The Democrats Problem with Middle Majority

There is an excellent article in the NYT today:

http://www.nytimes.com/2011/07/31/opinion/sunday/tuning-out-the-democrats.html?ref=todayspaper

It coincides with a front page article discussing liberals problems with President Obama and another article discussing farmers problems with a Republican bill requiring residency documentation verification.

What I found enlightening about this article is the feeling that the Democrats are just as much a tool of lobbyists as the Republicans and both parties just look out for the rich guys' interests.  If you believe that, then government is not working for you and all you want to do in minimize your tax burden and you are now on the same page as the Tea Party, even if the Republican policies to privatize Social Security and Medicare will in the long run be bad for your economic class.

Before throwing President Obama under the bus in terms of 2012, liberals need to understand what the communication problem is at the moment with their policies.  Most working people have not been well served by globalization.  Although there is very little beyond education that the government can do to protect workers from globalization, little things matter in generating empathy from voters for what you are trying to do in Washington from a policy standpoint.

So, while I will still voice support for TARP and Fiscal Stimulus, the voters will not support anymore stimulus unless the unemployed become so numerous that it swings public opinion.  No more stimulus.

Banks are the bad guys in many minds and those who read my American Banker blog know that I do not believe bigness is bad and that the banks have been punished enough.  But the articles point is the concept of fairness to all.  People paying mortgages do not think that non-payers should get a break.  Let the banks foreclose and get this behind us.  (Note to bankers, do your documentation appropriately.)

Undocumented workers are perceived as increasing lawlessness regardless of the economic benefit it provides the country.  As the President has been doing, find ways to enforce the law and discuss why a Guest Worker program is needed to accompany that.

Lastly, as I have been promoting for as long as anyone would listen to me, run a budget surplus when the economy is strong and run a deficit when the economy is slow.

We live in interesting and frustrating times.  Liberals cannot give up when their priorities are out of vogue.  Rather they need to rethink, as the article discusses, why their message is not being heard and think about what message will get them listened to.

A humanitarian safety net (Social Security and Health Care) is in the interest of all, but it has to be affordable.  A bankrupt country cannot support a humanitarian safety net.  If you believe as I do in that safety net, then you will support the President's move to the middle and any action he takes to convince people that the government is working for the benefit of all citizens.

Movie Review: Collapse

Not a great movie and more like a 90 minute blog for ultra liberal concerns.  My son saw it and wondered what my thoughts were.  So below is my email to him with them.


I came up with 4 major thoughts while watching it.

1.  The peak oil concept has been around for most of my adult life coming into liberal vogue in the early 1970's.  It is definitely a true concept except that the original dates when it would happen have continued to be put off by additional findings of oil, incorporation of better technology to use energy more efficiently and the substitution of other forms of energy to replace the use of oil.

2.  The speaker portrays things as inevitable but ignores the possibility or probability that technological advances can create new ways of doing things such as renewable energy from solar, wind and water.

3.  Much of what the speaker said is correct politically around the world.  As long as resources exist, those with aspirations will pursue the means to consume them.  Americans cannot deny the Chinese, Indians or Africans economic development if they can organize their society to have economic growth.  That is not a moral judgement, it is a reality that people everywhere want to live "better".

4.  A great deal of non-energy resources are now recycled and that means we are not likely to run out of those resources.  We do need to figure out a way to grow enough food for the world to eat while using some forms of food for the production of non-fossil fuel.  The technology for this is already under development but is not fully cost effective yet.  It doesn't help that most Republicans are not believers in global warming and do not support much government support for policies that would encourage greater use of non-fossil fuels.

Recession GDP Drop Revised Bigger

As economic data becomes more aged (to a point), it becomes more accurate because lagging data points are included.

From the end of 2007 when the recession began through June 2009 when the recession ended, GDP fell 5.1% with newest revision increasing the drop from 4.1%.

Now for those who think that TARP and the Fiscal stimulus passed by Congress under both Bush and Obama was a waste of money, please rethink that again.  How far would GDP have fallen without that stimulus?  How much higher would unemployment be today? and where would the housing market be if unemployment were significantly higher?  What would have generated the turn around?

Keynes was not wrong!  Fiscal stimulus is a necessary precondition to ending deep recessions and depressions.  Monetary policy can only support that.  Milton Friedman was also correct.  Governments cannot borrow indefinitely and need to run a budget surplus when the economy is growing.

This is why Ronald Reagan raised taxes during his second term.  This is why Bush I raised taxes.  Revenues were needed to pay for the necessary government and create the room to have fiscal stimulus when needed.  Bush II forgot this and didn't find a way to pay for the War on Terror.  Now the government is out of room to borrow, the messy politics of deficit reduction have only begun, and the country will likely slide into another recession or an extended period of very slow growth.

Fortunately, for those looking to enter the work force, the baby boomers are burning out and want to work less if they can afford it so there will be good jobs for the educated cream of the crop.

Thomas Friedman expresses one of my core beliefs

From his most recent column:

"That is why we need to raise new tax revenues as well — so we can simultaneously shrink the entitlements programs, but still keep them viable, and generate the funds needed to strengthen all five parts of our growth formula. Anyone who says that either entitlement reform or tax increases are off the table does not have a plan for sustaining American greatness and passing on the American dream to the next generation.

Alas, that is the Tea Party. It is so lacking in any aspiration for American greatness, so dominated by the narrowest visions for our country and so ignorant of the fact that it was not tax cuts that made America great but our unique public-private partnerships across the generations. If sane Republicans do not stand up to this Hezbollah faction in their midst, the Tea Party will take the G.O.P. on a suicide mission. No American politician was more allergic to debt or taxes than Thomas Jefferson, but he also appreciated the need to have the resources to make the Louisiana Purchase and insisted that on his tombstone it be written that he founded the University of Virginia."

It is the Republican's Deficit!!

The Congressional Budget Office finally decided to add up whose policies created the deficit.

Continuing Policies:
Bush
War on Terror:  $1.469 billion and continuing
Bush Tax Cuts:  $1,812 billion and continuing
Non-Defense Discretionary: $608 Billion
Medicare Drug Benefit:  $180 billion

Obama
Non-defense Discretionary Spending: $278 billion
Stimulus Tax Cuts:  $425 billion
Health Care Reform:  $152 billion

Bush Policies contribute $4.1 trillion to the cumulative deficit while Obama policies contribute $0.9 trillion.  These are the continuing policies.

On the one-off policies, Bush spend $997 billion to try and prevent a depression and Obama spend $271 billion.  I consider both of these as money well spent as it is bad enough to have a 9% unemployment rate and the current state of the frozen housing market, how bad would it be if we hadn't had the stimulus spending.

Anyway, my point is the policies that the Republican house want to continue have created most of the current deficit and they insist is the Democratic spending.  So rather than raise any taxes to pay for the War on Terror, they insist that military spending be left untouched and all the budget balancing come out of entitlements.  I don't know too many people who would vote for that explicitly and I don't understand why the Democrats cannot hold the Republicans accountable for this nonsense.

I repeat, I have joined Americans Elect.  I took their views poll and I am more liberal than most on immigration and health care but more conservative on general economic and foreign policy stuff and right in the majority on social issues.

My conservative friends call me a flaming liberal but I still see myself as a man of the middle.  I support universal health care and a balanced budget when the economy is doing well.  I would raise taxes to pay for the war on terror and reform entitlements to make the programs sustainable in the long term, but I would not gut them like Paul Ryan.  I support individual liberties as does Ron Paul, but I would not bring the troops home too fast as Ron Paul would.  Debating this stuff and recognizing that every view has validity is the stuff of democracy.  See my Reason blog.

Well, Oh Well

It's 5:05 pm on Sunday and John Boehner is about to announce the Republican plan to avoid a 40% immediate cut in Federal spending with the advance statement saying the Republican's will go it alone.

Didn't the Senate vote that down earlier this week?  Where are the compromises?   The country has not voted in the Tea Party as the ruling government.  The President has the veto, not the Tea Party!

So if the Republicans pass something with no compromises, then the Democrats try to add some compromises in the Senate and dare the Republicans Senators to filibuster it and the house to reject that language.  A republic democracy is supposed to represent all views that get voted in.  The Tea Party is less than 50% of the house but they are trying to govern by veto threat rather then negotiate their point of view.

This is no way to run a democracy but it is what we have at the moment.

I am joining Americans Elect.

The Fear of Reason

This is from the New Republic and I will start with the quote from Leon Wieseltier.

"The problem with reason, he explained, was that it claimed to settle matters once and for all, and that this was arrogant, and that it left him with nothing more to say.  Rationalism made him feel excluded and late.  I replied, that he had it backward.  It is not reason, but unreason, that shuts things down.  You cannot argue against an emotion, but you can argue against an argument.  That is why we were still contending with Maimonides, and why he is still contending with Aristotle.  A reasoned discussion is always open and a reasoned intervention is always timely.  Unreason is more arrogant, more impatient, more cruel than reason.  Since reason is general, it is inclusive."

This is the problem with politics today.  Sound bites almost inevitably appeal to emotion.  They do not explain or advance the case for an argument.  The solutions for our problems require voters to understand the differences in the details for how each party plans to provide for an affordable safety net.  Sadly, neither party will elucidate the voters with rational details and we are left with the scrum in Congress which serves no respect for either party.

Kudo's to Tom Coburn

Kudo's to Tom Coburn (Republican Oklahoma) for trying to bring the Deficit Reduction Commission ("DRC") recommendations back to life in the Senate.  His current proposal is for 75% spending cuts 25% revenue increases which is a bit off the DRC's 65/35 split, but when you are talking trillions over 10 years a lot can change but the direction has to be firm and any split in these ranges would be appropriate.  I hope he gets some traction.

"Job Crushing Tax Hikes"

I realize we are now witnessing political theater and only the participants know for sure where we will really end up when there is a compromise, so I am not bothering to respond to some of these things that irritate me.

However, enough Republicans have used the term "Job Crushing Tax Hikes" to characterize what President Obama is trying to get them to agree to that I feel I must respond.

Over the years a number of industries have successfully lobbied members of both parties to give them tax breaks on certain activities.  Now these companies pay effective tax rates of less then 20% rather then the list price of 35%.  Hedge Fund employees get compensated with income that goes directly into the hedge fund investments.  The Hedge Fund deducts the payment as an expense so there is no tax at the company level. For the employee, magically, this is not taxable income until the investment is liquidated.  If the investment is unsuccessful, the money is lost and there is a tax deduction for that.  If the investment is successful, it is taxed as a capital gain even though capital gains are otherwise made with already taxed money.  Meanwhile, the small business entrepreneurs that create most of the jobs pay income at the personal tax rates.  Well, you can't reduce rates for them until you eliminate tax subsidies to others.  And we had plenty of job creation with the higher tax rates and balanced budget that Bush I/Clinton brought about.

Many point to the fact that other countries have lower tax rates.  Well those other countries don't have massive tax deductions that reduce the effective tax rates for those with deductions in the U.S.  Other countries have universal health care and don't rely on business to pay anything for health care beyond their taxes.

The President tried to control the cost of health care and the Republicans are advocating repeal of that with no plan for any other replacement.  On the Revenue side, to help minimize how much spending must be reduced, the President is trying to reduce the tax subsidies that help some avoid paying their fair share.  I don't understand why the President doesn't tie these revenue increase to paying for the War on Terror like I do, but I finally heard one senator do it last night, so maybe we will hear more of this soon.

When two sides disagree, a compromise is in the middle.  That is where the President is, but the Republicans are not.

For the Republicans this is a war that if they win they will dismantle every aspect of the social safety net.   That is Grover Norquist's goal and the Democrats cannot allow that to happen unless the independent voters wish it.  There has been no sign of that in any election (witness the Democratic win in the Western NY Republican district).  So now the Democrats get to just say no and we will see what chaos this impasse results in, but the impasse is the fault of the Republicans so let the chips fall where they may.

Hopefully, logic will eventually prevail.

What % Down Payment Should Alleviate Risk Retention?

I would like to use this opportunity to lay down some principles that should govern this debate.  It is national policy that mortgage financing should migrate from the Government Sponsored Entities “GSE” back to the markets that remain mostly closed because of investor resistance.  Providing standards that promote investor confidence are the key to accomplishing this goal.  The Congress has required that loan originators retain a financial interest in sold loans unless they meet a standard to receive the designation of “Qualified Residential Mortgage.”

I was dismayed to see this weekend that an alliance of banks, real estate agents and consumer housing advocates are lining up to oppose the proposed 20% minimum down payment to avoid risk retention and receive the designation of being a “Qualified Residential Mortgage”.

Prudent home financing is a cornerstone of American economic policy.  When we fail to adhere to that we end up with a financial crisis and a recession with higher loans losses for the banks and investors, higher unemployment and lowered wealth for all.

Those in opposition say down payment alone does not determine creditworthiness and other factors should be allowed into the determination of what is a safe loan.  However, the purpose of risk retention is not to prohibit the granting of “Non-Qualified” loans.  It is an effort to provide an environment that will allow the securitization markets to resume their financing of a substantial percentage of home purchases.

Investors are correctly distrustful of mortgage pools without substantial down payments.   There is no coupon that compensates investors for credit losses when these losses arise from systemic risks and a lack of standards in mortgage loans is a systemic risk.  So if the market for residential mortgage securitization is going to be revived, there must be standards that can be believed.

Investors do not trust purchasers of homes to buy what they can afford.  Investors do not trust mortgage originators to verify income and non-real estate assets across a large pool of mortgages.  Investors do not trust the rating agencies to perform due diligence that mortgage originators are doing what they say they will do.  Investors do not trust that the regulators will do anything to protect the investors.  The only things that investors can trust are down payments that are meaningful or risk retention by the mortgage originators.

Since it is national policy to bring some balance back to the mortgage mark with a blend of GSE and private market activity, there must be substantial risk retention or substantial down payments.

When banks starting buying receivables from companies many years ago, 20x expected loss was a rough standard for risk retention.  20% down payments were the norm when the local bank held mortgages.  There is something about the number 20 when conservative bankers are thinking about credit enhancement to protect against loss.  Why should the securities markets deserve anything less?

As for the ability to originate loans that do not meet the “qualified” standard, this does nothing to prohibit such origination.  Such “non-qualified” loans can be held on balance sheet or sold into the market with risk retention.  National policy should be that loan originators accept the risk that they deemed prudent and the securitizations should be protected from all but a remote probability loss scenario.  That is the definition of a “AAA” security.  An environment like this will keep the cost of home financing at the lowest possible price for those who put up substantial down payments.  That is as it should be.