Currently the United States is undergoing one of the worst financial crises of the last hundred years. Since the crisis is occurring in the middle of a presidential election, it is undoubtedly helping the opposition party challenger, Barack Obama. Obama and McCain have both presented strikingly different plans for recovering from the crisis.
Obama’s plan is centered on a middle class tax cut with increased taxes for taxpayers earning more than $250,000 for couples or $200,000 for individuals (according to Americans for Tax Reform). This plan is the wrong prescription for the economy and is likely to make the problem worse.
In fact, Obama’s income tax hikes are only the starting point for his tax increases. He would increase the capital gains tax by 13%, which could affect people who own stocks in their 401(k) plans or who sell their homes. Obama would also increase the dividend tax on stocks, which also affect 401(k) owners. While McCain would phase out the Alternative Minimum Tax (AMT), which snares increasing numbers of middle class taxpayers, Obama would leave it intact. Obama would also reinstate the Death Tax, which under current law will be reduced to zero by 2010 and then jump to 55% in 2011. Obama also supports increasing Social Security taxes on higher income taxpayers. Obama would also leave the US corporate tax rate at 35%. This is one of the highest corporate tax rates in the world; only Japan and Germany are higher. Additionally, Obama has also proposed a cap-and-trade tax system on carbon emissions and a windfall profits tax on oil companies. Both would lead to higher energy prices for consumers.
While Obama does propose cuts for the middle class (many in the Democratic congress do not agree with this aspect of his plan), his tax increases would affect the segment of the population that drives the economy. The top 5% of taxpayers includes many small business owners. Over half of the nation’s workforce is employed by small businesses. If these companies have to pay more in taxes, they will have less money to pay employees. That will translate into fewer jobs. Additionally, the top 5% of taxpayers already pay 60% of all taxes. This figure is up from 56% before Bush’s tax cuts.
History shows us that low tax rates typically lead to economic growth. In the United States, there have been four cuts in tax rates over the past one hundred years. These cuts took places during the administrations of Coolidge and Harding, Kennedy, Reagan, and George W. Bush. In each case, the economy grew, jobs were created, and tax revenues actually increased. This can also be seen around the world. When Ireland cut its corporate tax rate to 15%, it became one of the fastest growing economies in Europe. Eastern European nations such as Russia, Slovakia, Serbia, Ukraine, Romania, and Georgia have all used low flat taxes to stimulate their economies.
On the contrary, increasing taxes slows the economy and actually leads to a smaller Gross Domestic Product and fewer tax revenues. FDR’s tax increases and regulation in the 1930s made the Great Depression in the US last much longer than in many other countries. In 1920, a severe depression had lasted only a year due to President Harding’s cuts to federal taxes and spending. George W. Bush got similar results with tax cuts in 2001.
A more recent example of the folly of tax increases can be found in the state of Michigan. In 2007, Governor Jennifer Granholm enacted the state’s largest tax increase in generation in order to make up a budget shortfall. The taxes were planned to generate about $1.3 billion in new revenues. Instead, tax receipts are far below projections and Michigan entered a statewide recession two years before the rest of the country.
The other side of the coin is that Barack Obama has proposed numerous new spending programs. These costly programs include massive expenditures on healthcare, the environment, a national service plan, college tuition assistance, and many other programs. The total for Obama’s new spending is close to $300 billion per year according to the National Taxpayers Union. Such massive new spending programs would rapidly expand the deficit and increase the federal debt.
Obama and the Democrats are also unlikely to make serious reforms to the nation’s mortgage markets. Many of the problems that we face today can be traced to the Community Reinvestment Act of the Carter era, which required banks to loan money to low-income borrowers. The program was expanded under President Clinton, who directed Fannie Mae and Freddie Mac to increase their holdings of subprime loans.
Fannie Mae and Freddie Mac made large campaign contributions to congressional Democrats in exchange for thwarting Republican attempts at oversight. The two top recipients were Senator Chris Dodd, now chairman of the senate committee that oversees banks, and Barack Obama, who received more money in four years than most members received in twenty. Franklin Raines and Jim Johnson, former CEOs of Fannie Mae and Freddie Mac, have worked extensively on Obama’s campaign.
In contrast, John McCain plans to repeal the Alternative Minimum Tax and reduce corporate tax rates. McCain wants to simplify the tax code so that both individuals and companies will save on accounting costs. John McCain also cosponsored legislation to increase oversight of Fannie Mae and Freddie Mac in 2005.
McCain also has a long record of opposing government waste and pork barrel spending. This makes him an ideal candidate to tackle the growing problems of Social Security and Medicare. Medicare is projected to be bankrupt by 2019 and Social Security by 2050. Changes must be made immediately to avoid massive new taxes or draconian benefit cuts to save both programs later.
Barack Obama’s economic policies take the United States in precisely the wrong direction. His numerous tax increases and expensive new spending programs have been proven to restrict economic growth in the past. To further restrict economic growth when the country is already in a recession would almost certainly prolong and deepen our current economic crisis.
Sources
http://atr.org/content/pdf/2008/August/082508pr-ObamaMcCain%20Matrix.pdf
http://online.wsj.com/article/SB121192942396124327.html?mod=djemEditorialPage
http://www.ntu.org/main/page.php?PageID=6
Showing posts with label fannie. Show all posts
Showing posts with label fannie. Show all posts
Monday, October 27, 2008
Sunday, October 5, 2008
Why the Wall Street Bailout Is a Waste of Money
On October 3, 2008, President Bush signed into a law the Economic Stabilization Act. This $700 billion law was touted as the only way to rescue the US economy from certain collapse. Instead, President Bush and Congress have likely only delayed the inevitable. The law does nothing to resolve the underlying problems that are threatening our economy.
Candidates from both parties have been quick to condemn Wall Street greed for the implosion of a growing number of banks and investment firms. These companies made billions of dollars in the subprime lending market for years before the bubble of inflated real estate prices began to burst. If we look deeper into the history of subprime lending, an industry in which I worked at one time, we find that while greed certainly played a role, it is not the only factor in the crisis.
Subprime lending as we know it today did not exist prior to 1977. In that year, Congress passed the Community Reinvestment Act, which was signed into law by Jimmy Carter. The law was intended to prevent racial discrimination in lending and to prevent the “redlining” of low-income neighborhoods. Activist groups used the law to challenge regulatory approval for new bank ventures when banks did not comply satisfactorily with the CRA.
The act was significantly strengthened by President Bill Clinton in the 1995. His administration stepped up enforcement of the act by setting performance-based goals. The Clinton Administration also encouraged banks to relax rules for income verification of borrowers and provide for lower down payments. The new CRA also allowed banks to bundle mortgages into securities, which could then be sold to other banks instead of being held by the original lender.
The Clinton Administration also pressured Fannie Mae and Freddie Mac, quasi-governmental companies, to buy more of these mortgage backed securities. In 1999, Fannie Mae CEO Franklin Raines, now an Obama advisor, told the NY Times “there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' Fannie Mae further reduced the credit requirements of the mortgages that it purchased as it increased its share of the mortgage market.
The US government directly encouraged the banks to make risky loans with the implicit guarantee that they would be bought by Fannie Mae and backed by the government. Community groups pressured banks to lend more money to low-income borrowers under the threat of bad publicity. Banks did not resist when they found that money was too easy to make in the subprime market in a time of rapidly rising real estate values. By 2007, Fannie and Freddie owned or guaranteed about 40% of the US home loan market. Many banks were heavily invested in Fannie and Freddie stock as well as mortgage backed securities.
The fundamental flaw of the Economic Stabilization Act is that while it includes money for the US Treasury to buy bad mortgages from troubled banks. What it does not do is to remove the impetus that sparked the subprime frenzy in the first place. The Community Reinvestment Act is still law and many of the same people, in both government and banks, are still wielding power.
The Democratic Party is heavily involved in the crisis due to their goal of providing more affordable housing for low-income families. Chris Dodd, chairman of a senate committee that oversees banks, resisted attempts to reform Fannie and Freddie in 2003 and 2005. Dodd also received the most money of any congressman from Fannie and Freddie employees and PACs. Barack Obama, the second highest recipient, includes former Fannie and Freddie CEOs, Jim Johnson and Franklin Raines, among the economic policy advisors to his presidential campaign. Obama also worked with ACORN, one of the community activist groups that pressured banks to lend more money in low-income areas or be harassed under the CRA.
On the other hand, the Republicans did halfheartedly attempt to reform the system. President Bush noted as far back as 2001 that the size of Fannie and Freddie was “a potential problem.” In both 2003 and 2005, Republicans introduced the Federal Housing Enterprise Regulatory Reform Act. In both cases, Democrats threatened a filibuster over the ability of the GSEs to contribute to groups like ACORN. In spite of a Republican majority in both houses, the bill went nowhere.
With the Democrats virtually certain to regain control of both houses of Congress and likely to capture the White House as well, it is highly unlikely that there will be any meaningful reform to the CRA. If the government continues to pressure banks to make loans to people who cannot repay them, then we will certainly revisit the mortgage crisis. More bailouts will be required until the Treasury has no money left. Higher taxes to generate revenues would likely cause the economy to slow further.
As in Ayn Rand’s Atlas Shrugged, the government and the community activists essentially became parasites that attached themselves to the financial sector, which willingly went along with the scheme. Money was sucked from the banks until the bubble burst and they started to fail, resulting in the present crisis.
To further complicate the situation, two other bailouts are already appearing on the horizon. Medicare is projected to be bankrupt by 2019. Social Security will follow it into insolvency in 2041. Either large tax increases or large benefit cuts will be required to keep the programs solvent. These bailouts will be on top of additional spending proposed by congress for programs such as universal health care.
If we are to avoid an economic collapse, there must be fundamental change in the attitudes of Americans. We should, to paraphrase a great president, ask not for handouts from our government, but ask that our government put a stop to spending on programs not authorized by the Constitution. We must return to the days before the New Deal and the Great Society when Americans did not look to the government to provide for their financial security.
Sources:
http://www.answers.com/topic/community-reinvestment-act
http://www.dollarsandsense.org/archives/1997/1197campen.html
http://www.heritage.org/Research/Economy/HL516.cfm
http://pajamasmedia.com/rogerkimball/2008/09/29/who-caused-the-biggest-financial-crisis-since-the-great-depression/
http://query.nytimes.com/gst/fullpage.html?res=9c0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all
http://www.marketwatch.com/news/story/text-economic-rescue-bill-official/story.aspx?guid={6945E610-2654-4C44-87ED-3DA763EE0200}&dist=hplatest
http://faustasblog.com/?p=6567
http://www.liveleak.com/view?i=ae3_1222100943
http://wharrison55.newsvine.com/_news/2008/09/20/1890073-bush-and-mccain-tried-to-reform-freddie-fannie-democrats-declined
Candidates from both parties have been quick to condemn Wall Street greed for the implosion of a growing number of banks and investment firms. These companies made billions of dollars in the subprime lending market for years before the bubble of inflated real estate prices began to burst. If we look deeper into the history of subprime lending, an industry in which I worked at one time, we find that while greed certainly played a role, it is not the only factor in the crisis.
Subprime lending as we know it today did not exist prior to 1977. In that year, Congress passed the Community Reinvestment Act, which was signed into law by Jimmy Carter. The law was intended to prevent racial discrimination in lending and to prevent the “redlining” of low-income neighborhoods. Activist groups used the law to challenge regulatory approval for new bank ventures when banks did not comply satisfactorily with the CRA.
The act was significantly strengthened by President Bill Clinton in the 1995. His administration stepped up enforcement of the act by setting performance-based goals. The Clinton Administration also encouraged banks to relax rules for income verification of borrowers and provide for lower down payments. The new CRA also allowed banks to bundle mortgages into securities, which could then be sold to other banks instead of being held by the original lender.
The Clinton Administration also pressured Fannie Mae and Freddie Mac, quasi-governmental companies, to buy more of these mortgage backed securities. In 1999, Fannie Mae CEO Franklin Raines, now an Obama advisor, told the NY Times “there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' Fannie Mae further reduced the credit requirements of the mortgages that it purchased as it increased its share of the mortgage market.
The US government directly encouraged the banks to make risky loans with the implicit guarantee that they would be bought by Fannie Mae and backed by the government. Community groups pressured banks to lend more money to low-income borrowers under the threat of bad publicity. Banks did not resist when they found that money was too easy to make in the subprime market in a time of rapidly rising real estate values. By 2007, Fannie and Freddie owned or guaranteed about 40% of the US home loan market. Many banks were heavily invested in Fannie and Freddie stock as well as mortgage backed securities.
The fundamental flaw of the Economic Stabilization Act is that while it includes money for the US Treasury to buy bad mortgages from troubled banks. What it does not do is to remove the impetus that sparked the subprime frenzy in the first place. The Community Reinvestment Act is still law and many of the same people, in both government and banks, are still wielding power.
The Democratic Party is heavily involved in the crisis due to their goal of providing more affordable housing for low-income families. Chris Dodd, chairman of a senate committee that oversees banks, resisted attempts to reform Fannie and Freddie in 2003 and 2005. Dodd also received the most money of any congressman from Fannie and Freddie employees and PACs. Barack Obama, the second highest recipient, includes former Fannie and Freddie CEOs, Jim Johnson and Franklin Raines, among the economic policy advisors to his presidential campaign. Obama also worked with ACORN, one of the community activist groups that pressured banks to lend more money in low-income areas or be harassed under the CRA.
On the other hand, the Republicans did halfheartedly attempt to reform the system. President Bush noted as far back as 2001 that the size of Fannie and Freddie was “a potential problem.” In both 2003 and 2005, Republicans introduced the Federal Housing Enterprise Regulatory Reform Act. In both cases, Democrats threatened a filibuster over the ability of the GSEs to contribute to groups like ACORN. In spite of a Republican majority in both houses, the bill went nowhere.
With the Democrats virtually certain to regain control of both houses of Congress and likely to capture the White House as well, it is highly unlikely that there will be any meaningful reform to the CRA. If the government continues to pressure banks to make loans to people who cannot repay them, then we will certainly revisit the mortgage crisis. More bailouts will be required until the Treasury has no money left. Higher taxes to generate revenues would likely cause the economy to slow further.
As in Ayn Rand’s Atlas Shrugged, the government and the community activists essentially became parasites that attached themselves to the financial sector, which willingly went along with the scheme. Money was sucked from the banks until the bubble burst and they started to fail, resulting in the present crisis.
To further complicate the situation, two other bailouts are already appearing on the horizon. Medicare is projected to be bankrupt by 2019. Social Security will follow it into insolvency in 2041. Either large tax increases or large benefit cuts will be required to keep the programs solvent. These bailouts will be on top of additional spending proposed by congress for programs such as universal health care.
If we are to avoid an economic collapse, there must be fundamental change in the attitudes of Americans. We should, to paraphrase a great president, ask not for handouts from our government, but ask that our government put a stop to spending on programs not authorized by the Constitution. We must return to the days before the New Deal and the Great Society when Americans did not look to the government to provide for their financial security.
Sources:
http://www.answers.com/topic/community-reinvestment-act
http://www.dollarsandsense.org/archives/1997/1197campen.html
http://www.heritage.org/Research/Economy/HL516.cfm
http://pajamasmedia.com/rogerkimball/2008/09/29/who-caused-the-biggest-financial-crisis-since-the-great-depression/
http://query.nytimes.com/gst/fullpage.html?res=9c0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all
http://www.marketwatch.com/news/story/text-economic-rescue-bill-official/story.aspx?guid={6945E610-2654-4C44-87ED-3DA763EE0200}&dist=hplatest
http://faustasblog.com/?p=6567
http://www.liveleak.com/view?i=ae3_1222100943
http://wharrison55.newsvine.com/_news/2008/09/20/1890073-bush-and-mccain-tried-to-reform-freddie-fannie-democrats-declined
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