November 25th, 2008

Predicting the financial crisis: a few who saw it coming, and why

Here’s an exceedingly sobering article by Michael Lewis on the roots of the financial crisis, and a few of the prognosticators who saw it coming. These people had a couple of characteristics in common: a finely-honed BS detector; a willingness to face unpleasant truths, ask unwelcome questions, and make depressing predictions; and an immunity to the desire to move with the pack.

In retrospect, the truths in the article seem self-evident. But at the time they were being formulated they most certainly were not. There’s apparently a very powerful desire to believe in a pleasant fable in which home prices continue to rise forever, and where heads of huge companies and the people they employ actually know—and care—what they are doing, and what the larger consequences of their actions might be.

A while back I called the subprime mortgage market and its derivatives and tranchings an attempt at alchemy, that futile quest to turn base metals into gold. Unlike actual alchemy, this effort seemed to work—for a while. But now it’s turned to dross.

I was surprised to see something akin to my alchemy metaphor appear in the Lewis article in the following quote from a man named Steve Eisman, the abrasive yet prescient Wall Street analyst featured in the piece, “I didn’t understand how they were turning all this garbage into gold.” Some years ago, Eisman set about to find out, researching the situation by observing and talking to those in the subprime debt business.

What he discovered makes chilling reading. At the end of this long but edifying article, you may find yourself very angry, if you weren’t already.

Here’s a sample; Eisman is explaining to the author how the “creative” instruments called collateralized debt obligations (C.D.O.s) operated:

“You have to understand this,” [Eisman] says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

Yes, we can blame Barney Frank and the Democrats and Fannie and Freddie for their part in the subprime mortgage debacle. But they only acted as a starter engine, and failed (along with so many) to see where the runaway bus was heading. The point is that few people did see; it took someone with the clearsighted cynicism (I don’t think that’s an oxymoron) and the drive of Eisman to put it all together and try to sound the (largely unheeded) warning.

I agree with those who criticized John McCain for failing to point out the Democrats’ large role in pushing subprime mortgages at the start, and failing to check them later on. However, he was also excoriated by many people for blaming the crisis on “Wall Street greed” instead. There’s no “either-or,” of course. But if anyone has any doubt at this point how right McCain was about the greed part, all they have to do is read this article.

I know I’ve already quoted the piece at some length, but here’s just a bit more. It describes the beginning of the end, when a man named John Gutfreund, the ex-CEO of Salomon Brothers, turned it from a private partnership into Wall Street’s first public corporation in the 80s:

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished….No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit…

“When things go wrong, it’s their problem,” [Gutfreund] said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

Actually, Gutfreund got out of the game quite some time ago, forced to resign in disgrace from Salomon in 1991. Later, he advised students to do something better with their lives than follow in his footsteps. But he knows more than most what went down and how it worked—and how it is that we are all now forced to assume risks we would never have thought of taking.

[NOTE: Hat tip on the article, commenter "logern."]

58 Responses to “Predicting the financial crisis: a few who saw it coming, and why”

  1. Baklava Says:

    Neo, Your first link has an error.

  2. Scottie Says:

    This just goes to verify my more basic instincts.

    If something is too complicated to understand – or at least obtain a basic grasp of the concept with a little effort, it’s probably something I don’t need to be involved with!

  3. Baklava Says:

    Neo, I read the article when Logern posted it. It was insightful and goes to show that reading is sometimes better than writing. Or at least adds balance.

    The key question that arose to my mind now is what to do about it.

    At Real Clear Politics there is advice from Paul Krugman, Thomas Sowell and others on what the U.S. should do.

    While Paul points out situations correctly I disagree with his prescriptions except one. Yes, states and the federal government can put more emphasis on infrastructure (bridges, power, water, etc) and the money spent on that is actually GOING to an asset that makes things better.

    I do not agree with the idea of making credit easier or freeing credit as Paul seems to be making the case for.

    Yes, credit should be available for people but not AS available as it was. I can’t remember who wrote it yesterday but the writer was saying that yes banks credit positions are getting stronger but the responsible borrowers are not seeking credit it is the irresponsible borrowers that are seeking more than 70% of the credit from banks and banks are not willing to go down that road with those borrowers leading into this near future.

    It is my position (because I agree with Thomas Sowell) that we should be doing our work, letting the market forces play out, paying our loans, buying what we need, investing for the future and let those who made bad decisions flail away. If a company needs to seek chapter 11 bankruptcy to restructure like General Motors then let them. They’ll be stronger in the end if they can shudder production and have less labor costs (their labor cost is 50% higher than Toyota and Honda’s plants in the U.S.)

    We need to get to an era where people make good sound business and family budget decisions. Economics 101 needs to be taught in high school.

    People need not extend themselves in the future and corporations that mechanized the overvalued debt should learn lessons for the future.

    AND lastly. The government should stop spending MORE and MORE each year like it does.

    I’m tired of the press in CA lying about Arnold cutting when each year the amount spent is higher than the previous year. Call it a reduction in the amount of increase but do not call it a cut you lying Sacramento Bee writers!!! Journalism has been dead – and this recession proves that journalists need to wake up and do their jobs – stopping being negligent/lazy !

  4. Assistant Village Idiot Says:

    Gutfreund has several relatives diagnosed with BPAD, and I always wondered from a distance whether this meant he had the condition as well, or whether there was a manic culture to the family. We certainly attribute sociopathy to Eisman’s dinner companion, but narcissism, mania. or grandiosity can make you look awfully similar to an Antisocial.

    In the hyperconnected world, you can leverage pathology.

  5. M.E. Says:

    Came across that article this morning via Survival Blog (linked by Instapundit); it’s terrifying and riveting. Just unbelievable that this stuff could be going on, while most of us were going about our lives, going to our jobs, paying our mortgages, raising our families. Scottie: the sad part is that even though we weren’t involved with this stuff, it’s going to involve us: it will bring down our economy and subsequently our government.

  6. neo-neocon Says:

    Baklava: Fixed the link. Thanks for the heads-up.

  7. Baklava Says:

    ME wrote, “It will bring down our economy and subsequently our government.

    I disagree.

    Government is doing a powerplay right now. They are insisting and inserting their need.

    We need to continue having value, providing valuable services and learning skills and be of value to our neighbors, etc.

    I have about 50 skills from tiling, cooking, gardening, sewing, electrical, computers (my career), and wood working. We all as Americans should do what it takes to make a living and let those companies that cannot provide a service that we need fail or restructure to provide a better product.

    People will continue to need food, shelter, divorces, health services, transportation, energy, clothes, etc.

    If the federal and state governments and individuals can’t live within their means then there will be suffering but responsible people will keep plugging along.

    Remember 90% of us continue to work, pay our mortgages, save, buy things we need. If companies can’t survive given THAT marketplace then let them go… we don’t need to bailout GM, or lenders who are receiving payments from the 90% of us who are paying our mortgage.

    Lessons can be learned for those who think money comes easy and a capital gain in your house is always expected… Do not leverage yourself to the point that you can’t afford your style of living!

    And journalists should stop lying about veterans, health and social services budgets being cut when they weren’t!

  8. Scottie Says:

    M.E.,

    It’s not just sad – it’s deplorable that millions of people who have tried to manage their finances well and take care of their families and try to get ahead by hard work are now going to have to bail out fat cats and politicians who made more in a few years than many of these people will make in a lifetime.

    If this is what the *system* – politically and economically – is to be, then perhaps it is time for it to all come crashing down anyway so we can start over and rebuild something better….

  9. Baklava Says:

    http://www.gmu.edu/departments/economics/wew/articles/08/CapitalismAndTheFinancialCrisis.htm

    Read and enjoy. I did.

  10. Baklava Says:

    http://www.spectator.org/archives/2008/11/25/liberalism-never-sleeps

    This was fun reading also…

  11. Baklava Says:

    excerpt from the above article:

    But in the Citizenship Report, Murguia is all smiles. She asserts that “[b]y working together, NCLR and Citi can effectively tackle the barriers to asset development that Latino families face and eliminate the racial-ethnic wealth disparity.”

    Attempting to eliminate that wealth disparity worked out really well, didn’t it? Now Citigroup faces extinction in large part precisely because it signed on to leftist groups’ crazy push to give subprime mortgages to people who couldn’t afford to pay them.

    MEANWHILE, VISIONS of fat underwriting fees and commissions are dancing in Citigroup’s head. The company is keeping its fingers crossed that economy-crippling carbon emission controls are enacted. The company wholeheartedly buys into Al Gore’s global warming fantasies.

    Citigroup Research put out a self-serving report, “Carbon Trading: The Sky’s the Limit,” last year, that’s irrepressibly bullish on future carbon-related investment opportunities. The paper cites the prediction by the CEO of Abu Dhabi Future Energy Co. (ADFEC) that in 2012 the carbon market will be worth $40 billion, and predicts that cap-and-trade is coming to the U.S. Not surprisingly, the report extols the virtues of controlling carbon dioxide emissions through carbon trading, rather than through the imposition of a carbon tax: Investment firms can’t earn commissions and fat underwriting fees from a carbon tax.

    Last year the company said it intends to direct $50 billion “over the next 10 years to address global climate change through investments, financings and related activities to support the commercialization and growth of alternative energy and clean technology among the clients and markets it serves, as well as within its own businesses and operations.”

    The boutique Citi Alternative Investments, which manages $60 billion in real estate, private equity, and hedge fund capital for Citi and select net high worth investors, reports that its Sustainable Development Investments (SDI) section expects to invest more than $2 billion of private equity over 10 years in a variety of green projects, including carbon credit markets.

    Will Citigroup come to its senses and abandon its green crusade now that markets have tanked and every day brings more evidence refuting the theory of anthropogenic global warming? The jury’s out on that.

    Why don’t we try a radical experiment and allow Citigroup — with all of its foolish investments and silly distractions wholly unrelated to making a profit — to fail?

    That’s change we can believe in.

  12. Baklava Says:

    btw, my Roseville, CA electricity bill now includes a line item called, “Climate Change Mitigation $4.00

    Thank you !!

  13. Tim P Says:

    Neo,
    A very interesting article, Kate at Small Dead Animals, which like yours, is a very good site posted it on 11/15.

    Another different but interesting take on the origins of the present financial crisis can be found here.

  14. Tim P Says:

    Best financial advice I’ve seen lately.

    “The quickest way to double your money is to fold it in half and put it back in your pocket.”

  15. pierre Says:

    CDOs are nothing new. They also figured prominently in the last Bush family financial debacle back in ’90. When failed oilmen take over, you simply know that the graft will focus on property speculation. It’s tradition, you see – this year’s dry well becomes next year’s orphaned tenement or strip mall. If one’s money’s tucked away with Pictet & Cie, or someplace sound, they’ll avoid these pitfalls for you. Patterns of right-wing corruption are plain to see a long way off, but it takes the right sort of education and, as it were, upbringing. Ideology loses its allure when Father sits you down with your private banker and your million and says, “No more. You will have to live off this, and grow it if you can, until I die.” Then the National Review will make you smile, as you begin to understand its appeal to diffident provincials on a slippery slope.

  16. Occam's Beard Says:

    When failed oilmen take over, you simply know that the graft will focus on property speculation.

    Never mind the retrospective. Let’s get relevant to the present: how about when failed communist agitators take over?

    Pictet & Cie

    A gay Parisian bathhouse? A disease caught off public toilets? What is that?

    Patterns of right-wing corruption are plain to see a long way off, but it takes the right sort of education and, as it were, upbringing.

    You’re right. Left-wing corruption is so much harder to discern, because they’ve had so much practice at it, not to mention overwatch by the liberal media.

    Ideology loses its allure when Father sits you down with your private banker and your million and says, “No more. You will have to live off this, and grow it if you can, until I die.”

    It also loses its allure when your ward heeler sits you down with your community organizer and says that you’ll have to live off your welfare payment, and show some initiative. Perhaps start a business in dealing drugs or running girls…

    Explain to me again why we don’t let the Germans kick your sissy asses again, right now.

  17. br549 Says:

    I was speechless after reading the article. With anger.
    Wall Street and D.C. have me about as angry as I have ever been in my life. As far as I can tell, as far as I can see, I’m screwed. My kids and their grand kids will still be paying for it. Our country does not have the first nickel of the promised bail out money. The bail out amount keeps climbing. No one knows the final amount, because there isn’t one.

    People need to go to jail. People from Wall Street, people from the Hill. I firmly believe that.

    Many people saw this coming. Instead of trying to plug the holes, they found other ways to profit from the coming collapse for as long as possible. I read in another article where a $14,000 per year fruit picker was forwarded all the money necessary to purchase a $720,000 home. 14K wouldn’t make three mortgage payments on a house that expensive.

    I was in Roseville a couple years ago helping build their new waste water treatment plant. Huge, beautiful homes – brand new – in neighborhood after neighborhood. With sheets in the windows instead of curtains.

    The entire thing is insane.

  18. Occam's Beard Says:

    Another article, albeit narrower in scope, that you might want is this one by Bethany McLean, who also blew the whistle on Enron. I’ve become quite a fan of hers, and not because she’s hot.

    Well, not entirely because she’s hot.

  19. John G. Spragge Says:

    Remember George H. W. Bush deriding the Laffer Curve as “voodoo economics”? Well, let me suggest something radical: the invention of the Laffer curve marks the latest “get rich quick” scheme to make it into government policy.

    I would hardly say that the ascendancy of supply-side economics alone has led to the present sorry pass, but it did mark the moment that conservatives ceased to regard prudence as their prime virtue.

  20. pierre Says:

    You see, you’re ruined and you need our charity and forbearance.

  21. Baklava Says:

    John with seems to deny reality saying, “the invention of the Laffer curve marks the latest “get rich quick” scheme to make it into government policy

    I’m sorry if I’m a bit harsh here. But do you deny that if tax rates are 0% you get zero revenues? And do you deny that if you have a 100% tax rate the subsequent year you will have nobody claiming income and therefore close to zero revenues?

    What the Laffer curve is about sir is showing that there is a sweet spot somewhere with factors concerning how the economy is doing currently and changes in attitudes and behavior. The sweet spot is not near 50%. Less people are willing to work harder only to pay a tax rate of 50%.

    The trick in creating a tax policy is realizing that yes, we need revenues into the government but we also want to encourage (not penalize) hard work and risk and investment.

    It is true no matter how you want to argue that a rise in tax rates (especially leading into a recession) has a negative effect on the economy.

    You can argue that the sky is down and the grass is purple. It doesn’t make it so. You can pretend that a tax rate increase on capital gains, and corporations and upper income brackets will help the economy. It is the opposite.

    Learning is essential. Hatred has taken over you I know and i was there in 1991. I’m trying to wake you up as I was there.

  22. Occam's Beard Says:

    You see, you’re ruined and you need our charity and forbearance.

    Then you’d better be nice to the Germans, damned nice.

    Is there something in the water supply that makes people delusional? France doesn’t matter. Germany is the natural leader of Europe.

    And if we really needed France’s charity (forbearance? forbearance from doing what? is there something France can actually do, rather than talk about doing?), then I’d be throwing a rope over a rafter to hang myself.

  23. Old texas turkey Says:

    Wall Street and greed are part and parcel the same thing. Blaming Wall St. for greed would be the same as blaming an orthodox sect of any religion of being “too religious”

  24. Whispers: Thinking Straight » Blog Archive » The money pool: distance between buyer and product Says:

    [...] and services, the ‘connecting’ people had a lot of room for creative use of the money. Predicting the financial crisis: a few who saw it coming, and why takes note of an article by Michael Lewis on the roots of the financial crisis. There’s [...]

  25. neo-neocon Says:

    Occam’s Beard: “pierre” is commenting from the heartland of the good old USA.

  26. Occam's Beard Says:

    Thanks, neo. For some reason that snotty patronizing tone of his gets my goat.

  27. Occam's Beard Says:

    The curious thing is that he sets himself apart from Americans. That’s what led me to infer he wasn’t American, and of course with “Pierre,” French was the obvious choice.

    I’ll ignore him from here on out.

  28. Assistant Village Idiot Says:

    Pierre, spell out for us how it’s the Bush family, supply-side economics. and the right wing that’s responsible for all this. I hear you asserting the connection, but I don’t see evidence, only a pre-existing narrative delivered in a condescending tone.

  29. pierre Says:

    You would instantly grasp the Gestalt if you’d ever seen a failed African state with rigid castes, pervasive corruption and a syphilitic president-for-life. You can fairly smell the all-encompassing atavism. It comes from the slave states, you see. What your set sees in their mumbo-jumbo I cannot fathom.

  30. Oblio Says:

    Pierre, the African states you describe usually subscribe to some sort of Marxist mumbo-jumbo before they sink into kleptocracy, civil war, and genocide. But I think you should be nicer about them, since their dictators control up the largest bloc of votes in the United Nations General Assembly.

  31. Nolanimrod Says:

    Neo,
    You did a real service by posting this one. It finally makes sense. Thank you.

  32. Artfldgr Says:

    EXCELLENT!!!!!!

    love the eisman thing… but remember something.. eisman did not care who or why it was or became the way it is…

    the truth is that the CEOs make so much that, as a venture capitalist informed me, they have a real stake in the company and what happens.
    ..
    in eismans story, if you care to, you can extract that the CEOs of larger firms were at the mercy of presumed experts that werent morally doing the job they were paid to do…

    that is… the people below a ceo ALSO need to have morals to present things truthfully… and not play their own political games and stuff…

    to blame the CEO, is to blame a blind man and not blame the people who help that blind man to see.

    in this mix you will of course have bad ceos that actually do the bad things that some people think of. but they are captains of small concerns (in head count), who work larger things and leave employees blind… a person who runs a huge corporation like citibank does not really have the freedom to make policy and decide other than the facts his lower people hand him…

    and lastly, to the cause… each of these entities, even the not so good ceos that spoil the bunch, are working in an environment where the state defines morals.

    that there is an artificial landscape that is on top of a real landscape… and like movie scenery, this landscape changes as laws and rules change and administrations…

    what this does is create a financial system that cant work the fundementals at the bottom, but have to constantly work the ‘rules’ that shift that is on top. the new rules change the landscape, and old niches close, and new ones open each time they do this.

    beofre long… its more about finding advantage in interpreting rules and doing operatins with in the artificial framework, than it is about actually working the base things about the business.

    quick example
    as long as the state said that a bank only need 10% of capital to cover fractional banking, no bank can afford to, in the short term, not lend with 10% backing. if they thought that under 50% was bad, they are stuck competing in a world where 10% is allowed… and if they dont join in and do the same, they will lose huge marketshare…

    so what happens is TIME becomes a funky factor… they KNOW its bad… but they cant lobby the state… they cant change the new law… they cant set this figure to any other one… except maybe one close but better…

    in shortest way possible:
    when the state distorts the market, the market has to pretend its real, or else suffer short term failure.

    so they end up playing the game of avoiding short term failure, and living as long as they can till the long term failure eventually comes…

    at 50% i can only make 2 loans for each matching principal.. at 10% i can make 10 loans for each matching principal… as a banker living in the here and now… my bank will not be open if i can only write 2 loans for every 10 my competitor does. can i?

    so the morals needed to avoid this disaster couldnt come from the finance guys.. it had to come from the people in the state in not distorting the market that way in the first place.

    the best the finance guys could do was work it… and hope they were not holding the hot potatoe when the music stopped.

    CEOs like presidents, dont have the powers most of us imagine they have… they ARE powerful, but not in the ways or areas we normally pretend we know.

    [if we really did know, and could work it, most of us wouldnt be doing the kinds of jobs we do to live]

  33. Oblio Says:

    Lewis writes vividly enough to delight the folks back home in NOLA, but I am still perplexed by two central mysteries: 1) How did the seller of a Credit Default Swap use what are essentially insurance premium payments to back new bonds? The magnitude of the numbers seems all wrong unless CDS sellers were charging massive premiums. 2) How did the sellers of the Credit Default Swaps get the pricing so wrong, since presumably they knew that a CDO portfolio based on a BBB tranche should have a yield close to the underlying portfolio? (Another small mystery is whether Moody’s can stay in business making mistakes like this.)

    Of the two, the second is easier to understand. Credit markets get the probability of default wrong all the time. I recall the Asian Contagion and how Russian bond holders (in 1998) who bought at 40 cents on the dollar didn’t get them cheap enough! And I was amazed when JP Morgan made loans to Enron secured by Enron’s own stock (which in financial terms is a derivative of the bond value). Every speculative bubble turns up bankers who have been lending too cheaply.

    Where are these bankers getting their training? They don’t seem to know anything about finance.

  34. Le Trebuchet Says:

    I am glad to see that some of these guys are fessing up to their part in this debacle. However, I’m not so sure they are as naive about not knowing what was going on. The names Cloward and Piven are going to be coming up in the middle of this sooner or later.

  35. Oblio Says:

    I think, but I am not sure, that Atfldgr has the wrong end of the stick in what seems to be an attack on fractional reserve banking. Bankers are, and must be, in the leverage business or the cost of borrowing would become insupportable. The question they have to answer is, at what point does the leverage become unstable given the variability of the value of their assets? 30:1 at Lehman was clearly imprudent. I can’t imagine what they were thinking.

  36. Artfldgr Says:

    We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. (“I didn’t understand all the product lines, and they don’t either,” he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. (“They’re buttering you up and then doing whatever the fu*k they want to do.”)

    and so the viability of wallstreet and middle america depends on its cultural basis and morals that come from that. no such thing as a moral organism made up of immoral parts…

    Eisman is a moral person… who believed in a morals that was prior to the new secular liberal world… he was totally caught off guard by the systematic immorals of the different bit actors in the play.

    though even those bit actors, not being capable people, were being fed by a legal monster which was defining what was acceptable, and even socially good to do. the sc*m that he referred to were being given absolution by the state, and so could freely act like that with little conscience. (in a way they too have been relying on a state whose major morals were a function of the people)

    it was only a matter of time before twisted morals and end justifies the means thinking, coupled with irreverence for the people whose money they are working with (thanks to liberal class envy/hate), would corrupt a peoples so much that literally thousands would operate blithly for years and no one catch on but a few really really close to the gears ticking.

    lets just say that some ideologues got some really great advice as to where to place the diamond cutters anvil during carter, and then rely on our corrupted morals to make it work. (after all, everyone cheats, and if everyone cheats then i lose if i dont cheat, ergo, everyone now cheats).

    the key things that liberals and such have been constantly saying arent key turn out to be very key. culture rather than the transmitter of negative lessons, was the way to tune our natural selves to our artificial view of the world. which is why the less culture we have, the more ills we have, rather than less. our problem with culture should have been its odd inventions to placate differnt things (burka, rag dolls, etc), rather than believe that those things didnt exist.

    now that we have no culture, and everything is equal, we are morally bankrupt, and the KEY ingredient to a cohesive productive benificient and nice nation is its moral account being full rather than bankrupt.

    allowing political terrorism to rewrite votes and short the natural political reform process in a democratic republic is a great example of loss of morals.

  37. Artfldgr Says:

    oblio,
    they werent thinking… they were just blindly implementing the rules that the state said they had to have.

    the dems do not believe in financial principals, so to them, the amount that a fractional reserve should have is an arbitrary number, just as a tax rate is, and other such.

    its a cargo cult mentality, image without substance, making the motions, but never understanding why things dont work since they seem to be doing the same things that effective people do. (and to them they think that they are lucky that they can get around it by other means).

    the state has no economic ability to set an arbitrary single rate on fractional reserve. any person who was doing such loans would realize that the rate, and the loans quality, and such all would define a certain risk… and all can move around… but once the state says… 10%… like a compass needle that one functional point slides and sticks. AAA loans might be able to get away with 5%… while ABB and lower may need 20% and much higher amounts… since they default at higher rates…

    and BBB which would be at a high rate are at a high rate, and the poor cant get a loan beacuse of it.

    so the dems basically said… is that all? you mean you wont make those loans because BBB loans need 70% coverage? shucks.. we can fix that!

    bam… the gavel comes down, and the rate is set at 10%… this setting is backed by the states ability to hurt and fine, and eventually murder the infinitely uncooperative.

    their tweaking is what tells you they were in some way monitoring the situation… after 20 years the massive size of our economy and bonds were still absorbing that… and they realized that its not the amount.. its the amount and RATE (speed) that it comes in… as long as incoming speeds are low, large bundled loans ended up being written down, and basically distributed in some way…

    the tweaks and other action groups pressure basically started cramming bad food down the beasts throat too fast for it to take it in…

    the invisable hand always tries to compensate… and so it wasnt till so much was being crammed that the ignorant and morally banrupt and embicilic could then get in on the action. they had to hire them faster than an industry can hire good employees and vette them…

    so when this was at a more normal rate. carter till 2000 lets say, our huge size and such allowed us to eat that crap…. eisner was amazed…

    after that, in clintons time it was tweaked and suddenly the beast was having more dirt crammed down… kind of timed for which president? but the beast swallowed it and kept going almost through two terms.

    now the response has been to put the persons who pushed the handle of the steam train full throttle in charge again… which seems to be a pattern in that such people first paint exit on a entrance… and then create a crisis.. and we run through the exit that they point… and we run right into the prison

  38. Oblio Says:

    Artfldgr, I’m not following you. About whom are you talking? Mortgage originators, investment banks, commercial banks, hedge funds, quasi-government entities? There are what is known as “agency issues” all over the place in this story as well as information asymmetries and perverse regulation. Greedy and shortsighted trading behavior. Lack of adult supervision and self-discipline. I am disgusted by the lack of leadership in premier institutions. Any number of moralists can make their living in the wreckage.

    I am also not convinced that Eisner’s behavior was all that it should have been. We hear one side of the story from Lewis, who has always been a little glib for my taste.

    The key reason to understand how we got into this mess is because we have to get out of it. That is somewhat a technical matter that revolves around liquidity, pricing, spreads between different rate classes, accounting rules, the shape of the yield curve, and enforcement of the regulations for capital sufficiency.

    The scary thing is, just as our newspapers can’t seem to get their facts straight, our bankers can’t seem to do the math. Do our politicians know how to govern? We will see.

    For what it’s worth, I have been favorably impressed over the years with the ability of the US Government to get the important things done, despite all the whingeing we hear. I’m thinking about Treasury, USTR, Defense, the Fed, NOAA, CDC, NSA and many others (but not all!).

    I even think we’ll get back the vast majority of the financial bailout money that goes into the right hand side of bank balance sheets. The same is not true for bailing out Detroit.

  39. John G. Spragge Says:

    And do you deny that if you have a 100% tax rate the subsequent year you will have nobody claiming income and therefore close to zero revenues?

    I deny that in any given situation you can draw a “curve” between the two extreme rates and plot a “sweet spot” for maximum revenues. Indeed, I suggest that the very act of trying to identify that “sweet spot” will affect social behaviour in such a way as to move what you call the sweet spot. The uncertainty applies here: the act of measuring changes the thing measured.

    But the real problem of the so-called “Laffer curve” comes down to this: it purports to make money appear by magic, and thus to obviate the need for governments and voters to make tough choices. Indeed, a fundamental factor limiting the scope of government, that the voters have to pay for everything the legislature decides to fund, plays a critical part in maintaining limited government. The idea that you can have lower taxes and more programs at the same time thus qualifies as not only “voodoo economics” but very questionable politics.

    In any event, ever since supply side economics came on the scene, the United States has run a trade deficit, and, except for a brief period in the Clinton Administration, has run a government deficit as well.

  40. Gray Says:

    Indeed, I suggest that the very act of trying to identify that “sweet spot” will affect social behaviour in such a way as to move what you call the sweet spot. The uncertainty applies here: the act of measuring changes the thing measured.

    Oh, utter and compleat horseshit…. It’s not quantum mechanics. It’s not subatomic particles.

    It’s the grossest of gross phenomena:

    “Wanna buy this?”
    “Nah, I don’t have enough left after taxes.”
    “How about now?”
    “Nah…..”

    I guess he’s never hear the joke that ends with: “frog with no legs goes deaf.”…..

  41. Oblio Says:

    Narrowly considering the question of the Laffer Curve, it must be true that there is some optimal rate of taxation for raising revenues. The practical problem is, we don’t really know the shape of the curve or how to figure out with certainty when we are in the middle whether cutting taxes or raising taxes increases revenue more.

    There are other quasi-religious parts of the argument as they relate to the relative importance of other ideas in economics, but since Nobel prize winners don’t speak with one voice on the topic, we are unlikely to develop clarity and consensus in this forum.

    The wilder claims of the advocates for supply side economics are almost certainly wrong. So is the idea that US national economic strategy since 1980 (actually since 1978) has been mainly based on supply side economics. There are too many other factors to consider to render an accurate accounting for the impact of supply side policies, to the extent that they have been implemented by changing the tax code.

    Pre-eminent among these circumstances have been the financial demands of war, first from 1979 to 1989 against the Soviet Union and from 2001 to the present against whatever you wish to call it. Niall Ferguson gives the long view in The Cash Nexus: “In the beginning was war.” Highly recommended reading.

    http://www.amazon.com/Cash-Nexus-Money-Modern-1700-2000/dp/0465023266

    Back when I worked in DC, we had a saying: “Every question is political and every question is connected to every other question.” True, I am afraid, but not helpful.

  42. Artfldgr Says:

    Oblio,
    Artfldgr, I’m not following you. About whom are you talking?

    first before i try to answer, i want to thank you for questioning and helping me discuss this. in many ways great questions help me as much as they do you.

    oblio, those that you listed come AFTER the state defines the landscape that they act in.

    Mortgage originators, investment banks, commercial banks, hedge funds, quasi-government entities?

    way before they get to do what they do, the state makes or changes rules…

    first the state changes the interest rates for loans to artificially low amounts… (amounts below inflation so technically the state is giving away money).

    “The Federal Reserve cut interest rates to as low as 1% so that after inflation we had negative interest rates.”

    this causes regular mortgages to go down…

    if the interest rates remains normal… then there wouldnt have been a huge flood… like the difference between the fractional reserve rate being 30% (which is around normal average), and 10% which was the rate that fannie and freddie were set by the state arbitrarily.

    a garden hose over a week can move thousands of gallons of water… try to do the same in a day, and you will burst the line… in other words, like a car, or any other machine, you can over run and burn the machine out by hitting the throttle to hard and keeping it down…

    lowering interests to 1% basically is the pedal to the metal… with inflation, its was pedal to the floor under the car. (and to add more candy to it… the large entities when gettin gthis loan, could spend it to the full value of the money before it spread thorugh the economy and its value sank to its real level… i print 1 million… its out in the market… when i print another million the first is half the value of the second… but the guys that get this money first, get to spend it before its value declines).

    anyway… thse arbitrary and artificially low interest rates creatd by an tax backed entity, led to an explosion in loan business.

    what you had were companies who now had one or two sales people, and they needed 10…

    when this type of expansion happens so fast, quality of those you hire goes down a lot while you try to fill spaces with warm bodies… so doing this effectively poisions a business sector (the swedes doing similar with a mandate of 40% women on boards is doing the same thing. not because women cant be board members, but because the rate of good board members entry is lower than the arbitrary rate they are requiring…)

    basically expand the economy too much too fast by artificial manipulation and you shift how people make choices and what choices they can make…

    in a very short time, laons and stuff for commercial banks more than doubled… imagine any industry doubling in a few years… that fast of an expansion in such a huge sector, means that quality of people goes down to fill it.

    the same thing happend in programming…when i was starting everyone were computer or information scientists… as they got warm bodies in, these people could make code that workd, but they diditn know all the other things tha went with it. they could hammer a nail in, but they werent expert carpenters. the business expands too fast for quality people to take up the cracks that open as it expands.

    when this interest rate happens, you have to imagine that hte already mature market is saturated… that most who can afford to get homes are those who are alreay doing it.

    so when it expands, who do you loan to? you HAVE to start going lower and lower into more risky loans as there is no place else to go…

    now steps in the CRA… why? because the bankers werent jumping in as fast as the state wanted them to… so the state basically made these things look even more attractive… that they could be bundled and basically transfered to another firm…

    the side story is that at the same time, the big brokerages went public, rather than were private, which meant that the corporate officers (as eisman points out), no longer had real stakes in the outcomes of the companies. it was a fundemental change to brokerages.

    ok… now the people your referring to get involved… but they couldnt till the landscape was changed… the prior landscape (prior to the legal changes), was already saturated…

    withot the state playing games, the landscape is more fixed and slower to evolve… you cant push it or pull it… that is till you insert a state bank like the fed into the system rather than just over see the banks that exist… now the state is a player in the system it oversees… (the fundemental problem of socialism.. the state is the dispenser, and the police and so there is a conflict of interest… between action, and policing).

    the fed is a fake bank… it does not follow the rules of other banks… it follows the rules of the state, and damn the rules of economics (other than a way to explain to people why what was wrong seems so right, and they should get another chance).

    so as this expands, the people start hiring lower quality people, they get on a short term rollercoaster because to not get on it is to be left in the dust…

    and thats where all these other people and entities totally emerse themselves and play the state rule game.

    the state rule game is that each time there is a new rule (as i explained above), they have to then work this rule and its implications..

    and they did… and some clever people realized that the state created a circular system… in which the people playing with loans could then invest in the hedges that were betting against them… in effect, they were throwing the game to win in the outside bettering parlor…

    they make money.. and the state provided this new landscape that then allowed for this circular thing to happen.

    if your clever and you look, the same circular thing was what enron used… selling gas to outside, and buying it back cheaper… (of course when the state arbitrarily said that was not allowed, all the investments backed by that circle fell). the same thing happened with metro train cards… the coins were perfect.. hard to cheat… (remember coin sucking?)… but these programmable cards changed the landscape, and so people started using unlimited cards to sell swipes… they would get a stack of them, and then spend the day selling cheap rides…

    the state said.. hey! thats not what we want.. and then changed the landscape again…

    we are so used to this landscape shift, and so ignorant of its actions, that we dont even notice that that is where the real game shifted to. that there is more money to be made after the state changes rules and tills that soil than there is to make honest money. of course if the state wasnt doing this, they couldnt do what they do.

    the states actions came first… like opening up the valves, and letting more water than the system could handle in.

    when CRA wasnt causing the melt down fast enough… they tweaked it… they also tweaked fanny and freddie… to have a much lower reserve than other banks required.

    once all this was set… the system just started working the artificial environemnt created by the artificial rules, and arbitrary manipulations of indicators to change behavior.

    they become invasive species to a new land… and that then causes all new twists of behavior and things which the state says it now has to invent new rules to bandaid the false situation created by shifting the landscape…

    meanwhile.. they dont do these changes comprehensively… so the new rules stay, while an old rule changes… and so the lanscape shifts again with the new rules.

    this is the core of the issue.. the source the fountainhead, the wellspring..

    you throw too much easy money out there, your going to attract the greedy and parasicital faster than the norm… period… you also convert some norm to greedy and parasitical…

    throw sugar into a cut some day… the greedy and the parasitical will grab that and use that to push further their own negative ends… while the bodies cells and such can only move at a proper rate as they are limited by merit.

    when morals decline, merit declines.. and normal cells start to act like the others… they become a cancer to the organism…

    but none of this could happen without either the state changing rules reactively in the short term..

    yes upsetting things from black swans disruptive technology will h appen… but they dont cause the harm that the states empty shift does…

    ther is more… but its thanksgiving and my wife calls.. :)

  43. Artfldgr Says:

    one thing on laffer that i think even occam is missing..

    the laffer curve can be viewed two ways… the sweet spot way… and the maximum level way..

    everyone here seems to be arguing about the sweet spot…

    but they are not asking what is that sweet spot trying to accomplish? (and this goal is NOT what laffer was trying to get to)

    the sweet spot is the zone in which the state can maximally tax the population and not cause decline…

    no one is asking or realizing that this maximal point can be way above the necesarry spending point of a state that is not trying to do things that is not its job.

    in other words, used the way you guys are arguing, your trying to figure out how much milk you can take from momma cows and still raise the babies…

    but that depends on whether the farmer wants the milk for his family, or maximal milk for other things…

    this is the unspoken part of things that we are blindly accepting..

    over time, with a large population and effective methods… the state side of the equation should go down… unless the state suddenly is communistic and feels it owns all productivity, and so says its losing something when the people do better!

    this language change is all around and we dont ‘get it’.

    the state says that cigarette smoking costs us X dollars a year.. .

    does it?

    it only does that if you plan Y amount of productivity freom each person as if yo uown them, and then feel that your cheated from Y level of productivity by their own actions…

    once you get his i own the people mindselt, the wording changes to this… if the people owned themselves, ZERO productivity is lost…

    but if the state owns you, and is bent on a certain level of productivity from each of its means of production, then the state starts to get pissed when its robots act on their own, and lower productivity that they feel belongs to them

    once this happens its only a matter of time before the state tries to maximize revenues (new speak for figuring out how much blood a tick can take before making the body sick. the laffer curve allows parasites to maximize how much they can tap the maple tree before they kill the goose laying their golden eggs.

    the state then says… hey… if i let my horses run around… they might hurt a leg… and i have to pay for maintenance before they have even produced for me… so i better not let tag, conkers, and other games happen, it might damage my slave property before they earn for me.

    they are turning us into slaves… which is why there isnt enough work or economy… because the masters economy is not large enough to encompass the masters AND the goodness for the slaves… so most slaves end up sitting around causing problems… which is why the move to all manner of population reduction…

    too many horses on a farm are a drag on productivity…

    laffer curve shouldnt be used to maximize state revenue!!!! unless you accept that state needs are always larger than the needs of the parasites that they tap for sustenance.

    next lesson.. how a state job is not the same as a jobs in the economy.. :)

  44. Baklava Says:

    John,

    Your first paragraph made sense.

    Your second and third paragraph was illogical. You wrote, “In any event, ever since supply side economics came on the scene, the United States has run a trade deficit, and, except for a brief period in the Clinton Administration, has run a government deficit as well.

    Surely you know that the ‘trade’ deficit has nothing to do with tax rates really but consumers ‘choosing’ to buy goods from foreign nations more than they choose to buy our goods. We have quite an uphill battle in explaining this stuff to you if this is the kind of stuff you are writing to me.

    When it comes to economics you truly need to do a LOT more reading and less talking. You clearly have no idea what you are talking about and I can only say it that bluntly.

    As for the federal deficits you can chart back and see when they truly started appearing. 1969 is a magical year when the last surplus was. In the 1960′s the defense budget was 50% of the federal budget. Today the defense budget is only 19% of the federal budget. Now that we made that clear let’s move on.

    If you plot a graph over the last 60 years you can see that revenues into the federal government was at 20% of GDP + or – 1%. Got that? That means whatever the economy was doing the federal government took in about 20% with taxes and fees.

    On the expenditure side of the chart you can see that the federal government spent about 20% of GDP until about 1974. You can see subsequent to 1974 that the federal government started spending about 23% of GDP (except 1998 and 1999).

    So what is the problem?

    It’s easy to see isn’t it?

    Liberals will fail !! I know you are going to fail also!!

    I failed at this simple logical issue too until 1991.

    Try harder !!! You can do it !!!

    Yes!!! The federal government SPENDS TOO MUCH !!!

    And it isn’t because of ‘defense’ That is the only budget item that has gone down over the years as a percentage of the budget.

    What has been the problem then? Everything else. While your Democrat leadership wants to blast Republicans for ‘cutting’ veterans, health, social, education, environmental programs……

    ……

    …. all I can tell you is that your Democrat leadership is LYING. This causes rank and file people like you to lie unknowingly. You are ginned up with so much HATE and discontent because you think Republicans don’t ‘care’.

    Sorry John. The only people who don’t ‘care’ are the people who fail miserably in doing the due diligence to see what I wrote is true.

    NOTHING but defense over the last 40 years has been cut. Not Medicare, school lunches, environmental programs nor education. We spent more each year than the previous year and some years we see double digit percent increases.

    OK?

    Be lazy and negligent and full of hate (your own admission) but your rantings do nothing to convince me (a man who has studied and read and knows the facts) of anything except that you are less educated than I was in 1991. Period.

    Hard choices?

    I personally hope that Obama gets on national TV and promises that he understands economics now and says that during his administration that he will NOT raise tax rates and will actually lower capital gains tax rates, corporate tax rates and everybody’s tax rates.

    He should apologize for his stated plans which had people hunkering down, divesting from the market, conserving and spending less.

    He should apologize for his part in the Fannie Freddie mess (where he took the second most from contributions from then behind Chris Dodd) and opposed reform of the ways they were doing business in 2005 and 2006.

    He should tell everyone that he will no longer ever again support low income people getting into houses with teaser rates to make them more affordable – he has been one who has supported this type of loans. That’s ridiculous.

    We need to learn these things so that this doesn’t happen to us again. We need to hear from Obama that he has learned so that we see a brighter economic future and start to feel confident in investing.

  45. Oblio Says:

    Artfldgr, I hear your point about the excessively lax monetary policy until 2006. In 2005, I was asked to do a world economic forecast for my company, and we concluded that central banks needed to intervene and would do so quickly, because the effects of excess liquidity were so apparent in cheap debt, leading to assets and commodities being bid up. I warned that in the near future, cash would be king (again), to the accompaniment of hearty laughter from my audience.

    This spring, I met with the same group, and they started calling out “Cash is King.”

    Whether the government is spending too much money is a good topic for another day.

    Happy Thanksgiving to all.

  46. John G. Spragge Says:

    Gray:
    Taxes pay for four general categories of things: national defence and law enforcement which I think we agree governments have to provide in some form or another, standards (the government agreement to provide standards runs from the time of Magna Carta right through to the Internet Engineering Task Force, W3C and OASIS) social insurance, or trnasfers to the elderly, disabled, and unemployed, and of course sheer waste and corruption. The first two catgories provide the essential basis without which commerce (buying things) would not work at all; the third, if done right, facilitates commerce by encouraging people to take risks, and I think we agree on the importance of eliminating the last category of government expenditure. Overall, without the protections governments provide, nobody could buy or sell anything. Therefore, we need some government, and as a result, taxes. Debating the question of the exact best tax rate affects people’s perceptions of what they will get for their money and what they can expect from the government. Hence, the discussion changes their behaviour, and hence, the uncertainty principle applies.

    Baklava:
    Please provide a pointer to anything I have said, ever, in which I indicated hatred for anything or anyone. As for your argument, it suffers from a classic leap of faith: substituting for information. Linked to that, your argument suffers from a flawed method and also from a classic lapse in logic. Let us say, as you claim, that the non-defence portion of the United States federal budget has expanded by a considerable amount. You still don’t have enough information to bolster your claim that the government spends too much, because neither you nor the rest of us know how much government spending contributes to the technical advancement that forms the core of your prosperity. It doesn’t do just to add up spending on government R&D, because technical advancement involves risk and also the displacement of workers, rapid advances in technology may create a need for more social insurance. You can speak as confidently as you like; you simply don’t have the information to back it up.

    We all agree that government should spend no more money than it has to. But limits on government spending should come from the things the voters will agree to do without, not what they don’t want to pay. The “Laffer curve” theory short-circuited this decision making by assuring people they could pay less and still get that they want out of government. And that makes it a true get rich quick scheme.

  47. Baklava Says:

    John wrote, “Please provide a pointer to anything I have said, ever, in which I indicated hatred for anything or anyone. et us say, as you claim, that the non-defence portion of the United States federal budget has expanded by a considerable amount.”

    It has. It has gone from 50% of the budget to 19% of the budget today. A steady decline as a percentage.

    John really funnily wrote, “You still don’t have enough information to bolster your claim that the government spends too much,

    Yes. I do. I’ve formed an opinion based on the fact that revenues INTO the government have been about 20% of GDP over a 60 year period. That’s a pretty good basis of time.

    Then about 1974 (after the great society kicked off) we see the spending side of the equation go from 20% to 23% and it WASN’T defense that caused the problem.

    John SHOWED he misunderstands by writing this, “The “Laffer curve” theory short-circuited this decision making by assuring people they could pay less

    No. THe Laffer curve showed that tax rates could be actually lowered while more revenues flowed into the government or conversely tax rates could be raised with less revenues into the government.

    You can continue to misunderstand the Laffer curve and economics all you wish. It doesn’t do anything for yourself to do so.

    Good day and Happy Thanksgiving.

  48. Baklava Says:

    John wrote, “Please provide a pointer to anything I have said, ever, in which I indicated hatred for anything or anyone.

    Please read through your own material before you post it.

    John funnily wrote, “et us say, as you claim, that the non-defence portion of the United States federal budget has expanded by a considerable amount.

    It has. It has gone from 50% of the budget to 19% of the budget today. A steady decline as a percentage.

    John really funnily wrote, “You still don’t have enough information to bolster your claim that the government spends too much,

    Yes. I do. I’ve formed an opinion based on the fact that revenues INTO the government have been about 20% of GDP over a 60 year period. That’s a pretty good basis of time.

    Then about 1974 (after the great society kicked off) we see the spending side of the equation go from 20% to 23% and it WASN’T defense that caused the problem.

    John SHOWED he misunderstands by writing this, “The “Laffer curve” theory short-circuited this decision making by assuring people they could pay less

    No. THe Laffer curve showed that tax rates could be actually lowered while more revenues flowed into the government or conversely tax rates could be raised with less revenues into the government.

    You can continue to misunderstand the Laffer curve and economics all you wish. It doesn’t do anything for yourself to do so.

    Good day and Happy Thanksgiving.

  49. Gray Says:

    Overall, without the protections governments provide, nobody could buy or sell anything. Therefore, we need some government, and as a result, taxes. Debating the question of the exact best tax rate affects people’s perceptions of what they will get for their money and what they can expect from the government.

    Whoa, whoa, whoa….

    The Laffer Curve hold true even if the government spends the taxes wisely.

    Even taxes for Constitutional reasons cause a loss of tax revenue above a certain marginal rate because economic activity is depressed and government money is ‘crowding out’ private.

  50. Gray Says:

    But limits on government spending should come from the things the voters will agree to do without, not what they don’t want to pay.

    But human need is infinite and the amount people can pay is finite. Nobody ever agrees “to do without’ and I can only pay 100% of my income.

    How do you not understand that?

  51. John G. Spragge Says:

    Baklava claimed that:

    THe Laffer curve showed that tax rates could be actually lowered while more revenues flowed into the government or conversely tax rates could be raised with less revenues into the government.

    In fact, the theory behind the Laffer curve has never proven correct in practise. Tax cuts without program cuts have always led to big deficits. President Reagan cut taxes sharply in 1981, and found himself running such a big deficit that he had to raise taxes thereafter. So did the original George Bush. As we all know, the current president has continually run a large deficit; the round of tax cuts in the last presidential term doubled the US federal debt. The advocates of the Laffer curve have never kept their basic promise, that money will appear, effectively, from nowhere.

    In fact, the process of balancing program needs against costs forms a critical part of government, and the argument that people will never moderate their needs or agree to pay the cost of the government they want ultimately ends by claiming that the people lack the maturity to rule themselves; in other words, democracy doesn’t work.

    So I claim that the Laffer Curve model has failed in practise, and the theory has allowed citizens to evade one of the most basic and most difficult responsibilities of a self-governing people.

  52. Baklava Says:

    The Laffer curve deals with the revenues coming into government.

    President Reagan cut taxes sharply in 1981 John and guess what from 1982 – 1989 revenues almost doubled from 550 Billion to 990 Billion.

    What therefore was the problem as I keep saying?

    It is simple…

    Not too hard..

    You can do it !!!

    Yes you can !!!

    It was the spending side of the equation. The federal government spent more than it took it. It’s revenues equalled about 20% of GDP and spending was about 23% of GDP.

    You can continue the head in the sand, finger in the ear, nah nah nah nah method.

    But it only hurts you……

    The clarity is all here. Read.

  53. Ymarsakar Says:

    It’s past the capability of reading here. It used to be, long ago in the days of Gutenberg, that simply reading could produce education and enlightenment. But that was only cause of the dismal potential for education before the G Press.

    Now a days, with so much information available, it is not so much important that you read a lot as it is important that you be able to sift through the data to find the truth. That takes analysis ability rather than the intrinsic ability called intelligence to soak up data and comprehend it.

    For all you know, your intelligent brain could be soaking up nothing but enemy propaganda and you think it is the Good Stuff (TM).

    The clarity is all here. Read.

    It is their fundamental assumptions that are erroneous. No amount of reading will ever overthrow those. They are not here as blank slates for books to educate them. They need to be de-programmed first, Baklava. That requires psychological shock, not simply the absorption of data.

  54. Baklava Says:

    Ymar,

    I guess I have hope as I read and read and my core beliefs changed in 1991.

    I try.

  55. John G. Spragge Says:

    Baklava:
    Yes, Ronald Reagan cut taxes. And the deficit ballooned. And taxes didn’t stay cut. Read this:

    One year after his massive tax cut, Reagan agreed to a tax increase to reduce the deficit that restored fully one-third of the previous year’s reduction…. Reagan raised taxes again in 1983 with a gasoline tax and once more in 1984, this time by $50 billion over three years, mainly through closing tax loopholes for business. Despite the fact that such increases were anathema to conservatives–and probably cost Reagan’s successor, George H.W. Bush, reelection–Reagan raised taxes a grand total of four times just between 1982-84.

    The economy expanded despite these tax hikes and deficits, mainly because of a wave of invention that brought us the personal computer and then the Internet. But don’t kid yourself: the theory behind the “Laffer Curve” never worked. The free money never materialized. And now you have a debt that has risen to historic levels, just as the Baby Boomers get ready to retire and collect the entitlements they have paid into all these years.

    As for your argument that your government spent too much: yes, the United States government spent (and spends) too much. But you have never agreed on what to cut (agricultural subsidies? defence? transportation? social insurance?) You could justify making deep cuts to many of these programs, but the beneficiaries would fight to save them. For the past forty years, you have had political leaders unwilling to tell the voters the hard truth: tax cuts mean program cuts. Tax cuts mean less for agriculture, less for defence, less of a social safety net. If you want government to do what it does for you now, you have to pay more. If you want to pay the same or less, you have to live with program cuts. That means nice people not getting subsidies, higher food prices, higher state or local taxes for highway repairs (or road closures or tolls). And at least some conservative politicians have justified their moral coewardice by promising that the theory behind the Laffer Curve will deliver pennies from heaven.

  56. Baklava Says:

    John wrote, “Yes, Ronald Reagan cut taxes. And the deficit ballooned. And taxes didn’t stay cut.

    John. Look. The tax rates came down from 70% and went up only marginally to what 28%….

    In effect the tax rates were still sharply reduced.

    This is SIMPLE logic. You are coming up with all sorts of inconsequential arguments because they bring into the picture the SPENDING problem.

    Look at the revenues John. The revenues went up every year from 1982 – 1989 and went from 550 billion to 990 billion after the tax rate decrease.

    Also, unemployment dropped, the economy expanded and the base of tax payers expanded.

    It is very very simple. If you lower tax rates it is better for the economy.

    If you raise tax rates it has a negative impact on the economy.

    You can keep denying it or trying to convince me (a well read man) but it’s like trying to convince me that H2O is not essential to life by bringing up spending.

    Spending is a whole OTHER part of the equation. Increased government spending spurs economic growth and it’s ‘desired’ by us voters. We want goodies!!!

    Not me.

    I want the government to live within it’s means and that means I want the federal government to only spend what it takes in which is about 20% of GDP. It shouldn’t spend 23% of GDP.

  57. Whiskey tango foxtrot, over? « Blunt Object Says:

    [...] tip to both Neo-neocon and Coyote Blog.  Damn, how’d I miss this [...]

  58. Greed, Stupidity and the Sub-Prime Mortgages « Totalrecoil Says:

    [...] this over at Blunt Object who also points to neo-neocon and Coyote [...]

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Previously a lifelong Democrat, born in New York and living in New England, surrounded by liberals on all sides, I've found myself slowly but surely leaving the fold and becoming that dread thing: a neocon.
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