Put The Blame Where Blame Is Due

[west20th]

Yeah, they both spend like drunked sailors, but the Republicans routinely use "cutting spending" as a key part of their platform. The Democrats tell us that they're going to spend our money like it's radioactive.

So you're saying the GOP are liars? They promise to cut spending but rarely do? Actually, there are a good amount of liars in all of politics.

[CDeb]

So you're saying the GOP are liars?

On that issue, yes.

They promise to cut spending but rarely do?

Yes.

Actually, there are a good amount of liars in all of politics.

Yes.

[TheNiche]

On NPR this morning they were speaking to the woman who is world markets editor of the Financial Times, talking from Davos about the mood there-- where unlike in the US, is frustrated by siginificant concern for inflation (specifically food and energy, which we of course don't count in our infllation numbers) and why the European Central Bank won't cut rates.

Food and energy (and energy's secondary effects) are measured as components of inflation. Some reporters exclude energy in particular as it is so volatile and its inclusion in the general number dilutes the general number's meaning, depending on the context in which the data is being cited.

[TheNiche]

To be fair, both sides spend like drunken sailors. The difference is that Republicans simply refuse to pay for it, while Democrats hike taxes to pay for their shopping sprees. Wouldn't it be a nice change of pace to debate which is better, buying on credit, or pay as you go, instead of the intellectually dishonest crap that we hear today?

It isn't that Republicans refuse to pay for it...clearly paychecks to Federal employees continue to be cut. The difference between parties seems to be that Republicans finance our government expenditures with debt, while Democrats finance it with equity.

On this tendency, Republicans have a distinct edge. By financing with high levels of debt, backed by the collective productive capacity and relative political stability of the United States, the cost of capital (i.e. interest rates) is much reduced. If taxpayers must immediately finance government spending on a household-by-household basis, nobody will be able to get as good a deal, whether dirt poor, middle class, or uber wealthy.

[lockmat]

I think we'd be MUCH better off if it weren't for Pork Barreling

[crunchtastic]

Food and energy (and energy's secondary effects) are measured as components of inflation. Some reporters exclude energy in particular as it is so volatile and its inclusion in the general number dilutes the general number's meaning, depending on the context in which the data is being cited.

Yes and no. There is a difference between CPI and core, and which of those numbers are routinely backed out by central bankers for purposes of monetary policy, which was my point rather than reporting, per se.

This is from 2 years ago, but is rather approporiate for today's disucssion:

http://bigpicture.typepad.com/comments/200...istory_of_.html

In any event, I highly recommend The Big Picture for this kind of stuff, as well as The Oil Drum for energy topics.

[crunchtastic]

I think we'd be MUCH better off if it weren't for Pork Barreling

Yup.

I got my check for my Homeland Security project, didn't you?

We might as well let Lockheed Martin, et al, just print money when they want some.

[TheNiche]

Yes and no. There is a difference between CPI and core, and which of those numbers are routinely backed out by central bankers for purposes of monetary policy, which was my point rather than reporting, per se.

Monetary policymakers have available to them and are cognizant of all components of CPI, including food and energy. The article seems to lend further support to my assertion that particular measures are more valid than others for various purposes. And I agree that the Fed is shooting blanks at the market...but to the extent that the market can't discern blanks from live ammo, it may be warranted on some level.

[BryanS]

I think we'd be MUCH better off if it weren't for Pork Barreling

...as much as I love our current President, this is fairly innovative:

The president planned to issue an executive order Tuesday ordering federal agencies to ignore earmarks that aren't explicitly enacted into law, erasing a common practice in which lawmakers' projects are outlined in nonbinding documents that accompany legislation.

http://www.cbsnews.com/stories/2008/01/28/politics/main3761509.shtml?source=mostpop_story

Since the line item veto has been ruled unconstitutional... The Executive branch cannot mark out specific items from a bill; however, it is within the Executive branch's authority to preside and manage the expenditure of funds, in the Executive... so... the pork $$$ get sent to federal agencies, but instead of burning through the money, the money sits, unspent and dare I say: "hog tied." As such, pork projects can't add to the national debt in this case... at least that is how I understand it...

[BryanS]

It isn't that Republicans refuse to pay for it...clearly paychecks to Federal employees continue to be cut. The difference between parties seems to be that Republicans finance our government expenditures with debt, while Democrats finance it with equity.

On this tendency, Republicans have a distinct edge. By financing with high levels of debt, backed by the collective productive capacity and relative political stability of the United States, the cost of capital (i.e. interest rates) is much reduced. If taxpayers must immediately finance government spending on a household-by-household basis, nobody will be able to get as good a deal, whether dirt poor, middle class, or uber wealthy.

High levels of debt, and the amount of money we have to print to finance it, is toxic (inflation). The reality is that both parities finance government expenditures with debt and there is no other practical way to do it. I would give the edge to the party (or other leaders) that can actually bring sanity to the United States Federal Budget (i.e. produce a balanced budget, live within our means.)

[crunchtastic]

High levels of debt, and the amount of money we have to print to finance it, is toxic (inflation). The reality is that both parities finance government expenditures with debt and there is no other practical way to do it. I would give the edge to the party (or other leaders) that can actually bring sanity to the United States Federal Budget (i.e. produce a balanced budget, live within our means.)

Understanding that you won't be fighting any wars like that?

I find that most conservatives aren't really isolationists.

[RedScare]

I find that most conservatives aren't really isolationists.

I find that most conservatives are not really conservatives.

[BryanS]

Understanding that you won't be fighting any wars like that?

I find that most conservatives aren't really isolationists.

Well... maybe if we break our go-to-war habits, we wouldn't have to worry about that, would we? (that's a whole other thread - I say this tongue-in-cheek). You do bring a good point though. We could go so broke, that we may not even be able to defend ourselves in perhaps the not too distant future, or at least be able to pay for it. Our national credit card has a limit. As soon as we loose the ability to service our debt, we will be screwed anyway.

[TheNiche]

High levels of debt, and the amount of money we have to print to finance it, is toxic (inflation). The reality is that both parities finance government expenditures with debt and there is no other practical way to do it. I would give the edge to the party (or other leaders) that can actually bring sanity to the United States Federal Budget (i.e. produce a balanced budget, live within our means.)

There is some seigniorage, but we aren't in a crisis situation. If you think about it, the M2 money supply has grown at a 5.9% rate over the last year (and M1, which is the only thing that the U.S. government actually has control over has actually contracted!) and inflation has been well below that, reflecting a rapid expansion of GDP, all while interest rates (contrary to what the fisher effect would suggest) are really quite low...and not only because the Fed is influencing them but because foreign investment is actually accelerating. Things could be a whole lot worse, and if it were any other country than the U.S., probably would be.

I don't give an edge to sane politicians. It is rightly counterintuitive, IMO.

[BryanS]

...There is some seigniorage, but we aren't in a crisis situation...

...yet. I do think that the Fed is laying the ground work for a future one though. Based on preliminary 4Q GDP results:

"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.8 percent in the fourth quarter, compared with an increase of 1.8 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 2.5 percent in the fourth quarter, compared with an increase of 1.9 percent in the third."

Price index for gross domestic purchases: 1.8% to 3.8% => 111% increase

Excluding food and energy (core): 1.9% to 2.5% => 32% increase

At the rate we are going now, the gross domestic price index, on an annual basis, would move up by more than 400%. The "Core" index, up more than 120%, annually. We'll have to see how this quarter plays out, but I think we could be headed from some major problems down the road.

And what has the Fed done? Lowered interest rates, which only compounds the problem. All the Fed does is chase short-term credit fixes vs. its more important job of keeping inflation under control.

[memebag]

And what has the Fed done? Lowered interest rates, which only compounds the problem. All the Fed does is chase short-term credit fixes vs. its more important job of keeping inflation under control.

Inflation would help a lot of people out right now. If debtors ever understood how that worked, the world would change dramatically.

[BryanS]

Inflation would help a lot of people out right now. If debtors ever understood how that worked, the world would change dramatically.

...please explain...

[Jeebus]

Instead of just refinancing the home they were already in and get it at a better rate that they were already able to manage, they get in something with double the payment, because the interest rate was so alluring, and then they get in over their heads and lose it all.

I'm pretty sure most of the foreclosures are coming from first-time home owners. They bought the ARM scam hook, line, and sinker.

[TheNiche]

...please explain...

Memebag is kind of right, but not entirely.

Inflation is a tricky little thing, and the effects are dependent upon the cause. If the money supply is increased, everything costs more and everybody gets paid more, yet the outstanding principal on debt remains fixed. In that case, the amount of money that has been borrowed relative to the amount that is made decreases; even though people on ARMs will see higher interest rates (called the Fischer Effect), they still benefit in between adjustments. M2 is increasing at a little over 5%, so that's part of it.

The bigger inflationary effects, however, are a result of commodity prices and an imbalance of foreign trade. That's something that hurts debtors because it doesn't cause wages to go up at all and makes it harder to continue consumption at the rate that they'd gotten used to. That kind of trend is hurtful to debtors, and it's also a contributor to the current effect.

All in all, the two counteracting causes of inflation seem to be cancelling one another out at the moment.

[cottonmather0]

If the government would stay out of it and let the market fix itself, which is completely incompatible with our political system, the economy would fix itself. We NEED a recession. We NEED some unemployment. We NEED higher interest rates. The economy needs to retract and repair itself - get back to equilibrium with Europe and Asia, George Soros is often a loon but he's right in this instance - and get rid of some inefficiencies, but no one in the government who wants to get reelected (ie everyone) can afford to ever let that happen. The government's tinkering is just like taking cold medicine when you're sick - you might feel better but you're still stick and only time can cure the common cold. If you just take medicine and keep pushing yourself it takes longer to get better.

But I am rambling.

With regards to the OP - lenders are not necessarily to blame for people not paying their bills. For the longest time, politicians complained that lenders and financial institutions "discriminated" by not extending credit to certain classes of people (ie "fairness in lending"). So the banks did and now they're getting burned and now the politicians are complaining that the banks were not responsible enough.

Subprime borrowers are "subprime" for a reason - they don't pay their bills, or, at least, they are statistically at a higher risk for not paying their bills. Everyone who is blaming the banks seems to be forgetting that simple fact. That's where blame is due.

[RedScare]

With regards to the OP - lenders are not necessarily to blame for people not paying their bills. For the longest time, politicians complained that lenders and financial institutions "discriminated" by not extending credit to certain classes of people (ie "fairness in lending"). So the banks did and now they're getting burned and now the politicians are complaining that the banks were not responsible enough.

Subprime borrowers are "subprime" for a reason - they don't pay their bills, or, at least, they are statistically at a higher risk for not paying their bills. Everyone who is blaming the banks seems to be forgetting that simple fact. That's where blame is due.

Fairness in lending is not responsible for this bust. Federal law only requires that lending standards be the same for all groups, not LOW for all groups. The lenders figured they could make a killing lending at higher rates to risky borrowers. They also counted on housing prices continuing to escalate, allowing problem borrowers to refi or sell out. They took it too far, and the market price dropped, a double whammy that ensured a collapse.

Federal lending rules did not cause this. Greed did.

[cottonmather0]

Fairness in lending is not responsible for this bust. Federal law only requires that lending standards be the same for all groups, not LOW for all groups. The lenders figured they could make a killing lending at higher rates to risky borrowers. They also counted on housing prices continuing to escalate, allowing problem borrowers to refi or sell out. They took it too far, and the market price dropped, a double whammy that ensured a collapse.

Federal lending rules did not cause this. Greed did.

Red, you missed my point. I'm not saying that the federal lending rules caused this, I am saying that the politicians are speaking out of both sides of their mouth when they castigate the banks for not doing more for certain communities and groups and then turn around and criticize them for doing so when things go south.

[RedScare]

Red, you missed my point. I'm not saying that the federal lending rules caused this, I am saying that the politicians are speaking out of both sides of their mouth when they castigate the banks for not doing more for certain communities and groups and then turn around and criticize them for doing so when things go south.

I think you are missing my point. Whatever the politicians are saying has nothing whatsoever to do with fair lending laws, which was explicitly stated in your first post. In fact, your even suggesting such suggests to me that you do not understand the basis of the mortgage crisis whatsoever. It is a worldwide crisis, not US based. And, frankly, the root of the problem is not just borrowers or lenders at all, but wealthy investors and hedge fund brokers who refused to recognize their risks, even when it stared them in the face.. If they had not bought these subprime mortgages, there would have been no mortgages available for subprime borrowers to default on.

You should pull out your contract law book. There is no contract if two parties do not agree. As I said way earlier in this thread, there is plenty of blame to go around. But, though it is often convenient to blame everything on the greedy poor, it does not become a crisis until the greedy rich become involved. The poor simply do not have the clout to cause more than a few hundred thousand in damage. It takes the rich to make it a trillion dollar mess.

[Subdude]

If the government would stay out of it and let the market fix itself, which is completely incompatible with our political system, the economy would fix itself. We NEED a recession. We NEED some unemployment. We NEED higher interest rates.

Economics as bitter medicine. That was the approach Herbert Hoover took in ignoring the onset of the Great Depression.

[memebag]

...please explain...

Inflation is like Robin Hood. It steals from the rich and gives to the poor. If you have extra money, enough to invest, then inflation devalues the return from that investment. If the interest rate is below the inflation rate, you're loosing money.

If you don't have extra money, like most US citizens, you're in debt. Inflation lets you pay off debt with inflated dollars, which is smart if the interest on the debt is less than the inflation rate.

That's why inflation is seen as such a tremendous threat by people with surplus money. It's worse than Marxism from their perspective, because it actually works.

[TheNiche]

Inflation is like Robin Hood. It steals from the rich and gives to the poor. If you have extra money, enough to invest, then inflation devalues the return from that investment. If the interest rate is below the inflation rate, you're loosing money.

If you don't have extra money, like most US citizens, you're in debt. Inflation lets you pay off debt with inflated dollars, which is smart if the interest on the debt is less than the inflation rate.

That's why inflation is seen as such a tremendous threat by people with surplus money. It's worse than Marxism from their perspective, because it actually works.

See my earlier post first. Outcomes vary depending upon the cause but IN NO WAY IS THIS LIKE ROBIN HOOD!

There are three patterns that conspire against the poor in inflationary times (even when its caused by an increase in the money supply):

1) the wealth of a household has a very high positive correlation with the amount of debt that the household carries, so debt is disproportionately concentrated among the wealthy households, corporations, and governments;

2) the proportion of a household's debt that is revolving (i.e. credit cards) is highly negatively correlated with the household's wealth, and the interest rates of revolving credit reset frequently so as to account for the effect of inflation, meaning that revolving credit does not diminish in value relative to the debtor's income;

3) the greater the net worth of the debtor, the more leverage a creditor will allow, which means that wealthier folks can borrow far in excess of what they earn on account of what they already have can act as collateral;

4) The elderly living on annuities such as pensions have to contend with higher prices without correspondingly higher incomes; and

5) Expectations of further inflation lead people to convert free cash into physical goods. The wealthy tend to be very sophisticated in countering this, investing in precious metals and a basket of other commodities, as well as equity securities which adjust to match inflation automatically. The poor tend to buy depreciable consumer goods sooner rather than later.

The bottom line: Inflation puts disproportionate pressure upon the poorest members of society.

[memebag]

See my earlier post first. Outcomes vary depending upon the cause but IN NO WAY IS THIS LIKE ROBIN HOOD!

There are three patterns that conspire against the poor in inflationary times (even when its caused by an increase in the money supply):

1) the wealth of a household has a very high positive correlation with the amount of debt that the household carries, so debt is disproportionately concentrated among the wealthy households, corporations, and governments;

So the people with the most money owe the most money? I find that very hard to comprehend. How can you label someone wealthy if he has more debt than a poor person?

2) the proportion of a household's debt that is revolving (i.e. credit cards) is highly negatively correlated with the household's wealth, and the interest rates of revolving credit reset frequently so as to account for the effect of inflation, meaning that revolving credit does not diminish in value relative to the debtor's income;

But those interest rates are limited by usury laws. Inflation isn't.

The late 70s was a perfect example of this. Smart debtors realized that assuming debt at seemingly high interest rates made perfect sense because inflation was continually devaluing the dollars used to pay it off.

[BryanS]

So the people with the most money owe the most money? I find that very hard to comprehend. How can you label someone wealthy if he has more debt than a poor person?

But those interest rates are limited by usury laws. Inflation isn't.

The late 70s was a perfect example of this. Smart debtors realized that assuming debt at seemingly high interest rates made perfect sense because inflation was continually devaluing the dollars used to pay it off.

You both make excellent points... Taken to the extreme, let's not just embrace inflation, let's embrace hyperinflation. If we can get the Fed to print money at the speed of light, everything we buy, consume, and our salaries would sky rocket. We could all be millionaires. That will let someone who, say, over 10 years who has accumulated large amounts of debt, to able to pay off that debt, almost instantly. We could pay off our 200+ year old national debt in a year. You're using inflated dollars to pay off non-inflated debt. Yippee!!! ... but the more sinister problem is... that person, as well as most working people in this country, have 401K plans. So a person who has built up a nest egg over 30 years and is about to retire suddenly finds out that his savings are now basically worthless. So a person spent their entire working career, saving for retirement, to get out of the rat race, only to find out they cannot stop working until they die. Who wants that? People with "surplus money" don't want to see their investments erode due to inflation, but neither do hard working "poor people" who have saved/invested for their future, for perhaps decades. So in this case, its the hard-working "poor" (and middle class) person who would have much more to lose to inflation pressures than the "rich" person who can more readily absorb such losses. Inflation should roughly match population growth, so I am told. Any more beyond that, and everybody has a real problem on their hands.

Wealthy people are not those who have a lot of money. They are people who have enough investments/savings such that they can elect to cut off their income, quit their job, and live on those savings/investments over, say, a 10 year period (by The Millionaire Next Door standards). So a janitor who makes 30K a year, but has a 300K in savings/investments is "wealthy." A doctor who makes 500K year, but has no savings and spends everything he makes, is "poor." In this scenario, if inflation takes off, the low-income, high net worth janitor will be taking it in the shorts vs. the save-nothing, low net worth doctor, whose salary is in the upper 5% of our population, would basically have nothing to lose (vs. the other 95% of us who have to save/invest wisely for our future.)

[memebag]

You both make excellent points... Taken to the extreme, let's not just embrace inflation, let's embrace hyperinflation. If we can get the Fed to print money at the speed of light, everything we buy, consume, and our salaries would sky rocket. We could all be millionaires. That will let someone who, say, over 10 years who has accumulated large amounts of debt, to able to pay off that debt, almost instantly. We could pay off our 200+ year old national debt in a year. You're using inflated dollars to pay off non-inflated debt. Yippee!!! ... but the more sinister problem is... that person, as well as most working people in this country, have 401K plans. So a person who has built up a nest egg over 30 years and is about to retire suddenly finds out that his savings are now basically worthless. So a person spent their entire working career, saving for retirement, to get out of the rat race, only to find out they cannot stop working until they die. Who wants that? People with "surplus money" don't want to see their investments erode due to inflation, but neither do hard working "poor people" who have saved/invested for their future, for perhaps decades. So in this case, its the hard-working "poor" (and middle class) person who would have much more to lose to inflation pressures than the "rich" person who can more readily absorb such losses. Inflation should roughly match population growth, so I am told. Any more beyond that, and everybody has a real problem on their hands.

Inflation punishes lenders (that includes investors and savers) and rewards borrowers. The wealthy invest orders of magnitude more than the poor.

Wealthy people are not those who have a lot of money. They are people who have enough investments/savings such that they can elect to cut off their income, quit their job, and live on those savings/investments over, say, a 10 year period (by The Millionaire Next Door standards). So a janitor who makes 30K a year, but has a 300K in savings/investments is "wealthy." A doctor who makes 500K year, but has no savings and spends everything he makes, is "poor."

I don't see how your first sentence jibes with the others. Investments cost money. Wealthy people have a lot of money, which they tend to invest.

In this scenario, if inflation takes off, the low-income, high net worth janitor will be taking it in the shorts vs. the save-nothing, low net worth doctor, whose salary is in the upper 5% of our population, would basically have nothing to lose (vs. the other 95% of us who have to save/invest wisely for our future.)

I think if you look at the debt load of the US population, you'll find those percentages reversed. Most US citizens owe much more than they can ever afford to lend.

[BryanS]

Inflation punishes lenders (that includes investors and savers) and rewards borrowers. The wealthy invest orders of magnitude more than the poor.

I don't see how your first sentence jibes with the others. Investments cost money. Wealthy people have a lot of money, which they tend to invest.

I think if you look at the debt load of the US population, you'll find those percentages reversed. Most US citizens owe much more than they can ever afford to lend.

My main point is... we are all saving and investing for our future (or should be). Even with high debt loads, and tons of credit card debt, most people who have a job, have a retirement account. We're not saving enough for our retirement, but what we do save, we can't afford to lose to high inflation demands. By your definition, wealthy people can invest "a lot of money," probably in a month, what a "poor person" would have to painfully work years, even decades to match. At the end of the day - everybody is in the game, but the stakes are much higher for the "poor person" because they have years of savings/investments on the table, at risk... I say the upper 5% of high income wage earners are at less risk, because if they changed their lifestyles (those who don't save for their future), they could quickly position themselves for a better future vs. the majority of us who have to painfully save on our meager salaries, for decades.

Regarding "wealth" ... I was trying to make the point that it isn't high cash flows or high income that matters. It's a person's net worth (and the ability to live off of it) in relation to their current income (in the absence of it) that matters. So you don't have to focus as much on the whole rich vs. poor argument and who has higher debt, is better off, has more money, investment objectives, etc.

I really don't know too many people that would say that high inflationary periods (e.g. of the late 1970's) are "a good thing" for the economy, as a whole. Here is someone who lived through that period, and sees us headed back to that era:

http://www.youtube.com/watch?v=U3N7PU9ohMI