Independent Caucus

Financial Crisis Explained: The Joe Intili Version

This is a follow-on to the previous post.  I offer this explanation as the "Joe Intili Version" because it comes from research and reading done over the several hours since that post, and because it is my summary and conclusions based on that reading.  Per the previous post, I find it remarkable that something which is supposed to be a "crisis" does not have a defining description anywhere, it seems; rather, particularly in Washington, it has a chorus of individuals seeking to blame one cause or another in the hope of advancing one political agenda or another, or just simply to cover their respective backsides.  This post is my attempt at an explanation for how and why the problem occurred.

But, before that, what is the problem?  It is a liquidity crisis - basically, an increased difficulty in getting cash in the form of short-term loans, the kind businesses use all the time to counter short-term fluctuations in their cash-on-hand, i.e. in their cash flow, brought about by business-cycle fluctuations which are daily and inevitable.

Ok, so then why is it becoming increasing difficult for businesses to get these kinds of loans?  Well, typically a business will ask the bank it typically deals with for this kind of loan.  If that bank's cash position (capital requirements for same) are such that the bank cannot make the loan itself, even if this business has a very good credit rating and plenty of collateral, then it will seek a short-term loan from another bank.  Banks do this all the time, but a bank's financial rating is key to getting the loan.  And a bank's financial rating (e.g. from a rating organization like Standard and Poor, quite ironically named) is based on the quality of its assets.  Many currently troubled banks are in trouble because they are holding large MBS assets, i.e. mortgage-backed securities, which rating organizations are finally getting around to dropping below investment-grade, when their initial ratings were misguidedly at investment grade.

Lowering an asset's rating can trigger a whole domino effect of bad outcomes, and it's why getting the rating correct the first time is key.  So many payment streams (mortgage-holders making payments, or rather, not) backing MBS assets are foreclosing that everyone - the rating organizations who rate the assets, and those poor buggers holding them - realizes now that they were/are substantially over-valued.  Banks in need of cash can't unload them at anything near what they paid - so they can't get cash that way - and other banks with cash to loan are reluctant to loan it to these troubled banks because their overall financial rating is now too low.  Such over-valued securities are being called "illiquid", and there are literally trillions of dollars 'em in the banking system, and with Fannie and Freddie, more than enough to "clog the arteries" of the financial system, as some are saying.

Hence, the current liquidity crisis.

Why/how did it happen and who is responsible?

I see five things which interacted to bring about the crisis:

1. A 1995 regulatory rule change under Clinton which allowed for higher borrowing limits on CRA loans (loans to poorer and often minority borrowers under the Community Reinvestment Act of 1977), and also for the securitizing of those loans (the repackaging and selling of the loans as securities, a trend which started in the 1970s with Ginne Mae, and exploded during the housing boom of the last 10 years or so).
2. Insufficient regulation around loan securitization to guarantee that (a) specific underwriting documentation on the credit-worthiness of the borrower was collected, and (b) that such underwriting documentation was forwarded to and considered by the rating organization in rating the mortgage-backed security.
3. Moral hazard on the part of securities rating organizations like Standard and Poor.
4. Actions by the Fed to steadily lower interest rates following 9/11, and keep them there, fueling the housing boom.
5. A lot of hope and greed on the part of borrowers, fueled by persistently low rates and rising real estate values.

I'm going to address these in backward order.

Low interest rates ever create a boon in mortgages and therefore new-home construction.  Such was the case after 9/11, when the Fed slashed rates in response to the economic downturn and instability following the attack.  But rates were kept low.  Lots of folks concluded it was a good time to "trade up".  The demand-push caused a predictable inflation in home prices, and an explosion in new-home construction.  It also encouraged people to buy homes as a speculative investment, hoping to sell or "flip" the homes, as the case may be, in a relatively short period of time in order to cash in on their nicely appreciated values.  Further, both speculators and those who planned to live in these homes were more willing to accept a riskier adjustable-rate (ARM) or sub-prime loan if they didn't meet the underwriting criteria for a traditional, fixed-rate loan, because they assumed the increased equity of the home due to appreciation would qualify them to refinance to a traditional loan within a short period of time.  The dramatic increase in new-home construction (loans were cheap for builders too, don't forget) eventually produced a glut of new homes which had a retarding influence on the sale of existing homes, until the price bubble leveled off and began to fall.

Because of low interest rates and the 1995 CRA rule change, and the general purpose of the CRA, which is to see that under-served areas are served and receive an equitable number of mortgages, yet without sufficient safeguards against defaults, more and larger CRA loans were made, and more of these were ARM or sub-prime, too, the motivations of these borrowers being no different than other borrowers, to buy more home now without the necessary equity for a traditional loan, and refinance to a traditional loan once the house quickly appreciated.

The practice of securitizing loans increased steadily, and especially after the 1995 rule change, the motivations on the part of the originating banks (a.k.a. "the originator") being (1) profit-taking on payment streams (the loans) so that they could enhance their capital, meet capital requirements for writing more loans,  write more loans, and repeat the process, and (2) to shed the risk of writing so many loans at low historic interest rates which might prove too low to cover the default risk, especially given the increased appetite of borrowers for ARMs and sub-primes, and the increased number and size of CRA mortgages.

Because, with securitized loans, the loan risk is transferred from the originator to the purchaser of the security, the security can only be properly priced if such risk is evaluated and underwritten with every bit as much care as if the originator had held and retained the risk for the life of the loan.  Regulations and enforcement thereof for collecting proof-of-income and other types of underwriting documents are not as critical if the institution which loans the money is also the institution which shall hold the loan.  It is self-interest to underwrite something like that thoroughly and well.  But, with securitization, where the originator only writes the loan and then repackages it and sells it to others as securities, where the security-holders now hold that risk, there exists the moral hazard on the part of the originator to not underwrite as carefully - or barely to underwrite at all.  Purchasers of those securities instead rely on the financial rating given the security by a rating organization like Standard and Poor.

So, then, do the originators collect even a sparse underwriting dossier and provide that to the rating organizations to use for rating the security?  I don't know.  I'm not sure what they typically provide or don't.  I assume they provide some info, but not enough, since it's not their problem, and there were not sufficient regulations to make them.  But why wouldn't rating organizations demand such information?  Obviously they didn't, because they consistently and dramatically over-valued these mortgage-backed securities.  And based on their inflated ratings, investors purchased them, and in large numbers, and hence the crisis.  My guess is they didn't demand such info at least in part because they trusted that underwriting of a kind which had been historically done had in fact been done by the originator, when such motivation had deteriorated substantially knowing the loans would be securitized.  Further, rating organizations fell prey to the moral hazard presented by both the existence of competition between rating organizations, and the fact that they are paid by the institutions which wish to be rated, or have their securitized offerings rated.  If Standard and Poor gives a bad rating to an MBS offering from Bank of America, or from Lehman on behalf of Bank of America, how likely is Bank of America to switch to one of Standard and Poor's competitors the next time they need a rating?  Well, quite good, I should think, and so the tendency with these ratings was clearly to error on the high side.

These things all conspired.  So, if wishing to assign presidential blame (in roughly chronological order):  (1) you have Carter, who, under CRA, twisted the arms of banks at the time to write more loans to poorer, less-qualified buyers without any funding mechanism for an inevitably higher risk of defaults; (2) you have Clinton, who allowed for a substantial increase in the size of CRA mortgages and allowed for them to be securitized; (3) you have Bush, who pressed the Fed for lower interest rates after the 9/11 attacks, and did everything possible to keep them there, including doing his federal borrowing from foreign countries like China, including every dollar appropriated for the wars in Iraq and Afghanistan, fueling the housing bubble which then exposed the regulatory flaws in securitized mortgages; (4) you have to a lesser extent, Clinton (second term), and a greater extent, Bush (both terms), who presided over an explosion in securitized mortgages which were under-regulated and poorly underwritten, given that, under securitization, regulation insuring strong, documented, and transparent underwriting and accurate ratings by rating organizations is absolutely key to a healthy market, and that a lack of such regulation permits the inevitable degradation in underwriting which attends a decoupling of those who approve the mortgage from those who hold the mortgage; (5) you have a whole host of presidents for allowing an obvious moral hazard to exist with the rating organizations, where those they rate are also their paying customers; (6) and lastly, you have a lot of optimism and greed on the part of home buyers, that they could speculate with their home purchase, and flip the home or take the low teaser rate and refinance to a traditional mortgage once (and if, but they didn't really consider that) the home quickly appreciated in value.

I feel better now, as I feel like I have some handle on this.  The several hours were worth it.  Because now I know that the bailout proposal which comes down from on high must address at least those things.  Let's be sure it does, and be prepared to scream and holler at our Congressman if it does not, in addition to the added requirement which derives from the bailout itself, that it well look after our $700 billion.

The Greatest Failing of The Financial Crisis

..is explaining it to us.

I am personally fortunate to have benefited from a college education, to have had bright and curious parents, and all my life been able to exercise my own curiosity.  I have always found public policy and issues of governance fascinating, a veritable fitness center for curiosity.  I've read.  I've had conversations with friends and others, including a friend last night who is very knowledgeable on the subject of derivatives and investments in general, since he works for a major New York insurance brokerage firm, AIG being their biggest client.  And I still can't plainly, simply, and most importantly, correctly explain the sequence of steps which led to the current liquidity crisis in lending we are now facing.

I can't tell that story, a story which necessarily includes the motivations of those key individuals and groups along the entire sequence of steps.  Because the steps themselves are not enough, although I would be happy at this point to just confidently know them.  But unless I know the "why" behind the steps, I can't possibly critique the current rescue plan or any plan.  I make my money designing and writing software.  If an application, mine or someone else's (well, humbly, someone else's) goes completely haywire, I can't recommend to the customer a fix, nor provide a cost-estimate on that fix, until I thoroughly understand the current sequence of steps leading to disaster.

Now, customers are not IT experts.  They are stakeholders.  They are business people.  And their business might be anything.  Coffee.  Insurance.  Hand cream.  Anything.  And it's that business on which they are experts.  They expect me to be the expert on matters of IT.  But they have to pay for it.  There are technical jobs and lines of work all around us where part of the job, a critical part, if not THE critical part, is for the technical expert to explain something inherently technical to someone inherently not, a paying customer whose technical expertise lies elsewhere.

In an Internet, satellite and cable-news age, with a 24-hour news cycle, the greatest failing of this crisis is the inability of technical experts (if it is an inability, and therein is where conspiracy theories true or ridiculous are hatched) to plainly explain how this crisis came to be, to explain it to journalists and our political representatives in Washington, so that the 24-hour news cycle can then bring that explanation to us.

One is left to believe that the clearest and most dire explanations are occurring in private, on Capitol Hill, behind closed doors.  Journalists comment on the ashen look of Congressmen and Senators emerging from those meetings with the Treasury Secretary and his team, emerging with a keen sense of urgency.  Yet the public hearings, those we get to hear and watch on C-SPAN and hear recounted and summarized in the media, are frustratingly obtuse and high-level.

If you listen to listeners and viewers calling into public affairs programs, they are flailing.  Flailing.  You can hear the frustration which ever attends a lack of understanding.  It's as true for the fourth-grader struggling with fractions as with this.  They postulate their own reasons for the crisis, the motivations of those who caused it, and those trying to solve it, and they run the gamut, like explanations for Stonehenge.  It's like we've been catapulted back to an unenlightened age, when scientific knowledge was thin, and unusual events, particularly bad ones, were explained and attributed to one dissatisfied spirit or another.

If I can explain threads and race conditions and modularity and heap sizes and rollbacks and the like to folks who primarily understand coffee, insurance, and hand cream, yet must understand which IT proposals to fund and which to reject, then financial experts and those with expertise in this particular area of mortgages and mortgage-backed investments ought to be able to clearly and in lay terms explain it to me.  And from that, then, I can then conduct myself as a citizen and a constituent confidently and well.  Without that, I can only flail, concoct spirits, and conspiracies.

There are not theories behind how we got here.  There are facts.  And as Senator Moynihan once reminded a Senate colleague - that he was entitled to his own opinion, but not his own facts - there are not different sets of facts, with different degrees of rectitude here.  There are not different sequences of steps.  There is THE sequence of steps which brought us to this point.  I want to know what that sequence is.  I want to know so that I can know if the rescue plan proposed by Secretary Paulson and nearing agreement by the Congress addresses and corrects that sequence.  I want to know, before I agree to fund that fix with my tax dollars.

You see, this whole issue is different than many, even most policy decisions debated by our political leaders.  Most of those debates take place within a realm of different and ever-competing philosophies of governance.  And certainly different approaches to a fix could be debated among differing philosophical camps.  But the sequence of steps that once, not long ago, made credit available and now has made it unavailable at levels which threaten day-to-day financial transactions of just about any company, or any consumer for that matter, or so the threat has been described in any case, is not philosophical, but empirical.  I can't philosophically argue for scaling over refactoring, servlets over web services in my line of work, without understanding that empiricism, without understanding what happened and why.  And it is unacceptable to me that our representatives have been too busy attempting to craft a fix to the problem to fully and plainly explain it to me.

Because the IT expert does not run off and craft the solution before educating the paying customer on the problem and how it occurred.  If an IT department did that, and came to the customer afterwards, as the President, Secretary Paulson, and our Congress are doing, the customer would flail, would yell, and would express every kind of frustration with that behavior.  And that's how the American people are feeling right now.  It's how so many of these callers are feeling.  It's how I'm feeling.  This whole thing has revealed not one but two problems, one financial, and one democratic.

Just Say No

Hmm...let's see. 

"There's been a tragic terrorist attack on 9/11. We need to do something NOW about Saddam Hussein, who didn't attack us.  He has yellow cake from Africa!  There are stockpiles of weapons of mass destruction!  We don't want the smoking gun to be a mushroom cloud!!  We need to act now.  With little debate!  It's that urgent!  We could be not attacked again by Saddam!  The clock is ticking!"

"There's been a tragic terrorist attack on 9/11.  We need to reorganize all law-enforcement, intelligence, and emergency-response agencies into one behemoth agency!  And we need to do it quickly!  With little debate!  It's that urgent!  We could be attacked again!  The clock is ticking!!"

"There's been a tragic terrorist attack on 9/11.  We need to rethink and redraw the lines for civil-liberties protections, and allow domestic wiretaps and home searches without warrants!  And we need to do it quickly!  With little debate!  It's that urgent!  We could be attacked again!  The clock is ticking!"

"There's been a rash of reckless loan-taking and loan-making by homeowners and banks.  There's been a boon of multi-hundred million dollar men and women on Wall Street receiving those sums as bonus for a job well done in their lending recklessness.  And now many banks are teetering!  And so are many of those who did the borrowing!!  We have to prop up those reckless borrowers and institutions by giving them nearly $1 trillion paid for with taxpayer debt, and that when the current debt has already increased under this President from $3.5 trillion to its current $9.6 trillion!  And we need to do it quickly!  With little debate!  It's that urgent!  Another reckless institution could fail!  Another house could foreclose!  The clock is ticking!"

Enough.  ENOUGH!

Congress, be the branch deemed the most important branch by the Founders, the branch defined and described in Article I.  Not II, not III.  Article I.

Congress has been a feckless rubber stamp all during the tragic Bush Presidency.  And it's why its approval rating is 9%.  As McCain likes to say, a rating that low is family and staff.

This economy, STILL NOT TECHNICALLY EVEN IN RECESSION!..MUCH LESS TEETERING ON DEPRESSION!, is not going over the edge if Congress does not "act now", but performs its function under Article I as the deliberative body it was created to be.  We are a republic, not a direct democracy, because the founders believed good things and good decisions would come from the deliberation of elected representatives, accountable to the people via regular election.

Ok, so then why is the Treasury Secretary, the President, the Fed Chairman, and some of us telling them to not?  Why, in God's name, are we asking them to hurry up and not deliberate on a transfer of nearly a trillion dollars in taxpayer debt to companies, which, if they are too big to fail, then they are too big to exist?

And debt it will be, because, as ever with this country, we are not going to cut government to pay for this, and we are not going to collect more taxes to pay for it...no, no, no...we might feel that!..that might hurt!..and we would have to sacrifice OUT OF OUR PAY?..for our government's spending for which WE APPROVE?  Nah, let's keep our pay where it is and have our KIDS pay it (yeeeeaah!).  Yep, let's borrow it again from that country that saves so much, China, ever willing to prop us up since we buy all their goods at Walmart and every other store.  Let's not be patriots ourselves and eagerly take responsibility for our country's fiscal security.  Nah, let's force our kids to be the fiscal patriots..let's let history remember them.

No.  It stops here.  Please America, and please, Congress, just say 'no'.  Think.  Deliberate.  Reason and be smart.  If the system is so fragile that we can't just let the losers lose and move on from there as we have so many times before, most recently, from the dot-com bubble, and it must receive a prompt injection of funds totaling nearly $1 trillion, then do what a caller on C-SPAN suggested this morning.  Divide that money among borrowers (he said it would be $50,000 per, but I didn't do the math) and tell them the only way the money can be spent is as a lump-sum payment against their mortgage.  So, the banking system gets an immediate $trillion injection of cash, and Americans get to cut their indebtedness by $50,000.

Sounds good to me, but that's with the benefit of zero deliberation and debate.  I'm guessing that with a little of those two things we can come up with more and better ideas.  Congress - you've allowed yourselves to be rushed into various bad decisions since 9/11.  Deliberate.  Reason.  Re-read Article I if you have to.  Don't let us down again.

Wanted: The New Patriotism

It's interesting.  I don't know why obvious partisans are asked their opinion at all.  I really mean that.  No edification accrues to the non-partisan, the independent, the undecided voter from what they say, and certainly not to an opposing partisan.  I compare political partisans to those especially devoted and proud parents of misbehaving or even delinquent kids whom principals and vice principals must deal with periodically.  It's their job to talk to the parents about their child, but the parents will hear none of it, and continue to defend, laud and promote their son or daughter at every turn.

POTUS radio (on XM) typically interviews campaign managers and staff from week to week, sometimes day to day, from the Obama and McCain campaigns.  They feel like it's news, or at least interesting, because these folks are at ground-zero of campaigns for President of the United States, and on that basis alone they should be correct in that assessment.  Should be.  But those interviews, and direct broadcasts of campaign conference calls with the media are useless, in my view, because they are not just a little predictable.  They are wholly predictable.  The answers to questions posed by POTUS or assembled media are the blindly, fully one-sided, my-candidate-is-all-good-and-not-the-slightest-bit-deficient-or-open-to-criticism answers of the parent who refuses to entertain, much less sustain, anything critical about his child.

I find many people in general to be this way, work colleagues, people in general.  In my view, that aspect, that quality about them does not make our country better.  It holds us back.  It keeps people from identifying, and then helping to advance or implement a good idea, because "good ideas" can only in their estimation originate or be popular with their own respective party.  If it's being talked about favorably by the other party, there must be something wrong with it, and support for it should be reassessed.  McCain and Obama in this election both talk around the edges of this phenomenon without tackling it head-on, with concrete ideas on how to defeat it, how to defeat this mood of blind partisanship that, like someone's 30 extra pounds, has accumulated slowly but steadily until the partisan dynamic in Washington and in the lunch room has grown corpulent.

McCain likes to talk about "putting my country first", but then he runs disrespectful, patronizing ads like the Paris Hilton / Britney Spears ad, which is beyond the pale for someone like Obama who was vetted by tens of millions of voters through 51 primaries and caucuses against veteran politicians like Hillary Clinton and Joe Biden yet emerged victorious.  And yet McCain is saying to those millions, "Ah, what do you know?  He's just a celebrity."  And Obama tries to describe his vision of "not a red America, not a blue America, but the United States of America", and yet to one of McCain's criticisms, doesn't have an impressive record so far of working across the aisle in the Senate to forge bi-partisan legislation intended to solve the difficult problems we must solve to be a better country.  The tough problems consistently are kicked down the road because of this partisan, party-first, power-first mentality, and Obama hasn't spoken to it with sufficient outrage and a vision for how to change it, since he is, after all,  the "change" candidate.

Various media analysts are the same way.

Why ask Donna Brazile anything?  Why ask Bill Kristol anything?  I can give their answers myself.

Why read certain columnists?  Why publish them?  Once they have demonstrated that they will always weave their column from only the silver lining if about their candidate, and from shoe laces if not shoe leather if about the other, why would any journalistic publication keep them on staff, that is, if they don't intend to be an arm of a particular party, but a party to the traditions of independent media and reporting, best as they can be?  Einstein, the way he worked, seeing realities about the universe and working backwards, would have instantly concluded, quite correctly, that these media organizations do not wish to be independent.  And they don't.  So now we have conservative media companies and liberal ones, and once the media completely loses its objectivity and starts clearly choosing sides (MSNBC versus Fox News, for instance), it pumps even more Big Macs and Ho-hos into the already corpulent, politically partisan culture in America.  And America slips a little bit further from her greatness, her great beginnings, her great twentieth century, and backslides a little further as a great country, a country ready to meet the challenges here and abroad in this century.

I started IndependentCaucus as my trifling effort to push back on that, to slim that beast by a pound or two among its readers if at all possible, even if barely a flicker of effect overall, because I hate seeing what's happening to my country, smart people choosing sides, using their tremendous intelligence and innovation to craft arguments to make the other side look bad rather than to solve the nation's problems, their lunch-room compatriots talking right past one another, if willing to discuss politics at all in "mixed company".  I think while many of our Founders would have themselves been cognizant of some of the unavoidably partisan aspects which attend any campaign, they would be appalled by the nature of debate or lack of it in the Congress and in Washington.  And I think they would leverage the power of unlimited debate in the Senate to filibuster this country in a long and overdue scolding about what it is to be an American.  An American, rather than a Democrat, or a Republican, or a Whig, as the case may have been.

The way in which 90% of the vote is determined pretty much based on which party a guy is from, in red state / blue state fashion, and that the election, election after presidential election, is determined by the slim 10% of folks in the middle, many of whom probably follow politics the least, and are the least interested, hence their perennial status as "independent", is an intense polarization which I can't recall in American history unless you go back to just before the Civil War.  Even then, on policies not at all tied to slavery, I wonder if the ability of congressmen and presidents to work with others regardless of party to solve the nation's problems did not exceed what we are experiencing now.

Because what we have now is a Social Security trust fund with no money in it, where each budget the executive takes it and spends it, and the Congress lets him; a dependency on foreign oil predictable 30 years ago and literally a national security threat now; the most expensive health care in the world, and the most uninsureds in the developed world, and care tied almost entirely to employment; an Earthly temperature which keeps going up and up, and a throw-away culture which keeps our land fills doing the same; a world population still out of control on a planet where water resources are fixed, and food resources are reaching their limits, the regular expansion of which is triggering a historic decline in bio-diversity with effects we can't begin to predict; a government which doesn't respect us, We The People, but is sneaky in one form or another, invading privacy without warrants, or buying things but not asking the American people for the money, rather borrowing it, and deferring the tax increase or program cut till later, to a different President, a different Congress, a different set of constituents who can't possibly hurt the decision-makers now.

That paragraph describes a country in decline.  Our candidates for President will beat their chests and say, "This is the greatest country in the world, and our best days are ahead of us."  Fine.  But are these our best days?  Are they?  Or are they a decline from previous days?  If they are, say so, and say how to fix it, and begin by trying to take down, as the Berlin wall had to be taken down, bit by bit, the harmful wall of party-first behavior which now permeates journalism, media, lunch rooms, board rooms, and, of course, Washington - and begin replacing it with a "New Patriotism".

I wrote a comment on IC recently which was a comment to some comments posted by two more Democrat-faithful readers of the blog regarding the "Wow" post, which complimented the choice of Palin.  In the end, I said that rather than allocating time and effort to criticizing Palin, they (both campaigns) should get on with crystalizing their vision for this country, that it's that vision which people want to know, and will determine their vote.  And I made reference to past presidents, and their tag line for their vision, whether it was "New Deal" or "New Frontier" or Clinton's "New Covenant", and I suggested their chief mission is to identify and promote their "New [fill in appropriate vision-thing word here]".

Choosing the "New Patriotism" would be a good choice, and in this blogger's view, is America's way back to the future.  If the "New Partisanship" of the last couple decades, no longer new, yet well entrenched, cedes its appeal to the "New Patriotism" with this election, then this next election and this next Presidency will have been truly historic, and depending on which corpulent leg you may be currently standing, America will once again be "a shining city on a hill", or a "place called Hope", and perfectly ecstatic about both.

Federal Deficits Are Tax Increases

Anyone disagree with that?

If you are having the uneasy feeling like you don't fully understand the topic, but that that sounds right, then you are probably left or left-center politically.  If you are thinking that is totally wrong, you are far right.  If you are thinking that sounds perhaps right, but is a biased or propagandized way of putting it, then you are probably center-right politically.

Well, this article is to tell you that whatever your political leaning, it's true.

Would anyone argue that deficits = borrowing?

I hope everyone is nodding their head in affirmation on that one.  It is borrowing, the borrowing done in one budget, for one fiscal year.  What about the national debt, or just "the debt"?  Is that the same as deficits?  No.  The Debt is the accumulation of everything the federal government owes to others.  So it is the accumulation of all deficits, plus interest, minus any paying down of principal.  Sound familiar?  That's right.  Just like any loan you have.  The Debt, at any point in time, equates to the "pay-off amount" for what the federal government has borrowed cumulatively over all years, and still owes.

Enough with definitions.  I said deficits are tax increases.  Not just "taxes", but "tax increases".  Was I wrong?

Let's think of a single budget.  Better yet, let's think of a single piece of government spending.  A road.  A bridge.  A batch of Humvees.  Further, let's assume that tax collections for the fiscal year are what they are, and that other budget priorities have already spent all of that (or, say at the beginning of the fiscal year, all collected revenues have already been allocated to other spending).  There is no more cash (collected tax revenues) with which to buy the item.  If the federal government wants nonetheless to still spend for that item, it has three options:  (1) offer a bill to raise taxes in an amount to cover the spending, (2) cut some other program or programs by the amount of the additional spending, (3) borrow the money, i.e deficits, or what folks like to call "deficit spending".

Does anyone disagree with that?  Right, left, or center?  If so, please comment on this post.

Therefore, as you can see, right away, this:  tax increases to pay for the item = cuts to existing programs to pay for the item = deficits to pay for the item.  Tax increases to pay for the item = deficits to pay for the item.  Tax increases = deficits.

Except that it doesn't end there, does it?

Leaving out option #2 for the time being (we'll come back to that), those are the federal government's options when it wants to buy something and doesn't have the money, the cash, the collected tax revenues in sufficient amount to pay for it.  Increase those collections, or borrow.  What if we borrow?  Then the thing we bought, ultimately, will cost us more in future tax increase than it cost to purchase, right?..because the future tax will have to cover the item cost..plus interest.  That's right.  Money is not free, even for the federal government.

More terms.  A future tax increase can also be called a "deferred tax increase".  We are going to do the spending now, but we are going to raise taxes by the necessary amount later to pay for it - plus interest.  But make no mistake - make no mistake - as soon as the decision to borrow is made, the decision is made to raise taxes, just to defer collection of the tax increase till some time in the future, while deciding to pay interest on that amount now (lenders insist on that part).

Borrowing (deficits) = A deferred tax increase totaling the amount borrowed, plus interest.

Still dubious?  Well, maybe the economy will grow, and we will grow our way out of our indebtedness?  Yeah, sure, that's always true!  And maybe you will get a promotion and grow your way out of your indebtedness faster than you would have otherwise.  But in doing that, you still had to pay it back!  Right?  So growth is always a good thing - so long as it's faster than the rate of inflation.  So long as it is, it brings added income and buying power, some of which can be used to pay down debt more quickly than otherwise.  But it's a "zero sum", as folks like to say.  That is, it still gets paid back, and the income used to pay off the debt and its accumulated interest still doesn't go into saving, college funds, a vacation, or new clothes - it goes to paying off the debt.  It can't go to both places.  Same with the federal government.  If the U.S. gets wealthier - GNP goes up faster than inflation - the increased federal income (collected taxes) can be used to pay off the debt more quickly than otherwise, but it is money that but for that debt could have gone to pay for other things (road, bridges, or whatever), or, if we have all the roads, bridges, education and so on that we think we need, it could come back to us in the form of a tax cut!!  But it can't go both toward the debt and us, or any other two places at the same time!

So then you're saying, well, but maybe keeping tax rates low - whereby the government must typically borrow each year to pay for those things for which it did not collect enough tax - helps to grow the economy, grow GNP by an amount which covers and even exceeds the amount borrowed?

How many think that?  That insufficient collected taxes, complemented by borrowing, will expand the economy by an amount sufficient to cover the borrowing?  And by that, I mean, without having to raise tax rates (because that would be a tax increase)?  How many of you think that, right, left and center?  What about that feeling in your gut, the same gut feeling I initially asked of you in your reaction to the title of this post?  Are you thinking, "Yeah, that sounds pretty much right."

Well, this post is for you then.  Directly for you.  To disabuse you of that line of thinking, so that you can, then, as a voter, and a constituent to your government, help to stop this practice, and in patriotic manner, do your part to change it.

I'm going to do that with the help of some math.  Hopefully 50% of you reading this didn't just click to something else.  I hope I've hooked you enough to hold onto you just a little while longer, for some math that will startle you, and hopefully, also start you, start you toward demanding a different policy from your government.

We know that in math, we always solve for "X".  Don't know who decided that, but let's run with it.  What shall X be?  What are we seeking?  If borrowing can pay for itself by growing the economy to where the increase in collected taxes offsets the borrowing, by how much growth would that have to be?  30% of the amount borrowed?  100% of the amount borrowed?  By what percentage of the amount borrowed would GNP have to increase such that the resulting increase in collected taxes would cover and offset the amount borrowed?  Let's go with the following:

X = percentage increase in the amount borrowed by which GNP must increase for collected taxes to offset the amount borrowed at no change in the existing tax rate

t = existing, average federal income tax rate

b = amount borrowed

Ok, so what is b times X, otherwise denoted bX?  Well, that's the GNP increase in dollars from the amount borrowed, and the basis for the increase in collected taxes.  So, then, multiplying t times that is the amount of additional collected taxes at existing tax rates resulting from the GNP increase.  We need that amount to cover (equal) the amount borrowed.  Leading to this equation:

tbX = b, and if we solve for X?

Well, tX = 1, and X = 1 / t.

Let's say the average tax rate is .28 (28 percent).  Then GNP would have to increase by a factor of 1 / .28 = 3.5 times the amount borrowed for collected taxes on that GNP increase to offset the amount borrowed at existing tax rates.

Who reading this believes that if the government borrows $5 billion to pay for something it wants now, that that act will increase GNP by 3.5 times $5 billion, or an increase to GNP of $17.5 billion?

Borrowing $5 billion increases GNP by $17 billion?  If true, one could truly claim to have discovered free money.  But it's not true.  And not even close.  And the truth is that some amount of borrowing is offset by a slight increase in GNP, but..wait..does that even slight amount cover the interest on the loan itself?  You notice, for simplicity, I left that out of the equation entirely.  So government spending (even if borrowed) increases GNP slightly, but interest on the borrowing decreases GNP slightly, and neither make a dent in the overall "net worth" of our country, which, make no mistake, took a serious dive southward by borrowing the $5 billion.  Add to that that our federal government has gotten in the habit of borrowing it from foreign sources instead of domestic (in order not to push up domestic interest rates...that's right, they not only want to insulate you from feeling the pinch of what they bought by deferring the tax increase to pay for it, but they also want to insulate you from higher interest rates by borrowing the money abroad), and it means that the interest on the borrowing doesn't even recirculate through the U.S. economy, and help spur growth here, but makes us even poorer by having the interest payments leave our shores.

The next time - and make no mistake, this is nearly entirely an indictment of Republican fiscal policy in the administrations of Reagan, George I, and George II, who as only 3 or the 43 presidents, are responsible for nearly all of the accumulated debt of the United States, now $10 trillion and climbing, $3.5 trillion when George II took office, about $1 trillion when Reagan took office, and $3 trillion when he left - but the next time a Republican says, because they have made it their mantra, "I'm going to keep your taxes low!  I'm going to let you keep more of YOUR money!"  Ask them, DEMAND of them, "Sir (or Madam), do you mean just collected taxes, or ALL taxes, collected and deferred?"

Then see what they say.

But it starts and ends with you in a democracy, with you understanding plainly that federal borrowing is a tax increase but deferred, or a cut in an existing program, where the administration has identified only the amount of the cut, and not also the program to be cut, thereby circumventing democratic debate of the program cut itself.

Deficit spending is literally "taxation without representation", since the representatives and President who decide to deficit spend are an earlier and different group from those who will have to implement either the tax increase or equivalent program cuts, and they have a different set of constituents.  It's the younger people, many too young to vote now, or not even born yet, who will have to raise taxes later to cover the debts; and thereby the burden is forced on them to sustain the good faith and credit of the United States by not defaulting on that debt.

Because debt is like that.  You pay for it, or you don't.  Always your choice.  But this is our country.  And we do not default on our debts.  The American T-Bill does not ever risk becoming the next junk bond.  Ever.  To find that outcome acceptable is to choose conceit over patriotism.  I argue in the strongest possible terms, that that is exactly what those three offending administrations have done, by willfully deciding to saddle America with what is now $10 trillion dollars in total deferred tax increases.  Tax increases they didn't have the nerve, the guts, and yes the patriotism to pay for outright, and honestly, through honest debate, and a setting of national priorities, or quite simply by asking the American people for it, rather than insulating them from it so that they barely knew it was going on until it was so advanced.

Patriotism is ever forward-looking.  As to those whose vote is incapable of politically threatening your President, your party, your leaders, your Congressman, those too young now or not yet born, you have to choose whether to be part of the conceit or the patriotism...then decide whether to defer $10 trillion in tax increases to them, while enjoying their benefits now, and force them to either implement those tax increases, at tremendous national and individual sacrifice, or to default.

Pay or default.  It's always been such.  Reagan, George I, George II knew it and did it anyway.  How popular do you suppose they will be to historians - necessarily in the future - who will recognize the incredible sum of tax increases those three presidents deferred to them, and for which they must now pay, or cut government to nothing, or default upon?  I look forward, with any luck, to living long enough to learn and know.

But don't just stop and accept it when the next politician says "I'm going to keep your taxes low!"  Ask them, demand of them, "All taxes?...or just those you plan to collect?"

Wow

Wow, was I wrong.

My goodness.  What a speech.  A phenomenal speech.  And the camera, and the moment, LOVES her.  And she loves it right back, and with an ever present and utterly charming touch of Alaskan earthiness, honesty, directness, and, oh yeah, accent.

Wow.  No shrinking violet there, ladies and gentlemen, but no shrill partisan, politico, or apparatchik, either.

She was as good as Romney was almost comically bad.  He may have redefined bad.  Literally.  I will have to look up 'bad' on dictionary.com and see if his picture or speech are listed as examples.  Republicans can be so thankful McCain knew better.

Rudy was Rudy.  A pretty good speaker, just generally, and he was tonight.  Some funny stuff.  Some red meat.  Some more sober and thoughtful moments.  A good cheerleading speech for McCain.  His attacks left a red mark.  But Palin's drew blood, and she seemed both sensible and cheerful doing it.  That's not easy.  Often, you attack the other guy, and you look worse yourself.  You bring him down a peg, and yourself as well.  Everyone looks worse and seems less, and it's why the public generally doesn't like negative campaigning and rhetoric.  She pulled it off.  That's how good that speech was.

Well, friends, we have a race and a fight to the finish line.  And I think we are now confident that it will be close.  It's going to come down to a few hundred thousand voters, uncommitted, independent voters, in a few swing states.  And in that way, and maybe only that way, it will be like the last two presidential elections.  But this election is way different.  It is, more or less, a contest between the best "new guard" nominees both major political parties could put forward.  With the extremely bold, and, yes, maverick pick of Palin, McCain showed he is the youngest old guy in the Republican party.

I don't know about the rest of you old enough to remember John McEnroe at 18, when he joined the U.S. Davis Cup team, and also played a summer's worth of clay court tournaments in the U.S. and abroad, a series of tournaments called the Volvo Grand Prix.  It became grand, eventually, but at the time, the series was new, and included a lot of lesser known tournaments in a lot of small and mid-sized cities in the U.S.  The major networks didn't consider many of the tournaments important enough to cover, and so coverage was picked up by independent stations, including public broadcasting stations, like channel 13 in Pittsburgh, the station where I watched them.  It was a low-power station, and often required a lot of rabbit-ear sculpting to tune it in.  But I was mostly successful.  And I'll never forget seeing McEnroe hit a ball, that first time.  I had no idea who he was.  None.  He may as well have been Sarah Palin.  And I knew after just a few games of play that this young kid was like nothing I had ever seen, nothing like anyone could have seen or expected.  That's what we all saw tonight.

If the Dems are smart, they will now forget about going after Palin, and get on with their fundamental message and plan for the country.  In other words, they will make it about them, not about any question of Palin's ability, talent, willingness or readiness to lead.  Can one speech do that?  Can one speech take all those questions off the table.  I am saying yes - yes it can - if you'll pardon the pun.  In the VP debate, Biden needs to treat her with the respect she has now earned, and prepare just a little harder.

What she accomplished tonight was to remove herself, her selection, as an issue in this campaign.  That was exactly her job, and to appeal to independents.  And, well, mission accomplished on both fronts.  But she went beyond that.  She didn't just win a point, or game, or set.  As with Mac - he did all those things, regularly - but it was HOW he won that left you shaking your head in amazement, with shots and energy, ideas, and, oh yeah, a touch of attitude like tennis had not seen.  Johnnie Mac?...meet Sarah Palin.

Wish I Knew

Wish I knew who will win this election.  Oddly, it makes me kind of edgy not knowing, having to wait.  I don't think either of these guys is Kennedy.  Heck, Teddy Kennedy wasn't Kennedy, and by that I mean his brother, John.  John Kennedy had all these Republicans with whom he agreed on a range of issues, who were allies and friends.  He respected the president he succeeded, Ike, especially on his careful stewardship of America's military might, and on keeping spending and taxes low.  His "New Frontier" was not a 180-degree change in direction.  It was Ike + a set of challenges which Kennedy felt were worthwhile and the American people were ready for, like the challenge of abolishing Jim Crow laws, sending a man to the moon, a nuclear test ban, and the Peace Corps.  He spent sparingly and generally governed like a progressive Republican, a novel thing, and an approach to leadership which didn't exist in either party at the time.

But I hope Obama wins, because I think it's a requirement (necessary, but perhaps not sufficient) for Black America relieving itself of a significant chip on its shoulder - the shattering of the "black" ceiling, that no African-American has ever been President.  It's well past time.  For women, too, yet that wait goes on a little longer.  And I'm confident in the foreign policies advanced by a contemplative President and a very knowledgeable Vice President.  I'm also calmed that, God forbid, the death of a President has Joe Biden next in line to raise his right hand.

Finally, I was scared before I went to see I.O.U.S.A. (the movie), and more scared afterwards, that the willingness of Republican administrations to ask of the Congress appropriations for which they cannot pay out of that year's collected tax revenues, during an era of relative peace, and choose instead to simply defer those tax collections until later, with interest, interest going in ever greater proportion to lenders outside the U.S., making our nation truly, structurally poorer as a consequence, and our dollar worth less, bringing inflation, especially for those international commodities priced in dollars, such as oil, is the single greatest medium to long-term threat to our country, and becoming more of a short-term threat all the time.

Nearly all of the nation's debt (in percentage terms) was accrued by the deficit plagued spending policies of these administrations - Ronald Reagan, George H.W. Bush, George W. Bush.  That's 20 years of leadership.  We've been a country 232 years.  So less than 10% of our administrative years gave us nearly all of our national debt, now approaching $10 trillion, or about 67% of our GNP.  That during a period of relative peacetime, when the nation should having been doing the opposite, and paying down the debt, as it has historically following periods of high debt (usually, following periods of war).

So...a single President, a single 4 years, much less 8, can do historic damage to the nation's fiscal condition and level of debt.  McCain voted with Bush on so many of those spending priorities, and high-deficit budgets.  I'm simply not prepared, barring a thorough convincing on why I should feel differently, to have John McCain as my President, to be the man whose budgets shall be presented to the Congress for at least the next four years.

I just can't do it.  The Republican fiscal brand is completely shot for me.  I feel like I would lose any right to protest or complain if I voted for McCain and he continued from Bush in running our federal fiscal situation into the ground.

So, the conventions, debates, and so on are interesting stuff for me, but, again, barring a thorough convincing of why I should trust John McCain or ANY Republican with the federal budget, and in the interest of full disclosure on any website named IndependentCaucus, my vote will be with Obama-Biden.  To me, it's still "the economy, stupid".  If we get that wrong, it will be very hard to accomplish any other difficult task.  My number one concern is not Iran, or Pakistan.  It's inflation, the out-of-control borrowing of our Federal Reserve, and being not at the gunpoint of nations like China and Russia, but the ballpoint which could send the American economy into a tailspin if either threaten a major sell-off of American T-Bills, or, even more worrisome, threaten to quit buying them.  I'm not a one-issue voter, but that is my number one issue.  And on that issue, I am with and favor the Democrats.  Curious what you think...

Sarah Palin - Initial Thoughts - Part III

Ok, so, prior to my first post, I was speechless.  Prior to my second, I could see how - though a long shot, and with lots of "ifs" out there, any one of which could derail her and candidate McCain - Sarah Palin could help McCain win in November.  And now, prior to this one, what I expect is my last on my initial reaction to the choice, I'm asking myself whether it was a smart choice, and what does it say or reveal about candidate McCain?

Well, in short, and quite simply, if she passes all of those "if" tests which are out there for her, and McCain is elected, then those empirical outcomes together will deem it a smart choice.  If she fails those tests, he will lose, and it will have been a bad choice.  Ok, so there was risk, but all consequential things have risk.  As to McCain's judgment, was it a good calculated risk, or was it mostly cynical, reckless and desperate?

What about the analog in the previous post to Obama, and him taking 90% of the black vote, when otherwise Hillary would have gotten it, and what that infers as at least possible in terms of how white, independent women might respond to Palin?

On the first question, it comes down to how well McCain knew her, or others close to McCain knew her, and their judgment in judging her talent as a leader, potentially, as leader of the free world.  There is a considerable amount of divining in that, as even Bill Clinton has said recently, that "no one is qualified to be President", except, I'm sure he was inferring, someone who already has been.  But intelligence, judgment, patriotism, the ability to inspire, lead, communicate, and a readiness to work with people of differing political parties and views to craft policy and law which will stand the test of time and better our country - those are all qualities which would inspire confidence that someone could be President.

It's already been widely reported that McCain met her only twice before, and had one phone conversation with her, prior to offering her the vice presidential spot on the ticket.  What does that reveal about McCain?  Well, I think anyone would agree, for the position of VP, that degree of vetting alone would be far too insufficient, and, if that were all that took place, would in my view show him to be reckless and erratic - not good qualities for a president.  If substantially more vetting was done by others, and McCain participated actively in a meeting to discuss all that others knew and had learned about Pailn, after and based on which McCain made his decision, then it shows a readiness to delegate, and rely on information from close advisors - which is of course necessary as President.  And I don't know, in his three interactions with Palin prior to offering her the VP, how long they were, how thorough.  Were they in effect of enough substance and depth to qualify as a job interview?  If they were not, then it really shows a willingness to largely delegate to others matters of key importance.  Reagan is known to have governed like that, so perhaps we can infer McCain would govern similarly.  But in delegating the task, if McCain didn't query those individuals with questions like "Is she a leader?  A patriot?  Is she smart?  Has she made good policy judgments?  Is she knowledgeable?  Has she shown an ability to inspire?  Does she put country ahead of party?  Can she lead this country if it should come to that?" then, that would reveal to me that his motivations were otherwise, cynical, largely a grab for white female votes, and that would indicate incredibly bad and reckless judgment.  We won't know till journalists write the story of her vetting and selection by McCain, or until we see and hear Palin and make those judgments for ourselves.

As for the analog to Obama, it was not an attempt to equate Obama and Palin.  But it was a good observation on Marty's point that Hillary (and Bill, of course) are hugely popular in the African-American community, and yet Obama and Clinton came nowhere close to splitting that vote.  In years when Jesse Jackson ran, the same thing occurred.  Perhaps not with Reverend Sharpton, I'm not sure.  What that says is this:  for a constituency which has never had their guy be President or Vice President, that having that means history, and history wins.

So long as the person is revered and seen as competent by his or her own constituency.

Barack was and is.  Jesse was and is.  Is Palin?  Or, rather, will she be, once the nation knows who the heck she is?  And can she acquire that familiarity and competency in the eyes of independent white women and others in the two months she has before election day?  That's the huge gamble and risk which was either reasonably calculated based on affirming information acquired through careful vetting, or a reckless and cynical gamble by someone who, if so, should not be President.