Another Financial Crisis - Sorry for Debt Dummies

[Stasher]

A terrific article I felt that touched on a point that pounds home something spoked about here... Fiscal Responsibility or you get face punches.

http://nymag.com/daily/intelligencer/2015/12/big-short-genius-says-another-crisis-is-coming.html?mid=fb-share-di

The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision.


Lastly this is a bit of a scary thought from the article when it really comes down to it, this wouldn't be a big problem if society wasn't so wasteful and excess & overuse the way of life.

Fundamentally, I started looking at investments in water about 15 years ago. Fresh, clean water cannot be taken for granted. And it is not — water is political, and litigious. Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me, unless I was pursuing a greater fool theory of investment — which was not my intention. What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce — the water embedded in food is what I found interesting.

[PKFFW]

I totally agree that responsibility starts with those individuals who choose to borrow money.  He is right that the "crisis took a village" and that everyone who borrowed money and didn't pay it back bears some responsibility.  The lack of personal responsibility in that regard can not be ignored and I agree that society in general should be encouraging everyone to take more responsibility and care in this area.

However, the bit about "I better understand all the conditions....." is really a tiny bit of the article.  To me he is clearly making the point that the "suits"(his word) are basically con artist criminals treating the small borrower and investor as a mark to be swindled.  It's very difficult to "understand all the conditions....." when what are basically highly sophisticated criminals are doing everything they can to hoodwink you.  He does warn people they should be more suspicious in future.

Anyone who actually understands what happened in the GFC knows that it was NOT simply a case of a few bad apples not paying their loans off.  The entire "sub-prime" lending was still only a relatively small percentage of overall debt.  There will always be a percentage of loans that do not get paid off.  If it had just been a case of the sub-prime blowing up, the crisis would have been bad for those lenders who actually lent the money in the first place, probably all of them would have gone bust.  However, it would have been nothing like what it was.

The real problem happened when the bad lenders, some banks and other institutions colluded in packaging such bad loans together and then outright lying about what was in those packages and selling them on.  It was then compounded by hedge funds and the like creating what amounted to a betting game on whether those packages would fail.  Winning gamblers are a rare thing indeed and this time it was no different.  The house won the rigged game and society bailed them out.

Now we have the situation where the gamblers feel they can do whatever they want, lend whatever they want, lie about whatever they want and continue to privatise the profits and socialise the costs because it has been made explicitly clear to them that they are "too big to fail".  Let the good times roll.

[Stasher]

Now we have the situation where the gamblers feel they can do whatever they want, lend whatever they want, lie about whatever they want and continue to privatise the profits and socialise the costs because it has been made explicitly clear to them that they are "too big to fail".  Let the good times roll.

Scary thought isn't it
Great response PKFFW , I enjoyed your thoughts as much as the original article.

[nobodyspecial]

Now we have the situation where the gamblers feel they can do whatever they want, lend whatever they want, lie about whatever they want and continue to privatise the profits and socialise the costs because it has been made explicitly clear to them that they are "too big to fail".  Let the good times roll.

Scary thought isn't it
Great response PKFFW , I enjoyed your thoughts as much as the original article.

But if Reagonomics os correct all those $Bn paid to bail out hedge fund managers will trickle down to us peasants.
At least those of us peasants working on Porsche's production line or in Colombian fields.

[brett2k07]

Now we have the situation where the gamblers feel they can do whatever they want, lend whatever they want, lie about whatever they want and continue to privatise the profits and socialise the costs because it has been made explicitly clear to them that they are "too big to fail".  Let the good times roll.

Scary thought isn't it
Great response PKFFW , I enjoyed your thoughts as much as the original article.

But if Reagonomics os correct all those $Bn paid to bail out hedge fund managers will trickle down to us peasants.
At least those of us peasants working on Porsche's production line or in Colombian fields.

An excerpt from "Trickle Down" Theory and "Tax Cuts for the Rich" written by Thomas Sowell:

"At various times and places, particular individuals have argued that existing tax rates are so high that the government could collect more tax revenues if it lowered those tax rates, because the changed incentives would lead to more economic activity, resulting in more tax revenues out of rising incomes, even though the tax rate was lowered. This is clearly a testable hypothesis that people might argue for or against, on either empirical or analytical grounds. But that is seldom what happens. Even when the particular tax cut proposal is to cut tax rates in all income brackets, including reducing tax rates by a higher percentage in the lower income brackets than in the upper income brackets, such proposals have nevertheless often been characterized by their opponents as “tax cuts for the rich” because the total amount of money saved by someone in the upper income brackets is often larger than the total amount of money saved by someone in the lower brackets. Moreover, the reasons for proposing such tax cuts are often verbally transformed from those of the advocates— namely, changing economic behavior in ways that generate more output, income and resulting higher tax revenues— to a very different theory attributed to the advocates by the opponents,
namely “the trickle-down theory.” No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter’s monumental 1,260-page History of Economic Analysis. Yet this non-existent theory has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena. It has been attacked by Professor Paul Krugman of Princeton and Professor Peter Corning of Stanford, among others, and similar attacks have been repeated as far away as India. It is a classic example of arguing against a caricature instead of confronting the argument actually made."

[sirdoug007]

Now we have the situation where the gamblers feel they can do whatever they want, lend whatever they want, lie about whatever they want and continue to privatise the profits and socialise the costs because it has been made explicitly clear to them that they are "too big to fail".  Let the good times roll.

Scary thought isn't it
Great response PKFFW , I enjoyed your thoughts as much as the original article.

But if Reagonomics os correct all those $Bn paid to bail out hedge fund managers will trickle down to us peasants.
At least those of us peasants working on Porsche's production line or in Colombian fields.

An excerpt from "Trickle Down" Theory and "Tax Cuts for the Rich" written by Thomas Sowell:

"At various times and places, particular individuals have argued that existing tax rates are so high that the government could collect more tax revenues if it lowered those tax rates, because the changed incentives would lead to more economic activity, resulting in more tax revenues out of rising incomes, even though the tax rate was lowered. This is clearly a testable hypothesis that people might argue for or against, on either empirical or analytical grounds. But that is seldom what happens. Even when the particular tax cut proposal is to cut tax rates in all income brackets, including reducing tax rates by a higher percentage in the lower income brackets than in the upper income brackets, such proposals have nevertheless often been characterized by their opponents as “tax cuts for the rich” because the total amount of money saved by someone in the upper income brackets is often larger than the total amount of money saved by someone in the lower brackets. Moreover, the reasons for proposing such tax cuts are often verbally transformed from those of the advocates— namely, changing economic behavior in ways that generate more output, income and resulting higher tax revenues— to a very different theory attributed to the advocates by the opponents,
namely “the trickle-down theory.” No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter’s monumental 1,260-page History of Economic Analysis. Yet this non-existent theory has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena. It has been attacked by Professor Paul Krugman of Princeton and Professor Peter Corning of Stanford, among others, and similar attacks have been repeated as far away as India. It is a classic example of arguing against a caricature instead of confronting the argument actually made."

Trickle-down isn't an economic theory, it is a political theory.  It was described by Reagan's budget director, David Stockman.  The fact that it is not a thoroughly described and analyzed economic theory just highlights how its supposed benefits have no basis in reality.

http://www.theatlantic.com/magazine/archive/1981/12/the-education-of-david-stockman/305760/?single_page=true

Yet he was conceding what the liberal Keynesian critics had argued from the outset—the supply-side theory was not a new economic theory at all but only new language and argument to conceal a hoary old Republican doctrine: give the tax cuts to the top brackets, the wealthiest individuals and largest enterprises, and let the good effects "trickle down" through the economy to reach everyone else. Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican orthodoxy. "It's kind of hard to sell 'trickle down,'" he explained, "so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."

[GuitarStv]

Now we have the situation where the gamblers feel they can do whatever they want, lend whatever they want, lie about whatever they want and continue to privatise the profits and socialise the costs because it has been made explicitly clear to them that they are "too big to fail".  Let the good times roll.

Scary thought isn't it
Great response PKFFW , I enjoyed your thoughts as much as the original article.

But if Reagonomics os correct all those $Bn paid to bail out hedge fund managers will trickle down to us peasants.
At least those of us peasants working on Porsche's production line or in Colombian fields.

Ah yes, the theory where the rich elite establishment finish a particularly filling meal with a lot of good wine and deign to mosey over to the edge of a cliff, unzip, and let their golden bounty trickle down to the thirsty uplifted faces of the peasants below.  Why are the damned peasants not more grateful???

[brett2k07]

This "trickle down" opposition goes back a lot further than Reagan. It actually began in the 1920s according to Thomas Sowell.

I'll stop the quote quoting in the interest of space and readability, but there is actually sound evidence that cutting taxes does in fact tend to raise tax revenue. When you slash the tax rate, people shift their wealth and income away from tax shelters like municipal bonds and are more likely to invest in taxable investments in the private sectors. Those investments tend to create opportunity and jobs. In 1921 the tax rate on those who made over $100,000 per year was 73%. By 1929, the government had cut the rate to 24%. During that time, tax revenue went from $700 million in tax revenue in 1921 to over $1 billion in 1929. Those with incomes over $100,000 paid 30% and 65% of those amounts, respectively. It seems counterintuitive to expect an increase in revenue from a reduction in the tax rate, but that's exactly what happened.

Woodrow Wilson seemingly advocated for the tax cuts during a speech to Congress in 1919 following that same logic.

Most notably, John F. Kennedy, the darling of the Democratic Party stated it outright: “It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates….[A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.”

Reagan was merely following the examples of those before him. The "trickle down" theory has nothing to do with wealth redistribution. As Thomas Sowell put it, it's just an argument against the sound economic theory, with empirical data to back it up, of cutting tax rates in order to change the investment behavior of the wealthy and generate more tax revenue.

[Jack]

I'll stop the quote quoting in the interest of space and readability, but there is actually sound evidence that cutting taxes does in fact tend to raise tax revenue. When you slash the tax rate, people shift their wealth and income away from tax shelters like municipal bonds and are more likely to invest in taxable investments in the private sectors. Those investments tend to create opportunity and jobs. In 1921 the tax rate on those who made over $100,000 per year was 73%. By 1929, the government had cut the rate to 24%. During that time, tax revenue went from $700 million in tax revenue in 1921 to over $1 billion in 1929. Those with incomes over $100,000 paid 30% and 65% of those amounts, respectively. It seems counterintuitive to expect an increase in revenue from a reduction in the tax rate, but that's exactly what happened.

1929, huh? So the side-effect of cutting taxes is to create a stock market bubble that pops and causes the Great Depression? I'm not sure your argument is as persuasive as you think it is... ; )

Granted, price elasticity of demand and its effect on total revenue are basic economics concepts, and you can apply the same principles to taxes. However, where "trickle-down economics" fails (at least nowadays, as opposed to the '50s) is in the assumption that taxes are genuinely so high as to be in the elastic zone, which Republicans never seem to be interested in proving.

[tjalexander]

I'll stop the quote quoting in the interest of space and readability, but there is actually sound evidence that cutting taxes does in fact tend to raise tax revenue. When you slash the tax rate, people shift their wealth and income away from tax shelters like municipal bonds and are more likely to invest in taxable investments in the private sectors. Those investments tend to create opportunity and jobs. In 1921 the tax rate on those who made over $100,000 per year was 73%. By 1929, the government had cut the rate to 24%. During that time, tax revenue went from $700 million in tax revenue in 1921 to over $1 billion in 1929. Those with incomes over $100,000 paid 30% and 65% of those amounts, respectively. It seems counterintuitive to expect an increase in revenue from a reduction in the tax rate, but that's exactly what happened.

1929, huh? So the side-effect of cutting taxes is to create a stock market bubble that pops and causes the Great Depression? I'm not sure your argument is as persuasive as you think it is... ; )

Cutting taxes has never been cited as a cause of the Great Depression.

[bwall]

 That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. [/i]

People have been lending money now for over 2000 years (!). During this time, it was always incumbent on the lender to determine if the borrow was worthy of receiving funds. Until 2005 when banks loaned money to anyone with a pulse. And then in 2008 when the GOP blamed the individuals, not the banks, for the bad loans.

In other words, the borrowers could mis-represent all they want, the loan isn't approved until it's approved.

[nobodyspecial]

That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. [/i]

So being able to buy $1M of credit default insurance on a $100K mortgage and then being allowed to go out and choose the person you sold the mortgage to - was totally the fault of the borrower?

[tjalexander]

If the borrower never asked for the loan, would there have been a loan? Logic 101

Many people to blame but absolving the borrower is ludicrous. Nobody seems to take responsibility for their actions these days.

[GuitarStv]

If the borrower never asked for the loan, would there have been a loan? Logic 101

Many people to blame but absolving the borrower is ludicrous. Nobody seems to take responsibility for their actions these days.

I'm regularly offered loans from several banks, my mortgage broker, my credit card provider, car companies, and furniture places.  All without asking for a loan.

When we first bought our house, we were looking for a place that was about 350k, and were qualified for a 900k mortgage.  We had a monthly income of under 110k a year at the time.

[onlykelsey]

I'm regularly offered loans from several banks, my mortgage broker, my credit card provider, car companies, and furniture places.  All without asking for a loan.

When we first bought our house, we were looking for a place that was about 350k, and were qualified for a 900k mortgage.  We had a monthly income of under 110k a year at the time.

What I can't figure out is that people have stopped reaching out to offer me free money.  When I was a grad student living off of 15K, I couldn't get them to stop raising my credit limit.  I'll earn a quarter million this year, and I don't even get promo credit cards.  I'm not complaining, but it's strange. I wonder what the algorithm is that produces this result.

[Stasher]

I wonder what the algorithm is that produces this result.

Maybe if you are carrying debt or making minimum payments? It shows them they could make good returns on interest from you maybe?

[Zx]

I'll stop the quote quoting in the interest of space and readability, but there is actually sound evidence that cutting taxes does in fact tend to raise tax revenue. When you slash the tax rate, people shift their wealth and income away from tax shelters like municipal bonds and are more likely to invest in taxable investments in the private sectors. Those investments tend to create opportunity and jobs. In 1921 the tax rate on those who made over $100,000 per year was 73%. By 1929, the government had cut the rate to 24%. During that time, tax revenue went from $700 million in tax revenue in 1921 to over $1 billion in 1929. Those with incomes over $100,000 paid 30% and 65% of those amounts, respectively. It seems counterintuitive to expect an increase in revenue from a reduction in the tax rate, but that's exactly what happened.

1929, huh? So the side-effect of cutting taxes is to create a stock market bubble that pops and causes the Great Depression? I'm not sure your argument is as persuasive as you think it is... ; )

Cutting taxes has never been cited as a cause of the Great Depression.

He was using a classic straw man argument there. That's ingrained into liberals when presented with facts they don't appreciate. I don't know if that's better than the GOP's method of ignoring facts they don't appreciate or not. What I do know is that there is a LOT of koolaid out there, and too many people have been marinating in it for far too long.

If you think there is a difference between Dems and Repubs then you've had too much of it. They both have power and they mean to keep it. They both have the money, and they mean to keep it. The only difference is the flavor of koolaid they feed their sheep. Just another good reason not to have a TV and to ignore the "news" outlets, because there are no more journalists anymore...just activists holding a job as journalist.