The Sequester Is President Obama’s Fault

Dean Baker
Truthout, March 4, 2013
See article on original website

Now that we are counting up the days of the sequester instead of counting down, it would be a good time to cast blame. And my candidate is President Obama.

I’m not blaming Obama for the reasons that Bob Woodward came up with in his fantasyland. I am blaming President Obama and his administration for trying to be cute and clever rather than telling the public the truth about the economic crisis. The result is that the vast majority of the public, and virtually all of the reporters and pundits who deal with budget issues, does not have any clue about where the deficit came from and why it is a virtue rather than a problem.

The basic story is incredibly simple. Demand from the private sector collapsed when the housing bubble burst. We lost $600 billion in annual demand due to residential construction falling through the floor. We will not return to normal levels of construction until the vacancy rates return to normal levels. Vacancy rates are still near post-bubble record highs.

We also lost close to $500 billion in annual consumption spending due to the loss of the $8 trillion in housing-bubble-generated equity that was driving this consumption. This demand will also not come back.

This creates a gap in annual demand of more than $1 trillion. The stimulus, which boosted demand by roughly $300 billion a year in 2009 and 2010, helped to fill part of this gap, but was nowhere near big enough. Furthermore, stimulus spending fell off quickly in 2011 and the stimulus is now pretty much gone altogether. This means that we are still faced with a huge hole in private sector spending.

We know the Republicans love the Job Creators and President Obama has gone out of his way to show his love also. But in the real world, investment in equipment and software has never been much above its current share of GDP except in the days of the dot.com bubble. This means that unless we drug investors so that they are willing to throw hundreds of billions of dollars into the stock of worthless companies, we are unlikely to see any substantial rise in investment.

As a result we are stuck with an economy that is mired well below full employment. President Obama’s top economic advisers from his first term all claim that they understood this point. But they said that they could not get a bigger stimulus package through Congress.

That assessment may well be true, but the real issue is what President Obama did after the stimulus package passed. He could have told the country the truth. He could have said what all his advisers claim they told him at the time: the stimulus was not large enough and we would likely need more. He could have used his presidency to explain basic economics to the public and the reporters who cover budget issues.

He could have told them that we need large deficits to fill the hole in demand that was created by the collapse in private sector spending. He could have shown them colorful graphs that beat them over the head with the point that there was very little room for investment to expand even under the best of circumstances.

He could have also explained that consumers would not go back to their bubble levels of consumption since the wealth that had supported this consumption had disappeared with the collapse of the bubble. The public would likely understand this point since most homeowners had themselves lost large amounts of equity and understood that they were much poorer as a result of the collapse of the bubble.

In this context the only choice in the near term is between larger budget deficits and higher unemployment. The people who clamored for cuts in government spending and lower deficits are in fact clamoring to throw people out of work and slow growth.

We will never know if President Obama could have garnered support for more stimulus and larger deficits if he had used his office to pound home basic principles of economics to the public and the media. But we do know the route he chose failed.

He apparently thought the best route to get more stimulus was to convince the deficit hawks that he was one of them. He proudly announced the need to pivot to deficit reduction after the passage of the stimulus and then appointed two deficit hawks, Erskine Bowles and Alan Simpson, to head a deficit commission.

This set the ball rolling for the obsession with deficit reduction that has dominated the nation’s politics for the last three years. Instead of talking about the 9 million jobs deficit the economy faces, we have the leadership of both parties in Congress arguing over the debt-to-GDP ratios that we will face in 2023.

This would be comical if lives were not being ruined by the charade. The unemployed workers and their families did not do anything wrong, the people running the economy did.

Now the sequester comes along throwing more people out of work, worsening the quality of a wide range of government services and denying hundreds of thousands of people benefits they need. Yes, this is really stupid policy and the Republicans deserve a huge amount of blame in this picture.

But it was President Obama who decided to play deficit reduction games rather than being truthful about the state of the economy. There was no reason to expect better from the Republicans in Congress, we had reason to hope that President Obama would act responsibly.

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Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.

"The ForeclosureGate scandal poses a threat to Wall Street, the big banks, and the political establishment. If the public ever gets a complete picture of the personal, financial, and legal assault on citizens at their most vulnerable, the outrage will be endless." - Michael Collins

Beyond ForeclosureGate - It Gets Uglier

Submitted by Michael Collins on Wed, 04/20/2011 - 21:14

Michael Collins

The ForeclosureGate scandal poses a threat to Wall Street, the big banks, and the political establishment. If the public ever gets a complete picture of the personal, financial, and legal assault on citizens at their most vulnerable, the outrage will be endless. (Image)

Foreclosure practices lift the veil on a broader set of interlocking efforts to exploit those hardest hit by the endless economic hard times, citizens who become financially desperate due medical conditions. A 2007 study found that medical expenses or income losses related to medical crises among bankruptcy filers or family members triggered 62% of bankruptcies. There is no underground conspiracy. The facts are in plain sight.

ForeclosureGate represents the sum total illegal and unethical lending and collections activities during the real estate bubble. It continues today. Law professor and law school dean Christopher L. Peterson describes the contractual language for the sixty million contracts between borrowers and lenders as fictional since the boilerplate language names a universal surrogate as creditor (Mortgage Electronic Registration System), not the actual creditor. Other aspects of ForeclosureGate harmed homeowners but the contractual problems that the lenders created on their own pose the greatest threats.

When the Massachusetts Supreme Court upheld a lower court ruling that the actual creditor must named in the mortgage agreement (a legal requirement that the banks forgot to meet in their contracts), there was consternation on Wall Street. What would happen if a class action lawsuit challenged these flawed mortgages? Isn't the Massachusetts decision the latest of many attacking the legal basis of the shoddy business practices and boilerplate industry contracts? What if homeowners started walking away from their underwater mortgages based on the legally flawed contracts? If there were a viable prospect of a class action suit against financial institutions threatening to invalidate these contracts, wouldn't that crash the stock values of the big banks and some Wall Street firms?

The big banks and their partners on Wall Street need a preemptive strike to derail the legal process that threatens their existence. They may get a temporary reprieve through pending consent decrees from the United States Department of Justice and consortia of state attorney's general. If that protection fails, big money will make every effort to buy a bill from Congress that absolves them retroactively, en masse. The consent decree might cost them a few billion dollars. That's much better than owing the trillions in lost home values due to their contrived real estate bubble and stork market crash.

As bad as this is, it gets worse.

Beyond ForeclosureGate

The surface scandal is about fraudulent business practices and a systematic assault on homeowners by lenders, servicers, and the legal system. A much broader picture must be viewed in order to understand the utter contempt that the ruling elite has toward citizens and the depraved tactics used to express that contempt, all to serve endless desire to accumulate more money and power.

The set up began when we heard about the ownership society in the 2004 presidential election. President Bush defined ownership as taking the government out of our lives so more people could own homes and control their destinies. The foundation was home ownership. As Bush said on the campaign trail, "We're creating a home -- an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property" October 2, 2004.

Then Federal Reserve Chairman Alan Greenspan was uncharacteristically coherent when he laid the foundation for the swindle earlier that year. Greenspan told the Credit Union National Association that the fixed rate mortgage was "an expensive way of financing a home." He was clear when he advised lenders that, "consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage." February 2, 2004. Home equity through exotic mortgage products fueled consumption and became the new "margin account."

The Chairman of the Federal Reserve and the president ratified the real estate bubble, already underway at the time, as political and financial doctrine. The advice was clear. Get an ARM, own your piece of the American Dream and spend that equity. Housing prices never go down, right?

Freddie Mack, Fannie Mae, Wall Street and the big banks provided the back room. Mortgage Backed Securities (MBS) derivatives were vastly expanded. This made it easy for more homebuyers to qualify for mortgages they might not otherwise get, credit standards dropped. Those with good credit saw an array of tantalizing zero interest loans and other mortgage products to maximize available cash and feed the stock market.

It was all good until it wasn't.

The real scandal is the unfathomable loss of wealth and opportunities by the vast majority of citizens and the vicious attack on the most vulnerable citizens as a part that process. The attack continues and is worthy of review.

Foreclosure and Bankruptcy

Foreclosure is the down side of the ownership society. When you're sold a bill of goods, a property that you were told you were qualified to buy, and you lose it, you are evicted from ownership island.

Before Congress passed the 2005 bankruptcy reform act, homeowners could avert foreclosure in many states by filing for bankruptcy. Not just anyone could qualify. The process of qualifying was difficult and, oftentimes humiliating. But homes were saved and families were preserved with a chance to start over.

A myth emerged of the bankruptcy abuser, a high-class sort of welfare cheat. These reckless people worked the system to rack up large debts that were subsequently wiped clean through bankruptcy. The alleged abuse of the system became the excuse for a major overhaul of bankruptcy law. The legislation passed the Senate with 74 yes votes and soon became law.

The changes since the 2005 legislation provide substantial benefits to creditors. Morgan et al summarized the direct benefits to creditors in a forthcoming publication in the New York Fed's Economic Policy Review. Before bankruptcy reform, the filer of a bankruptcy claim used to determine Chapter 7 or 13 filing status. That makes a difference in the amount and type of debt relief. The legislation imposes means test that determines precisely which chapter (7 or 13) filers must use. Significantly, chanter 13 filers retain more debt from medical and other unsecured credit.

Legal costs ranged from $600 to $1500 before bankruptcy reform. Legal fees now range between $2800 and $3700. Previously, there was no requirement for credit counseling prior to filing.

Filers must now document approved credit counseling six months before filing or face dismissal of their case (Morgan et al.). This counseling requirement can lead to unwarranted dismissals or inordinate delays in filing at a time when filers need relief.

Under the old law, only bankruptcy trustees appointed by the federal court could file claims of abuse by the filer. Under the new legislation, anyone can file a claim of bankruptcy abuse, which can lead to a dismissal of the cause. This is a huge benefit to lenders who wanted to keep citizens from realizing debt relief.

The Real Benefit for Big Money - Delayed Bankruptcy Filings

The new law makes it harder to file a claim, doubles costs, and gives the creditors a say in claiming fraud on the part of those who file claims. Significant delays in filing for bankruptcy became the norm.

From Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, Lawless et al., American Bankruptcy Law Journal, Vol 82, 2008

Time is money for loan servicers. A long delay before a bankruptcy filing, allows servicers the opportunity to add on special fees, many of which the borrower can't comprehend. One thorough study showed that many of these fees were questionable. The longer it takes, the greater the revenue opportunities. Delay benefits creditors since loan payments continue at their original level.

What happened to those big spending, reckless bankruptcy abusers that were the rationale for the 2005 reforms? The following graph from the Consumer Bankruptcy Project shows that there is virtually no difference between the incomes of filers before and after bankruptcy reform. The majority of filers made between ten and forty thousand dollars a year before reform. That has remained virtually unchanged. The big spending abusers were and remain a mythical construct; the centerpiece of a diversion strategy to keep attention away from this never-ending gift to creditors.

 From Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, Lawless et al., American Bankruptcy Law Journal, Vol 82, 2008

These newly empowered creditors were the same creditors who hired debt collectors to try and frighten people out of their filings. A major study found that 24% of filers reported that debt collectors told deliberate lies to avoid bankruptcy. They heard that filing for bankruptcy would lead to jail, job loss, or an IRS audit. Some were told that it was illegal to file for bankruptcy. Lawless, et al. Did the Bankruptcy Reform Fail? An Empirical Study, October 2008

The deck was stacked early against citizens and protection from creditors disappeared under the new law. The creditors, who so recklessly precipitated the economic collapse, came out on top. They were free to profit in any way they could from their new market.

What Causes Bankruptcy - Financial Shocks from Medical Expenses

Prior to the new law, the major cause of bankruptcy stemmed from medical care expenses and the resulting disruptions to families. Rather than the mythical big spender contrived by Congress, for nearly half of filers, major medical expenses, family tragedies, were the tipping point to a loss of financial viability.

The Consumer Bankruptcy Project audited a representative sample of bankruptcy filers in 2001. The audit found that 46% cited a "major medical cause" for bankruptcy. This includes the direct cost of uncovered medical bills for major illness or injury, lost work due to the same, and the need to mortgage the family home to cover medical costs.

Did Congress review this data? Were they intent on making it harder to file bankruptcy as a result of illness? When bankruptcy is delayed or simply not attainable, less money is available for needed medical care. Were the members supporting bankruptcy reform indifferent to the suffering compounded by their thoughtless legislation?

The situation is worse now. A comprehensive survey of those who filed bankruptcy in 2007 showed the increasing desperation of those faced with medical problems. When individuals or family members are in dire need of medical care, do they just sit home and suffer?

 From Medical Bankruptcy in the United States, 2007: Results of a National Study, Himmelstein et al., American Journal of Medicine, 2009:04

Nearly two thirds of bankruptcies result from medical care that people can't afford or losses in income from medically required leave. Where are the big spending cheats?

Nihilists at the Helm

The big banks, Wall Street, the politicians they own, and the Federal Reserve Board created the real estate bubble in bad faith.

They knew or should have known:

• that the real estate bubble was unsustainable;
• when the bubble deflated, many homeowners would hit a financial wall; and, that
• when homeowners hit the wall, to maintain viability for their families, they would need relief of some sort.

What did the nihilists of the financial elite and their hit men walking the halls of power do with all this knowledge? They went ahead with the real estate bubble, fostered it, deregulated meaningful controls on the financial industry, and crafted a new bankruptcy law to stick it to filers. They knew or should have know that data from 2001 showed a very high rate of filings due to the financial stress of medical care. Did they care? Do they care now? Has anything been done to correct this injustice?

While citizens suffer in financial distress, often due to illness, at the behest of influential bankers and investors, the Department of Justice crafts a settlement with lenders and their representatives to relieve them of the stern justice due for their specific crimes and the larger horrors they visit upon citizens, all in the name of short term profit.

We are most emphatically not a nation of laws. We are a nation where the law is used by a very few for their own purposes, without regard for the well being of the nation or its citizens. We are a lawless nation.

END

 This article may be reproduced entirely or in part with attribution of authorship and a link to this article.

In Economic Populist, also see:
ForeclosureGate Deal - The Mandatory Cover Up by Michael Collins
The Arc of Justice - The Ibanez Case Ruling by Numerian
An Update on the Foreclosure Mill by Robert Oak
Is Residential Real Estate a Ticking Time Bomb? By Robert Oak

MSNBC's Dylan Ratigan interviews James K. Galbraith on "The Largest Swindle in American History"

Visit msnbc.com for Breaking News, World News, and News about the Economy

Can the American Economy Possibly Get Any Worse? Yes, and It Absolutely Will! ...Except for Those with Incomes in the Top 10%.

Recession Over? Depends on Who You Ask

by Mark Brenner

(Original article in Labor Notes September 2009 Issue)

Unemployment was already nearing 10 percent in March during this Detroit job fair. Now the Fed says it will stay there into next year, yet orthodox economists are saying the worst is over. When the Labor Department announced that a quarter million jobs were lost in July, the news was greeted with cheers and backslapping on Wall Street. One week later the Federal Reserve declared the worst was over -- we were on our way out of the recession.

Almost as an afterthought, the Fed also predicted that unemployment would stay close to 10 percent until the end of 2010.

If the jobless won't get a break for more than a year, what explains the sighs of relief from Washington and the celebrations on Wall Street? How is the recession over?

Our Pain, Their Gain

Recovery, it turns out, is in the eye of the beholder. And the government's statisticians -- together with most of the media -- put a lot more weight on the corporate bottom line than on workers' day-to-day. To make matters worse, our pain has been their gain.

Productivity rose 6.3 percent economy-wide between April and June. This means fewer people were doing more work, which helps explain why companies from Ford to Caterpillar to IBM reported healthy profits.

Businesses got back in the black by shedding workers, cutting hours, and eliminating everything from vending machines to health benefits. Employers have also used the lousy job market -- and the fear and uncertainty that creates -- to wring more work out of the workforce, often for less pay. Nothing reminds someone he's over a barrel like the threat of being fired during the worst economy in living memory.

According to a recent poll by The Economist magazine, one in six U.S. workers have taken a pay cut. Last month close to 26 million workers were unemployed, when you include those forced to work part-time instead of full-time or those who've given up looking altogether. Sixteen states report double-digit employment, with a half dozen others close behind.

Meanwhile, the financial giants who needed nearly $2 trillion in taxpayer bailouts are flying high again. In July Goldman Sachs bagged the biggest quarterly profit in the company's history: $3.4 billion. Even AIG -- the insurance giant turned basket case -- showed its first profit in more than a year. No wonder the stock market has climbed 45 percent since March.

And Goldman Sachs is partying like it's 1999, not 2009. The company has already set aside more than $11.4 billion for bonuses this year, although corporate bigwigs warned employees "to make sure that we're not being seen living high on the hog," as one exec told the New York Post.

More to Come

Meanwhile, workers are worrying about whether there'll be money coming in this year, not how to spend it. There's little good news on the horizon.

Even though profits are up, there's little hope for a near-term burst of hiring. Managers will wait as long as possible to see if a rebound is really taking root.

And today's technology -- from supply chain management software to digital payroll records -- allows companies to add workers "just in time." In the past, firms hired in anticipation of an uptick; now they wait till new orders or higher sales are in hand. But with consumers grappling with mounds of debt, new spending and consumer confidence are still in the tank.

This is especially bad news for the long-term unemployed, workers who've been out of a job for more than six months. Last month more than a third of all unemployed workers fell into this category, the highest level since 1948. Moreover, close to half a million will exhaust their unemployment benefits by the end of September, and perhaps as many as 1.5 million by the end of this year.

Same Old, Same Old

So what will turn recession into a recovery for the rest of us?

For most of the last generation the economy worked according to a simple formula. The rich took the lion's share of economic growth, while the rest of us made ends meet through easy credit and by working longer hours.

Whenever recession threatened, the Federal Reserve lowered interest rates and bankers were more than happy to prime the pump by peddling more debt. Our economy stayed aloft thanks to credit cards and the stock market and housing bubbles.

But by 2000 Ronald Reagan's infamous trickle-down had completely dried up, and most workers stopped seeing even the meager gains of the 1980s and 1990s.

In fact, every bit of economic growth in the 21st century has gone to the top 10 percent -- those earning at least $109,000. Two-thirds was captured by the top 1 percent-folks earning more than $400,000.

Today's Great Recession should have been the curtain call for an economic model that has left most workers with less buying power than they had in the mid-1970s, swelled the ranks of the uninsured to 46 million, created income inequality not seen since the Great Depression, and left most of us drowning in debt.

But apparently no one in Washington got the memo. The government's top economists have been preoccupied with nursing Wall Street back to health so that the speculators can continue on their merry way unchanged. Goldman Sachs' top financial officer confirmed the back-to-business mentality, telling the business press, "Our model really never changed, we've said very consistently that our business model remained the same."

There was outrage, yes, when the government fattened the fat cats with our money, but it wasn't enough. So we'll keep hearing well-paid pundits crow about "recovery" as if 255 million working people didn't even exist.

Now watch Bill Moyers interview former senior banking regulator William K. Black. Dynamite!

Then watch these two short videos to see the direction the economy is going out in San Diego. More dynamite!

Real Estate Wasn’t the Only Bubble in 2004-2006 That's Now Abursting...

Easy Loans Financed Dividends

By FLOYD NORRIS

New York Times

“Dividends don’t lie.”

Chalk up the death of another Wall Street cliché.

In the late bull market, dividend payments provided one of the seemingly strongest arguments for the bulls. Maybe earnings numbers could be manipulated, but dividend payments required cash. If the company had the cash to hand out, you could be confident the earnings were real.

It was a lie.

It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers.

Click here for the full article