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Monday, 02 March 2009

On Economic Fairness

Crabby Old Lady swore off writing about politics after the November election. Her intense involvement with the campaign for many months bordered on addiction and she is happy to report that her recovery is going well. Her political interest now, she believes, falls into the normal range for a reasonably well-informed citizen.

However, she’s gotten all bothered over two items in particular: taxes and mortgages.

Although it is amusing to watch Republicans squealing like pigs now that President Obama’s campaign proposals are making their way toward realization, some misinformation needs correcting.

The GOP objection to the president’s proposed tax increases for top income brackets is the same old, same old: “You can’t do that. Those are the people who create jobs,” they screech in print and on television.

That, of course, is a disingenuous argument (otherwise known as a lie). Holding down the top tax rate is just “trickle-down economics” from the Reagan administration, sometimes called “supply-side economics” and it never worked.

Instead of investing their extra money in businesses, the rich people and corporations kept the money from their tax cuts for themselves all these years and did not create any jobs. In fact, they shipped as many as they could overseas to countries where they could pay workers substantially less than in the U.S. This also kept down salaries for the jobs that remained. Adjusting for inflation, the average American worker hasn’t had a raise in more than a decade.

While watching the Republican moneybags shriek at the proposition of actually paying their fair share, Crabby vaguely recalled that in her youth the top tax bracket was about 93 percent. A quick check of historical rates here proved that she wasn’t far off. From 1951 through 1963, through all of Crabby’s teen years and a bit beyond, the rate for highest earners was 91 percent. Beginning in 1964, it was lowered to about 70 to 75 percent.

The rate remained around 70 percent until Ronald Reagan was elected when the rate was dropped to 28 percent for awhile. George H.W. Bush raised it to 31 percent and Clinton increased it to 39 percent. Then George W. Bush got the rate down to 35 percent in 2003, where it has remained.

The rich have been making out like bandits for half a century on the backs of working stiffs. No one is asking them to pay 91 percent and a few more percentage points isn’t going to change the lives of the rich and famous much, but it will help a bit to offset needed spending.

As President Obama has mentioned and any thinking person knows on their own, we all need to make sacrifices now, and the rich cannot be exempt.

Now regarding mortgages that are higher these days than the value of the homes. It has become conventional wisdom, repeated by reporters and pundits in newspapers and on television news every day, that the federal government, i.e. taxpayers, should not be bailing out people, as President Obama proposes, who bought beyond their means.

Huh? Crabby could be wrong, but she is under the impression that these borrowers were not taking loans from the neighborhood shark. They went to banks which require many long forms to be filled out. They supplied copies of tax returns and W-4s and anything else loan officers asked for. The banks, presumably, read all this paper, checked employment and credit history, and ordered up appraisals of the purchases in question. It’s what banks do. Or should do and they did not.

If Joe Blow earns $50,000 a year and applies for a loan to buy a $1 million house, who is at fault when the bank approves the loan? Crabby could argue that Joe shouldn’t have been idiot enough to count on winning the lottery to make the balloon payment in 10 years. Even so, the banks approved the loans. So who is the idiot?

However, most people in mortgage trouble are not Joe Blow. They did not buy McMansions. And it is Crabby’s contention that it is the bankers who, in their greed, stupidly handed out loans that they knew could not possibly be paid in the long term.

As we all know now, doing so is what set off the collapse of the economy which has left responsible borrowers with homes they cannot afford to sell (even if there were any buyers) because the houses are worth less than the mortgages.

Bankers are still flying to congressional hearings in private jets. Crabby doesn’t want to hear any more “conventional wisdom” that responsible borrowers shouldn’t get some small amount of help.

[At The Elder Storytelling Place today, Lois Cochran has a few words about the November election in A New Day – New Hopes.]


Posted by Crabby Old Lady at 02:30 AM | Permalink | Email this post

Comments

Very well put. I wonder at economies that allows Joe Blow to live under the illusion that he is entitled to owning a home, a bank that will approve such a morgage, and wealthy people who expect publically elected politians to fight soley for their lot. Talk about a system that is broken...

Oh what can one say but hear! hear!

You go, Crabby!

Crabby, well said.

I wonder if you've heard of and/or have opinions of a theory of economics known as Social Credit and first introduced in the 1920's by C.H. Douglas. There is beginning to be a resurgence of interest in this theory. Hopefully, many will become interested!

I've begun to write about it a little and have many links to other sources here:
http://omnicrone1.typepad.com/katethoughts/2009/03/social-credit-.html

Social Credit

Hey, thanks, Virginia; I think I got this link right. :)

Well said.
Have you or your readers heard of Social Credit, an economic theory first advanced in the 1920's by Scottish economist, C.H. Douglas?

I'd love to hear some opinions from you or this group.
The links available on Google seem to be growing. I've posted an intro and several links on my blog at KateThoughts. Hope you'll check it out.

When I was in the Real Estate and Mortgage business during the 70's and 80's, banks were VERY strict and cautious about whom they lent money.

They asked for ,just as you said, Crabby, pay stubs, last Sears bill and car loan info. When they were satisfied with that they then went into other long term debts you may have i.e. Alimony,child support,etc.

I won't even go into the appraisal process except to say that the bank always assumed you were going to default and wanted the appraiser to make sure that the loan to value ratios were in the bank's favor in case they had to take the house back,which was seldom, but not unheard of. Foreclosures were rare.

It took more than 6 weeks to be approved for a $60,000 loan, and all the time we held our breath because the loan could be denied at the last day before the commitment was due.

All that and the banks were making money hand over fist. Even today, the nicest building on any corner is a bank, built in the era of "Tough" loans.

Then, something happened and "sub prime" loans became the norm. The commitment process went something like this.

"I would like to borrow $600,00 to buy a $610,000 McMansion."

"Certainly ,sir. Are you currently employed?"

"No, but every day I am looking for a position."

"Of course, now I will have my assistant hold this mirror up to your mouth and, if the mirror fogs up, proving that you are breathing, the loan will be approved immediately."

This,of course, is far fetched,but not by much. Some very risky loans were approved and all those "Origination" fees and "points" went directly to the bank and they took advantage of every dime of it.

Now, all the borrowers are being blamed for getting in over their heads, and they deserve some of the criticism, but the banks were in control of the money, they were the professionals and they should have stuck to their original guidelines when making these loans.

Where is my comment?

Good article Crabby. I hadn't heard the point about the historical tax rate for upper income earners, before. Of course, no body paid that much, right? Then as now, there were available tax shelters for the wealthy.

I think the mortgage crisis is complex. We try to make sense of it, but there are so many factors. I too agree with you and Nancy, that the banks were in control--they should have had reasonable standards for issuing loans. However, once the "big boys" loosened up their lending policies, the other "boys" had to follow, or lose business. So they say.

For me, the issue also involves loose federal regulation, and the ever enlargement of the banks.

The repubs want to blame Clinton for this! Or they want to put up smokescreens to obscure the real issues. (Nationalization of banks! Bad!) But the real issues are how to get out of our very difficult national dilemma, and then how to fix the system so it won't happen again in our children's lifetimes. But they don't give us reasonable solutions for this; they simply talk up tax relief for the wealthy.

I wrote on this subject on my blog and the reason the banks made risky loans was because they weren't taking a risk. They bundled the mortgages and sold them to investors. Therefore, they no longer had any equity or interest in the house they made the loan on. The government has to accept much of the blame for a lack of oversight.

I've been sitting here shaking my head in agreement with everything you wrote so furiously that I think I'm in danger of whiplash. In addition to all you said I'm also offended by the assumption that people only do good for economic gain as evinced the moaning and groaning about the proposed reduction in that benefit. Neither I, nor anyone I know contributes to worthy non-profits for the tax deduction. We do so because we care and have a sense of civic responsibility. Those for whom the organizing principle has been (and unfortunately still is) greed, do not get this at all. It may also come as a surprise to them that great numbers of people who will be paying more taxes actually voted for President Obama knowing this. Also about responsibility and stepping up to the plate when it's necessary.
People who want to see this administration fail don't seem to realize that there is only one ship of state and we're all on it. They are trying to make it the Titanic.

Enough said.

Let's try this again :)

Old Crabby Lady :) - I agree with your observations completely. The rich do need to pay their fair share of taxes (just like I did yesterday) and trickle-down economics are not the answers to our problems.

It is never anyone’s fault - that is my biggest complaint right now. People rich or poor, banks and everyone has a little or a lot of responsibility for us being where we are now economically and not too many are stepping up to the plate and saying the "buck" stops here. Then taking responsibility for what they did.

President Obama has the beginnings of a plan, but - well we will see how it works out?

I don’t like seeing people loose their homes, but it does happen due to a variety of circumstances. If someone over-estimated what they could afford (its just that there are so many this time)and we should help as much as we can, but there does have to be some personal responsibility also. But if they have lost their job or other situations beyond their control, we have a moral obligation to help them if we can.

The ones that were speculating on being able to sell the house for a nice profit in a couple of years - those are the ones I have a hard time feeling sorry for - they knowingly took a chance on something that doesn’t have a guarantee and it didn’t work out - those are the breaks sometimes and they learned the lesson the hard way.

The families that were planning to stay in their home, those are who I really believe we need to help the most. But how do we tell the two apart?

This is where I agree with you totally that the banks had a responsibility and they didn’t say no to those that didn’t really qualify for their loans. What have the banks done to show responsibility? Their executives have had to go to Washington with their hats in their hands to ask for billions in federal bailout money…but I don’t see very many of those "leaders" loosing their jobs for incompetence! Instead they got and gave out bonuses - which really %$%%%^^%%$$%@@%$ me off still.

If I screwed up that bad at my work, I know I would be looking for a new job somewhere else, not getting a bonus. I guess that is what bothers me the most is that the banks have been helped with billions of our money and yet there are no changes in leadership or attitudes at these "too large to fail" institutions.

New leadership certainly can’t do any worse than what they have had for the past 5 years or so.

Time to get off the soapbox :)

Right on, Crabby!

Standing ovation, Crabby. A Canadian fan of yours.

"Columbia Journalism Review's Dean Starkman and Ryan Chittum have made the point over and over again that much subprime lending was simply fraudulent. People who should have qualified for prime loans were given more expensive subprime ones instead, because it was more lucrative for the mortgage brokers, lenders, and Wall Street firms."

Read this article at Slate, link below.

http://www.slate.com/id/2212480/entry/2212637/?from=rss

This is a worthwhile article about this subject. It is titled, Let's Have a Hanging Party, and it alleges massive fraud throughout our economy. Our latest prosperity was an illusion created by smoke and mirrors.

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