Deficit moralizers--now destroying the economy

[eridani]

http://www.nytimes.com/2010/11/01/opinion/01krugman.html?_r=1

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.


<snip>

Meanwhile, the administration’s mortgage modification program — the program that inspired the Santelli rant — has, in the end, accomplished almost nothing. At least part of the reason is that officials were so worried that they might be accused of helping the undeserving that they ended up helping almost nobody.

So the moralizers are winning. More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe.

The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.

But they don’t know that. And because they don’t, the slump will go on.

[fasttense]

1. How much money did the government borrow to bailout Wall Street/

Banks/Insurance firms? No one seemed to care about the deficit then. No one seemed to care about the deficit when bush started two useless wars.

So, tell me again why the baby boomers (Who were the 1st generation to pay off both their parents and their own Social Security.) have to take a cut in their paid for Social Security benefits or work until they die in order to balance the budget?

And why are the deficit moralizers not so bothered by the $700 billion tax cut for the uber rich?

Something tells me deficit moralizing is simply a ruse.

[DoctorK]

2. what?!

"So, tell me again why the baby boomers (Who were the 1st generation to pay off both their parents and their own Social Security.)"

Ummm, there are a few TRILLION in IOUs at the SSA that belie your assertion.

It is the current generation of workers that are expected to pay into SS AND issue real debt for the IOUs representing the money the Federal Government has always spent from SS on other things.

[Patchuli]

11. A "few TRILLION in IOUs" that Reagan started

and the other presidents kept borrowing from it. It was not to be used for general fund. My generation not only paid for our parents who only started paying in 1940s we also paid double tax so that SS would not run out of money for us. But since the government felt that our retirement was theirs for the stealing, it's got problems. I'd say it's time the ultra wealthy and the corporations which are the true "undeserving" pay their freaking share. I'd say it's time to stop "nation building" and feeding an oversized military budget.

I'd say welcome to DU but hopefully you are not here to spread right wing crap.

[AnneD]

16. I remember when they raised the SS tax....

I was in my mid 20's. I had a fierce debate with my elderly neighbor over this very topic. I agreed to the tax increase to pay for my generation's SS. I wanted the SS money to in essence be put in a locked box (Al Gore Jr had just come home from VN and was just starting his political career so I beat him to the punch). He said it should go to the general fund. I argued that it would get spent up.

Well, here I am now reaching retirement but younger than he was at the time. I have a lifetime of work and little SS left to show for it. I wish I could say I told you so to that neighbor, but he passed away a long time ago. Yeah, all I have is an almost empty sack. Tax the rich bastards. If you hold 99% of the money, you should pay more taxes. I have already paid.

[Patchuli]

20. Yep, I remember too

and I think we need to hold the feet of Washington to the fire. F them and their "cat food commission." We've paid our way.

[DoctorK]

3. kruggy math?

"But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.
And if you point out that their arguments don’t add up, they fly into a rage."

Why don't they add up? Existing real debt should be paid. The government shouldn't step in and arbitrarily reward the profligate at the expense of those who save. Furthermore, adding to the deficit incurs ongoing interest expense to the federal ledger while simultaneously dislocating real investment in the wealth generating economy.

"Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist."

What a sorry lie and sloppy economics. Profits (and wealth) are derived from price differentials, and the potential for them exists in inflationary and deflationary environments. Constantly raising prices via inflation doesn't necessarily foster real profits.

"Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity."

Yes, because I didn't get in debt over my head during the boom, because I saw that the interest rate cuts that Krugman was ranting for were fostering a housing bubble, and because I knew that reality would eventually re-assert itself through the inflation, I didn't get a mortgage. Now Krugman wants to tell me I should pay pay higher taxes so the government can bailout mortgagees caught up in the fiasco HE clamored for? You're damn right I'm 'passionate' that foreclosures should proceed on the people who can't pay the contract they signed. I want those house prices to fall, because THEN I'll buy one. Not as an 'investment', but as a shelter.

End the shell games. The mortgage modification program helped almost nobody because of two reasons, people didn't even pay the new modified terms and because people realized that paying the loan was a losing proposition (the home value didn't support the price they were paying - strategic default).

Krugman calls fiscal reality 'punishment', and wants to pretend that printing money is a panacea.

[clixtox]

4. Your ranting and raving are certainly justified...

on your personal level. The problem is that if your answer for the current problems is implemented, the malaise in economic activity and the "overhang" of debt obligations outstanding, will ensure a protracted depression as credit, and therefor the money supply, contracts precipitously.

Blaming some of the victims of the bubble, those enticed into mortgages they can not repay, is short sighted and counter-productive. I say "enticed" because the lenders were feeding these debt obligations(mortgages), and whatever inherent risks, immediately to the investment banks, hedge funds and others. These so-called, "Masters of the Universe", who created wildly profitable derivatives from these obligations, often derived from sub-prime borrowers, needed more home mortgages, regardless of the loan's fundamental viability, to cash in on these, however shaky, obligations. There was this voracious secondary market, that immediately took the whole risk/contract from the loan originators, and combined them, sliced them into collateralized debt obligations(CDO) tranches, had them (over) rated for quality as "AAA" prime investment grade, and then resold the anticipated debt payment stream, making a killing. These collateralized debt obligations, completely unregulated, were sold and, it turns out, sold usually to buyers who had no idea of the true risks involved. It turns out that the sellers of these "toxic assets" also were generally ignorant of the risks. In fact many of the unwary investors were other investment banks and commercial banks, which is why they are all now technically bankrupt or defunct, unable to make the traditional loans required to keep the economy vibrant and productive. They are focused now on "deleveraging", their debts, unwinding their debts, selling them for whatever they can in a buyers market and rebuilding their capital. They are rabidly risk adverse and are only interested in investing in sure things, like federal debt.

Other scammed investors were sovereign funds, the wealth of whole countries, other political entities, like Orange County, California. Insurance companies, hedge funds, wealthy individuals and even most of the investment banks were all left "holding the bag". Until the taxpayers bailed them out under Bush, initially.

When this, well it is hard to describe, "mountain" doesn't do the magnitude of these "toxic assets" justice, anyway when this huge beyond comprehension, pile of debt became unstable, as home values began to shrink, the unraveling swept most of those holding these derivatives away. Much of these debt obligations had been insured by insurers without their actually understanding the potential risk of defaults and how these defaults could snowball.

The total value of the derivatives piggy backed on the approximately $15 trillion of outstanding USA home mortgage debt can only be estimated because of the unregulated and opaque nature of the beast. Estimates in 2007 ranged upwards of 600 trillion dollars. In other words the mortgage debt was leveraged about 30 times it's underlying marketable value, possibly much more. If these assets were "marked to market", valued at what they could be sold for today, there wouldn't be a financial system to castigate. That's one of many ways the Federal Reserve bank has bailed out the banks & corporations, it is by buying this junk at 100% instead of at the reduced value it actually would bring out on the open market, if there were any buyers.

The more home mortgage defaults that occur, the magnitude of the repercussions multiplies wildly. Derivatives were also created out of many types of other debt obligations besides home mortgages, including commercial mortgage debt, credit card debt, auto loan obligations, student loans and even CDO debt itself! The variety of toxic assets created is so mind boggling that just recognizing the acronyms requires recondite knowledge. All of the many varieties of CDOs are at risk in this "recession".

Requiring the debtors to pay the price for their poor judgement, especially home mortgage debtors, under the circumstances, would be crippling today and disastrous tomorrow. Better to go after those who actually created the problem, created these toxic assets, and mis-rated them, without understanding the consequences until too late for most, while making, and often losing, trillions for themselves in the process. The borrowers who defaulted are overwhelmingly in no position to help themselves or anybody else. Going after them is just plain stupid, hopeless and ultimately, counter-productive.

That is the message hidden, apparently, in the NYTimes article, punishing the legions of mortgage defaulters isn't the answer, that's for sure!

[Yavin4]

6. Your Post Is Brilliant, Insightful, On Point, and Utterly Useless in Today's Climate

The moralizers have won the argument. Austerity is the rage, and the world is going to plumment into economic chaos because of it.

We're heading for a 2nd crash which will make 2008-09 look like Christmas morning.

[alanquatermass]

7. But doesn't there come a point where a Gov't's deficit...eventually...

...becomes a catastrophe?

Doesn't it have to happen some time?

Am I wrong?

[Yavin4]

12. Depends on the Govt.

For unstable governments like Mexico, nations in Africa, etc., yes, deficits are problematic. For the U.S., they're not. Our deficits are the results of poor priorities. For example, we're spending $700 billion this year on defense. For what? What nation on earth is gearing up to attack us? None.

We need to do the following:

Return the top tax rate back to the Clinton era
End the wars in Iraq and Afghanistan
Cut defense by 2/3
Create a Public Option health insurance system to control costs

Those simple steps would wipe out the deficit in three to five years.

In the short term, enact a real stimulus program which would create jobs and lead the development of new industries in fields such as energy.

[alanquatermass]

14. Most of that stuff you said sounds reasonable, however...

-- I'm still not sure if a Public Option is the way to go on health care -- I'm agnostic about that, but open to persuasion -- but all of the other stuff you proposed: Turning back the "tax clock" to the Clinton era (when taxes were higher but not Draconian), ending the wars in Iraq and Afghanistan (enough already!!!) and slashing the defense budget (by 2/3rds though? Hmmm. Maybe...) all make sense to me.

Thanks for a great response!

Alan

[Yavin4]

15. The Larger Point Is That The Deficit Gets Portrayed As This Big Scary Monster

When in reality, it's far from it. The deficit engenders fear in people because they don't understand the difference between themselves being in debt and the U.S. govt. being in debt.

Bottom line is this, we went from surplus to debt because:

(1) The Bush tax cuts
(2) The wars in Iraq and Afghanistan
(3) The recession


Correct 1 and 2, and do a stimulus for 3, and everything will be fine.

[DoctorK]

17. you want to see scary?

Look at the projections for net interest expense for the next decade:

just to keep the 'big picture' of what we're facing in mind:

the last budget that Obama put out:
www.whitehouse.gov/sites/default/files/omb/budget/fy201...
Here is the net interest expense (annual in billions of $) budgeted for the coming decade, and it's total burden (this doesn't buy services, just pays interest to bondholders).

2009 - 187
2010 - 188
2011 - 250
2012 - 340
2013 - 434
2014 - 516
2015 - 586
2016 - 652
2017 - 716
2018 - 779
2019 - 844
2020 - 912
2011–2015 - 2,126
2011–2020 - 6,029

The cost of the debt now is negligible because most of it is held in short term bonds with very low interest rates, the higher amounts in later years reflect the expectation of more normal interest rates, and the addition of the anticipated deficits.
In just a few years we'll be spending as much on our existing federal debt as currently do the military and the wars. Over 2 trillion dollars will be spent between now and 2015 just on maintaining the existing level of debt - not buying medicine, food, investing in infrastructure or people.
To surrender 6 trillion dollars in interest over the next 10 years is insanity. We have to pressure the government to not spend more than it takes.

[Yavin4]

19. Again, It's Only Bad, If Your Priorities Are Bad

Yes, if we keep doing stupid things like wars for no reason, then, yes, bad times are ahead. However, it's simply a matter of adjusting PRIORITIES.

Bump the top tax rate 2 points. End the wars. Cut defense by 2/3, and there's no deficit.

The defense budget is $700 Billion for one year. There it is right there.

Look at this way, you're in car heading for a wall. If you don't stop, you're going to crash into the wall. You can stop if you step on the break and avoid the hitting the wall. Step on the brake, and we won't hit the wall.

[DoctorK]

18. it's not a matter of 'blame'

"Blaming some of the victims of the bubble, those enticed into mortgages they can not repay, is short sighted and counter-productive."

It's a matter of returning the economy and prices to the reality of supply and demand.
Trying to paper over the problems (with Bernanke's printing press) that exist and were induced by the Federal Reserve is the short-sighted and counter-productive strategy. It moves the pain from those who showed the worst judgment to those who did not (on both sides of that asset/liability ledger).

What is crippling the system is this effort to pretend that closing our eyes and pressing on as if nothing is wrong will somehow lead to things getting better.

We need to acknowledge the bad debt and corresponding lack of assets so we can re-establish a firm basis (rooted in prices based on supply and demand, not ignore and pretend) for future economic growth.

[pokercat999]

5. Nationalize the TBTF, fraud filled banks, mark all mortgages to

20% below todays actual market value and re-issue mortgages at 4% interest. Bring back and enforce regulations on banks and stop the ongoing casino games. Stop HFT (high frequency trading) on wall street. Place tariffs on all imported goods equal to the amount those goods would cost if the labor to produce them was at union scale, add in the cost of our EPA and OSHA regulations and soon manufacturing would be returning to the US.

Without union scale wages and full employment our economy will never "recover".

[clixtox]

8. Nationalization of BofA could occur pretty soon...

as reported Thursday 11/11/10 at, <http://www.alternet.org/story/148817/>. A very interesting article, to say the least. Read it and weep...

[alanquatermass]

9. Democratic Senator Kent Conrad said the following today re: The debt

"There is no way of (reducing the debt) that's not controversial and difficult... if some of us have to sacrifice a political career to get this country back on track, then so be it. It has to be done."

Conrad -- a Democrat! -- thinks we need to go on cutting taxes to stimulate growth.

[alanquatermass]

10. They are also proposing a 15 cents-per-gallon gas hike...

-- which I think makes perfect sense.

[billlll]

13. AAR - revive it to get our message out

Air America Radio