more with his big picture look at our economy's illiquid disfunctions.
Firstly, I'll outline my best understanding of what the term "Savings" represents. Secondly, I'll offer some background on how I've arrived to the Importance of Savings in our Economic Model. Thirdly, I will conclude with some Good and Bad News recent developments have for our Economic Model -- which I hope will come to a New Equilibrium in next 8 years based on Higher Savings, Lower Consumption, and Higher Investment.
I simply believe the current Savings/Consumption/Investment relationships as drivers of our economy are no longer sustainable -especially given the pernicious, growing Wealth and Income gaps in our society.
In this respect, I'm under the impression Dr. Reich may still be stuck in the old world addiction to high Consumption (70-72% of GDP) as the primary driver of our economy. As a non-expert layman, I think this is a Big Mistake. I will show some data on other countries performing well with Economic Models that are not as out-of-balance as ours, i.e., not so driven by Consumption and profligate Debt expansion.
I. DEFINITION OF 'SAVINGS'
People are confused, as I have been at times, by what is meant by SAVINGS ... what does it represent?I prefer to concentrate on Household Savings but Businesses and Government also provide Savings, the total of which was less than 1% of GDP in 2006 -- the lowest in 50 years, according to Mr. Feldstein.
As stated once before, Household Savings comprise: (a) income after-tax (including salaries, wages, benefits, interest, dividends, bank deposits, contributions to pension accounts and 401k plans, employer contributions to pension plans, and asset investments....LESS: payments against a mortgage or loan and borrowing not used to invest in financial assets (e.g., credit card debt) or not converted into some other form of savings.
I assume the government works with this definition correctly and consistently, refining the data collection sources over time. I've not had any time to go into this aspect, Art.
Clearly, however, the concentration of Wealth and the enormous Debt explosion affecting mainly the lower-middle class are affecting the negative Savings rate calculations in 2005-07.
Another factor is the aging of society where older people above 60tend to save Less... while those in their 40s-50s save More. As one expert said,
"A negative U.S. net Household Savings rate implies that the Saving of the savers in their 40s-50s is less than the reduced saving of the expanding older lower-saving group above 60."
The facts tell us U.S. Household Savings fell from an already low of 1.7% in 2004 to a -1.5% in 2007... compared to 7%-8% in late 80s and early 90s, making it possible to finance investments in housing, business equipment and infrastructure.
II. DISCOVERY OF IMPORTANCE OF SAVINGS
My persistence for some time that our Economic Model was and is fundamentally Out-of-Balance started during my years as an independent general management consultant to Dutch International firms. Traveling constantly in Europe and between the U.S. and Holland, I became interested in how other economies worked.
I have noticed that cyclical downturns have been much less severe in Holland (and in selected other European countries) and the economic recoveries slower than in the U.S. WHY?
I've concluded the Dutch decades- long sensible, progressive tax structure (now 50% on for high incomes to 35% on most other incomes) and the Dutch year-end/year-out balanced budget discipline have contributed to a culture of PRUDENCE AND SAVING that has been a constant with the Dutch.
I've also noticed that the spread in recent years between the European Central Bank benchmark rate and banks' interest rates on Savings has usually been more attractive. There's a growing healthy competition among European banks to win the Savings deposits of existing and new clients. For example, the ECB's benchmark rate now is 4.25% while various banks are now offering short-term interest rates from 4.7-5.30% on Savings deposits depending on the term.
These factors, in addition to high Safety Reserves held by European banks, have always reinforced the liquidity and confidence in the financial system (despite recent setbacks by UK's Northern Rock, and UBS of Switzerland due to sub-prime fiasco). They have assured relatively stable financing of Investments in weak as well as strong economic times. And a balanced Social-Safety Net for those in difficulty in good and bad times provides
another "Stabilizing Cushion."
Some might call this Socialism or something worse. The Dutch would call it "Capitalism with a Conscience" with proven financial and cultural benefits. Holland's GDP per capita beats the UK, Germany and France; it has a stable employment in the 5-5.5% range and no major private or public Debt imbalances ... all with a Consumption per capita much lower than GDP per capita, high Savings and high Investment as drivers of the economy.
Following is some very interesting Consumption and GDP per capita data as a percentage of OECD average performance:
2005 ACTUAL INDIVIDUAL CONSUMPTION(AIC) and GDP Per CAPITA as a PERCENTAGE of OECD AVERAGE (Real Per Capita Data)
................AIC......GDP
DENMARK.........102......105
FRANCE..........106......102
GERMANY.........103......105
ITALY........... 93...... 96
NETHERLANDS(a)..107......120
NORWAY(a).......117......164
SPAIN............91.......94
SWEDEN(a).......104......110
SWITZERLAND(a)..109......122
UK(b)...........119......109
CANADA(a).......112......121
U.S. (b)........152......144
(a) Lower AIC with Higher GDP
(b) Higher AIC with Lower GDP
Source: OECD Publication, Nov.21,2007
The U.S. beats Europe by far in individual Consumption and GDP per capita as a % of average OECD results. BUT, there's a real peculiarity in the results above: the Netherlands, Norway (with high oil exports), Switzerland, and Canada, particularly, are performing well-above the OECD average with a much LOWER CONSUMPTION per capita than in the U.S.
For example, the UK's GDP per capita is about 9% above the OECD average whereas its individual Consumption per capita is 19% above the OECD average. This reflects a volume of Investment per capita that is significantly BELOW the OECD average. In the Netherlands, the situation is reversed with GDP per capita relatively Higher than Consumption per capita -- indicating the volume of Investment is well ABOVE the OECD average.
CONCLUSION: A Spending structure with a relatively high share of individual Consumption is NOT the only magical way to have a stable, growing economy offering a fair playing field for all.
America's economy has been driven by growth in Consumption and GDP ... the faster, the better. This worked for a period up to the late 70s. But commencing in the later 1980s, cracks in our Economic Model started to subtley appear, e.g., in 1989 we were no longer a CREDITOR to other nations. We, in a relatively short period, have since become the world's greatest DEBTOR with a national Debt of 49.5 trillion, an increase of $4.5 trillion in last eight years... and a ZERO Savings rate.
WHAT HAPPENED?
Beginning in the early 80s, CONSUMER price inflation was replaced by increasing public confidence in ASSET price inflation-- first with Stocks, then to Financial Assets, and since 2000 the speculative rise in home prices. People began to think Asset inflation would become a permanent condition (egged on by snake oil lending practices and poor Fed controls). So, households were encouraged to SAVE LESS from a peak of 12% of GDP in 1980, to 8%in late 80s and early 90s, to 5%in Clinton's 1st term dropping to 2.4%in his 2nd term, and then collapsing to -1%/-2% negative Saving rates in Bush's 2nd term.
Of course, this and cheap money also abetted the selling/refinancing of assets and borrowing more to support Consumption and living standards --at the SAME TIME the average rate of increase in real hourly earnings dropped sharply to 1% in 2003-04 and also turned NEGATIVE since then.
III. EXPECTED GOOD and BAD NEWS
It's likely consumers will SAVE MORE in coming years (given proper incentives and REDUCTION in tax rates) as Imported Inflation (oil price/commodity rises) continues, and as realization sinks in that stocks and home prices will not inflate nearly as much in future years as in recent years. Much improved controls of flagrant credit card excesses should also help the Saving impetus.
Other good news is that lower Consumption means lower imports which helps the Current Account Deficit and ultimately the Dollar. A stronger Dollar will make foreign exports cheaper but this will be offset by rising energy costs and related product higher transportation costs from far away distances.
The bad news is that Consumption will structurally decline to +-65-67% of GDP and unemployment may remain higher for a time until we put together Marshall Plan Investments (properly paid for by clever packaging of tax incentives, reform of tax code for more equitable tax rates for lower-middle class, cuts in Defense expenditures, etc.) for infrastructure, education, health care, alternate fuels, etc., recognizing these investments will take 4-8 years to have a measurable impact.
SUMMARY
If we can come together (got to stay hopeful, Art) by a return to Financial Prudence with a Social Conscience, then I'm optimistic we can meet the tough challenges to our social-democracy.
I say this in the spirit of personally being a Conservative financially, but a Progressive socially ... falling back on Edmund Burke's principles of fair play and concern for the Individual and Community.
If continue to "bully each other" in our cultural-political dialogue, then "Man the Lifeboats." For this will be a one-way journey to a Cultural and Financial Polarization that will set our nation back for decades.
As a major Step towards Real Constructive Change, we must confront Reality head on of the necessity to adjust the inequites and imbalances in our Economic Model. This means moving toward less Consumption, more Investment and higher Savings as the driving forces in our economy.
Maybe wishful thinking on my part (as I own some shares) but I cannot see them going down.
The Fed will like extend the line of credit, or will open the discount window to allow them enough time to recapitalize. The shareholders will likely get significantly diluted. However F&F will eventually be a $50 stock's in 5 years.
Art,
Sorry, for correction you no doubt noted:
..national Debt of $9.5 trillion..
Frank:
As usual a fine dissertation. I don't think it answers my question though.
Your definition:
(a) income after-tax (including salaries, wages, benefits, interest, dividends, bank deposits, contributions to pension accounts and 401k plans, employer contributions to pension plans, and asset investments...LESS: payments against a mortgage or loan and borrowing not used to invest in financial assets (e.g., credit card debt) or not converted into some other form of savings.
This would appear to follow the definition of personal disposable income which is the start of the Savings equation. More specifically, if you follow the BEA definitions:
Wage and salary accruals and disbursements. The monetary remuneration of employees, including the compensation of corporate officers; commissions, tips, and bonuses; voluntary employee contributions to certain deferred compensation plans, such as 401(k) plans; and receipts in kind that represent income. Accruals and disbursements differ in the treatment of retroactive payments. In the national income and product accounts (NIPAs), wage and salary accruals is the appropriate measure for gross domestic income (GDI) and wage and salary disbursements is the appropriate measure for personal income.
Personal income. Income received by persons from all sources. It includes income received from participation in production as well as from government and business transfer payments. It is the sum of compensation of employees (received), supplements to wages and salaries, proprietors' income with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj), rental income of persons with CCAdj, personal income receipts on assets, and personal current transfer receipts, less contributions for government social insurance. Related terms: Local area personal income, State personal income.
Disposable personal income. Total after-tax income received by persons; it is the income available to persons for spending or saving. Related terms: Personal consumption expenditures (PCE), Personal income, Personal saving.
Personal outlays. The sum of personal consumption expenditures (PCE), personal interest payments, and personal current transfer payments.
Personal saving. Personal income less the sum of personal outlays and personal current taxes.
Your definition, I don't know the source, is more expansive and less Greek than BEA's but they look to be in sync.
My dilemma is that, focusing only on 401Ks, I make a decision to contribute to my company's 401K. Employer matching rates are all over the place from zero to 100%. My recent employer matched 50% of my contribution.
First, my 401K contribution is pre-tax so, each year, whatever my effective tax rate turns out to be, I have received that as a rate of return. In addition my employer is adding to my contribution (savings?) another 50%. That is a phenomenal rate of return on my (savings?) option. No bank account can come close. Admittedly the tax savings is merely a deferral of taxes to a future date, but the theory has always been for pre-tax savings options that when I commence to pay taxes on those funds I will be in a lower tax bracket so I end up with a net tax savings of some amount.
Since I have "put away" (saved for my future) using options with high rates of return, I can now maintain my living standards by borrowing, via credit cards, home equity lines, with lower interest costs than I am earning on my (savings?) - Home equity lines further reduce my interest costs due to tax deductibility. The very definition of "financial leverage".
I am not suggesting that this is always a wise decision but as long as the economy continues to grow and jobs are available and asset values rise, I should, eventually, be in fat city while having enjoyed feeding my every desire along the way. Initially much of this activity was predicated, perhaps only subtly, on the idea that my earnings would continue to grow sufficiently to cover any liquidity issues that might arise. I doubt that in most cases this was a premeditated thought process but in the abstract the practice made sense. Economic downturns, globalization, inflation, began to destroy the concept, not because the "leverage" idea was faulty but because consumers are not well versed in risk management or awareness and easily overextend themselves. It is a result of American optimism, maybe better defined as "ignorance is bliss".
I won't dispute your concern over the 70% consumption rate in GDP other than to point out that we have a massive economy that must provide jobs for a massive population.
With globalization, imports have clearly exceeded exports. Most of what we import either used to be produced here, with American jobs, or could be produced here, with American jobs. Outside of some specialty food items and a few high tech items we have the capacity to produce all of what we consume, notwithstanding oil. Coupled with the rise in productivity in the last twenty years, productivity gains that did not "trickle down" to wage earners, we added to the dilemma of a continuing rise in consumption, with stagnant or lower wages and job losses.
To a great extent the average American worker is not really aware that much of his problem is stagnant or declining "real" wages. I believe that the constant harangue over taxes is because some don't understand the true problem and most find blaming the government the easiest scapegoat. To your point, we are not exactly highly taxed when compared with much of the rest of the Western world.
What has become apparent to the average joe is that not spending means even more job losses. Even if some of those job losses are Walmart jobs or part-time jobs, fewer jobs mean fewer options for solving liquidity problems. Until the recent fall of the dollar, US exports were not providing sufficient jobs, especially high paying jobs. If we don't increase production in the US, creating more jobs and driving GDP growth via production, the only way to continue GDP growth is through consumption. A model we have been following for the past couple of decades.
Since our wage scales tend to make products produced here non-competitive with foreign produced goods, there is little incentive for capital to be invested here to spur economic growth. Of course the classical economic answer would be for wages to decline even further to establish competitiveness but that does little to alleviate the pain the average worker is already suffering.
In the short term, I have to agree with Dr. Reich that we need consumption to continue to be the driver. The hole won't get smaller but it will get deeper more slowly.
As to Savings, my point is that I'm not sure we are saving any less than we have historically, it's just outside the normal historic view, and the model change has been obscured and offset by increased consumption via credit. Again, the 401K/credit scenario, is not unwise financially if managed well. The problem remains that the average American is not attuned to sophisticated financial management.
In net, the assertion is that the true cause and effect does not lie with lower savings rates but higher credit spending, obscuring the true savings rate, simply by virtue of the simplistic definition of Savings. This seeming doublespeak is important because you don't solve problems by attacking the wrong cause. Ergo, I don't think tax policies incentivizing Savings is the answer as much as policies directed at better control of credit markets. Simply legislating caps on chargeable interest rates at 12 or 15% API would cause the credit industry to initiate actions that will begin to solve the issue. The biggest concern with that is making sure the credit industry does not institute immediate changes that will injur those with outstanding balances.
If we were to view the Savings rate simply from a cash standpoint I think you would see an entirely different result.
Poor SBVOR. He operates under the impression that NBER has a succinct set of standards for judging recession. lol
They do not.
Frank:
To your continual political plea; You know I'm not one given to "I told you so's" but I told you so!
If you are following the general election campaign so far, you see that Obama has had to shift away from his generic "hope and change" message to tackling specific issues. Further he has had to become somewhat more of an attack dog, either in defense or taking advantage of McCain guffaws (which seems to be a neverending supply).
We have only just begun the fight and nastiness has been creeping in and you ain't seen nothing yet.
It does always amaze me that we are so advanced technically but so backward culturally. Technology hasn't helped us. In the old days, our only venue for political speak was newspapers and the periodic news on radio and TV. In rare cases we might have a candidate appear in town and listen to a speech. With the advent of cable TV, more especially 24/7 cable news coupled with the internet we are bombarded hourly with the same inane stories over and over. The smallest of issues or mispeaks are broadcast so frequently that you would think the War of the Worlds had commenced. We have hour after hour of political pundits, surrogates and analysts rehashing today's latest gaffe, repeating the same words over and over. The most amazing thing is all the free TV advertising afforded the campaign staff talking heads with constant interviews all day. Usually these talking heads don't expand on the issues but rather just use the time to get in the campaign themes or buzzwords or daily email rhetoric scaled down to sound bites. It is truly an absurd phenomenon.
After the election, whoever wins, the hurt, angry feelings will be with us awhile and will inhibit progress significantly. Recent estimates are that Dems will not gain enough Senate seats to be filibuster proof and that will stall very important legislative actions.
Currently our problems are so diverse and so large in numbers that any impediment to progress keeps us on a very slippery slope. A slope we haven't begun to climb because we are still trying to slow our downhill slide.
We are years, if not generations, away from any return to two parties who are both interested in the general welfare of our populace. It is now beyond merely ideological differences. It has segued to following the money.
Best example; as we speak I am listening to Dumbya chastise Congress for their inaction on opening up more oil reserves while he has lifted the Presidential ban on offshore drilling. Everyone knows, even conservatives, that this is no Valhallic relief plan, nor is there one, but it buys miles of political gain with the masses of Americans who have no understanding of the complexities and just want the pill that makes it all go away.
Why would not the question on the lips of every American be; why are the oil companies not drilling on lands or seas where they already hold leases? There may be reasonable answers, not likely across the board, that would clear up the issue for the public and many of the politicians and remedial actions could be undertaken.
The problem is that, politically, solving the dilemma is not the goal. Kicking it on down the road, keeping the ball in the air, gleaning all the political gains possible, at least in the current election cycle, is far more important than focusing the message and legislation on real solutions even though they may be far in the future as well.
Admittedly I am not objective but I feel the Dems really do want to approach solutions and it's the cons who want to drive the political SUV. Rove's legacy, to conservatives, is to milk all issues for political gain as long as there is milk left in them, never giving much thought to what happens if we die trying. As long as the end comes after the votes are counted Rove thinks his counsel will prevail.
We're a long way from getting out of this funk. Chances are it's going to take a whole new wave of young political thinkers in both parties to get back to any semblance of an efficient, problem solving functioning government with a view to what's best for the country. Nurturing a young new wave will take years.
I know you feel this is cynical and pessimistic but I still maintain it is merely "realistic".
Art, we've got leaders, not representatives, that is all... they've figured out how to game the system to their benefit.
You may find alternative news sources more to your taste. They've got less to lose, so often contain more facts than Faux News, etc.
anonymous 10:55:
sbvor's problem is that he lives in a closed little world befitting his closed little mind. He has no idea how the real world operates.
Anyday now, he'll begin a campaign to add a Book to the Bible: "The Gospel according to Ann Coulter".
b. dewhirst:
Thanks for the input. I peruse the net periodically and visit a few blog sites that provide deeper enlightenment via more obscure news sources.
Generally though, as I sit here blogging, adding insight and educational messages to our culture but adding nothing to our GDP, I have MSNBC on TV in the background (I love the personalities even though the rhetoric is abhorrent most of the time) and get the constant "breaking news", such as, flash flood warnings issued in Podunk Center, Idaho or someone's cat stuck up a tree. Being fairly good at analysis I can usually sort out meaningful info from fatuous nonsense.
I would disagree with your "leaders" comment, although I get your drift. We only have a handful of Washington insiders who would be capable of "leading" a Boy Scout troop or a church choir as opposed to "leading" anything more substantial. For the most part they are much more opportunists than leaders. Few of them could make a living in sales.
I don't know, they all seem to be doing -very- well for themselves financially...
b. dewhirst:
Methinks that financial gain says little for "leadership" skills. In today's age connections and pandering appear the greater skill set for acquiring financial gain.
And I think your idea of leaders is a little naive, but then... I'm against hierarchy.
b. dewhirst:
Perhaps, rather than naive, I have a higher standard for the definition of "leadership".
And where are all these leaders with leadership who don't take advantage of their position?
b. dewhirst:
Start with the CEO of Costco. Look around your community at those leading food banks and homeless shelters and a variety of services for the poor. Though not all of them, look at many religious leaders, parents and others involved in Boy Scouts, Girl Scouts, whatever Scouts.
There are a tremendous number of "leaders" in this country, lo, the world, whose names never grace the front page of anything.
Seek! Your quest will be far easier than Diogenes search.
Sorry, that CEO may be a more pleasant thief then all the rest, but if he is running a for-profit company, as far as I'm concerned he is stealing from his workers.
As for religious leaders, most of the ones in this country (Jewish, Christian, and Islamic) have holy books which include Numbers 31, and rape-and-genocide aren't my idea of a good thing.
The boyscouts leadership discriminates against gays and atheists.
None of your 'leaders' do much for me.
As for what that has to do with leadership... everything.
As for food-banks... leader is a synonym for ruler, but organizer isn't. As for larger charities, I know what some of those leaders get paid.
b. dewhirst:
Your first failing is that you are given to hasty generalizations, which then renders your objectivity moot.
I believe I've already attracted your attention to a certain naivety?
CEOs, Boyscout higher-ups, and clergy aren't exactly my favorite people, and they weren't before you suggested they were wonderful leaders that should be genuflected before.
b. dewhirst:
Implicit in "all" your assertions is that your views apply to "all" in any given group. I made no such declaration. I merely pointed out that within some of those groups mentioned one can find true "leaders" far more readily than one can find them in government. I didn't even mention the education profession which I bet I dare not.
This is not a perfect world so you can always find exceptions. On the other hand you are but one person whose judgment may not "always" be accepted as sage.
All CEOs of for-profit companies run for-profit companies, which I believe to constitute theft. All clergymen of the specified religions (with the exception of Bahai and Unitarian Universalists, perhaps) include the genocide and rape of Numbers 31 in their religion. All boyscout leaders support a policy of discrimination against gays and atheists (or they would have resigned.)
I asked you which leaders didn't abuse their positions (implicitly including 'living up to the ethical obligations of individuals in that station')
You failed to meet that standard, and are now splitting hairs.
Art,
Due to workload, I can't respond in great detail to your micro-economic thinking on the accuracy and workings of precipitous decline of personal saving rate since the mid 1990s.
I'm taking a macro-economic view about the declining trend to a negative savings rate (no expert disputes this sharp downtrend has occurred, although some think it is slightly overestimated depending on factors taken in calculating the personal saving rate). As I am saying and we agree, the rate includes a Number of factors besides savings in the form of bank deposits. My reading of the BEA definition of the Personal Saving Rate is as follows:
"It is calculated by taking the difference between Disposable Personal Income (incomes of all kinds Minus taxes), MINUS personal consumption expenditures (including non-mortgage interest payments), then Dividing this quantity (personal savings) by Disposable Income."
In brief my look is macro-economic in that I"m convinced the declining trend to a negative savings rate in recent years is a cause for great ALARM. It simply means we are consuming more than our after-tax income supports. I agree with you the debt explosion has contributed to this decline in the saving rate.
The decline seems to be structural and it's increasing our dependence on savings from foreign sources in the form of massive Current Account Deficits. I think this is a very risky strategy because it inevitably leads to painful internal economic adjustments. For example, as I and some more expert have long said, this trend might make it impossible to finance all the attractive net-present-value investment opportunities internally (including social-infrastructure investments), i.e., we will be forced to a ever greater dependence on foreign lending.
Still, many economists/analysts are a little stunned and perplexed by the magnitude of the personal savings rate drop since the mid 90s
... a drop far deeper than experienced in Europe with its prudent Debt lending
culture.
How we've transformed into a nation of SPENDTHRIFTS in just 10 years is a mystery to some, but not to me. It's the double-attack problem of wage stagnation, and cheap money encouraging a huge debt surge and rate of growth to extroadinary +320%levels of GDP...
all placing real constraints on our financial system's overall Liquidity. This in combination with burgeoning national budget Deficits have multiplied our dependence on foreign lenders and brought us to position of being world's greatest DEBTOR.
This blog is not appropriate to go into technical details of the accuracy or factors included in the saving rate, e.g., the debate whether unrealized or only realized capital gains should be included in the calculation.
For an excellent technical discussion of the Savings Decline, besides Martin Feldstein's article I mentioned to you, I suggest you read following:
"The Decline in the U.S. Personal Saving Rate: Is It Real or Is It a Puzzel," by Massimo Guldolin and Elizabeth La Jeunesse , Nov/Dec 2007.
Their highly detailed analysis of the measurement weaknesses doesn't detract one iota from my judgement there is reason to be very CONCERNED about the overall low level of personal savings in our Economic Model, for reasons I've mentioned here and in other posts.
Pump priming very near term (as Dr. Reich suggests) is probably a necessity to keep Consumption from falling too far during recession (combined with energy/commodoty price escalation), but this is only a makeshift emergency solution.
America's out-of-balance Economic Model is forcing us to fundamentally increase lower-middle class after-tax income sharply (paid for by an increase in progressive rates), plus implementing strict controls for sound credit card debt and asset financing, as you also say. We need both. For me, this all means it's inevitable that Consumption will and must find a new Equilibrium with greater Savings and Investment playing a much larger role in driving the economy's GDP.
Will respond later to your 2nd post which has me worried for you, as you seem to be transending to Nihilism, rather than Realism, in your views of nation's ability to get some constructive control of its excesses and to change course for the betterment of ALL.
You are hearing hopeful signs from someone who has been a studied cynic of all cynics for many years about our social-economic-cultural dysfunctions.
b. dewhirst:
Reviewing our dialogue I would suggest that you have done your share of hair splitting, albeit perhaps with thicker hairs.
Providing a list of "leaders" which might fit your definition of leadership is a rather fruitless exercise. You would either pooh-pooh the list with generalized statements, such as, all CEOs of for-profit companies are stealing from their employees or some other some such drivel far removed from logical debate.
You might even post your own list of those who satisfy your expansive view and that list may very well be longer than mine leading you to the illogical conclusion that "all" on both lists are bad.
You espouse a rather absurd ideological viewpoint which cannot be countered with reason, therefore continuing debate is senseless.
Enjoy your leaders then... I promise you, though... they'll always disappoint.
b. dewhirst:
Having been around the park quite a few more years than you I have seen my share of disappointment and harbor no illusions of grandeur in most of our vaunted "leaders". At the same time I have experienced the success stories of many unsung "leaders" and some "sung" ones that substantiate that "all" is never a correct assumption.
Would love to hear back from you on the subject in 30 or 40 years but, alas, lifespans are such a delimiter.
A pity the only standard of comparison you can find for them is "Not as bad as Walmart."
Not very convincing from where I sit.
b. dewhirst:
If you are seeking validation to the premise that we are being taken down the road to perdition by our, so-called "leaders", most of my posts here would provide you that validation from my purview.
The problem is that I try to remain, in my postings, logical and reasonable and that drives an abhorrence for overgeneralizations.
"All" water does not boil at 212 degrees F.
Then why do you insist on calling them "so called leaders"!
They're leaders, and this is what most of them do!
Don't defend them as some kind of aberration, and I won't call you naive.
Frank:
In my mind the issue lies in the calculation rather than the result.
In the first place, notwithstanding all the vagaries in defining Disposable Personal Income, as far as 401k contributions are concerned, once contributed they are no longer available for disposable income without tax penalties. Same is true from the get-go for employer contributions to pension plans. Of course deducting either or both of these from Disposable Personal Income would only exacerbate the issue.
A real aspect that is having some influence is the change, by many large corporations, from pension plans based on "defined contribution" rather than the historic "defined benefit". Supposedly, I have never researched it, in the long term, "defined contribution" works out better for younger employees but I fear that may be more smoke and mirrors. The shift did reduce employer contributions which would have the effect of reducing Disposable Personal Incomes thereby decreasing the "Savings" resulting from the standard calculation.
Historically there were two reasons for personal savings; retirement and "rainy days". Before the rapidly expanding advent of credit, "Savings" were limited and arose more from "discretionary" income as opposed to "disposable" income. Since, to the average consumer, spending and saving were predominantly cash functions many people tended to spend what they felt they wanted to and then saved some or all of what was left. Granted many went the other way and saved off the top and then spent from what was left. The key was the cash methodology.
Over the past 50 years workers have been subjected to tons of advertising and advisory seminars preaching the value in wise investing. Essentially this advice was to invest in stocks and bonds instead of bank savings accounts. Many heeded the advice. Others with less available for investment were estopped by fees and investment limits until that all began to change in the 90s. Although stock market investments are liquid and somewhat readily available for cash conversion there is a tendency to not dip into stock or bond investments for normal spending needs unless an emergency develops.
Along with this move to sounder investing (saving) came 401K options offering even greater rates of return. Those who had the option, and it continues to grow, took advantage. Because these funds can be borrowed against, without penalty but with rigid repayment regs, they also serve as "rainy day" "savings".
Since WWII owning one's own home has been integral to the American Dream. The housing boom following the war coupled with the Interstate Highway system providing suburban growth, created a huge home building market for even average workers. Historically home values had always risen, albeit much slower in the 50s and 60s than later. We lived in our first house for 9 years and enjoyed appreciation of 60% over that time period. We lived only 2 1/2 years in our second home and profited when we sold it by 97%. Had I sold it 6 months earlier my return would have been around 120%. The motivation for first buying a home was that I could end up with a mortgage payment little more than I was paying in rent and I could deduct the interest and gain appreciation.
As home buying picked up steam so too did purchasing appliances, furniture and household accessories. This was an increase in consumption fed by US produced goods. In the 60s through the 70s incomes were also rising at fairly high rates, often driven by higher inflation. Credit availability was still restricted but was expanding enough that spending could be achieved without saving up. With earnings and personal wealth rising, managing finances was not a difficult process.
Jobs were plentiful for the most part so the paradigm seemed to make sense. Even during times of unemployment, between unemployment insurance, dipping into savings and some credit card use, one could weather the storm until new employment occurred.
Concurrently with all this expansion of wealth and income and credit, capitalism was working overtime. Bigger and better, fancier and more efficient, new fangled products abounded. US manufacturers seemed to be building in obsolescence, both technical and real, into new products so frequency of replacement increased. New cars came with ever more bells and whistles. TV screens got bigger and bigger. Color TV became available. For homeowners, automatic dishwashers moved from "nice to have" to a "must". So too, washers and dryers. These latter two gained urgency when more and more wives entered the workforce. In the 90s came computers and a market for billions of dollars of sales and profits. Bigger monitors, faster processors, more memory have kept this industry turning over again and again.
As stated before, with "savings" now invested in assets with greater rates of return, bank savings accounts fell by the wayside for most American workers. With their excess funds less liquid expanding credit allowed for keeping up consumption and the American public, dumb or not, had been lured into continuing consumption, not far different from Ulysses and the Sirens.
The rapid rise in home prices created greater home equity and that became a resource for even more borrowing and from a leverage standpoint was very wise, provided done carefully.
The major changes that began to blow the ballon to big were the shift to supply side economics and then the move to free trade and globalization. Job growth began to decrease, at least in rate, and more and more products were imported. Wages began to stagnate and new jobs were at lesser pay rates then many were accustomed to.
The latest straw is the bursting of the housing bubble. Keep in mind that the vast majority of American homeowners had no idea of the stupid lending practices taking place. All they knew was that home ownership was growing and housing values were ballooning. Most of them didn't jump in the water and increase their home equity lines but they are getting hurt by declining home values nonetheless.
Much is made, in discussions of personal savings rates, of the impact reduced savings has on trade balances (deficits). Is this a function of savings or is it more related to the import mix of products sold versus those manufactured in the US?
Has consumption increased in absolute terms, beyond population growth, or has its proportion of GDP increased due to lower production in the US?
I know this is a long diatribe and has rambled a bit but I view all this, and while recognizing faults by average US citizens, I still come back to the root of the problem having little to do with real savings but rather to less US production, leading to less, or lesser paying, US jobs, and ease of credit availability, promoted by a banking system run amok.
The BEA Personal Savings formula is far too simplistic. It's akin to viewing a P&L statement which reflects only Sales-Expenses=Profits, and when Profit ratios show a decline, exclaiming we have found the root of the problem; Profits declined!
A return to greater tax progressivity will help but minimally. Credit restrictions, on the industry not on the consumer, will make a big dent. But the biggest factor would be increasing production and good paying jobs here in the US. The latter being far more difficult to manage and effect will be the last thing looked at.
We must remember that unless we make our quest more complex by focusing only on production tending toward more exports, consumption will be critical to success.
As I look at it, without an exhaustive review of historical numbers, I do not see the American workers propensity to save as the problem. Besides legislation in the areas above I would also suggest a new paradigm for calulating savings rates, breaking out many more variables for analysis. Backing into important statistics is never a good idea.
As with my military spending argument, if we can grow the other elements of GDP, consumption ratios will come back down, easily to your suggested range.
Most dogs who chase their tails realize that once they catch them they have achieved nothing but tying themselves in knots. Better to find more productive items to chase. Cause and effect! "Real" cause and effect!
b. dewhirst:
What you call me is of little concern to me. I doubt you can come up with anything I have not been called before, in spades.
Our semantic dilemma seems to surround our definition or view of "leadership". Having attended conferences and seminars on the subject my definition appears more expansive than yours.
True "leadership" does not exist in the hands of one who merely commands by virtue of power and position. Dumbya is considered, by many, as the "leader" of the free world. To my mind he couldn't lead anything or anyone if he didn't have power behind him. I wouldn't follow him into a whorehouse let alone a war (I might wait and enter the whorehouse later). Hearing/reading the opinions of many around the world I appear to not be alone.
Power and position alone do not a "leader" make. in my mind.
But we follow, don't we?
A leader is one who leads.
We are led.
Just because you don't like where we're going doesn't mean we aren't being led.
The word "leader" has a very simple definition... and a very ratified one with no almost no relation to reality. You'll forgive me if I choose the former, I trust.
This "We need a good leader to save us!" crap is what gets us into these messes in the first place.
b. dewhirst:
Some "lead". Some just exercise power.
"Before we get started, lets define leadership. Leadership is a process by which a person influences others to accomplish an objective and directs the organization in a way that makes it more cohesive and coherent. Leaders carry out this process by applying their leadership attributes, such as beliefs, values, ethics, character, knowledge, and skills. Although your position as a manager, supervisor, lead, etc. gives you the authority to accomplish certain tasks and objectives in the organization, this power does not make you a leader, it simply makes you the boss. Leadership differs in that it makes the followers want to achieve high goals, rather than simply bossing people around."
Yes. Exercising power against others is what leaders do. I'm not interested in your sophistry.
b. dewhirst:
Sounds like a disgruntled "follower".
You just keep thinkin Butch.
As I explained much further up-thread, I'm a libertarian socialist... I'm morally opposed to most kinds of coercion, and that means I'm morally opposed to leaders.
To me, you sound as sensible as someone in 1855 talking about "the good slave-masters."
b. dewhirst:
Idiocy by any other name is still idiocy.
The beauty of youth is that the mind, unfettered by responsibilities, is free to explore all sorts of extreme ideas.
The ugliness of adulthood is that extreme ideas turn out to be just that; extreme ideas, which have no practical applicability and are only feasible in the abstract.
You're a little behind the curve but your entry into adulthood should be coming soon.
Hell of a leader you must be, what with your total unwillingness to consider other's points of view and instant recourse to insults of others intelligence and youth.
Hope you didn't pay too much for those courses in leadership. I would have thought someone of your advanced years would have been able to spot a scam, but I guess age is no antidote to naiveté.
b. dewhirst:
Neither here nor there but I was a good leader who always entertained reasoned, rational points of view. I am now retired and no longer need to concern myself with leading or motivating others. I, especially, have no need to sit idly by and listen to fatuous nonsense.
Other points of view founded in some semblance of reality are worth entertaining. Even abstract social/philosophical ideas can be worthy of debate provided there is the possibility of reasonable conclusions. Absent that possibility the exercise is a major waste of time.
Is always interesting that those who commence insults whine the loudest.
Whatever. Have fun butchering the english language from your retirement home.
b. dewhirst:
You just keep thinkin Butch!
... and you just keep thinking 'colonoscopy bag' and 'senility.'
b. dewhirst:
Your posts would portend that you are nearer senility than me.
By the way it's colostomy bag. Colonoscopy is an endoscopic examination, been there, done that.
My solace is that your turn is coming sooner rather than later.
"Libertarians" are a special bunch, Art. Sbvor and dewirst are similar 'special' cases. Even if off in seperate branches of the same tree of childishness. They are Bullying children allowed to grow up that way and unfortunately need to be handled with care.
Not that the rest of us are not occasionally one-sided and childish, it's just "liberatarians" (also called 'classical liberals') seem to never grow up.
Thanks for your insider view of the capitalist curse...that ever larger concentrations of money usually garners money much easier than actual work. (The semi-retired Gates and Buffett are trying to inform us similarly in the vain that you're giving us.). Govt. regulation of the economy is a healthy necessity. But 'intelligence' is needed thus for our govt. to work well enough so we try to read and learn to gain that 'intelligence'. I am sure we'll disagree on some things but the name-calling that supposedly different types of "libertarians" give here is not intelligent. dewhirst, I hope you can abstain from the sbvor type of derangement.
Frank Thomas!! Good points. You may have reached a higher plane (or is it plain?) than even our Robert, our host. And Toast! you too! I wonder where the 'entitlements' are going these days? Seems to be to the higher incomes.
Again, special thanks to Robert Reich for allowing this free discussion to flow.
Actually, Warren Buffett agrees that taxes are far too loose on his social class.
Obviously, as you know, I don't appreciate being lumped in with Sbvor. You might have noticed a "few differences" between Noam Chomsky and Bob Barr as well.
I'll let you guys get back to convincing yourselves that whatever you do is right because you did it.
I have a question on Freddie and Fannie - why don't the CEO's pay back the billions they received in bonuses the past 2 years while their reckless leadership led to the fall of these entities? They reaped all the money and rewards of their corrupt activities with regards to loans, lending, etc. and now the taxpayers are going to have to bail them out??
SVBOR posted, in reference to the condition of Fannie and Freddie:
"My bet is that the hysteria Mr. Reich seeks to stir up here has no more substance than his imaginary recession."
Thanks, SV - can you pull out your checkbook and backstop the Fannie/Freddie thing? Instead of tax dollars, maybe you can take care of it, since you seem to know something that no one else does.
It's the ol' "conservative" rickroll one again, with Democrats often joining in when they see a chance to throw money away. Pocket the profits, then bring in the taxpayers for the losses.
Okay, score one for Mr. Reich.
Then again, I don’t have any friends in high places at Fannie or Freddie. Does Mr. Reich?
Anybody care to comment on how we got to this point?
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