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More from Libby Spencer’s Place
Posted by: Dale Franks on Monday, March 17, 2008

Well, I'm short a tooth, now. But, most of the pain is gone. On the other hand, I'm still on vicodin tonight, so we'll see how the pain is tomorrow, when I have to switch to Aleve and aspirin.

In any event, the comments section over at Libby's place is still going strong, so here's the latest abstract.

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I'm not an economist, although I do lunch with many of them in various countries. Many of them seem less convinced of the inconsequential nature of Bush's actions relative to economic stability than you are.
I've been similarly critical of the administration's policies in many economic areas.

But we're talking about a specific thing here, and you guys are dragging in irrelvancies like tax rates, and the like, and failing to address the key point, which is that mortgage brokers—who were the key players in creating this fiasco—are essentially unregulated at the federal level.

I don't know how to make it any simpler for you.
Don't you think the debt we have incurred from Bush's war has had any effect on credit markets and hence on our current state of affairs?
Well, that's a very complicated question.

First, the US national debt is about $9 trillion, of which, about $4 trillion is treasury notes held by US government agencies. The public debt of the US, i.e., bonds held by non-governmental institutions and individuals, is about $5 trillion. With a GDP of $13 trillion, that means that the public debt is about 37% of GDP. This makes the US the 65th highest ranking nation in terms of public debt to GDP.

For instance other advanced nations have debt ratios like:

Norway 39.1% of GDP
UK 43.3% of GDP
Austria 61% of GDP
Canada 64% of GDP
Germany 65.3% of GDP
France 66.6% of GDP
Belgium 86.1% of GDP
Italy 105.6% of GDP
Japan 182.4% of GDP

So, I think you have to ask, if our debt level is crowding out private debt with public debt, is that also happening in these other countries.

With the exception of Japan, it doesn't appear to be.

Logically, there must be some level of public debt at which private debt s crowded out of the debt market by the easy availability of government-backed instruments, but no one really has any idea what that level is, and despite massively increasing debt since the 1970s, the crowding out doesn't appear to have started here, or in most OECD countries.

Moreover, when we look at the basis of this crisis, which is in home mortgages, there's not too much of a direct relationship between the two markets. You can't, after all, live in a 7 3/4% 30-year Treasury Bond.

To the extent the two markets are related, it's that the market in treasuries can be an even stronger driver of interest rates—including mortgage rates—than the Fed is.

Treasuries can, I think, compete more directly with business bonds than they do with home mortgages—after all, people do need a place to live, but investments in treasuries or commercial paper tend to be made for the purpose of capturing a steady income.

The short answer is, "I don't know", but if a crowding out effect was occurring, I'd expect to see it first in yields for commercial paper rising, in order to attract investors away from treasuries, not on mortgage interest rates of availability.

However, let's be very clear on the cost of "Bush's War". Since 2003, we've spent a cumulative total of $584 billion for the Iraq War. At the same time, the US has generated over $63 Trillion in GDP. So, over the past five years, the amount we've spent in Iraq makes up 0.09% of GDP.

I guess the effect that 0.09% can always be debated, but that's really a drop in the bucket compared to federal spending on, say Medicare or Medicaid.
Sometimes, you know, the economy reflects what the President is doing in the world.
Sometimes it does. But in a very real sense, the president's economic policies are pretty limited in their effect on the actual economy. The president has no power to spend federal money—or even to choose not to spend it—without the explicit permission of Congress. And the president really has no way of controlling monetary policy, unless the Fed agrees. The president just isn't the key player in either fiscal or monetary policy. To the extent a president can change fiscal policy, such as by lowering or raising tax rates, those structural changes have to be passed into law by Congress.

Moreover, the economy tends to respond only to real structural changes. Tossing out a one-time rebate of $600 per taxpayer is not a policy that will have any lasting effect. Only long-term, structural fiscal changes, about which people and firms can plan their finances, have any noticeable effect on the economy.

As far as the president's other activities...well, if the Presidewnt announced we were invading Saudi Arabia to take all their oil and use it for US domestic consumption, I'm sure that's have quite an effect on the world's economy as well. But that wouldn't, properly speaking, be a result of economic policy.
"the lowest quintile have seen real rises in income of 36% over that period."

Really? when you say real rises do you account for inflation?
Of course, I do. making comparisons in nominal terms is essentially worthless.

In 1970, nominal GDP, i.e., GDP in 1970 dollars, was a bit north of $1 trillion. In 2006, it was $13.3 trillion. In real terms, however, 1970 GDP was around $3.8 trillion. So the lowest quintile is getting a smaller share of a vastly larger pie.
 
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First of all, clearly, these people are reluctant to involve themselves in the discussion of the expense of social programs, and will instead focus on the far less expensive and far more vital war effort. to my thinking, this raises some question about how seriously away or take their complaints about the economic situation.

And you are correct, Dale, when you suggest that the key issue is mortgages, mortgage brokers, et cetera. Which, in turn, is precisely why I laid out my argument, over there, about granting mortgages to people who couldn’t afford it, solely because of a commitment to equal opportunity laws. It’s my view that that is the major player in all of this. Of course, it is also the one they ignore. apparently, the concept that when you focus on traditionally lower income groups, who also traditionally have had credit problems in the past, you’re going to end up with credit problems in the future, is when they’d rather not deal with. It’s far easier to blame the problem on racism, sexism, or what have you.

the financial situations that we are talking about are the direct result of attempting to mend a social situation unbending the economy all out of shape. We are paying now, with the results of that meddling. I suppose we could call it the law of unintended consequences, though frankly I find it difficult to believe that they could have not known that dumping huge amounts of mortgage money into those subgroups wasn’t going to turn around and bite them in short order.


As an aside, it’s interesting to note that these are the same issues that are coming up in the Democratic primary, just now. I wonder if they will have noted that parallel, but I doubt it.
 
Written By: Bithead
URL: http://bitsblog.florack.us
Let’s not get too excited and imagine the problem is due to legal issues of having to lend to everyone, etc. I’d say good old fashioned greed and idiocy played a big part (the two often go hand in hand.)

Keep in mind banks view loans as "selling product" and the salesmen want to get that sale, oh, yes, they do. Which book by Tom Wolfe had the "work out" banker, the guy who tries to get the money back, after the sales guys have over-extended loans? I forget.

Heck, Holland had a bubble over TULIPS of all things, so I don’t need to see the government as causing this one. One of the big factors in bubbles is that speculators (who are vital in capitalism) create artificial demand, so that when it finally pops, reveals a big over-hang and thus massive fall in demand.

So between mortgage guys wanting the extra sales, the dumb slobs who lied on their docs, the bankers who thought selling off the risk would work, the speculators flipping condos, etc., its not too hard to see what happened. If it is true that government rules on lending to low income folks fueled the problem, I wouldn’t doubt it, but I’d need to see harder evidence.



 
Written By: Harun
URL: http://
One of the big factors in bubbles is that speculators (who are vital in capitalism) create artificial demand
When speculation invests in new product, process, or non-financial marketplaces it has a connection with reality and its necessary. When a speculation’s payoff shifts from a realized benefit from those things and is based on continued demand from other speculators, its no longer helping capitalism. It is instead a creature onto itself. Those slips of paper of whatever is being bid on might as well be baseball cards or lottery tickets.

The strife from the fallout from those ventures puts the rest of capitalist system at risk. Its mostly from the psychological effects. But if people stop buying from fear or the government creates knee-jerk regulations, everyone gets hurt.
 
Written By: jpm100
URL: http://
"we’ve spent a cumulative total of $584 billion for the Iraq War"


This begs a few questions

How much of that would have been spent on defense anyway?

If we hadnt gone into Iraq and were still patrolling the nofly zones how much would it have cost to do so?

 
Written By: retired military
URL: http://
Let’s not get too excited and imagine the problem is due to legal issues of having to lend to everyone, etc. I’d say good old fashioned greed and idiocy played a big part (the two often go hand in hand.)
Once the lower incomes were defined by federal law as a legit market by way of racial quotas, the banks went after it. Looked pretty good for a while, didn’t it?

How much of that would have been spent on defense anyway?
Your point is taken, but I suppose that to depend on who is in power. If the left had their way, nothing. Reality is far different, but since when do such arguments arise from reality?


 
Written By: Bithead
URL: http://bitsblog.florack.us
I’ve been similarly critical of the administration’s policies in many economic areas. But we’re talking about a specific thing here, and you guys are dragging in irrelvancies like tax rates...
Here’s a thought, Dale: had Bush not cut taxes, our deficit would have been smaller and we would have had to sell fewer securities to pay for that deficit. The more securities we have to sell, the higher the interest rate goes in order to attract more investors. Fewer tax cuts would have meant lower interest rates, which would have meant more of a bubble. So, the tax cuts actually (to some limited extent) minimized the problem by raising the cost of borrowing.

Is that inaccurate?

DALE: Well, as it happens, I was referring to thier complaints that the tax system wasn’t progressive enough, not about the level of taxation in general.

In your question, you’re really referring to the "crowding out effect", which I think I addressed elsewhere, i.e., there may be a crowding out effect, but with rates hovering at or slightly above historic lows for the past 5 years, I’m not seeing much evidence of it.
 
Written By: Jon Henke
URL: http://QandO.net
It looks to me as though part of the problem is that Libby doesn’t know the difference between the Federal Reserve and the Treasury Department. It’s a common mistake.

Suggesting that everything, including government agencies, private institutions, and public/private hybrids, are vehicles for party policy does provide an interesting mirror into how she thinks, though.
 
Written By: Dave Schuler
URL: http://www.theglitteringeye.com
Here’s a thought, Dale: had Bush not cut taxes, our deficit would have been smaller and we would have had to sell fewer securities to pay for that deficit
Following the tax cut, tax revenues went UP, Jon.

 
Written By: Bithead
URL: http://bitsblog.florack.us
Bithead,

True, revenue went up, but so did the deficit.
However...how much of that was from the tax cuts, how much of it from the enormous expansion of the welfare state (ie. Medicare part D), and how much is from the war seems difficult to parse out.
 
Written By: Warrior Needs Food Badly
URL: http://
"...how much of that was from the tax cuts, how much of it from the enormous expansion of the welfare state (ie. Medicare part D), and how much is from the war seems difficult to parse out"

Not really. The bad stuff (deficits, etc.) is caused by out of control wasteful spending on the military industrial complex. Good things are caused by investment in America’s future.
 
Written By: timactual
URL: http://
So, over the past five years, the amount we’ve spent in Iraq makes up 0.09% of GDP.
Shouldn’t that be .9%? (584/63000*100)

 
Written By: Grimshaw
URL: http://
True, revenue went up, but so did the deficit.
You would expect that in a wartime situation wouldn’t you? Your remaining point about the welfare state and it’s expansion is also correct.

Look, Jon is making an assertion here, that the lower tax rates were responsible for less money being available to the federal government, forcing them to fund their needs by other means... bonds and such. And that’s simply not the case. there’s no way the tax cuts could have caused the effect he’s speaking to, since income didn’t tighten as a result of them.

Now, were Jon to mzake the argument that the federal funding pinch is being caused by too much social spending... we’d all be on the same page.

And Tim, without that military spending, we don’t HAVE a future.



 
Written By: Bithead
URL: http://bitsblog.florack.us

The bad stuff (deficits, etc.) is caused by out of control wasteful spending on the military industrial complex
Would this be bad stuff like radar systems and mri’s?
 
Written By: Ody
URL: http://
"Would this be bad stuff like radar systems and mri’s?"

Of course. If it has anything to do with the military, it is tainted. Except for those neato camouflage fatigues and cool looking field jackets.
 
Written By: timactual
URL: http://
I don’t see anything here that is inaccurate, but I don’t think you’ve considered all aspects of the question.

Iraq War direct spending is $584 billion, but indirect costs make that number go up significantly. Furthermore, don’t just include the war. Include the huge increases in non-Iraq War defense spending. Over Bush’s presidency, that’s - this is a back-of-the-envelope calculation, so it’s not perfect - about an extra 1.5 trillion or so.

It may be a small share of the total GDP over that period, but it’s somewhere between 50% and 100% of the cumulative budget deficit over that time.

First, our budget deficit plays a part, at minimum, in the perceptions of foreign capital and their willingness to spend in the US. Budget deficits make very large bailouts more of a problem, less likely, and thus drive investor panic. It seems to me that our budget deficit plays a role in the fall of the dollar: countries running surpluses tend to have strenghtening currencies.
Furthermore, there’s the inflationary impact of all that spending.

For another point, there’s an opportunity cost to that money spent in Iraq. If we’d poured it into education, worker productivity, infrastructure, etc - we might have ended up with more private capital investment in useful goods - instead of real estate speculation. Private capital would both have taken advantage of the positive outputs of the spending, and quite possibly directed their own spending to be synergistic with our public spending at home.

Instead, the big growth industry in USA since 2003 is in defense subcontractors that pour their money into overseas bases.
 
Written By: glasnost
URL: http://
"we might have ended up with more private capital investment in useful goods - instead of real estate speculation."

You’re actually claiming that spending those tax dollars differently would have led to less speculation? Are you suggesting that people would have put their desire to profit aside? For many people the speculation paid off. Are you saying that "good deeds" done in Washington would have inspired everyone to do likewise?

 
Written By: Grimshaw
URL: http://

 
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