On the bottom end of the wage scale we may find a “DISCOUNT wage effect”: wherein weak bargaining power leaves wages below — in the American labor market probably far below — what consumers would have been willing to pay: meaning that today’s consumers are getting a – probably hugely serious — bargain.
On the other end of the wage scale we might find examples of a wage “PREMIUM wage effect”: where consumers are pressured by market conditions to pay much more than the seller would have been willing to accept if there were sufficient competition or whatever: meaning consumers are getting a — possibly hugely serious — skinning.
If a deeply discounted wage is raised — in Obama’s case …
… to still below LBJ’s 1968 minimum wage …
… almost double the per capita income later (!) …
… stretched out over three years (agh!!!) …
… I think consumers are more likely to drop some spending on premium wage products (where they are being skinned) in order to continue purchasing the still deeply DISCOUNTED wage products (and therefore still very much comparative bargains.
Even were today’s federal minimum of $7.25 doubled to $15 they would still end up paying only as much as they would probably have been willing to pay in the first place – still a COMPARATIVE bargain with PREMIUM wage made products.
* * * * * * * * * * * * * * * * * * * * * * *
When I was a gypsy cab driver in the Bronx, back in the late 1970s, the (legit — with medallions, etc.) yellow cabs raised their meters and we raised ours in step with theirs. Everybody agreed that this did not hurt business. I also heard from the veteran drivers that the last meter raise did cost a lot of business — I was new (finally got my driver’s license at age 32).
In any market, selling anything, you never know for sure what the customer will pay until you test. Does this chart below look like the federal minimum wage has been much tested (OVER MULTIPLE GENERATIONS!!!)?
yr..per capita…real…nominal…dbl-index…%-of
68…15,473….10.74..(1.60)……10.74……100%
69-70-71-72-73
74…18,284…..9.43…(2.00)……12.61
75…18,313…..9.08…(2.10)……12.61
76…18,945…..9.40…(2.30)……13.04……..72%
77
78…20,422…..9.45…(2.65)……14.11
79…20,696…..9.29…(2.90)……14.32
80…20,236…..8.75…(3.10)……14.00
81…20,112…..8.57…(3.35)……13.89……..62%
82-83-84-85-86-87-88-89
90…24,000…..6.76…(3.80)……16.56
91…23,540…..7.26…(4.25)……16.24……..44%
92-93-94-95
96…25,887…..7.04…(4.75)……17.85
97…26,884…..7.46…(5.15)……19.02……..39%
98-99-00-01-02-03-04-05-06
07…29,075…..6.56…(5.85)……20.09
08…28,166…..7.07…(6.55)……19.45
09…27,819…..7.86…(7.25)……19.42……..40%
10-11-12
13…29,209…..7.25…(7.25)……20.20?……36%?
* * * * * * * * * * * * * * * * * * * *
I almost forgot: … 🙂 …
There is a growing consensus is that the economy may be permanently slowing down (economists are calling the “SECULAR STAGNATION” I think) and employment permanently stalled because too much income is being squeezed out of the pockets of most American employees …
… meaning that raising — doubling if we want any noticeable effect; not just closing in on 1968 — the minimum wage should be a sure fire way to raise employment all around.
Low wages result in more profit, not necessarily lower prices. The market, the product demand, sets the price. Businesses always try to get labor costs as low as possible and still provide the labor standards they require.
There is an interesting piece on voxeu: http://www.voxeu.org/article/us-inequality-due-assortative-marriages Suggesting that assortative marriage is a significant part of the increasing inequality in the us. The article shows that if the assortative marriage rate was the same now as in 1960 the gini coefficient would fall to .35 from .43. Assortative marriage is where folks with the same educational attainments marry, i.e. college grads marry college grads, HS grads marry HS grads etc.
Now one reason assortative marriage may occur more now is that the numbers of men and women in the various classes are more nearly equal than in 1960 (in particular the college grad level and above).
Growth in the
Residential Segregation
of Families by Income,
1970-2009
“The proportion of families living in affluent neighborhoods doubled from 7 percent in 1970 to 14 percent in 2007.
Likewise, the proportion of families in poor neighborhoods doubled from 8 percent to 17 percent over the same period.”
My comment:
In 1970, the proportion of Americans in the “affluent” and “upper income” classes, and also in the “low income” and “poor” classes were relatively small, while the proportion of Americans in the “high middle income” and “low middle income” classes were very large.
If you break down those six classes into three classes, the high and low classes grew and the middle class shrunk. Those three categories are almost equal in size today.
In 1970, both the high and low classes were about 18% each, while the middle class was over 60%. In 2007, both the high and low classes were about 30% each, while the middle class was over 40%.
I suspect, many middle class Americans moved into the higher classes, while many immigrants from poor countries moved to the U.S. and into the lower classes.
However, U.S. living standards improved substantially, including through real median income. Chart:
Isn’t “residential segregation of families by income” nothing more than the result of a smaller middle class, kicked off by the Powell memo?
What would be more interesting is if we looked at the rising disparity of top earners to lower earners, and compared that to the situation just before the French Revolution. How much more did Jean-Baptiste Réveillon make compared to his average worker, and how does that compare to the Walton family? (“Let them buy their cake for less.”)
many more times the earnings of the average worker was the CEO of
Actually, affluent neighborhoods doubled from 7% to 14% and poor neighborhoods roughly doubled from 8% to 17%.
You may want to watch an episode of Kojak to see how poorly Americans lived and worked in the 1970s, and what a disaster the environment was, compared to the 2000s 🙂
Living, labor (or working conditions), and environmental standards are much higher today than in the 1970s.
Yes, government increased regulations substantially, since the 1970s, in education, health care, energy, housing, small business, finance/banking, environment, manufacturing (fuel and safety standards), etc..
Federal regulations, not including state regulations, cost the U.S. $2 trillion a year.
There should’ve been more regulations on Fannie and Freddie. The moral hazard they created and generated in the housing market turned out to be an expensive disaster.
In the case of education, it wasn’t just regulations and subsidies, along with monopoly power (including textbook prices) that drove-up the costs of education, it was also a generally fixed supply of top colleges and more students, including foreign students.
The U.S. education boom continues.
Of course, not all regulations are bad or the costs exceed the benefits.
As far as environmental standards, firms will not pay the costs of the negative externalities they create, if they don’t have to. Consumers, along with an informing media, can regulate firms too, or change their practices, not just government impositions.
It should be noted, the $700 billion in TARP by the Bush Administration was almost or entirely paid back, with interest, under the Obama Administration. So, those huge Obama budget deficits would’ve been even worse without the TARP repayments.
Moreover, the “recovery” is actually weaker than reflected in GDP growth, under the Obama Administration, because trade deficits shrunk substantially as a percent of GDP, which adds to GDP growth.
Let’s give credit where credit is due and show what a train wreck this “recovery” has been for the global economy, U.S. states, and U.S. households (it’s been a recoverless expansion, since June 2009). I’m amazed stronger growth hasn’t been the top priority. This depression is hurting the poor the most, and will hurt them the most in the future.
And, I stated before, if lending standards began to tighten when the Fed began the tightening cycle in 2004, the housing/financial crisis could’ve been averted, resulting in a milder recession.
Instead, lending accelerated, the economy peaked in 2007, and the credit market froze in 2008. It was a boom that inevitably turned into a bust.
What Caused the Financial Crisis
November 16, 2010
“Starting in the late 1990s, the government, as a social policy to boost homeownership, required Fannie Mae and Freddie Mac to acquire increasing numbers of “affordable” housing loans. (An “affordable loan” is made to people who normally would not qualify.)
By 2007, 55 percent of all loans made by Fannie and Freddie had to be “affordable.” By June 2008, there were 27 million subprime housing loans outstanding (19.2 million of them directly owed by government or government-sponsored agencies), with an unpaid principal amount of $4.6 trillion.”
“What we know is that almost 50 percent of all mortgages outstanding in the United States in 2008 were subprime or otherwise deficient and high-risk loans.
The fact that two-thirds of these mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations, is irrefutable evidence that the government’s housing policies were responsible for most of the weak mortgages that became delinquent and defaulted in unprecedented numbers when the housing bubble collapsed.
****
Bush Administration Tried to Reform Freddie and Fannie Five Years Ago
CBS News
February 19, 2009
“Karl Rove, “We were briefed as far back as 2001 about the problems with Fannie and Freddie; in fact, we moved aggressively in 2004 to regulate Fannie and Freddie, actually got a bill through the Senate Banking and Finance Committee only to have it filibustered by [Sen.] Chris Dodd.”
Rove said Fannie Mae and Freddie Mac “accelerated their imprudent behavior after we attempted to regulate them. They bought almost as much mortgage debt from 2005 through 2008” as they bought in their first 30 years of their existence.
“In fact, in 2003, when we sent our first members of the Cabinet up to talk about this on Capitol Hill, Barney Frank had a hearing in which they basically beat up everybody we sent up there in pretty vociferous language.”
****
Mayor Bloomberg:
“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.
Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.
But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves.”
Michael Bloomberg is an American businessman and politician who is currently Mayor of New York City. With a net worth of $25 billion. He is the founder and 88% owner of Bloomberg L.P., a financial data-services firm.
Larry Goldberg, would you prefer more income inequality with higher living standards for the masses or less income inequality with lower living standards for the masses?.
Creating wealth is not a zero sum game. It not only raises living standards, it generates growth, employment, tax revenue, etc. The U.S. needs to make it easier, not harder, to create wealth.
Dec. 24, 1999 and the signing away of Glass-Steagall allowing DEREGULATION of savings banks and investment banks to become one, allowing banks to AUCTION off the majority of their mortgages instead of holding 70%, the almost exclusive sales of SUB-PRIME mortgages IS what caused the BUST of 2008. TARP was paid back by that 85 billion per month QE (banker/wallstreet welfare) STILL being paid out as of this writing. TODAY’S WEALTH IS DEBT, that’s all that’s being created.
Good question. The knee-jerk answer is a higher standard of living for all at the cost of income equality for some. But how far should that inequality be allowed to go before the masses send you scurrying to the Bastille? How many hours is too many for EMichael’s great niece?
And I believe that technology, not government policy, has raised our standard of living. For example we produce more food per acre with less labor because of chemicals and machines, not lower wages and less regulation. Even you won’t argue that government policy spurs the kind of innovation that leads to new chemicals and machines.
On the other hand, you could. The 70’s environment you complained about at 10:35 was cleaned up by the regulations you complained about at 11:09. The Powell memo was a reaction to those laws, amongst others. So you’re no stranger to irony.
Mike, exchanging sub-prime loans isn’t the same as creating sub-prime loans.
No bank would lend money to people with no income and no down-payment, without the encouragement and support of government.
How did QE cause TARP to be paid-off? The Fed is making tens of billions of dollars a year on interest off those securities, which it gives to the Treasury to help pay-down those huge Obama federal budget deficits. Eventually, those securites mature or expire.
Fed Turns Over $77 Billion in Profits to the Treasury
January 10, 2012
“The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer.
Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.
Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.”
Larry Goldberg, you make lots of false assumptions. I never stated all regulations are bad. I also stated before consumers and the media regulates the economy, not just government.
Regulations tend to be regressive, tend to raise prices or lower real wages, and an economy cannot absorb too much regulation, resulting in slow growth, e.g. for a long period of time, until the economy becomes large enough to absorb those regulations.
And, you didn’t really answer my question. For example, would you rather have a hundred times more billionaires and a higher standard of living or no billionaires and a lower standard of living?
With respect to your first comment – my false assumptions – I stand corrected.
(I also agree that generally regulations hurt jobs. 10 people at $1/hr are more jobs than 1 at $10/hr. If we could do that, and get rid of labor, environmental, and fire safety regulations maybe we could bring the shirtwaist business back to Manhattan.)
Seriously and perhaps off topic though, taxes and government regulations aren’t usually the cause of, or answer to, anything, IMHO. But less of them surely bring profit. And since technology (“rising productivity”) means less labor is needed, and less middle class. Not a problem perhaps, until it is.
And with respect to your second point – that I didn’t answer your standard of living question – you are correct again. I didn’t.
Larry Goldberg, too much regulation hurts low income Americans and small businesses (which create the vast majority of jobs) the most. Reducing tax rates raises disposible income to raise consumption + saving = income. Lower tax rates also reduces the cost of production, particularly for small businesses.
Regulations have benefits. However, an economy may not be able to afford those benefits, particularly when the total costs are too high and exceed the total benefits. There are opportunity costs, e.g. slower job growth or higher prices for more regulations or tougher regulatory standards when they’re already excessive.
PT: The “Fed” is NOT the Treasury or ANY part of “The Government”. It is a consortium of PRIVATE BANKS, licensed to print notes of exchange used predominately by this nation. ANY amount of funding “given” to Treasury is in loans to Treasury, “profits’ or otherwise.
QE buys T-Bills&bonds. T-Bills&bonds are Treasury debt. EVERY penny of QE goes to Treasury either as fresh debt or old debt through a third party. (Say that, YOU bought a T-Bill years&years ago. When YOU bought said T-Bill, YOU lent x dollars to Treasury. When QE shows up YOU sell that T-Bill to the Fed for the principle+interest. Treasury did NOT make a nickel of interest off that T-Bill, YOU DID. That’s how the world turns.)
When Glass-Steagall disappeared then investment banks merged with savings banks & could INVEST&lose YOUR savings in crappy sub-prime loans, sold to ANYONE able or not to pay because FDIC WILL PAY back YOUR savings. That’s how the game is played.
However, I will say the ultimate purpose of the Fed is to smooth-out business cycles, to raise living standards, because economic boom/busts cycles are suboptimal (I passed the comp exams in Money & Central Banking).
The Fed creates or destroys demand deposits to increase or decrease the money supply through the money multiplier using the monetary base, which is called high powered money.
Open market operations is one way to add liquidity or drain dollars out of the economy. The Fed buys securites to increase the money supply or sells securities to decrease the money supply, including Treasury bonds at commercial banks.
When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed’s best choice, although it also attempts to keep inflation expectations low, i.e. a cautious stance. U.S. monetary policy can’t get much better.
Also, I may add, in reply to part of your statement. QE causes bond prices to rise, including for individual investors. Moreover, of course, there’s a positive correlation between risk and return, e.g. higher returns on sub-prime securities.
And, the Glass-Steagall repeal, which created efficiency, and one-stop shopping, only facilitated the poor policies created and encouraged by Congress, e.g. promoting risky loans with too-big-to-fail.
Congress created the conditions that would lead to the financial crisis, which was facilitated by Wall Street. Lenders provided too many risky loans that caused too much homebuilding and too much equity extraction on rising home prices.
Moreover, I may add, U.S. trade deficits reached $800 billion a year (or 6% of GDP) by the mid-2000s. U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds.
Those dollars should’ve been “refunded” by the U.S. government to U.S. consumers, in the form of tax cuts, to allow the spending to go on.
However, instead, Congress directed some of those dollars into the housing market, e.g. through Fannie and Freddie, to promote the building and buying of more houses for people who really couldn’t afford them.
As long as home prices continued to rise, Congress didn’t have to fully pay for the giant social program it created.
On the bottom end of the wage scale we may find a “DISCOUNT wage effect”: wherein weak bargaining power leaves wages below — in the American labor market probably far below — what consumers would have been willing to pay: meaning that today’s consumers are getting a – probably hugely serious — bargain.
On the other end of the wage scale we might find examples of a wage “PREMIUM wage effect”: where consumers are pressured by market conditions to pay much more than the seller would have been willing to accept if there were sufficient competition or whatever: meaning consumers are getting a — possibly hugely serious — skinning.
If a deeply discounted wage is raised — in Obama’s case …
… to still below LBJ’s 1968 minimum wage …
… almost double the per capita income later (!) …
… stretched out over three years (agh!!!) …
… I think consumers are more likely to drop some spending on premium wage products (where they are being skinned) in order to continue purchasing the still deeply DISCOUNTED wage products (and therefore still very much comparative bargains.
Even were today’s federal minimum of $7.25 doubled to $15 they would still end up paying only as much as they would probably have been willing to pay in the first place – still a COMPARATIVE bargain with PREMIUM wage made products.
* * * * * * * * * * * * * * * * * * * * * * *
When I was a gypsy cab driver in the Bronx, back in the late 1970s, the (legit — with medallions, etc.) yellow cabs raised their meters and we raised ours in step with theirs. Everybody agreed that this did not hurt business. I also heard from the veteran drivers that the last meter raise did cost a lot of business — I was new (finally got my driver’s license at age 32).
In any market, selling anything, you never know for sure what the customer will pay until you test. Does this chart below look like the federal minimum wage has been much tested (OVER MULTIPLE GENERATIONS!!!)?
yr..per capita…real…nominal…dbl-index…%-of
68…15,473….10.74..(1.60)……10.74……100%
69-70-71-72-73
74…18,284…..9.43…(2.00)……12.61
75…18,313…..9.08…(2.10)……12.61
76…18,945…..9.40…(2.30)……13.04……..72%
77
78…20,422…..9.45…(2.65)……14.11
79…20,696…..9.29…(2.90)……14.32
80…20,236…..8.75…(3.10)……14.00
81…20,112…..8.57…(3.35)……13.89……..62%
82-83-84-85-86-87-88-89
90…24,000…..6.76…(3.80)……16.56
91…23,540…..7.26…(4.25)……16.24……..44%
92-93-94-95
96…25,887…..7.04…(4.75)……17.85
97…26,884…..7.46…(5.15)……19.02……..39%
98-99-00-01-02-03-04-05-06
07…29,075…..6.56…(5.85)……20.09
08…28,166…..7.07…(6.55)……19.45
09…27,819…..7.86…(7.25)……19.42……..40%
10-11-12
13…29,209…..7.25…(7.25)……20.20?……36%?
* * * * * * * * * * * * * * * * * * * *
I almost forgot: … 🙂 …
There is a growing consensus is that the economy may be permanently slowing down (economists are calling the “SECULAR STAGNATION” I think) and employment permanently stalled because too much income is being squeezed out of the pockets of most American employees …
… meaning that raising — doubling if we want any noticeable effect; not just closing in on 1968 — the minimum wage should be a sure fire way to raise employment all around.
Low wages result in more profit, not necessarily lower prices. The market, the product demand, sets the price. Businesses always try to get labor costs as low as possible and still provide the labor standards they require.
There is an interesting piece on voxeu: http://www.voxeu.org/article/us-inequality-due-assortative-marriages Suggesting that assortative marriage is a significant part of the increasing inequality in the us. The article shows that if the assortative marriage rate was the same now as in 1960 the gini coefficient would fall to .35 from .43. Assortative marriage is where folks with the same educational attainments marry, i.e. college grads marry college grads, HS grads marry HS grads etc.
Now one reason assortative marriage may occur more now is that the numbers of men and women in the various classes are more nearly equal than in 1960 (in particular the college grad level and above).
Consumers want low prices and producers want low wages.
When goods are abundant, prices fall. When labor is abundant, wages fall.
We need more pro-growth and fewer anti-growth policies from our politicians, to raise employment and living standards.
Growth in the
Residential Segregation
of Families by Income,
1970-2009
“The proportion of families living in affluent neighborhoods doubled from 7 percent in 1970 to 14 percent in 2007.
Likewise, the proportion of families in poor neighborhoods doubled from 8 percent to 17 percent over the same period.”
My comment:
In 1970, the proportion of Americans in the “affluent” and “upper income” classes, and also in the “low income” and “poor” classes were relatively small, while the proportion of Americans in the “high middle income” and “low middle income” classes were very large.
If you break down those six classes into three classes, the high and low classes grew and the middle class shrunk. Those three categories are almost equal in size today.
In 1970, both the high and low classes were about 18% each, while the middle class was over 60%. In 2007, both the high and low classes were about 30% each, while the middle class was over 40%.
I suspect, many middle class Americans moved into the higher classes, while many immigrants from poor countries moved to the U.S. and into the lower classes.
However, U.S. living standards improved substantially, including through real median income. Chart:
http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N
Also, data on classes on page 12 of this PDF:
http://graphics8.nytimes.com/packages/pdf/national/RussellSageIncomeSegregationreport.pdf
Isn’t “residential segregation of families by income” nothing more than the result of a smaller middle class, kicked off by the Powell memo?
What would be more interesting is if we looked at the rising disparity of top earners to lower earners, and compared that to the situation just before the French Revolution. How much more did Jean-Baptiste Réveillon make compared to his average worker, and how does that compare to the Walton family? (“Let them buy their cake for less.”)
many more times the earnings of the average worker was the CEO of
Ignore that last sentence fragment.
You can “suspect” all you want to, but the math is different.
7 % of the middle class moved into affluent neighborhoods. 21% dropped from their middle class neighborhoods.
21 is more than 7, even with your links.
Actually, affluent neighborhoods doubled from 7% to 14% and poor neighborhoods roughly doubled from 8% to 17%.
You may want to watch an episode of Kojak to see how poorly Americans lived and worked in the 1970s, and what a disaster the environment was, compared to the 2000s 🙂
Living, labor (or working conditions), and environmental standards are much higher today than in the 1970s.
Well, all I can say is that growing up in the 70s I was able to work 500 hours a year at minimum wage and pay for my college tuition.
Right now my great-niece is attending the same school and needs to work over 2000 hours a year at minimum wage to pay for her tuition.
Yes, government increased regulations substantially, since the 1970s, in education, health care, energy, housing, small business, finance/banking, environment, manufacturing (fuel and safety standards), etc..
Federal regulations, not including state regulations, cost the U.S. $2 trillion a year.
And you think regulations caused all of the price increase?
Beyond silly, pal.
What do you think caused your stated higher environmental standards? Private enterprise?
“Federal regulations, not including state regulations, cost the U.S. $2 trillion a year”
Just think, the lack of banking regulations cost us 12 times the amount you claim.
There should’ve been more regulations on Fannie and Freddie. The moral hazard they created and generated in the housing market turned out to be an expensive disaster.
In the case of education, it wasn’t just regulations and subsidies, along with monopoly power (including textbook prices) that drove-up the costs of education, it was also a generally fixed supply of top colleges and more students, including foreign students.
The U.S. education boom continues.
Of course, not all regulations are bad or the costs exceed the benefits.
As far as environmental standards, firms will not pay the costs of the negative externalities they create, if they don’t have to. Consumers, along with an informing media, can regulate firms too, or change their practices, not just government impositions.
It should be noted, the $700 billion in TARP by the Bush Administration was almost or entirely paid back, with interest, under the Obama Administration. So, those huge Obama budget deficits would’ve been even worse without the TARP repayments.
Moreover, the “recovery” is actually weaker than reflected in GDP growth, under the Obama Administration, because trade deficits shrunk substantially as a percent of GDP, which adds to GDP growth.
Let’s give credit where credit is due and show what a train wreck this “recovery” has been for the global economy, U.S. states, and U.S. households (it’s been a recoverless expansion, since June 2009). I’m amazed stronger growth hasn’t been the top priority. This depression is hurting the poor the most, and will hurt them the most in the future.
And, I stated before, if lending standards began to tighten when the Fed began the tightening cycle in 2004, the housing/financial crisis could’ve been averted, resulting in a milder recession.
Instead, lending accelerated, the economy peaked in 2007, and the credit market froze in 2008. It was a boom that inevitably turned into a bust.
I still don’t see it how you have explained Fannie and Freddie being central as they came in late in this game.
What Caused the Financial Crisis
November 16, 2010
“Starting in the late 1990s, the government, as a social policy to boost homeownership, required Fannie Mae and Freddie Mac to acquire increasing numbers of “affordable” housing loans. (An “affordable loan” is made to people who normally would not qualify.)
By 2007, 55 percent of all loans made by Fannie and Freddie had to be “affordable.” By June 2008, there were 27 million subprime housing loans outstanding (19.2 million of them directly owed by government or government-sponsored agencies), with an unpaid principal amount of $4.6 trillion.”
“What we know is that almost 50 percent of all mortgages outstanding in the United States in 2008 were subprime or otherwise deficient and high-risk loans.
The fact that two-thirds of these mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations, is irrefutable evidence that the government’s housing policies were responsible for most of the weak mortgages that became delinquent and defaulted in unprecedented numbers when the housing bubble collapsed.
****
Bush Administration Tried to Reform Freddie and Fannie Five Years Ago
CBS News
February 19, 2009
“Karl Rove, “We were briefed as far back as 2001 about the problems with Fannie and Freddie; in fact, we moved aggressively in 2004 to regulate Fannie and Freddie, actually got a bill through the Senate Banking and Finance Committee only to have it filibustered by [Sen.] Chris Dodd.”
Rove said Fannie Mae and Freddie Mac “accelerated their imprudent behavior after we attempted to regulate them. They bought almost as much mortgage debt from 2005 through 2008” as they bought in their first 30 years of their existence.
“In fact, in 2003, when we sent our first members of the Cabinet up to talk about this on Capitol Hill, Barney Frank had a hearing in which they basically beat up everybody we sent up there in pretty vociferous language.”
****
Mayor Bloomberg:
“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.
Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.
But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves.”
Michael Bloomberg is an American businessman and politician who is currently Mayor of New York City. With a net worth of $25 billion. He is the founder and 88% owner of Bloomberg L.P., a financial data-services firm.
Larry Goldberg, would you prefer more income inequality with higher living standards for the masses or less income inequality with lower living standards for the masses?.
Creating wealth is not a zero sum game. It not only raises living standards, it generates growth, employment, tax revenue, etc. The U.S. needs to make it easier, not harder, to create wealth.
Dec. 24, 1999 and the signing away of Glass-Steagall allowing DEREGULATION of savings banks and investment banks to become one, allowing banks to AUCTION off the majority of their mortgages instead of holding 70%, the almost exclusive sales of SUB-PRIME mortgages IS what caused the BUST of 2008. TARP was paid back by that 85 billion per month QE (banker/wallstreet welfare) STILL being paid out as of this writing. TODAY’S WEALTH IS DEBT, that’s all that’s being created.
PeakTrader,
Good question. The knee-jerk answer is a higher standard of living for all at the cost of income equality for some. But how far should that inequality be allowed to go before the masses send you scurrying to the Bastille? How many hours is too many for EMichael’s great niece?
And I believe that technology, not government policy, has raised our standard of living. For example we produce more food per acre with less labor because of chemicals and machines, not lower wages and less regulation. Even you won’t argue that government policy spurs the kind of innovation that leads to new chemicals and machines.
On the other hand, you could. The 70’s environment you complained about at 10:35 was cleaned up by the regulations you complained about at 11:09. The Powell memo was a reaction to those laws, amongst others. So you’re no stranger to irony.
Mike, exchanging sub-prime loans isn’t the same as creating sub-prime loans.
No bank would lend money to people with no income and no down-payment, without the encouragement and support of government.
How did QE cause TARP to be paid-off? The Fed is making tens of billions of dollars a year on interest off those securities, which it gives to the Treasury to help pay-down those huge Obama federal budget deficits. Eventually, those securites mature or expire.
Fed Turns Over $77 Billion in Profits to the Treasury
January 10, 2012
“The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer.
Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.
Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.”
Larry Goldberg, you make lots of false assumptions. I never stated all regulations are bad. I also stated before consumers and the media regulates the economy, not just government.
Regulations tend to be regressive, tend to raise prices or lower real wages, and an economy cannot absorb too much regulation, resulting in slow growth, e.g. for a long period of time, until the economy becomes large enough to absorb those regulations.
And, you didn’t really answer my question. For example, would you rather have a hundred times more billionaires and a higher standard of living or no billionaires and a lower standard of living?
PeakTrader,
With respect to your first comment – my false assumptions – I stand corrected.
(I also agree that generally regulations hurt jobs. 10 people at $1/hr are more jobs than 1 at $10/hr. If we could do that, and get rid of labor, environmental, and fire safety regulations maybe we could bring the shirtwaist business back to Manhattan.)
Seriously and perhaps off topic though, taxes and government regulations aren’t usually the cause of, or answer to, anything, IMHO. But less of them surely bring profit. And since technology (“rising productivity”) means less labor is needed, and less middle class. Not a problem perhaps, until it is.
And with respect to your second point – that I didn’t answer your standard of living question – you are correct again. I didn’t.
Larry Goldberg, too much regulation hurts low income Americans and small businesses (which create the vast majority of jobs) the most. Reducing tax rates raises disposible income to raise consumption + saving = income. Lower tax rates also reduces the cost of production, particularly for small businesses.
Regulations have benefits. However, an economy may not be able to afford those benefits, particularly when the total costs are too high and exceed the total benefits. There are opportunity costs, e.g. slower job growth or higher prices for more regulations or tougher regulatory standards when they’re already excessive.
PT: The “Fed” is NOT the Treasury or ANY part of “The Government”. It is a consortium of PRIVATE BANKS, licensed to print notes of exchange used predominately by this nation. ANY amount of funding “given” to Treasury is in loans to Treasury, “profits’ or otherwise.
QE buys T-Bills&bonds. T-Bills&bonds are Treasury debt. EVERY penny of QE goes to Treasury either as fresh debt or old debt through a third party. (Say that, YOU bought a T-Bill years&years ago. When YOU bought said T-Bill, YOU lent x dollars to Treasury. When QE shows up YOU sell that T-Bill to the Fed for the principle+interest. Treasury did NOT make a nickel of interest off that T-Bill, YOU DID. That’s how the world turns.)
When Glass-Steagall disappeared then investment banks merged with savings banks & could INVEST&lose YOUR savings in crappy sub-prime loans, sold to ANYONE able or not to pay because FDIC WILL PAY back YOUR savings. That’s how the game is played.
Mike, your statement implies so much misinformation, it’s difficult for me to directly respond to it. So, I’ll cite Wikipedia:
http://en.wikipedia.org/wiki/Federal_Reserve_System
However, I will say the ultimate purpose of the Fed is to smooth-out business cycles, to raise living standards, because economic boom/busts cycles are suboptimal (I passed the comp exams in Money & Central Banking).
The Fed creates or destroys demand deposits to increase or decrease the money supply through the money multiplier using the monetary base, which is called high powered money.
Open market operations is one way to add liquidity or drain dollars out of the economy. The Fed buys securites to increase the money supply or sells securities to decrease the money supply, including Treasury bonds at commercial banks.
When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed’s best choice, although it also attempts to keep inflation expectations low, i.e. a cautious stance. U.S. monetary policy can’t get much better.
Also, I may add, in reply to part of your statement. QE causes bond prices to rise, including for individual investors. Moreover, of course, there’s a positive correlation between risk and return, e.g. higher returns on sub-prime securities.
And, the Glass-Steagall repeal, which created efficiency, and one-stop shopping, only facilitated the poor policies created and encouraged by Congress, e.g. promoting risky loans with too-big-to-fail.
Congress created the conditions that would lead to the financial crisis, which was facilitated by Wall Street. Lenders provided too many risky loans that caused too much homebuilding and too much equity extraction on rising home prices.
Moreover, I may add, U.S. trade deficits reached $800 billion a year (or 6% of GDP) by the mid-2000s. U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds.
Those dollars should’ve been “refunded” by the U.S. government to U.S. consumers, in the form of tax cuts, to allow the spending to go on.
However, instead, Congress directed some of those dollars into the housing market, e.g. through Fannie and Freddie, to promote the building and buying of more houses for people who really couldn’t afford them.
As long as home prices continued to rise, Congress didn’t have to fully pay for the giant social program it created.
PT: Perhaps YOU should READ those links before posting them.