Moral Culpability And The Crisis: Our Least Sexy Title Ever

Ever since we experienced the highly enjoyable financial panic of 2008, people have been casting about for someone to blame. And why not? Every great crisis needs an equally great bad guy. It's fun, and it increases the chance that your abject misery will eventually get optioned into movie rights.

But there's one bad guy that's proving surprisingly popular: The homebuyers themselves. Why not? They were the irresponsible borrowers who took on too much debt, far too soon, and sent the economy into crisis. This is America, after all. If you have to hate someone, you might as well hate the common man.

We're probably behind the ball on this one, seeing as how the recession ended while we were suffering a particularly bad hangover during the entire month of June, 2009, so we should probably let this one go. But we're immodest fellows here at the Strawman Blogger, so late or not, we're going to put this myth to rest.

Don't worry. You can thank us later.

First, let's get a few things out of the way. Homeowners assumed too much debt in the crisis. That much is obvious:

And it also had very predictable consequences:

But participating in a crisis doesn't make you culpable for it. When you buy a home, you work with a team of people: Real estate agents who help you shop for a home, lenders who finance it, and industry experts who provide advice and perspective along the way. Each one earns money when you buy a home. And each one earns more money the more home you buy.

And, during the worst housing bubble in American history, each one argued that a bubble wasn't possible.

Realtors fed that delusion. In 2005, David Lereah, Chief Economist and Senior VP for the National Association of Realtors (NAR), argued that, "[t]here is virtually no risk of a national housing price bubble based on the fundamental demand for housing." In 2006, he predicted a "soft landing for the housing markets." Even as late as October, 2007, the NAR continued to peddle the line that, "[t]he speculative excesses have been removed from the market and home sales are returning to fundamentally health levels."

Nor were they alone. On August 18, 2007, celebrity columnist Ben Stein appeared on Cavuto on Business to state that, "[t]he credit crunch is way overblown ... The subprime problem is a problem, but it's a tiny problem in the context of this economy ... It's a buying opportunity, especially for the financials, maybe like I've never seen before in my entire life.

Financial firms were not immune to the excess. Abetted by the ratings agencies, which catastrophically failed to recognize the growing risks in the mortgage market, large investment banks were net long in housing until the bitter end. Even the previously responsible JPMorgan Chase, which had long avoided the collateralized debt obligation business, was eventually burned by the infamous Magnetar trade, losing $880 million on the Squared CDO alone.

But perhaps the most memorable remark came from then-Fed Chairman Alan Greenspan, who stated, "Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets ... Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications."

Homeowners took on too much debt. More than they could afford. But they didn't do it alone. They did it on the advice of their realtors, who assured them that housing was a good investment. They did it with loans from their banks, who were eager to finance mortgages in any way possible. They did so with liquidity provided by Wall Street, who's addiction to mortgage securitization fueled the crisis. And they did it on the advice and encouragement of financial experts and the Federal Reserve itself.

Each of these actors were experts in their own field. Should home buyers have ignored their advice? Perhaps. But arguing that means admitting that the entire mortgage industry was engaged in an exercise of bad faith - providing bad advice to good people, in hopes of turning a profit.

So who was at fault, you ask? Everyone. And no one. That's the trouble with bubbles. They work because they're so damn convincing. If no one believed in them, they wouldn't happen in the first place.

Well. That, and the bankers, of course.

We Could Do Something Stupider Than This, But We Wouldn't Want To Try

So even reasonable and adult Americans have lately been making sounds about refusing to raise the debt ceiling. Not at least without some smidgen of compromise, which will no doubt involve putting poor people in ankle shackles and driving them through the streets.

Honestly, this is so monumentally stupid that we actually be surprised, if we weren't such a cynical and worldly fellow. Let us be utterly clear on this point. Refusing to raise the debt ceiling doesn't change a single thing about our prolifigate, irresponsible, and altogether ill-considered spending. It just means that we refuse to pay the bills.

To put it another way: If the United States of America was you, refusing to raise the debt ceiling would be like refusing to pay your mortgage. I wonder how that would turn out?

Why is it that nominally intelligent people can't grasp this? If you want to do something about spending, cut spending. If you want to raise more in taxes, raise taxes. What you should NOT do, under any circumstances, is willingly default on the national debt simply because you want Medicare benefits issued in chickens.

This is not a bloody game. In 2008, led by a serious mispricing of extant market risk, the mortgage securities market suffered a massive panic and commisserate flight to safety, which crushed security prices and drove down Treasury yields. The inability of the market to supply a co-equal supply of new safe assets led to a collapse in aggregate demand that, along with global deleverging, threw the economy into a massive recession.

That's what happens when investors doubt the safety of MBSs and CDOs. Imagine what happens when the United States regularly, and for no reason other than it's simple bloodymindedness, starts defaulting on it's debt.

Pah!

Obviously, it's been quiet times at the SMB. Again.

We'll kick things off in short order, but until then, play with this. It's a budget calculator that let's you tackle the intractable problem of America's debt.

To make it more interesting, the SMB lays down a challenge - respond by posting your best effort in the comments section. We won't burden you with any rules, but we do suggest you be realistic. If, for example, you decide to take the axe to Medicare, kindly explain how you'll convince Congress to cut a program that's supported by 70% of the population.

It should be instructive, if nothing else.

HT: Matt Yglesias

The Idiocy Of The Common Man

If you are something
don't ask for nothing!
If you are nothing,
don't ask for something!
- Arcade Fire, Neighborhood
As regular readers of this blog will note, the SMB has always tried to be the voice of reason in the noisy debate about the American deficit.

We're very fond of this role. It's not terribly difficult, doesn't involve a great deal of strenous research, and allows us frequent use of the term "dangerous idiots" along with plenty of time to drink red wine.

So we found this survey interesting. Follow along as we quote Ryan Avent, quoting Matthew Yglesias, paraphrasing the survey in question:

In this economy, voters are wary of raising taxes, even if the revenue raised goes to something they deem important, like paying down the deficit. A majority (51 percent) say that even though the deficit is a big problem, we should not raise taxes to bring it down, while only 43 percent say that we might have to raise taxes to reduce the deficit. This rejection is even more acute among the least educated and lowest income voters, who are being disproportionately hurt by the recession and as such are even more strident in their rejection of a new tax to pay down the deficit.

And by an even wider 2:1 margin, voters reject cuts in Social Security, Medicare or defense spending to bring the deficit down (61 to 30 percent). With nearly three-quarters of the federal budget devoted to these items, exempting them from cuts leaves little room to make realistic progress on deficit reduction...

Nearly half of voters think the deficit can be reduced without real cost to entitlements, with 48 percent believing there is enough waste and inefficiency in government spending for the deficit to be reduced through spending cuts while keeping health care, Social Security, unemployment benefits and other services from being hurt.

SweetfancyfuckingMoses. Pull yourselves together, people. Even in a country with the level of taste necessary to embrace James Patterson, William Kristol, and the musical stylings of Wham!, this is embarrassing. You can raise taxes. You can cut entitlement programs. But you cannot tightly shut your eyes, click your heels together, and wish aloud for the Magical Government Waste Fairy to alight on the CBO Projections with the gift of $1.4 trillion dollars of government waste a year.

Grow. Up.

In Which We Solve The American Debt Crisis For All Eternity – Part I

There must be some kinda way outta here,
Said the Joker to the Thief
There’s too much confusion here,
I can’t get no relief – Bob Dylan

Spending freezes. Monetary tightening. My credit card balance. Yes, the debt crisis is everywhere these days, to the point where your wandering correspondent can’t safely travel the blogosphere without tripping over threats to raise the Fed fund rate.

Originally, I had hoped to solve this problem in a single blog post. But it seems you’ve gotten yourself in quite the mess. Even my venerable intellect would be taxed to clean it up in a mere seven hundred words.

So instead we’ll take it easy: follow-through is important here. From time to time these posts will crop up, and I’ll explain the basics of our debt problem – its characteristics, its management, its cyclical and structural issues, until, much farther down the line, we’ll arrive at the obvious solution. All written in prose so clear and lucid that even a peasant like you can understand it.

But first, we’ll have to clear up this strange confusion between the debt and the deficit.

Debt and Deficit – Two Entirely Different Ways To Screw Yourself

Details, details. The debt is simple – it’s the measure of the outstanding liabilities of the U.S. government. Like all debt, its value rests on the expectation of timely payments from the borrower. It takes many forms: treasury bills, notes, and bonds, TIPS, and assorted other government securities. Indeed, it is the management and sale of these securities that forms an important part of our monetary policy.

The debt is also, in nominal terms, quite large.

The Deficit – Some Problems Find You

The deficit, on the other hand, is not a current obligation. Rather, it’s the difference between the money our government acquires and the money it spends. It is the rate at which we add money to the debt.

Now, those of you who have been poorly educated, are of weak constitution, or who cannot be ballsed to keep up with current events, will be troubled by this. “Tis Obama!” you cry. “And his terrible, socialist, no good health care policy. Or perhaps the bailouts.” Which brings us quite conveniently to our first important point:

Our First Important Point

Ponder, if you will, this graph:



Here, we find something very clearly demonstrated. That there a two ways to run a deficit – and, in evils, they are worlds apart.

Lesson The First – The Cyclical Deficit

The cyclical deficit. The hurricane in otherwise peaceful financial waters. Like a seasonal storm, it swoops down among our nation’s finances to wreak untold havoc. Like a seasonal storm, it passes quickly, leaving nary a trace behind.

In normal times, the government raises money through taxes, and spends it in the budget. During a recession, tax revenue falls, while our spending remains the same. A deficit ensues.

Falling revenue alone is enough to cause a deficit. But of course our government is not content with a merely passive role, so they engage in assorted types of expensive action designed to bring the economy back to health. And the deficit increases.

Once the economy is chugging nicely along again, the cyclical deficit all but disappears. Tax revenues go up, spending drops back to it’s original level, and cyclical factors – like the much maligned fiscal stimulus and the Troubled Asset Relief program – fade into tiny lines in the future horizon.

Lesson The Second – The Structural Deficit

The structural deficit is an altogether different animal, nasty and full of venom. A structural deficit is not a product of a recession. It is always there. It is simply a feature of the things we cannot afford, and the things we refuse to pay for.

The cyclical deficit ebbs and flow. The structural deficit does not. Like cancer, it just grows and grows. An increasing part of it is caused by health care costs, which will absorb 49% our GDP by 2082.

It’s also caused by programs that have no tax offset. Since raising taxes is so politically unpopular, we stopped doing it – between 2000 and 2008, we simply put everything on the credit card. The wars in Iraq and Afghanistan, the Bush tax cuts, the 2003 Medicare Part D Prescription Drug expansion – all of these were enacted without a single offsetting piece of revenue, in the midst of an already growing deficit.

Truly, people. How the current Republican party became a model of fiscal prudence is insulting in its audacity. They passed a massive, budget busting tax cut that primarily benefited the richest Americans, along with an expansion to Medicare that cost $1 trillion dollars, and did not bother to come up with a single dime.

In closing: What have we learned?

1) When we fix our debt problem, we cannot focus on cyclical factors. We must concentrate on the structural problems that threaten our solvency.

2) Using quick, back of the envelope calculations, the 10-year financial impact of both the Troubled Asset Relief Program and the fiscal stimulus have exactly this much impact: F@%&-all.

3) When passing the largest tax cut in American history, it’s best to find a way to pay for it, first.