Article Most Wanted: financial crisis

WHAT BROKE? THE ROOT CAUSES OF THE CRISIS

Tukang Warta 0 cause of the crisis, economy, financial crisis 12/16/2014 01:00:00 AM

<h3>
Background of Financial Crisis</h3>
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The financial crisis that is wreaking havoc in financial markets in the U.S. and across the world has its origins in an asset price bubble that interacted with new kinds of financial innovations which masked risk,with companies which failed to follow their own risk management procedures, and with regulators and supervisors who failed to restrain excessive taking. We start by giving the factors that we judge contributed to the bubble in home prices and its interaction with financial markets.2 We then turn our attention to the issue of increases in capital requirements for financial institutions. Lack of capital, or excess leverage, was only one of the culprits in the disaster; however, raising capital requirements is an important step towards a more stable financial sector. 
 
<h3>
The Causes of the Crisis</h3>
1. Home prices were expected to keep rising 
Nominal or dollar prices for residential housing had, on average, followed an almost unbroken upward path over the decades leading up to the financial crisis. Housing price declines had hit specific geographic 
regions, but these were local or regional events and did not overcome the rising certainty in the minds of many people that there was little or no risk of sustained price declines in a well-diversified portfolio of assets underwritten by the value of residential housing. 
 
2. Long and short interest rates were low 
The combination of low interest rates sustained by the Federal Reserve after the 2001 recession and the availability of large public and private pools of funds in the global capital market ensured that mortgage interest rates would be low, increasing the demand for housing. Low interest rates also fueled a desire for yield among investors, encouraging them to take on greater risks. 
 3. Housing demand built on itself to create a bubble in prices 
Declining interest rates and the greater availability of mortgages were key drivers of the growth in housing demand, but demand can also build on itself. As people witness price increases year after year, and witness those around them investing in homes, a “contagion” of expectations of future price increases can (and did) form and perpetuate price increases. Buying a house, buying a bigger house, or adding on to an existing house not only provided people with more (tax-advantaged) consumption, i.e., the benefit of having more space or amenities; it also provided an investment with a great expected return. In the late 1990s, investing in stocks, especially technology stocks, became the rage and there was a bubble in 
equities. Once the technology bubble burst in 2000, however, the alternative investment of buying a home or a second home became even more attractive. 
 
4. Shifting types of lending and the erosion of standards 
As the economy recovered from the 2001 recession, the expansion of lending was in conformable and other prime mortgages; but as the boom proceeded, a larger fraction of the lending was for subprime, Alt-A, and home equity lending. In 2001, there was US$2.2 trillion worth of mortgage originations, with 65% of these in the form of conventional conforming loans as well as Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans. An additional 20% were prime jumbo mortgages, issued to those with good credit buying houses that were too expensive to be conforming, meaning that 85% of originated loans in 2001 were of prime quality. There was a huge expansion of mortgage lending over the next couple of years, and in 2003 nearly US$4 trillion worth of loans was issued, but the share of prime mortgages remained steady at 85% as the volume of conformable mortgages soared. 
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The total volume of mortgage lending dropped after 2003, to around US$3 trillion a year in 2004–2006, but the share of subprime and home equity lending expanded greatly. Prime mortgages dropped to 64% of the total in 2004, 56% in 2005, and 52% in 2006, meaning that nearly half of the mortgage originations in 2006 were subprime, Alt-A, or home equity loans. It is clear that there was a significant change in lending patterns apparent in the composition of loans going back to 2004. In addition, there was an expansion of loans to lower-income, higher-credit-risk families, including from the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as they sought to expand home ownership for the benefits it brings in terms of sustaining neighborhoods. 
 
Lending standards deteriorated around 2004 or 2005. Families that lacked the income and down payment to buy a house under the terms of a conforming mortgage were encouraged to take out a mortgage that had a very high loan-to-value ratio, perhaps as high as 100% (often using second or even third mortgages). This meant that they started with no initial equity, and thus no true financial stake, in the house. 
 
As it became easier to borrow using a home as collateral and as home prices continued to rise, families started using their homes as an ATM, refinancing and taking out any equity that had built up. Americans were tapping into the rising wealth they had in their homes in order to finance consumption. Greenspan and Kennedy (2007) estimate that homeowners extracted US$743.7 billion in net equity from their homes at the peak of the housing boom in 2005, up from US$229.6 billion in 2000 and US$74.2 billion in 1991. The increase in house prices allowed a borrowing spree. 
 5. Economic incentives in the housing and mortgage origination markets 
In many U.S. states, it is possible to repay a mortgage early without penalty. This option meant that households were encouraged to take out mortgages with terms that looked good in the short run, but were unfavorable in future years. They expected to refinance later on better terms, and without incurring a prepayment penalty. 
 
The most perverse incentive in the mortgage origination market, though, was the ability of originators to immediately sell a completed loan off their books to another financial institution. Most mortgage loans were originated by specialists and brokers who did not provide the funding directly. One institution provided the initial funding of the mortgage but then quickly sold it off to another financial institution, where it was either held on a balance sheet or packaged with other mortgages to be securitized (see below).3 The key issue here is that the institution which originated the loan had little or no financial incentive to make sure the loan was a good one. Most brokers and specialists are paid based on the volume of loans they process; therefore, they had an incentive to keep the pace of borrowing rolling along, even if that meant making riskier and riskier loans. 
 
6. Securitization and the funding of the housing boom 
Securitization was seen as a solution to the problems with the old savings and loan (S&L) model, as it freed mortgage lenders from the liquidity constraint of their balance sheets. Under the old system, lenders could only make a limited number of loans based on the size of their balance sheet. 
 
The new system allowed lenders to sell off loans to a third party, take it off their books, and use that money to make even more loans. The GSEs, notably Fannie Mae and Freddie Mac, were created by the federal government in 1938 and 1970, respectively, to perform precisely this function: the GSEs bought mortgage loans that met certain conditions (called “conforming loans”) from banks in order to facilitate mortgage lending and (theoretically) lower mortgage interest rates. 
 
The GSEs could then either sell the mortgage-backed securities (MBS) on the open market, or they could issue their own bonds, use the revenue to buy the MBS, and hold them on their own books. They earned 
a profit because they earned a higher interest return on the mortgage assets than they paid on the bonds that they had issued. This has some similarity to the S&L model, except that Fannie Mae and Freddie Mac could hold much larger pools of mortgages that were geographically dispersed. In addition, the GSEs were seen as implicitly guaranteed by the federal government (a guarantee that has since become explicit), so they paid only a few basis points above Treasury yields on their bond issuance. This implicit government backing lowered their cost of borrowing and allowed them to inflate their balance sheets enormously. The GSEs became major participants in the mortgage market; and by 2008, Fannie Mae and Freddie Mac held or guaranteed US$5.4 trillion in mortgage debt. 
 
The GSEs were allowed to operate with very little capital, which made them very vulnerable to an increase in defaults. In addition, their problems also came from their efforts to meet the affordable housing goals set by Congress. Congress pushed them to provide more loans to low-income borrowers to justify the capital advantage they had because of the implicit federal guarantee. They did not buy subprime whole loans directly, but they bought large amounts of subprime MBS from private issuers that they then kept on their books. Indeed, the two GSEs bought between US$340 and US$660 billion in private-label subprime and Alt-A MBS from 2002 to 2007. 
 
Many have pointed to the combination of the GSEs and Congressional pressures to make loans to low-income borrowers as one of the main culprits in the financial crisis (see, for example, the comments by Peter Wallison at this conference). Moreover, some critics of the GSEs argue that these institutions were  not telling the truth about the extent of their purchases of bad loans. Offsetting this view, however, is data reported by the Federal Reserve that indicate that the foreclosure rates on the Fannie Mae and Freddie Mac mortgage portfolios are lower than the foreclosure rates on mortgage portfolios held by private sector banks. Getting to the bottom of this issue fully is a project that goes beyond the scope of this paper. 
 
this issue fully is a project that goes beyond the scope of this paper. Securitization played an increasingly important role in financing the housing boom, especially as it created assets that could be sold to overseas 
buyers. The real boom in securitization since 2001 came from subprime and Alt-A loans (Alt-A mortgage loans are made to borrowers with pretty good credit ratings but who do not provide full income and asset documentation), as the share of these loans that were securitized jumped 75% after 2001. By 2006, securitization was funding most of the mortgage loans in the lower-rated categories — the loans that are now in trouble. 
 7. More securitization and more leverage — CDOs 
Over time, the financing of mortgage-backed debt grew more complex and opaque. Not only did the market become riskier and less transparent, but it shifted into areas that were unregulated or weakly regulated. Banks, brokers, hedge funds, and other institutions utilized financial innovations to 
increase their holdings of these products; and large amounts were sold overseas, particularly to European financial institutions. Securitization has been an extremely positive innovation for credit markets; but as the securitized assets were sliced and diced and placed in off-balance-sheet entities, the increases in risk were being obscured by the complexity of the instruments. 
 
As the securitization of mortgages increasingly became an affair of the private financial sector, it spurred further innovation in products that in good times generated large profits but have also been the source of some of the biggest losses since the crisis unfolded in 2007. Collateralized debt obligations (CDOs) represented a further step into the new world of securitization that exploded after 2000. A CDO is an instrument that redistributes the underlying risks from a mortgage or other assets lying beneath it. CDO 
issuers purchased different tranches of MBS and pooled them together with other asset-backed securities (ABS). In fact, it became possible to build a highly rated CDO from a pool of assets, each one of which alone was quite risky. By giving first claim to the senior tranche and “overcollateralizing” the pool (so that a portion could default before any tranche was affected), the issuers were able to create AAACDOs even when they were starting out with pools of risky assets. The issuers worked directly with rating agencies to structure the CDO tranches, so that they could optimize the size of highly rated tranches in order to lower the funding costs of the CDOs. 
 
There is a general perception that there was “grade inflation” by the rating agencies who worked with the issuers, a perception we agree with. There were also conflicts of interest by the rating agencies who were 
advising the issuers and being paid for that advice, even as they were deciding what rating to give. There may also have been some collusion on the part of the groups buying the CDOs to raise the rating. Some financial managers are restricted by law to holding only investment-grade securities, and that means highly rated tranches. The fund managers were paid at the end of the year on the basis of the returns achieved in their funds, and the AAA CDOs carried attractive rates of return and made them look good — until the crash. 
 
8. Structured investment vehicles and off-balance-sheet entities 
One of the constraints on banks and some other institutions is that they must meet capital requirements, that is to say, they must fund a given percentage of their assets with shareholders’ capital rather than with some form of debt. Capital requirements for banks are mandated jointly by the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve. Capital requirements lower the profitability of banks, since they limit the extent to which banks can leverage any initial shareholder investment (plus accumulated retained earnings). Naturally, therefore, banks looked for ways to circumvent the requirements. The favored means of getting around these mandated capital requirements became what were known as structured investment vehicles (SIVs), an off-balance-sheet special purpose vehicle (SPV) set up by banks to hold MBS, CDOs, and other long-term institutional debt as their assets.7 By dodging capital requirements, SIVs allowed banks to leverage their holdings of these assets more than they could on their balance sheets. SIV assets reached US$400 billion in July 2007, according to Moody’s Investors Service (2008). 
 
9. Leverage and the push to short-term borrowing 
The increase in leverage over the course of the subprime bubble was widespread, spanning across many financial institutions and across many forms of instruments. Adrian and Shin (2007) illustrate the perhaps counterintuitive, but extremely important, empirical insight that when financial institutions are forced to mark to market, meaning they must assign a value to an asset based on its current market valuation, rising asset prices immediately show up on banks’ balance sheets, which increases the banks’ net worth and directly reduces their leverage ratio. 
 
Investment banks were not supervised like deposit-taking commercial banks and did not have the same capital requirements; thus, they were able to increase leverage to a greater extent. Investment banks were also not subject to the regulatory restrictions that accompany the capital requirements. Institutions such as Bear Stearns and Lehman Brothers borrowed at very short term and held risky longer-term assets, with low levels of capital or reserves to cover changing market conditions. Greenlaw et al. (2008) calculate that, while commercial banks are on average leveraged at 9.8:1, brokers/dealers and hedge funds are leveraged at nearly 32:1 (the GSEs were leveraged at 24:1 even though they were regulated). 
 
One of the favorite instruments of short-term borrowing for investment banks became the overnight repurchase agreement or “repo loan”. Overnight repos are a form of collateralized borrowing, whereby a bank pledges its assets as collateral in an overnight loan with another bank. 
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10. Credit insurance and the growth in credit default swaps 
The process of securitization was further aided by the growth of credit insurers and derivatives called credit default swaps (CDS), which in principle allowed the default risk to be taken out of MBS and CDOs 
before they were marketed to general investors. The first forms of credit insurance were developed by so-called monoline insurers. Having developed this line of business, the mono line companies — along with banks, hedge funds, and financial guarantors such as AIG — expanded their business model into structured products related to the housing market, selling CDS to insure holders of MBS, CDOs, and other assets against mortgage default risk. However, many of these transactions were not overseen by 
any regulatory body. They were done in over-the-counter (OTC) markets, so that no one other than the two parties involved knew the terms of the contract. 
 
AIG became the biggest player in the CDS market, and its operations were carried out through an AIG subsidiary in London. After 2000, the business of insuring mortgage-related assets, along with corporate bonds and other assets, grew exponentially. The size of outstanding CDS reached US$60 trillion in 2007. As of September 2008, AIG, a financial guarantor, had itself sold nearly US$500 billion worth of CDS with little capital in place to protect against widespread losses. 
 
11. The failure of company risk management practices 
Many financial companies have lost huge amounts of money in the aftermath of the crisis, and many CEOs have lost their jobs. The crisis reflects poor internal corporate governance, poor infrastructure in and oversight of opaque financial markets, and, most of all, mistakes made by decision makers in the private sector. 
 
There have been two important assessments made of the failures (and successes) of risk management practices at financial institutions in the wake of the crisis. On March 6, 2008, the Senior Supervisors Group (2008) issued a report based on a survey of 11 of the largest banking and securities firms (plus a roundtable meeting that included five additional firms). The report identifies risk management practices that helped some of these institutions avoid the worst of the losses as well as practices that led to failures. The failure of financial institutions to follow sound risk management practices was a major cause of the crisis. The second assessment was the report to shareholders prepared by the Swiss bank UBS (2008) at the request of regulators that described in great detail the risk management failures that took place at the bank prior to the crisis. 
 
12. Regulation and supervision 
Despite a general move towards deregulation in the United States, there was still an extensive regulatory apparatus in place in financial markets leading up to the crisis. As described by a senior executive at one of the large U.S. banks, there were “roomfuls of regulators” going over the books. The failure of regulators to force financial institutions to follow sound risk management practices was also one of the most important reasons for the financial crisis. The widespread belief developed over the past 20 years or so that markets can regulate themselves may have contributed to the regulatory laxity, which in turn contributed heavily to the crisis. An additional reason for regulatory failure was a significant share of subprime mortgages — those that are at the root of the current financial crisis — which were originated by independent mortgage companies, or non-depository companies unaffiliated with any bank. These independent companies were not covered by the FDIC, the Federal Reserve, or federal regulation, but rather only by state regulation. 
 
This concludes our discussion of the causes of the crisis. We now turn to summarize the impact of raising capital requirements, which might have prevented or at least eased the crisis. 
 
<h3>
What Is the Impact of Increasing Capital Requirements?</h3>
One of the regulatory reforms with the strongest support among policy analysts and regulators is to significantly increase the capital requirements for banks. All else equal, this should make the banks safer by providing a greater cushion to survive the mistakes and accidents from which they inevitably suffer. Higher capital requirements should also discourage transactions of lower economic value by creating a higher hurdle rate, since the extra units of capital need to be paid for by additional expected return. Some of the regrettable transactions that seemed attractive during the bubble might not have been undertaken at a higher hurdle rate. 
 
Unfortunately, higher capital requirements are not free. At the margin, the increased hurdle rates are likely to make it harder for businesses and individuals to obtain loans, raise the cost of loans, lower the interest rates offered to depositors and other suppliers of funds, and reduce the market value of the common stock of existing banks. One of the keys to determining the exact right size for an increase in minimum capital levels is to quantify these effects. 
 
We take a pragmatic approach to answering a more specific question: what are the likely effects on loan pricing and availability of an increase in minimum capital requirements for U.S. banks over the next few years? The specificity allows us to focus on the key variables and relationships as they exist here today. Thus far, the debate and analysis surrounding bank capital increases have been heavily qualitative. There is a need to supplement these important considerations with numbers. Given space requirements, we cannot present our analysis of the numbers, but we will summarize the conclusions. It should be noted that this section of the paper is excerpted from a far more detailed analysis and, therefore, a great deal of the commentary has been left out in the interest of space. For the full-length version, please visit the Brookings Institution website. 
 
Our analysis strongly suggested that the U.S. banking industry could adjust to higher capital requirements on loans through a combination of actions that would not wreak havoc on the system. Not surprisingly, the adjustments would need to come from a range of actions, since the rebalancing appears tough to achieve with the adjustment of any single factor. Fortunately, the banks do have a variety of levers to pull, which should allow them to make the transition. These findings imply that there would likely be relatively small changes in loan volumes by U.S. banks as a result of higher capital requirements on loans retained on the banks’ balance sheets. The various actions required to restore an acceptable return on common equity appear unlikely to be large enough, even in the aggregate, to significantly discourage customers from borrowing or move them to other credit suppliers in a major way. 
 
These findings may seem counterintuitive, given the large percentage increase in required common equity devoted to lending considered here and the strong focus of bank managers on rationing that common equity. Three points may help clarify the results. First, banks are highly levered institutions: a great bulk of the funding for a loan comes from deposits and debt. Even though common equity is expensive, it accounts for less than a fifth of the cost of a typical loan. Second, higher equity levels reduce the 
risk of a bank and therefore lower the returns demanded by debt and equity investors, reducing the cost of each dollar of debt or equity supporting the loans. Third, as shown in detail below, reasonable actions by the banks can restore returns on equity to levels that are attractive to investors. Thus, there should be the ability for banks over time to raise new equity sufficient to maintain their loan volumes. It is true that large amounts of capital would need to be raised, but this appears quite feasible given a reasonable phase-in of the new rules. A four-percentage-point increase in the level of common equity as a percentage of the roughly US$7.5 trillion of loans in the U.S. banking system would require about US$300 billion of new equity. This would represent an approximately 20% increase in the existing US$1.4 trillion of equity.10 Put another way, this could be obtained by retaining roughly two years’ worth of the system’s earnings, assuming even a 10% return on equity for the banks as a whole. In practice, a mixture of capital raising and earnings retention would likely provide the needed capital. 
 
We side with the large majority of policy analysts who favor higher capital requirements for banks as a key step in providing greater stability to the financial system. So, we are heartened by these initial findings, which strongly suggest that a significant increase in bank capital requirements would have substantially smaller effects on lending than some have argued. 
 
<h3>
Conclusions</h3>
Some people have argued that the cause of the financial crisis was greedy banks. Others have argued that government policies, notably towards the GSEs, caused the crisis. Yet another argument is that government regulators failed to stop bad behavior by greedy banks and other institutions. Our view is that all of the above factors contributed to the crisis, and we would further add that excessive borrowing by consumers was also a factor. 
 
It is proposed that higher capital standards would help avoid another financial crisis. We agree and argue that reasonable increases in capital standards would not undermine the ability of banks to provide financial intermediation. 
 
By: Martin Neil Baily and Douglas J. Elliott

WHAT BROKE? THE ROOT CAUSES OF THE CRISIS

Background of Financial Crisis The financial crisis that is wreaking havoc in financial markets in the U.S. and across the world has i...

America Economy - Warning from Five Mainstream Economists

Tukang Warta 0 economy, financial crisis 11/30/2014 09:30:00 PM

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The Wall 
 Street Journal ran an article the likes of which I have never 
 seen. "<a href="http://online.wsj.com/article/SB10001424052702303561504577497442109193610.html#printMode">The 
 Magnitude of the Mess We're In</a>." It was written by five well-known 
 economists. It warns readers about a series of highly destructive 
 outcomes of the federal government's present fiscal policies. The 
 article says that these problems are close to being unmanageable. 
 The first 
 economist involved is George Shultz. He taught at the University 
 of Chicago and MIT. He served as the Secretary of the Treasury under 
 Nixon and Secretary of State under Reagan. He served as the Head 
 of the Office of Management and Budget under Nixon, and also Secretary 
 of Labor under Nixon. I can think of no other economist with comparable 
 experience at the highest level. He is an insider's insider. He 
 is 92 years old – a true elder statesman 
 The second 
 economist is Michael Boskin. He teaches at the Hoover Institution. 
 He used to teach at Stanford. He was the head of the Council of 
 Economic Advisers under the first Bush. Then there was John F. Cogan 
 of Hoover and Stanford. Then there was Allan Meltzer, who is the 
 most respected historian of the Federal Reserve System. Finally, 
 there was Stanford's John Taylor, of "Taylor rule" fame, one of 
 the most respected academic economists in the USA. 
 
 A NAÏVE 
 ARTICLE 
 The problem 
 with this article is it is naïve. It is Pollyanna to the core. 
 It begins with the on-budget deficit: a mere $1.2 trillion a year. 
 The on-budget deficit is peripheral to the real federal deficit, 
 which reflects the unfunded liabilities of the federal government, 
 primarily in Social Security, Medicare, and Medicaid. This deficit 
 dwarfs the on-budget deficit. <a href="http://teapartyeconomist.com/2012/08/10/11-trillion-increase-in-debt-in-one-year/">It 
 is rising at $11 trillion a year.</a> 
 This deficit 
 has a present value of $222 trillion. This means that the federal 
 government, today, must invest $222 trillion in market investments 
 that will return about 5% per year for the next 75 years. No such 
 investments exist, and the federal government does not have $222 
 trillion in reserve. The Federal Reserve system could print that, 
 of course, but then that would only lead to hyperinflation. 
 In other words, 
 by starting with the on-budget deficit, the five economists low-balled 
 the problem. This makes it look as though the problem can be dealt 
 with by Congress. It cannot, except by one technique, namely, default. 
 They mention unfunded liabilities only briefly, and they offer no 
 numbers. 
 Nevertheless, 
 in a na‹ve sort of way, the five economists do point out that present 
 politics makes it virtually impossible for the on-budget deficit 
 not to escalate, and if it does, it is going to lead to a series 
 of inevitable disasters. The five economists go into the details 
 about these disasters, and it is a good thing that somebody bothered 
 to do this. 
 The article 
 began with a good question: "Where are we now?" Answer: a lot worse 
 off than the article says. 
 It asks this 
 question: "Did you know that annual spending by the federal government 
 now exceeds the 2007 level by about $1 trillion?" I do. You do. 
 Who doesn't? 
 They list 
 the deficits: $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 
 trillion in 2011, and another $1.2 in 2012. "The four-year increase 
 in borrowing amounts to $55,000 per U.S. household." 
 Recall that 
 the unfunded liability's present value grew by $11 trillion over 
 the past 12 months. So, the article low-balls the magnitude of the 
 mess we are in. 
 The Treasury 
 must raise $4 trillion this year to pay the interest on the on-budget 
 debt. They warn: ". . . the debt burden will explode when interest 
 rates go up." Quite true. 
 The government 
 cannot tax upper-income people. The top 1% pay 37% of the income 
 taxes. (That is because they make most of the income, which the 
 authors do not mention.) 
<blockquote>
 Did you 
 know that, during the last fiscal year, around three-quarters 
 of the deficit was financed by the Federal Reserve? Foreign governments 
 accounted for most of the rest, as American citizens' and institutions' 
 purchases and sales netted to about zero. The Fed now owns one 
 in six dollars of the national debt, the largest percentage of 
 GDP in history, larger than even at the end of World War II.</blockquote>
 This is true. 
 But this means that the Treasury will get back most of the money 
 it pays to the FED it pays as interest. The FED repays most of this 
 at the end of the year. This is an accounting device. 
 Conclusion: 
 "By replacing large decentralized markets with centralized control 
 by a few government officials, the Fed is distorting incentives 
 and interfering with price discovery with unintended economic consequences." 
 This is true. It lies at the heart of the mess we are in. 
<blockquote>
The Fed's 
 policy of keeping interest rates so low for so long means that 
 the real rate (after accounting for inflation) is negative, thereby 
 cutting significantly the real income of those who have saved 
 for retirement over their lifetime.</blockquote>
 Bernanke's 
 FOMC says this will continue until at least 2015. 
 They say that 
 the FED is replacing the Treasury as the source of government debt 
 management. They are correct. 
 They warn 
 of price inflation. The reserves of QE3 could do this. But if the 
 FED unwinds too fast – sells assets, abandoning QE – "banks 
 may find it hard to adjust and pull back on loans. Unwinding would 
 be hard to manage now, but will become ever harder the more the 
 balance sheet rises." 
 The FED tried 
 to unwind over the last 12 months. They do not mention this. The 
 result: the FED's panic return to QE3. There will be no unwinding. 
 Then they 
 summarize some highlights, though peripheral. "Did you know that 
 the federal government had 46 separate job-training programs? Yet 
 a 47th for green jobs was added, and the success rate was so poor 
 that the Department of Labor inspector general said it should be 
 shut down. We need to get much better results from current programs, 
 serving a more carefully targeted set of people with more effective 
 programs that increase their opportunities." In short, blah, blah, 
 blah. If we have 46, one more program is marginal, and there will 
 not be the elimination of (say) 45 of them. 
 They go on 
 and on, telling us of boondoggles. This is just noise. Nothing is 
 going to change. 
 Then they 
 get to Obama's budget. That budget will "raise the federal debt-to-GDP 
 ratio to 80.4% in two years, about double its level at the end of 
 2008, and a larger percentage point increase than Greece from the 
 end of 2008 to the beginning of this year." Quite true. But this 
 budget was passed by Congress. All budgets are passed by Congress. 
 We are headed 
 toward $18.8 trillion in debt. That will take $743 billion in interest 
 payments. But, as they fail to mention, most of this will go to 
 the FED, and will be returned. The problem is this: there is no 
 negative feedback for Congress. Rates are close to zero. 
 Then they 
 get to the really tough nut to crack: the unfunded liabilities. 
 But they offer no specifics. 
<blockquote>
 Worse, the 
 unfunded long-run liabilities of Social Security, Medicare and 
 Medicaid add tens of trillions of dollars to the debt, mostly 
 due to rising real benefits per beneficiary. Before long, all 
 the government will be able to do is finance the debt and pay 
 pension and medical benefits. This spending will crowd out all 
 other necessary government functions.</blockquote>
 No, it won't. 
 Why not? Because there will be a default on these programs. Younger 
 voters will mandate this. Granny is going to get her checks cut 
 off. The following will not happen: "One result will be ever-higher 
 income and payroll taxes on all taxpayers that will reach over 80% 
 at the top and 70% for many middle-income working couples." 
 QE3 creates 
 uncertainty, they say. Quite true. "Traders speculate whether and 
 when the Fed will intervene next. The Fed can intervene without 
 limit in any credit market. . . ." Quite true. 
 Then they 
 mention what was never mentioned before Ron Paul's run in 2007: 
 "This raises questions about why an independent agency of government 
 should have this power." 
 Then they 
 ask: "What's at stake?" It's the right question. 
 Treasury debt 
 is not a safe haven forever, they say. Good point. 
"In short, 
 we risk passing an economic, fiscal and financial point of no return." 
 There. Someone said it. Of course, we are far beyond the point of 
 no return. The $222 trillion in the present value of the unfunded 
 liabilities guarantees this. 
 The USA could 
 lose its full faith and credit status. 
 They see this 
 as a great danger. I see it as liberation. They quote Alexander 
 Hamilton on the benefits of the federal debt. I much prefer Thomas 
 Jefferson's assessment. The full faith and credit of the U.S. government 
 allowed the government to finance the Civil War and World War II. 
 Quite true, and that is why its loss would be a great thing. 
 Then comes 
 the bottom line. 
<blockquote>
 The problems 
 are close to being unmanageable now. If we stay on the current 
 path, they will wind up being completely unmanageable, culminating 
 in an unwelcome explosion and crisis.</blockquote>
 We are going 
 to stay on the present path. The problems will become unmanageable. 
 The U.S. government 
 is going to default. The five do not use the D-word, but what they 
 say points to it. 
 Then they 
 push to full Polyanna mode. 
<blockquote>
 The fixes 
 are blindingly obvious. Economic theory, empirical studies and 
 historical experience teach that the solutions are the lowest 
 possible tax rates on the broadest base, sufficient to fund the 
 necessary functions of government on balance over the business 
 cycle; sound monetary policy; trade liberalization; spending control 
 and entitlement reform; and regulatory, litigation and education 
 reform. The need is clear. Why wait for disaster? The future is 
 now.</blockquote>
 They are correct. 
 The future is now. And it is not going to change. Politics guarantees 
 this. 
 
 CONCLUSION 
 I was happy 
 to see an article from mainstream economists on the mess we are 
 in. Of course, the mess is vastly worse than they indicate. The 
 on-budget debt of $15 trillion is peanuts compared to the $222 trillion 
 of present-value net unfunded liabilities. But the mess is bad enough 
 to warrant this article. 
 Nothing will 
 change Congress. Nothing will change the executive. There will be 
 no cutback in spending until the numbers force the Great Default. 
 Americans 
 will not be ready. State and local governments will not be ready. 
 Will you be 
 ready? 
 
September 
 26, 2012 by <a href="maito:garynorth@garynorth.com">Gary North</a>
<a href="http://teapartyeconomist.com/">Tea Party Economist </a>

America Economy - Warning from Five Mainstream Economists

The Wall Street Journal ran an article the likes of which I have never seen. " The Mag...

50 Fun Facts About The US Economy I bet You Did Not Know!

Tukang Warta 0 America Economy, economy, financial crisis, the list 9/20/2014 01:00:00 AM

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#50) In 2010 the U.S. government is projected to issue almost as much 
new debt as the rest of the governments of the world combined. 
 
#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010. 
 
#48)
 If you went out and spent one dollar every single second, it would take
 you more than 31,000 years to spend a trillion dollars. 
 
#47) In 
fact, if you spent one million dollars every single day since the birth 
of Christ, you still would not have spent one trillion dollars by now. 
 
#46) Total U.S. government debt is now up to 90 percent of gross domestic product. 
 
#45)
 Total credit market debt in the United States, including government, 
corporate and personal debt, has reached 360 percent of GDP. 
 
#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009. 
 
#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent. 
 
#42) In the area around Sacramento, California there is one closed business for every six that are still open. 
 
#41) In February, there were 5.5 unemployed Americans for every job opening. 
 
#40)
 According to a Pew Research Center study, approximately 37% of all 
Americans between the ages of 18 and 29 have either been unemployed or 
underemployed at some point during the recession. 
 
#39) More than 40% of those employed in the United States are now working in low-wage service jobs. 
 
#38)
 According to one new survey, 24% of American workers say that they have
 postponed their planned retirement age in the past year. 
 
#37) 
Over 1.4 million Americans filed for personal bankruptcy in 2009, which 
represented a 32 percent increase over 2008. Not only that, more 
Americans filed for bankruptcy in March 2010 than during any month since
 U.S. bankruptcy law was tightened in October 2005. 
 
#36) Mortgage
 purchase applications in the United States are down nearly 40 percent 
from a month ago to their lowest level since April of 1997. 
 
#35) 
RealtyTrac has announced that foreclosure filings in the U.S. 
established an all time record for the second consecutive year in 2009. 
 
#34)
 According to RealtyTrac, foreclosure filings were reported on 367,056 
properties in March 2010, an increase of nearly 19 percent from 
February, an increase of nearly 8 percent from March 2009 and the 
highest monthly total since RealtyTrac began issuing its report in 
January 2005. 
 
#33) In Pinellas and Pasco counties, which include 
St. Petersburg, Florida and the suburbs to the north, there are 34,000 
open foreclosure cases. Ten years ago, there were only about 4,000. 
 
#32) In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure. 
 
#31)
 The Mortgage Bankers Association recently announced that more than 10 
percent of all U.S. homeowners with a mortgage had missed at least one 
payment during the January to March time period. That was a record high
 and up from 9.1 percent a year ago. 
 
#30) U.S. banks repossessed 
nearly 258,000 homes nationwide in the first quarter of 2010, a 35 
percent jump from the first quarter of 2009. 
 
#29) For the first 
time in U.S. history, banks own a greater share of residential housing 
net worth in the United States than all individual Americans put 
together. 
 
#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009. 
 
#27)
 U.S. commercial property values are down approximately 40 percent since
 2007 and currently 18 percent of all office space in the United States 
is sitting vacant. 
 
#26) Defaults on apartment building mortgages 
held by U.S. banks climbed to a record 4.6 percent in the first quarter 
of 2010. That was almost twice the level of a year earlier. 
 
#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942. 
 
#24)
 New York state has delayed paying bills totalling $2.5 billion as a 
short-term way of staying solvent but officials are warning that its 
cash crunch could soon get even worse. 
 
#23) To make up for a 
projected 2010 budget shortfall of $280 million, Detroit issued $250 
million of 20-year municipal notes in March. The bond issuance followed 
on the heels of a warning from Detroit officials that if its financial 
state didn’t improve, it could be forced to declare bankruptcy. 
 
#22)
 The National League of Cities says that municipal governments will 
probably come up between $56 billion and $83 billion short between now 
and 2012. 
 
#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks. 
 
#20)
 Two university professors recently calculated that the combined 
unfunded pension liability for all 50 U.S. states is 3.2 trillion 
dollars. 
 
#19) According to EconomicPolicyJournal.com, 32 U.S. 
states have already run out of funds to make unemployment benefit 
payments and so the federal government has been supplying these states 
with funds so that they can make their payments to the unemployed. 
 
#18) This most recession has erased 8 million private sector jobs in the United States. 
 
#17)
 Paychecks from private business shrank to their smallest share of 
personal income in U.S. history during the first quarter of 2010. 
 
#16)
 U.S. government-provided benefits (including Social Security, 
unemployment insurance, food stamps and other programs) rose to a record
 high during the first three months of 2010. 
 
#15) 39.68 million 
Americans are now on food stamps, which represents a new all-time 
record. But things look like they are going to get even worse. The 
U.S. Department of Agriculture is forecasting that enrollment in the 
food stamp program will exceed 43 million Americans in 2011. 
 
#14)
 Phoenix, Arizona features an astounding annual car theft rate of 57,000
 vehicles and has become the new “Car Theft Capital of the World”. 
 
#13)
 U.S. law enforcement authorities claim that there are now over 1 
million members of criminal gangs inside the country. These 1 million 
gang members are responsible for up to 80% of the crimes committed in 
the United States each year. 
 
#12) The U.S. health care system was
 already facing a shortage of approximately 150,000 doctors in the next 
decade or so, but thanks to the health care “reform” bill passed by 
Congress, that number could swell by several hundred thousand more. 
 
#11)
 According to an analysis by the Congressional Joint Committee on 
Taxation the health care “reform” bill will generate $409.2 billion in 
additional taxes on the American people by 2019. 
 
#10) The Dow Jones Industrial Average just experienced the worst May it has seen since 1940. 
 
#9)
 In 1950, the ratio of the average executive’s paycheck to the average 
worker’s paycheck was about 30 to 1. Since the year 2000, that ratio 
has exploded to between 300 to 500 to one. 
 
#8) Approximately 40% of all retail spending currently comes from the 20% of American households that have the highest incomes. 
 
#7)
 According to economists Thomas Piketty and Emmanuel Saez, two-thirds of
 income increases in the U.S. between 2002 and 2007 went to the 
wealthiest 1% of all Americans. 
 
#6) The bottom 40 percent of 
income earners in the United States now collectively own less than 1 
percent of the nation’s wealth. 
 
#5) If you only make the minimum 
payment each and every time, a $6,000 credit card bill can end up 
costing you over $30,000 (depending on the interest rate). 
 
#4) 
According to a new report based on U.S. Census Bureau data, only 26 
percent of American teens between the ages of 16 and 19 had jobs in late
 2009 which represents a record low since statistics began to be kept 
back in 1948. 
 
#3) According to a National Foundation for Credit 
Counseling survey, only 58% of those in “Generation Y” pay their monthly
 bills on time. 
 
#2) During the first quarter of 2010, the total 
number of loans that are at least three months past due in the United 
States increased for the 16th consecutive quarter. 
 
#1) According 
to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. 
budget deficit, the U.S. Congress would have to multiply each tax rate 
by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent 
rate would be 36 percent, and the 35 percent rate would have to be 85 
percent. 
 
This article was originally published at End of the American Dream 
 
Hat tip Willie Wonka, Rick Blaine 
 
 
Author: Contributing Author

50 Fun Facts About The US Economy I bet You Did Not Know!

#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined. #4...

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