Wednesday, December 29, 2010
Back in August, the Independent Report featured a story about the tattered balance sheets of the states. Even then, it was quite obvious that trouble was brewing.
However, the dire condition of state budgets across the nation is something the mainstream media has largely ignored — until now. The problem has reached such catastrophic proportions that it can no longer be disregarded.
In fact, 60 Minutes recently featured a story highlighting the unfolding crisis.
Meredith Whitney, one of the most respected financial analysts on Wall Street, warned 60 Minutes about the next financial meltdown — in state and local governments.
Whitney, who made her reputation by warning that the big banks were in big trouble long before the 2008 collapse, was blunt.
"It has tentacles as wide as anything I've seen. I think, next to housing, this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," she told 60 Minutes.
New Jersey Governor Chris Christie concurs.
"It's not like you can avoid it forever, 'cause it's here now," said Christie. "And we all know it's here. And the federal government doesn't have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's comin'."
Nationwide, state and local governments are now sitting on a mountain of debt that has reached an all-time high of 22 percent of U.S. GDP.
Historically, municipal bonds have been viewed as the safest of investments. However, many analysts are now openly talking about the possibility of a municipal bond market crash in 2011.
If such an event does occur, things such as roads, sewer systems, water systems, etc., would no longer be repaired, much less constructed. State and local governments would have to raise taxes significantly. Even then, it's likely that many would still be unable to meet their funding needs.
New Jersey faces a $10 billion deficit.
California faces a $19 billion budget deficit next year and its credit rating approaches junk status. It now spends more money on public employee pensions than it does on the state university system.
And Illinois spends twice much as it collects in taxes and is unable to pay its bills. The state currently owes about $5 billion and has no credible solution to its problems. State Comptroller Dan Hynes calls Illinois "a deadbeat state".
Nationwide, the generous retirement and health care packages given to public employee unions are now grossly underfunded. Two prominent university professors have calculated that the combined unfunded pension liability for all 50 U.S. states is approximately 3.2 trillion dollars.
According to Whitney, no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.
"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney says. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."
The deficit problems of the states have become the problems of local governments, which depend on their state for a third of their revenues. Whitney is convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt.
"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted. "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
That's a frightening prospect. Since huge numbers of municipal bonds are held by big banks, even a few defaults could affect the entire financial market.
According to Whitney, there's a gathering storm on the horizon.
"It'll be something to worry about within the next 12 months," she warns.
This spring, the $160 billion in federal stimulus money that has helped states and local governments limp through the great recession will run out. The states will need additional help and will almost certainly ask for another bailout.
However, right now, bailouts are political dynamite in Washington. That's because the federal government is also broke and facing a national debt that has now reached $14 trillion.
These problems have been mounting for many years and now the moment of reckoning has finally arrived.
We're in for some rather ugly political battles, and even worse outcomes. A total economic collapse is quite likely, if not inevitable.
Tuesday, December 28, 2010
The latest news from the housing sector continues to be bad. Home prices declined sharply in October.
The non-seasonally-adjusted S&P/Case-Shiller 20-city composite home-price index fell 1.3% on a monthly basis and 0.8% on an annual basis in October.
Prices hadn’t dropped on an annual basis since January and are 29.6% below their 2006 peak.
Six cities — Atlanta, Charlotte, Miami, Portland, Seattle and Tampa — hit their lowest levels since home prices started to fall in 2006 and 2007.
The Case-Shiller report is based on prices over a three-month period, so this report included prices from August, September and October. That makes it more accurate in revealing trends than a single month report.
According to Bank of America Merrill Lynch, there’s an inventory of 7.2 million homes, or roughly 21 months of supply, nationwide. That includes homes that are in, or close to, foreclosure.
Think about that; there's nearly a two-year supply of foreclosures either on the market or headed to market. What will that do to home prices? Imagine what this portends for stable owners seeking to sell their homes? There's a lot of competition from very cheap foreclosures out there.
And then consider the fact that banks are holding onto foreclosed properties without listing them for sale. They're doing this with the hope that these homes will recover their lost value. The banks are hoping to at least break even, if not make a profit.
They may be waiting for years.
If banks were required to report the true value of the homes on their books, and thereby report their true losses, many more of them would be insolvent. As it stands, 157 US banks have already gone under in 2010. But even some of the biggest banks, the Mega Banks, are on very shaky ground.
The price declines will inevitably push even more mortgages underwater. At present, nearly a quarter of all homes with a mortgage already have a lesser value than they are mortgaged for. That number will only increase.
The process of price discovery, which is necessary to determine the final value of housing, is still years away. Prices will continue to fall in 2011 and in 2012.
That's because there's still the problem of option-ARM loans that will reset over the next two years. Option ARMs — which became widespread in 2005 — let borrowers choose to make very low payments for the first five years.
During that initial period, borrowers were allowed to pick their payment option, including just the interest. According to Fitch Ratings, 94 percent of option ARM borrowers elected to make minimum payments only.
The bulk of option ARMs reset dates are spread out from 2010 through 2012, meaning the foreclosure waves will drag on for at least the next two years. That has federal and state officials bracing themselves for the next tidal wave of foreclosures
Almost all the homes with mortgages have already lost value, thereby lowering the homeowner's equity. Most of them will have a difficult time refinancing as a result.
The artificially low interest rates set by the Fed are still masking true home values. Easy money is still providing at least some incentive to buy, yet even that cannot thwart the brutal combination of price declines and falling demand.
Eventually, home prices will fall back to levels not seen since the 1990s, the 1980s, and perhaps even the 1970s in some areas.
Millions of prospective buyers are currently sitting on the sidelines, believing that the bottom has not yet been touched. They may be left waiting for a while. And the longer they wait, the longer it will take to see any meaningful sort of recovery.
At best, it is probably still years away.
Monday, December 27, 2010
Though the recession officially ended in June 2009, when the economy started to grow again, many Americans still feel the lingering after effects.
Gross domestic product, the broadest measure of the country’s output, grew at an annualized rate of 3.7 percent in the first quarter of 2010. But then it stalled, with the rate falling to a mere 1.7 percent in the second quarter and 2.6 percent in the third quarter.
Some believe that the $858 billion tax-cut compromise between President Obama and Congressional Republicans will stimulate the economy by putting more cash in the hands of consumers.
Additionally, unemployment insurance benefits for the long-term unemployed were extended, yet again. This will keep these people afloat and recirculate that money back into the economy.
However, these moves have only inflated the government’s huge debt burden (now $13.9 trillion) and pushed onerous decisions further off into the future, when they will be even more difficult to grapple with.
Analysts at large bond brokerages say the extension of the Bush tax cuts will push the federal deficit to about $1.4 trillion in fiscal 2011.
After the tax extension was signed into law, Moody's Investors Service warned that the tax deal raises the chance that it would issue a negative outlook on the U.S. government's AAA credit rating.
Unemployment benefits have overwhelmed many states, who have turned to the federal government for help.
According to the Economic Policy Journal, over 60% of Americans receiving state unemployment benefits are getting these directly from the US government, as 32 states had borrowed $37.8 billion from Uncle Sam to fund unemployment insurance as of May. Obviously, the problem has grown worse since then.
Roughly 15 million Americans do not have jobs, which is cutting into tax revenues, increasing unemployment payouts, and hurting consumer spending. At 9.8 percent, the unemployment rate remains at its highest level since the early 1980s.
Unfortunately, even the optimists recognize that unemployment is likely to remain above 9 percent through all of next year. And even if the economy managed to grow at 4 percent in 2011, that would hardly alter the unemployment picture.
Economists estimate the economy would need to grow by 5 percent for a full year to push down the unemployment rate by a full percentage point.
There are many reasons to question the ability of a recovery to take truly hold.
The US economy is overly reliant on consumer spending, which accounts for a whopping 70 percent of GDP. With so many people out of work, earning less, and working only part-time, spending is strained and will remain so until those problems are rectified.
The housing market remains anemic, and continues to be a drag on the economy. Nearly a quarter of all mortgages are under water. Home ownership continues to decline. Foreclosures are up. Demand is down. And home values are also down; US homes will lose a whopping $1.7 trillion in value in 2010.
Aside from the housing market, financial markets and the US banking system also remain vulnerable to the continued fallout from the European debt crisis. So far, the problems have been limited to the smaller economies of Greece, Ireland, and Portugal. Should a larger economy (such as Spain) reveal similar strains, the ensuing panic could be widespread and the effects crippling.
Then there is the mounting concern about the tattered balance sheets of state and local governments. At least a few — such as California, Illinois, New York, Michigan and even Texas — may eventually require a federal bailout. Given the current political environment, such an outcome would be deeply unpopular.
After gutting budgets, many states have no reasonable way to further reduce deficits and spending. They face a quandary that seems to lack a solution. No US state has defaulted since Arkansas, during the Great Depression. That could change in the next year or so.
States continue to borrow in order to fund their day-to-day operations, continually worsening their already burdensome deficit problems. The states are truly too big to fail, and that is the horrific prospect currently facing the federal government.
The state deficit problems are enormous and unwieldy, making them the next bubble to inevitably burst. The Center on Budget and Policy Priorities estimates that the cumulative state budget shortfalls are somewhere around $425 billion for fiscal 2009 through fiscal 2011.
When this economic domino falls, or any of the aforementioned, the prospects of recovery will fall with it.
Monday, December 20, 2010
Ownership Is Down. Foreclosures Are Up. Supply Is Up. Demand Is Down. And Values Are Down.
Housing is not recovering, and until it does there can be no economic recovery in the US.
Home ownership has declined in the US for the third year in a row. And since 2005, home ownership has declined by 3 million households, according to a report from the US Census Bureau.
A combination of spiking foreclosures, high unemployment, falling wages and a lack of savings for a down-payment (once again a required 20 percent) have eroded the American dream of home ownership.
The share of households that own their homes has been sliding since the housing bubble burst in 2006. The rate fell again in the second quarter of this year to 66.9 percent — the lowest since 1999 — from a peak of 69.4 percent in 2004, the Census Bureau says.
However, millions of houses on the verge of foreclosure threaten to send homeownership to its lowest level in 50 years. According to new industry estimates, the rate could plummet to about 62 percent as early as 2012 and almost certainly by the end of the decade. Homeownership rates haven't been that low since they hit 61.9 percent in 1960.
There are not enough first time-buyers, or those with adequate credit, to thwart the slide.
More than half of applicants (53 percent) don't have a high enough FICO score to get the best mortgage rates. Even worse, 35 percent of US consumers—some 70 million people—are now considered sub-prime and simply cannot qualify for credit. This huge segment of Americans cannot get a mortgage and are not participants in the housing market. That, alone, significantly hurts demand.
Some Americans cannot afford to own a home. Others see ownership as a bad investment, at present. And millions more have lost, or are about to lose, their homes. The combination is crushing home ownership.
Yet, even those who own their homes, and who do not appear to at risk of losing them, are facing their own unique struggles.
CoreLogic reports that 10.8 million, or 22.5 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter of 2010, down from 11.0 million and 23 percent in the second quarter. However, this decline is due primarily to foreclosures of severely negative equity properties rather than an increase in home values.
During this year the number of borrowers in negative equity has declined by over 500,000 borrowers. An additional 2.4 million borrowers had less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.
That will eventually spur even more defaults and foreclosures. As it stands, the housing inventory data is muddled due to the number of foreclosures that are not yet listed for sale.
The decline in ownership is having a negative effect on prices. Supply is easily exceeding demand. The Census Bureau reports that 18.8 million homes are currently vacant.
US homes will lose a whopping $1.7 trillion in value in 2010. About $9 trillion has been lost since June 2006, according to report from Zillow.com. These losses are simply stunning.
Worse, Fitch Ratings forecasts that home prices will drop an additional 10 percent next year.
An excess housing supply—due to defaults, pending foreclosures, or vacant homes—is holding down home prices. And, according to many analysts, there is every indication that excess supplies and falling prices will continue into next year. It's not hard to imagine.
The so-called 'shadow inventory' continues to grow. According to Morgan Stanley, 8 million foreclosure-bound homes have yet to hit the market.
Laurie Goodman, senior managing director at Amherst Securities, reports that 1 in 5 distressed homeowners in the US faces, or may face, foreclosure. She says 11.5 million home loans are non-performing or highly distressed at present.
All of that excess inventory will eventually push housing prices even lower than they already are, which will result in even lower equity for millions of homeowners. That could, in turn, make millions of homeowners more vulnerable to foreclosure.
Homeownership has generally built personal assets. But for millions of Americans, that is no longer the case. The most valuable asset of millions of Americans continues to decline.
With unemployment hovering near 10 percent, and housing showing no signs of a bottom, any sort of recovery seems like a very distant prospect.
Monday, December 13, 2010
Last week, 60 Minutes conducted an interview with Federal Reserve Chairman Ben Bernanke. At the outset, correspondent Scott Pelley noted that this is the worst recovery the nation has ever seen.
Perhaps that's the reason that Bernanke, who is charged with finding a way out of this mess, decided to do a prime-time interview on national television. It was an unusual event.
As Pelley noted, Fed Chairmen rarely do interviews. But Pelley said that Bernanke feels the need to speak out because he believes his critics may not understand how much trouble the economy is in.
Oh, I think they know, Ben. I think everyone knows.
Bernanke felt the need to get in front of the camera and provide the Fed's spin in order to counter all of the resistance the central bank is simultaneously facing from seemingly all quarters.
It's reasonable to assume that Bernanke never gives an honest assessment of anything, and that the Fed keeps all of its most harrowing data to itself. Whatever dire economic numbers the Fed reveals, it's safe to assume the real numbers are even worse. That's because the Fed, like the government, lies.
For that reason, some of Bernanke's assessments were rather sobering.
"Between the peak and the end of last year, we lost eight and a half million jobs", said Bernanke. "We've only gotten about a million of them back so far. And that doesn't even account the new people coming into the labor force. At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say five or six percent."
Got that? The Federal Reserve Chairman was willing to admit on a nationally-televised, prime-time news show that it may take as long as five years before unemployment comes back down to six percent.
It was a stark and stunning revelation. But to readers of The Independent Report, it's not the least bit surprising.
In an effort to jump start the economy, the Fed plans to buy $600 billion in US Treasury securities, with the intention of lowering rates on long term loans for things like cars and homes.
Bernanke wanted to emphasize that this $600 billion quantitative easing program comes from the Fed's own reserves. "It's not tax money. It does not add to the federal deficit."
Bernanke never bothered to mention where the Fed gets those reserves. That was pretty convenient.
"One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way."
That's technically true. The Fed doesn't actually need to print any paper currency. It simply extends credit to various banks by electronic transfer. It all amounts to nothing more than key strokes on computers, in which billions in credit are instantly conjured and then moved from the Fed's balance sheet to the balance sheets of numerous banks. It's like magic.
When asked if there was a scenario in which the Fed would commit to more than $600 billion in quantitative easing, Bernanke replied, "Oh, it's certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And, finally, it depends on how the economy looks."
That surely spooked Treasury markets. The notion of the Fed buying Treasuries and propping up the market with conjured money is certainly unsettling.
Bernanke went on to say that what passes for a 'recovery' may not be self-sustaining.
"It takes about two and a half percent growth just to keep unemployment stable. And that's about what we're getting. We're not very far from the level where the economy is not self-sustaining."
Notice that he said nothing about actually reducing the unemployment rate? Current GDP growth will merely serve to maintain the current unemployment rate and keep it from rising. That's hardly reassuring.
Most disturbingly, this economic collapse occurred right under the noses of Bernanke and his comrades at the Fed. And now they are being entrusted with managing a recovery. It's hardly reassuring.
Even though the Fed was the regulatory watchdog of the largest banks when outrageously risky lending led to a worldwide financial crisis, Bernanke doesn't assume any responsibility or blame.
When asked if there is anything he wishes he'd done differently over these last two and a half years or so, Bernanke replied, "Well, I wish I'd been omniscient and seen the crisis coming, the way you asked me about. I didn't."
In Bernanke's estimation, seeing the oncoming crisis, which was rushing at him like a financial freight train, required the sort of omniscience that only a genie or wizard might possess.
How did the Fed miss the looming financial crisis?
"There were large portions of the financial system that were not adequately covered by the regulatory oversight," said Bernanke. "So, for example, AIG was not overseen by the Fed... Neither [was] Lehman Brothers, the company that failed. Now, I'm not saying the Fed should not have seen some of these things. One of things that I most regret is that we weren't strong enough in putting in consumer protections to try to cut down on the subprime lending problem. That was an area where I think we could have done more."
What a joke.
Bernanke is not committed to consumer protection. In fact, he lobbied against the Consumer Financial Protection Agency.
In 2008, federal regulators had the power to supervise Citigroup, Bank of America, Wachovia, Washington Mutual, Lehman Brothers, Bear Stearns, and Countrywide and force them to pare back their risky activities – and yet they didn’t.
It is absurd to say that regulators didn’t have the authority to manage systemic risk. It was simply a lack of interest.
William K. Black, a former bank regulator and now an associate professor of Economics and Law at University of Missouri as Kansas City, says the Fed was completely derelict in its duties as a regulator.
"The most severe failure was at the Federal Reserve," said Black. "The Fed’s failure was the most harmful because it had unique authority to prevent the fraud epidemic and the resulting economic crisis. The Fed refused to exercise that authority despite knowing of the fraud epidemic and potential for crisis."
The Fed is entirely and completely against regulation. In fact, it can accurately be described as an anti-regulatory, regulating agency.
As Mr. Black further notes, "The anti-regulator policies that Bernanke championed were the principal drivers of the fraud epidemic that have produced recurrent, intensifying crises."
It is true that the Fed wasn't the regulator in charge of insurance giant AIG. That distinction belonged to the Office of Thrift Supervision, which — like the Fed — showed a complete dereliction of duty. Like other US federal bank regulators, the OTS is paid by the banks it regulates. How's that for conflict of interest?
However, Bernanke was a member of the board of governors of the Federal Reserve system for most of the period from 2002 to 2006, when historically low interest rates set by the central bank sparked the housing bubble, the resulting financial crisis, and subsequent recession.
Bernanke, and others like him, prefer to blame the whole financial disaster on sub-prime lending. But the reality is that many perfectly conventional mortgages went bust. And commercial real estate was at least as overblown as housing, and it went bust too.
It's simply stunning to hear the man who failed to supervise regulation blame weak regulation for the financial crisis, but Bernanke did just that while speaking to the American Economic Association in January. And, in his view, low interest rates were not to blame.
“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” said Bernanke.
However, Bernanke's predecessor, Alan Greenspan, rejected advice about the risks of subprime lending. And Bernanke followed the same lax regulatory course when he was appointed to head the Fed. The reality is that the Fed had the authority to regulate in many ways; it simply chose not to.
Bernanke, like Greenspan, believes that self-regulatory mechanisms are inherent in free markets. Both men believe in the "free hand" of the market, which makes outside regulation unnecessary.
In 2006, Chairman Bernanke professed, "Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”
All along, Bernanke has displayed a continual propensity for getting it wrong.
While speaking at the Federal Reserve Bank of Chicago's annual conference in May 2007, Bernanke famously stated, “Importantly, we see no serious broader spillover to banks or thift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits”
That was absolutely, positively, untrue. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed.
And the fallout has continued to be brutal; so far this year, 151 US banks have failed. Yet, the Fed hasn't shown the same mercy to small local and regional banks that it has to the mega banks.
Of particular concern is the recent revelation that the Fed made 21,000 transactions, stretching from December 2007 to July 2010, that totaled $3.3 trillion. These transactions included loans and purchases with financial firms including Citigroup, Morgan Stanley, Goldman Sachs, major industrials companies including GE, and even to foreign corporations and foreign banks, including the Bank of England.
The loans were nearly interest-free. And the revelations of these secret transactions make the Federal Reserve appear to be the Central Bank of the World. None of this would have been known if Congress had not forced the Fed to reveal these transactions. Yet, we now know that the Fed has been acting as a sort of global bailout machine.
So Bernanke is either a liar, an abettor, or just wildly incompetent. And yet he was reappointed as Fed Chairman by President Obama in January of this year.
However, Bernanke received stiff opposition on the way to confirmation for his second term. The full Senate voted 70–30 in his favor, the narrowest margin for any Fed Chairman in history.
Even before he went on national TV to plead his case, all eyes were on Bernanke, and they will continue to be. The American public is on to him. Before this crisis most Americans had no clue what the Fed was, or what it did. Now nearly everyone knows. The opposition is vast. The doubt and mistrust are massive, and perhaps even historic.
According to a new Bloomberg Poll, a majority of Americans are dissatisfied with the Federal Reserve and say it should either be brought under tighter political control or abolished outright.
Perhaps Congressman Ron Paul put it best when he said, referring to Bernanke:
"There is something fishy about the head of the world’s most powerful government bureaucracy, one that is involved in a full-time counterfeiting operation to sustain monopolistic financial cartels, and the world’s most powerful central planner, who sets the price of money worldwide, proclaiming the glories of capitalism."
Sunday, December 05, 2010
The Independent Report seeks to analyze economic events in an apolitical manner. The goal is objectivity, an unbiased analysis and, well, independence.
So much of what passes for news these days is highly politicized, and the goal here is to analyze and dissect economic developments minus the political spin, and absent any particular ideology.
Normally, The Independent Report doesn't focus on politics. In fact, politics is typically avoided because of the ugly circus that it is.
It is clear is that our political system is broken in many ways. Washington appears quite divided and highly partisan.
But one political event (or, rather, charade) occurred this week that is worth mentioning because it revealed just how broken, how corrupt, and how dysfunctional our government truly is. And it also revealed that, when push comes to shove, Congress isn't nearly as divided as we're typically led to believe.
Once again, Congress proved that it is an old boys network whose members even include women. And that club takes care of its own, no matter how egregious, how unscrupulous, how unethical, or how illegal its members behaviors are.
This week, the House of Representatives chose to merely censure Rep. Charles Rangel, despite behavior that should have led to his expulsion, arrest and prosecution.
The 80-year-old Democrat admitted he had failed to pay all his taxes, filed misleading financial statements, and improperly sought money from corporate interests in exchange for a college center bearing his name.
That's typically known as tax evasion, taking bribes, a quid pro quo, and an abuse of one's power and authority. And all of it is illegal, in addition to unethical.
Last month, the House ethics committee found Rangel guilty of 11 of 13 charges of financial misdeeds, overwhelming evidence of his misconduct and guilt.
Yet, the chairman of the ethics committee, Democratic Rep. Zoe Lofgren of California, said Rangel simply "violated the public trust." However, it's far more accurate to say he violated the law — in numerous ways.
Despite this fact, Rangel's colleagues chose to merely censure him, which amounts to a slap on the wrist.
It was only the 23rd time in the nation's history that a House member has been censured. Yet, there is no real punishment, other than to say, "Mr. Congressman, this will go down on your permanent record."
What a sham. What an injustice.
Rangel's many friends and staunch allies in the House — including members of the Congressional Black Caucus and the New York delegation — tried to reduce the punishment to a simple reprimand, though that effort failed. But it didn't really matter. The punishment is the same; nothing at all.
Clearly, Congress protects its own, just like cops do.
Even Rangel's constituents seemed to care little about his conduct or the charges against him. Rangel was re-elected to a 21st term last month with more than 80 percent of the vote despite being under an ethics cloud for more than two years.
Despite the overwhelming evidence of his guilt — which was the opinion of his colleagues — Rangel hubristically argued that censure is reserved for corrupt politicians — and he's not one of them. That reveals the height of Rangel's delusion and arrogance.
The reality is that Rangel ignored rules of conduct and avoided paying his taxes despite his knowledge of tax law due to his long service on the tax-writing Ways and Means Committee. In other words, Rangel knew the rules because he helped write them. He also thought he knew how to circumvent them. How precious is that?
Rangel chaired that panel until last March, when he stepped down after the committee — in a separate case — found that he improperly allowed corporations to finance two trips to Caribbean conferences.
That is simply stunning. Rangel was booted from the committee on separate charges! This is a man who is utterly and consistently corrupt, and who is devoid of any decency or ethics.
Rangel shortchanged the IRS for 17 years by failing to pay taxes on income from his rental unit in a Dominican Republic resort. He filed misleading financial disclosure reports for a decade, leaving out hundreds of thousands of dollars in assets he owned.
He used congressional letterheads and staff to solicit donations for a monument to himself: a center named after him at City College of New York. The donors included businesses and their charitable foundations that had issues before Congress and, specifically, before the Ways and Means Committee. That's called a conflict of interest.
Rangel also set up a campaign office in the Harlem building where he lives, despite a lease specifying the unit was for residential use only.
The representative is obviously a man of enormous ego and hubris. He believes he is as important as he is powerful.
But instead of expelling Rangel and ordering his prosecution, his Congressional colleagues chose to merely censure him. Besides the embarrassment, censure carries no practical effect. The next level of punishment was expulsion, and yet Congress stopped short of that. In the process, it stopped short of assuring justice.
It is abundantly clear that Congress is a kangaroo court and that it cannot — will not — police itself. It is an elitist old boys network, where they all watch each others' backs. Congress is a totally corrupt institution and it is plainly despicable.
Like any other American citizen who is convicted of such charges, Rangel should be in jail. But instead he remains a Congressman. How disgusting.
This is what passes for justice in America. It clearly proves that there are two justice systems in the land of the free and the home brave; one for the powerful and connected, and one for everybody else.
Friday, December 03, 2010
Taxes Are Unpopular, But Voter Sentiment Is Unrealistic
In the current political climate, many Americans want less government spending, lower taxes and the elimination of the deficit. Yet, they simultaneously demand that their (or their parents/grandparents) Social Security and Medicare benefits remain untouched.
Republicans have long embraced the idea that tax cuts don’t need to be paid for. And it seems that the Democrats have joined them in this reckless belief.
The Republicans strongly pushed the extension of the Bush tax cuts. And the Democrats feared letting them expire for all but the richest Americans. After all, raising taxes is one of the 'third rails' of Americans politics.
The problem was, extending all of the Bush tax cuts increased the deficit by about $4 trillion. Even if Congress had extended the cuts only for people making less than $250,000 a year, it would have increased the deficit by more than $3 trillion.
That's a whole lot more than the Obama stimulus or Bush's bank bailouts, both of which were wildly unpopular. This deficit increase via tax cuts occurred after the election of the Tea Partiers and other conservatives to Congress. How could that be acceptable to anyone concerned about the deficit?
Ultimately, cutting taxes or increasing spending both have the same effect on the government's balance sheet. One takes money out of the Treasury at the front end, while the other takes it out at the back end.
The Democrats have long been labelled as the party of 'tax and spend'. Yet, it's also fair to describe the Republicans the party of 'borrow and spend'.
At least one dyed-in-the-wool, true-blue conservative has called out his party for the reckless irresponsibility of their unyielding tax cut mantra.
"This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts," said former Reagan budget director David Stockman in a NY Times op-ed last summer.
Stockman is not a lone voice in the wilderness.
In 2006 William Niskanen, the former chairman of the libertarian Cato Institute, published an influential paper titled “Limiting Government: The Failure of ‘Starve the Beast.’ ”
In it, he critiqued the conservative idea that cutting taxes now would “starve” the government of revenue, and thus force it to reduce spending. The reality, he said, was the opposite. If politicians found they could cut taxes without paying for it, they realized they could increase spending without paying for it, too.
Between 1981 and 2005, tax cuts led to more, rather than less, spending. The other problem with the theory, Niskanen wrote, was that it let Republicans off the hook. The belief that you could cut taxes without reducing spending had “substantially reduced the traditional Republican concern for fiscal responsibility.”
At present, there is a lot of anger about the size of the federal government's budget deficit, and rightly so. Americans, who are tightening their belts, want the government to do the same. People are looking for governmental responsibility and restraint. The anger and concern is coming from across the political spectrum.
However, the current deficit was not caused just by over-spending and under-taxation. It was caused by the collapse in tax revenues that resulted from the 2008 financial crisis and the subsequent economic downturn. And tax revenues will only improve when the unemployment problem improves. That may be a long way off.
There is no doubt that the federal government is too big, has too many employees, and spends too much money. But the deficit problems won't be solved with budget cuts alone.
After all, we're now in year-nine and year-11 of two separate wars that are both part of America's larger and ongoing 'War on Terror'. And since tax revenues were not raised to pay for those wars, but were in fact cut, they were put on the government's credit card.
The reality is that there are no easy solutions. Rather, there are only painful ones. There will be austerity measures that deeply affect most Americans, and budget cuts of all varieties that will anger just about everyone.
But the reality is that the US won't eliminate its deficit, balance its books, and pay down its debt without tax increases. But that's the problem; any tax increases in such tenuous times could ultimately cool the ailing economy even further.
A recent LA Times/USC Poll of California voters is reflective of the general American sentiment. The poll found that Californians oppose tax hikes in favor of budget cuts to balance the state budget. Yet, they object to most of the cuts that could be made. Reality bites.
Naturally, everyone favors cutting 'waste', 'fraud' and 'abuse', however vague those terms may be. Most voters favor cuts over taxes because they believe we're already taxed too much.
The government has gotten itself — and, by extension, the rest of us — in quite a pickle. Cuts need to be made, revues need to be raised, and voters want neither.
Meanwhile, the tax base has been shrunken considerably because so any people are out of work.
Dick Cheney, who argued for a tax cut despite a looming shortfall, famously declared, "Reagan proved that deficits don't matter."
While many conservatives may have agreed with him then, most Americans — regardless of political affiliation — would beg to differ right now.
Wednesday, December 01, 2010
60 Minutes recently aired a story about the GOP's knee jerk opposition to taxes. What made the story particularly compelling was that David Stockman, President Reagan's budget director, called out his own party for their extreme orthodoxy against taxes.
Stockman has gravitas because he is the Republican who once helped engineer the largest tax cut in history during Reagan's presidency.
But these are different times.
The Bush tax cuts were never rescinded, even while the US was engaged in two lengthy, costly, wars. Both of those unfunded wars were put on the federal government's credit card to be paid in the future.
However, this borrowed war money will be much more expensive to pay back in future years, due to the interest on the exorbitant debt that's been created.
Stockman says all the Bush tax cuts should be eliminated - even those on the middle class.
"It's become, in a sense, an absolute. Something that can't be questioned. Something that's gospel. Something that's sort of embedded into the catechism. And so scratch the average Republican today and he'll say 'Tax cuts, tax cuts, tax cuts,'" Stockman explained.
"It's rank demagoguery," he added. "We should call it for what it is. If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn't come up with $50 billion, when the problem is $1.3 trillion. So, to stand before the public and rub raw this anti-tax sentiment. The Republican Party, as much as it pains me to say this, should be ashamed of themselves."
Stockman is also quite critical of President Obama for saying things like, "I believe we ought to make the tax cuts for the middle class permanent."
"We have now got both parties essentially telling a big lie, with a capital 'B' and a capital 'L' to the public," he told Leslie Stahl. "And that is that we can have all this government, 24 percent of GDP, this huge entitlement program, all of the bailouts. And yet, we don't have to tax ourselves and pay our bills. That is delusional."
The national debt is now growing by $100 billion a month. So, the massive hole continues to grow ever deeper.
"We're going to be in a period of austerity. We've had a 30-year spree of really phony prosperity in this country," said Stockman.
Yet, Stockman says neither party is truly committed cutting spending.
"Even Republicans have said there's nothing significant we want to cut. They don't want to cut Social Security entitlements; they don't want to cut Medicare reimbursements to doctors; farm subsidies; education loans for middle class students. Certainly not defense!" he said.
Stockman says there should be a one-time 15 percent surtax on the wealthy that he estimates would cut the national debt in half. But he knows it is highly unlikely in such a strong anti-tax environment in America today.
"We've demonized taxes. All right. We've created almost the idea they're a metaphysical evil," he said.
"In 1985, the top five percent of the households, wealthiest five percent, had net worth of $8 trillion, which is a lot. Today, after serial bubble after serial bubble, the top five percent have net worth of $40 trillion," he explained. "The top five percent have gained more wealth than the whole human race had created prior to 1980."
The antipathy to raising any taxes or making any real spending cuts is so intense in Washington, Stockman despairs that when the new Congress returns after the holidays, they'll do what they often do: nothing.