Who to believe about the cause of the 2008 crash?

The Government just released the Congressionally authorized report on the causes of the Financial Crisis.  The 6 Democrats on the panel said it was caused by failure of Government Regulation.  The 4 Republicans said there was no way to foresee it so there is no way to regulate it.


Who's right?  Here are some facts I find enlightening.


I found a website that lists the top 10 worst financial crisis in the history of the United States.  The website was aimed at investors so was identifying worst based on the investing performance rather than overall damage to the economy, so wasn't strictly addressing banking related financial crisis, but seems close enough.


The number 1 worst financial crisis was the the great depression that started with the stock market crash in 1929 and the bursting of the housing bubble.  Here is the interesting part.  Republicans controlled both houses of Congress and the Presidency from 1921 to 1933 so had complete control of government policy and regulation leading up to the crash and great depression.


The number 2 worst financial crisis was the current financial crisis that began with the housing bubble that burst in 2006.  Once again, Republicans controlled both houses of Congress and the Presidency from 2001 to 2007, so had complete control of government policy and regulation leading up to the crash.


Thus the start of the two worst financial crashes on the list coincide exactly with the tail end of the only two times in the last 100 years Republicans controlled all the levers of government.


The 1980's Savings and Loan debacle that cost taxpayers some $800 billion dollars was not on the list, probably because it didn't affect stock prices as significantly as the other items on the list.  Republicans took control of the Senate and the Presidency in 1981 and one of their early achievements was to deregulate the Savings and Loan industry - arguing that regulation was a drag on the housing market.  By 1986 hundreds of Savings and Loans were collapsing and taxpayers were picking up a bill that reached somewhere in the neighborhood of 800 billion dollars.  Ironically that bailout played a big part of the late 80's and early 90's federal deficit the Republicans created a big uproar about in 1993 to help them regain control of the House of Representatives in 1994.


I have found no significant financial crises that occurred after a period of Democratic control in the last 100 years (as far back as I am inclined to look given the changes in the world since then)


So I guess in one sense the Republicans on the panel are half - right.  Republicans certainly are incapable of foreseeing or preventing financial crises.  

Sarah Palin's notion of "respectful" political dialogue

Just heard Sarah Palin's statement criticizing the press for suggesting heated political talk could have contributed to the climate leading to the Arizona shootings.  When I heard her say the problem isn't with "law abiding citizens who respectfully exercise their first amendment right" I have to wonder if she has any clue what the word respectful means?  She can hardly say a paragraph without loading it with emotionally charged terms, and painting the world in her good guys v. bad guys views.  That is the crux of the complaint from her opponents - she is clueless about what it means to be respectful - and she just seems to prove it every time she opens her mouth.

Fair taxes - how do you determine what is fair?

What are fair taxes? No politician seems willing to actually try to define a standard to determine what is fair, so years ago I decided to figure out what seems fair to me. Now all the political pundits are jawing about the Bush tax cuts, fairness, class warfare etc. To me it's just a rehash of a battle of glittering generalities that I've been hearing for decades. I think it is way past time we came up with a standard for what constitutes a fair tax.

When I figured out what seems to me to be fair and applied that standard I concluded that wealthy people are not pulling their weight - or, to put it in a different way there are a lot of things taxpayers like me are paying for that rich folks get a lot more benefit from than we do.

Class warfare? No. All that class warfare hooey is a smokescreen to protect their ability to keep picking our pockets. Here is how I got there - my challenge to the reader who thinks I am on a rant here is to tell me where I am wrong.

First step - define a standard for "fair" taxes.

In day to day life what is fair is determined by matching payments to benefits. You pay according to the benefit you receive. Suppose your next door neigbhor comes to you and says he thinks we should go together and hire 4 security guards. 1 to guard each of our houses and the neighborhood, and the other 2 to guard your neighbors fast food franchises in various locations out of the neighborhood. "We should split the costs 50/50," he says, "thats fair". We would both be paying the same amount, but he would be getting 3 guards out of 4 to his benefit. Clearly not fair. But if he pays 3/4 and I pay 1/4, its fair.

I see no reason the same basic reasoning shouldn't apply to government, so I conclude that to the extent possible the people who benefit from a program should pay for the program in proportion to their benefit.

Obviously you can't do that for some things such as welfare, or school lunch programs for poor kids, but for the vast bulk of the Federal budget it seems to me that should be the applicable standard.

So how do Federal taxes stack up on this fairness standard?

Some taxes stack up pretty well.

Payroll taxes that are paid by employees and employers to fund unemployment insurance, social security taxes and Medicare all benefit the people that pay the taxes - particularly with Social Security what you get out is pretty directly related to what you put in. Gasoline taxes, when used to build and maintain highways, are an excellent match.

Income taxes don't stack up so well. Roughly 1/2 of the income tax payments we send to the IRS go to defense spending. Do we all benefit equally from defense spending? I decided to investigate that question and here is what I found.

I looked at Germany as country similar in development and per capita income and wealth. I also looked at China and Russia, our perceived principal competitors in the world at the moment.

Geography -

Germany, Russia and China all live in historically dangerous neighborhoods. Germany is bordered on three sides with countries it has gone to war with periodically for centuries. China is also surrounded on the north, east and south by countries from which invasions have been launched for a millenia. Russia is surrounded on the west, south and east by countries from which invasions have been launched for millenia. The US? We have oceans - effectively moats -on 2/3 of our borders. The notion of Canada invading the US borders isn't even on the table and the idea of Mexico invading doesn't bump my probability meter off the no chance peg very far.

Yet despite the fact Germany, Russia and China all live in more dangerous neighborhoods, in total Military spending:

Germany spends about 8% of what the the US spends

China spends about 16% of what the US spends -

Russia spends about 10% of what the US spends -

If we combine the budgets of our perceived potential enemies, Russia, China, and then include Iran and North Korea, what they are spending amounts to less than 33% of what the US spends. When US expenditures are combined with spending by a couple of our closest allies it amounts to nearly 50% of the total defense spending in the world.

Then I wondered how to convert total spending to something measurable on the fairness meter?

I decided to compare per capita income to per capita defense spending.

Looking specifically at Germany income per capita is about $41,000 per person and for the US about $46,000 per person. Income is reasonably similar. But in defense spending the difference is staggering. Per capita spending on defense in Germany is about $425 per person. Per capita spending on defense in the US is about $1900 per person.

Don't think I picked out Germany to bolster my case. All the data is available online - its like this for almost every country in the world (other than Israel) and for most countries the difference is even more glaring.

Why is defense so expensive for us? Why is the average German citizen spending $425 a year for defense and we average Americans spend $1900?

The answer seems to be because we as a country want to project our power around the world to protect our economic interests. We have engaged in 3 wars in the oil rich middle east in the last couple decades even while scores of small wars were taking place in Africa or Southeast Asia that we ignored. We have military bases all over the world. Our military expenditures are so large because we want to protect our commercial interests overseas such as our financial and oil industries.

We as a nation have chosen to maintain this enormous military establishment. I'm a good citizen, I am willing to pay my part, I think it does benefit us all to some extent (although it clearly makes us a target for terrorists). But seems to me that something close to the per capita figure for Germany is what I ought to be paying. The benefit to me from our ability to influence oil markets in the middle east is modest, the benefit to wealthy people who control the oil industry and the financial firms is enormous. I therefor concluded I should be paying around $425 a year and the other 3/4 of our current defense expenditures should be covered by taxes on either multinational corporations or the very wealthy people who control multi-national corporations.

How does the reality stack up?

For simplicity I just looked at defense spending and assumed for the initial calculation that for the other 1/2 of the federal budget the current tax law is fair (the IRS web site provides lots of data about who pays how much - details on my calculations follow this rant).

After juggling numbers for awhile I computed that 37.5% of the budget should be paid for by normal taxpayers like me (50% of non military items and 25% of the defense budget).

62.5% of the Federal budget should be paid for by the wealthiest persons and corporations that benefit from our military and political involvement around the globe (50% of the nonmilitary budget and 75% of the defense budget).

By my computations Corporations and the richest 1% of Americans contribute 50.4% of the total federal discretionary budget (things other than what is funded by payroll taxes).

50.4% is way short of the 62.5% they should be paying if the cost of the military is borne according to benefit.

So even before we start looking at other budget items we regular tax payers are subsidizing the wealthiest to the tune of 12% of the Federal income tax budget.

What about the 700 Billion bailout? The Cash for clunkers plan?  Or all the other plans to rescue corporate America from collapse.  I accept it was all necessary to avoid a complete economic meltdown - but Wall Street is now rolling in money, while Main Street is struggling. Coupled with the fact Wall Street caused the mess it seems to me those richest 1% should be paying a lot more than 38% of the cost of the bailout. They clearly benefited most from the bailout, on this part of the Federal budget I would feel it was quite fair to make them pony up about 80% of the bailout costs.

What about Federal Courts? Back when I was still a practicing lawyer I realized that maybe 98% of Federal court time is spent refereeing fights over money between really rich corporations or individuals. You can't go to Federal court to get an adoption, or to change your name, or get a divorce, or to force your neighbor to stop building his fence on your property. All those things normal people end up in court about are outside the jurisdiction of Federal Court. Rich folks should be paying most of the cost of the Federal Court system.

What about when when some polluter trying to maximize his bottom line fills the air full of toxic chemicals, or covers the water in an oil slick. I'm just a bystander, I shouldn't have to pay to clean up the mess - let the guy making money off the activity pay for it.

When you get right down to I am hard pressed to think of anything regular taxpayers get from the income tax that they doesn't involve subsidizing rich folks in the process.

And who pays for Congress...don't even want to go there. I certainly don't feel like they've done much for me lately.

Here is the raw data and calculations I used - as noted all the data came from online sources provided by the IRS, the UN or other similar organizations:

The United States spends 663 billion dollars currently on defense, 4.3% of GDP

Germany spends less than 1/12 of what the the US spends - 48 billion, 1.3% of GDP

China spends less than 1/6 of what the US spends - 99 billlion, 2.0% of GDP

Russia spends about 1/10 of what the US spends - about 66 billion , 3.5% of GDP

The combined budgets of our perceived potential enemies, Russia, China, Iran and North Korea amounts to less than 1/3 of what the US spends. When US expenditures are combined with our closest allies it amounts to nearly 50% of the total defense spending in the world.

By my calculations from figures at various Federal Government web sites, 73% of the federal descretionary non payroll budget is funded by individual income taxes, about 20% by Corporate taxes and the remaining 7% by other miscelleneous taxes.

According to the National Tax Payers Union the top 1% of Taxpayers, those making over $380,000 a year, pay 38% of Federal Personal Income taxes. So assuming these richest folks contribute 38% of the remaining 80% (giving them the benefit of the assumption they pay all of the 7% miscellaeneous taxes) (the other 20% comes from Corporations - I am also giving the Corporations the benefit of assumption all that they pay goes to defense) which works out to 30.4% of the Federal budget covered by taxes payed by the richest.

The Capital Gains tax red herring

Republicans are constantly arguing the way out of our economic mess is to reduce or abolish the Capital Gains tax so investors will take their money and spend it on building jobs.

A country like India, a poor country with an extraordinary opportunity for development to bring its population up to rich world standards of living has relatively little capital. It has to rely on foreign capital. It makes a great deal of sense for India to have no capital gains tax as their need for capital formation outweighs the risk of instability.

The United States is awash in Capital. Trillions of dollars in assets are locked up in pension funds, mutual funds, private equity, all looking for better returns than everyone else. We cut the Capital Gains tax in 1996 to current levels. Since then we have seen bubbles that rose and burst in equities, commodities, real estate, and almost any other asset someone thought they could make money on, culminating in the economic morass we now find ourselves in. Our problems are many but lack of capital is not a problem, it is a red herring that diverts us from more productive problem solving.

Meg v. Jerry

Jerry Brown left the Governor's office the last time in 1982. In my recollection California schools were ranked pretty high, and spending per student was also pretty high. We were in a recession at that time so we were running a deficit of 6 billion or so, and unemployment was pretty high, but a lot of other states had it worse than us at that time.

In the intervening 28 years, by my count Republicans have been governor for 25 years, Democrats (Gray Davis) for about 3 years. Every one of those Republican Governors (George Deukmajian, Pete Wilson and Arnie) ran on the same platform Meg Whitman is running on. Cutting taxes for rich folks and cutting regulation on business.

Yet somehow we have the biggest deficit problem of any state in the Union, and higher unemployment than most other states outside the rust belt. We rank near dead last in school funding and not much better in achievement.

I am reminded of the almost universal belief by Doctors back in the 1800's that the way to cure sick people was to cut them and bleed some blood out of them (or apply leeches). Now we find this belief laughable, but the brightest medical minds in the world at that time believed bleeding was the cure for many ills. I think Republicans have the same problem. The have a belief (that just happens to be very favorable to them making lots of money) and they have no interest in adjusting their believe to fit reality.

Why Government is disfunctional

Prop 22 on the upcoming California ballot is a scrap between local governments and the state over limited funds. Prop 22 is sponsored by Cities who argue about protecting local services I was listening to arguments pro and con on NPR and kept coming back to the fact I have been seeing a lot of data recently documenting the fact public employees make a lot more in salary and benefits than the average private sector employees. Why should we in the private sector care about helping protect money for local services when it seems like with "public servants" protecting their relatively cushy jobs is more important than providing services? In the private sector when funds are not available people make less money. In the public sector when funds are scarce salaries are protected at the expense of the services that are the function of the organization.

It seems to me the fiscal train wreck that is government in California stems in large part from that simple issue. People in the private sector see a lack of accountability in the pubic sector. "Public Service" is a dead concept, public sector jobs are usually pretty cushy compared to their private sector counterparts. Its easy to lose any enthusiasm for supporting government when you are scrambling to pay taxes to support people who are living off your labors quite comfortably.

Marketers run the US

Politics, business, even universities are run by the marketers. They are utterly amoral.

Big business is the worst of course. They will do everything in their power to pry money out of your pocket. If you try to call their customer service and talk to them they say "yes, I understand" while they ignore what you called them for to give their various sales pitches. They will use all the powers of psychology and persuasion to sell things people don't need to people who can't afford it.

But politicians are not to far behind. Not the politicians personally, but the consultants they hire and slavishly follow. Emotion is the enemy of good problem solving, but political consultants realize stirring up emotions can lead to votes, so they stir away shamelessly. Every little issue becomes an apocalyptic threat to our nations survival. Issues that have no impact on most people are milked to stir up outrage.

And finally there are the Universities who have become all about marketing and image and bend the whole nature of education to accommodate the marketers. Required textbooks cost more than rent on a students apartment because they make professors lots of money and provide grist for the marketing mill. Tuition consistently rises far faster than the cost of virtually everything else in our world as marketing education takes a bigger and bigger chunk of the education budget.

Unfortunately the marketers are dominant because the are good at what they do. They know how to push our buttons, how to manipulate us, how to fool us.

If anyone ever developed an inoculation that protects against the wiles of marketers they would be doing everyone a big favor.