The Blame Game - Consumers

In this recent economic downturn, people from all sides are pointing fingers and trying to place the blame on one another. This is the first of a series of posts in which I will try to dispel some of the myths being spread.

The most common theme you hear when it comes to the housing market is "people bought more house than they could afford." While this is true in some cases, more often it only became true three to five years after the home was purchased.

Back around 2003-2004 we were just beginning a recovery from the twin market downturn caused by 9-11 and the tech bubble burst. Jobs were slowly being created, interest rates were at all time lows and many were expecting the economy to really grow. Because of this, more people saw that they were finally able to get into the housing market. This caused house prices to grow which allowed people already in a house to upgrade to a new house. This was the start of the housing market boom.

What people didn't realize was that the economic growth they were seeing in the markets was a shallow gain. While average wages were going up, they weren't matching inflation. What's more is that the average number was skewed by a large increase in income for the top 1% with little to no gains for the other 99% of us (see charts below). At the same time, mortgage brokers and other lenders (who we will discuss more thoroughly later) saw the potential for large profits via new mortgaging schemes now dubbed "sub-prime." This led them to encourage clients that could qualify for standard mortgages to instead apply for adjustable rate or other balloon mortgages.

Courtesy
Courtesy
Courtesy

This is why I say most people trapped in this mess could afford the house they bought at the time. However, when inflation went up (not only food prices, health insurance costs have increased 20-30% annually in many cases; an average of 6%) but their wages didn't, they were put in tighter and tighter circumstances. In the very early days of the current crisis (circa 2005-6) some people were still able to refinance or sell their way out. But some people hit a more severe hardship. Many people got to the point where they were living paycheck to paycheck. If they lost their employment for even a month, they wouldn't be able to pay the mortgage. If they had any sort of medical emergency, they wouldn't be able to pay the mortgage. These people began going into default.

By late 2006 and throughout 2007, the housing boom started really slowing. Job growth had slowed or at times gone negative. Federal interest rates had been raised from their 2003 lows of 1% back up to a more reasonable 3%+. At the same time, personal property taxes were being reset to the new home values. In many cases this caused a doubling of those taxes. People could no longer refinance their homes. Fewer people could buy so housing prices began to slump and selling the house was no longer a way out. Wages that had been stagnant (or negative) for three or four years were no longer able to afford the mortgage and the rapidly increasing cost of getting to work. The people who in 2003 could afford their house were rapidly getting buried under increasing piles of debt. This trap many home owners fell into is what began the popping of the sub-prime bubble.

So I ask you, is it your fault that corporations have enjoyed their multi-million dollar golden parachutes while the employees working 60 hours a week to make ends meet get nothing? Is it their fault that insurance costs grow by double digit percentages while coverage steadily drops?

There were some people who bought beyond their means, don't get me wrong. If you make $30,000 a year, you probably can't afford a $300,000 house. If you are told you can live in a house for three years without paying anything (what some of the balloon mortgage plans promised), it is probably too good to be true and you shouldn't sign up for it. But I can't put the blame on a working family who couldn't see that their earnings would be the same four years down the line but their expenses would have grown by double digits. I don't blame the public school graduate who can't understand the ins and outs of mortgages that even the Harvard educated accountants who invented them barely understand.

Review of the bailout

Yet another letter to my representatives

This is in regard to the Wall Street Bail out program titled "Emergency Economic Stabilization Act of 2008" (pdf).

I must first congratulate Congress on the openness of the process in making the full text of the proposed legislation available and open for public comment before being proposed on the floor. Such a process clearly opens up government to be truly of the people and allows us to make sure government is working for the people. Thank you.

About the legislation itself, there are many good things in it. I do have hesitation about some aspects and am strongly opposed to one main clause. As I was reading the bill, I kept a running Twitter stream going of my thoughts.

Beginning with the aspects of this bill that I like, the general outline of the plan is a good idea. While I don't believe that an insurance program will be effective, allowing Sec. Paulson to either apply such a system or buy the securities themselves directly gives him the flexibility necessary to handle such a large and complicated issue. I am also really happy with the openness of this program. The regular reports detailing what securities are being purchased or insured will significantly improve the trust of the American people that their money is being used appropriately.

Requiring this program to work on renegotiating mortgages is probably the single thing that will do the most good in this bill. I also appreciate that executive pay will be restricted if they take part in this program; such a protection will ensure the executives aren't taking advantage of the tax payers for their own personal gain.

There are a couple parts of this bill that I do find issues with. One is the incredible power Sec. Paulson will wield under this bill. Not only is he being put in charge of guiding this program through the Department of Treasury, but he is also one of the five members of the oversight board, with the other four members also being significantly involved in the troubles facing us now. The only other actual oversight is provided by the Office of the Comptroller. Congress will set up another oversight board, but that board will only be set up in a review role, unable to require changes to the program. This concentrates an enormous amount of power over as much as $700 billion in the executive with minimal checks from other branches. I believe that at the least, Congress should be allowed active oversight of the program as well, to ensure tax payer money is being appropriately used.

That however, is not the main issue for me in this bill. Also contained in this bill is the suspension of mark-to-market accounting (section 132). It is my understanding that this accounting procedure requires banks (and other entities) to list the value of their assets at current market value, not at their expected future value of those assets. Such a write-down has played a factor in this crisis because banks' asset sheets have dropped in value significantly. However, suspending such a rule allows the banks to effectively lie to investors and officials that would loan to them. Were such a rule to be passed for someone such as myself, I could apply for a loan saying that I have $1 million in assets based on a 401k with $10,000 and a $100,000 house -- if I hold on to them long enough, it is estimated that they will be worth $1 million. I would be laughed out of any bank office were I to ask for a loan using that logic.

I do believe that mark-to-market should be reviewed as required in section 133, but the mark-to-market rule should not be suspended until after such a review. There are types of trades that shouldn't be able to affect market value of some of these assets and as such, the rule does need refining. Suspending it wholesale removes the transparency so desperately needed on Wall Street now to improve investor and credit trust. PLEASE, fight against this section of the bill.

h/t to BAC for linking to the proposal text

UPDATE: The bill as it was written failed to pass (Yes, ignore the title, this appears to be the correct roll call). My congressman, William "Lacy" Clay did vote against the bailout.

Open letter to my congressional representatives

I have been listening to lots of coverage of the Tresury Secretary's financial bail-out program proposed 09-18-2008. From my understanding, our government would be responsible for over 1 trillion dollars of bad mortgages. This increases our deficit by 25%. Right now, with just AIG, Bear Stearns and Fannie and Freddie loans under our control, treasury bill yields are nearly 0%. If we take this extra $500 billion in bad debt, the yields will be negative - people will be paying the government to borrow money from us. Our dollar will tank and inflation will go through the roof.

I know that not taking action will cause many more financial institutions to fail. I know that stock markets will continue to fall. This is a risk that the investors knew they were taking on. These financial institutions knew that they didn't really understand the securities they were creating. They willingly took on the risk and gambled with our future. We cannot have the federal government take away all that risk and tell these companies that they were right to take on this risk. It will tell these institutions that they are too important to fail, so if they make further mistakes or take on more bad risks, they will be protected from this risk by the tax payers. This can not happen, and I ask, as a strong supporter of you and an Obama volunteer, that you vote against any such bail out that leaves banks and executives involved in this without penalties.

Thank you for your time

My life as a Momocrats chauffeur

With all the depressing news going on right now, let's focus on a more hopeful time. It was a time when, even though Americans were facing many challenges on many fronts, we knew that, with the right tools, we could make a better country. It was a time when our leaders looked to the future confident in our ability to rise above our personal divisions; when politics wasn't just about the people who were running but about the issues they were fighting for. Let's go back to three weeks ago.

The week of the DNC, my wife was a credentialed blogger through Momocrats. Though ouur son and I wouldn't be able to get credentials and wouldn't be able to get in to see any of the major speeches or anything, we thought it was important that we all go and be a part of this. So we packed up the car and drove the 850 miles to Denver.

The atmosphere there was electric. Signs everywhere were welcoming the Democrats to town. The residents were cheerful and open, many of them thanking us for being a part of the convention. Maybe it was just that there were so many people with the same hopeful world view that brought everybody's mood up.

The plan for us would be that I would run backup: drive Jaelithe and the other Momocrats to whatever events were needed; pick up and drop off supplies; and acquire food when time allowed. The rest of the time, I would take our son to see the city. Denver is a really nice city - for St. Louis residents, imagine Grand Center, the Loop, and the Central West End rolled together into one area. We went to the Denver Art Museum (free thanks to Target), local parks, the main pubic library and many other local sights.

The convention itself was interesting. By going there ourselves, we were able to cut through the curtain the media would hang in front of our eyes. Instead of watching the infighting MSNBC tried to show, we saw an assistant of Chris Matthews run out to grab the seven "PUMA" members in the area to keep them from leaving the shot. Instead of seeing protesters only allowed in the "Free Speech Zone," we saw protesters allowed and encouraged to say their peace when they interrupted Nancy Pelosi at an event.

I also saw the speeches, not through the talking heads and pundits on MSNBC and Faux News, but directly (or as my wife described, "unfiltered") on CSPAN. Rather than listen to Matthews or Hannity bloviate about themselves, I watched regular citizens describe the problems they face as they work themselves to the bone but still see 2%+ real pay cuts as inflation outgrows pay for those making less than $1 million a year. I watched veterans who can't get health care because the party in power would rather spend the money in Iraq. And through this all I have watched these hard working citizens be called whiners over Twitter when they describing how their government has forsaken them in favor of the top 1% of earners.

The DNC was hopeful and uplifting. It gave us real solutions to real problems facing everyone. Yes, they attacked their Republican rivals, but they attacked John McCain's tax policy which mirror's Bush's, and we all see how well that worked. They attacked McCain's foreign policy, which take's Bush's unilateralism to the next level, and showed how isolating ourselves from the world is the wrong way to go.

This is what politics and political conventions should be about. It should be about praising your party's accomplishments and highlighting its policies. It should be about issues that matter to all of us. It shouldn't be about criticizing the hundreds of thousands of community organizers working for $10,000 a year to make the millions of people in their community safer. It shouldn't be about patenting the word "lipstick."

We need a politics focused not on the personality of the one or two people in charge. We need a politics focused on helping the 300 million people living in this country. We need a politics about that recognizes the place of those 300 million people among the 6 billion people globally. Not long ago, those 6 billion people looked to America as the city on the hill, as leaders. Over the past 40 years, and especially in the last 8, we have abdicated that position. That doesn't have to continue. The Democrats recognize this and want to make our nation a shining example of democracy and equality again.

Country First

Yeah, I know I said I would re-cap the DNC. Don't worry; it's coming, but the vitriol and slime coming from the north is requiring my response.

John McCain is very fond in his campaign against Obama to say he "puts his country first." Obama did a good job of directly addressing that last week in his speech, but I wanted to draw some more attention. When John McCain says he puts his country first, one must ask, "What part of the country?" Clearly both candidates are very proud Americans -- you wouldn't run to be the symbol of a country you weren't.

When John and Sarah Palin say they put country first, the most glaring question is "Which citizens?" John McCain's tax plan is very top heavy. The people in the top 5% of incomes stand to save a significantly larger amount than anyone in the bottom 80% of earners. In fact, those in the top 1% will save almost 10% (on average), those in the bottom 40% will save (on average) about 2%. Clearly, he puts the very wealthy first. Barack Obama's plan is to cut taxes for the bottom 80% by about 5% (on average). He intends to pay for it though by raising taxes on the top 1% of earners by about 1 to 2%. Clearly he puts the regular citizens first.

Source (PDF)

How about the environment, this is a large part of what our country's future relies upon. Three out of the four candidates are willing to say that humans are having an effect on global warming. Sen. McCain is even will to call for a "cap" and trade program. However, he doesn't actually know what the word cap means. In fact, he wants to give corporations whatever carbon credits they request, and then let them trade them back and forth. However he doesn't want to charge for the credits, nor does he want to fine companies for polluting more than their credits allow. Again, John McCain puts corporations and the rich first. Obama understands that corporations are paid to only care about one thing, money. If there is no fiscal benefit for taking an action, or fiscal penalty for not, they won't take that action. Everything is about ROI. Because of this, he intends to auction off all credits and institute penalties for exceeding those credits. This will create a fiscal incentive to move to less polluting technologies. The money the government will raise through these auctions will also be reinvested in the environment with proceeds being turned into grants to green technology R&D. Clearly, again, Obama puts the environment and our nation's future before corporations and lobbyists.

What about the 51% of our country that is female. John McCain campaigned against (although he failed to cast his vote) the Lily Ledbetter act that would have given women more rights when it comes to fighting for equal pay for equal work. He and the Republican party were able to filibuster this bill this year. He was afraid that by opening up when a lawsuit could be filed, corporations would have to actually pay people fairly, reducing their profits. Barack Obama has campaigned vociferously for this; in fact, most of one day of the DNC convention focused on this, with Ms. Ledbetter herself making an appearance. Once again McCain puts corporations first, Obama people.

How about the military? John McCain wants to fight any where, any time. He wants to stay in Iraq for 100 years. He would love to attack Iran. He probably would have tried to send American forces in to fight against Russia in the recent Georgian incident (forget bringing back the Cold War, lets heat up things a bit). There is no doubt that given the proper resources (including troop levels and recuperation time) our military can meet any objective we set before them. McCain doesn't want to do that though; in fact, he has voted against giving veterans improved benefits and sufficient time back home with their families. Here McCain is putting the wrong part of our military first, as Pres. Clinton so accurately said, "[The] people the world over have always been more impressed by the power of our example than by the example of our power," but McCain has it backwards, caring more about showing off our power. Senator Obama though wants to use our military smartly as a targeted weapon to use only when absolutely necessary. He also wants to reward our veterans, many of whom sacrifice everything for their country. He fought for Sen. Webb's GI bill and for Walter-Reed reforms; he is still fighting for mental health parity for the troops. Again Sen. Obama puts our troops first.

I could go on (and probably will again) but remember, when a candidate says "I put my country first," ask "How?"

Busy month!

We have had a very busy month this past August. The Obama campaign has drafted my wife and I as neighborhood team leaders for our area. My son will be starting pre-school through Hazelwood's reverse mainstream program on Sept. 2. And the thing that has been taking most of our time lately -- my wife got a press pass through Momocrats to cover the DNC Convention in Denver this past week.

While Isaac and I weren't allowed into most events, we all drove out there (all 850 miles). It was so nice to actually cut through the curtain the MSM wants to lay in between what is really going on and the story they want to tell. I'll try to share some of the stories over the next week or so. For now, check out Momocrats to see some real behind the scenes stories.

FISA: Cliffnotes Edition

After digging through pages and pages of the FISA legislation, I've come away with a much better appreciation of the law itself, instead of all the misinformation swirling around it.

The biggest thing that everyone (including Bush & Co.) said this authorized was warrantless wiretapping of anyone. Just skimming through the bill clearly puts lie to that. Even spying on a foreigner in a foreign country must get a certification from the FISA courts. If you are trying to spy on an American, the rules are even stricter. This bill also makes one of Bush's biggest defenses of his previous program moot. Originally, Bush argued that the Patriot Act and related bills gave him implicit authorization to spy freely; this bill instead says explicitly that all wiretapping (overseas) must go through FISA.

This bill also added significant protections for Americans overseas. To my knowledge, the CIA had pretty much free reign to spy on anyone, as long as they were outside of the country. This is no longer the case. It also gave clearance for telecoms interested in their clients' privacy like Qwest to challenge these orders.

Probably the most important addition in this bill is the review process. The main reason Bush was able to get away with what he did for so long was because these organizations' actions were not monitored. Now there are very clear reporting procedures. The American people get to see how this is happening every six months. Openness is the most important defense we can have against an overreaching government. As the saying goes, "Who is watching the watchers?"

They did, however, use this bill to add a couple things I disagree with. First is the fact that they extended the grace period between when the spying starts and when the AG needs to get approval from the original 3 days to a full 7. I don't personally see any reason the AG should not be able to turn in the information required to FISA if he believes there is a serious reason to start wiretapping. If he has enough information to believe there is a serious national security risk then he should have enough information to convince a FISA judge. If he doesn't then he should get that information before starting the spying. However, this is one of those points that I believe is a viable negotiation point to get the rest of the legislation passed.

My next issue, and this may just be something I missed or didn't understand, is that there are no rules on how to treat information gained from the wiretapping should a FISA judge reject an application. For example, the AG starts eavesdropping on Joe American in Germany and three days later turns paperwork over to FISA. Two days later, the DOJ records him talking about something illegal, but the next day FISA rejects the warrant request. Can that information be used in an arraignment or for future warrants against Joe, or does it have to be discarded as tainted like similar evidence in unauthorized investigations? If anyone reading this is a lawyer and understand it better than me, please help fill me in.

Finally there is the issue of the telecom immunity. This is everything it was advertised as. Telecoms can have any law suit against them thrown out if the AG says to the district court what he already testified to Congress. The one interesting thing I did find in this was that the cut off for immunity only goes back to 9-11. According to many sources though, this program started immediately after Bush took office, February of 2001. If that is the case, I would expect that any suits related to those actions should be able to go forward. This is the deal killer on the bill to me though. In effect, it authorizes the Nuremberg Defense, "I was only following orders." According to the Nuremberg Principals: "The fact that a person acted pursuant to order of his Government or of a superior does not relieve him from responsibility under international law, provided a moral choice was in fact possible to him." As Qwest's resistance, to its financial detriment, demonstrates, these companies did have a moral and legal choice to refuse.

With the cadre of lawyers corporations like AT&T have, there is no question in my mind that they knew there was no legal grounds to follow these orders, but they complied anyway hoping for such a future defense. When a corporation or other entity knows that they can use such a defense, there is nothing to keep them from violating the law the next time someone asks. In fact, it discourages companies like Qwest from resisting next time -- they have a lot to lose if they resist, and nothing to lose if they comply. This is very dangerous moral ground, and the precedent should never have been set.