Questions for our American friends

[Arturo2nd]

"Taxes are the price we pay for civilized society." In addition to the federal income tax, state income tax in many states, Social Security and Medicare taxes, state and local sales taxes, we also have hotel taxes, taxes on phone service, entertainment taxes as part of ticket prices to concerts, plays, and movies, gasoline taxes included in the price paid at the pump, and all kinds of excise taxes, e.g., tires, autos, boats, and jewelry. One thing we do not yet have in the United States is the Value Added Tax that is prevalent in Europe and much of Asia.

I really don't know why folks are complaining. I just looked at the bills in my pocket. They say "United States of America Federal Reserve Note." Thus, it is the government's money, which they have graciously allowed me to use for awhile. Of course, they also have forbidden me to print up my own money. Chances are that nobody would let me pay for things with any money that they knew I had printed up despite the fact that I owe a lot less money than the Federal Government. In fact, I have more assets than debts. But the government has a better credit rating for now.

[Roubignol]

So according to Rogerbh calculator, if I earn 100 000$ brutto per year in the State of New York as a single man. Grosso modo, I have 62'000$ netto remaining.

That's quite far from very ... liberal. That's even more than several European countries.

Do you think that you have the infrastructures working for the money that you redistribute in taxes?

[deepsepia]

Originally Posted by Brian249x

Subprime mortgage loans were bundled together into securities that were then rated 'AAA' by the bond rating agencies and sold by the banks as investment grade securities. Folks like Goldman Sachs then sold derivitavites backed by the phony "investment grade securities."

He and the other CEOs didn't overlook a damn thing. They knowingly sold bonds as equivalent to U.S. Treasury bonds, high class corporate bonds or mortgages made to folks with very high credit ratings and substantial equity in their homes. In fact those bonds were backed by adjustable rate mortgages made to people with poor credit ratings and no equity in homes that were sold at prices inflated by a real estate bubble. The bankers made a ton of money in commissions on these sales. The mortgage companies committed fraud, the home buyers committed fraud, and the bankers who sold these junk bonds mismarked as investment grade securities committed fraud. Then to make it all worse the investment banks sold derivatives based on the turds to make sure that enormous houses of cards were leveraged on top of guaranteed to fail mortgage bonds.

Please read The Big Short by Michael Lewis where the whole Ponzi scheme is reported by the former investment banker in terms even laymen can grasp.

Gotta disagree there . ..

1. Not a Ponzi scheme. A Ponzi scheme is s specific structure of fraud, where you have to keep pulling in new money to pay off old investors, who are told that these are investment returns, when in fact they're just capital from new investors. That's not the same as subprime, whether correctly or fraudulently represented

2. Subprime was not the reason for the financial crisis. Leverage was. Leverage anything 44 to 1, and its going to blow up. Lehman could only afford 2 cents' of losses on each dollar of assets they held, at that leverage ratio. Sooner or later, every bank is going to take those losses. If you borrowed that heavily, sooner or later you'd go bust too; and if loans to you were assets at other highly leveraged banks, you could create a cascade of failures-- that's precisely what happened. Subprime was always a relatively small portion of mortgage lending-- could not bring down an adequately capitalized banking system.

3. The basic assumption of all real estate finance in the US was that prices were local. We had never in living memory seen a %10 decline in prices across all markets. It is fair to say that, in retrospect, the various debt securities were not appropriately priced by the market, but understand that the ratings agencies don't set the price -- buyers do. Buyers and rating agencies looked at the senior tranches of sub prime as AAA because existing models, working with existing historical pricing data, suggested that default rates would be very, very low.

4. "The Big Short" is fun and everyone loves anecdotes, but they're of limited utility in trying to understand a systemic failure. Lewis' book does not explain the meltdown of the system. To understand that, you have to get substantially more technical. See for example, Gary Gorton (Professor at Yale)'s "Securitized Banking and the Run on Repo"
https://www.moodys.com/microsites/cr...n_repo_nov.pdf
The Repo market is technical and no one's ever going to make a fun movie about it, but its how banks finance their own securities holdings . . . if you don't understand the repo market, and what happened to it in 07-09, you're missing fundamental information.

5. To assert "fraud" you have to believe that people running Wall Street firms wanted to bankrupt their own companies and render their own personal stakes in their companies worthless. Lehman executives and employees were very big holders of Lehman stock, and Lehman was a big buyer of mortgage backed securities . . . so who is the "fraud" on here? The banker who pays too much for a loan? He's "defrauding himself"?

Remember-- no one predicts markets well. The S&P 500 has outperformed nearly every investment manager over the last 10 years. That doesn't make them liars or frauds-- its just that the market will move in ways that makes anyone who predicted anything look like an idiot, sooner or later.

So again, I just don't see any reason to claim that "massive fraud" tells you that much about the financial crisis. Sub prime has always existed and its not at all a bad thing-- you _want_ someone who doesn't have great credit to get a loan. Loans always go bad; sometimes they go bad less often than predicted, sometimes more often.

And finally, what happened to both real estate and sub-prime prices in the collapse of 07-09 was an extreme low; people who bought either in that period ended up making a fortune. That indicates that their quality was not nearly so bad as claimed . . . effectively you had a bank run and a panic, but it doesn't mean that the prices achieved in these fire sales were accurate reflections of value.

That's how it works in markets-- things can be overpriced, and they can also be underpriced, for every buyer who thinks Amazon's too cheap, there's a seller who thinks its too dear. One of them will be proved right, but the reason there's any transaction at all is that at the time, no one knows for sure.

[SanteeFats]

Originally Posted by xyzde69

Do you think that you have the infrastructures working for the money that you redistribute in taxes?

Oh hell no. Pretty much national, state, and city/county infrastructure are in various stages of disrepair. There are some areas that are okay I think but I can't name any. The answer of course is to raise our taxes.

[Decadence]

Originally Posted by bigtrain45

No need to raise everyone's taxes, just the top 5% whose taxes have been reduced steadily since Bush II.

Really? You actually including the Obama years in that statement?

Top marginal tax rates going back to Bush II

2000 - 39.6%
2001 - 39.1%
2002 - 38.6%
2003 - 2012 -- 35%
2013 - Current -- 39.6%


It's true that after the Bush tax cuts took effect that the top rate went from 39.1 to 35... and went back up to the same rate as when Clinton left office right around the time Obama got re-elected for a second term.. and has stayed there ever since.

According to the Wall Street Journal, the top 20% of earners pay 84% of all income tax. The bottom 50% pay less than 5%, with many paying none or even getting back more than they paid in via the 'earned income credit'.

[Arturo2nd]

Originally Posted by deepsepia

Gotta disagree there . ..

1. Not a Ponzi scheme.

OK. It wasn't a Ponzi scheme. Are you seriously denying that junk bond types of securities were sold to Fannie Mae and Freddie Mac, European banks, pension funds, and insurance companies as AAA investment grade bonds? Of course, creating derivatives based on the interest streams generated by these junk securities is going to amplify the effect.

Where Lehman Brothers got in trouble was when they retained the junk and derivatives in their own portfolio, forgetting that these high yields were going to slam to a halt when the ARMs adjusted. (The vernacular for this is believing your own BS.) Paulsen admits to being shocked to discover how much of the junk Lehman had retained. The whole game was to package, unbundle, and repackage securities into new products that passed the liability for failure onto parties other than the investment bank. Goldman Sachs played this game better than any of the other investment banks.

You make an apologia for the rating agencies, but many observers believe that they failed miserably in evaluating ARMs made to subprime buyers as bearing the same risk as high quality loans. The result was that the lenders could the sell the loans to make more bad loans to unqualified buyers of properties at overinflated bubble prices. The whole story of The Big Short is that of the investors who examined the securities and the underlying loans and made a killing shorting (i.e., making leveraged bets against) the market.

One must be careful not to allow the technical jargon of the finance industry to obfuscate the simple underlying reality. Having both an Economics degree and Finance MBA, I find it useful to put things into cruder terms. For example, the way to make money in bubbles and Ponzi schemes is to get in early and get out before the collapse.

Originally Posted by Decadence

According to the Wall Street Journal, the top 20% of earners pay 84% of all income tax. The bottom 50% pay less than 5%, with many paying none or even getting back more than they paid in via the 'earned income credit'.

I don't have a problem with the well-to-do paying most of the tax. After all, they are getting most of the goodies. As for the payments to the bottom 5% it is important to remember that this group is overwhelmingly composed of female head of households. It really is in the interest of the wealthy class of investors to allocate enough of the take to kickbacks to the workers large enough that the workers continue playing the game. Slot machines come to mind as an appropriate metaphor.

[deepsepia]

Originally Posted by Brian249x

OK. It wasn't a Ponzi scheme. Are you seriously denying that junk bond types of securities were sold to Fannie Mae and Freddie Mac, European banks, pension funds, and insurance companies as AAA investment grade bonds? Of course, creating derivatives based on the interest streams generated by these junk securities is going to amplify the effect.

A lot of basic misunderstandings there.

FNMA did not buy bonds, junk or other. FNMA bought mortgages, so long as they conformed to their underwriting standards, which they then packaged into MBS, with their guarantee. Over the years, FNMA did reduce their underwriting standards somewhat, but this played a minor role in the financial crisis. Mortgages themselves are not rated by the credit rating agencies. Poor quality mortgages were originated or purchased by banks and packaged as "private label" subprime MBS, not agency securities. The worst loans and mortgages never conformed to Agency requirements and were never packaged by them into MBS; most of the securities that were being bet against in "The Big Short" are these private label MBS, CMOs and CLOs, not Agency MBS.

The mortgages purchased by the Agencies performed quite well, much better than the prices in the panic selling of 2007-2009 might suggest. Agency MBS did tank in price during the Crisis, but this was an over-reaction, a panic fire sale by distressed sellers. People who bought FNMA, FRMA and GNMAs during the panic, notably the Federal Reserve, made fortunes of money on these securities . . .

The Fed bought these securities in their "Maiden Lane" funds, which were very profitable, profits paid to the US Treasury; proof positive that the Agency securities were being sold too cheap in the fire sale of 2007-2009.

See the NY Fed's accounting of Maiden Lane for details:
https://www.newyorkfed.org/markets/maidenlane.html

Originally Posted by Brian249x

Where Lehman Brothers got in trouble was when they retained the junk and derivatives in their own portfolio, forgetting that these high yields were going to slam to a halt when the ARMs adjusted. (The vernacular for this is believing your own BS.)

Lehman "got into trouble" when they went from 15 to 1 leverage to 44 to 1 leverage. What this meant was that they couldn't withstand even the smallest of losses. This is isn't fraud, but it is stupid. The first people's money that they lost was their own . ..

Originally Posted by Brian249x

You make an apologia for the rating agencies, but many observers believe that they failed miserably in evaluating ARMs

The ratings agencies did a poor job, but there were two other measures of securities' values: Credit Default Swaps and market price. Ratings are a snapshot based on a model, and they simply had no model of any %10 decline in their analysis. That's a mistake, not fraud.

One might add that the folks _writing_ the Credit Default Swaps that the hedge fund guys lionized in The Big Short bought also got it wrong. No telling of the meltdown is adequate without discussing AIG Financial Products. AIG had been a very well run company, extremely profitable, and a genuine AAA credit. Over the years, they began to use their strong balance sheet to write Credit Default Swaps-- eg they were the insurer against bonds defaulting.

They did not rely on the ratings agencies-- they did their own analyses of these Mortgage-backed securities and decided that the premiums paid were more than worth the risk assumed. They were wrong, and a big part of the meltdown was the sudden realization that the CDS "insurance" that all these folks had purchased from AIG was quite likely to be worthless, leaving all sorts of folks who thought they'd laid off risk on AIG exposed to massive and unexpected losses.

Little known fact: had the Federal Government not bailed out AIG, those CDS bought by the heroes of the Big Short would have been worthless; as AIG could not pay the claims against it generated by the CDS they had written. So guys like John Paulson actually "got it wrong"-- they bought a kind of insurance, from an insurer who themselves went broke, and could not pay off their "claim".

See "AIG in hindsight" for this most important and poorly understood by the public aspect to the financial crisis:
https://www.chicagofed.org/~/media/p...014-07-pdf.pdf

Originally Posted by Brian249x

One must be careful not to allow the technical jargon of the finance industry to obfuscate the simple underlying reality. Having both an Economics degree and Finance MBA, I find it useful to put things into cruder terms.

I find it useful not to pretend that complex systemic failures can be represented by anecdotes. A story ain't an explanation. Repo is not "jargon" -- its the mechanism by which banks finance themselves in the very short term. If you look back to Ben Bernancke's concerns at the time, he talks a lot about the freezing of repo-- which meant essentially that banks were unwilling to lend to each other, even overnight.

The Financial Crisis of 2007-2009 is extraordinarily interesting, but it is neither a Ponzi scheme nor a massive fraud. And "The Big Short" is simply a few anecdotes about a few trades, it doesn't even attempt to be an exploration of why banks from Iceland, England, Germany, France and around the world all became insolvent so quickly. Nor does it explore the growth of the "shadow banking system" -- unregulated and opaque entities like AIG Financial Products-- which built up enormous leverage and systemic risk outside the view of any regulatory authority.

If you want a more sophisticated and complete analysis -- still accessible to laypeople, you might start with Prof. Alan Blinder's "After the Music Stopped"
http://www.nytimes.com/2013/02/08/bo...r.html?mcubz=0

Originally Posted by Brian249x

For example, the way to make money in bubbles and Ponzi schemes is to get in early and get out before the collapse.

There's an analysis that focuses squarely on the question: "whether mid-level managers in securitized finance were aware of a large-scale housing bubble and a looming crisis in 2004-2006" -- by a very clever technique, looking at their own personal real estate transaction data-- see Wall Street and the Housing Bubble; DOI: 10.1257 / aer.104.9.2797 in the American Economic Review.

Its behind a paywall, PM me if you want to see a copy (but the punchline is "no, the folks who you claim were perpetrating some massive fraud based on knowledge that the housing market was about to implode themselves bought houses at the same or even increased rate at the peak" . . . empirical evidence that they were not fraudulently pumping an asset class that they knew to be compromised.)

[Arturo2nd]

Originally Posted by deepsepia

The ratings agencies did a poor job, but there were two other measures of securities' values: Credit Default Swaps and market price. Ratings are a snapshot based on a model, and they simply had no model of any %10 decline in their analysis. That's a mistake, not fraud.

One might add that the folks _writing_ the Credit Default Swaps that the hedge fund guys lionized in The Big Short bought also got it wrong. No telling of the meltdown is adequate without discussing AIG Financial Products. AIG had been a very well run company, extremely profitable, and a genuine AAA credit. Over the years, they began to use their strong balance sheet to write Credit Default Swaps-- eg they were the insurer against bonds defaulting.

They did not rely on the ratings agencies-- they did their own analyses of these Mortgage-backed securities and decided that the premiums paid were more than worth the risk assumed. They were wrong, and a big part of the meltdown was the sudden realization that the CDS "insurance" that all these folks had purchased from AIG was quite likely to be worthless, leaving all sorts of folks who thought they'd laid off risk on AIG exposed to massive and unexpected losses.

The Financial Crisis of 2007-2009 is extraordinarily interesting, but it is neither a Ponzi scheme nor a massive fraud. And "The Big Short" is simply a few anecdotes about a few trades, it doesn't even attempt to be an exploration of why banks from Iceland, England, Germany, France and around the world all became insolvent so quickly. Nor does it explore the growth of the "shadow banking system" -- unregulated and opaque entities like AIG Financial Products-- which built up enormous leverage and systemic risk outside the view of any regulatory authority.

It seems to me that the basic mechanism of packaging ARMs made to folks with poor credit ratings into bonds and selling those bonds is pretty fraudulent. Weren't the bonds structured by packaging quality loans in the higher tranches to conceal the extremely low quality of the lower tranches? It also seems to me that making loans to low quality buyers without actually documenting their ability to pay, then reselling those loans to third parties is an activity of questionable business ethics.

So, we have several groups of people buying, selling, rating, and insuring securities without having adequate models to properly evaluate those securities. I guess that it can be argued that folks who are too stupid to know what they are selling and the risks they are exposing both their customers and themselves to, are not really committing fraud.

The European banks were a primary market for these "investment grade securities." As the mortgages started melting down and the price of the bonds collapsing the banks became insolvent. Remember bonds, loans, and such represent bank assets on their balance sheets while deposits are liabilities. $4.1 trillion of bank assets went up in smoke virtually overnight. Even a huge bank has trouble absorbing a $10 to $20 billion dollar hit to its capital. The U.S. government had to inject $182.3 billion into AIG to redeem Credit Default Swaps on Collateralized Debt Obligations. Otherwise, a whole raft of money market funds, hedge funds, banks, and other financial firms would have been taken down in an AIG bankruptcy.

(The Federal Reserve received equity in exchange for the loans. AIG repaid the loans with interest and the stock was sold. The government made a $22.7 billion profit. AIG was forced to sell a substantial portion of its assets to repay the loans and reported $498.3 billion in assets and $76.9 billion in equity in 2016. Presumably it is no longer "operating like a hedge fund" to goose its bottom line aka net income.)

What we observe here is whole industries of people representing themselves as smart and sound financial professionals, who proved themselves to be greedy, lazy, short sighted, or downright stupid. Some would call them frauds.

[Roubignol]

Hi,

Here are the observations of Albert Einstein about your country and your population. As European citizen, they are very interesting. But are they still available?

That's why I asked you the following question:

As still living American citizens , which points have changed since Einstein wrote his remarks?

Here is the text (I only have cut the part about the cult of the individual personalities that can be resumed by his sentence: "The cult of individual personalities is always, in my view, unjustified."


Duration reading time about 3 to 4 minutes.

Some Notes on my American Impressions.

I must redeem my promise to say something about my impressions of this country. That is not altogether easy for me. For it is not easy to take up the attitude of an impartial observer when one is received with such kindness and undeserved respect as I have been in America.

[…] My experience teaches me that this idealistic outlook is particularly prevalent in America, which is usually decried as a particularly materialistic country.

After this digression I come to my proper theme, in the hope that no more weight will be attached to my modest remarks than they deserve. What first strikes the visitor with amazement is the superiority of this country in matters of technics and organization. Objects of everyday use are more solid than in Europe, houses infinitely more convenient in arrangement. Everything is designed to save human labour. Labour is expensive, because the country is sparsely inhabited in comparison with its natural resources. The high price of labour was the stimulus which evoked the marvellous development of technical devices and methods of work. The opposite extreme is illustrated by over-populated China or India, where the low price of labour has stood in the way of the development of machinery. Europe is half-way between the two. Once the machine is sufficiently highly developed it becomes cheaper in the end than the cheapest labour. Let the Fascists in Europe, who desire on narrow-minded political grounds to see their own particular countries more densely populated, take heed of this. The anxious care with which the United States keep out foreign goods by means of prohibitive tariffs certainly contrasts oddly with this notion; but an innocent visitor must not be expected to rack his brains too much, and, when all is said and done, it is not absolutely certain that every question admits of a rational answer.

The second thing that strikes a visitor is the joyous, positive attitude to life.
The smile on the faces of the people in photographs is symbolical of one of the American's greatest assets. He is friendly, confident, optimistic, and--without envy. The European finds intercourse with Americans easy and agreeable. Compared with the American, the European is more critical, more self-conscious, less goodhearted and helpful, more isolated, more fastidious in his amusements and his reading, generally more or less of a pessimist.
Great importance attaches to the material comforts of life, and peace, freedom from care, security are all sacrificed to them. The American lives for ambition, the future, more than the European. Life for him is always becoming, never being. In this respect he is even further removed from the Russian and the Asiatic than the European is. But there is another respect in which he resembles the Asiatic more than the European does: he is lest of an individualist than the European--that is, from the psychological, not the economic, point of view. More emphasis is laid on the "we" than the "I". As a natural corollary of this, custom and convention are very powerful, and there is much more uniformity both in outlook on life and in moral and æsthetic ideas among Americans than among Europeans. This fact is chiefly responsible for America's economic superiority over Europe. Co-operation and the division of labour are carried through more easily and with less friction than in Europe, whether in the factory or the university or in private good works. This social sense may be partly due to the English tradition. In apparent contradiction to this stands the fact that the activities of the State are comparatively restricted as compared with Europe. The European is surprised to find the telegraph, the telephone, the railways, and the schools predominantly in private hands. The more social attitude of the individual, which I mentioned just now, makes this possible here. Another consequence of this attitude is that the extremely unequal distribution of property leads to no intolerable hardships. The social conscience of the rich man is much more highly developed than in Europe. He considers himself obliged as a matter of course to place a large portion of his wealth, and often of his own energies too, at the disposal of the community, and public opinion, that all-powerful force, imperiously demands it of him. Hence the most important cultural 30 functions can be left to private enterprise, and the part played by the State in this country is, comparatively, a very restricted one. The prestige of government has undoubtedly been lowered considerably by the Prohibition laws. For nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced. It is an open secret that the dangerous increase of crime in this country is closely connected with this. There is also another way in which Prohibition, in my opinion, has led to the enfeeblement of the State. The public-house is a place which gives people a chance to exchange views and ideas on public affairs. As far as I can see, people here have no chance of doing this, the result being that the Press, which is mostly controlled by definite interests, has an excessive influence over public opinion.

The over-estimation of money is still greater in this country than in Europe, but appears to me to be on the decrease. It is at last beginning to be realized that great wealth is not necessary for a happy and satisfactory life.
As regards artistic matters, I have been genuinely impressed by the good taste displayed in the modern buildings and in articles of common use; on the other hand, the visual arts and music have little place in the life of the nation as compared with Europe.

I have a warm admiration for the achievements of American institutes of scientific research. We are unjust in attempting to ascribe the increasing superiority of American research-work exclusively to superior wealth; zeal, patience, a spirit of comradeship, and a talent for co-operation play an important part in its successes.

One more observation to finish up with.
The United States is the most powerful technically advanced country in the world to-day. Its influence on the shaping of international relations is absolutely incalculable. But America is a large country and its people have so far not shown much interest in great international problems, among which the problem of disarmament occupies first place today. This must be changed, if only in the essential interests of the Americans. The last war has shown that there are no longer any barriers between the continents and that the destinies of all countries are closely interwoven. The people of this country must realize that they have a great responsibility in the sphere of international politics. The part of passive spectator is unworthy of this country and is bound in the end to lead to disaster all round.

Albert Einstein

[Roubignol]

Originally Posted by deepsepia

The Financial Crisis of 2007-2009 is extraordinarily interesting, but it is neither a Ponzi scheme nor a massive fraud.

I don't know what is your definition of fraud. But it was a MASSIVE fraud.
All around Europe, banks proposed Lehman Brothers' or other American investments products called (sorry about my translation) "derived products" to old retired people or little investors... under the following name "Capital guaranteed" (protected).
According to these products and to the banks, the people who bought these kind of investments, could make 0% of benefits to 5 or 10% depending the market. At least their capital was in security.

Surprisingly, in Switzerland, the boss of the most exposed Swiss bank (the Credit Suisse) was an American ex-chief of .... Lehman Brothers.

After having sold millions of these toxic products, about one or two years later, there was this huge crisis.
Don't tell me that the European Banks, Lehman Brothers, the other American investment banks and even the US estate banks regulation office (I don't know its name) had no idea that these products were toxic.
That's impossible.
If they didn't... How can people trust economists, estate regulation and banks anymore.

Where is the money?
Was it really impossible to change the rate to the borrowers, to them give more time to pay their debts?
No... they decided to put one investment bank in bankrupcy and request money from the states (through the citizens) to save these banks.

The question still is... in which pockets is the money?

If it's not a fraud... I don't know what it is.