Cap and Trade

I'm not unhappy that the House passed the climate change bill. Notice that I said, "not unhappy." I used a double negative there as way to say I'm happy, but in a reserved way.

Here's what I like about the bill.

1) "Cap and Trade," in theory, makes people accountable for their actions. Greenhouse gas emissions are what we economic educators call a "negative externality." Cap and Trade imposes costs on those who create the negative externality. It uses the best economic thinking to recognize that there is a socially optimum amount of pollution that we all put into the air. Yes, hippies, there is a socially optimum amount of pollution. A pollution free world would mean no mangoes, no organic food, no ability to travel or provide aid to the developing world. There are lots of good things that come as a side effect of pollution. So, what cap and trade does is sets a limit at the socially optimum amount of pollution and forces polluters (all of us) to pay for the pollution we create beyond our socially optimum amount.

2) The cost of the bill is modest. "Democrats pointed to two reports — one from the nonpartisan Congressional Budget Office and the other from the Environmental Protection Agency — that suggested average increases would be limited after tax credits and rebates were taken into account. The CBO estimated the bill would cost an average household $175 a year, the EPA $80 to $110 a year. But Republicans and industry groups say the real figure would be much higher." Let's assume the CBO estimate is accurate. $175 a year is LESS THAN FIFTY CENTS A DAY. Let's assume an even worse case scenario than that, which is that the CBO is wrong (as they frequently are). Let's assume that the cost is twice as much. That's $350 a year. Um, hello, that still LESS THAN A DOLLAR A DAY.. In either scenario, the marginal cost is nominal to the average energy consumer and producer.

The hullabaloo about the bill's cost is nonsense and reflective of people's mathematical illiteracy, which is an educational failure -- not a legislative one.

Here's what I don't like about this piece of legislation:

1) It's a 1200 page monstrosity. Now, I confess, I can't make it through a 1200 page monstrosity of a bill, laden with legislative language that makes it darned near impossible for the "average American" who will be paying the dollar a day more to understand. I found the 1092 page version that was reported to the House, but not the full version. Now, reading this is NOT our responsibility as citizens. The Founders created a Democratic Republic, not a direct democracy, for a reason. The length troubles me because it creates exceptions and enforcement provisions that limit the effectiveness of the legislation and will likely keep enforcement and execution limited.

2) The process. I dislike the news media's blind idol worship of President Obama. I generally applaud the President for treating the American people like adults and not fearing complexity in addressing difficult issues. However, I'm concerned about his repeated attempts to turn issues into immediate crises that demand attention and action yesterday. To his (or his advisors') discredit, too frequently, deliberative debate and discussion about issues gets dismissed. I don't know if that's on the media, our legislative leaders, on us, or all of the above. However, the lack of informed, serious, deliberation that requires people to use their heads, their hearts, and all of the other faculties that would give us effective government that reflects the judgment of an informed citizenry.

In general, I'm hopeful that the Senate will keep the lobbyists at bay on this issue and pass the legislation. I'm just nervous that the pigs will not be able to stay away from the trough as the Senate deliberates...

Spam?

Somehow, our class blog(s) got flagged as spam. This could be what happens when artificial intelligence replaces real intelligence...

I can't wait to hear from Google why this was flagged originally. It's AP Econ students posting about required topics from their slightly nutty teacher.

It's really been a bad week. Thank God it's over.

Recession

We are currently in the middle of one of the worst economic recessions of the last half century. Unemployment is too high, inflation is too low, in general the market is down, and maybe most important of all a large portion of the public has lost trust in the economy. Recently people have loved to point fingers, trying desperately to identify a single entity to blame the current economic condition upon. Unfortunately the situation is not that simple, there is no one person or organization responsible. A combination of national disasters, attacks, wars, irresponsible lending, irresponsible borrowing and particularly a misjudgement of the housing market have all lead to our current situation.
Firstly I would like to point out that even with the many bad decisions made concerning the economy in the last twenty years there have been a few things that were totally out of our control, i.e the terrorist attacks of September 11th, and hurricane Katrina. 9/11 essentially forced into a war and the damage along the gulf coast has taken years to be repaired, both of which were and are extremely costly efforts only building upon the already large national debt, as well as placing unwanted pressures on the economy.
Economically the current problems have their roots in the reforms of the early eighties. The inflationary growth from the Reagan years helped to instill a false sense of economic security in average Americans, and I believe helped to create a bubble in the housing market. Throughout this period of prosperity housing values steadily climbed and as the Fed lowered the interest rates at the end of the century providing incentive to purchase and invest in all of the new houses being built in this time of surplus. The American people and banks handled this inherently good situation horribly. Banking on the ever increasing prices of houses, people began to take out mortgages on homes sometimes thousands of dollars above their means. These foolhardy people were enabled by what are known as sub-prime mortgages, or mortgages available to people with poor credit with absurdly low down payments. Banks profited wildly from mortgages issued during this apparent housing boom. Banks bundled all these loans together into what are known as mortgage backed securities and sold these securities to larger investment banks on Wall Street. These banks were only too eager to buy up these securities as long as the housing market continued to grow at it’s dependable rate. This was a recipe for disaster. If housing prices had continued to rise a problem may not have arose, but as we all know nothing can increase forever and when the prices leveled off and began to decline, when the metaphorical bubble burst. Everyone involved was in trouble. A only small drop in the price of the housing market brought everything to the surface. So many people holding sub-prime mortgages defaulted on said mortgages that banks investments in the housing market were crushed, evidence can be seen in banks such as Bear Stearn, Citi Group etc. Further worsening the crisis as people defaulted on payments and banks were unable to make good on mortgage backed securities insurance companies like A.I.G were suddenly in very hot water. They were simply unable to cover all the mortgage backed securities that defaulted and needed 85 billion from the government in order to stay afloat.
With the collapse of these investment giants the everyday American began to feel the effects of the recession. As banks were forced to tighten down on their cash and slow lending, investment of all kinds crippled, and when companies of all kinds have less money they are forced to cut costs, directly leading to the recent spike in unemployment. The country finally felt the consequences of its irresponsible lending and borrowing of the last eight years.

how did we get here

Economists believe that we are in the worst financial crisis since the Great Depression of the 1930s. Yikes. The International Labor Organization predicted at least 20 MILLION jobs lost by the end of 2009 alone. Trade is down, wages are down, and the stock market is all over the place. Obviously, we want out of it. But in order to figure out and work toward a solution, we need to first get to the roots of the problem.
There were hundreds of causes leading up to the recession, but let’s focus on the big ones. Natural disasters and events such as September 11th attacks moved Short Run Aggregate supply to the left, which put upward pressure on price levels and decreased output. This is turn decreased consumer confidence (which meant they spent less) and raised unemployment.
Increased borrowing (and therefore debt) of Americans caused AD to shift right, creating unsustainable output and price, so SRAS shifted left in the market’s attempt to self-attempt. This also causes an increase in inflation. The loss of consumer confidence in the financial system is a huge problem because it’s part of the vicious cycle that’s sending the economy into this downward spiral. Less consumption meant loss of jobs, and therefore even less consumption, and decreased price levels, leading to deflation.
One of the main and most obvious reasons for the current recession is the years of easily available credit to people, so that they were buying things (houses, cars, Margaritavilles,etc.) that in reality they couldn’t afford. This really goes back to the economic prosperity that began in the early 1980s and continued for 26ish years. Times seemed good, and people had confidence in the banking systems.
Following Sept. 11 and DotCom Bust, Fed Chairman Alan Greenspan kept interest rates low (at one percent from June 2003-2004), making it an attractive time to take out loans. So banks too were taking huge loans out (getting a little too leverage-happy), which got them into their own trouble later on. This time of apparent prosperity in the US was actually the years in which the economy became closer and closer to its breaking point.
Meanwhile, the Fed was raising the Federal Funds rate, therefore inverting the yield curve from about 2004-2007. This eventually led to a collapse of the US housing bubble, and ultimately a financial crisis, which meant everyone rushing to the banks to take their savings out. Not only did this leave the banks weakened or forced into bankruptcy, it also took money out of the system and under mattresses, which meant less money flowing in the economy (the opposite of what we need).
So now people were left with houses that they couldn’t afford to pay mortgages on, and really had no business buying in the first place. As many rushed to put their houses on the market at the same time, the price for housing fell as supply increased (remember most are in the same boat anyway), and millions of people are left jobless (or soon to be, anyway) and stuck with homes that they can’t afford.
Some believe that this all goes back to “sub-prime lending� of gov-sponsered banks such as Fannie Mae and Freddie Mac. In 1992, government resorted to deregulation of giants such as these, a measure that was delayed an only moderately successful. The government ended up bailing them out earlier this year, while many other banks failed without the people’s mortgages being paid to them.
This led to obviously decreased confidence in investment banks and in the financial system in general by both the American people, and international partners in exchange and trade (the dominoes continue to fall…). Decreased international confidence in our financial system means even less money flowing through our system.
Now, in 2008, we are seeing every-increasing levels of both unemployment and inflation. Some possible causes for this inflation are “excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets� (Reuters).
There are probably hundreds of causes leading up to this recession, some we should have foreseen, and some that we couldn’t have. But now that we recognize the roots of these issues, we should do whatever we can to reverse it, starting with increasing consumer confidence in America’s financial system.

Romer's Recession

Our current economic situation cannot be blamed on one specific event, person, or administration. Where we are now is the result of mismanagement and imperfect information in nearly every facet of the American economy. This repression/recession has been a long time coming, and it could have been easily prevented had we been a little more educated about what was going on.

Starting in 1982, the economy experienced huge growth that showed no signs of stopping. Washington benefited from this growth just as much as the rest of us, so policies were made that encouraged this unprecedented growth and prosperity. This merging of financial and government interests was our first step towards disaster. Government policies leaned further and further towards deregulation (see Clinton years). Newer, more complex financial instruments were created. China and India were developing into economic super powers, and fast. Their new wealth poured into the U.S., making capital even easier to get. People trusted Wall Street; they thought their money was safe in these complicated schemes. Banks gained more power and influence over the government. The line separating commercial and investment banks blurred, a move that hadn't been allowed since before the Great Depression. Aggressive lending practices gave people the ability to live far above their means.

One of the best examples of this was shown through the housing market. Banks gave people mortgages on houses they couldn’t afford, and then sold the debt away to other investors. Buying mortgage debt was considered a "safe" investment, because whenever someone couldn't pay their mortgage, they would just sell the house, which would have already increased in value. Investors wanted to buy more mortgage debt because it was a (seemingly) risk-free way to make a profit. Banks started giving sub-prime mortgages in order to meet the demand of the investors. When people began defaulting on their mortgages, banks put those houses up for sale. More people were defaulting, and more houses were on the market, so supply of houses shifted right, causing house prices to decrease. People who couldn't make their mortgage payments no longer had an easy out. They couldn't sell their house for a profit anymore because their house wasn't as valuable. Investors were left with worthless CDOs, banks were left with worthless houses, and homeowners lost their houses. The entire credit market froze.

The failure or near failure of America's major investment banks followed the credit freeze. These banks had been household names for decades, but without money coming in from mortgage payments, they didn't stand a chance. Lehman Brothers failed, while Fannie Mae and Freddie Mac had to be bailed out by the government. Americans had put their savings and their confidence into these institutions, and now they were failing. We lost confidence in the financial system as a whole, which only added to the economic woes. With less confidence came less spending and less investment. The stock market plummeted, decreasing confidence even further.

What I've said so far makes the average American seem like a victim of the greedy bankers and investors of Wall Street. While some of that is true, average Americans need to shoulder the blame as well. When everything was going great, people thought they could live above their means forever and get away with it. People making $30,000 a year were buying $700,000 houses, just because they could. Everyone thought that they could get out whenever they needed to and pass on the debt to someone else. Interest rates were extremely low, and money was cheap. Why not buy a new car/house/boat when you were practically being given the money to do so? Average Americans got greedy, Wall Street got greedy, even the government was greedy.

Right now, we are not in a great place economically. Consumer confidence has not been restored, unemployment is still increasing, and the stock market is iffy. Businesses keep closing down and housing prices remain low. Other nations no longer want to invest in the U.S. economy because they think we'll lose their money, and who can blame them?

It's Now a Competition

The other day I received a postcard from Camp Hollymont, the girls’ camp I attended for 4 years and stopped going to when I could no longer be a camper. Yes, they still send me mail. On one side of the postcard were pictures of campers and the camp’s landscape. On the other side was a deal to give $50 off your bill for every new camper you recruit. But wait! That’s not the best part! To make sure they get as many new campers as possible, they made it a tribal competition to win the coveted TOTEM POLE!

After reading this postcard I said “Wow, even Hollymont is suffering.� This made me wonder in how many ways the suffering economy will affect my camp this year. Well for starters, there will probably be a lot of empty beds this year. Usually by January all of the good sessions are full because the camp is so popular. Will there be fewer counselors this year? Probably. There were usually a counselor, an assistant counselor, and a CIT per cluster. Will they cut out the assistant counselor this year? And then there are the CITs. Usually they get half off the cost to come to camp. This year that gracious amount will probably be cut down. The amount of money that parents put into their child’s account for snacks and t-shirts from the camp store will be cut down. People like me who tried to use that money infrequently wouldn’t even touch it.

Then we come to the question of the camp’s profits. The rent they have to pay to use the facilities no doubt went up due to the recession. If they cut counselor’s wages and cut the amount off the CITs get, would they still come out where they would have been? Well that would depend on how many campers show up this year. Undoubtedly, their profits will go down. So I guess we will see come summertime how hard Camp Hollymont and other camps alike will be hit.

Recessionary Causes

The current US economic recession is one for which we are long overdue.  Its roots lay decades ago, and cannot be simply blamed on the recent housing bubble and subprime mortgage crisis. Looking back can help us prevent another financial breakdown, and hopefully diagnose the problem and produce an answer to the question everyone is asking: how much longer will it last? As we look back we find danger in lack of transparency—especially in reference to financial innovation and deregulation. Though the future looks grim the recession will end eventually. Only, this time around we must try to act as the catalysts for change instead of as the cause for the problem.

President Ford's final days in office were marked not only be his party's inability to control inflation, but also as the final years for Keynesian economics.  The Carter administration marked by the energy crisis and mounting foreign policy woes only helped to usher in the "Reagan Revolution" which changed the American economic policy drastically to fit his supply-side ideals. His tax cuts and reductions in government spending contracted the size of the government, as tight monetary policy tamed inflation, restoring confidence as well as national growth.  Reagan is also credited with deregulating the financial sector, believing in less government oversight, trusting the private sector to be transparent and regulate itself. He also promised something arithmetically impossible: to increase military spending, cut taxes, and balance the budget. He was tremendously successful at the first two, though his economic policies caused huge budget deficits, quadrupling the United States national debt, making the US and its presidents all too comfortable in deficit spending and starting wars. During this period, approximately between 1973 and 1985, the U.S. financial sector accounted for about 16% of domestic corporate profits. Later, we will see that in the 1990s, it grew from 21% to 30%, and this past decade, it has soared to 41%.

The 1990s and early 2000s have been marked by radical deregulation of the financial sector. Not only were the walls between investment banks and commercial banks eliminated, but the ratio of a firms debt to its capital base was drastically increased. The deregulation caused one thing for sure: greed. With the US economy essentially artificially growing, large financial institutions pushed their workers to get on board. The result, of course, is technology. What could be wrong with this as grater productivity? It only pushes our Productions Possibility Curve out. These financial innovations such as sub-prime, alt-A, and option ARM mortgages were moneymakers in theory. This coupled with bankers operating with the false sense of safety; the Gaussian Copula function, gave financers the illusion that they could accurately calculate risks. Federal Reserve policy of keeping interest rates at 1% during the 2002-2004 period was similarly a catalyst for the housing bubble. Banks were quick to loan, figuring the housing market's exponential growth was sustainable. If a loan was defaulted on, the bank could still make money--simply resell the house for a higher price. Soon, however the housing bubble and subprime mortgage crisis emerge leaving banks with toxic assets. Suddenly Franny Mae and Freddy Mac (which held at one point over half the mortgage market with 12 trillion (with a "T") dollars) found itself on the verge of bankruptcy. Much of this was comprised of asset-backed securities--the bundled loans banks sold to these institutions while FM and FM were seemingly unaware that these loans came from people trying to live beyond their means.

Going along with this, there was a 238.5% National increase in housing prices between the 1980s and the mid 2000s with a meager 1% to 5% raise in income over the same period of time. What, then, was rising if income wasn’t? Capitol gains, of course. The people who held the dangerously innovative loans were relying on the stock market’s rapid growth (NASDAQ grew from under 400 points to over 5000 at its peak in 2001) as a large part of their income. When the market became less hospitable, banks jacked up the rates on their ARMs to compensate, while people had even less pay. Ironically, it was the banks who suffered, and were forced to either go out of business or call on the government for bailout money.

In the end, who are we to not allow companies to try to make as much money as possible? Moving foreword, is the only answer to put a cap on growth? As long as there is a set of rules, there will always be innovation that tests its diction and exploits its loopholes. The main role of the government is to lessen the extremes of the business cycle, keep our inflation around 1%, reach the natural rate of unemployment, and keep the economy and GDP growing at a sustainable rate, one which matches our ever-growing LRAS curve. From my research, it would seem that government as a whole has failed to implement contractionary policy when it was needed most (semi-excluding Clinton). Certainly, a tax hike is not a wise political move, so maybe the answer lies in greater power to the Fed. Granted, a number of factors such as September 11, and the grand entrance of China into US markets caused worry among Congress and the Fed, and they acted blindly in hopes of a good turnout. Regrettably, however, the opposite happened. Undoubtedly greed and ignorance played and integral part in the private sector, though transparency seems one possible solution that could have helped prevent much of the shady dealings among financial giants. Living within your means must be a main focus, and the government may not be relied upon on the future for bailout money. These are all things to be implemented once we are out of the recession but what can we do now to increase growth? Is it consumption? Some people aren’t sure…

Household consumption as a percentage of GDP has rapidly grown in the past decades: in the 1970s it was about 62% whereas in 2006 it was up to almost 72%. Compared to four other countries with advanced economies, UK, France, Japan, and Germany, this growth and flat-out percentage rate is unprecedented. It would be expected for a country with a stable growth rate to have this ratio be fairly constant, though ours has grown rapidly, especially in the past decade. For this number to go up, a combination of things must have happened: 1. Lower taxes (current or future) that increase disposable income 2. Expectations of larger future income (through faster productivity growth)/ expectations of more productive investment which reduces the need to save and invest to generate the same amount of future income 3. A demographic transition that makes the future (income or wealth) look better than the present. An aging population and a growing government debt make the future look worse than the present. If any, there is the need to increase savings. Now however, in the midst of a recession, would be a bad time to address this imbalance as increasing V in MV=PQ is a necessity in getting out of our recession. Once it is over, we must correct this going foreword, and use this ratio as a recessionary sign.

The Monopolistic Death Grip of the NCAA

"March [could] be just as mad, and far more beneficial to students and fans," said Jeffrey L. Kessler in the New York Times. Kessler imagines a world in which the NCAA's monopolistic death grip on the postseason college basketball tournament has been broken. In his world, ticket prices would be drastically cheaper and organizations like the NIT could compete fairly against the NCAA without the imposition of anticompetition laws.

Unfortunately, Kessler's world is not a reality, and the NCAA tournament is, in fact, a thriving monopoly. Much to the dismay of the NIT, entry into the market is impossible. Somehow, the NCAA managed to establish anticompetition laws that solidify its status as a monopoly. Most notably, any team that chooses to compete in the NCAA tournament may not participate in any other postseason tournament under threat of severe NCAA penalties. Essentially, this means that the NIT is prevented from competing for the 64 best teams in the country. In turn, they have to settle for the lesser college teams. This ultimately amounts to smaller profits for the organization.

Within the demand curve, the NCAA has total price setting power. As a result, they under produce and overcharge, creating lots of dead weight loss. Of the 72,000 seats available in Ford Field this year, only 24,000 are available for purchase by the general public. A ticket to attend the final three games of the NCAA tournament would cost you about $400, assuming you won the ability to purchase one of the few in the first place through the lottery.

Here's the most ridiculous part. In the past, you had to write a letter requesting a paper application for tickets. Now, the lottery takes place online, so many more people apply for tickets. My dad used to get tickets for us every year, but, because of the digital switch, he has failed to do so for the past two years. Here's how it works: you are allowed 10 entries per application at a cost of about $400 per entry for a shot at decent seats. With each entry there is an $8 fee. My dad enters 10 entries for himself and for my mom. In total, he's paying $8,000 for tickets (money he gets back if he doesn't win) and $160 in fees. Here's the catch. All of this money has to be paid by May and you don't find out if you get tickets till August. In the meantime, the NCAA has put my dad's $8,160 along with the money from everyone else who just APPLIED for tickets into their bank account, where they accrue enormous amounts of interest over the four month period on other peoples' money. If you don't want to get stuck in the quagmire of the lottery, you can try to buy tickets on the secondary markets. However, prices in these markets are grossly inflated by hundreds of dollars.

In advertising alone, the NCAA tournament earned $643 million off of last year's tournament. Profits are expected to grow this year. Also, the NCAA has an 11-year $6 billion dollar contract with CBS that gives the company the right to broadcast the tournament. In short, the long-run profits of the NCAA tournament are outrageously high.

I'll leave you with an analogy from Kessler's New York Times article...

"To appreciate the unfair and anticompetitive nature of the N.C.A.A.'s rules, consider an example from the board game Monopoly. Imagine that a new rule in that board game required that all of the best properties---Boardwalk, Park Place, the railroads and the rest--- be assigned to only one player (the N.C.A.A.), while the remaining contestants could try to acquire only Baltic Avenue, Mediterranean and the other streets with much lower values. Could these other players effectively compete?"

(http://www.nytimes.com/2004/03/28/sports/ncaabasketball/28KESS.html?ex=1395810000&en=ad0e71cc95fad4d9&ei=5007&partner=USERLAND)

If I had to guess, I would say that it is Jimmy Carter's fault somehow.

How could it possibly be possible that the world’s greatest nation, the messiah of liberty and justice for all, has allowed itself to become so fundamentally mired in recession, fear mongering, and near-complete economic breakdown?  The United States is supposed to be the planet's leader, its light, its beacon of Obam- I mean HOPE.  The reality is unfortunately a tad bit less ideal.  There are basic flaws throughout the US system.  Whether these flaws are in legislation, executive power, the drooling majority, golden-parachuted-rat-bastards on wall street, or Unions, they all have one thing in common; they have contributed to the economic meltdown of this country.  There is not one fatal flaw, but rather a terrible symphony of woes which finally brought the giant to its knees.

Screw chronological order, I’ll do it the way I think it ought to be done.  Consider briefly the rate at which the standard of living has increased in this country since even the 1980’s.  Fifth Graders with cell phones, cars for everyone, credit cards at fast food restaurants.  All examples of the comfort and style of the life available to an increasing number of Americans.  This seems like a good thing, and yet it has led to one of the biggest factors contributing to our current recession.  The mental state of Americans is somewhat to blame for the current status of the economy.  Because people expected their own house, their own car, plasma t.v.’s, Verizon FiOs and DirecTV, and all the other amenities that are seemingly indentified with the American Dream, they spent money they didn’t have.  Even with the deadly perception issues, this flaw in our culture could have been averted had the big lenders hadn’t been making loans that everyone involved knew could not and would not be paid.  I mean, a $300,000 loan on $33,000/yr with a wife, two kids, and a dog.  Come on.  Lets sell the debt to China, that’s a great idea!  There is no need to get technical, common sense is all one needs to realize that this is a problem.

Moving on.  Ahh, Labor Unions.  Just a short rant on this SOBs.  How is it that the Labor Unions in most of the industries in the US are stupid enough to kill the goose that lays the golden egg?  UAW, way to go guys!  Keeping your 70k a year is a good thing for you in the short run.  Too bad Honda, Toyota, and Nissan are paying their employees 36 a year and making a better car.  Good luck with your 401k’s now that the company you grilled so hard for extra cash (which you didn’t deserve) is on the brink of a terrible death spiral on the order of Bear Stearns.  Unions are something the world can live without.  If you don’t like what you are getting paid, go get another job.  If you can find one that pays well enough, maybe you should have thought about that before you had a couple of kids and bought a dog and got a loan you won’t pay for a house you don’t need.  If unions were never invented, the world would be a better, and cheaper, place on the whole.

Reagan was a great man.  There is no arguing that point.  He did great things for this country at a time when great things were sorely needed.  Unfortunately, what goes up must come down, and the majority of the negative aspect of supply side economics are now beginning to rear their ugly heads.  I fear we are now seeing the decline and fall of Reaganomics, and although this is a potentially disastrous event, it will more than likely serve as a catalyst for development of new economic ideas and ingenuity in a outdated system.  As much as I respect Reagan’s legacy, I….I think….I think it is time for change.  Ugggh.  But in all seriousness, a new system is what the US needs to climb back to its figurative perch at the top of the metaphorical mountain of the International economy.

Stupidity is the enemy of the people.  Well in this case it is more like ignorance.  People in all classes and sectors of this economy basically assumed everything was going to be fine no matter what stupid stuff we did as a nation.  Not one of the commoners in this country saw this whole thing coming, at least not on the scale at which it came.  The rampant economic ignorance in this country is terrifying.  Even now, when the economy is the people’s biggest worry, the laymen trust the media and their policy makers to do what is best for them.  Unfortunately, money is what makes today’s world go round, not happiness and dandelions.  Besides, the policy makers in this country don’t really seem to understand whats going on.  We have the left pointing fingers at the right, the right pointing fingers at the left.  People blaming it all on President Bush, even after his policies are no longer his.  People blaming it all on Obama, even though Geitner is the real Devil in Disguise.  It seems as if no one knows anything about any of this.  How can we expect to get anything done if we don’t pull together and actually try to fix it?  Throwing Money at the problem will not work.  We are going to have to incur losses in order to right ourselves.  China well probably never be paid, and they need to get used to that.  Isolationism is not the answer, but selective foreign affairs might help. It can be done, but first we as Americans need to collectively get our minds right.  Besides, It was probably Jimmy Carter’s fault somehow. Idiot.

50000FT

Economy Since 1980
Robert Mertens
Since 1980, the U. S. economy has fluctuated at times as it has seen massive overall growth. In 1980 stagflation contributed to a “Misery Index� of 22% (unemployment at 7.6% combined with inflation at 14.4%). With the election of Ronald Reagan, the U.S. pursued a fiscal policy of massive tax cuts and cuts in government spending. After a short recession in 1982, the economy began to improve with “trickle down� economic policies. The belief was that cutting taxes for the rich would be a positive incentive to invest more and stimulate the economy. The slogan, “A rising tide lifts all boats� justified the lowering of the top tax rate from 70% to a 33% maximum. This economic growth caused more revenue to flow into the government even with the lower rates but as defense spending increased to confront the Soviet threat and Congress would not rein in domestic spending, the federal debt increased. A booming economy caused the stock market to increase and mortgage loans for real estate development given out more freely. Changes in tax laws caused some developers to default on their loans and then, in October 1987, the stock market dropped 508 points in one day, its biggest loss ever. Two days later it jumped back up 187 points in one day. These sudden events in the duration of less than a week caused consumer confidence to waiver.
As the eighties drew to a close, however, international trade and the economy were dramatically increasing with the fall of the Soviet Union and the more capitalist-friendly economic policies in China. The 90s saw a booming U.S. economy and of economies worldwide with Russia’s emergence as an international exporter of oil and natural gas causing a drop in energy prices and new computer technologies becoming major economic assets. Free trade agreements and outsourcing to cheap labor sources, predominantly China, along with new technology stocks caused the stock market to grow from 2590 points to 11,497 points during that one decade. This, along with average GDP growth of over 3% per year and minimal inflation caused a massive economic growth throughout the decade. During the 90s however, with illegal immigration and high outsourcing of manufacturing, lower class workers believed that their jobs were being compromised, whereas the rich were getting richer and the poor poorer. The reality was that, overall, everyone was able to have more in the 90s compared to just a few decades before.
In 2000, the “Tech Bubble� burst and suddenly many people who had invested in overpriced tech stocks hoping to have bought the next Microsoft began to fear that their stock was overvalued and all began to sell at the same time. By 2002 the stock market had fallen to 7590 with the help of the September 11 atrocities and an increase in government costs. To help recover, looser credit for home mortgages was encouraged and groups of mortgages were bundled together to sell as investments. This spiraled out of control as “get rich� buyers over extended themselves buying homes hoping to flip them for a profit or refinance them to pull out cash from the equity to spend on consumer goods. This resulted in many homeowners having massive debt but with the expectation that continuing increases in home values would enable them to get away with irresponsible purchases. The oil shock of 2007 caused an economic slowdown and tremendous losses by American car companies. As unemployment began to creep up there were increasing defaults on mortgage payments and a loss of confidence by investors in mortgage-backed securities. This domino effect has crushed stock market values and led the government to attempt to stop the decline with “bail-outs� for seemingly anything and everything. Whether this is the right course of action will only be seen in the future by looking back and what is being done and analyzing the results as no government borrowing on this scale and resulting involvement in private companies and banks has every been tried before in peacetime.

Comcast~ No fun for anyone

         Comcast, the main entertainment provider for millions nation wide, is a major monopoly. It under produces it services, (not enough HD channels) and over charges for them (PPV cost way too much). Unfortunately for many, there are few if any affordable substitutions for Comcast, hence its monopolistic power.

But how did it become a monopoly? There are a couple of different reasons. For one, in order to have a functioning cable network, miles and miles of lines must be laid and acres of land must be acquired. This creates a very high fixed cost. All of these lines and transformers need to be constantly monitored and maintained, which dictates the need for many employees, adding to the already growing variable cost. Once the cable infrastructure is in place, it would be impossible to enter the cable tv market in the same area. Doing so would require running a second set of wires to each and every house for which there is no land for because Comcast is already using all of it. And let us not forget the most important thing that allows Comcast to have its monopoly, the government sanction. Through licenses and other law and legislation, the government has basically not only allowed this monopoly to occur, but it protects it as well, as long as Comcast keeps the tax money flowing. 

So what are the perks of being a media monopoly? Lets start with the one that is most intrusive into our lives (and more specifically our pocket book). Comcast gets to charge whatever price they want for their services, as long as the demand curve allows it. This allows for maximum profit gain. For example, their profits were up by 38% in the third quarter of 2008. (www.variety.com/article/VR1117994870.html?categoryId=18).

Not only do they get to charge the highest price possible, but they also under produce by not having enough HD channels. This, as a result, creates a lot of dead weight loss, which in this case manifests itself as wasted money and people with dish (if they can afford it) or antennas. As in any monopoly, price discrimination can fix this problem. Comcast does this in many ways, charging different prices to different regions, different packages that are available, and the promotional bundle of phone, Internet, and cable (all scratchier, slower, and blurrier then they need to be). By doing this they eliminate deadweight loss and consumer surplus while increasing their customer base as well as producer surplus. But there is one perk that Comcast does not get to enjoy. Since Comcast is not a complete monopoly (i.e. dish and fios), they still need to invest in minimal advertisement to prevent people from switching to cable alternatives, such as dish. But in the end, Comcast is still pretty much a monopoly because it continues to show the characteristics of one (i.e. high fixed cost, over charge/under produce, price discrimination). Additionally, most people cannot afford dish.

Eastern Motors Economy

This economic failure we are currently engulfed in cannot be completely blamed on the events that occurred in the past few years, though there is evidence that economic policies our government in the past 8 years are partially to blame. This economic downturn took its roots in late 2000 when the economy was booming like never before. At the end of Bill Clintons presidency and through the first year or so of George Bush’s presidency the economy saw enormous growth and people were spending like never before. It seemed as though the economy would never slow down, but as we all know it did. After the tragic events on September eleventh the economy saw a sharp fall as all of America was in shock. Meanwhile the FED was fighting this downturn furiously, by lowering interest rates to encourage people to spend and take out loans. Not only did these actions encourage people to spend, in encouraged them to spend money…that just wasn’t there. People were spending money they had no business spending, banks were giving loans to people who had no business having loans and people were buying houses they had no business buying. For example consider a car company located all up and down the east coast called Eastern Motors™ they are a company that took of around 2004 and there paraphrased policy consisted of this; if you have a credit card regardless of how bad your credit is and how much money you actually have, you can buy one of their cars. These were not just any cars though, these were Porsches, Lamborghinis, Bentleys, Ferraris, Aston Martins (yes even for Harrison) and any other exotic you can think of. So essentially someone who could be flipping burgers at McDonalds could at the same time own a Lamborghini that he can’t even pay the insurance for. People seriously thought they were living the “American Dream� but this time it really was, only a dream.
This was only a minor example of unqualified consumption by the American people though, the big crisis occurred on the housing market. Now that people were bringing in more money, they though, why not buy a bigger house or a boat or any other large dispensable item of great value, so what did they do, they turned to the bank. At this point in time, banks were handing out loans like candy, a lot like Easter Motors™. This put both sides in worlds of trouble, on one side the people who took out the loans soon realized they could not pay back the loans and were essentially trapped in their own debt. On the other side banks soon realized that the money due for the thousands of loans they gave to people was not being repaid so intern, they were broke. When people realized that the banks had no money they ran to the banks to withdraw all of their money they had stored there only to be told that it no longer existed and that the bank was going out of business leaving people broke and homeless often times. This left America clueless of what to do next, like a deer in the head lights they stopped watching as one by one major banks started falling off the map. This is not where the tragedies end though. Americans would soon find unemployment rates skyrocketing like never before and they could nothing but watch as the FED adopted, what they thought to be more aggressive policies in the right direction but some of its members would soon realize that action was not always the best action. What I mean by this is the way in which the FED was trying to artificially stimulate the economy while it is clear to those on the outside looking in that the best path of action is seemingly waiting for the economy to fix itself. Secondly we are currently being lead by a president whose platform is deteriorated under his own feet, while he is constantly planning and planning to throw money at the problem until it is “FIXED�. But all this talk and no action has gotten him into the situation Bush was in for almost his entire presidency. Obama is currently loosing his support from the American people by the masses. MSNBC took a pole last week asking the American people to grade Obama on his performance using the letter grading scale. When the results were tallied people were stunned approximately 47 percent of Americans who participated gave Obama an F while around 35 percent of fearless supporters or just plain uninformed voters gave him an A, leaving the rest scattered through out.
No you may be a little confused at this point due to the fact that I had previously said that what was most likely best for the American economy was no action at all and how that seemed to be what most Americans supported but yet I just stated that Obama was ridiculed for doing a lot of talking and taking no action. What this proves is that the American people clearly have no idea what is best at this point but the reason I believe he received so many F’s is because though the American people don’t know what to do in this situation, but they assume that the president does. The issue is people have lost faith in the banks and the FED and now are looking towards the Government to save them and nothing is happening. It is a said day in America when the president is constantly on TV and the news is on everyday and yet the most informative TV show dealing with the economy is a South Park episode comparing the Economic down turn to the crucifixion of Jesus Christ.
With the economy still plummeting with so sign of stopping, the FED is still attempting to but a bottom under this drop while the American people are left to question what the future of the American economy will hold and weather or not their children will grow up in the same type of country they did when they were young.

Resources courtesy of Parke

Parke sent this to me via email, and I'm impressed with both.

Recession 101 points you to five other resources Bankling was too lazy or tired to do the work itself. Included among the five links is the Visual Guide to the banking crisis that Roday so loves. You can even watch that one in HD... which I so love.

Parke's second source was a flow chart which I found particularly useful.

That said, though, you all are still being too financially focused in what I'm reading so far. Think of the financial crisis as a mirror which reflects other fundamental flaws!

Sumerth's ultra-liberal version of reality

It seems like only yesterday that the United States was once the world's greatest economy. A nation of growth and progress, the U.S. continued to dominate the world economy, producing advancing technology and helping other nations who strove to follow its path. Yet, currently the United States is in a serious recession. The economy continues to falter as GDP declines, and unemployment sky rockets. Currently the GDP of the United States according to the last BEA release shows real GDP at -6.3%. This is expected to continue to fall for the next year or so. Unemployment, another indicator which shows us that our nation is in a recession, has gone up to 8.5%. Roughly double of what it was during the economic boom of the 1990s. Inflation has also increased; according to the BLS release in February the CPI rose 0.5%, showing that price levels continue to rise. There were many players who played a key role in the responsibility economic mess our of our once great nation.

Let's start early, all the way to 1982 when Ronald Reagan was president. Reagan an economic genius, helped spur the economy into a long twenty-nine year period of economic growth. He did this by implanting his idea of supply side economics where instead of trying to increase the demand or the consumption of products (who's effects are good yet not perfect: increase in GDP but higher levels of inflation) he tried to increase supply (whose effects are almost perfect: increase in GDP along with a slow decrease in price levels). Reagan's economic plan coined famously as Reaganomics helped the supply side of the economy or the entrepreneurship of the economy in two major ways. One, Reagan lowered the costs of business by reducing the power of labor unions in companies. Reagan’s war on Unions started in 1981 when he fired 13,000 air traffic control workers and destroyed their union, this was the start of the demise of the labor union movement. All though I usually drift to the extreme left of the political spectrum I must admit that this plan worked. Soon wages became flat and production went up due to the lowered cost of dealing with Unions.

The second step in Reagan's plan of shifting supply was to deregulate various public industries, most notably telecommunications, transportation and financial services. The deregulation of these industries boosted competiveness, investment, as well as opening new industries thus increasing overall production of the economy. Thirdly, Reagan helped simplify our tax system into 5 simple progressive tax brackets. This along with tax cuts targeted for the wealthy led to increased investment and more production. These economic principles were followed by the next two presidents, Bush Senior and Clinton. Clinton especially was lucky enough to have the explosion of the internet to encompass his similar Reaganomics policies. If you disagree with me just take look at the numbers, a net increase in employment of 16 million, and an average increase in GDP of 3.4% a year. Yet what does this have to do with economic recession today? Let's take a look at the housing crisis and we'll see an amazing connection.

During the economic that twenty nine year economic boom, a series of government placed economic policies led to the demise of the housing market. One of the many was the extremely low interest rates which allowed more people to take out loans for homes. Here the Federal Reserve tried to artificially move demand thus creating a fake boom to match the increase in supply and causing the prices for all goods and services, mainly houses, to go up. So if anybody wanted to buy a home they would have to pay more for it. Thus with housing prices going up, sub-prime lenders made loans to people who could not afford them allowing for these lenders to make a short term profit in this artificial boom. Soon the value of these loans went down due to increased interest rates (causing housing prices to decrease) as well as banks not covering the difference when people could not meet their loans due to decreasing housing prices. Yet why was this shift artificial? Since the Federal Reserve kept the rate at which they lend money so low the supply of funds (money they lend) kept shifting right. This put downward pressure on the price to borrow money leading to all capital resources to flow into the housing market.

Along with this government backed companies such as Fannie Mae and Freddy Mac bought up these loans or mortgages and combined them to sell to investors as mortgage backed securities further complicating the process. Finally in 2007 when this housing bubble exploded, the entire economy felt it’s after shock.

Now how did this affect the banking industry? Remember as the value of homes went up (due to low interest rates), sub-prime lenders made loans to earn short term profits. Soon Wall Street heard of this and banks began to invest heavily into the mortgage backed securities that Fannie Mae and Freddy Mac were selling. When the housing bubble burst, banks such as Citigroup, Bank of America, and Bear Stearns collapsed as well due to the heavy losses in their investment of mortgage backed securities. Hedge Funds especially took a hard hit to the housing market since they invested a minimum of 7 billion dollars in mortgage backed securities. Also insurance companies such as AIG, began selling credit default swaps (paying banks when mortgages defaulted) to various investment banks. This soon put these companies in quite a mess. To go along with this banks needed to stop lending in order to stay in business. This credit crunch soon affected many other industries who had nothing to do with the housing market. Since many industries were not receiving any form of investment, companies began to cut cost. Soon prices for many goods and services shot up leading to various people reducing in expenditures. With this decrease in expenditures companies were losing profit and began to lay off jobs. With unemployment peaking at 9% and rising along with declining GDP due to decreased investment as well as consumption the United States was about to enter a long recession.

In a nutshell there were many key factors which led to the demise of the economy, the 29 year inflationary boom, irresponsible actions by the Federal Reserve, and greedy lenders and investors. And no, it was not all George Bush’s fault, take it from a true liberal. I’m not trying to lay the blame on any of these factors but instead pointing out how we should try to fix the problem. You cannot make good decisions without understanding your mistakes.

A Slippery Slope

For those of you who watched SNL last night, their opening has a great take on the dangers inherent in nationalization of industries.

Click on the link above. I'm frankly not sure whether to laugh or cry at this one.

Carried Away- The Thexton Version of the Causes of the Recession

This economic crisis is our own fault. We could go around for days blaming it on the banks, Regan, the housing bubble, the government, etc. but that wouldn't be fair. We as Americans have been so privileged and have usually been at the top of whatever we do and we are used to being able to get what we want. Whether we admit it or not, we are greedy. We always want more; the newest model, the prettiest, the 'coolest' of whatever it is that we are buying. Do we really need all of this? No. As we learned in science class, the three things needed for survival are: food, water, shelter. We have gotten greedy and tried to buy everything that we wanted and made stupid decisions in the process. These stupid decisions I am referring to involve buying things (houses especially) that we knew we did not have enough money or credit to buy. Also, we took out loans of heinous amounts and couldn’t pay them back, which left banks with no money to lend out, which was a big part of the bank failures. We didn’t know any better. We wanted to get what we wanted when we wanted but didn’t know how it would affect us in the long run or the economy because we didn’t know how the economy worked. Anna Quindlen put it nicely when she said, "you can't proceed knowledgeably, in terms of personal finance or political judgment, in an area you don't really know much about."

The current economic situation is deeper than a recession but not deep enough to be classified as a depression, or a "repression" as Anna Quindlen put it. The unemployment rate is at 8.5%, the inflation rate is 0.24% for Feb. '09, and the GDP growth rate was -6.3% for the 4th Q 2008. None of these numbers are close to what they should be for a "3-way happy place" or equilibrium. The targeted range for unemployment is somewhere between 4.5% and 5.5%, the ideal range for inflation is 1% - 2%, and the intended range for GDP growth is between 2% and 4%. Let's start with the banks and housing bubble, not because it is the biggest cause, but because the media gives it the most attention. We know that those who work for the media are most likely NOT economists but we still believe them when they say, "oh this is all the banks' fault…oh this crisis is all because of Bush (or Obama)…oh this economy is going down the drains because of x, y, and z…" Why do we believe whatever bull crap the media gives us? It’s because we don’t know enough about the situation ourselves... but on to the banks and housing market. You could say it started with Regan and his supply-side economics and deregulation of the private sector. Both of these tactics could have been very successful in the short and long run if only there had been perfect information and transparency. The deregulation led to excessive freedom and power in the banking system and housing market. "Arrogant traders around the world [and in local banks] were playing a high-stakes game they didn’t understand" and the people they were dealing with, who didn't understand either, were hurt. Banks gave out loans to people who couldn't afford them and they weren't paid back. This led to people buying houses that they knew they couldn’t afford and taking out more loans to pay the mortgages. This leads to the mortgage-backed security (MBS) issue, where banks packaged multiple mortgages up, sold them to higher risk investors and the investors then put them into the stock market and/or hedge funds. The FED kept interest rates at about 1% during this bubble, and the banks kept buying MBSs because they thought they were going to keep making boatloads of money. When the markets went down, the MBSs went down with them. This meant that banks didn't get that money back and that the average American with too big a mortgage from too big a house on his plate couldn't pay the bank back. Banks then proceeded to give sub-prime loans with adjustable mortgages to people with faulty loans, but once the interest rate sky-rocketed, "Joe-the-Plumber" could no longer pay his loans back. Homes went into foreclosure because the money people had invested in the stock market was ‘gone’, their adjustable interest rates went way up, and the banks were out of loanable funds because of the above reasons and more. This was the bubble bursting which led to tons of foreclosures and to the failure of banks for reasons above as well.

Simon Johnson, in his essay "The Quiet Coup," uses the metaphor of an oligarchy to explain who is at fault. "An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down." In our current situation, a case could be made that the oligarchs were those at the very top of the ladder, the elites, the members of Wall Street who got rich wasting the average American’s money. Johnson says that when the market started to collapse, "the elites did what all elites do…they took care of their own." They were selfish and greedy and only saved what they needed to in order to return to their previous spending and splurging habits. Now this is not to say that they are the only ones to blame, because we are not placing blame here. The "average Americans" (i.e. those not in the top 1%-5% of the spectrum in this case) made some stupid decisions as well. They either chose to not educate themselves on this matter or were never given the opportunity (ragging on the education system to come in a later segment). But if you don't know anything about what you're doing, you’re probably going to end up doing something stupid (see above paragraphs for unpaid loans).

Harrison Claud's Causes of the Recession

When examining our current economic situation, you could point many fingers, lay blame in many ways, or try to pin the problem in one specific area, but it's just not that simple. There isn't just one person to blame, one corporation to blame, one governmental policy. It is a concoction of different mistakes made by different sectors of our country, all coalescing into the biggest financial meltdown of at least my generation. Which is something my generation is not used to, because my entire lifetime, and specifically dating back to about 1982, the U.S. economy was a shining beacon in the world market, and enjoyed the most prosperous time any country experienced in the contemporary world. During this period, however, mistakes were made that would eventually lead us into the recession we are experiencing today, and this blog post will attempt to delve into some of those issues, though of course no essay anywhere will be able to give the full story.

One ingredient that was a key part in this stew of disaster that goes unnoticed and unrealized by most people is just how much our foreign policies and relations have had an effect on our economic condition. Events such as the Iraq war, the Vietnam war, the Korean war, nuclear scares like the Cold War, and other foreign crises have been huge parts of the United States history. And in order for these wars to happen, or for the United States to extend its touch into far-reaching sectors of the world, our government had to shell out some major cash. Through this, the national debt went through the roof, and it also created a sense of distrust in the government by many parts of society (see George W. Bush). This meant that a lot of people decreased their consumption.

Another period during recent history that aided to this recession was the Reagan Era. During this time, many changes were made to the financial sector of the United States. Reagan was a big proponent in supply-side economics, and that the private sector should control the national level, and played a big role as far as the deregulation of the private sector. Debt exploded from 900 billion dollars before Reagan's tenure to 2.8 trillion dollars after his tenure. If transparency and perfect information of the government and Federal reserve had been available to the public, "Reaganomics" may have been wildly successful in the long run. The capitalist nature of our America, however, made this impossible, making "Reaganomics" a lot like crack. During his presidency, it was great, because America was high on crack, but a few years later, we took a look in the mirror and realized, "Oh my God, I'm addicted to crack. This is a bad situation."

Probably the reason for the recession that has gotten the most attention by the media would be the collapse of the housing market, and the subprime mortgage fiasco. After years of monetary inflation on the part of the Federal Reserve (an institution that created a 1% interest rate from 2002-2004, even dipping below 0% in 2003) families with bad credit and low income, who didn’t qualify for "prime" mortgages, applied for mortgages with insanely low down-payment and low interest. The housing demand rose to ridiculous levels, with money easily flowing from the Federal Reserve to the banks. The banks were more than willing to lend to the people, as they continued to make profits from an simulated "boom" created by the government. Credit was given by the government, through both fiscal and monetary policy, controlling prices, artificially raising demand, and as the government removed what it injected into the system, the demand returned to normal, and there was an inevitable "bust," with a glut of supply hurting prices, and misleading consumers. The government also sponsored companies such as Fannie Mae and Freddie Mac to buy mortgages given by banks and sell them as "mortgage backed securities," throwing leaves onto the blaze already created by the government. When everything came to the forefront, and the reality of what was happening set in, the housing market crashed, and we see the effects on our own economy.

So who is to blame for that? The people looking for nicer houses than they could afford, and buying them anyway? Or the banks that allowed these malfeasances to occur? Well, the banks are certainly at fault, for they invested a lot of money into these "mortgage backed securities," and as prices of houses rose and rose, these securities gave banks a guaranteed return-- something they would be stupid to stop investing in, right? Wrong. Banks that you’ve no doubt continued to hear about in the news such as Bank of America, Bear Stearns and Citigroup were key players in this securities market, and as the housing market crashed, all of the investments these banks had made were destroyed, sending the banks into (IRONY) bankruptcy. AIG, a huge insurance company, had to pay investment banks when these mortgages defaulted, and as this market for mortgage backed securities died, AIG was shattered. A 85 million dollar bailout was issued to AIG, which was AFTER investment banks like Lehman Brothers collapsed, all of which created a huge scare in the market. Unemployment began to rise, and the US growth became no more. Currently, the unemployment rate is still high, and continues to rise. Investment has shrunk, household debt is up to 100% , national debt is 350% of the GDP, a big change in 160% in 1980.

So who is to blame? The answer is of course, everybody. The everyday American people got greedy, and wanted things that they couldn't afford. The American corporations got greedy, and wanted money that wasn’t real. Ideas such as the stimulus package will help, but the American people need to get confidence back in the American system. Even then, how can we stop our country from repeating the same mistakes? Is it simply human nature to be greedy, to try to find loopholes and tricks to get money without actually earning it? That's what really scares me about this recession. Probably the reason for the recession that has gotten the most attention by the media would be the collapse of the housing market, and the subprime mortgage fiasco. After years of monetary inflation on the part of the Federal Reserve (an institution that created a 1% interest rate from 2002-2004, even dipping below 0% in 2003) families with bad credit and low income, who didn’t qualify for “prime� mortgages, applied for mortgages with insanely low down-payment and low interest. The housing demand rose to ridiculous levels, with money easily flowing from the Federal Reserve. The banks were more than willing to lend to the people, as they continued to make profits from an simulated “boom� created by the government. Credit was given by the government, through both fiscal and monetary policy, controlling prices, artificially raising demand, and as the government removed what it injected into the system, the demand returned to normal, and there was an inevitable “bust�, with a glut of supply hurting prices, and misleading consumers. The government also sponsored companies such as Fannie Mae and Freddie Mac to buy mortgages given by banks and sell them as “mortgage backed securities�, throwing leaves onto the blaze already created by the government. When everything came to the forefront, and the reality of what was happening set in, the housing market crashed, and we see the effects on our own economy. So who is to blame for that? The people looking for nicer houses than they could afford, and buying them anyway? Or the banks that allowed these malfeasances to occur? Well, the banks are certainly at fault, for they invested a lot of money into these “mortgage backed securities�, and as prices of houses rose and rose, these securities gave banks a guaranteed return. Something they would be stupid to stop investing in, right? Wrong. Banks that you’ve no doubt continued to hear about in the news such as Bank of America, Bear Stearns and Citigroup were key players in this securities market, and as the housing market crashed, all of the investments these banks had made were destroyed, sending the banks into (IRONY) bankruptcy. AIG, a huge insurance company, had to pay investment banks when these mortgages defaulted, and as this market for mortgage backed securities died, AIG was shattered. A 85 million dollar bailout was issued to AIG, which was AFTER investment banks like Lehman Brothers collapsed, all of which created a huge scare in the market. Unemployment began to rise, and the US growth became no more. Currently, the unemployment rate is still high, and continues to rise. Investment has shrunk, household debt is up to 100%, national debt is 350% of the GDP, a big change in 160% in 1980. So who is to blame? The answer is of course, everybody. The everyday American people got greedy, and wanted things that they couldn’t afford. The American corporations got greedy, and wanted money that wasn’t real. Ideas such as the stimulus package will help, but the American people need to get confidence back in the American system. Even then, how can we stop our country from repeating the same mistakes? Is it simply human nature to be greedy, to try to find loopholes and tricks to get money without actually earning it? That's what really scares me about this recession.

The Recession-- According to Ellis

In 2006 our economy was in full throttle; the stock market was climbing, innovation was greater than ever before in the United States, and all seemed to be going well. That is, until, as said by Time magazine’s Kurt Andersen, "we started gambling (and winning!)" – our economy went downhill from there. Banks were forced to foreclose, the prices of houses plummeted, and Americans found themselves either in debt or unemployed – or maybe both. But how did our economy go from such a prosperous era to an 'economic crisis'?
In the past few years, the values and prices of housing increased dramatically. Housing was not only growing in price but also in size, increasing by half its original size. The stock market was booming; people were bringing home more money than ever – so why not buy a nicer, larger house? "We started living large," as said by Andersen, "literally as well as figuratively."
Another factor of American’s having more spending money was the FED's efforts to stimulate the demand in the economy after September 11th. They lowered interest rates, to stimulate borrowing and spending and to promote growth. By doing this, there was more money to be spent – and over production. People were buying new houses, buying new cars, and utilizing new innovations – such as the internet, to purchase laptops and iPods – most likely rarely paying in cash under any circumstance.
With this promotion for growth, our economy became demand induced – with the ability to spend more. People wanted to live larger than ever before – maybe because there was more to purchase or invest in than ever before; this is when we turned to the banks. Americans looked to the banks for assistance in purchasing their dream home or their new Lexus – and the banks granted them mortgages and/or loans. Not only did this ultimately put Americans in potentially great debt, but the banks were in a situation as well. Many banks gave loans to unqualified people, meaning that some people were unable to pay back these loans which caused the banks a lot of trouble and loss.
With people easily being granted loans for mortgages, there was an increased demand for housing. Naturally, because the demand increased, the supply increased. More houses were built everywhere and because loans were so easy to come by, affordable housing was created – which did not necessarily seem like a bad idea at the time, but many of the loans utilized for mortgages were unable to be paid back to the bank.
But the banks seemed to balance out their losses from bad loans by investing in the housing market. Prices were still high. Therefore, the banks began investing in Mortgage-Backed Securities. These securities were highly profitable as long as the prices of housing remained sustainable. Banks invested in these and were profiting from them left and right. Unemployment was low, banks were prosperous, Americans had more money than ever (and spending more than ever too) – but all aspects of everything good in our economy, seemed to disappear.
The FED's plan to synthetically stimulate the demand completely backfired; it caused a great flow of money – which resulted in overspending in every category possible. Due to false assumptions on continued growth in the economy, consumers were in debt. The prices and values of the housing market declined steadily due to the overproduction of housing – and the easy process of receiving loans. But as the economy began to slow down, the loans were not being paid back – by the unqualified people they were granted to in the first place. Banks lost money and could not continue lending at the same levels as before.

Some more sources courtesy of Rachel

Rachel's post below draws on some good sources beyond what I've already posted. The first deals with the widening income data I mentioned Friday in A Period.

The second source shows equity index data since the 1980s. Can you say "profits income?"

Final source she used is a look at house prices in Ireland. The parallels are scary and since this is a global recession. It makes great sense to consider this, especially since many people overlook the international components at work here.

Long Run Aggregate Supply... Think about it...

The need to understand

As our nation reels from the plummeting stock market, it is vital that everyone understands how we got here in the first place. The problem started in the early 1980s and continued up until today. Along the way, there were mild recessions in 1991 and 2001, the extreme deregulation of the late 1990s, and the housing bubble of the 2000s. So how are we now facing the worst recession since 1973 and 1981? The period from 1982 to 2007 was the largest period of growth in the history of the United States and of the world. It was a period of enormous social growth, innovation, and of exploding wealth. Unfortunately, it was also a period of time where banks and Wall Street overreached. With people everywhere scared, GDP growth stalling, and a national unemployment rate of 8.1% for February 2009, it is time to understand what has happened so that we can take the right steps towards FIXING IT.
A huge cause of the current recession took root in the deregulation of the late 1990s. There were reductions on taxes on job incomes, a massive expansion of trade, large amounts of deregulation, and a scary amount of business profits and capital gains. In 1999, the government deregulated the banking industry through the Gramm-Leach-Bliley Act, which took away the wall between investment and capital banks and allowed all banks to participate in both markets simultaneously. In 2004, the capital requirements for banks were reduced (the ratio of the firm’s debt to the firm’s capital base was changed to 30:1…a completely insane number). As the deregulation continued, people watched the economy artificially grow and prosper, and became more and more confident in the idea that a deregulated system was the best.
Several other factors influenced the US’s fall from prominence. From the 1980s to the 2000s, wages stayed relatively stagnant while the housing market exploded. People began to invest in real estate, thinking it the safest and best thing to do. From 1996-2005, the number of fixed rate loans approved fell dramatically, while the number of mortgage loans approved soared. There was a 238.5% National increase in housing prices between the same period of time. The first time buyer and the repeat buyer’s prices also rose 239%. The scary amount of lending to people with faulty credit coupled with the huge raise in housing prices created the massive housing bubble that incited the fall of the market. Income also stayed mostly the same from the 1980s on: except for the top 1-5%. This 1-5% resembles most of Wall Street and their greed, and shows just how out of hand their situation became. During the Bush years (as well as a bit before), the influence of these Wall Street brokers eked its way towards Washington. As they gained more and more control, deregulatory measures were passed in abundance, just so that they could get more money in the bank. Also in the Bush years, tax breaks were given away to these powerful, rich people, thus hurting the bottom percents even more. As housing prices skyrocketed, incomes stagnated, and as the housing bubble grew, the Dow Jones, S&P 500, etc experienced a similar increase until 2001. After the mild recession, they gained steam until this past year. The economy appeared to be growing, but the growth was artificial and unsustainable. The economy was growing on top of the housing bubble, and when the bubble burst the economy fell.
The housing market, or the hotbed of this entire issue, was the catalyst in this situation. It started with the prosperous years of the late 1990s into the 2000s, when banks had so many loan able funds that they decided to lower their standards for borrowers. They dished out tons of sub prime loans (loans to faulty borrowers) to these borrowers, often tacking on an adjustable rate (the interest rate starts out low and manageable, then quickly escalates). When the housing bubble began to burst, the banks realized that they had no money left, so they jacked up the adjustable interest rate on people’s loans. All of the sudden, Joe the Plumber couldn’t pay back his loan, so he was forced to default on his loan and lose his home. The bank was then left with tons of these toxic assets, and no more money or a place to put the assets. This cycle was dubbed the “credit crunch� by the ever so helpful media. All these loans combined with mortgage-backed securities (asset-backed securities that are tied to houses) were bought then sold by the two GES machines Freddie Mac and Frannie Mae. At one point, these two giants owned almost half the mortgage market—12 trillion dollars. All during this time, the Fed kept interest rates at 1%, adding to the Housing Bubble. All these unsustainable practices were sure to fall through at some point, and they did spectacularly in the end of 2007 to the beginning of 2008.
The first to go was Bear Stearns; taken over by the Fed in March 2008. In September 2008, Lehman Brothers and AIG both fell, spooking the market and consumer confidence. AIG received an 85 million dollar bailout plan—the first of many (…only to spend 400,000 on an expensive retreat for top customers…infuriating.). Because the housing market rose so high so fast, banks bought tons of mortgage-backed securities, thinking they were hitting it rich. When the bubble burst, therefore, it dragged the heavily invested banks with them. Wachovia and Citigroup, along with a few others, quickly followed. On top of the obviously massive problems at home, the Us suffered another blow when foreign investment halted after Lehman Brothers fell. Also following the banks and the housing market, the various hedge funds began to fail, though none so impressively as Bernie Madoff’s (despicable).
Now, we as a nation are faced with the giant economic crisis generated by our own greed. The Wall Street brokers and workers (led by the stunning example of Madoff) showed their true colors as the markets began to fail. Never content, these people kept pushing for more and more money, doing whatever it took to succeed. The Stimulus package will help, but in order to really get the economy back in gear, people must regain confidence in the system. Without consumer spending, the economy can never fully recover. The government, the fed, and the American people must all help out in the fixing of our economy.

Transparency and Perfect Information

The present financial crisis has many causes, and there is no one issue that is 100 percent responsible. In fact, one could argue that if only one of the following things had occurred, we would be nowhere near the position that we find ourselves in today. However, in the Jenga tower that is the economy, we took out too many pieces: global changes, the Reagan era, the real estate issues, and the problems with the banking system. Now we are stuck with a formerly, beautiful, gilded tower that is now a pile of ruble. Without transparency and perfect information, this was bound to happen eventually.
We made many mistakes in the United States, but the enormous changes around the world definitely hurt our economic status. The United States has funded multiple wars and been involved in some major nuclear scares. The Korean War, Vietnam War, Cold War, Cuban Missile Crisis, and Berlin Blockade all demanded huge amounts of resources, greatly increased national debt, and created varying amounts of social unrest which can decrease consumption and general trust in the government. These events, combined with China’s rapid rise under Deng Xiaoping and India’s halt of inward-focused economics greatly affected the American, and for that matter, the Global economy. The pressure to make the numbers fit provided by China and India’s continued rise to prominence definitely influenced the publicly owed companies. Also the massive amounts of debt accrued through funding the Iraq and Afghanistan Wars have been draining the economy since they began. The changes and events in the world over the past thirty or so years have all contributed to our current situation and now we are experiencing the consequences.
The Reagan era ushered in many changes, especially in the financial sector. Reagan strongly believed in supply-side economics, and that the private sector should set the nation’s economic course. He, aided by the Federal Reserve, squashed inflation, and used the principles of supply-side economics in their entirety. Reagan also is largely responsible for the deregulation of the private sector. It is important to note that all of these actions could have been hugely successful in the short and long run if transparency and perfect information had been plentiful. However, in the incredibly competitive atmosphere of business, these two critical necessities were ignored and Reganomics ended up contributing to the current recession.
The banking system and the real estate issues are similar, and both stem from an excess of freedom, power and deregulation in finance. In addition to deregulation, the problems with the banking system came about through over-confident bankers who failed to plan for the big global changes as mentioned above, and calculated for known risks incorrectly. Banks have also grown far too large. Once the figurative walls between savings banks, insurance companies, investment banks, and brokerages were torn down, banks simply encompassed too much. The bankers got lazy and started grouping large amounts of assets together and setting up very imaginative ways to keep track of everything. This leads into the essential problem with real estate: innovative mortgages. Innovation is great when it is well researched and tested. However, sub-prime, alt-A, and option ARM mortgages were very poorly thought out. These are a few examples of ways banks helped people buy houses, when they had the income of someone who should be renting an apartment. Obviously, when it came time to pay up these people could not. They defaulted and the banks were stuck with all sorts of liabilities. Eventually, this bubble of very naïve thinking with no regard for long term success burst, and now we are seeing the result.
All of these factors combined lead to where we are today. Interest rates and inflation are extremely low. The unemployment rate is high and still rising. Household debt has risen from sixty percent in 1997 to 100 percent by 2007, and national debt is now 350 percent of the GDP as opposed to 160 in 1980. Investment has taken a sharp downturn and consumption is decreasing. The United States economy is in trouble, but it can all be fixed eventually. The key piece next time around must be transparency and perfect information to prevent another, similar recession.

David Brooks weighs in

Be sure to read the link above-- too simple, but points you in a couple of other directions to write your post...

Off to the play!

Micro- End of Unit Blog Assignment

We've just wrapped up our unit on Product Markets and Market structures.

It's also NCAA Final Four Weekend, one week from the NCAA Frozen Four (Hockey's equivalent of the Final Four, but they can't call it that for copyright reasons), the Employment situation report released today showed the US unemployment rate rising to 8.5% and another 663,000 jobs lost--- including one CEO of GM, Rick Wagoner at the urging of the White House.

Your blog for this unit can take one of two directions-- 1) you can comment on the economics of the Final Four-- look at the enormous revenue of the NCAA v. the value of the scholarships paid. What allows the NCAA to generate such enormous revenues? Is this a moral approach?

Or, you could look at the Financial Crisis. What are the types and sizes of firms that have gone out of business or demanded relief in the form of subsidies from the Federal Government? How did market power contribute to the crisis?

Or, you could pick your own topic to show the relationship of market structure to profits and jobs.