Setting Us Up For The Next Great Recession

The next great recession in the U.S. is going to look surprisingly like the last one. The exact same policies that led to the 2008 recession are being followed - and indeed, in many cases strengthened - by the Obama administration.

One of the great tragedies of the left taking control of the Presidency and both houses of Congress in 2009 was that the nation never learned the reasons for our economic meltdown. That means the real problems haven't been fixed.

If you listen to Obama and the left, the sole causes of the meltdown were Wall St. greed, the derivatives market, and deregulation - though even that which they complained about, the repeal of the Glass Stegall Act, occurred under Bill Clinton in 1999. The true culprits, subprime lending, the disastrous Community Reinvestment Act that was used to eviscerate lending standards, ostensibly to cure racism, and a historic fraud perpetrated by bond rating agencies in collusion with our government, are never mentioned.

As I pointed out when Dodd Frank was first proposed, the terms of that bill actually strengthened the policies that gave rise to the housing bubble. The effects are now being felt. A month ago, AG Eric Holder bragged about strong arming thousands of bankers for imaginary racism in lending. Now this the other day from IBD:

Despite new evidence the Community Reinvestment Act led to riskier lending and played a key role in the subprime mortgage crisis, the Obama administration is broadening the anti-redlining regulation's authority and scope, spooking bankers.

A recent study by the National Bureau of Economic Research, the nation's pre-eminent economic research group, states that the CRA "clearly" had a major impact on the flood of subprime loans made in the late 1990s and 2000s, which directly led to the housing crisis.

By quietly expanding the regulation, analysts say President Obama is picking up where President Clinton left off in April 1995, when he rewrote rules for what had been a largely toothless law as first drafted in 1977. Through executive orders, Clinton set strict numerical lending targets for banks in "underserved" neighborhoods, while ordering regulators to crack down on alleged bank redlining.

The new rules for the first time mandated that banks use "innovative" or "flexible underwriting practices." Compliance required banks to pass a heavily weighted "lending test" or suffer holds on expansion plans.

The CRA overhaul "has been a disaster," said ex-BB&T CEO John Allison in his recent book on the financial crisis. He argued it's forced "banks to participate in making high-risk housing loans to low-income buyers who would not meet traditional bank lending standards."

Added Allison, who now heads the Cato Institute: "The default rates on these low-income loans are extraordinarily high."

Still, the Obama administration wants banks to step up approval of such low-income mortgages. And it's using the CRA to spur more lending, including:

• Forcing banks through threat of prosecution to expand their CRA assessment areas to include inner-city areas blighted by subprime foreclosures, where they are compelled to invest in new brick and mortar.

Many banks, in fact, are under direct federal orders to open new branches or ATMs in high-risk and unprofitable areas of Detroit, St. Louis and other cities hit hardest by the recession. . . .

• Ordering bank defendants accused of lending bias to underwrite riskier CRA loans at discounted rates.

For instance, Justice has ordered First United Security Bank of Alabama to "ensure that residential and CRA small business loan products are made available and marketed in majority African-American census tracts," while offered on terms "more advantageous to the applicant" than normal.

• Toughening CRA enforcement by bank examiners, . . .

• Broadening CRA examination guidelines to include loan "pricing discrimination," and instructing examiners to take a closer look at improper "steering" of minority borrowers into subprime loans with higher interest rates and fees.

• Using the threat of CRA "noncompliance" and denial of expansion plans to pressure bank defendants into settling "fair lending" cases, while scaring other banks into lending in low-income minority areas where the banks aren't located. . . .

• Pressuring banks to fund HUD's new $7 billion Neighborhood Stabilization Program to earn CRA credits under a new "community development" test.

And it is not just banks. The major bond rating agencies are still giving subprime mortgage backed securities AAA ratings. This is just pure fraud being driven by government policy. People should be in jail over this. But that is not the concern of our government when it comes to the bond rating agencies. They are only being punished when they threaten to downgrade U.S. government debt:

. . . when S&P finally downgraded the US one notch in August 2011, the SEC and Justice Department announced that S&P was under investigation, just two weeks later.

Egan-Jones, a smaller rating agency, has been even more aggressive, downgrading the US credit rating three times in 18 months. And while the federal government may not have imposed Diocletian’s death penalty, they are just as willing to squash dissent.

In a country that churns out thousands of pages of new regulations each week, it’s easy to find a reason to go after someone. As you read this letter, in fact, you are probably in violation of at least a dozen regulatory offenses.

In the case of Egan-Jones, the SEC brought administrative action against the agency within two weeks of their second downgrade. And a few days ago, the case was settled.

I’m sure you have already guessed the ending: Egan-Jones is banned from for the next 18 months from rating US government debt. They’ve effectively been silenced from telling the truth. . . .

We are being set up by the left for our next massive economic meltdown. This is beyond travesty.

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Heading Towards A Self Inflicted Depression?

And to think that Obama ran against Bush on the charge that Republicans lacked fiscal responsibility.

The economic news gets progressively worse by the day. Obama has broken the bank with his profligate spending. Indeed, the borrowing for his spending has been so massive that Moodys is warning that it may have to downgrade federal government bonds - a move that would send us far deeper into debt. Further, this downturn is turning into a perfect storm, as it is merging into a crisis with social security and Medicaid. One would think all of that is more than enough, but no. Obama is pursuing plans for massive taxation through several vehicles, the sum total of which will massively burden every American and portends to derail any recovery. Then there is Obama's non-sequiter that in order to stem the bleeding from Medicare, we have to enact another trillion dollar program, universal health care. And lastly, from Carl at No Oil For Pacifists, a detailed review of Obama's economic programs to the present, set in an econ 101 grading scheme.

Economists debate whether FDR's massive "New Deal" spending was effective in combating the Great Depression. Given that the depression did not end until WWII, that is an open question. But Obama has bet the farm - and the second mortgage on the farm - on the theory that FDR had it right.

The national debt today is four times higher than it was just one year ago, standing at $1.84 trillion dollars. Of that, half has been borrowed. And that is a figure likely to rise as the year progresses both through increased allocations, increases in the cost of borrowing, and the failure of the Obama rosy predictions to fail to materialize. Just paying down that figure is daunting, if there was nothing more.

But we are in the midst of a near perfect economic storm. Democrat protests to the contrary, we have known for years that Social Security and Medicare were going to balloon in size - into the multi-trillions of dollars - as more baby boomers age. Democrats have run these plans as a ponzi scheme, and the scheme is being exposed by falling receipts. This will come to crisis proportions in a few years, if not sooner. But Obama has yet to say word one about how he will address social security. More on medicaid below.

Between Obama's profligate spending and our looming massive crisis in Social Security and Medicaid, we face yet another major obstacle. This from Financial Times:

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar. . . .

The bottom line of all of this is that we are headed for far more difficult times if the cost of our ability to borrow rises significantly - as will assuredly happen if we lose our AAA rating.

One of the clear lessons that came out of the Great Depression was that increasing taxation can defeat a recovery. Obama is planning to do tax increases on steroids. Obama intends to fund his profligate spending on the backs of all Americans through massive direct and indirect taxes as well as a business tax that portends to drive multinational businesses from our shores. As discussed by Martin Feldstein in the WSJ:

The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.

Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.

The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. . . .

Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.

CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, . . .

But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.

The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.

The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.

This is a large part of the smoke and mirrors of the Obama unrealistic forecasts. If a 10% tax in place on $1000 of income brings in $100 today, raising the tax to 15% almost assuredly does not mean that tax receipts will rise to $150. The more confiscatory taxes become, the more people do what they can to lessen the burden. To continue with Mr. Feldstein:

Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.

The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.

The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America. . . .

Read the entire article. To add to this list of proposed taxes, we find today that the Senate is looking into raising taxes on sin - specifically, alcohol, tobacco, chips and sodas. The bottom line, Obama's plans seem to be a clear path to a much weaker economy - and the people who are going to bear the biggest brunt are those in the lower and lower middle class.

As to Medicaid, that is clearly a plan that has to be addressed. But instead of trying to staunch the bleeding, Obama is making ridiculous claims that it can only be done as part of an incredibly expensive move to universal health care. As Megan McCardle points out:

Perhaps predictably, someone showed up in the comments to my post on Medicare and Social Security to argue that liberal analysts have very serious plans to cut Medicare's costs, which is why we need universal coverage, so that we can implement those very serious plans.

I hear this argument quite often, and it's gibberish in a prom dress. Any cost savings you want to wring out of Medicare can be wrung out of Medicare right now: the program is large and powerful enough, and costly enough, that they are worth doing without adding a single new person to the mix. Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people. Indeed, to the extent that seniors themselves are the people blocking change (as they often are), adding more users makes it harder, not easier, to get things done.

Lastly, in this whirlwind of bad news, Carl at No Oil For Pacifists has an exceptional post documenting Obama's economic moves over the past 100+ days:

What if the Presidency were a college course? Should Obama get good marks for making the first steps towards financial sanity? Imagine Obama's mid-semester report card from an ivy-covered academy . . .

Read it, and do hit all of the links. You will be amazed that Obama gets an A in econ 101.

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