bostonbubble.com

[john p]

Did you guys ever watch the cartoon of the coyote who would do things like put a rocket on his back wearing a pair of roller skates so he could catch the road runner? He'd light the match and then blow up and then you'd see the two white eyeballs and he'd be a black crisp....

To me, this was 2008/2009. Most of the financial models prior to that were bubble based, i.e. Ponzi (Madoff) or the technical analysis of riding the bumps with convexities.

After the stock market bubble collapse I remember hearing from my friends who were investors that while the big growth didn't occur as much, they made up for it with large amounts of money on small changes in value. What happened from this was that people began observing the impact of these large trades i.e. was it like a boulder splashing into a small swimming pool or did a trade make a a tiny impact with no ripples. It seemed like people were then controlling the impact or making noise in the market. Because of the Internet, information was less controlled, and you saw people trying to spread information or disinformation or you saw people piggybacking onto certain investors using modern tools. Capital moved quickly like a person hopping through stepping stones due to the technology. The name of the game in corporations wasn't being a good worker, it was being a good hustler and a good CEO had celebrity appeal. (read Tim Ferriss to get this mentality). People wanted so badly to have easy accomplishments that they could market. Tim Ferriss brags about how he won the Chinese Boxing Championship and when you hear the story you find that he used methods to drop like 25 pounds before the weigh in and then he would throw his smaller opponents out of the ring and win on a technicality. Basically, this guy "beat the game". You had this easy credit and fast money mentality and people didn't want to "stay home" and build fundamentals over a long period of time. These fools like savers were suckers and we glorified the lightweights who bragged about a 4-hour workweek. To me, this was the weakening of industrious values. Just as Tim Ferris strives to outsource the work in his start ups, our nation outsourced the work "That Americans refuse to do". Now in all fairness to Ferriss, he does know how to be effective, it is just that his goals are pretty shallow and he has no interest in being a responsible member of society. He uses a lot of the same techniques as say Thomas Edison and Ben Franklin, but Edison was trying to bring electricity, music and improve the quality of life for society, and Ferriss wants to self gratify. What is missing is values and a desire to help your fellow man. People stopped looking out for eachother and were so focused on their own get rich quick scheme that they didn't pay attention to the abuses and predatory practices. The top Academic Institutions used to throw a penalty flag if something current was totally irrational. People used to vote for Ivy Leaguers because they knew they were smart but also that they cared. Aside from the likes of Robert Shiller of Yale, most academic elites stayed pretty much silent during all of this irrationality

So we had this lax attitude and we relaxed rules, relaxed lending and made credit easy and all that slack in the rope hung us. That big rocket we strapped on our backs to get rich quick without working hard like the coyote trying to catch the Road Runner blew up. We didn't even know what kind of rocket we strapped on our back when we created these Derivatives and Credit Default Swaps but they blew up when the Market did what markets naturally do, eventually correct.

It is like we saw the Market get drunk and then have to get it's stomach pumped and now deal with a rough hangover. Given all of that, they're still serving the same booze that tanked us.

Technically, I understand that quantitative easing brings us down slowly, but having the "hair of the dog that bit you", and starting your diet on Monday philosophy seems a bit of a cop out for politicians who want to be Santa Claus as opposed to responsible leaders who tell us what we need to hear. Telling us what we want to hear is what politicians have to do, so I think that the message needs to come from regular people and the message needs to be spread and adopted and after public opinion supports a responsible message, only then will our politicians follow suit. I don't think we should wait for politicians to do the right thing, they need to swim in the political currents that most people don't. Politicians can't talk about cutting Entitlements, but that is the biggest, fastest growing thing that is killing us financially.

What is the message, what is the medium? I think if people started to trust that their fellow man was responsible, intelligent and honorable, they would govern themselves accordingly. I honestly think that if we reconstitute ourselves and make ourselves a stronger material we can carry the load of these problems with ease.

I totally appreciate everyone's input.

[mpr]

John, I think one of the main enabling philosophies for the decline in
the value of doing useful work - and of course the decline of useful work
itself - is the part of the society that worships at the alter of the Free Market.
People had the attitude that any activity was ok and justified if it made
money because the "market" automatically meant that if an activity made
money it was useful and good.

[Boston ITer]

[john p]

I think we are a far cry from "the altar of the free market".

http://taxprof.typepad.com/taxprof_blog/2007/10/top-1-pay-more-.html

from above:

[quote]New data released by the IRS today offers interesting insights into the distributional spread of the federal income tax burden, new analysis by the Tax Foundation shows. The new data shows that the top-earning 25% of taxpayers (AGI over $62,068) earned 67.5% of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86%). The top 1% of taxpayers (AGI over $364,657) earned approximately 21.2% of the nation's income (as defined by AGI), yet paid 39.4% of all federal income taxes. That means the top 1% of tax returns paid about the same amount of federal individual income taxes as the bottom 95% of tax returns.[/quote]

emphasis mine.

Let's go over some of these questions:

Q: Havetaxes gone up or down under Obama?

A: Up. We're just taxing future generations.

http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures/


Q: Is the level of Taxation high or low by historical standards

A: How about the standard of Market Capitalization?

http://4.bp.blogspot.com/_BTyVSDdxyc0/Rx5YmDYH6PI/AAAAAAAAADo/BuLur1SpoXI/s400/stock%2Bmarket%2Bcapitalization%2Bas%2BGDP.bmp

http://www.thestreet.com/content/image/12729.include

Can we use the "Average" to determine the surcharge of the Stock Market Bubble before we run the numbers (see above link), or should we ignore all that Bubble Tax Receipt that followed?


http://www.ritholtz.com/blog/wp-content/uploads/2009/06/6-19-09-market-cap-1.gif

http://www.ritholtz.com/blog/2009/06/market-capitalization-as-a-percentage-of-gdp/


http://en.wikipedia.org/wiki/File:Revenue_and_Expense_to_GDP_Chart_1993_-_2008.png


The Stock Market Bubble increased Tax Revenue because the GDP was INFLATED. That surcharge caused by the stock market bubble went into the real estate bubble which doesn't increase the tax receipts to the same degree.

http://pickensdemocrats.org/images/Economy/FedDeficitSurplus.png

Much of the tax receipts of the Clinton Surplus were based on a Bubble.

Now look at the above link to see how receipts were at the early stages of steep decline when Bush took Office. Add in a War and Homeland Security Department you can see where his Outlay Surcharge came from on top of the Babyboomers beginning to draw from the Entitlement Programs (Mandatory Spending).

Now, notice the 2008 TARP or (Toxic Asset Relief Program). This is a big spike which threw our economy into a tail spin.

Now ask yourself, what "Asset" was "Toxic"? Answer, SubPrime Mortgage Backed Securities compounded by the Credit Default Swaps that got paid out as the "insurance" type payments which kicked in in the case that these securities plummeted.

Obama is trying to get away with blaming Bush for the Toxic Assets

http://2.bp.blogspot.com/_2fuk3iGxQxM/RwfQF4VpICI/AAAAAAAAA1o/cMI6fvudYtU/s400/re-sm.JPG

look how house poor our Nation is:

http://www.utahfoundation.org/img/briefs/2009_07_post-keynesian_fig1.gif


The focus of today's debate is what caused the "Toxic". If you can find responsiblity in Bush for creating the toxic assets, I'd agree with you, but after a lot of research, my conclusion is that it was a combination of: Adjustable Rate Mortgages, lowering of the lending standards, easy credit, derivatives and credit default swaps, securitization of subprime loans, separation of commercial and investment banks etc. and almost all of this happened PRIOR to Bush.

What Obama did was use this Toxic Asset issue and use it as a "Crisis" to help pay for more government waste and increase the Entitlement progams that we couldn't afford in the first place. Instead of using this TARP to focus on arresting the Toxicity, he fanned the flames, beat the drum beat of doom and gloom, and bashed and blamed Bush so he could get what he wanted politically. Until, he realized that he couldn't politically get away with blaming Bush any longer so he then started to tell us that we were in "Recovery".

Bottom line MPR is that our Founding Fathers were right to believe that power was better in the hands of these "Ignorant" people than alone in the hands of the Elites. Yes, sometimes the ignorant people will release an O.J. Simpson, but they get it right far often than wrong.

I think with respect to the Toxic Assets that took a lot of people by surprise, Obama got in by blaming Bush and the lie got twice around the world before the Truth got its boots on.

Again, here is Barney Frank on video claiming that there was no housing bubble.

http://www.youtube.com/watch?v=iW5qKYfqALE

Go to second 45.

[john p]

Getting back to the title of the thread:

http://www.nber.org/papers/w16230.pdf

[mpr]

[mpr]

[john p]

Oh, that's easy, I just want information that would convince me that they understood the real causes of what happened and how what they are doing will solve the problems and are the best options.

I do think the Tea Partiers get that we are making decisions that future generations will have to pay for. It's kind of like how twenty or thirty years ago the bleeding hearts thought that it was better to give someone a government job versus putting them on Welfare and now we have to pay their Pensions. Those Pension Formulas were based on fewer public sector employees per citizen and those employees made a fraction of private sector employees. Today, we have to pay for what prior generations voted on, without our consent today. It is a form of taxation without representation, one generation taxing the next.

I get the whole "Founding Fathers" argument is cliche, I hear violins going off in my head when I write that shit and it even sounds to me like fingernails on chalkboards, but I do think that guys like Franklin and Jefferson and Adams knew that they were putting power into the hands of regular Joe's and they thought it through and considered the alternative (actually lived the alternative...).

You're aware of Public Unions trying desperately to get bailed out by US Taxpayers?

Here's a popular youtube video of an Obama Supporter who said that with Obama she wouldn't have to worry about putting gas in her car or paying for her mortgage.

http://www.youtube.com/watch?v=P36x8rTb3jI

She doesn't have to worry about paying for her mortgage, but "Other People's Money" do. Man, she was right.

Now this is the flip side, a guy who's not happy about paying for someone like her's mortgage:

http://www.youtube.com/watch?v=JmKXR-FLa2g&feature=related

Now my point about the "Market Cap" is kind of like residential tax rates. When the evaluations of the real estate market values go up, the tax rates go down and vice verse. When people give you the "As a percentage of GDP" line, you have to understand how the GDP is being manipulated by bubbles.

Further, if you want to go futher back, now you have to take into account that our Government back then was building bridges, tunnels, train lines, waterfronts, culverts, dams, laying infrastructure i.e. highways, commuter rails, MBTA etc. At least we got something for our money.

What makes you so sure that Obama isn't the demagoge?

http://www.youtube.com/watch?v=kbbIQFcEhcQ

He's going to lower the ocean levels? How about plugging the dam oil?

[Boston ITer]

As for Founding Fathers, the two most brilliant, who could stack up with today's best talent (most likely in the private sector), would be Alexander Hamilton and Ben Franklin.

Jefferson reminds me too much of these multi-lingual academics with impractical ideas of governance. In fact, his sole noteworthy feat... the Louisiana Purchase, was endorsed by Hamilton, his political foe, an advocate for federalism. The deal needed Hamilton's national bank to make it happen. Does that make Jefferson the first Obama?... a man who talks about state's right but when push comes to shove, is a federalist at heart (see Jefferson's Embargo Act).

And Hamilton was a closet abolitionist (he co-started the Manumission society with Jay) but kept his voice low, on the topic matter among his Maryland friends (since he already had plenty of enemies). It's rather clear that Jefferson wasn't but yet, he wrote the Declaration of Independence & we know how that reads.

Remember, it weren't average Joes, even caucasian ones, who were voting back then; it were property owners. That didn't change till 1850... so much for the founding fathers.

[mpr]

[balor123]

It's not clear to me that either elites or average Joe make good politicians. Some problems in this world just don't have good answers. Perhaps the last half century we were lucky in that culturally we had better intentions and our tools weren't so powerful that those bad intentions could destroy an economy.

As for the interest rates, I think the psychological effect is missed. I made the same argument a few pages back that john p is making, that the drop in rates turned into downpayments for future properties thus there was high leverage on those rate drops. More importantly is the psychological effect - it was the catalyst that caused people to become overconfident in housing. I don't think you'll find many people who don't know someone who anecdotally was able to pay off some debt thanks to refinancing, pay for large ticket items like college educations, or move into otherwise unreachable properties. It's hard to appreciate the magnitude of money earned by society in this way ($100bil in Boston alone!). It's even harder to appreciate how those gains can ever be realized.

[john p]

Regarding Pensions, here is a good article in the New York Times:

http://www.nytimes.com/2006/10/24/business/retirement/24pension.html?_r=1

I am not for one type of abuse over another; I don't like public sector abuse or private sector abuse.

It was House Republicans that voted against the TARP. It was Republicans that fought the Bank Bailout. When I hear Democrats giving the Wall Street versus Main Street argument, I wonder if anyone realizes that the House Democrats voted 241 to 10 in favor of it?

http://www.govtrack.us/congress/vote.xpd?vote=h2009-26

Back to the interest rate argument of the original poster:

Psychology does have a magnifier effect. Take for consideration a poll that would ask buyers and sellers who bought and sold during the bubble what induced them to do such? Many might say that they got caught up in it and did what everyone else was doing and I think more than 5% would say that it was low mortgage rates.

I remember watching this customer and employee exchange at a Jiffy Lube; you know when they come in and tell you what else is wrong with your car.... Anyway, this Jiffy Lube guy said you need this and that done and I remember watching the customer's eyes and him saying "No" and watching for a reaction. The Jiffy Lube guy shrugged and walked away and I asked the if he believed the guy or not. He said to me, you know these guys come in here and tell you all this bullshit, but the fact of the matter is if the car was going to fall apart he wouldn't have let me drive out of here. Many people govern themselves this way. Many sat and listened to a mortgage broker who wore cufflings and a fancy suit who drove a fancy car who used fancy language and talked quickly who sounded like they knew what they were talking about and thought, hell, everyone else is doing this and there has got to be rules that prevents this guy from getting me into a situation that was bad, so I'll just go along.

This has always been my main point, individuals in capitalism in a government of the people in a democratic republic need to do a bit more to protect themselves from being victims. Of course I want to beat the ever living shit out of people who prey on the weak in society, but I think it is more effective to also teach people self defense skills.

MPR, I know you care and I know you're very smart but you have to remember that politicans can't politically address certain issues because if they do talk about cutting back on Entitlements their Party is toast. All I care about is whether it breaks left or right, the message has to be clear so people understand it and they then can govern themselves accordingly. The message that we have to binge eat today and then go on a diet Monday is confusing; people need the right metaphor or logical formula to get that and it has to apply with reality.

I'd rather have a better informed Tea Party than not, so I think we need to get past the "they're full of shit and ignorant hypocrites" phase. I understand how many of your observations are in the strike zone, but again, the remedy will not flow from the politcal distribution channels and many are frustrated, like myself, with having to be a part of this false choice between entitlement or capitalistic abuses.

I think Obama ought to identify parameters or filters that are clear to qualify Stimulus Spending i.e. if the project doesn't do x, y, or z it doesn't qualify. I think people are pissed and see this as a total spending frenzy. People thought that we'd see private sector jobs and just see public sector and union bailout. That is not what was sold to us. The bait and switch is what is going to sink Obama. Obama is the sinking ship. Personally, I'm pretty above water, I'm just trying to anticipate what's ahead so I can plan accordingly. If I think the Republicans take over Congress, that will change a lot of things.

If the public outcry that prevails is the Rick Santilli rant of "I don't want to pay for my neighbor's mortgage", I think you'll see less government intervention for first time homebuyers and mortgage loan remodifications. If this happens, the market might be left to find its true bottom, which is bad, but at least people might get some sense of stability with respect to what the playing rules are which is in of itself, an unknown wildcard. I like Obama as far as the quantitative easing provided we had some filters and ground rules, but the wildcard I'm most afraid of personally is if they change the mortgage tax deduction for the interest portion.

I had someone call me one time asking money for some gun lobby and they came at me with this b.s. about Hillary Clinton having secret meetings with foreign governments trying to come up with international laws to restrict gun rights. I told them that although I didn't agree with Clinton on a number of issues that there was no way in the World she would do that and to go screw. My wife said that they threw out Hillary's name because it is like a lightning rod for certain people and then when they get them charged up they hit them up for money. Of course there are some nuts in the right wing that scare me, but I don't understand the limits of what Obama will do with government intervention in the Economy. The Founding Fathers (violins) often talked about the poison of vanity and how that really can distort reason. When I saw Obama with the gift to charge people up the way he did and then say things like he was going to lower the sea level, that scared the hell out of me because hero worship is absolutely not what we need right now. We need people to buy American where they can to keep our money here and to behave responsibly and elevate their democratic and economic skill sets. I honestly want to fix what is wrong with Government, go after the private sector predators, and elevate the skill set of citizens so they can less easily be preyed upon.

Reagan was able to sell America on the idea that Government was the problem not the solution, and that by lowering taxes we would get more jobs and more prosperity for the Middle Class. Bill Clinton cut government spending and introduced spending reform and we saw more prosperity (again, we also had a Stock Market Bubble so much of it was artifical).

The big tell sign for me in the next year and a half is if Hillary smells Obama's blood in the water, will she challenge Obama in 2012 the way Ted Kennedy did Jimmy Carter in 1980.

http://en.wikipedia.org/wiki/Causes_of_the_United_States_housing_bubble

[john p]

I forgot to post this:

http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

[mpr]