Annals of the Great Recession XV.

The TARP and the stimulus bill were intended to recover from the financial crisis of 2008-2009.  What about preventing a re-run in the future?  The Dodd-Frank Act required banks to hold larger capital reserves and to submit to “stress tests” to evaluate how well they could deal with a future financial crisis on the scale of 2008.   Curiously, the law also limited the trade in “credit default swaps.”  Admittedly, the wholesale trade in these insurance policies against a collapse of the bubble seems to have been what sunk the AIG insurance group.  On the other hand, they were an investment by people who saw the bubble for what it was rather than blindly believing what they were told.

One effect of the new legislation appears to be that it has encouraged the consolidation of the banking system.  It has been argued that the costs of complying with the new regulations are more than smaller banks can bear, so they have sold out to already big banks that are better able to shoulder the burden.

It is said that generals are always preparing to fight the last war.  Banks and investors are on guard against sub-prime mortgages.  However, “bubbles” can develop in any asset.[1]  So, some kind of new crisis is always possible.  Can the government and the financial system respond effectively to a new crisis?  The answers are not encouraging.

First, a flight from Keynesian demand-management policies followed quickly on the financial crisis.  President Bush encountered considerable difficulty in getting Republicans to accept the TARP.  President Obama opted for a stimulus bill that Paul Krugman warned was half as big as it needed to be, spread over two years instead of front-loaded into one year, and contained a bunch of tax cuts that would be used to reduce debt instead of engaging in new spending.  Both Republicans and Democrats have proved critical of deficit spending plans.

Second, in the absence of a Keynesian policy on the part of the Congress and President, the Federal Reserve Bank launched a long program of “quantitative easing.”  It bought huge amounts of both MBSs and U.S. treasury debt as a way of pumping money into a slow-recovering economy.  It has only recently begun to unwind this position and to raise interest rates.  That means that it would be difficult to counter a new recession by cutting interest rates.

There may also be a deep hostility to government intervention on the part of many voters.  The policies that saved the American—and world—economy from a new Depression looked very much like a privatization of gains and a socialization of losses.[2]  Thus, in 2007, the top 10 percent of income-earners held 71 percent of the nation’s wealth; now the top 10 percent hold 77 percent.  That is about an 8 percent increase.  The Fed’s quantitative easing pushed up asset prices when ownership of stocks and bonds is concentrated in the upper income groups.

In 2007, the bottom 90 percent of earners held 29 percent of the nation’s wealth; today the bottom 90 percent hold 23 percent.  That is an average 20 percent drop in assets for the vast majority of Americans.  Even so, it is worse for some than for others.  Back in 2007, the median lower-income family had about $18,000 in assets.  Today they have about $11,000 in assets.  Doubtless that fall largely represents the loss of the houses they bought without being able to pay for them.  Would Congress tolerate a new TARP or a new stimulus bill?

Maybe.  The combination of the recent tax revisions and the huge spending bill that enjoyed bipartisan support seem likely to massively expand the deficit.  Maybe stimulus is back in style if you put in enough treats for everyone.  Locking up a bunch of bankers might have to be one of those treats.

[1] See: Alexandre Dumas, The Black Tulip (1850).

[2] President Obama may have contributed to this with his denunciation of the rich as “the people who tanked the economy.”  Bill Gates and Warren Buffett tanked the economy?

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Annals of the Great Recession XIV.

To review, the presidents from 1981 to 2017 were Ronald Reagan (1981-1989), George H.W. Bush (1989-1993), Bill Clinton (1993-2001), George W. Bush (2001-1009), and Barack Obama (2007-2017).  The chair-people of the Federal Reserve Bank were Alan Greenspan (1987-2006), Ben Bernanke (2006-2014), and Janet Yellin (2014-2018).  So, those are the people upon whose watch various things happened.[1]

Between 1997 and 2006 the government eased regulations on lending and encouraged home-ownership among new groups.[2]  Mortgage originators—banks or mortgage companies—did what they were allowed and even encouraged to do: they issued mortgages (loans) to “sub-prime” borrowers.[3]  These amounted to hundreds of billions of dollars of risky loans.  Rather than hold these dangerous loans on their own books, the loan originators re-packaged the mortgages as collateralized debt obligations (CDOs) and mortgage-backed securities (MBS), then sold these packages to investors.[4]  With many previously-excluded buyers seeking a limited stock of housing, housing prices rose by a national average of 124 percent.  The value of the CDOs and MBSs also rose.  Prices for both exceeded their real value.[5]

Then, in 2007 and 2008, it became apparent why sub-prime borrowers had previously had trouble getting loans.  The number of defaults started to rise sharply.  The MBSs and CDOs dropped toward their real value.  Financial institutions that had purchased these “instruments” suddenly found immense sums wiped off the asset side of their ledgers without their liabilities (what they owed other people) being reduced.  Bankruptcy loomed for the banks unless they could get rid of these dogs in a hurry and replace them with more valuable assets.  First Bear, Sterns, and then Lehman Brothers failed.  Seeking to stop the bleeding, banks pulled in the reins on all lending, including for productive investment.  The whole economy rapidly slowed during 2008.  The Dow Jones Industrial Average fell by 50 percent.  This reduced the values of many assets held by the upper and middle-classes, causing them to cut spending in order to reduce their own debts.  With consumption spending and investment both falling, the unemployment rate jumped to 10 percent by late 2009.

Acting quickly, the George W. Bush administration pushed through a Troubled Asset Relief Program (TARP) that bought $700 billion worth of bad debt from the banks.  The Obama administration launched a mini-Keynes stimulus program of $757 billion.  The Federal Reserve Bank cut interest rates to near zero and held them there for a long time.

[1] “The long shadow of the financial crisis,” The Week, 13 April 2018, p. 11.

[2] In part, this seems to have had a worthy purpose.  Houses are a key middle-class asset, but “red-lining” by banks had long restricted access to home purchases by African-Americans and other groups.  See: https://en.wikipedia.org/wiki/Redlining

[3] Sub-prime borrowers are ones with poor credit-worthiness.  For an explanation of how credit-worthiness is determined, see: https://www.investopedia.com/terms/f/ficoscore.asp  Very often, these are referred to in public discourse as “sub-prime loans,” as if the problem existed only with “predatory” lenders.  This seems to me to resemble referring to illegal immigrants as “un-documented immigrants,” as if the only problem is a bureaucratic foul-up with issuing them some documents.

[4] Apparently, it was possible for the purchasers to discern that the CDOs and MBSs were very risky—and possibly worthless—investments.  Most people did not do so.  A few did.  See: Gregory Zuckerman, The Greatest Trade Ever (2009) and Michael Lewis, The Big Short (2010).  The bets against the housing buble were called credit default swaps.

[5] This is called a “bubble.”

Bill of Rights II.

 

The Articles of Confederation provided a poor sort of national government. The “United States” received scant respect either from foreign or state governments.  The men who authored the Constitution were determined to correct this fault.  However, they knew that the great majority of Americans feared the power and ambition of any central government.  Like the British monarchy, even the most “liberal” government might become tyrannical.  For example, a government might seek to abolish slavery in the Southern states merely because a numerical majority found it abhorrent.

Consequently, James Madison designed a government based on the separation of powers.  The executive, the legislature, and the judiciary would be co-equal branches of government.  Each branch would work to hold in check the pretensions of any over-mighty individual branch.[1]

Some delegates to the constitutional convention in Philadelphia worried that these provisions did not go far enough in insuring individual liberty.  Elbridge Gerry and George Mason proposed addition of a bill of individual rights.  This was rejected.  Later, Richard Henry Lee proposed that a bill of individual rights be added to the Constitution.  This, too, failed.

James Madison had argued against any bill of rights.  He believed that such a bill would do no good against a “republican” government based on popular sovereignty.  That is, the “people” would brook no opposition from a minority.  Furthermore, a government might interpret a Bill of Rights as stating the maximum, rather than the minimum, liberties of the people.  However, during the ratification process it became apparent that many ordinary citizens shared the reservations of Gerry, Mason, and Lee.  Essentially, they believed that even the most “liberal” government might become tyrannical over time.  Madison had argued that no bill of rights need be included because the division of powers and the conflict between interest groups would hold tyranny at bay.  This argument failed to persuade many of his readers.  The promise to add a Bill of Rights then became a bargaining chip in the effort to persuade state conventions to ratify the Constitution.  Six states recommended that a Bill of Rights be adopted once the Constitution had come into effect.  There were only 13 states then, so…

Madison abandoned his opposition to a Bill of Rights.  He wrote his own.  He offered these to Congress in June 1789.  He proposed to splice-in Amendments One through Five within the Constitution itself in Article I, Section 9, between Clauses 3 and 4.   Clause 3 bans Bills of Attainder.  Clause 4 bans direct taxation except equally according to the census.  In short, Madison intended that the Bill of Rights be individual rights.

Added instead as an appendix to the Constitution, they were adopted by Congress and ratified by the required number of states by December 1791.  Critically, the Ninth Amendment stated that “The enumeration of certain rights shall not be construed to deny or disparage others retained by the people.”  In this way, Madison responded to his fear that a tyrannical government might treat a Bill of Rights as a maximum statement of the rights of individual citizens.

Subsequently, the courts, including the Supreme Court, held that the “right of the people” referred to the rights of individuals.  Freedom of religion is an individual right.  Freedom of speech is an individual right.  The freedom to petition for redress of grievances is an individual right.  The right to be safe from unreasonable search and seizure of papers is an individual right.  The right to not be compelled to testify against oneself in a court of law is an individual right.  The right to trial by an impartial jury is an individual right.  The right to not suffer cruel or unusual punishments is an individual right.  God save the United States of America.

[1] Although that left the danger that two branches might, for their individual reasons, gang-up on the third branch.

Bill of Rights I.

English people, including the Anglo-Americans, understood their history as the product of a bitter struggle between tyranny and freedom.  Stuart absolutism had sought to restrict the rights of Englishmen.  This led to the English Civil War, the execution of King Charles I, and the republican Protectorate.  The Stuarts had been restored in 1660, but had acknowledged the role of Parliament and the laws as guardians of the rights of Englishmen.  King James II (r. 1685-1688) had tried to tip the balance toward French-style absolutism during his brief reign.  This had triggered the Glorious Revolution of 1688, while the constitutional fruits of that revolution had been harvested by the terms of the Hanoverian Succession in 1714.

Britain’s American colonies, and New England in particular, were peopled by the descendants of anti-absolutist Englishmen of the mid-17th Century.  The Englishmen who did not migrate had fought the English Civil War and created the republican Protectorate government.  The two groups shared many ideas.  These ideas were in some respects, pre-Enlightenment, rather than Enlightenment ideas.  John Locke occupied a central position for both strains of thought.  Locke had argued that a “social contract” bound both governors and the governed.  If either party broke the contract, then the other party was not bound to comply with the terms of the contract.  A tyrannical ruler had no legitimate claim on the obedience of his subjects.

That fear of a strong central government had arisen from these earlier experiences.  In the 1760s, the Americans had still seen themselves as Overseas Englishmen.  They still possessed the rights of Englishmen.  Those rights, in their understanding, included the right to be taxed by their own elected representative and the right be tried by a jury of their peers.  Both of these rights had seemed threatened by new taxes imposed by a British parliament elected only by British voters and by the Admiralty Courts appointed by the Crown and operating without juries.  As early as the Stamp Act Crisis, a handful of Americans had seen the measures as the leading edge of an effort to subjugate the colonists to absolute government.

In these circumstances, resistance offered the best path to preserving existing freedoms.  Colonial legislatures had denied the right of Parliament to impose the Stamp Act, then organized boycotts of British goods, and worked-up mobs to intimidate potential stamp distributors.  The organizers of this violent intimidation then went on to create the Sons of Liberty as a continuing resource.

The threat of superior military force added another dimension.  Until the French and Indian War (1756-1763), Anglo-Americans had defended themselves—and occasionally made offensive war—through their militias.  These were call-ups of all able-bodied and self-armed men in every Middlesex village and farm.  Anglo-Americans associated “standing armies” with the expansion of absolutist/tyrannical government like that in France.  Paranoia added another dimension.  After the defeat of the French, the Quartering Act had required the colonists to house British soldiers.  If the foreign danger had passed, why did Britain need to keep troops in America?  Did the Crown intend to impose its will on its American colonists?

In September 1768, two regiments of British infantry were ordered to Boston to support collection of the Townshend Duties.  The “Boston Massacre” (1770) cemented American hostility to regular troops.  The “Boston Tea Party” (1773) demonstrated the uses of violence.   Then came Concord and Lexington (1775).  Then came the Revolutionary War.  In the minds of many Americans, the ultimate defense against tyranny lay in the ability to shoot back.

Memoirs of the Addams Administration 32.

Americans are deeply divided on the subject of abortion.  A clear majority (57 percent) support a right to abortion in all or almost all circumstances.  A large minority (40 percent) oppose a right to abortion in all or almost all cases.[1]  Among women, 38 percent believe that abortion should be illegal in all or most cases, while 59 percent believe that it should be legal in all or most cases.  That’s a gap of 21 percent.  Among men, 55 percent think that it should be legal in all or most cases, while 42 percent think that it should be illegal in all or most situations.  That’s a gap of 13 percent.  On the other hand, 38 percent of women oppose abortion in all or most situations, while 42 percent of men oppose abortion.  Some 59 percent of women support a right to abortion, while 55 percent of men support a right to abortion.  So, pro-choice women are right to view men as the weaker vessel on this issue.

White Protestant evangelical Christians make up the most convinced group of abortion opponents.  Almost two-thirds (63 percent) of this group opposes abortion under all or almost all circumstances, while one-third favors a right to abortion in all or most circumstances.[2]  Then 76 percent of evangelicals are white, with another 11 percent being Hispanics.  Evangelicals are not rich: 86 percent have a family income under $100,000 a year and 57  percent have a family income under $57,000 a year.  They are less educated: 43 percent have a high school education or less; 35 percent have some college, but not a degree.  They are older, with about three-quarters born before 1985, with the biggest single group (35 percent) being Boomers.   The vast majority of them (79 percent) say that religion is very important in their lives.  However, evangelicals are evenly divided over the basis for judging right and wrong: 50 percent believe that there are clear standards and 48 percent believe that it depends on the situation.

In terms of political parties, 56 percent of evangelicals are Republican or lean in that direction, but 24 percent of them are Democrats on lean that way, and 16 percent identify as independents.[3]  Here’s the kicker: 55 percent of Evangelical Protestants are women, while 45 percent are men.[4]

However, possibly significant differences exist within both camps.  One quarter of Americans (25 percent) believe that abortion should be legal in all cases, while one-sixth (16 percent believe that it should be illegal in all cases.  OK, that settles that.  However, that leaves 32 percent who believe that abortion should be legal in most (but not all) cases and 24 percent who believe that it should be illegal in most (but not all) cases.

So, where is the middle ground?  Probably restricting abortion to the 20 week mark would be broadly acceptable.  If a woman is pregnant, but can’t decide, so be it.

Who will seize that middle ground?  Well, there are a big chunk of opponents of un-restricted abortion who are Democrats or potential Democratic voters.[5]  Is it worth a majority?

What’s wrong with a compromise?  First, it’s a rejection of a long-standing principle.  Second, it’s a rejection of a long-standing reality.  The War on Abortion will not work any better than/differently from the War on Drugs.  Or alcohol.  Or guns.  We already tried.

[1] http://www.pewforum.org/fact-sheet/public-opinion-on-abortion/

[2] In comparison, 53 percent of Catholics say it should be legal in all or most situations, and 44 percent say it should be illegal; while among black Protestants, 55 percent say that it should be legal and 41 percent say it should be illegal.

[3] The non-Republican evangelicals split 13 percent “liberal” and 24 percent “moderate.”

[4] http://www.pewforum.org/religious-landscape-study/religious-tradition/evangelical-protestant/  So this is not only a war by men on women.

[5] Natalie Andrews, “Abortion Splits Democrats,” WSJ, 14 August 2017.

Memoirs of the Addams Administration 31.

After the latest (but perhaps not last) attempt to “repeal and replace” the Affordable Care Act (ACA), some Republicans have fallen back.  Lamar Alexander suggested that a bipartisan effort to “stabilize and strengthen” the ACA.[1]  Will President Trump accommodate himself to this inconvenient truth?  The president could scuttle the ACA’s healthcare market places by refusing to authorize the payment of the subsidies that enable “Cost Sharing Reductions” in premiums.  Under the Obama administration a federal judge held that payment of the subsidies without a Congressional appropriation is illegal.  The case awaits final resolution in the Supreme Court, but the Trump administration has continued to make the payments in the meantime.  Halting the payments would lead to an estimated 19 percent jump in premiums nation-wide.  Does Donald Trump want to shove millions of Americans off medical insurance?

Six months into his administration, President Trump has begun to encounter resistance from fellow Republicans.[2]  They are eager to embrace a strong line against Russia, they can’t do anything to bring a resolution to the “collusion” story, and they’re angry about his verbal assault on Attorney General Jeff Sessions (so recently one of their own).  If Republicans break from the president, he will have little choice but to abandon a legislative agenda in far of issuing a blizzard of executive orders and vetoing Republican legislation out of spite.  Those will be contested in the courts.  On the other hand, if Republicans break from the president, they will have little chance of advancing their own legislative agenda unless they can unite with Democrats to over-ride a presidential veto.  Of course, cooler heads may prevail.

Playing to his base, the president announced that transgender troops would be barred from further service in the military, and the Justice Department launched an investigation of affirmative action admissions policies by universities.[3]  There may be legitimate reasons for limiting transgender troops in the military.  It isn’t clear that the president knows any of them.  Rather, he seems to have been over-responding to pressure from Christian conservative Republicans.  In any event, the Pentagon said that a tweet is not the same thing as a formal order, that there is a formal review of transgender service people under way; and that all troops will continue to be treated with respect.  In terms of affirmative action, there is a sense in some quarters that it has been turned into a system of “set asides” for African-Americans and, to some extent, for Hispanic-Americans.  Given the over-supply of colleges, it doesn’t have much effect.

Under these adverse conditions, a steadier hand in the White House became vital.  President Trump’s churning of his White House staff reached a new stage.[4]   Chief of Staff Reince Priebus and Press Secretary Sean Spicer left, while Anthony Scaramucci became director of communications.  Then Secretary of Homeland Security John Kelly took over as chief of staff.  Next thing you know, Scaramucci got booted out of the White House.  Kelly, a retired Marine Corps general often portrayed in the media as a Drill Instructor screaming orders up the noses of staffers, tried to impose some order.  (No such option appears available to the Congressional Republicans.)  One key task for Kelly will be dealing with leaks from the sieve-like White House.  It will fall to the Justice Department to stanch the leaks from the Trump Resistance within the federal bureaucracy.  Editorials and columnists generally agreed that a far more challenging task lay in the need to wrangle an undisciplined president.

[1] “Health care: What happens now?” The Week, 11 August 2017, p. 6.

[2] “The GOP: Rebelling against Trump,” The Week, 11 August 2017, p. 16.

[3] “Justice Department to target affirmative action,” The Week, 11 August 2017, p. 6.

[4] “Embattled Trump turns to Kelly,” The Week, 11 August 2017, p. 4.

Memoirs of the Addams Administration 30.

“The great thing about hitting yourself in the head with a hammer is that it feels so good when you stop.”  Recently, almost two-thirds (64 percent) of Americans desired the preservation of the Affordable Care Act (ACA) as it currently exists or with reforms of “problem areas.”[1]   Are there “problem areas”?  Yes.  Here are a couple of examples.  First, there are many people who are caught in a tight spot by earning too much to qualify for subsidies, but too little to be able to afford health insurance.  Second, only a few insurance companies had any experience at providing/pricing health insurance to poor people.  The Obama administration lured many other health insurers into participating in the healthcare market places by promising that all sorts of healthy rubes would pay premiums without needing much care.  Then, the Obama administration failed to enforce the “mandate.”  Many people did not even bother to get health insurance.[2]  The lack of young, healthy fools ready to be gouged for the benefit of older, wealthier people lies at the root of the instability in healthcare market places.  Third, the survival of the system depends upon continuing subsidies from appropriations passed by Congress.  The Republicans have declined to pass such appropriations and a federal court has held that spending without an appropriation is unconstitutional.  This case has not yet been heard by the Supreme Court.  When the Court does hear the case, it seems likely to support the initial decision.

Then, there are all the bad-press issues.  President Barack Obama said that “If you like your insurance, you can keep it” (or words to that effect).  Then the government cancelled a lot of insurance policies as “garbage policies” when the policy-holders really liked those policies.  The “roll-out” of the healthcare.gov web-site was a humiliating mess.  The Supreme Court held that the extension of Medicaid could not be forced on states that didn’t wish to participate by the threat to withhold other Medicaid funding.[3]  Naturally, these colossal screw-ups colored the perception of the ACA for a time.  Now, however, with the ACA an established—if imperfect—reality,[4] Republicans might do well to concentrate on remediation.

Such remediation might consist of getting rid of the ACA mandate on what must be covered; getting rid of the “mandate” that everyone must be covered; allowing/encouraging a few experienced companies to provide insurance for previously uninsured Americans[5]; expanding the range of those people eligible for subsidies; appropriating the moneys needed to make the system work; and not trying to coerce states that don’t want to expand Medicaid.

This will not be easy for Republican law-makers to do.  It abandons ideas of personal responsibility, to which many Republican voters are committed.  It expands spending, when we are already neck-deep in red-ink.  On the other hand, it will not be easy for Democrat law-makers to do.  It abandons the idea of “equal access” to health care and it abandons another federal suppression of state autonomy.

Then we can argue about how to close the budget deficit.  Anthoer difficult task.

[1] “Poll Watch,” The Week, 11 August 2017, p. 17.

[2] About 15 million people did get health insurance solely out of fear of the Internal Revenue Service (IRS).  These 15 million resent having to buy something they don’t need and constitute the core of those people who would “lose” this insurance under various Republican plans.

[3] This class-based program of medical insurance covers many Trump voters as well as the voters whom the Trump voters despise for other reasons.

[4] Like Social Security, Medicare, and the Espionage Act of 1918.

[5] Yes, I understand that this will create a two-tier medical care system.  “What are you, fresh offa da boat?  Expect that the streets are paved with gold?  ‘Merica is hard place to live.  Still, is better than the Old Country. “  NB: Imagined monologue, not a quote from the text.