Here is an interesting link and discussion about the economy
http://www.telegraph.co.uk/finance/economics/6147211/Barack-Obama-accused-of-making-Depression-mistakes.html
Wednesday, September 9, 2009
Sunday, August 30, 2009
Number of Americans paying no Income tax--43million
If you want to know who is paying the Federal Income tax check this link.
Where is our stimulas money going?
Want to know where your stimular money is going? Check out this link. http://www.hivegroup.com/stimulus/
Unfunded Debt in the U.S.
Check out this calculator in order to get an idea of the level of debt we are incurring in the U.S.
Friday, February 20, 2009
Reasons for the Financial Collapse (the Great Recession)
© 2009 Rick Adamson
by Rick Adamson 9.20.09
When one combines the mandates of the Community Reinvestment Act with high fuel prices and high food prices (due to large subsidies for the production of ethanol, etc.) it is no wonder that we are having so much trouble in the economy.
Conventional wisdom attributes the crisis to the collapse of housing prices and the sub prime mortgage market in the United States as well as greedy New York bankers. This is not correct; these were themselves the consequence of another problem. The crisis' underlying cause was the combination of very low interest rates and unprecedented levels of liquidity (moneyed folks had lots of money on the side lines and were looking for a place to invest it). The low interest rates reflected the U.S. government's overly accommodating monetary policy after 9/11. (The U.S. Federal Reserve lowered the federal funds rate to nearly one percent in late 2001 and maintained it near that very low level for years.)
Facing low yields, this liquidity naturally sought higher ones. One basic law of finance is that yields on loans are inversely proportional to credit quality: the stronger the borrower, the lower the yield, and vice versa. Huge amounts of capital thus flowed into the sub prime mortgage sector ( a sector which did not exist until created by FedGov) and toward weak borrowers of all types in the United States, in Europe, and, to a lesser extent, around the world. For example, the annual volume of U.S. sub prime mortgages rose from a long-term average of approximately $100 billion to over $600 billion in 2005 and 2006. As with all financial bubbles, the lessons of history, including the long-term default rates on such poor credits, were ignored.
As a result of all that liquidity and the desire by investors for higher returns the investment banks in New York put additional pressure on lenders to provide more sub prime mortgages so that they could be packaged into investment instruments (called securitized mortgages) and sold to these investors and satisfy their need for higher yielding investments.
Unfortunately, many of these sub prime mortgages had interest rates that adjusted upward in 2005, 2006, 2007 and 2008 which resulted in increased monthly payments. At about the same time, gas and food prices were going through the roof. As a result, many people could no longer make their monthly mortgage payments and foreclosures began to increase. Home prices began to plummet as well for the same reasons.
In addition, Consumers began to reduce consumption due to higher mortgage commitments and higher gas and food prices, as well as due to being laid off by their companies as a result of higher costs and reduced sales. This affected all business activity in the Country including automobile purchases, retail purchases and other spending which was the beginning of a viscous downward cycle of just about everything in the economy.
This called into question the safety of the investment instruments (securitized mortgages) developed by the investment banks. Some of these instruments were held as investments and some were sold to the investors discussed earlier. As a result of the increase in foreclosures, etc., the investors and banks began to discount the value of the holdings on their books which reduced their earnings and lowered or stopped their lending to consumers, other banks and foreign Countries. This has been called the banking crisis.
Thus, the collapse of housing prices and the sub prime mortgage market did not cause the problem but rather exposed a problem that was brewing on Wall Street since 1999 when the sub prime market began to develop as a result of the Community Reinvestment Act (a Federal law). Also note that the Federal government regulates interests rates, mortgage requirements and investments. Without it's involvement there never would have been a sub prime mortgage or an investment product based on mortgages.
Over the last several years efforts were made by many (including John McCain, George Bush and others) to warn Congress of the potential problems that were on the horizon but these warning were ignored.
In the beginning the investment banks would package these investment instruments (backed by mortgages) and have the instruments rated by Moodys or another credit rating agency. Investors (including the investment banks) would then buy and sell these instruments for a profit. They would purchase insurance on the instruments from entities like AIG, (an insurance company that the Government has bailed out to the tune of about $150 billion so far) so investors did not have to worry much about what they were purchasing. They also increased the instruments' value on their books using Mark to Market accounting when they thought their value had increased. This would produce profit for the investor and bonuses for their executives. They also borrowed additional funds using these increased values in order to purchase even more of the very same investment instruments which resulted in leverage at some banks of 30 to 1 as compared to their original cost (for every $1 they owned they owed $30). This entire process, with exception of the credit rating company, was subject to regulations promulgated by the Federal government!
Thus, the banking crisis resulted from the Federal Government’s belief that every American should be able to purchase a home (Community Reinvestment Act) and its failure to regulate the buying and selling of securities (that were developed by the the greedy and highly leveraged banks) containing sub prime mortgages.
In conclusion, this current mess we find ourselves in was caused not by our citizens but by our Federal Government and the regulated (albeit unregulated) investment banks in New York.
Notes:
In an article for the New York Post, economist Stan Liebowitz writes that the CRA encouraged a loosening of lending standards throughout the banking industry despite warnings of default. Banks were allowed to loan to consumers who were not credit worthy with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." He notes that the Fannie Mae Foundation singled out Countrywide Financial, whose commitment to low-income loans had grown to $600 billion by early 2003, as a "paragon" of a nondiscriminatory lender who works with community activists, following "the most flexible underwriting criteria permitted." The chief executive of Countrywide is said to have "bragged" that in order to approve minority applications, "lenders have had to stretch the rules a bit."
A recent Wall Street Journal editorial on the current housing crisis argued that "Washington is as deeply implicated in this meltdown as anyone on Wall Street" because politicians "promoted housing and easy credit". The editorial lists the CRA as as one of the subsidies and policies, and stated that it "compels banks to make loans to poor borrowers who often cannot repay them".
In a piece for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, partially attributed the current "economic downturn" to the Community Reinvestment Act, charging it with "forcing banks to lend to people who normally would be rejected as bad credit risks."
https://www.nytimes.com/2008/10/24/business/economy/24panel.html
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