Posts Tagged ‘bonuses’

Who REALLY Exploded Your Economy, Liberals Or Conservatives?

August 3, 2009

From Mark Levin’s Liberty and Tyranny, pages 67-71:

From where does the Statist acquire his clairvoyance in determining what is good for the public?  From his ideology.  The Statist is constantly manipulating public sentiment in a steady effort to disestablish the free market, as he pushes the nation down tyranny’s road.  He has built an enormous maze of government agencies and programs, which grow inexorably from year to year, and which intervene in and interfere with the free market.  And when the Statist’s central planners create economic perversions that are seriously detrimental to the public, he blames the free market and insists on seizing additional authority to correct the failures created at his own direction.

Consider the four basic events that led to the housing bust of 2008, which spread to the financial markets and beyond:

EVENT 1: In 1977, Congress passed the Community Reinvestment Act (CRA) to address alleged discrimination by banks in making loans to poor people and minorities in the inner cities (redlining).  The act provided that banks have “an affirmative obligation” to meet the credit needs of the communities in which they are chartered.1 In 1989, Congress amended the Home Mortgage Disclosure Act requiring banks to collect racial data on mortgage applications.2 University of Texas economics professor Stan Liebowitz has written that “minority mortgage applications were rejected more frequently than other applications, but the overwhelming reason wasn’t racial discrimination, but simply that minorities tend to have weaker finances.”3 Liebowitz also condemns a 1992 study conducted by the Boston Federal Reserve Bank that alleged systemic discrimination.  “That study was tremendously flawed.  A colleague and I … showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates.  Our study found no evidence of discrimination.”4 However, the study became the standard on which government policy was based.

In 1995, the Clinton administration’s Treasury Department issued regulations tracking loans by neighborhoods, income groups, and races to rate the performance of banks.  The ratings were used by regulators to determine whether the government would approve bank mergers, acquisitions, and new branches.5 The regulations also encouraged Statist-aligned groups, such as the Association of Community Organizations for Reform Now (ACORN) and the Neighborhood Assistance Corporation of America, to file petitions with regulators, or threaten to, to slow or even prevent banks from conducting their business by challenging the extent to which banks were issuing these loans.  With such powerful leverage over banks, some groups were able, in effect, to legally extort banks to make huge pools of money available to the groups, money they in turn used to make loans.  The banks and community groups issued loans to low-income individuals who often had bad credit or insufficient income.  And these loans, which became known as “subprime” loans, made available 100 percent financing, did not always require the use of credit scores, and were even made without documenting income.6 Therefore, the government insisted that banks, particularly those that wanted to expand, abandon traditional underwriting standards.  One estimate puts the figure of CRA-eligible loans at $4.5 trillion.7

EVENT 2: In 1992, the Department of Housing and Urban Development pressured two government-chartered corporations – known as Freddie Mac and Fannie Mae – to purchase (or “securitize”) large bundles of these loans for the conflicting purposes of diversifying the risks and making even more money available to banks to make further risky loans.  Congress also passed the Federal Housing Enterprises Financial Safety and Soundness Act, eventually mandating that these companies buy 45% of all loans from people of low and moderate incomes.8 Consequently, a SECONDARY MARKET was created for these loans.  And in 1995, the Treasury Department established the Community Development Financial Institutions Fund, which provided banks with tax dollars to encourage even more risky loans.

For the Statist, however, this was still not enough.  Top congressional Democrats, including Representative Barney Frank (Massachusetts), Senator Christopher Dodd (Connecticut), and Senator Charles Schumer (New York), among others, repeatedly ignored warnings of pending disaster, insisting that they were overstated, and opposed efforts to force Freddie Mac and Fannie Mae to comply with usual business and oversight practices.9 And the top executives of these corporations, most of whom had worked in or with Democratic administrations, resisted reform while they were actively cooking the books in order to award themselves tens of millions of dollars in bonuses.10

EVENT 3: A by-product of this government intervention and social engineering was a financial instrument called the “derivative,” which turned the subprime mortgage market into a ticking time bomb that could magnify the housing bust by orders of magnitude.  A derivative is a contract where one party sells the risk associated with the mortgage to another party in exchange for payments to that company based on the value of the mortgage.  In some cases, investors who did not even make the loans would bet on whether the loans would be subject to default.  Although imprecise, perhaps derivatives in this context can best be understood as a form of insurance.  Derivatives allowed commercial and investment banks, individual companies, and private investors to further spread – and ultimately multiply – the risk associated with their mortgages.  Certain financial and insurance institutions invested heavily in derivatives, such as American International Group (AIG).11

EVENT 4:  The Federal Reserve Board’s role in the housing boom-and-bust cannot be overstated.  The Pacific Research Institute’s Robert P. Murphy explains that “[the Federal Reserve] slashed rates repeatedly starting in January 2001, from 6.5 percent until they reached a low in June 2003 of 1.0 percent.  (In nominal terms, this was the lowest the target rate had been in the entire data series maintained by the St. Louis Federal Reserve, going back to 1982)….  When the easy-money policy became too inflationary for comfort, the Fed (under [Alan] Greenspan and the then new Chairman Ben Bernanke at the end) began a steady process of raising interest rates back up, from 1.0 percent in June 2004 to 5.25 percent in June 2006….”12 Therefore, when the Federal Reserve abandoned its role as steward of the monetary system and used interest rates to artificially and inappropriately manipulate the housing market, it interfered with normal market conditions and contributed to destabilizing the economy.

————————————————————————————————

1 Howard Husock, “The Trillion-Dollar Shakedown that Bodes Ill for Cities,” City Journal, Winter 2000.

2 Stan Liebowitz, “The Real Scandal,” New York Post, Feb. 5, 2008.

3 Ibid.

4 Ibid.

5 Howard Husock, “The Financial Crisis and the CRA,” City Journal, Oct. 30, 2008.

6 Liebowitz, “The Real Scandal.”

7 Husock, “The Financial Crisis and the CRA.”

8 Ibid.

9 Editorial, “Fannie Mae’s Patron Saint,” Wall Street Journal, Sept. 10, 2008; Joseph Goldstein, “Pro-Deregulation Schumer Scores Bush For Lack of Regulation,” New York Sun, Sept. 22, 2008; Robert Novack, “Crony Image Dogs Paulson’s Rescue Effort,” Chicago-Sun Times, July 17, 2008.

10 Office of Federal Housing Enterprise Oversight, “Report of the Special Examination of Freddie Mac,” Dec. 2003; Office of Federal Housing Oversight, “Report of the Special Examination of Fannie Mae,” May 2006.

11 Lynnley Browning, “AIG’s House of Cards,” Portfolio.com, Sept. 28, 2008.

12 Robert P. Murphy, “The Fed’s Role in the Housing Bubble,” Pacific Research Institute blog.

The government links from footnote 10 have been purged (and I COUNT on left-leaning “news” sources to purge stories that reveal the left for what it is), but there is plenty of evidence that a) Fannie and Freddie were firmly in the hands of Democrats; b) that Democrats and Fannie/Freddie at least twice resisted reforms by President Bush and Republicans; and c) that Fannie and Freddie executives – who were deeply involved with Democrat activismactively cooked the books to obtain huge bonuses prior to the disastrous crash.  We can also demonstrate d) that Barack Obama and Chris Dodd were involved with corrupt Fannie and Freddie (and Obama and Dodd were also receiving large contributions from corrupt Lehman Bros. even as Obama was getting a sweetheart mortgage deal from corrupt Tony Rezko while Chris Dodd was getting sweetheart mortgage deasl from corrupt Countrywide) right up to the tops of their pointy little heads.

When one examines the actual factors that led to the housing mortgage meltdown (as Mark Levin documents), when one examines the Democrat’s patent refusal to even accept that there was even a problem with Fannie and Freddie – much less allow any regulation – prior to the ensuing disaster, and when one examines the record to see which politicians were receiving money from the parties most responsible for the disaster, there is clearly only one party to blame: the Democrat Party.

And they are right back to all their old tricks.  It was rampant and insane spending that got us into this financial black hole – and they want MORE on top of MORE spending.  Meanwhile, Democrats such as Barney Frank are hard at work trying to create the NEXT massively destructive housing bubble, ACORN is trying to seize houses from rightful owners in the name of the “poor,” liberals are making moral hazard that rewards recklessness and irresponsibility and punishes frugality and responsibility official government policy , even as the Obama administration is creating “solutions” to the foreclosure issue that have abjectly failed.

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Punishing The Rich Punishes The Poor By Punishing Economic Growth

July 15, 2009

I don’t know about you, but I have never gotten a single job – or even a single job offer – from a poor person.  And even when I’ve applied for a job at a company, there was always a rich person or persons up the food chain who had made that job possible.  We “ordinary people” don’t stop and think about how much we have actually depended upon the rich.  But as our economy tanks, maybe it’s time we did.

How the Mighty Have Fallen

The rich really aren’t like you and me–: They’re historically recession-proof. But this time they’ve been hit hard—and we may all be the poorer for it.

By Robert J. Samuelson | NEWSWEEK
Published Jul 11, 2009
From the magazine issue dated Jul 20, 2009

Just who is “rich” in America is a matter of considerable disagreement. No one disputes that Bill Gates (No. 1 on last year’s Forbes400 list with a net worth of $57 billion) and Warren Buffett (No. 2 at $50 billion) are wealthy or, indeed, that everyone on the Forbes list qualifies (the poorest had a net worth of $1.3 billion). But as you move from billions in net worth to the mere hundreds or many tens of millions, and then to annual incomes of the mere hundreds of thousands, the arguing begins.

In April, The Wall Street Journal ran an article sympathetically portraying families with incomes around $250,000, the level that President Obama has targeted for tax increases. By most measures, these families rank in the top 2 percent to 4 percent of the income spectrum. But many—possibly most—see themselves as “upper middle class” and not “rich,” the paper reported.

“I’m not after sympathy,” said the wife of a surgeon who makes about $260,000. “What I want is a reality check on what rich means. I can pay my mortgage and can buy some clothes. I’m not going without, but I’m not living a life of luxury.” The mayor of San Jose scoffed at $250,000. That’s what a two-engineer couple might make, he said. It put them in “the upper working class” and wasn’t enough to “buy a home in Silicon Valley.”

The article triggered an outpouring of e-mails—many applauding that someone had finally described their harried plight; others sarcastically wondering what planet the whiners lived on. But so much angst among the affluent—however defined—attests to something else: the present recession, unlike any other since World War II, has deeply shaken the nation’s economic elite.

With secure jobs and ample incomes, the rich and the near rich are supposed to be insulated from economic slumps. Well, not this time. Many feel fearful, threatened, and impoverished. In a recent Unity Marketing survey of consumers with incomes exceeding $250,000, 60 percent said their financial situation had deteriorated; 39 percent said bonuses or commissions had been cut; 29 percent said their regular income had been reduced; 8 percent said they’d lost their jobs; and 4 percent said their hours had been reduced. Even with a partial stock-market rebound, many of America’s most affluent feel vulnerable to layoffs and lost income, just like other Americans. “This has been an equal-opportunity recession,” argues Pam Danziger of Unity Marketing.

Collateral damage is widespread. Sales at luxury chains have fallen sharply; same-store revenues for Saks Fifth Avenue and Neiman Marcus dropped about 25 percent in recent quarters. Many country clubs are struggling to hold members. In New York’s Hamptons, unsold homes reached a 34-month supply early this year at the prevailing sales pace; buyers had hibernated. Economist Susan Sterne, a specialist in consumer spending, calls it “the demise of luxury… the people who buy $3,000 Gucci handbags. You see it in the luxury-car market and housing.”

Some causes are obvious. With the recession’s epicenter on Wall Street, layoffs and bonus reductions among highly paid investment bankers, traders, and money managers have thinned the ranks of the rich. The plunge in share prices has especially hurt the wealthy, because they disproportionately own stocks.

But something bigger may also be happening. In a new study, economists Jonathan Parker and Annette Vissing–Jorgensen of Northwestern University find that—contrary to conventional wisdom—income losses in recessions are proportionately greater for the well-to-do than for middle-income households. By their estimates, the relative income loss for the top 10 percent of the population is 26 percent larger than for the average household. For the top 1 percent, the contrast is even starker. Their proportionate loss is more than double—that is, if the average household had an income loss of 10 percent, the top 1 percent would lose more than 20 percent.

That doesn’t mean they suffer more hardship. It’s almost certainly tougher for a family with an income of $50,000 to adjust to a $5,000 loss (10 percent) than it is for a family with $1 million to compensate for a $200,000 drop (20 percent). And the poor experience the highest joblessness. Still, the increased economic vulnerability of the upper classes is a change from the past. Before the 1980s, the conventional wisdom was true, Parker and Vissing–Jorgensen say. Higher income conferred more stability.

It’s not entirely clear what changed. Parker thinks that “one cause is the dramatic increase in pay for performance.” In the past quarter century, salaries for top executives and managers have increasingly consisted of stock options, year-end bonuses, and sales incentives, he says. When the economy thrives, pay rises; when it sours, pay falls. Parker also cites the growth of professionals (lawyers, doctors, accountants, consultants) among the economic elite. “When the demand for elective surgery or legal services or consulting services goes down, so do their incomes,” he says. Even among the top one tenth of 1 percent, wages represent half their income, and “proprietors’ income” (essentially profits from a business or partnership) accounts for another quarter. The stereo-type of the rich living mainly off dividends and interest income is increasingly outdated. Many of the wealthy are owners of small businesses whose well- being is—to some extent—hostage to the business cycle.

It will strike many, no doubt, that the setbacks and anxieties for the country-club set are just deserts. Some will correctly note that well-paid CEOs and investment bankers helped bring about the economic crisis. They’re just getting their comeuppance—and it’s about time. Others will point out that countless studies have shown that, in recent decades, the gap between the rich and the rest has widened. From 1990 to 2006, for instance, the share of pretax income received by the top 1 percent grew from 12 percent to 19 percent, says the Congressional Budget Office. The present reverses are a healthy correction. So goes the argument.

All this is understandable, but incomplete. The criticism usually presumes that if the rich and near rich get less, someone else will get more. Redistribution achieves a better social balance. Sometimes that happens. But sometimes when the rich get less, no one else gets more. Regardless of how the rich earned their money—trading bonds, performing surgery, starting new companies, providing legal work—it’s no longer so lucrative. The rich get poorer, but no one else gets richer. Society is worse off.

“Trickle-down economics” is a despised phrase and concept to many, but it also embodies a harsh reality. The rich often play a pivotal role in U.S. economic growth, and if they are enfeebled, then the consequences are widespread. Consider:

Consumption spending, the economy’s main engine, is skewed toward the upper classes, because they have most of the income. In 2009, households with more than $200,000 in income account for 3.4 percent of the total but will generate almost 14 percent of consumer spending, estimates economist Sterne. Households with incomes between $100,000 and $200,000 represent about 14 percent of the population and 34 percent of spending. Together, these groups generate nearly half of U.S. consumption, although they’re only a sixth of the population.

Similarly, the rich pay most of the taxes. In 2006, the richest 1 percent paid 28 percent of all federal taxes, estimates the CBO. The richest 10 percent (including the top 1 percent) paid 55 percent. The system is progressive—that is, the richer people get, the more of their income they pay in taxes. In 2006, the effective rate for the top 1 percent was 31 percent, reflecting all federal taxes. By contrast, the poorest fifth paid an effective rate of 4 percent. (State and local taxes are less progressive, because they rely more heavily on regressive sales taxes.)

The wealthy dominate charitable giving. In 2004, families with a net worth exceeding $5 million made up about 1.5 percent of all U.S. families but accounted for 27 percent of contributions, according to the Center on Wealth and Philanthropy at Boston College. Those with a net worth between $1 million and $5 million, about 7 percent of all families, represented another 20 percent of contributions. So, a tenth of American families made nearly half of all gifts.

Wealthy individuals are an important source of money for venture capital—funds invested in startup companies. Individuals and families represent about 10 percent of VC money (most of the rest comes from pension funds, college endowments, and insurance companies).

When the affluent retrench, they drag a lot with them. For example, the financial crisis led to a 44 percent fall in year-end bonuses at Wall Street firms, to $18.4 billion in 2008 from $32.9 billion in 2007, according to the New York state comptroller. No doubt that struck many as overdue and insufficient. Bankers were overpaid, and huge year-end bonuses encouraged excessive risk-taking. The trouble is that the loss of taxes on the bonuses blew a $1 billion hole in the state’s budget and made it harder to pay for schools, health care, and prisons.

It’s the same story with consumption. In late 2008, spending declined at about a 4 percent annual rate, and, in the first quarter of this year, rose slightly. But Danziger’s surveys show steeper cutbacks at the top. From 2007 to 2008, consumers with incomes from $150,000 to $249,000 reduced spending by about 8 percent, while those above $250,000 cut almost 15 percent. Similarly, charitable giving decreased to $308 billion in 2008, a drop of 5.7 percent after adjustment for inflation, says the Giving USA Foundation, a nonprofit group. Donations may fall further this year. The stock market is a strong predictor of giving. A 100-point rise in the S&P 500 stock index increases charitable contributions by $1.7 billion, says the Center on Philanthropy at Indiana University.

Not all charities have suffered. “Our funding is up 42 percent over last year,” says Ross Fraser of Feeding America, an umbrella group that channels cash and groceries to 206 food banks around the country. “Charities such as ours do well when times are hard. If you have to choose between giving to the ballet and feeding a hungry child, who’s going to win?” But that compounds the pressure on other nonprofits: colleges, hospitals, and environmental groups.

It’s probably true that being rich is more a state of mind than an explicit level of income or wealth. It’s feeling of having enough money so that money is no longer a worry. For many, that sense of security is gone. Michael Silverstein of the Boston Consulting Group reckons there are about 100,000 households with a net worth—counting their homes, stocks, bonds, and businesses—of at least $20 million. Even at these rarefied levels, he thinks, many are rattled. “They’ve seen up to a 30 to 40 percent drop in their net worth from peak to trough.  Some have friends at blue-chip companies like General Electric, AIG, or Citigroup who have lost fortunes invested in company stock,” he says.

What’s unclear is whether the trauma will permanently change behavior. Silverstein is skeptical. “The nice thing about Americans is that they have short-term memories,” he says. “We’ll get out of this—and then the rich will realize they’re rich again and start to spend.” But Danziger, the marketing researcher, thinks the shopping culture has taken heavy hits. Americans have “been on an extended buying spree for the past 20 years. They’ve got stuff—and they don’t need a lot of it,” she says. There’s a growing realization “that material wealth doesn’t make people happy.” Striving to replenish their savings, Americans—even the rich—will skimp on spending.

Once way or another, it’s doubtful that trickle-down economics will soon regain the power of recent decades, when exploding stock and real-estate values and rising salaries were compounded by George W. Bush’s favorable tax changes. But cheering at its eclipse may be premature and misguided. The contradiction is that many of the large gains at the top that are routinely deplored also provide the economic fuel for desired spending at the bottom. If the rich—however defined—remain stuck in neutral, the overall economy may not do much better.

Think about some of the “filthy rich” such as doctors and small business owners.  Ask yourself this: if there wasn’t the promise of high pay at the end of the road, do you think we’d have as many doctors?  Would you spend tens of thousands of hours in study, and thousands of more hours in stressful and sleep-deprived residency, if you weren’t going to be well-paid in the end?  How about small businesspeople?  Would you risk all your savings and years of your time developing a business if you didn’t have the right to expect a real reward if you actually succeeded?

What’s wrong with us for hating such people for their hard work and their success?  Why on earth would we wish them anything but success when we benefit from their succeeding with better health, better jobs, and better lives than we could otherwise ever have apart from them?

There has long been a movement by the political left in America to be more like sophisticated Europe.  Liberals say, “What Europeans do with government is pretty good.  And what they do with civil rights is pretty good.  And what they do with health care is pretty good.”  And there’s this constant movement on the part of the left to be more like Europe.  In our Surpreme Court liberal justices have been quoting what Europeans do in their law.  The fact is, 200 years ago there was the same kind of intellectual elitest movement going on – “Let’s be like Europe.”  Thomas Jefferson made a statement that is applicable today:

“The comparisons of our government with those of Europe are like a comparison of heaven and hell.”

That’s the thing.  As Europe has dived into socialism, fascism, communism, and just about every other “-ism,” what should have been obvious is that Americans shouldn’t be more like Europeans; it should be the other way around.  And socialist redistribution of wealth is neither American nor successful.

There’s a joke that compares the attitudes of Americans with the attitudes of Europeans.  An American rides the bus, sees an expensive sports car, and says, “Some day I’m going to own a car like that.”  And there’s a European who rides the bus, sees an expensive sports car, and says, “Some day that son of a bitch will be riding the bus just like me.”  What makes that joke so sad is that we have too many American liberals who are thinking like the Europeans even as the Europeans are beginning to think more like Americans used to.

As we speak, Democrats are devising more and more ways to fund their massive and frankly European-style socialist spending programs by punishing the rich for their success.  They are going to lift the successful Bush tax cuts and raise taxes on “the rich.”  They are going to impose additional taxes in the form of “surcharges” on “the rich” to try to pay for their socialist-style health care agenda.  As a result the rich – who already pay a shockingly high share of the taxes – will begin to see more taxes than they have seen in decades.  And they will keep coming after “the rich” as long as Marxist-style class-warfare politics pitting the proletariat against the bourgeousie continue to work for them.