# A Little Simple Arithmetic

by on February 1, 2013

Imagine that there are 12.3 million people who are unemployed. You want to cut that number in half without reducing the labor force participation rate. You want to accomplish this in four years. On average how many jobs must be created per month to accomplish that?

12.3 unemployed people/ 2 = 6.15 fewer unemployed people
4 years X 12 months per year = 48 months
6.15 fewer unemployed people / 48 months = 128,125 jobs per month

That’s in addition to the something between 120,000 and 150,000 jobs per month that must be created to provide for the “natural increase”. So something between 250,000 and 280,000 jobs must be created per month. Last month roughly 150,000 jobs were created.

For a graphical illustration of this see the Hamilton Project’s “Jobs Gap” reckoning.

Another Ho-Hum Jobs Report
February 1, 2013 at 11:27 am

Drew February 1, 2013 at 10:52 am

Rather than just firing a torpedo broadside into Obama policies (which is what I really beleive and would like to do) let’s ask two questions:

1) why (and especially in light of the crap GWB took during his tenure for a 5.5% unemployment rate) doesn’t our glorius media focus on the issue. Is there a higher priority issue than growth and unemployment? I bet ice thinks not. I know the mainstreams are totally in the bag for Obama, but really, is there not one shred of journalistic self respect left? I thought Dems “cared.” Why no complete and total outrage, or at least noticable guffaws, about Harry Read’s mind numbingly stupid rationale, Carney’s dancing like a monkey with an accordian, and Obama’s typical missing in action stance?

2) So what to do? Given the (primarily govt policy driven) asset bubble nature of the recent collapse, and the bizarre attempts by Bernanke and Geitner to reinflate that bubble, the fact that government is broke and taking ever more resources from the private sector, isn’t it the height of folly to look to government as the solution? If you go over to OTB you will see commenters in all earnesty lamenting the fact that we are not expanding government right now. That’s the economic solution they say. Can anyone make the case that of the two engines, public vs private, private isn’t the better driver, allocator and creator of wealth? Public is tapped. Just tapped.

I think we have about a 10 year road to recovery from here. I’ve owned businesses that took 7-10 years to recover from difficulties. You don’t change reality or get there any sooner by delaying the necessary. I’m darkly afraid that we just put another four years of trauma in front of us before we can get back on the path.

I happen to think the numbers were and are cooked. Others, more charitable, will simply look and say “wow, what timing, right after the election. Who knew?” Those of us in the business world every day knew. As I noted yesterday in comments, I don’t think we are stagnant, but we are certainly underperforming and misdirected.

jan February 1, 2013 at 11:10 am

“So something between 250,000 and 280,000 jobs must be created per month. Last month roughly 150,000 jobs were created.”

That 250,000 job estimate needed, to indicate signs of a genuine recovery, have been bantered around for years. However the media tends to go “Wow” every time the job gains crawl upward towards the mid 100,000 range.

We are literally living in a news media hologram, the MSM has helped create, in order to cover for the leadership lapses and fiscal errors of this president!

jan February 1, 2013 at 11:33 am

“If you go over to OTB you will see commenters in all earnesty lamenting the fact that we are not expanding government right now.”

It’s like their heads have been encrusted in cement, as they’re being thrown into the river of delusion.

“I happen to think the numbers were and are cooked.”

…especially the injection of that magical 800,000+ job number last Fall, leading to a magnanimous reduction of the UE rate to fall below 8% — a pesky number which had been plaguing the veracity of Obama’s economic recovery storyline. What luck!

jan February 1, 2013 at 12:43 pm

These decreasing numbers of workers leads to other concerns:

This continued explosion of people not in the labor force should be tremendously concerning as it represents an obstacle for the government to ever balance the budget without drastically raising taxes on those still working.

Finally, a comment generated from the above story condenses the status of our economy into a single paragraph:

Let’s see, Q4 contracted, 8.5 million fewer people working than 4 years, black unemployment way up, Hispanic unemployment way up, female unemployment up, youth unemployment way up, Federal debt approaching 200% of GDP, worst recovery from a recession in history, 47 million on food stamps, 1 in 6 live in poverty, 49% pay no Federal tax….but we’re in a ‘recovery’, and the economy has hit a ‘snag’. Wow, I’d hate to see it if it hit a ‘speed bump’.

Why is it that there are those who continue to cheerily recite the ‘recovery line’ of the Obama Administration, while there are those who just add up where we are today, and see a completely different picture?

Drew February 1, 2013 at 2:30 pm

I see Doug M stepped into the fray over at OTB………and right on que certain commenters went for the government spending mantra, infrastructure and such.

In best Gomer Pyle voice: surprise, surprise, surprise!

What is fascinating is that these very same commenters belly ache about the horrible waste and inefficiency of government spending……..when its the Pentagon. It was probably 1990 or so when I pitched my first bank deal to the credit committee based upon “the aging and crumbling infrastructure” and all the spending required to fix it. Heh. Young and innocent……and stupid.

Our government has been at the task of taking money from x to give it to y, while hiring reliable voters, er, government workers to “administrate” the redistribution (read: crumbs for the really needy and steak for the connected) for some 50 years now.

Sorry, thats not a productive sector of society and optyimal use of resources.

Steve Verdon February 1, 2013 at 3:41 pm

“Our crumbling infrastructure….” a perfect example of if you repeat a lie often enough eventually people will believe it.

Sure our infrastructure is not perfect. It does need regular maintenance, and in some cases it may be a bit neglected, but this idea that it is crumbling like a stale cookie and by directing vast resources at these projects will yield a huge return is just simply complete bullshit.

jan February 1, 2013 at 4:24 pm

What needs updating and repair is our electric grid.

steve February 1, 2013 at 5:13 pm

” why (and especially in light of the crap GWB took during his tenure for a 5.5% unemployment rate) doesn’t our glorius media focus on the issue. Is there a higher priority issue than growth and unemployment?”

I dont see a day go by w/o it discussed, but then I read a lot of econ sites. It has certainly been the top topic at left of center econ blogs. On the right, it seems that the debt is the leading topic, at least since Obama was elected. Not much before then.

” isn’t it the height of folly to look to government as the solution?”

Mostly. I think we can expect govt to mitigate the worst of the effects of this crisis. As part of those efforts, the extra money going into the economy will generate some new jobs, but longer term we need for the private sector to create real, new jobs. Unfortunately for us, the private sector has not been very good at this for a long time. It has provided jobs by running up debt, but pyramid schemes dont work forever. The private sector needs to find a way to increase growth faster than it increases debt.

Query- Some people were very convinced Romney was going to create jobs. Since he would be doing that working through govt., wasnt it really the Romney supporters who believed that govt could create jobs? How was he going to do that?

Steve

Dave Schuler February 1, 2013 at 5:48 pm

I dont see a day go by w/o it discussed, but then I read a lot of econ sites. It has certainly been the top topic at left of center econ blogs.

So do I. Based on what I see there’s universal acceptance of the idea that more spending, just about on anything, will unambiguously push us out of the ditch. To my eye they’re absolutely desperate to justify their policy preferences.

Again, to my eye the empirical evidence is just not that strong. And there’s pretty fair empirical evidence suggesting that debt-to-GDP really is significant. Which calls their unshakeable faith in boosting “aggregate demand”, by which nearly all mean consumption (which isn’t the same thing), into question. That’s really what I mean when I say “folk Keynesianism”.

Icepick February 1, 2013 at 6:11 pm

I bet ice thinks not.

“You have chosen … wisely.”

Icepick February 1, 2013 at 6:17 pm

Mostly. I think we can expect govt to mitigate the worst of the effects of this crisis.

We’re over three and a half YEARS into the RECOVERY.

And if it is a crisis, perhaps you asshats shouldn’t have worked so hard to re-elect someone that doesn’t give a goddamned rat’s ass about the unemployed. Seriously, what has Obama done about unemployment? Even Schuler thought Obama’s latest jobs bill was basically nothing but a weak election ploy. You re-elected these assholes, so you get NO CLAIM to care about us unemployed folk. You voted for the FUCK THEM party. So fuck you in turn.

Steve Verdon February 1, 2013 at 6:39 pm

What needs updating and repair is our electric grid.

This is happening, actually.

Mostly. I think we can expect govt to mitigate the worst of the effects of this crisis.

Jesus steve, do you believe in fairies too?

As part of those efforts, the extra money going into the economy will generate some new jobs, but longer term we need for the private sector to create real, new jobs.

Government is spending more than ever, but job creation/growth has been extremely sluggish.

Unfortunately for us, the private sector has not been very good at this for a long time. It has provided jobs by running up debt, but pyramid schemes dont work forever. The private sector needs to find a way to increase growth faster than it increases debt.

You make it sound like the private sector is completely separate from the public sector. If the public sector provides bad incentives via policy, then the private sector will likely respond to those bad incentives. Why did we over invest in housing? Because the private sector thought it would be a good idea just because? Or was it due to factors within the private sector (failing to appreciate that risk can’t really be reduced no matter how you bundled financial objects) as well as within the public sector (keeping interest rates so low for so long)? The first one is bad, couple it with the second one and you can really leverage yourself into quite a pickle…and look we are in quite a pickle. Add on the tendency of the public sector to bailout the financial sector and it creates an environment of perverse incentives piled on top of stupidity.

Then layering on additional regulatory burdens and possibly additional costs (e.g. Obama Care) and one wonders why the private sector isn’t providing more jobs?

Which calls their unshakeable faith in boosting “aggregate demand”, by which nearly all mean consumption (which isn’t the same thing), into question. That’s really what I mean when I say “folk Keynesianism”.

Consumption spending is already a large chunk of GDP. I wonder if it can go much higher. In other words, many people seem to think that not only is 70% of GDP being consumer spending is okay we should beaver away at getting it to 75% or even 80%. With low job growth/creation, without increasing consumer debt loads, and health care costs eating up greater portions of consumers take home pay.

Seriously…do these people think unicorns really do exist? I’m convinced they must.

Icepick February 1, 2013 at 6:52 pm

Seriously…do these people think unicorns really do exist? I’m convinced they must.

It makes more sense if they’re planning on wrecking things and all this talk of “aggregate demand” is just smoke and mirrors to hide their true purpose.

TastyBits February 1, 2013 at 7:07 pm

@Steve Verdon

… Or was it due to factors within the private sector (failing to appreciate that risk can’t really be reduced no matter how you bundled financial objects) as well as within the public sector (keeping interest rates so low for so long)? The first one is bad, couple it with the second one and you can really leverage yourself into quite a pickle…and look we are in quite a pickle. …

Without the second, the first would be limited to the primary parties, and the downside risks would curtail most of it.

A problem is created by the government. This problem causes distortions in the free-market. The government creates regulations for the distortions it created. The free-market is blamed for the original problem. Free-market supports argue against regulations not the Fed, and pro-government supporters win.

Andy February 1, 2013 at 7:07 pm

Mostly. I think we can expect govt to mitigate the worst of the effects of this crisis.

Ok, when does the “crisis” end? To me the “crisis” is looking like the new normal. I can understand big increases in government spending to ameliorate the effects of a short-term crisis and I can also understand that government spending will go up in response to a recession, but when does it end?

Drew February 1, 2013 at 8:55 pm

C’mon, guys (and gals), you know I’m talking about ABC, NBC, CBS, NYT, AP etc, which is where the volume is………….not blogs where you can get sane analysis like, oh, I don’t know…….The Glittering Eye?

Drew February 1, 2013 at 9:14 pm

“So fuck you in turn.”

And I know you mean that only in the best possible way.

Seriously, I just have no idea where steve is coming from, and I guess Dave as well. Of course you can read references to the economy and unemployment. But this is total denial of how the national discourse is shaped through the major media outlets. And how people subsequently vote. Its been a total pass for Obama. A total pass.

I crudely refered to the Steve Kroft puff piece interview with Obama and Clinton. But I do not apologize. There are dead people and Obama and Clinton are yucking it up with Kroft because they know its a total suck up piece. Propaganda, really. Bush would have been mercilessly dogged with biting questions for months on the economy or foreign policy. (Hell, he was.) Obama? Isn’t he cute? How about going on the View next week? Poor guy. He single handedly saved the world in 2008 and 9, but now, what’s the poor fellow to do? There are meanies in Congress. Its just so hard and he’s just one man. Hillary? What does it matter? And with her faux tears and outrage. Gawd.

And this is what passes for journalism these days on all the important topics of the day. Most people don’t read esoteric blogs. Thay have not the interest or the time. Political junkies read them. All you have to do is watch those fascinating man on the street interviews done all the time. People take their ques from the major media outlets.

Our foreign policy is a mess, and we have incredible economic issues. But its all “what, me worry?”

Drew February 1, 2013 at 9:24 pm

I know this is completely off topic…….

I don’t think we have many, if any, golfers here. But if the Super Bowl bores you, take a look at the Waste Management Open (Phoenix Open) this weekend. Phil Mickelson has gone berserk and is putting on one of the better performances of all time. 60, 65. I’ve played that course a dozen times. You can go low, but that’s just stupid low.

I’ve always said if he can keep it on the fairway off the tee no one can beat him, not even Tiger Woods. His iron play and short game are just too good. He’s a birdie making machine. New driver. He’s keeping it in the fairway.

steve February 2, 2013 at 8:31 am

“Jesus steve, do you believe in fairies too?”

Extended UI, Medicaid, food stamps. The 4th quarter of 2008 was the worst since the Depression. That was stopped. Note that my claim is not that the economy was cured, but that the effects were lessened.

“You make it sound like the private sector is completely separate from the public sector. If the public sector provides bad incentives via policy, then the private sector will likely respond to those bad incentives. Why did we over invest in housing? ”

This clearly precedes the subprime mess (which I think was multifactorial, including bad public policy, but happened mostly because people were making lots of money). The run up in private and corporate debt started around 1980, give or take a bit. Public policy clearly played a role. The tax advantages of debt financing vs equity financing have been eel covered. There has also been liberalization of banking rules, also well documented. It seems to me that this was largely done at the request (with lots of money and lobbying) of the financial sector. Is it really the fault of govt when they let banks do what they would have done absent the rules they removed? I guess I will let the lawyers or whomever parse that one out.

” Seriously, what has Obama done about unemployment? Even Schuler thought Obama’s latest jobs bill was basically nothing but a weak election ploy. You re-elected these assholes, so you get NO CLAIM to care about us unemployed folk. You voted for the FUCK THEM party. So fuck you in turn.”

Binary choice. Return the people to power who presided over the collapse, plus another large war, or go with the status quo. Not believing that govt can do that much about jobs, the choice was pretty clear. Those who thought govt can create jobs, voted Romney.

Steve

Dave Schuler February 2, 2013 at 8:36 am

The 4th quarter of 2008 was the worst since the Depression.

Measured how? That’s not a rhetorical question. I want to know. I think in terms of jobs lost, decline in GDP, etc. there were worse quarters during the Volcker recession.

Update

Judging by this graph, yes, the fourth quarter was a very, very small amount worse in decline in GDP than during the recession of the 1980s. Not enough worse to justify the panicked reaction, however. Not as bad as during the recession of the 1950s.

My point here is not that there was no recession. It’s that the reaction to it was wrong. I don’t know if that was because we’ve gotten soft, we thought the good times would last forever, political reasons, whatever.

jan February 2, 2013 at 11:08 am

“There has also been liberalization of banking rules, also well documented. It seems to me that this was largely done at the request (with lots of money and lobbying) of the financial sector. Is it really the fault of govt when they let banks do what they would have done absent the rules they removed?”

The so-called ‘liberation’ of banking rules was done at the behest of government politicos, such as Barney Frank, who wanted no one denied the right of home ownership. The banks were initially leaned on to give loans to basically unqualified people, in areas that were oftentimes ‘red-lined.’ It was considered non PC to have too many tough rules in place for fiscally marginal people. Thus, begin the practice of turning a blind eye, making everyone a home-owner, whether they could afford it or not.

Property values then superficially rose, fueling even higher prices in the housing market. And, more and more lending brokers succumbed to the ever-weakening rules (filling their own wallets in the process), granting almost carte blanche loans, with high appraisals and little to nothing down, to people with little to no income, just so Mr & Mrs ‘Can’t-Afford-This-Home’ could buy it.

It was a recipe for financial disaster, which, we in the business kept telling people. But, when government sanctions bad behavior, lenders make money fulfilling government’s demands, and people, undeservingly get what they want, nothing, short of a calamity, will stop such a process. Bush and McCain both weakly attempted to introduce legislation, somewhere in 2006/2007, to stem some of these irrational practices. But, Congress foiled such legislative restraints, deeming them biased and/or discriminatory to those who were less advantaged.

Steve, IMO, you support a government who doesn’t abide by the enumerated powers it was initially granted. What you seem to like is a strong arm that meddles with the market, calls the shots, making rules oftentimes based on emotional, if not inane, politics rather than sound fiscal practices. Then when the economy goes south, you have the temerity to call the private sector out, because of their coalescing around and making a profit off these impossible government policies.

“Return the people to power who presided over the collapse, plus another large war, or go with the status quo.”

It’s funny, because from my perspective, it was more the democratic influence in Congress, pushing for greater lending fairness which caused the lack of oversight in the creation of unhealthy sub prime mortgages, superficially ballooning housing prices, leading to the ultimate housing bubble collapse. ‘Fairness’ is a word used by the dems as a lever to move an agenda forward. There is no real measurement, though, in fairness, just a murky insinuation that if you don’t adhere to a certain way of thinking than it is unfair. The same tactic is being used in taxation of some, versus others. It will probably be applied to healthcare as well, when stipulating what is fair in the granting of care to some but not others.

” Not believing that govt can do that much about jobs, the choice was pretty clear. Those who thought govt can create jobs, voted Romney.”

I’ll correct that statement for you: Those who thought small businesses, enterprising entrepreneurs, in other words the private sector, voted for Romney. Those who relied on an allegiance to a paternal government for their well being voted for Obama.

steve February 2, 2013 at 11:10 am

Dang, I always forget about the 58 recession. I like Ike, so maybe that colors my memory. Anyway, the 2008 drop was also accompanied by record TED spreads. Credit markets were really frozen. The markets clearly thought this was a catastrophe in the making.

“Not enough worse to justify the panicked reaction, however.”

We have just discovered our biggest banks are insolvent. The company insuring a lot (most) of their hedging, AIG, is also insolvent. Your response? We created the 80s recession on purpose. A lot different.

Steve

Dave Schuler February 2, 2013 at 12:00 pm

We have just discovered our biggest banks are insolvent.

We”ve known they were insolvent since 2008. As I’ve said for more than 20 years, the big banks should have been broken up long ago. They should have been nationalized in 2008 or 2009 and top management removed.

Here’s a puzzle for you. Why was the CEO of GM forced out while the CEOs of the top banks were left in place? Because what the banks had done was less feckless? Because they were less incompetent? Or to keep the jolly little revolving door between government and financial institutions rotating?

Too big to allow to fail is too big to allow to exist. What have we done? Made them bigger.

steve February 2, 2013 at 12:47 pm

@jan- 1) You need to start much earlier. Start with Regan. Work forwards.

2) Interesting how Barnie Frank made all that happen while he was in the minority and controlled just one part of Congress. How does that work? If you can do that, why doesnt Paul Ryan just make his plans come true? At least make up a story that makes sense.

3) You are aware of the budding subprime mess in California that was stopped in the 90s? You are aware that CRA loans make up a small percentage of the subprime loans?

4) Dont you believe in incentives?

5) Keep a copy of the Constitution on my desk and read it every few months. Took an oath to protect it. I probably interpret it differently than you do. That has always been true for Americans. I would suggest re-reading, or reading Federalist 78.

6)”making rules oftentimes based on emotional, if not inane, politics rather than sound fiscal practices.”

Do you mean stuff like “starve the beast” where you just keep cutting taxes while doing nothing about spending? Maybe passing the largest unfunded spending bill in our history (Medicare Part D)? Prior to Reagan, I think the GOP was the more fiscally responsible party. Now, neither party is really responsible, but one party wants to keep putting people in power that will farm out our foreign policy and engage in large scale wars of adventure.

Steve

jan February 2, 2013 at 12:50 pm

Another one of the government’s financial interventions, has been the Dodd-Frank Act — legislation aimed at reforming Wall Street. However, there are those who label this legislation the very definition of tyranny, because of the uncertain regulatory power it exerts over banks, especially damaging the viability of the smaller community banks versus the ones “too big to fail.”.

…..as Dodd-Frank’s burden will fall hardest on smaller banks, larger banks will weather Dodd-Frank’s regulatory storm. Their lobbyists can carve out regulatory loopholes, while these banks rely upon their higher profit margins and regulatory compliance officers to withstand Dodd-Frank’s full force.

I also find it somewhat ironic that a banking regulation bill would have the names of Chris Dodd (infamous for his Countrywide dealings) and Barney Frank (seen by many as an enabler of the sub prime mortgage fiasco on it.

It’s equivalent to having a Jack The Ripper Bill created, in order to defend the rights of victims having their throats slashed.

jan February 2, 2013 at 1:03 pm

Do you mean stuff like “starve the beast” where you just keep cutting taxes while doing nothing about spending?

As I recall there was a deal with Reagan and the dems to cut spending. Who reneged on that one?

…the largest unfunded spending bill in our history (Medicare Part D)?

I don’t know anyone who supported that legislation. In fact conservatives always bring that up as to why they kind of disowned Bush. Also, during the Bush era, as I recall, it was the conservatives who repeatedly (and derogatorily) described his monetary policies as ‘spending like a drunken sailor.’

This is one point, which I credit the conservative wing of the republican party with, in that they will criticize their own members when they act foolishly. I don’t see much of that in the dem party, though, as they seem to only applaud like seals, and follow like lemmings towards national insolvency.

jan February 2, 2013 at 1:15 pm

but one party wants to keep putting people in power that will farm out our foreign policy and engage in large scale wars of adventure.

History tells a different story, Steve, regarding the engagement in large scale wars. For instance, the Viet Nam War was escalated under what presidency? And, who is credited for bringing the troops home from that one? It’s always been a mix of D and R dealing with the guns and butter of war. Even in the 21st Century, Bush initiated two wars in the ME, but Obama has extended war-like maneuvers by his Libyan involvement, botching it later on with his Benghazi debacle.

I don’t even know what you mean by “farming out foreign policy…”

TastyBits February 2, 2013 at 1:21 pm

@jan

You, the Republicans, and the banks will be happy with the Bureau of Consumer Financial Protection ruling that outlaws those dreaded CRA loans. The Dodd-Frank bill created the Bureau, and I am a little surprised to see you and the Republicans bashing Rep. Barney Frank.

The practices of the mortgage mess were limited in the 1990′s, and one reason was Glass-Steagall (Banking Act of 1933). Gramm–Leach–Bliley (Financial Services Modernization Act of 1999) removed the separation of financial services. Freddie and Fannie also contributed to the mess.

As to the CRA, I invite the numbers showing that bank loan portfolios contained substantial numbers of “bad” loans. While I am waiting, I will review how regulations work.

Any regulation that does not have “shall”, “must”, “will”, and a few others is a suggestion. “Should” is not “shall”. “Consider” or any similar words are suggestions, and “shall consider” is a suggestion because of the “consider”. This is important to understand how regulations are used by the regulated.

In the case of the CRA, “assess”, “take … into account”, and “evaluation” render the bill meaningless. It does have a provision about”… the safe and sound operation of such institutions”, but this is toothless because it is part of the statement of purpose. The entire thing is mush, and unless unsafe and unsound operations are allowed.

These types of regulations are used to create a competitive advantage or to “shake-down” a company. One tactic is to help the regulator “cover all the bases” by inquiring about a specific regulation – CRA provisions. The regulator looks at a competing bank’s CRA compliance. The competing bank then “jumps through hoops” to ensure compliance. Since the CRA negates any actual cation, getting into compliance is a waste of money and resources. A community action group employs a similar tactic with the bank directly.

Before, during, and after bank mergers, the CRA is used to affect the outcome by the interested parties. The bank that intends to “put a bug in the regulator’s ear” will need to ensure its CRA rating can sustain scrutiny. The bank will send its junior members to the CRA decision table. The competing bank will do the same. This table is generally known as “the kids table”.

Also, the entities affected by these regulations generally do not complain about the regulations. It is usually a third-party with no direct relation to the primaries. With Obamacare, the companies directly affected are not complaining.

Icepick February 2, 2013 at 1:48 pm

Binary choice.

Truly it was. You could leave Obama in charge, when he and his team have been wrong on every single projection they’ve made, always to the downside, and who has no idea about what to do next (other than party it up at tax-payer expense), or we could have put in someone else. That status quo you are so happy about has been a disaster for millions and millions of us, and you are content to let us rot. Oh sure, you wring your hands to pretend like you care. but in reality you don’t give a damn. I know this because THIS IS WHAT YOU VOTED FOR – the status quo.

jan February 2, 2013 at 2:08 pm

You, the Republicans, and the banks will be happy with the Bureau of Consumer Financial Protection ruling that outlaws those dreaded CRA loans. The Dodd-Frank bill created the Bureau, and I am a little surprised to see you and the Republicans bashing Rep. Barney Frank.

TastyBits,

I can’t stomach giving much credit to Barney Frank for a ‘clean-up on aisle 2′ legislative gesture, in the Dodd-Frank Act, when he was such a muscular supporter of the very regulations helping to create the housing mess in the first place.

Both Dodd, former Senate Banking Chairman, and Frank, former chairman of the Financial Services Committee were strong Congressional enforcers of the CRA regulations. And, as was implied by Peter Wallison’s op ed piece, the risk of the mortgage-backed securities never takes off unless the federal government starts pushing lenders to lower their standards for worthy borrowers.

Everyone knows that the big banks should never have ceded to these lower standards. However, such standards were encouraged, via the federal policies constructed, so as to almost unquestioningly grant loans to anyone — overlooking a loan applicant’s credit blemishes, down payment capacity, even valid documentation.

It was a joke!

As Wallison’s piece concludes:

The narrative that came out of these events—largely propagated by government officials and accepted by a credulous media—was that the private sector’s greed and risk-taking caused the financial crisis and the government’s policies were not responsible. This narrative stimulated the punitive Dodd-Frank Act—fittingly named after Congress’s two key supporters of the government’s destructive housing policies. It also gave us the occupiers of Wall Street.

TastyBits February 2, 2013 at 3:42 pm

@jan

The Peter Wallison link is a joke!

He is trying to negate the story: “the financial crisis and ensuing deep recession was caused by a reckless private sector driven by greed and insufficiently regulated.”

The “story” is both true and false. It appears he has no understanding of the subject matter, and unfortunately, he muddles the whole thing.

Fannie and Freddie were part of the problem, but they are Government Sponsored Entities (GSE). They are some private-public Frankenstein monster. I have not delved too deeply into them, but I do know they were a problem.

The CRA is like the Assualt Weapons Ban of the same era. It is meaningless and toothless. The numbers are based upon x amount of cats for every y amount of dogs, but cats and dogs are so broad that anything can be justified. Furthermore, there is no penalty for non-compliance.

The difference between a subprime loan and a prime loan is credit score. The lower score requires a higher interest rate. Subprime borrowers have the same requirements as prime borrowers. Income, payment ratio, documentation, etc. He is lumping Alt-A and other exotic loans. These originally had a justifiable purpose, but they were abused.

The demand for the mortgages came from Wall Street. They needed mortgages to fill MBS’s. The MBS is created, and then, loans are created to fill the MBS. The MBS creates the demand. The demand for MBS’s is from investors needing AAA securities, and pension funds are among these. It should be noted that Wall Street makes money from every side of every transaction.

This was all easily contained, and a solution could have easily been had for substantially less than the bailouts. The financial crisis was a result of Credit Default Swaps (CDS), and this was not the CDS’s for the primary parties. The problem was the naked CDS market. This is similar to taking out a life insurance policy on your neighbor. The faster he dies, the quicker you get your money. It sets up a perverse incentives.

The financial crisis was the result of the repeal of Glass-Steagall and low interest rates. The deficit spending under President Bush also contributed, but without the first two, it too was containable. This was the main source of the problem, and Fannie & Freddie were like gasoline poured onto a fire.

In my opinion, Glass-Steagall is an example of a reasonable regulation. It was limited in scope, and it had proved to be beneficial. In my opinion, regulating CDS’s under the commodities regulations makes sense also. My opinion of the Fed’s track record is low – very low.

Repeal of Glass-Steagall, refusing to regulate CDS’s, and the Dot-Com bubble (Fed induced) were endorsed and approved under a Democratic President. The Republican President who followed made some gestures to rein-in the problem, but he was as beholden to Wall Street as the Democrats before and after him.

Dodd-Frank is supposed to be an attempt to correct the problems created when Glass-Steagall was repealed, but it is really an attempt to further control private enterprise and the free-market. The fix would be to reinstate Glass-Steagall. The problem is the limited scope. “Why let a good crisis go to waste?”

Again, the story Mr. Wallison is trying to negate is both true and false. Wall Street was greedy and insufficiently regulated, but the private sector did not cause the problem. A philosophically consistent and intellectually honest argument would arrive at the same conclusion, but the consistency would requiring him to gore some of his sacred cows.

Finally, anybody who believes that poor innocent bankers were led astray by the big, bad, mean Democrats is an idiot. Apparently, they require outstanding bonuses because they are the only people smart enough to run their companies, but they are so stupid the wascally Democrats can outfox them.

steve February 2, 2013 at 4:05 pm

“As I recall there was a deal with Reagan and the dems to cut spending. Who reneged on that one?”

You remember the myth. The numbers showed that Reagan cut taxes, increased our debt and increased spending. That doesnt fit with Reagan’s image, so that has been made up. For example, you do realize that the GOP under Bob Dole controlled the Senate then? A more comprehensive account at link. Also, look up magic asterisk.

http://www.washingtonpost.com/blogs/fact-checker/post/the-historical-myth-that-reagan-raised-1-in-taxes-for-every-3-in-spending-cuts/2012/12/13/58a33e4c-4555-11e2-8061-253bccfc7532_blog.html

“I don’t know anyone who supported that legislation. ”

I do. Paul Ryan, your VP candidate voted for it. First you vote for it to buy the old people votes. Then you say you really didn’t support it. Then you want people to vote for you?

” Viet Nam War”

I think you are partially correct here. Both parties are too committed to war. What is different now is that the neocons are concentrated in and run the foreign policy in the GOP. They still think Iraq was a great success. They think they can replicate that success in Iran.

” Oh sure, you wring your hands to pretend like you care. but in reality you don’t give a damn. I know this because THIS IS WHAT YOU VOTED FOR – the status quo.”

I think the last time I actually voted FOR a president is when I was young and idealistic. Reagan. Since then I usually vote against the guy I think will be worse. This is especially true if I can ascertain what advisers they are using. I can see some merit in just voting out the current admin if things are not going well, and absent foreign policy, I would probably have done that too.

Steve

steve February 2, 2013 at 4:11 pm

Peter Wallison? You forgot his sidekick, Ed Pinto. If you want, I think I can find Wallison’s testimony to Congress that we should disband Fannie and Freddie because they weren’t making enough loans to poor people, that the private sector was doing a much better job at providing a lot more loans. The real genius behind the efforts of Wallison and Pinto to was to redefine subprime loans and to just completely ignore certain categories of loans when they generated their story.

The CRA is not blameless. It contributed maybe 4% of the bad subprime loans. It was just one of many factors, but a minor one.

Steve

steve February 2, 2013 at 5:16 pm

“Here’s a puzzle for you. Why was the CEO of GM forced out while the CEOs of the top banks were left in place?”

He had no real allies. The banks control both parties, though I think there was also an element of fear at the beginning.

Steve

Icepick February 2, 2013 at 8:40 pm

Since then I usually vote against the guy I think will be worse.

Let me know how President Not Romney does this term. Hopefully this guy will have a lot more on the ball than President Not McCain had last term. Because President Not McCain was just simply the worst.

jan February 2, 2013 at 10:12 pm

Finally, anybody who believes that poor innocent bankers were led astray by the big, bad, mean Democrats is an idiot.

TastyBits,

There is obviously culpability on the part of people who processed the loans — bankers, brokers, loan agents etc. But, if federal regulations and oversight either permitted this to happen, or looked the other way in order to go along with some kind of social appeasement, then I lay it on the feds.

TastyBits February 3, 2013 at 1:25 am

@jan

There were four main regulatory bodies with additional smaller regulatory entities, and their areas overlap. There are turf wars among them, and the regulated use this to play one against the other. The people who work in these entities are hard working, but they cannot keep up with the financial guys. Timothy Geithner did not give up a Wall Street career to work in the NY Fed, but he was doing all he could to further their careers.

The financial guys are hustlers, operators, players. They are used car salesmen on steroids. They sell shit as gold, and they get the buyers to sell more of their shit. It’s a game. Warren Buffet is a ruthless asshole. He would sell his mother down the river, but he has cultivated an image as a wise old grandfatherly figure.

They sell the Republicans a load of shit about regulations enacted by the Democrats, and the Republicans fight the Democrats. Most of them are Democrats. They did not check the wrong box. They use the Democrats to enact the dreaded regulations. The shit that you get from the Democrats was sold to them by the same guys.

Both D’s & R’s are being played. You and @steve are spouting the shit that was sold to you by the same guys, and they will sell both of you the exact opposite shit in a few years.

steve February 3, 2013 at 6:25 am

“@steve are spouting the shit”

So I was wrong when I said

” The banks control both parties”

and

“. Is it really the fault of govt when they let banks do what they would have done absent the rules they removed?”

” Most of them are Democrats.”

Do you have a cite for this. The financial sector donates mostly to the GOP, at about a 55/45 ratio. Gelman has also done a lot of work exploding the myth that the wealthy, elites vote Dem. My wife keeps CNBC on a lot of the time and you certainly dont hear a lot of pro-Dem rhetoric.

Steve

Dave Schuler February 3, 2013 at 9:18 am

steve:

As you can see big banks donate to Republican candidates at the rate of about 3:1 compared to Democrats.

In terms of hiring apparatchiks, the big banks tend to be equal opportunity employers as can be gleaned from this.

Is it really the fault of govt when they let banks do what they would have done absent the rules they removed?

Is it really the fault of government when murderers kill people due to inadequate enforcement of the laws? I think it is. There are two sorts of sins: sins of commission and sins of omission.

Dave Schuler February 3, 2013 at 9:20 am

There were four main regulatory bodies with additional smaller regulatory entities, and their areas overlap.

As I’ve written here before there was one government agency that was specifically tasked with regulating the very sorts of activities that lead to the financial crisis. They had the mandate, the authority, and the funding. The agency has admitted to not doing its job.

jan February 3, 2013 at 11:19 am

There are two sorts of sins: sins of commission and sins of omission.

Ah, you separated the wheat from the chaff with that simple statement.

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