In a recent article, “How Trump Happened” by economics Prof. fJoseph E. Stiglitz, he wrote: we need to rewrite the rules of the economy once again. I agree. What is ‘Irrational Ex…
VIEW THESE TWO VIDEOS BEFORE YOU READ THE FOLLOWING ARTICLE!
Economies get into trouble after asset prices rise excessively. The Fed either raises interest rates to decrease speculation, or lets the economy implode, as it did in 2008. It then has to lower interest rates excessively to help heal the economy. The process of relying solely on the Fed to stimulate, and slow down the economy is flawed. There is a better way to maintain stable prices, and full employment, (the Federal Reserves mandates.)
View these two videos before reading the article “Proposed Solution For Modern Economies That Create Financial Crisis And Bubbles!!” posted at www.taxpolicyusa.wordpress.com
“How The Economic Machine Works”
Link to a second video, “Money From Nothing” that explains how the Federal Reserve and banks create money, set interest rates, controls the money supply, and helps to create boom and bust economic cycles. https://www.youtube.com/watch?v=BnlYsYlfVJs
If video does not load copy link and paste in browser, or search for the title on UTube
Hello! All Groups, Members, and Fellow Americans
My name is Chris Hall, I have stared a petition on Change.org to increase affordable housing, and home ownership.
Will you and your membership, if you are a group, PLEASE take 30 seconds to make a difference in people’s lives!! Right now?
Short Link to this page. Please feel free to use it to direct people to this page, or to tweet about this petition. http://wp.me/p42WQA-4x
Please inform your members of this very important petition, or forward this letter to all your contacts, members, and concerned parties.
The petition on Change.org.
“Increase Home Ownership And Affordable Housing Safely – Change Tax Code To Stop Wall St. Firms, Hedge Funds, and Investors From Investing In Single Family Homes” and I need your help to get it off the ground.
Congress will be debating income tax reform very soon. Unless the people raise their voices , Wall St. and accredited investors will continue reducing affordable housing, and home ownership by the middle class, and the working poor. We will become a nation of renters.
First we need to petition Congress to remove all tax benefits that investors enjoy when purchasing a single family home after 11/9/2014. Empower families with new mortgage terms to purchase, or refinance an owner occupied home. And then to repair the home they buy, if needed, a tax deduction should be enacted for the cost of repairing the home, as investors have now.
Repairing the homes will increase economic activity, and employment. Hundred of thousands, perhaps millions, of single family homes will be repaired, and improved by owner occupied owners, or contractors. Home values will be maintained. Neighborhoods will be improved, and maintained. The supply of housing will increase. Homes will become more affordable. Home ownership will increase in a rational and secure, manner.
PREVIEW VIDEO http://america.aljazeera.com/watch/shows/fault-lines.html
Watch full episode of “Wall St. Landlords” on Aljazeera America channel 219 on ATT U-VERSE. If video does not load, it means Aljazeera America has had to take it down. Search on the internet for similar videos on Aljazeersa America, You Tube, or for the title “Wall Street Landlords.” People are video documenting the economic imbalances of Wall St., and accredited investors investing in single family homes!! Prices of homes, and rents are rising too fast in some housing markets again.
Please join your neighbors, and make a positive change for your family by signing this petition. It will only take you 30 seconds.
The current process of maintaining employment, and economic activity is not efficient. It is better to help prevent deep recessions, financial crisis, and high inflation than to wait until they happen, and then rebuild employment by restarting, or expanding existing businesses, and creating more new businesses to get back to full employment again. Is that what we call progress?
The foreclose crisis has given the rich the opportunity to grab more income producing assets to increase their wealth. We need to change this economic injustice NOW!!!
Think ahead! Single family homes have increased in price 1000% since 1960 because of excess demand, and speculation. You, your children, or your grand children will want to buy a home some day! It is time you start looking out for yourself. Wall St. and investors are at the front of the line. Speak up, that is the only way we will be heard!!. Tell Wall St,, State and Federal Congresses, HUD, and the President that you have had it up to here, you know where that is, and you are not going to take it any more. You are ready to fight back. Enough is Enough; Let them know, You are mad as hell, and that you, and your family are not go down again without a fight.
After you sign the PETITION.go to http://www.taxpolicyusa.wordpress.com for more ground breaking ideas to help people succeed, and prevent foreclosures. If people create policies for a market economy that creates opportunities for people to succeed, fewer people become government dependent.
Short Link to this page. Please feel free to use it to direct people to this page, or to tweet about this petition. http://wp.me/p42WQA-4x
Will you and your membership please take 30 seconds to sign it right now? Here’s the link where you can also read the complete petition here.
This article appeared in Business Insider on Dec 15, 2010 by Ironman Calculations
- What caused it to begin?
- What caused it to end?
Today, we can answer those two questions. Let’s begin by revisiting and tweaking our operational definition of just what an economic bubble is:
An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might reasonably be expected to be realized from owning or holding the asset.
By applying that definition and noting the last month that changes in stock prices were coupled with changes in their underlying dividends per share before the Dot Com Bubble began, we identified April 1997 as the true starting point in time for the Dot Com Bubble. Likewise, we identified June 2003 as being the first month following the end of the period in which changes in stock prices and their dividends per share were decoupled from one another.
Having now identified those key months, we can look toward the specific events that occurred either during that month or the month preceding these months to identify the specific causes of the Dot Com Bubble’s beginning and end.
As it happens, we discovered the specific cause behind the rapid expansion of the Dot Com Bubble in what we’ll describe as a landmark paper by Zhonglan Dai, Douglas A. Shackelford and Harold H. Zhang. In “Capital Gains Taxes and Stock Return Volatility: Evidence from the Taxpayer Relief Act of 1997“, Dai, Shackelford and Zhang describe the events that led to the Dot Com Bubble’s inflation:
We use the Taxpayer Relief Act of 1997 as our event to empirically test the impact of a change in the capital gains tax rate on stock return volatility. TRA97 lowered the maximum tax rate on capital gains for individual investors from 28 percent to 20 percent for assets held more than 18 months. TRA97 is particularly attractive for an event study because the capital gains tax cut was large and relatively unexpected, and the bill included few other changes that might confound our analysis. Little information was released about TRA97, until Wednesday, April 30, 1997, when the Congressional Budget Office (CBO) surprisingly announced that the estimate of the 1997 deficit had been reduced by $45 billion. Two days later, on May 2, the President and Congressional leaders announced an agreement to balance the budget by 2002 and, among other things, reduce the capital gains tax rate. These announcements greatly increased the probability of a capital gains tax cut. On Wednesday, May 7, 1997, Senate Finance Chairman William Roth and House Ways and Means Chairman William Archer jointly announced that the effective date on any reduction in the capital gains tax rate would be May 7, 1997. As promised, the lower tax rate on long-term capital gains (eventually set at 20 percent) became retroactively effective to May 7, 1997, when the President signed the legislation on August 5, 1997.
Empirically testing stock market return data before and after the key date of 7 May 1997, when investors would suddenly have a reasonable expectation that a reduction in the capital gains tax rate would become effective, the authors made a stunning finding:
To provide more compelling evidence that the 1997 tax cut affected volatility (and mitigate concerns about omitted correlated variables), we focus on cross-sectional tests which are designed to detect the differential responses in return volatility of stocks with different characteristics. We hypothesize that the effect of a capital gains tax change on stock return volatility should vary depending upon dividend policy and the size of the unrealized capital losses (or gains). Consistent with expectations, we find that non and lower dividend-paying stocks experienced a larger increase in return volatility than high dividend-paying stocks. We also find that stocks with large unrealized capital losses had a larger increase in return volatility after a capital gains tax rate reduction than stocks with small unrealized capital losses. However, we do not find a similar relation with unrealized capital gains.
The difference in volatility between high dividend-paying stocks and non-or-low dividend paying stocks provided the key evidence pointing the finger at the Taxpayer Relief Act of 1997:
We infer from the findings in this study that the volatility left, after controlling for every known determinant, reflects the influence of the 1997 capital gains tax rate cut. Stock return volatility was substantially greater after 1997. Furthermore, firms most affected by the rate reduction showed the greatest change in volatility. Specifically, non-dividend paying firms had a greater increase in volatility than dividend-paying firms and firms with large unrealized capital losses experienced a greater increase in volatility than firms with small unrealized losses.
The reason we find that conclusion to be significant is because the Taxpayer Relief Act of 1997 left dividend tax rates unchanged – they continued to be taxed at the same rates as regular income in the United States, which provided a powerful incentive for investors to treat the two kinds of stocks very differently, favoring the low-to-no dividend paying stocks over those that paid out more significant dividends.
At least, until May 2003, when the compromises that led to, and ultimately the signing of the Jobs and Growth Tax Relief Reconciliation Act of 2003 would set both the tax rates for capital gains and for dividends to once again be equal to one another, as they had been in the years from 1986 through 1997:
With the disparity in taxes assessed against dividend paying compared to non-dividend paying stocks now gone, stock prices once again resumed their closely-coupled relationship with their dividends per share, and volatility was reduced.
Of course, that raises the question of why a bubble didn’t exist in the pre-1986 period where both capital gains and dividends were taxed at different rates. We would however point out that a very large percentage of publicly-traded companies paid dividends in that earlier period, limiting the effect of such a disparity.
By contrast, the founding and rapid growth of new computer and Internet technology-oriented companies in the early 1990s, which grew rapidly to become large companies and which as growth companies, did not pay significant dividends to shareholders, provided the critical mass needed for the 1997 capital gains tax cut to launch the Dot Com Bubble. We can see this in the size of Initial Public Offerings in each year since 1980, beginning from a very low level at the beginning of the 1980s, to their peak at the height of the Dot Com Bubble:
In the end however, we find that it took an act of Congress to launch the stock market bubble of the late 1990s, and that it took another act of Congress to undo its disruptive effect. The Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 are quite literally the bookends defining the period of disorder in the U.S. stock market known as the Dot Com Bubble.
This article by Thomas Frank was posted www.salon.com on:,
SUNDAY, SEP 7, 2014 04:00 AM PDT
Too Big To Fail bailouts let them get away with it. The amazing result of California fraud trial could change that
The Tea Party regards Barack Obama as a kind of devil figure, but when it comes to hunting down the fraudsters responsible for the economic disaster of the last six years, his administration has stuck pretty close to the Tea Party script. The initial conservative reaction to the disaster, you will recall, was to blame the crisis on the people at the bottom, on minorities and proletarians lost in an orgy of financial misbehavior. Sure enough, when taking on ordinary people who got loans during the real-estate bubble, the president’s Department of Justice has shown admirable devotion to duty, filing hundreds of mortgage-fraud cases against small-timers.
But high-ranking financiers? Obama’s Department of Justice has thus far shown virtually no interest in holding leading bankers criminally accountable for what went on in the last decade. That is ruled out not only by the Too Big to Jail doctrine that top-ranking Obama officials have hinted at, but also by the same logic that inspires certain conservative thinkers—that financiers simply could not have committed fraud, since you would expect fraud to result in riches and instead so many banks went out of business.
“Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent,” reported a now-famous 2010 story in the Huffington Post. “But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.”
So forget those thousands of hours of Congressional investigation and those thousands of pages of journalism on the crisis. It doesn’t make any sense to the man in charge. No jury would be convinced. Case closed.
As it happens, a trial just ended in Sacramento in which a jury was convinced that “executives intended to make fraudulent loans.” Here’s the thing, though: It wasn’t the government that made the case against the financiers; it was the defendants.
The case started as a routine mortgage-fraud prosecution, brought by none other than the aforementioned U.S. Attorney Benjamin Wagner. A group of eastern European immigrants had bought houses in California in 2006, in a real-estate market that was in the early stages of collapse. According to the indictment, filed in 2012, these people’s mortgage applications contained blank spots and wrong information; they were accused of getting the mortgages in order to sell the houses to one another at pumped-up prices in what is called a “straw buyer” scheme. Also, they defaulted on the loans.
However, members of the immigrants’ legal defense team—several of them appointed by the state—had read the newspapers over the years and were aware of the kinds of things that had gone on in real estate during the bubble. They knew, for example, that in the go-go days of the last decade, the mortgage origination industry routinely cranked out “stated income” loans—also known as “liar’s loans”—to people who were obviously unable to make the payments. The bankers back then almost never checked on whether the borrower was telling the truth about their income; they just wanted to make the loan. So the defense team in Sacramento came up with a novel strategy: How can the borrower have committed fraud on a mortgage application if the lender didn’t care whether their answers were truthful?
And lenders so didn’t care back in the bubble days. They invented liar’s loans and blanketed the country with them during the Oughts not because the poors talked them into doing it, or because the liberals in the Bush Administration forced them to do it—on the contrary, the government warned them against issuing these things, just as the government warns us against swallowing arsenic. The reason bankers did it was because liar’s loans were making bankers rich.
This is a difficult thing to understand—indeed, not understanding it is the stated reason Obama Administration officials have made no effort to send financiers to jail—so let us take this slowly. Executives at the mortgage origination companies got huge bonuses in those days for writing lots of loans. OK? They wanted to write more of them, and the only way to really crank out mortgages on a vast scale was by giving one to anyone who wanted one, regardless of their ability to pay, a feat that is only possible by means of the “liar’s loan.” So: Liar’s loans = rich bankers.
Now, it just so happens that liar’s loans are a lousy product, something that is virtually guaranteed to fail when prices stop rising, something that everyone knew at the time would fail when the bubble burst. That’s why you don’t see liar’s loans when banks are honest and regulators are on the job. Because the bank that makes liar’s loans—and the investor who buys a security based on liar’s loans—will eventually lose their money. That’s why they are banned today. So: Liar’s loans = dead banks. Liar’s loans = slow-acting arsenic. But on the other hand, the immediate bonuses that mortgage execs were collecting for making these poisonous loans were so sweet that they didn’t really care about the long-term effects. So while those awful loans they wrote eventually sank all the big subprime houses—and wrecked the global economy to boot, with Europe still in ruins, etc.—the bankers themselves lived to sail away into the sunset, their yachts laden with bullion.
Do you see what I’m saying? Executives do not always share the interests of the corporation that employs them. They weren’t “defrauding themselves,” as our federal protector laughs, they were defrauding the suckers that paid their bonuses, the shareholders that invested in them, the European pension funds that believed their excreta was Grade A Prime.
The name for this kind of scheme is a “control fraud”; it happens when the officers who control a firm use their power over the firm to enrich themselves while driving the firm itself to the boneyard. The country has seen control frauds many times before; indeed, the man who invented the term was a regulator of S&Ls during the S&L meltdown of the 1980s, and he saw the pattern so many times back then that he wrote a book about it. I am referring to my friend Bill Black, a professor of economics and law at the University of Missouri-Kansas City and also a Distinguished Scholar in Residence for Financial Regulation at the University of Minnesota’s School of Law. Control fraud, Black says, always follows the same recipe, with banks growing rapidly by making vast numbers of extremely risky loans, executives immediately getting rich with big bonuses, and the bank eventually collapsing under the weight of those malicious loans.
The last decade’s epidemic of crap financial instruments—liar’s loans, NINJA loans, interest-only ARMs and all the rest—fit the pattern perfectly. “It makes no sense for an honest banker to lend in this fashion,” Black told me. “If you lend in this fashion, you will suffer catastrophic losses. So honest banks don’t make loans without effective underwriting. But dishonest banks find, under the fraud recipe, that it optimizes their fraud scheme. To make not just a few bad loans, but to have a regular practice of making, day in and day out, enormous numbers of bad loans. . . . You’re mathematically guaranteed to make the officers rich and then they can walk away while the place collapses.”
Bill Black worked for many years as a bank regulator and a lawyer for the Federal government, but these days the Federal government has little interest in litigation against bankers. That’s why the mortgage-fraud case in Sacramento saw him appearing as an expert witness for the defense, on whose behalf he testified at great length about the role of control fraud in pumping the real-estate bubble.
The defense wanted the jury to hear Black’s theory because the essence of our government’s law-enforcement work on mortgage fraud is that banks were the victims. Those poor unfortunate financiers were tricked by little people like the “neighbor” that Rick Santelli once ranted against, trying to get an extra bathroom that he didn’t deserve.
What the defense team sought to prove was that this picture was completely upside-down—that the banks didn’t care if people lied on liar’s loans. According to the legal definition of fraud, the lie in question has to be “material,” meaning it has to influence the decision-makers. When a bank is honest, that is an easy thing to show. But it’s different if the decision-makers are themselves trying to crank out lousy (but profitable) loans. Bill Black again, on the control-fraud formula:
“Not only are they not distressed by crappy loans, they must make crappy loans. That’s the fraud recipe. . . . If the decision-makers are running a fraud in which they want this outcome, then they’re going to approve these loans. And they will create a system designed to approve loans that are 90 percent fraudulent.”
What would such a system look like? Well, indiscriminately handing out stated-income loans is part of it. A weak underwriting system is another element. In the case in Sacramento, the court heard testimony from an underwriter at one of the mortgage firms in question and learned that in certain cases she was actually forbidden to ask the borrower’s employer how much the borrower made—in other words, forbidden to check on the income that was stated in the stated-income loan. Here is how Bill Black reacted to that testimony, according to court transcripts:
Q. And do you have an opinion on the quality of the underwriting at GreenPoint [one of the lenders in the case] ?
A. Using the word “quality” in the sentence is an injustice to the word quality.
This was an utter sham in which underwriters were instructed not to underwrite. They were instructed, according to the testimony, that even if they called the employer, had them on the phone, that they were not permitted to ask about the income.
No honest banker would ever do that.
A mortgage company advertising flier that had been plucked from the sloshing depths of the last decade’s Internet offered further evidence of the bankers’ regard for facts. It is illustrated with a crude computer rendering of the three wise monkeys, next to the words, “Hear No Income, Speak No Asset, See No Employment.” (“Don’t Disclose Your Income, Assets or Employment on this hot new flexible adjustable rate mortgage!”) Look, kids—monkeys! This arsenic must be extra tasty!
The obvious way for the federal prosecutors to head off this argument would have been to describe the lender’s business practices and show that its executives were not, in fact, simply churning out vast numbers of super-high-risk liar’s loans in order to ring some bonus bell. That, in truth, the bankers really cared that facts be represented accurately on loan applications. Unfortunately, the Federal agent who had investigated the case—a man with plenty of experience detecting mortgage fraud—told the court that he had not talked to executives at the firms in question and, indeed, had not interviewed any top mortgage executives, ever.
Q. People in control of a company. So the person who calls the shots at the very top of a company. How many of those have you interviewed in your career?
A. As relates to mortgages?
Q. As to mortgages, yeah.
A. I can’t recall any.
A while later, with a different defense attorney asking questions, here is what the Federal agent had to say about the subprime mortgage lenders:
Q. So you were not concerned at all about the people who were loaning the money and their conduct; is that right?
MR. COPPOLA [the Federal prosecutor]: Objection. Argumentative.
THE COURT: Overruled. You may answer.
THE WITNESS: No. I would consider — they’re the victims in this case. That’s how I consider them.
What kind of snarky remark can I append to that, reader? Sarcasm fails me.
This was the first criminal proceeding to examine the basic facts of the mortgage meltdown, and the transcript suggests that some of the people in the courtroom knew it was a historic occasion. After reciting a list of iffy lending practices that were common in the subprime market 10 years ago, the transcript tells us that Bill Black testified as follows:
But for every one of those crazy things that I just described, they’re not crazy for the controlling officers because all of them come with higher fees.
Q. They contribute to the bonuses?
A. They contribute to the phony income that produces the bonuses, but they produce massive increases in losses. That’s why all of the lenders in this case suffered massive losses. Not, you know: Oh, gosh, things got bad. They fell off the table. Disastrous. Billions of dollars of losses in the case of GreenPoint.
But they also pumped out at least 20 billion dollars of this toxic waste. And they are one of the major contributors to the failure of Bear Stearns, one of the largest investment banks in the world.
So you finally have a case in which you are actually looking at the causes of the financial crisis. It’s the first criminal case.
MR. COPPOLA [the Federal prosecutor]: Objection to the relevance of the last remark. Ask it be stricken.
THE COURT: Denied.
The defense put Wall Street’s practices on trial, and the defense won. The jury in Sacramento eventually acquitted all the defendants of all charges.
When I got Bill Black on the phone last week, he talked about the case as a watershed moment. “I came out there to say, ‘Look! there are lions roaming the campsite!’ They took down the global economy!,” he told me. “And jurors can understand this. You say that you can’t get a prosecution. We will come to your back yard and show you how to get a prosecution. Because we’ll do it as a defense. Even though we have no FBI agents, no subpoena authority. . . , we’ll put on a successful prosecution. And we’ll show to you that jurors can understand this.”
U.S. Attorney Benjamin Wagner had this to say, according to the Sacramento Bee: “We respect the criminal process, and accept the jury’s verdict in this case. It will not dissuade us from pressing forward in the many other mortgage fraud cases currently pending in this courthouse.”
Have no fear. The government is on the case. They’re going to track down people who lied on a loan application in the last decade and go after them. Unrelenting pursuit of the people at society’s bottom.
And bailouts for the victims in the C-suites, should some new round of unpleasantness arise.
Of course, the result in the Sacramento case might knock those beautiful plans off the track. Up till now it has been covered as a kind of man-bites-dog story, because “an acquittal in Sacramento federal court is rare,” as the Bee put it. But maybe, in the weeks to come, acquittals like this will become more common. Already, says John Balazs, a member of the defense team, he has been contacted by other attorneys arguing similar cases. Maybe lawyers all over the country will soon be reminding juries that a borrower’s alleged misstatements can’t have been “material” to a lender if the lender was a control fraud dealing in liar’s loans. Maybe one day the courts of this land will acknowledge what the public has known for years: That the fraud that wrecked the world actually happened in the offices of the shadow banks and the Wall Street investment firms.
It all depends, says Toni White, one of the defense attorneys in Sacramento, on “if the judge lets it in.”
“This is what happens when defendants get a fair trial,” she continues. “Where are the CEO’s? Why aren’t they here?”
It’s a good question. The government’s near-complete failure to prosecute the true villains of the Great Recession will surely go down as the Obama administration’s grandest disappointment. It has convinced a generation that the fix is always in, that the government patrols some neighborhoods with a finger on the trigger, showing no mercy ever, but that in other precincts a kinder, gentler law prevails. It gets worse when people realize that the officers who ran the subprime lenders before the disaster are back in the mortgage business today. Taken as a whole, the crisis and its aftermath have given the lie to the president’s oft-repeated faith in meritocracy. The people see what’s happened and they get it: there is no meritocracy without accountability. What we’ve got instead is a society dominated by thieves.
I have pointed out before that the meaning of the term ‘liquidity trap’ has today become completely altered — with said alteration mainly coming from Paul Krugman’s bizarre redefinition which seems tied up with his idea about a natural rate of interest and the central bank being unable to hit this natural rate due to their coming up against the zero-lower bound.
In actual fact, a liquidity trap occurs when people rush out of assets and instead hold money. This leads to a fall in asset prices and high interest rates which then do not respond to central bank action. We encountered a liquidity trap proper very briefly in late-2008 but due to unprecedented central bank interventions we had exited this liquidity trap by early-2009.
In this post I want to spell out exactly why Keynes thought his liquidity trap idea so important. In order to understand this we must…
View original post 1,541 more words
Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)
Dear President Obama:
I listened to you talking about the need to extend unemployment insurance this morning 1/7/14. I agree unemployment benefits should be extended. At the same time we should change a couple of our income tax laws to help prevent the next financial crisis, and to increase the financial strength of the middle income people, and the working poor.
The question is : Are we using the correct tool to maintain economic growth?
Hi my name is Chris Hall. I have been in the real estate market since 1970 when I bought my first home.
I am writing you not to tell you my story, but the story of millions of families that have been affected by a flaw in our economic operational and guiding polices.
I believe “the flaw” is one of the reasons why poverty in our economy is increasing and the middle class is shrinking .
We need to use the income tax code to correctly control Inflation and inflation psychology and not only rely on the Federeral Reserve’s monetary policies. We need to change a couple of our income tax laws to help prevent the next financial crisis, and to increase the financial strength of the middle income people, and the working poor.
Enclosed you will find a short article outlining the income tax changes that are needed before the Federal Reserve changes monetary policy, which will increase interest rates! Higher interest rates could trigger another financial crisis.
Please stroll down the page at http://www.taxpolicyusa.wordpress.com to read the other articles about “Household Formation and Why We Have A Failure To Launch Generation”– “Government Policies That Keep You Homeless And Make Your Money Worth Less” and “ Underwater Mortgages Resolved Without Inflating Asset And Primary Home Prices”
Would you please sponsor the legislation to enact the 2% Appreciation/Inflation Taxation Policy, and the other tax reforms needed to improve the operation of our economy, and to maintain the value of our money (debt). If you can’t do it for America, please pass this information on to someone who will. Thank you
The Federal Reserve Cannot Control inflation, Inflation Psycholgy and Economic Bubbles By Themselves!
Ninety seven percent of our money is created by private banks as they make loans. Financial crisis are created by the excessive creation of private sector debt. (money) Therefore we should be concerned with how much private sector debt is being created in the private sector, and in which economic cycle it is being created, to control economic bubbles, high inflation, and deep recessions.
The question is: Are we using the correct “tools” to maintain economic growth?
The US economy is slowly improving, but it has come about by housing, and asset prices being inflated with very low interest rate money created with the Federal Reserve’s monetary policy of quantitative easing.
The Fed is currently purchasing between 70 to 80 billion dollars of Mortgage Backed Securities, and Federal Government Debt combined, per month. This monetary policy is known as Quantitative Easing, which has the effect of lowering long term interest rates.
Low interest rate have benefited Wall St. and investors. In some US housing markets investors have bought more than 40% of the single family homes for sale. Single family home prices have increase, in some markets, as high as they were before the financial crisis occurred, due to investor demand. Encouraging investors to invest in single family homes with tax incentives, and other financial ploys during a recession is shortsighted, and could lead to another sell off in single family homes. The single family home market should only include the families that want to live in the homes. Single family home prices should reflect their purchasing power, not the greater purchasing power of investors.
The tax deduction that investors currently have, that allows investors to deduct the cost of repairing a house should be given to homeowners. so neighborhoods do not deteriorate. Homeowners will hire contractors to do the work, thereby reducing unemployment and neighborhood blight.
Investors have many opportunities to invest in multi-unit housing. All tax incentives in the tax code for investors to invest in single family homes should be eliminated. If an investor does buy a single family home in an area that allows multi-unit housing, they will quickly build multi-unit housing on the land, which will increase the housing supply during the high appreciation cycle.
We have had one primary home bubble, do we really want to repeat history again?
Consider this, If we could create an economy that allowed people to stay housed, employed, and productive, taxes would not have to be collected, or increased to pay for a larger government “safety net.”
We should eliminate the high appreciation/inflation cycle, and deep recessions, control the creation of economic bubbles, and the excessive creation of debt (money) with the “2% Appreciation/Inflation Taxation Policy.”
History has shown us that the Fed does not have the correct tools to control high appreciation/inflation rates, or stimulate the economy correctly. In the last 50 years prices have increase 1000%. If the 2% Appreciation/Inflation Taxation Policy had been enacted 50 years ago, prices may have increased only 100%. Even if prices had increased 200%, our wages would have maintained their purchasing power with affordable raises, and our manufacturing capabilities would have remained in the USA. Our production jobs would not have been outsourced to other countries. Our wages, and products would have remained competitive in the world market place. We probably would not have become a debtor nation.
We need good paying jobs in our economy. Not policies that create “paper profits” and higher prices. We need to enact the “2% Appreciation/Inflation Taxation Policy,” Now!!!; before the Fed changes monetary policy, and interest rates rise further. Higher interest rates will decrease the value of all the money (debt) that has been created with a lower interest rate. This situation could create another financial crisis as money (debt) investors sell their money investments, in a panic, to preserve their wealth. We need to create a sustainable recovery on Main St.
The 2% Policy would work like this: If asset, and real estate prices were increasing more than 2% a year, the tax on savings and money investments would decrease based on the appreciation/true inflation rate. At the same time the interest tax deduction would decrease based on the appreciation/true inflation rate. This tax policy reform change would automatically change the tax code as our economy changes from the recession cycle towards the high appreciation/inflation cycle. This change in the income tax code would reduce the stimuli in the tax code for people to create excessive amounts of debt (money), which creates high inflation, and high appreciation rates. Money (debt) would become more valuable because of the lower tax rate on money investments and savings. More real wealth would be created. Our economy would become more productive, and less speculative. After annual appreciation/ inflation rates returned to 2%, the tax rate on interest income , and the interest deduction would automatically return to their previous tax rate and deductibility, to maintain demand.
It is a major flaw in the financial operation of our economy to rely primary on the Fed to stimulate, and control inflation and inflation psychology with interest rate changes. Instead of interest rates changing by excessive amounts, the 2% Policy would help maintain interest rates in a much narrower range. This would allow businesses, and consumers to make long term financial decisions. The middle class, and working poor would be able to stay employed as the economy balanced itself. They would be able to retain and increase their wealth, and climb the economic ladder. The 2% Policy would reduce government’s interest cost on the national debt, government social expenditures, and decrease government deficits by reducing unemployment insurance cost, food stamps, Medicaid, and welfare usage.
With the 2%Policy enacted we would not be relying primarily on the Fed to stimulate the economy, and control inflation and inflation psychology with lower, or higher than necessary interest rates. Changing interest rates excessively up, or down has proven to be very damaging to a capitalist economy by creating unemployment, foreclosures and bankruptcies, as higher interest rates reduce demand from the bottom of the economy, which reduces the ability of people to climb the economic ladder.
Very low interest rates increase senior poverty. With lower interest income, seniors deplete their savings, they then turn to government programs to sustain themselves, increasing government dependency, and their deficits. With less interest income senior’s demand for products and services decreases when the economy needs more aggregate demand. The baby boom generation is retiring by tens of thousands in this decade and beyond. It will be very important for our economy to increase employment, that seniors are able to maintain themselves, and increase their consumption as the next generation matures. The baby boom generation will remain a very large portion of our economy for many years. Their consumption will add many jobs to our economy if they remain economic viable, and do not become government dependent.
This is a shortened version of the complete article posted at http://www.taxpolicyusa.wordpress.com ” Government Policies That Keep You Homeless And Make Your Money Worth Less”
You will find the other articles posted there also.
Please share this article with your friends, to get them involved. Ask them to send this letter to their representatives in Congress to show their support. President Obama’s e-mail is: whitehouse.gov/contact We don’t want to keep repeating history. There, has to be a better way than Gloom, Boom, and Doom economics. What are your ideas! Please comment!
This article is from Dr. Housing Bubble Blog www.doctorhousingblog.com
Many are giddy about the rise in home prices. Yet gains in home prices with no subsequent gain in income are merely a repeat of the previous bubble with a different tune. In the last bubble, the memory has seemed to faded, the impetus for funky loan products came because incomes were not rising and products that offered additional leverage were taken up to mask the growing decline of wages. In the last couple of years, the tinder that lit this latest run came from the Fed’s artificially low rate eco-system. The difference this time is that the gains in home prices largely went tobig investors that now dominate the market. In the midst of all this trading, the homeownership rate has fallen. Household formation for younger Americans is dismal. The economy officially exited the recession back in the summer of 2009 (half a decade ago this summer). So why is housing formation so weak when it comes to younger households if the economy is supposedly booming?
Household formation – Under-performance
There was an interesting presentation made by Andrew Paciorek and was posted over at the Fed’s Atlanta website. The gist of the analysis attempts to examine the math behind the weak growth in housing formation.
One main reason that I have argued is that many younger households are simply saddled with large amounts of debt and weak incomes.
First, let us look at the math behind housing formation:
From 2000 to 2006, roughly 1.35 million households were forming per year. This baseline may be inflated given this was at the meat of the first housing mania. But let us use that as a baseline. Then, with the real estate crisis, housing formation hovered around the 550,000 range. That is a massive drop. What happened here was the yanking of maximum leverage loan products that really did not care about the borrower’s ability to repay the loan (i.e., their income). When that was put back into place, the market corrected fiercely since many were walking on eggshells hoping the bottom didn’t give out.
In 2012 household formation recovered to 1 million per year. This came because the vanilla 30-year rate collapsed and also, prices sinking made it more affordable for families to venture out and buy. The slide above mentions that housing didn’t jump start the recovery but I disagree. Investors plowed into the market. They jumped in with generous liquidity provided by the QE system. Investors went from something like 10 percent of all sales to well over 30 percent of all sales. A reader made an astute comment that items for the 1 percent are doing exceptionally well (i.e., luxury cars, food, and clothing) while items for the general population are taking a big hit (i.e., JC Penny, etc). Investors are buying homes with non-traditional financing largely unavailable to the general public. Indirectly, the rise in home prices has now created a wealth effect yet again:
These are some incredibly large year-over-year gains especially when incomes remain stagnant. So what you really see for many is that more income is going to housing in the form of higher mortgages or higher rents. Of course who gets these higher payments? Big investors that are now a big portion of the single-family housing market. So yes, the real estate market is once again front and center for this recovery yet this recovery is largely leaving out the middle class.
Household formation – Living with the parents
The other more obvious point is a larger portion of younger Americans now live at home with parents. In California, it isn’t uncommon to see multi-generations live in one household either out of saving money or necessity. This trend is undeniable across the nation:
In the early 1980s, about 36 percent of young adults lived with older family members while today it is up to 46 percent. Keep in mind this happened during the so-called recovery. Yet from 1990 to 2008 the pattern held around 40 percent. Why? Because young households bit the bullet and took on maximum leverage loans either the vanilla variety or of the more exotic kind like ARMs. The results were disastrous since 5.4 million homes have been repossessed since the real estate bust hit. Yet investors have been gobbling up these homes at distressed prices and leveraging the low rate eco-system developed by the Fed.
The reason for the lag
This answers a couple of points as to the lag in household formation from the young but the bigger point is jobs (or good jobs to be more precise) and income. Let us look at the conclusion of the presentation first:
I agree with the three underlying factors of formation. The third point is given very little attention. The labor market for younger Americans, even college graduates is not as positive as to justify current home prices:
Wage growth for college graduates has fallen. A large reason for home price increases has been a simple supply and demand equation. You have very little supply being metered out by banks and you have investors dominating the market (up to 50+ percent in Arizona and Nevada and over 30+ percent across the nation). Recall those massive price gains in home prices? Well now you have only 1 out of 3 households that are able to afford a home in California. The question of household formation strikes at a new issue in that this next generation is likely to have a tougher go at the economy than the baby boomers. In California for example, you have baby boomers that went to state universities when competition was not as fierce and the price-tag was virtually free plus the added bonus of the Prop 13 lottery that hit in 1978. Then, exiting into a job market that is nothing like the one today (and pensions were abound even in the early 1980s with low healthcare costs). Throw in the record bull market in stocks and you have a healthy combination of luck, timing, and fortune meeting together. Today I have talked with 2 income households where both are college educated professionals making good incomes and they are struggling to purchase a modest home in a decent neighborhood without throwing most of their net income at the mortgage.
The household formation question is an interesting one but I seriously doubt that young Americans are going to be part of the new real estate renaissance for a few years. Many are actually getting conditioned to enjoying renting and the employment mobility that is more part of the economy today compared to the lifetime employment of a generation ago. The facts are clear and that is a larger portion of younger Americans are living at home for some reason and not venturing off to launch on their own.