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Are you better off than you were a year ago? 28 States Say No.

The WSJ Economics Blog, discussing June 2010 unemployment rates by state, uses the headline “Most Regions Show Improvement“*

I suppose we should be encouraged by the headline and not look at the text:

Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.5%, respectively.

Despite the improvements in the jobless rates, 27 states posted a decline in payroll employment, while 21 notched increases. Montana and Alaska had the highest percentage increase from the previous month, while New Mexico and Nevada reported the largest percentage drops. [emphasis mine]

Less money is being paid in a majority of states. The clearest explanation, then, remains that the “decline” in U-3 reflects people dropping out of the work force, not being employed.

It gets more interesting if you look at the Year-on-Year Change. There, 28 of the 50 states show a U-3 unemployment rate that is higher than or equal to last year’s. (The District of Columbia’s U-3 rate declined by 0.1% over that time, so it is only 10.0% now.)

And the improvements are, lest we forget, from a high plateau. The 14 states with the greatest drop in their unemployment rate year-on-year have an average current rate of 8.4%—and a median rate of 8.95%, the average being skewed by the above-mentioned North Dakota, with it’s 9.3 people per square mile and total population under 650,000, 37% of which are not of working age.

Dropping North Dakota from the “biggest YoY winners” moves the median current unemployment rate to 10.0%, while the average is slightly above 8.75%.

If this is a recovery, then my December 2009 prediction that this will turn out to be a “cursive-zed” recession may turn out to be optimism.

*Also, “Jobless Rates Drop in Most States.”

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Health Care Thoughts – Public Policy Dilemma

Tom aka Rusty Rustbelt

HEALTH CARE
– PUBLIC POLICY DILEMMA

Fifty years ago much mental illness treatment was done in-patient in state run facilities, and many of them were hellholes (One Flew Over the Cuckoos Nest was probably too positive compared to what I saw early in my career).

The de-institutional movement (starting in the late 60s) caused a build up of community based services, and in combination with better therapies has made a much better (although not perfect) system. In many areas the mental illness and substance abuse facilities are run through common governance, some areas not so.

But there are still people who need in-patient services, especially those who also have chronic physical health problems, and there are too few beds and too few payment paths to accommodate those patients.

So what to do?

Some are being dumped into geriatric nursing homes, and not surprisingly the results range from not very good to disastrous. Exact numbers are hard to come by, because the reporting mechanisms do not always separate those admissions. Generally we hear about these cases after something goes terribly wrong and hits the media.

Nursing homes are getting better equipped to deal with geri-psych issues, but younger and often agitated patients really do not fit. A few nursing homes have set up special units or dedicated the entire building to mental illness patients, but not many that I can find.

Nursing home regulatory protocols actually hinder aggressive psych treatments, as regulators and consumers are concerned about “chemical restraints,” the notion that nurses drug the residents into submission and then sit around doing their nails and reading magazines (no psych drugs can be administered without a physician’s order and a thorough care planning process).

So far no one has developed a really good response to this problem, either clicical or financial. The health care reform bill has not directly addressed this issue, although it creates an opening for the discussion.

(For anyone interested in some good reporting go to the Chicago Tribune website and put “nursing homes mental illness” in the search block. The Trib also does a lot of good work on nursing home problems in Illinois. A Google search will yield plenty of information. Also this MSNBC story http://www.msnbc.msn.com/id/29781318)

Tom aka Rusty Rustbelt

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Wonder why we can’t solve problems? Consider BP’s latest ad, what you heard and the word “risk”.

By Daniel Becker

An ad I’ve been seeing recently aired by BP is promoting how much work they are doing to clean up the oil spill. It is designed to leave you feeling comforted that they are on top of it, they are cleaning it up in a massive effort. Say, 29 million gallons of oil and water sucked up. Wow. 29 million gallons.

Ever think about how big that is? Every stop to get out the calculator and crunch a few simple numbers to see how big 29 million is? Did you ask: I wonder how much that is in relation to the guesstimated barrels of oil spilled? Do you even think you need to know? Did it occur to you that maybe, in order to make an informed voting decision, you should see just how big a mess the oil spill is by comparing it to the 29 million gallons BP is impressing people with? You know, figuring it out because there is the possibility that this oil spill thing really is more than you might think as it relates to catastrophes to tell your grand kids about.

No? Yes? Maybe? I don’t know?


June 10th estimates were 25K to 30K barrels per day. June 15th estimates were 35K to 60K barrels per day. Gallons per barrel: 42. 29 million / 42 = 690,476.19 barrels / 25K barrels = 27.62 days of spill.

690,476.19 / 35K = 19.73 days of spill. 690,476.19 / 60K = 11.5 days of spill.

Total number of days of spill: 94 (by my count, can’t get google to answer the question). 27.62 days is 29% of the spill days. 19.73 days is 21% of the spill days. 11.5 days is 12% of the spill days.

But, here’s the rub, not all of the 29 million gallons captured is oil. It is water and oil. Thus, the total amount of oil recovered as presented in number of days of spill is something less. Are you still impressed with BP’s results? Does this make you reconsider your estimate of the risk of oil drilling as it is currently performed?

At 35K barrels per day, there are 3,255,000 barrels of oil spilled. At 60k barrels there are 5,580,000 barrels of oil spilled. Roughly. That is 136,710,000 to 234,360,000 gallons of oil. At 29 million gallons of liquid sucked up, we are talking about 4.7 to 8.1 times the number of days it has taken BP to reach that 29 million mark. Assuming that all 29 million gallons was only oil. But, it was not.

Can you relate the need to do such a simple calculation to the concept of risk? “Yeah, there’s a risk” you may say in response. Are you thinking physical risk? How about the concept of risk as exemplified in the concepts of hedging, credit default swaps and derivatives? Or the economic profession’s use of the word risk? Because if you are only thinking about the physical risk, then BP succeeded in it’s messaging. They succeeded by diverting your mind away from their concern and thus their means, modeling and reference for interpreting life and thus formulating and implementing their intentions. This means the chances of you making the voting decision that best benefits you are slim. Why? Because you failed to walk in their shoes because you listened as if you were the only one in the conversation. Yes, the empathetic concept of walking in someone else shoes does not only serve your ability to help another and sooth your soul, it also protects you from one who would use you.

Still want to know why we can’t solve anything in this nation any more such that your life gets easier or do you get it as to your roll in this democracy now? Our roll is not to just take in the message and see if it fits our individual language of how life works. It is to also understand the messenger and their interpretation of how life works.  In BP’s case, life works based on economics.  Their reference for words comes from economics.  Their understanding of democracy is economic based.  Freedom/free market.  Liberty/more choices.  Fiduciary responsibility/make money.  Justice/market clearing price.  Free speech/advertizing.  One vote/one unit of currency.  Rights/market power.  Social conscience/consumer reseach.  

Want another example of where we have failed as citizens in a democracy? Lets consider the relationship of the fed’s recently reported medicare fraud case involving 94 people and $251 million in false billings (fact, really happened) and the message that private insurance will reduce our costs, that a private insurance system is the best way to go. Or, how about the economic message behind the “private insurance is best” message that the free market is always best. Go ahead. Meld those two thoughts. One that is real, $251 million in fraud found by your government and one that is what? I already have tried and thus wonder: How is it that the private market with all it’s cost controls and managed care systems did not catch $251 million dollars in false payout? You know, considering “market clearing price”, “rational consumer”, “perfect knowledge”, etc, etc, etc. Haven’t heard these terms? I assure you BP et al have ’cause it’s all economic democracy to them.

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A USER FRIENDLY GLOSS ON THE CBO REPORT "Social Security Policy Options” JULY 2010

by Dale Coberly

“SOCIAL SECURITY POLICY OPTIONS” JULY 2010

A USER FRIENDLY GLOSS ON THE CBO REPORT

The first thing that strikes me about the CBO report is that the language is unnecessarily negative. They tell you that Social Security is running out of money. They tell you this three times in three ways. They don’t tell you that this means a whole lot less than you think it does.

They say “for the first time since…1983…outlays will exceed…annual tax revenues.” They don’t tell you that in 1983 the tax was increased exactly so that revenues would exceed outlays, increasing the size of the “Trust Fund,” in order to create a bigger reserve to carry Social Security through times, like the present recession, when outlays exceed revenues.

It has long been known that through this increased Trust Fund the baby boomers have paid in advance for their own retirement. But CBO just forgets about the Trust Fund and says “starting in 2016…the program’s annual spending will regularly exceed its revenues.” Forget about the two and a half trillion dollars the program has in the bank.

CBO tells you that “the trust funds… will be exhausted in 2039.” But they don’t tell you that Social Security can go right on paying benefits on a “pay as you go” basis, just the way it was designed to do. This could require a reduction in the “replacement value” of benefits, but not a reduction in their “real value” as compared to today’s. The “replacement value” is the amount of the monthly benefit as a percent of the worker’s adjusted average lifetime monthly income. (The “adjusted” income includes an effective interest that is equal to inflation plus the increase in average national per capita real incomes for each the year since the tax was paid on that income.) The reason the reduction would be needed is that the next generation of retirees are expected to live longer than the last. To avoid a reduction in monthly benefits, the same replacement rate could be paid, over the longer life expectancy, with a payroll tax increase at that time of about 1.9% of payroll for each the worker and his boss.

They do manage to tell you in a footnote that to bring Social Security “into actuarial balance over the 75 years, payroll taxes would have to be increased 1.6%.” This is about eight dollars per week for a worker making 50,000 dollars per year. They are not in a hurry to tell you that there is no need to increase the tax that eight dollars per week today. There is no need, and much harm in raising the tax too soon. All it would do would be to increase the Trust Fund… increase the amount of money that Congress “borrows” from Social Security and then blames Social Security when it doesn’t want to pay it back: “you should have taken the bottle away from me. you know I can’t be trusted.”

The eight dollars doesn’t need to be paid today. It can and should be phased in over about forty years. A rate that would never be “felt” as more than 80 cents per week. but would average twenty cents per week per year while incomes were going up an average of ten dollars per week per year. (Again, these amounts are in today’s money.)

I don’t quite know what to do about people who would think that saving an extra eight dollars per week so they can retire “on time” is an intolerable burden. And for those who think the eight dollars the boss would contribute is really “my money,” all i can say is, you aren’t getting it today, so you won’t miss it if the boss puts it in a savings account for you.

If you work for yourself, and pay both shares, and make near or over the top of the SS-taxable income, you would be looking at an extra 32 dollars per week. This is not an insignificant amount of money, but it is a good investment as insurance, especially as you will almost certainly get all of it back, with interest, when you retire. And remember it is 32 dollars out of about 2000 dollars per week….or more, depending how much over the cap you earn. It’s not something you would actually notice unless you obsess about what you “might have gotten” by investing, and risking, it on the market.

My guess is that if you are going to make big money on investments, you can find something other than your Social Security money to invest and risk. Then if the unthinkable happens and your investments fall through, or you become disabled, or your job becomes obsolete, you would still have about 2000 dollars a month (in today’s money) Social Security to live on. Not a lot by your standards, maybe, but a hell of a lot better than living out of a dumpster.

CBO tells you that the “gap” between revenues and scheduled benefits is 0.6% of GDP.
They don’t tell you that this is not a lot of money to pay for feeding and housing and providing modest comforts for about one fourth of the population. Or that the people getting the benefits will have paid for it themselves. That is, the people paying the tax will get their money back with interest. Perhaps they don’t want to have to try to explain “pay as you go” to people who think that money they put in a bank is kept in a locked box for them, growing interest by spontaneous generation.

A lot of people don’t realize that 0.6% is 60 cents out of a hundred dollars.
Surely the workers of America can find a better use for that kind of money than to save it for their own retirement.

THE POLICY OPTIONS

Page xi of the summary gives an overview of the effect on the actuarial gap of various policy options. The chart is poorly labeled. It is not clear that the values given are in “percent of GDP,” so you would have to know, for example, that a value of 0.6 on the chart is actually 100% of the actuarial gap.

Then you would have to be careful about reading the policy options. For example the second option “increase the payroll tax rate by 2 percentage points over 20 years” actually closes the actuarial gap entirely. Why then does the third option, “increase the payroll tax rate by 3% over 60 years, only close the gap by .5%of GDP (which is 83% of the entire gap)?

The answer is that 2% over 20 years is a full tenth of a percent per year, while 3% over 60 years is a tax increase of half a tenth of a percent per year. This means that after 20 years the second option has raised the tax 2%, while the third option would only have raised it by 1%. By year 40, when the third option catches up to 2%, the higher tax phased in earlier by the second option would have had its effect on the 75 year gap enhanced by the interest it has been earning from the excess it collected over what was needed to pay expenses in the earlier years.

On the other hand, by reaching a tax rate of 3% instead of 2%, the third option is much closer to closing the actuarial gap for “the infinite horizon,” which would require a total tax increase of 3.6% over 75 years.

It needs to be noted that this is the “combined” tax, so the workers’ share would be half a tenth of a percent per year in the second option, or half of a half of a tenth of a percent per year in the third option. In today’s terms that amounts to about 40 cents per week per year for the second option, and 20 cents per week per year for the third. These are not staggering burdens.

As it turns out, these increases “only” balance the trust fund for 75 years. To balance SS over the “infinite horizon” would require that the second option be run for about another 17 years, or the third option would need to be extended for another 15 years. A better answer would raise the tax one tenth of a percent whenever the Trustees report “short term actuarial insolvency.” This would average one fourth of one tenth of one percent per year (about twenty cents per week) for each the employer and the employee for 64 years and would leave SS fully paid for, and fully “funded,” able to pay all benefits for the “infinite future,” with no reason to anticipate a need for further tax raises after that time.

So when you look at the other policy options, you need to keep in mind that what you are being asked to do is to substitute another “solution” for part or all of the staggering cost of twenty cents per week per year for the workers to pay for their own benefits.

In this regard, you could:

RAISE THE CAP
Eliminate the taxable maximum (the cap), raising the tax on people making over 106,800 a year by 12.4%. These are people who would not expect to benefit from Social Security. You can see why they might think this is a poor idea compared to raising the tax of the people who will actually get the benefit by one fourth of one tenth of one percent per year.

Or you could raise the cap to cover 90% of earnings. This would raise the tax on some, but not all, income over 106,800 by 12.4%, and would save the workers about one third of that one fourth of one tenth of one percent per year. This is about six cents per week for the workers who get the benefits vs about 24 dollars per week, or 1200 dollars per year, for each ten thousand over the current cap, on a worker who will not see any benefit. Sounds like great politics.

CUT BENEFITS

Or you could cut benefits. CBO offers a variety of options. which save the worker from 3 cents per week to 20 cents per week, at the cost of cutting his retirement benefit (in today’s terms) from about a thousand dollars a month (note: “month”) to about 700 dollars a month, or even to 500 dollars a month. Talk about your penny wise, pound stupid.

RAISE THE RETIREMENT AGE

Or you could raise the retirement age to 70. this will save the worker 10 cents per week per year. If you can’t imagine what having to work an extra 3 years would do to someone with a hateful job, or declining health, declining physical or mental abilities, or a life expectancy somewhat shorter than what we are being told “we”… mostly the rich and well fed and lightly worked… can “expect”, you need to do some serious thinking. That future old person might be you. Or, if you can imagine this, your child:

“Here my child, my darling, I saved you ten cents per week. Only now that you are old, you have to work another three years to pay for it.” “But dad, my arthritis! But dad, I really wanted some time for myself before I have to go to the old folks home.”

But hell, what do you care? So what if the cop that answers your 911 call is seventy years old. No doubt the guy with the gun breaking in downstairs will be seventy too.

AND IN CONCLUSION

The last paragraph on p xii invites another kind of stupid thinking. It is true that gradually phased in tax increases will have a bigger lifetime effect on younger workers than older workers. But younger workers are going to be making a lot more money and living a lot longer. The phased in tax will actually proportion the larger share of the tax increase to those who will get the most benefit from it… by living longer in retirement at a higher standard of living.

The question you should be asking yourself is not, “Will I get a few tenths of a percent better or worse deal than my parents?” but, “Will I be getting a good value for my money?” The answer is that yes you will.

You are paying for insurance… an insurance policy that will pay you if you get disabled, pay your family if you die, pay you enough to retire if you otherwise reach old age without enough to retire on, and pay you back everything you paid in, with interest, if you are among those lucky enough to earn near the top of the income ladder for a whole lifetime.

What pays for this magic insurance is the difference between what the high earner “might have” gotten on his “investment” and the “average increase in wages” over his lifetime. That high earner will have plenty of other money to invest to chase those higher returns at higher risk.

Judge it as an investment and you miss the point that it is insurance. Judge it as welfare and you fail to understand that the workers pay for it themselves. It was deliberately designed NOT to be welfare.

I have only covered the Summary. But this is a good place to stop for now. Looking ahead, what I see is more clever writing that never lies exactly, but is carefully designed to lead you to arrive at false conclusions and hurt yourself, or stand silently by while they hurt your children

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Goldman’s Settlement with the SEC

by Linda Beale
crossposted with Ataxingmatter

Goldman’s Settlement with the SEC

On July 15, it was announced that Goldman had reached a settlement of the SEC’s charges regarding material misrepresentations in an Abacus CDO deal, acknowledging that its materials were “incomplete”. See Chan & Story, Goldman Pays $550 Million to Settle Fraud Case, NY Times (July 15, 2010).

Goldman sold the deal to buyers without informing them of the involvement of the counterparty to the deal. The counterparty was Paulson, a hedge fund manager, who had personally selected “most likely to fail” mortgages on offer and gotten Goldman to create a CDO package with those deals in it so that he could bet against the deal. The bet against the deal was a naked credit default swap. The person who bought the other side of Paulson was essentially buying a deck intentionally stacked against him, rather than a more diversified cross-section of subprime mortgages. Not surprisingly, that particular Abacus deal was particularly bad and went south within months of its creation and sale.

Now, in my view naked credit default swaps should be illegal. They are nothing but an insurance contract when the protected insurance buyer has no insurable interest in the reference property. As many have observed, such a situation presents a dangerous moral hazard– it is like letting an arson take out an insurance contract on the most expensive house in the neighborhood and then reap the benefit of the payout after he burns the house down. Nonetheless, the financial lobby is extraordinarily powerful, and Congress did not yet bite the bullet to ban naked credit default swaps in the financial reform package. (I say “yet” because I am convinced that we must dampen the use of such derivatives or stand by to witness destruction of both financial system and economy through continuing crises fueled by rampant speculation.)

But even if naked credit default swaps aren’t illegal (which is the current situation), that doesn’t mean that a bank should be able to cater to one client to create a financial product stacked with the worst of the worst subprime mortgages and neglect to tell another client about that critical fact. The SEC might have had difficult proving fraud: Goldman is no dumbie, and it is adept at selecting facts to cast itself in the best life and working to obscure facts that do not. Anyone hearing Paulson’s side of the story (read Michael Lewis, The Big Short) would want to know about his involvement in a deal, especially when those products were nonetheless rated AAA. (Yeah, rating agencies were in on the game too, but the banks were tailoring their synthetic CDOs to match the known rating agency procedures, sort of like stacking up a room full of people paid the average income and needing to boost it to make it look like incomes are higher, so adding a multimillionaire with just the right income to the mix to bring the average up to the desired goalpost and no more. Crapola.) And I for one suspect that the SEC could have rather easily proven material misrepresentation.

Goldman took a battering from having the suit out there and clearly wanted to settle. But Big Banks want to settle on terms that don’t produce real pain. So Goldman got a deal with essentially a $550 million price tag, which, as the weekend Wall St. Journal editorial notes, is “a mere two weeks worth of recent trading profits.” Goldman’s Bailout Fee, Wall St. Journal, July 17-18, 2010, at A12. Too little, methinks, even with the concession not to seek a tax deduction for any part of the fine which might otherwise have been deductible. See Donmoyer, Goldman Sachs Waives Tax Deduction on SEC Settlement, Bloomberg.com (July 16, 2010). In my view, anything under 10% of Goldman’s profits last year, plus no tax deduction, is de minimis. Anything smaller than that will be viewed by the financial industry as no more than a slap on the wrist. To be instructive and to spur more prudential banking from Big Banks, the penalty needs to be severe enough to be taken very seriously.
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Update: Michael Perelman at Econospeak has Seven Questions for the SEC regarding Goldman

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CountryWide goes Kafka – a First Person Narrative

by Mike KImel
Cross-posted at the Presimetrics blog.

CountryWide goes Kafka – a First Person Narrative

This post is going to be a bit different, at least for me. Generally I like to write things that are more data oriented, and that involve some pictures and figures. But this is a little story that happened to my wife and me, only a few weeks back, and I think it provides a bit of an illustration about how the economy works, or doesn’t, in these post-Housing Bubble days. Its an absurd story, it makes no sense whatsoever, it cannot possibly happen in a civilized country, much less one that calls itself capitalist, but every word is true. So here goes…

My wife, deep into her third trimester of pregnancy, went out to run some errands with my mother and a family friend. It was pouring, and when they got back to the house, they saw a piece of paper stapled to a little tree at the end of our driveway. It was a notice from the Sheriff’s Department that our house was going to be auctioned off on October 1st.

Now, obviously it had to be a bad joke. After all:

1. We had only bought the house the previous year and were about two months ahead on our mortgage.

2. The plaintiff was CountryWide, which is not the company with which have a mortgage.

3. The name of the defendant from whom the home was to be foreclosed was not the legal owner of the house – that is to say, my wife or I. In fact, the name of the defendant was similar to the name of the previous owner of the home, but the spelling was definitely off.

4. From what we heard of Sheriff’s auctions, notices tend to be left on the door. Not stapled to a tiny little tree in the pouring rain.

But when my wife checked the Sheriff’s site on-line, it turns out that, indeed, our home was slated to be auctioned off on October 1st. Multiple calls to the Sheriff’s office were not returned. As to CountryWide – who exactly do you call at CountryWide? There’s no “Press 4 if you have no relationship with CountryWide but we’re trying to seize your house anyway.” Ironically, if we did have a delinquent CountryWide mortgage, getting somewhere with them might have possible as any of their call center representatives would have been able to handle taking a payment. But the situation we were in, that they put us in, isn’t one of the options that their call center seems equipped to sort out.

When it started to become obvious that a) this was deadly serious and b) there was a whole machine moving inexorably forward, my wife got nervous. She didn’t sleep at all that first night, and because she didn’t sleep, neither did I. And every roadblock we hit made us more exasperated at what was already a difficult time.

After a couple of days of trying the obvious remedies, we contacted our title company and called our attorney. And it took a while, but the upshot was that after a few weeks, we managed to stop the proceedings. CountryWide uses an external law firm to deal with the Sheriff’s office, and we managed to convince them that the process should be halted. Doing so meant showing we had the title and that we are the owners of record as far as the County is concerned. Additionally, thanks to the previous owner who helped us out here, we were able to show that CountryWide received a wire transfer when the previous owner sold us the house. Thus, we proved to CountryWide’s external legal firm that they had followed unlawful orders by putting in the request to have our home foreclosed. They in turn managed to get their contacts at CountryWide to give them the OK to contact the Sheriff’s department to put a halt to the process.

Though we’re no longer in danger of losing our home (as far as we know), I’m kind of upset right now at two parties. The first is CountryWide, for all the obvious reasons. But I also have a problem with the Sheriff’s department because from where I’m standing, it seems like its procedures are set up in such a way as to validate CountryWide’s mistakes. Let’s start with the note pinned to a tree in the pouring rain. What if we were traveling or the wind was just a little stronger? Would the note have been there when we got back? Would we even have known about the auction until after it happened?

Second, it appears that that the Sheriff’s department auctions off homes simply on the word of CountryWide or its outside attorney. A check of the County Tax Assessor’s Office would have told them there was a problem with CountryWide’s request, namely that the person they wanted to seize the home from doesn’t own it or have any rights to it whatsoever. (Actually, I also wonder why the outside attorney didn’t check any of this either.) And it isn’t as if CountryWide and/or the Sheriff checked but were working off outdated information; if the previous owner was truly the intended defendant, her name wasn’t even spelled right in the complaint which also should have raised some eyebrows. Worse, as per the above-mentioned wire transfer, CountryWide actually wasn’t owed anything at all by anyone.

In short, CountryWide was trying to collect on a debt that didn’t exist, supposedly owed by a person who they had wrongly identified, by seizing property owned by other people. And yet the Sheriff’s Department acted on their claim, and refused to give us, the party affected by that series of errors, so much as a return phone call.

The only conclusion I can reach from this is that there are no safeguards at all built into the system. None. After all, it would have taken only a trivial amount of due diligence by any of the parties (CountryWide, their outside attorneys, or the Sheriff’s office) to derail this crazy train before it started. However, I assume CountryWide would be against such checks, as they cost money. But guess what? This whole process has cost my wife and me money, time, frustration and emotional distress. It would make more sense to hit up CountryWide for an extra few bucks every time they ask the Sheriff to auction off a house than it does to force the victims of CountryWide’s errors to pay for the company’s mistakes. Fortunately, we could afford an attorney, and despite the whole pinning-a-note-to-a-straggly-tree-in-the-pouring-rain thing, we also had the time to mount a defense.

That doesn’t mean when things settle down a bit over here we aren’t going after CountryWide to make us whole. And my wife and I intend to have some communication with the Sheriff’s department to do what we can to make them tighten up procedures to prevent this kind of nonsense from happening to other people.

But, in the end, one definite legacy of this whole affair is that from here on out, every four to six months I plan to check the upcoming foreclosure auctions to make sure my house isn’t on the list. Which leaves just one more thing to comment on, and since I like to have illustrations in my posts, let me end with a picture. The resolution isn’t particular good – it was taken on my phone – but it’s my favorite one so far:

Figure 1

(Rdan…Heather and Alex. Alex is a recent and new addition to the Kimel household.

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Overpaying CEOs

by Linda Beale
crossposted with Ataxingmatter

Overpaying CEOs

The Wall Street Journal reports today on a study by three academics on CEO pay. They are Streedhari Desai (Harvard), Jennifer George (Rice) and Arthur Brief (Utah), and their study is “When Executives Rake in Millions: Meanness in Organizations” (available on SSRN). Here’s the abstract:

The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies – an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.

Trends in this country are ominous.

1. Wages for the middle class have stagnated, especially with the waning power of labor unions to demand an adequate share of corporate revenues (a result of the decades-long effort of neocons and multinational corporations to kill labor unions and make new unionization efforts in previously nonunionized industries very difficult through generous provisions for employer control and significant hurdles for union approval).

2. The middle class has therefore depended more on debt than it should, a dependency that has been encouraged by the financialization of the economy and the hunger of the financial institutions and shadow banking system for “product” from which it can reap multiple layers of fees and excess profits. That easy flow of credit led directly to the financial crisis that caused the Great Recession.

3. Meanwhile, those at the top have done well and those at the very top–the ultra rich in the top tier of corporate status and in the finance (and shadow finance) industry and its related hangers-on–have done exceedingly well by being able to keep a much larger share of the business profits for themselves.

4. That inequality then has created a feedback cycle of disrespect for ordinary workers and greed for more profits and status and power that also led directly to the financial crisis that caused the Great Recession.

5. And now we learn the capping blow (which common sense tells us anyway, given what we know about human nature and its frequent inability to handle the struggle between self-interest and altruism in ways that benefit all) those at the top who have been paying themselves exceedingly well (and their buddies when they serve on their boards of directors) are likely to treat their employees exceedingly poorly. Greed at the top goes along with meanness towards those considered “beneath” them.

From my perspective this is just one more reason (i) to ensure that ALL compensation income is subject to payroll taxes (removing the Social Security cap) and (ii) to increase the tax rates on the income of the top by adding more rate brackets. We should go back to the type of system we had before Reagan, when there were many more “rate brackets” under the income tax. It’s really not reasonable in a progressive tax system to fail to distinguish between incomes of a quarter million and incomes of $10 million–they should not be taxed at the same marginal rate. And the hedge or equity fund or real estate partnership manager who makes more than a million a day as his compensation for managing (paid, of course, part as fee and part as “carried interest”) should be taxed at a rate considerably higher than the CEO who makes “only” 10 million a year. The wacky system we have right now lets that equity fund manager pay the preferential capital gains rate under a realization system–meaning with deferral as well as lower rates!

So why is it that Congress–even in a period of high deficits and lots of talk about having to change the benefits under Social Security because of the GOP and blue-dog Dems’ worries about the deficits (even though Social Security has actually been running a surplus) –couldn’t bring itself to pass a bill that would treat carried interest as the ordinary compensation income that it is, so that fund managers would pay tax the same way that their firm’s janitor does? Talk about meanness.

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US Federal deficits

Mark Thoma posted yesterday Is Galbraith Right that Deficits are Never a Problem? on Paul Krugman’s NYT piece I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish) on MMT and soveriegn debt (using Angry Bear’s posting of Jamie Galbraith’s testimony to Congress as a link), and has included Jamie Galbraith’s response. It is worth reading.

Ed Harrison at Creditwritedowns weighed in here.

Calculated Risk has posted a 5 series on Sovereign Debt both historical and comparative internationally.

More to come from other economists.

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Tax extenders legislation

by Linda Beale
crossposted with Ataxingmatter

tax extenders legislation

As most everyone knows, the Bush tax cuts were passed as temporary measures, with a provision sunsetting the cuts at the end of 2010. Back when the GOP controlled Congress passed the series of Bush tax cuts, they knew that they were creating a whopping deficit but said that deficits don’t matter. They were worried enough about appearances, though, to make the tax cuts temporary and be able to claim lower deficits than if they had been made permanent from the outset. They were quite clear that they planned to make the tax cuts permanent eventually, but they figured that revenue losses of $1.3 trillion or so in the first ten years of the tax cut were about all that they could get by with.

In the meantime, a few things came along that upset the applecart. First, the deregulatory agenda combined with casino banking to create a “perfect storm” financial crisis that quickly mushroomed into a deep recession. In Bush’s last years in office, billions were committed to bailout the financial system and plans were begun to put in place an economic stimulus package to attempt to thwart another depression along the lines not seen since the 1930s. Second, the ongoing wars in Afghanistan and Iraq continue to swallow billions annually. In that context, making the revenue reductions permanent starts to sound like crazy thinking.

Obama campaigned (somewhat foolishly, from my perspective) on retaining the tax cuts for those in the lower four quintiles, but letting the cuts lapse as scheduled for the wealthiest Americans ($250,000 or more in income). The fact is that we have huge revenue demands from the banking crisis/recession and the ongoing wars, and we cannot afford to continue a foolish fiscal policy by extending the tax cuts permanently.

One of the obvious items that should be allowed to lapse is the treatment of dividends as net capital gains subject to the preferential rate. GOP Senators, like Chuck Grassley from Iowa, are arguing that all of the tax cuts must be extended, even for the rich. See Heflin, Senate GOP: Small Businesses Would Suffer if Tax Cuts Expire, July 13, 2010. They claim that we shouldn’t tax the rich, because the rich will put their money into small businesses and that will be good for business: taxing the rich would mean that it would “dry up the funds of small-business owners and make it harder for them to expand their operations.” Id.

They even got Holtz-Eakin–a Republican economist–to argue that we need to extend tax breaks for the wealthy on the old claim that tax cuts foster economic growth. This is like the claim that the estate tax causes the loss of small family farms–it sounds good, is picked up by the media, fits the ideology of the “starve the beast” crowd, but it has the unfortunate attribute of not being true. We have achieved growth more consistently in periods of higher taxes, not vice versa. The “theory” on which the “tax cut equals growth” rests is a mixture of outright buffoonery (the Laffer curve “idea” drawn on a napkin and treated as though it were a scientific hypothesis by the Tax Foundation and Cato Institute types) and irrelevance (the Chicago School economic theory that makes assumptions so far removed from reality that it cannot be considered a reliable instrument for policy considerations).

Update: Rdan..Republican tax nonsense is worth a read and has a great chart.


Of course, the rich will just as likely put any money not paid in taxes in an offshore bank account that they hope to keep hidden from the IRS or in an emerging country market or in stock purchased in the secondary market, which doens’t help small business at all. The only way that anyone helps a business is to put money directly into the business. Most purchases of stock don’t put money in businesses–they are just financial transactions among people who own financial assets, not investments in businesses. This use of “small business” is just a ruse–the right-wing figures that ordinary Americans think small business is a good thing, so they provide a lot of rhetoric about protecting small businesses. But they are really just shilling for the rich, who have enough money to invest in small businesses whether they pay 2001 or 2010 tax rates.

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