We Didn't See it Coming

For Some reason, my comments on Paul Krugman's blog don't seem to stick. Below is my comment on his post entitled: How We Failed

The "We didn't see it coming" thing drives me crazy. My experience in seeing it [the bubble burst] coming is reflected in three clear memories.

First, The Great Unraveling by... some economist from NJ, pretty much had me change my ARM to a fixed rate mortgage a couple years before the bust.

Second, people with good jobs in my solid middle class neighborhood were saying, "If I had to buy my [modest row] house today, I couldn't afford it." I remember exactly where I was, walking my dog.

Third, it was going to by systemic: "Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFEHO," February, 2003, which lost Armamndo Falcon his job. http://www.ofheo.gov/Media/Archive/docs/reports/sysrisk.pdf

The Game in a Nutshell

Bailouts put the private debts onto the public (tax payer) balance sheet. Now Congress and the White House are poised to finish the job by putting that debt onto the backs of America's most vulnerable people.

Talking Point: US Government Debt and Jobs

Job, Jobs, Where are the Jobs?



The talking point is simple. Average Americans are not spending money, and the economy is stalled, because they don't have much money. It's no use giving tax breaks and low interest rates to product manufacturers, because the people who would normally buy their products don't have money. People need jobs.



It is debatable whether the American public is responsible for 70% of domestic spending on goods and services, but by sheer number their spending potential is huge. They might make up 70% of domestic spending if they had money to spend, but they don't have good jobs.



Why not? Government policies over the past several decades, supply-side (trickle-down) tax policies and corporate globalization policies, have created a record wealth gap. A study by three Citigroup analysts indicates that the top 1% of Americans earn as much annual income as the bottom 60% and the top 1% possess as much wealth as the bottom 90% of Americans. The analysts concluded “economic growth [in the US] is powered by and largely consumed by the wealthy few.” [1] This is borne out by recent statistics showing that growth in domestic product sales have declined at discount stores and have grown in high-end stores and luxury products.



The Solution:



The government needs to set policies to put money in the pockets of average Americans, and I'm not talking about a $600 check; it needs to be tens of thousands per year, which simply put means temporarily creating jobs. The money for these jobs needs to come from the places that it is being hoarded: The richest 1% of Americans and transnational corporations who have benefited greatly from government policies over the past few decades.



After people have had government-sponsored jobs for several years, they will have the money to buy more products and services they need. This will create a market for private sector products and, in turn, support more jobs in the private sector. Eventually, the government can get out of business of job creation.



And yes, these jobs will require more government revenue in the near-term, but will also generate new revenues. In the long run, we'll be more likely able to pay down the US Government debt.



Agree? Let policy makers know:

• Contact the Broadcast Media
• Contact the US Senate
• Contact the House of Representatives

Sources:



1. Can the Middle Class be Saved? Atlantic Monthly, September, 2011.

Talking Point: Debt and Medicare

Are Medicare & Medicade the Problem?



First, Medicare is not part of the general budget deficit & associated debt problem. That's because Medicare, like Social Security, has a dedicated fund separate from the general fund. It should be managed as a separate dedicated fund, not lumped into the general budget debate.



Second, if we spent per capita what every other industrial nation spends on health care, we would not have a long-term Medicare solvency problem. If we simply focus on cutting Medicare and Medicaid, we’re just shifting the rising costs to those least able to pay them: the elderly, the disabled and the poor, or people on their death bed. Is that the American way?



Solutions: First, we need to cut health care costs (not services). Second, in the next few decades, we all need to pay a little more out of our FICA payroll deductions to cover the fact that the baby boomers are reaching old age (maybe from 1.45% to 1.75% or something). After the wave of baby boomers passes, the deductions could decrease. Finally, if Congress insists on mixing the dedicated fund of Medicare with the general fund, then we should insist on cutting corporate welfare and increasing revenue from corporate profits to help meet Medicare's needs.



Wanna take Action? Start by calling Senator Kerry's office and tell him to get better control of his message (He is one of the super committee members). Here's a recent statement of his:

... the real problem for our country is not the short-term debt. We can deal with that. It’s the long-term debt. It’s the structural debt of Social Security, Medicare and Medicaid, measured against the demographics of our nation.

Unfortunately, his statements are playing into the hysteria that is enveloping the mentality that these safety nets should be cut. We need to re-frame the debate.



For Your Convenience:

• Contact the US Senate

Sources:



DemocracyNow! August, 12, 2011.

GDAE Podcast Episode 49

• Economist James Galbraith: Reality check on the Washington "Debt Crisis".

• Journalist, media critic and political analyst John Nichols: The Unraveling Murdoch News Corp media empire. Were crimes also committed in the United States?


• Ralph Nader: Common Ground with the Tea Party? This might be true for the principled libertarians within the Tea Party.

Play Episode 49 (32 min):

Households Paid Down Debt Instead Of Adding To Savings Accounts During Recent Recession

During the recent recession and financial crisis, households paid down debt instead of putting the extra cash into savings and retirement accounts.

From Federal Reserve Bank of New York Staff Reports, January 2011, "Household Debt and Saving during the 2007 Recession" by Rajashri Chakrabarti, Donghoon Lee, Wilbert van der Klaauw and Basit Zafar:

increase in saving―at least in 2009―did not materialize through an increase in contributions to retirement and savings accounts. If anything, such contributions actually declined on average during that year. Instead, the higher saving rate appears to reflect a considerable decline in household debt, as households paid down mortgage debt in particular. At the end of 2009, individuals expected to continue increasing their saving and paying down of debt, which is consistent with what we have observed so far in 2010. [Empahasis added]

Read the full research paper here.

Related articles

• Household Debt: $11.6 Trillion And Falling (npr.org)
• A Terrible Way To Fix The Economy: Households Deleveraging Through Defaulting on Debt. (rortybomb.wordpress.com)
• U.S. households reduce debt 10th straight quarter (marketwatch.com)

International Comparison of Capital Structure

From "An International Comparison of Capital Structure and Debt Maturity Choices" by Joseph P.H. Fan, Sheridan Titman, and Garry Twite, NBER Working Paper No. 16445, Issued in October 2010, (ungated version available here):

This study examines the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in 39 developed and developing countries. We find that a country’s legal and tax system, the level of corruption and the preferences of capital suppliers explain a significant portion of the variation in leverage and debt maturity ratios. Our evidence indicate that firms in countries that are viewed as more corrupt tend to use less equity and more debt, especially short-term debt, while firms operating within legal systems that provide better protection for financial claimants tend to have capital structures with more equity, and relatively more long-term debt. In addition, the existence of an explicit bankruptcy code and/or deposit insurance is associated with higher leverage and more long-term debt. We also find that firms tend to use more debt in countries where there is a greater tax gain from leverage, while firms in countries with larger government bond markets have lower leverage, suggesting that government bonds tend to crowd out corporate debt. Countries with more extensive defined benefit pension funds have higher debt ratios and longer debt maturities, whereas those with more extensive defined contribution fund activities have lower debt ratios. In addition, debt ratios are lower in countries that limit the bond holdings of pension funds. Finally, we do not find a significant association between financing choices and the size of the insurance industry.