Wednesday, September 24, 2008

Judgment Day

Republicans, including John McCain, believe regulation of the markets to be anathema. Deregulation goes hand in hand with the belief that tax cuts for the wealthy benefit everyone in the long run, because, they say, the wealthy are the ones who provide the jobs for this country (although it is said that small businesses drive much of the employment growth). They believe that it’s the wealthy who make the big investments in big business that benefit everyone. This is called “trickle down economics,” supply-side economics, or Reaganomics.

The first and foremost principle of Reaganomics that the current Bush administration and his Republican team have so loyally followed is blind faith in the market. The idea is that if the market is allowed to work, without oversight, the economy will naturally stay healthy. Trickle-down (also called supply-side) theorists believe that pumping money into the hands of the wealthy will cause them to invest in business, which will in turn cause the economy to grow, which will create jobs, which will eventually get money into the hands of the average working man. This theory is behind the Bush tax cut which greatly favored the wealthy and which John McCain has said he will make permanent.

Reality is quite different from the theory.

Deregulation caused greed and a high level of opportunism to come to the forefront. The economic market got out of control. During the credit boom between 2002 and 2006, both financial institutions and American households took on too much debt. Now many of those borrowers can't pay back the loans, which causes the credit market to not be able to make loans to anyone for any reason, which, in turn, chokes economic growth. This problem is exacerbated by the collapse in housing prices at a time when many Americans took out equity loans to finance a more extravagant lifestyle.

In his interview with PBS's News Hour on September 15, Nouriel Roubini, professor of economics at New York University, said the root cause of the economic problem is that “in the last few years, the approach has been the one of laissez-faire [a phrase literally meaning allow to do)…a financial market without appropriate rules and regulations …gets crazy, [with] asset bubbles, credit bubbles…self-regulation means no regulation....” He was speaking of fully uncontrolled, unregulated laissez-faire capitalism, a separation between government and economics, that has been promoted by the Republicans.

A Century Foundation report on the effects of Republican deregulation and tax policies that favor the rich reveals that:

• The supply-side economics theory makes the assumption that if you cut corporate tax rates, corporations are more willing to do things with their money. This is unlikely, for a host of reasons, starting with the fact that all a corporation is supposed to do is make money for expansion and for its shareholders. Additional savings incurred by a lessened tax burden does not mean corporations create more jobs. It does mean that these companies may have a better bottom line enabling them to pass out more money to shareholders and give CEOs ridiculously larger paychecks.

• Rich people did not get rich by sharing their money. When you give rich people more money, they don't necessarily provide someone a job with it. Instead, they may take a cruise or buy a new BMW or Mercedes. McCain, for example, apparently has 13 cars and seven houses.

• The current U.S. tax policy, begun by Reagan and continued by George W. Bush, has aggravated the growing gap between rich and poor, with tax cuts disproportionately rewarding those at the top while doing little for the middle class or the poor. The top 5 percent of income recipients in the United States have on average 5.5 times the income of the remaining 95 percent, but in terms of accumulated wealth, the top 5 percent have on average 23 times that of the remaining 95 percent. The average income on Wall Street last year was about $280,000, or nearly five times as high as the average of all other workers in the United States.

One of the best measures to demonstrate the failure of Reaganomics is to look at the growth of median household incomes. In 1980, when Ronald Reagan was sworn in, the median household income was $17,710. The U.S. Census shows the median income in 2005 was $46,326. When adjusted for inflation, the purchasing power of median American income for 2005 was only 85% of what it was in 1980. Even worse is that under George W. Bush, since 2006, the median income has actually been driven down while the cost of gas, groceries, utilities, and health care has drastically risen.

The current economic catastrophe has “trickled down” from Wall Street, tightening credit for consumers and businesses who have played by the rules. This is not just impacting the people who took out subprime mortgages to buy homes they could not really afford, but Jane and John Doe who has done everything correctly, by the book, paying their mortgage and other bills on time. The Hope Now Alliance, the lenders’ group put together at the urging of Treasury Secretary Henry Paulson, estimates the number of foreclosure proceedings that begin nationally in each month. The latest figures, for July, put the number at 197,000, the highest for any month since they started keeping track in July 2007. Of those that failed, 105,000 were normal mortgages, and 92,000 were subprime.

A word about the credit default swaps you have been hearing about: Credit default swaps, a kind of insurance, could be directly exchanged between banks. This supposedly spread out the risk, making it safe for banks to take on ever riskier forms of debt. These credit default swaps turned into the perfect vehicle to fuel a Wall Street boom. No one ever had any idea what these things were actually worth, they were traded directly from bank to bank without being administered or regulated by any exchange. Credit default swaps, in allowing banks to share risks, caused them to compete with each other in an effort to chase higher profit through risky loans. This “insurance” made it possible for the down payment on homes to become as low as 0% - nada, nothing, zip. The illusion of "safety" that CDS derivatives provided allowed the sub-prime mortgage market to be possible.

Now the chickens have come home to roost: So far in 2008, 11 federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering. The taxpayers are being asked to bail out the big banks and investment firms that were involved in the subprime mortgage game. The plan would enable the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions. The idea is that getting those debts off their books would ease one of the biggest choke points in the credit crisis, making them more inclined to lend money to the average Joe. The most infuriating part of all this is that we taxpayers have no choice but to agree to the $700,000,000,000 (billions) rescue plan or risk what the Bush administration warns would be a financial crisis of the type that will wipe out savings of retirees, make mortgages or college loans impossible to get, and send the economy into a downward spiral causing very high unemployment. If we don’t bail out Wall Street, our entire economic structure will collapse – taking the world down with us.

They are throwing around the term “severe recession” on the news programs – translate that into “Depression” – like what was experienced in the 1930s.

It is clear that regulations will be needed to avoid allowing greed to dominate Wall Street which puts self-interest before the public good. It is time to reject the idea that we all gain from enabling the accumulation of wealth in the hands of a very few. In his September 15 interview with PBS's News Hour, Roubini added, “Now we have to move towards appropriate rules, not excessive rules, but strong regulation, supervision of finance system. That’s what’s necessary.”

It is time to reject Reagan’s trickle-down theory. It just plain doesn’t work.

If you want a nice, simple explanation on the supply-side theory, how it only helps the wealthy, go here: