Posts tagged ‘Great Recession’

05/10/2012

Housing Crisis: “Easy Credit” Not Cause

While Republicans attributed the 2008 housing collapse to many factors during the 2011 and 2012 debates, including Fannie Mae and Freddie Mac, “easy credit,” and “loans to people who could not afford them,” they never really hit the nail on the head, because they never even mentioned “adjustable interest rates.”

Fannie Mae and Freddie Mac were not in and of themselves a problem. In the Great Depression, when housing crashed the first time, the Congress responded in 1938 by establishing “Fannie Mae,” the Federal National Mortgage Association (FNMA), which created a “secondary mortgage market” by accepting the assignment of mortgage notes from banks in consideration for cash, so banks could promptly turn around and make more loans. It was good public policy, because it effectively increased the sum of money available for lending, and increased the level of home ownership. There is no reason today to abolish that concept.

After Fannie proved useful, the Republicans in Congress made the mistake of converting it into a “mixed ownership corporation” in 1950, by allowing private investors to purchase its common stock. They also erred in 1968 by making Fannie 100% privately-owned, while maintaining their line of credit to the U.S. Treasury. Since Fannie wanted only lower risk private mortgages, Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), was created to accept the riskier notes, made by the FHA, VA, and FmHA. While the privatization of Fannie made it harder to monitor, that mistake did not cause the recent housing meltdown.

Some argued “easy credit” and relaxed lending standards contributed to the crisis, as borrowers were no longer required to put 20% down, or sufficiently prove a credit worthiness. As the crash hit and the values of many mortgages went underwater, many borrowers had little or nothing to lose, and simply walked away from their obligations. While this sounds like a possible cause, if the borrowers had stayed employed, and their interest rates remained unchanged, they would have continued making their monthly payments, and no defaults would have occurred. “Easy credit” allowing people to buy with small or non-existent down-payments had nothing to do with why they defaulted.

Mortgage Notes, containing “adjustable interest rates” which could escalate or balloon to unsustainable levels over time, were the real problem. Notes that allowed “interest only” payments, reduced no principle, and left borrowers in a perpetual state of debt, were also a menace. Once rates jumped upward for borrowers who had no extra cash, breaches were inevitable. Lenders like Countrywide should have been stopped from making such bad loans. President Obama said in his Jan. 25, 2012 speech, mortgages were sold to people who could not afford them, by lenders who knew it, and this is why regulations are needed to prevent financial fraud.

The way to get back to financial stability in the housing market is to outlaw “adjustable interest rates,” and permit only “fixed interest rates.” If borrowers had the certainly of knowing a monthly payment that could never change, defaults would have been limited to only those who lost their jobs, and the downturn in the housing market would have been relatively mild.

05/09/2012

Obama Inherited the Great Recession

The way many Republicans and right-wingers talk about the American economy, one might think the Great Recession of 2008 was somehow single-handedly caused by President Obama, but in case we have forgotten, the crash occurred under the watch of President George W. Bush, and when he vacated the White House in Jan. 2009, he left behind several major economic problems.

OBAMA NOT TO BLAME: While Gov. Romney repeatedly said during the Republican debates, he did not blame Obama for the Great Recession, he dishonesty suggested Obama’s policies were somehow responsible for making it deeper, and causing it to go on longer than it should have.

WHAT WOULD ROMNEY HAVE DONE? But what would Romney have done if he had been President in Jan. 2009? What if he had inherited the Great Recession?

HOUSING CRISIS: The housing market had collapsed, as the value of millions upon millions of homes, all across the country, had dropped to roughly half their previous values. Many suddenly realized they owed far more on their mortgages than their homes were worth. Their residences were considered “underwater.” As the Fed used Monetary Policy to keep lending interest rates low, Obama instituted a homeowners program to allow refinancing at lower rates. If Romney would have been President, he would have taken no action to get private homeowners out from their underwater status. It is just wrong to suggest millions of homes could have recovered from their depressed values in just 4 years.

BANKING MELTDOWN: Banks and some insurance companies were collapsing as the Bush Administration, followed by Obama, did everything they could to shore them up with government bailout loans. While it is now easy to say we should have just let them go bankrupt, the ripple effect of a free market free-fall would have been catastrophic. A hands-off policy would have triggered another Great Depression, with major economic failures in all economic sectors, bringing record levels of unemployment.

AUTO BANKRUPTCY: The recession caused General Motors and Chrysler to lose so many sales, they faced bankruptcy, and no private bank was able to lend them any money. The only option was a federal bailout loan, but Romney repeatedly opposed any financial help whatsoever for the beleaguered auto industry. If he had been President, these major industrial employers would have gone bankrupt, and the ripple effect would have killed thousands upon thousands of additional jobs at component part factories throughout the industrial Midwest. Once again, inaction would have turned the Great Recession into another Great Depression.

WALL STREET CRASH: Obama inherited a stock market that had crashed, and a Wall Street trading system that was dealing in unregulated derivatives, contributing greatly to the problem. While Democrats took action by passing the Dodd-Frank bill to eliminate financial abuses, the Republicans held firm to a hands-off business as usual approach. What would Romney have done?

HIGH UNEMPLOYMENT: When Obama took office, the level of unemployment was literally sky-rocking by the hour. Obama did what any reasonable President would have done, by signing a job stimulus bill, designed to help people get back to work. While the federal government used Keynesian economics through deficit spending to prime the pump, Republican Governors in nearly 30 states did exactly the opposite, which was counterproductive, by laying off people, and making the recession worse.

A pure capitalist total free market response to the Great Recession would have triggered a Great Depression. The history of the 1929 Stock Market crash, and the subsequent four years of inaction under President Hoover, proved that point. Governments must do what they can to help the nation out of a deep recession, and it appears Obama did as good a job as any President could have.

05/13/2011

Unemployment: Republicans No Help

The Republican-controlled Florida House and Senate voted to increase unemployment by cutting 4,492 state jobs. They also plan to spend 700 million less than last year. They did exactly the opposite of what most economists would do, and of course their rookie Tea Party Gov. Scott, approved of their misguided policies.

Florida Republicans should certainly know we are not out of the Great Recession, which started in 2008, when George Bush was President. What is unclear is whether they have any clue as to how to get out of it, or worse yet, whether they care. While no one expects all of them to have a college degree in economics, they should at least have studied the subject, before taking office.

When a local economy is stagnant, as ours is, state government can apply Keynesian economics, to stop high unemployment from becoming chronic. Florida could have created employment by spending more, not less. They could have used fiscal policy to grow the economy out of the recession, by creating jobs.

It is almost like the right hand does not know what the left hand is doing. While President Obama and the federal government are doing the right thing by spending for the purpose of stimulating the economy, the Florida Republicans are doing the wrong thing by budgeting less and causing more unemployment in a recession.

Unemployment not only hurts the unemployed, it harms the entire local economy. When unemployment remains high, buying and selling declines. One ripple effect is a decrease in state sales taxes. If the Republicans had increased spending, through fiscal policy, jobs would have increased. This in turn would have stimulated buying and selling, and would have increased sales tax revenues.

While the Republicans gave away 60 million in tax cuts to businesses, and forfeited another 37 million, by raising corporate income tax exemptions, from $5,000 to $25,000, there is no guarantee any of this will increase investment, or generate jobs. If wealthy taxpayers remain timid on new investments, and instead save money, there will be no resulting increase in employment.

There would have been no better public works investment project, to cure the ill effects of the recession, than the high-speed rail plan our governor foolishly rejected. Florida could have used federal dollars to construct a railroad, and could have stimulated all kinds of jobs. It’s sad, but Scott just doesn’t understand economics.

Public works projects are a much more direct and certain way of stimulating employment. During the Great Depression that started in 1929, the government provided public sector employment that stimulated the economy. Unemployment dropped from 23.6% (1932), to 16.9% (1936), and down to 14.6% (1940), before WWII itself finally brought about a full employment economy.

Next year, when the Republican Party is in Tampa for their National Convention, I am sure they will complain about Obama. When they say the President did not create enough jobs, I hope the St. Petersburg Times will remember to ask why they voted to directly eliminate state jobs, spent millions less during the Great Recession, and thwarted Obama’s efforts to turn things around.