Is the US president correct to say America is a better country because of Medicare, Medicaid and Social Security?

He is protecting his voter base and nothing more. Any cuts in those programs will put a bulls-eye on his forehead come Nov 2012.

Yes, these programs make America a better place.

Absolutely. I know many people who depend, or have depended on such programs for survival. Their lives have improved because of these programs, and because of this, The United States of America is a better place for them.

A better country than what?
The rest of the developed world?
No! Hah!

But yeah, those are things you need to concentrate on, if your standards of living and degrees of socio-economic equality are to ever reach the same kind of level as the rest of the developed world.

Yes. Civilized countries provide a social safety net for people who would otherwise suffer greatly.

Absolutely. Civilized nations take care of all their citizens, not just the rich and privileged.

@Qingu Precisely! What use is it to be the richest nation on Earth if we can’t take care of our own?

It is a good tactical position to take. It kind of puts anyone who disagrees with the current administration’s philosophy on Medicare, Medicaid, and Social Security in the position of answering one of those “Have you quit beating your wife” questions. To disagree with the current administrations philosophy towards those programs now carries with it the implication that one believes the nation would be better off without them. That is simply not the case.

Do we need Medicare – Of course. However we should examine how to more efficiently provide medical care for the elderly, including making more options for private supplemental coverage available.

Do we need Medicaid – Of course, but we should take a good hard look at the cost of providing free maternity and general health care for those who are not in this country legally and ask ourselves if this is something we should really be asking the American taxpayer to foot the bill for.

Do we need Social Security – Of course, but we should also be looking at ways to move from the current unsustainable model towards something that will not be bankrupt by 2035 (according to current estimates)

Yes, America is a better place because these programs exist. In fact, they don’t go nearly far enough to protect our citizenry against the ravages of the so-called “free” market.

It’s not a tactic and and it’s not a covering his ass for the upcoming election. The test of a civilization is how they care for their sick and elderly. I realise there are some ‘Spartan’ ideas in some sectors of American society. This president believes in the ideals that really do embody the best qualities humanity exhibits. My only worry is, because he has to work with so many people that would cut off the head to spite the face, his words, advice and intentions are lost.

I’m not sure whether Obama is an impotent champion of the people, or a lying tool of the establishment.
I’m also not sure which would be more worrying.

I mean, if the office has no real power when it comes to socio-ecomonic reform, what good is democracy?

By the same token, if the establishment’s tools are so good at lying, what good is democracy?

I don’t see how you can come with any answer other than it was covering his butt for the next election. He told us that SS, Medicare/Medicaid, and defense consumes 88% of the budget yet he didn’t address any of it. As far as I could tell he wants to have medicare negotiate prices on prescription drugs but other than that is was merely raise taxes. And if the prescription drugs don’t have the desired impact they’ll negotiate after the next election. How can that be anything other than kicking the can down the road. ‘Where’s the beef’?

He absolutely is right. Every major developed nation on Earth today provides for its elderly, infirm and poor. I have no desire to live in a Dickensian England with work houses for the poor and the elderly freezing to death in cold homes because they can’t afford heat. Anyone who yearns for such a state has the whole third world available to move into.

Without these programmes America would certainly be a much worse place, not just for the poor but for everyone.

@The_Idler, the office of president does have real power in domestic reform… just not unlimited real power, and not nearly as much real power as it does in foreign policy. Congress, for better or worse, has more power over domestic reform.

That said, Obama’s election brought meaningful health care reform and financial reform. Both were imperfect, both were watered down in Congressional compromises. But to say that nothing was accomplished, or that no real power was used, is just wrong.

@Jaxk, remember how you were champioining the Ryan plan?

And now you’re asking “where’s the beef”? LOL.

Here’s a side-by-side comparison of the two. http://www.nytimes.com/interactive/2011/04/13/us/politics/comparing-republican-and-obama-budget-plans.html

Obama’s suggests making Medicare and Medicaid, more efficient, cutting defense, and raising taxes on rich people back to where they were during Clinton.

Ryan’s plan suggests massive cuts in Medicare and Medicaid, leaving defense as is, and giving huge fucking tax breaks to the mega-rich.

Obama’s plan also lacks the reliance on magic that underlies the Ryan plan.

Here’s a transcript of Obama’s speech. I thought it was purty darn good, and about time.

http://projects.washingtonpost.com/obama-speeches/speech/622/

@Qingu

I’m not looking to start another flame war here. I’m as weary as the next guy. I’m just not finding anything in Obama’s proposal. His proposal says things like:

“The proposal seeks to reduce the growth in Medicare spending,”

“President Obama has asked governors to recommend ways to make the program more efficient.”

“both parties should work together now to strengthen Social Security.”

He just never says anything about what would be cut. The only place he has any specific plan is in the tax hikes. I have no problem if he wants to cut defense by $400 billion but what he said was ’ he thinks they can find it’. He wants to castrate Ryan for his recommendation while not offering anything specific of his own. I understand he won election by being vague and generalizing but isn’t it time for some concrete plan?

And the idea that if we don’t realize the savings he’s projected we could appoint another commission in 2014, is staggering.

@Jaxk, first of all, what incredible hypocrisy! Remember how Ryan claimed that giving 3 trillion or so in tax breaks would be revenue neutral? 3 trillion?

Secondly, you’re simply wrong. HCR already identifies savings in Medicare, which have been corroborated by the CBO (and internalized in Ryan’s plan); Obama’s plan would expand on these savings. And do you seriously think that cutting $400 billion in defense is going to be difficult? The most difficult thing about it will be political, i.e. pushing back against the military industrial complex. Moreover, his idea to increase taxes to raise revenue isn’t exactly opaque; that’s how governments raise revenue.

But most of all, I’m just astounded by your hypocrisy. I don’t want to start a flame war either, but you are making these criticisms after cheerleading Ryan’s plan, which was much more vague and completely unworkable to boot (not to mention sociopathic but we’ll leave that aside). Do you honestly expect anyone to believe you are debating in good faith when you act like such a partisan tool?

@Qingu

Maybe you should take a step back before you jump out and try to call me names. As I said if he wants to cut $400 billion in defense, I have no problem with that. Hell that works out about $39 billion/yr from a $671 billion budget. I’m a defense hawk and I could do better than that.

When we worked through the Ryan plan I was hoping to get some criticism based on the tax cuts he proposed as well as other criticism. All I got was that it was completely unworkable. I have no problem with anything Obama wants to cut in fact I would like to see the cuts from both plans combined. The problem I have is that Obama doesn’t define any cuts. He merely makes vague generalities and expects to be taken seriously.

Instead of just cheering because it fell from the lips of Obama, you may want to listen to what he actually said.

@Jaxk, okay, so Obama’s plan doesn’t mention many specifics. (I imagine he is reasonably leaving specifics for Congress to negotiate… since that’s how it will inevitably happen… but let’s leave that be.)

Can you please explain why you are voicing these criticisms now, for Obama’s plan, but failed to voice any criticisms for the Ryan plan you were cheerleading before?

Making sure people have access to health care and making sure that growing old does not mean growing poor are both good things. If these are true, the US is a better country than it would be without them. I don’t think anyone disagrees with these basic concepts.

Weather or not the way its done in the US is correct is an entirely different question. Its not clear to everyone that these make the US better than it would be without them, but I think they do.

That aside, he is only saying these things out loud now because of the upcoming election. Let the circus begin!

@Qingu

First I don’t think I was cheerleading the Ryan plan so much as I was cheerleading the idea that someone put spending cuts into a plan. I like the idea of cutting back on this massive spending we have been doing, and at least slowing the growth of debt. Obama didn’t really do that. His plan is basically to increase taxes to cover the massive spending. Not the direction I was hoping we’d be going. Of the $4 trillion he projects over 12 years, only $1 trillion is spending cuts and even those are somewhat nebulous.

I find it difficult to cheer about $2 trillion in tax hikes and maybe cutting some stuff if we can find it.

@Jaxk While I agree with you in principle. I have to say that I not a fan of throwing the non-rich to the dogs for the sake of letting the top tiers get a tax break, nor am I a fan of having the moderately wealthy (those in the low six-figure range) and small businesses subsidize the very top and the evasive corporations.

I am seeing a parallel here between the federal budget and the finances of “The Big Three” who are crushed by legacy costs. Unfortunately, it costs money to take care of the poor, elderly, and unemployed, and that money has to come from somewhere. Many Americans cannot take care of themselves without some sort of subsidy, be it government assistance, a decent benefit package, or merely having a job in the first place. Companies are posting record profits as wages are stagnant and benefits are declining for those who are lucky enough to even have jobs.

Note also that we collect less in corporate taxes than many other nations, and even those who pay those taxes (over ¼ of them don’t) pay lower rates than about half the other nations on Earth. It used to be that those taxes accounted for about one-quarter of revenue collected by the feds as opposed to their current, dramatically lower levels, thus shifting the tax burden onto the citizenry who in turn pass the buck to the middle class. Hell, I’ve seen a few numbers that merely enforcing some of the tax code enough to stem the creative accounting used by many corporations would net us over $1 trillion without even raising tax rates at all; if there is any truth to that then I am rather disappointed.

Is it possible that the system we have had in place is inherently flawed to the point where it is unsustainable? It seems to me that the only way that could possibly be false is if it were actually intended to allow (if not outright cause) a sizable portion of the population to live in the sort of poverty I normally associate with places like Calcutta. But who cares so long as our corporations post profits and we have the most multi-billionaires of any nation?

I think that the problems we are having took a long time to develop (too long to blame any one person, or even political party) and are merely a symptom of the flaws inherent in the way we have operated for the last few decades.

@jerv

Sensible arguments but let me throw in a few points. Most look back at the 90s and think we were doing quite well. Incomes were up, poverty was down, no one was starving in the street and by the end of that decade federal spending was about $1.8 trillion. Since that time inflation has been low but federal spending has more than doubled. We try and justify it by saying we have to provide for the poor. It just doesn’t wash. In 2000 we had 1.78 million federal employees. In 2010 we were up to 2.75 million. 97% work for the executive branch (startling isn’t it). And just to add insult to injury, federal wages grew 58% between 2000 and 2009 (I bet you wish your salary had grown by 58% in 10 years). So you have to ask, were we really that destitute in 2000? If we weren’t why is this massive growth in spending and government size so impossible to get rid of? Why do we feel this massive growth is the only way to get back to the prosperity of the 90s? Or is it this massive growth in government that is holding us back?

I have no problem trying to simply the tax code and closing loopholes. It is the subsidies and tax incentives we create that makes the disproportionate burden between companies and industries. But if you feel the corporate loopholes cause this problem, why are we arguing about trying to increase the individual rates? And your $trillion loophole claims sound more like hysteria than anything else.

Another interesting point is that in 2000 the top 1% paid 37% of all income taxes. In 2008 (the last year I have data) the top 1% paid 38% of all income taxes. And as a final note, government revenues are still, even at the bottom of this recession about 10% higher than they were in 2000. The problem we have here is a spending problem. Revenues are a bit short from where they should be but spending is totally out of control. IMHO

@Jaxk Since that time inflation has been low but federal spending has more than doubled. We try and justify it by saying we have to provide for the poor. It just doesn’t wash. Does this mean that federal spending doubled only because of the poor since it is being used as its justification? When the US invaded Iraq, money from Social Security was used and there was no money raised to pay for it. Could not that have contributed to the deficit before Democrats got the White House?

In 2000 we had 1.78 million federal employees.In 2010 we were up to 2.75 million. 97% work for the executive branch (startling isn’t it). And just to add insult to injury, federal wages grew 58% between 2000 and 2009 (I bet you wish your salary had grown by 58% in 10 years) I had no idea federal employees increased from 1.78 to 2.75 million in 10 years. Sounds terrible. But to be fair I would like to hear honest explanations as to why, before I judge this as excessive and utterly unjustifiable. I had to keep my mouth shut after the huge Homeland Security was created even though I know thousands if not tens of thousands of new federal jobs will be created. Its hard to criticize your goverment when they want to spend money for your protection isn’t it? I hate it when the extreme right use the words “big goverment” as propaganda but whichever party, democrats or republicans or both was responsible for raising 58% of federal worker’s salary, that suits “big goverment” indeed. But, big BUT. I still want to hear the justification of such an increase in their salary and if I find it reasonable, I won’t be so blind as to call it “big goverment.”

@Jaxk The problem we have here is a spending problem. Revenues are a bit short from where they should be but spending is totally out of control. IMHO

I think the plain truth is we only have a spending problem when we are being forced to spend on something we don’t like. Democrats support entitlements, Republicans don’t. They prefer to support entities who’s in charge of the “trickle down” process. I don’t think Obama is being vague when he does not hash everything in details. He maybe talking to voters yes, but he said what he needed to. That’s why Cantor, Ryan and other from their parties reacted insultingly to Obama’s speech yesterday. ( a way for them to talk and impress their voters as well ) They knew exactly where the president stands. He was not vague to them.

@mazingerz88 One thing a lot of people overlook in conversations like this is that Obama wasn’t president during the entire last decade; he didn’t take office until Jan 2009. Now, I’m not saying it was Bush-43, but it seems to me that most of those nearly a million government workers were added during a time when we had a POTUS from a party that is historically in support of smaller government. I mention that as just a little bit of irony, and also to illustrate that this problem isn’t new.
Now, part of it has to do with the fact that we now have Homeland Insecurity; a department that didn’t exist until after 9/11. Part of it is that the high unemployment has resulted int eh need for more administrative staff to handle the fact that more than twice as many people are in need of services.

@Jaxk Look at the percentage of income that that bracket earned then and now and I think you can see how you and I got into one of our first arguments here. As for revenue being short, I take that as proof that you don’t want to give more money to people who are so adept at avoiding the IRS, at least not until we revise a few things.

As for that “trillion dollar loophole”, personally I thought that was a bit over the top, but the fact remains that I have seen such claims, I have seen a lot of corporations dodge the IRS, and I doubt those numbers are off by more than two orders of magnitude. Considering that Congress held up our budget over a few billion, I feel that even if we only get 1% of that trillion dollar claim it would be worthwhile.

The reason I mention increasing the individual tax rates is simply because the effective tax rate doesn’t progress the same at the high end. If we still had the same sort of income disparity we did when I was a kid instead of what we have now then I wouldn’t care, but we have what we have so I do. Individuals are taxed progressively, so I want to see individual tax rates that are progressive, nothing more.

@mazingerz88

Did the wars contribute to the deficit, most certainly. You won’t hear me defending Bush’s spending. He spent way too much. That shouldn’t detract from the things he did right either. He sold the tax cuts as a way to grow the economy and grow it they did.

What I don’t understand is how liberals could scream about spending under Bush an then support even more spending under Obama. A little consistancy would seem to be in order.

@Jaxk To paraphrase Ralph Waldo Emerson, “Consistency is the hobgoblin of little minds.” :D

@jerv

As of 2008 the top 1% eaned 20% of income and paid 38% of the taxes. In 2000 the top 1% earned 20.8% of the income and paid 37.4% of the taxes. I don’t get your point.

As for the average tax rate, it does progress up. I don’t see your issue here either. There is (as I recall) a disparity when you get to the top .1% but that is a result of not getting a paycheck. Generally in that tax bracket you aren’t reporting wages but rather captital gains and tax free bonds which brings the rate down. Raising the tax rate will not have the desired affect on this group, it will only make the discrepancy worse. You can see all these numbers here. They come from IRS data.

@Jaxk I think that the difference between the way wages and capital gains are handled is the problem. And I’m not talking about huge changes either.

The Bush tax cuts grew the economy… right, right. I must have forgot about that, what with that growth bursting in 2008 like the bubble it mostly was.

@Jaxk If memory serves me right, to some who paid attention to politics and the economy in 2000, its a fact bush lost the surplus from clinton due to “dire economic situation” at that time. That part was not clear to me. How dire that was. And so the tax cuts. Im not sure which specific aspect of the economy you said grew but I know its a fact based on numbers that the jobs created were anemic, a few thousands considering the price. Also I hate to think that those tax cuts gave lucky beneficiaries money not to create jobs, obviously, but funds to invest in derivatives which we all know is a huge factor in the economy’s collapse or bursting of the bubble so to speak.
As for democrats screaming about bush spending I did not when he put money into aids charities. But I think they scream about bush spending everytime republicans do ugly politics and paint the democrats as most irresponsible. Is it just me or when it comes to mean and nasty politics republicans are genius? Those who are not will most likely just scream.

I was a bit younger at the time but I remember most Democrats screaming about Bush’s spending on Medicare Part D, an illegal war, and giving a trillion in tax cuts to millionaires and billionaires.

I agree with you that the opposition party always reflexively bitches about spending. But I don’t like this mentality where we say “they’re all the same” and pretend to be above the fray. Obama is spending a lot, but that spending is to avert a depression, and it has largely succeeded according to most economists. Now compare that to the rationale for Bush’s spending sprees.

@mazingerz88

The recession in 2001–2003 was fairly severe but was compounded by 9/11. The sum of those two created some very similar results to what we have seen over the past couple of years. The DOW dropped to 7200, NASDAQ dropped in half. Airlines as a result of 9/11 were on the brink of bankruptcy and we provided government bailouts to save them. If you look at the government revenues They represent fairly closely what was happening with personal and corporate income. The drop in the early 2000s was protracted due to the dual events of the DotCom bust and 9/11. But the drop and recovery gives a picture of how earnings fluctuated during and between the recessions. The tax cuts in 2003 coincide with the recovery and the spending of 2009 coincides with a distinct lack of recovery. Whether that is coincidence, I’ll let you decide.

The derivatives issue you mention is fairly complex. It stems from a change in the Glass-Steagall legislation (basically gutted it) which gave banks the ability to provide brokerage services and some complex financial calculations that skewed the risk of those investments. The Glass-Steagall change occurred in 1999 and was, in my opinion, the biggest contributor to this mess. Well at least one of the biggest.

Another point that needs to be made and I’m not sure if it is your issue but I know it is @jerv ‘s. The 90s brought incredible growth to this country. Unemployment was low and a whole new industry was created. New business starts were at all time highs and salaries, especially for upper management skyrocketed. Many of our current issues stem from the 90s. With all the start up companies, finding a CEO that could run them was a difficult task. Competition for high level management talent grew salaries at an incredible rate. To get into the top 1% of income earners in 1990, you had to make $167,421. By the year 2000 that number had grown to $313,469, almost double. By 2008 it grew to $380,354. Substantial but no where near the growth we saw in the 90s. The competition for high level management talent in the 90s was fierce and companies were actually bidding for good CEOs. Many of those guys with enormous salaries were not worth their salt and were let go, so the company would bid again for another which pushed pay at the top even higher. These were mostly high tech companies but the competition for top management bled over to other industries as well. At the lower levels, competition for high tech workers was equally fierce but it didn’t bleed over to other industries. Massive stock options were handed out to top management just to sweeten the pot and pushed earning higher faster. The DotCom bust put a lot of these guys on the street, but the die had been cast.

Most of that is behind us but the higher salaries are still with us. The growth of top salaries is declining but even with a smaller growth rate they are coming from a much higher base. That’s not to say there isn’t still competition for top CEOs but the field is more selective. This disparity in salaries was a product of the 90s and had nothing what-so-ever to do with taxes. I was there, in high tech, in the Internet, in upper management, and saw this first hand. Whether taxes are raised, lowered or stay the same, won’t affect this issue. Whether spending in increased, decreased, or left the same, won’t affect it either.

@Jaxk Now this is rare. You made a post that I cannot find even a single point to disagree with you on!

@Jaxk Thanks so much for taking the time to break down the pivotal events that took place around that time. Much appreciated. Now I do recall and would agree with @jerv that there is none for me to inquire about as well. I think what I will do next is research on how the Glass-Steagall was gutted. Who were the major players who made that happened. If its Republicans or Democrats or combined. Derivatives are definitely complex and that complexity was the reason why it was created by those super powers in shall we say Wall Street? They knew how slow the goverment would catch up to it, they knew it would be used as a political football and they knew before all hell breaks loose, they would have gotten their profits already. They themselves did not even know what was happening and only a few brilliant people figured mortgage derivatives are soon to be bust, hence they bet millions the other way and that earned them billions in return.

For years it’s always the Republicans whom I hear say regulations will stifle business if not destroy it. But when disaster strikes, all Bush can say was Wall Street got drunk as if his Republican party did not supply the alcohol. Im sure there are some Democrats who behaved like them but bottomline is it’s the majority within a party that reveals its true face to the country. I will admit I have a tendency to be very narrow minded when I’m frustrated. I feel it everytime I hear Republicans open their mouths, at anytime. I don’t think they are really helping, just posturing. I wish they would just say out loud on TV what they really think. They want to get totally rid of the big ones, Medicare, Medicaid, Department of Education and blurt out clearly their reasons, harsh or not. Just can’t deal with BS political rhetoric anymore.

“I feel it everytime I hear Republicans open their mouths, at anytime. I don’t think they are really helping, just posturing.
I feel that way about both parties :D

@mazingerz88

the gutting of Glass Steagall was bipartisan signed by Clinton. If I have to be honest (you made me do this) I’d say championed by Republicans. I think you have a complete misconception however, of how the derivatives got started. It was not a scheme to defraud or even manipulate anyone. @jerv posted a link to an article that explained it fairly well. Maybe we can get him to repost it.

It is Republicans that say regulation is stifling the economy. And it is. There is a study done in California about the cost of regulation. It is quite lengthy but the summary is short. Here is an excerpt:

“The study finds that the total cost of regulation to
the State of California is $492.994 billion which is almost five times the State’s general
fund budget, and almost a third of the State’s gross product. The cost of regulation
results in an employment loss of 3.8 million jobs”

Now that’s just California. If you extend those numbers nationwide that works out to a third of our GDP which is almost $5 trillion annually and tens of millions of jobs. Bear in mind that no one would suggest that we do away with all regulation. But also keep in mind that regulation is not cheap and it costs us more than just money. If we could get rid of the unproductive, duplicate, and nonsensical regulations we could very well fix our unemployment and financial problems.

Also keep in mind that Republicans are not the only source of resistance to regulation. It is very dependant on the program or institute to be regulated. Freddie Mac and Fannie Mae were at the heart of the housing bust. Bush went to congress several times to try and get them to regulate Freddie and Fannie. The Democrats would hear none of it. They not only said there was no problem with Freddie and Fannie but that Bush was fear mongering by just bringing it up. The derivatives market did not cause the crash. The housing crash exposed the problems in the derivatives market.

Final note. No one is proposing or trying to get rid of Medicare or medicaid but denying that they are driving us into bankruptcy isn’t helping the problem. We have to find a way to may them sustainable and right now they’re not. I will talk a little about the Dept. of Education since it is my pet peeve. The DoE has only been in existance for 30 years. It was created in 1980 by Jimmy Carter. At that time, we were the most highly educated country on earth. More graduates from HS and college than any one else. I’m not saying we were perfect just better than the other countries. Since that time, during the rule of the DoE we have dropped to 17th (I believe) well behind most of the industrialized world. There is no way to paint that as a success story. You may not want to blame the DoE for that deterioration but you certainly can’t say they’ve improved anything. Programs like ‘No Child Left Behind’ have created a bureaucratic nightmare for the schools. Causing the schools to hire more administrators than teachers to keep up with the bureaucracy. The federal government doles out money to cover the extra costs but the schools end up paying more to cover the costs than the government gives. Creating a net loss to education. The truth is, if the DoE folded up shop and removed the bureaucracy there would be more money for education not less.

@Jaxk Which one? I post quite a few links, so I need my memory jogged.

Traces of the world’s first known disabled, elderly human have been found in Spain. The individual is thought to have been a male who received support from his group and lived 500,000 years ago. This discovery suggests that our ancient human relatives were capable of compassion and social bonding. The elderly fellow, who lived in Spain, was a member of the species Homo heidelbergensis, a type of ancient human believed by some to be exclusive to Europe and ancestral only to Neanderthals.

http://news.discovery.com/archaeology/disabled-elderly-human.html

Now if the ancestors of the Neanderthals could do this (no grocery stores, no Tylenol, no wheelchairs, remember), how could any American homo sapiens today disagree with America being a better country because of Medicare, Medicaid and Social Security.

Makes you wonder.

@jerv

It was the story about the kid that came up with the calculations used to assess risk. It was not too long ago.

@Jaxk My mistake for painting derivatives in such simple and rather dramatic terms. Looking forward to reading that link from @jerv and learn about it. But as far as what I remember, yes it was not a grand conspiracy but another way for investors to trade. I also recall, if I’m not mistaken, credit default swaps were created in the mid 1990s when some big personalities in the business got together and agreed on trading securities without collateral backing it up. I maybe wrong but that is how I understand credit default swap is in it’s bare bone form. I have no knowledge whether any republican or democrat reacted to oppose such a dangerous process of an investor buying large sums of derivatives even though when he loses, there is no back-up money for him to cover his losses. That needed regulation in my view. My only problem with republican rhetoric about regulation is they always talk in absolutes lie any regulation should be totally discarded. Whatbhappens when disaster strikes? Or is it still, let capitalism reign free? Not even a small tweaking every now and then and yes maybe there will be jobs lost but without it the whole ship might sink?

With regards to the housing bust we have to get to the heart of this issue because let’s face it not only it is flawed but republicans never really liked the philosophical reason it existed.
I was under the impression the crash happened because billions in mortgage derivatives are being bought with the purchasers simply relying on brokers who in turn rely on ratings agencies who really did not do their jobs. They gave triple A ratings to batches of subprime mortgages which did not deserve such ratings. Is that the fault of fannie Mae and Freddie Mac specifically? There could be enough rationalization to dismantle those two but the principle behind it I believe should still be pursued.

guess my problem with republics

Ah, The Formula That Killed Wall Street regarding David X. Li’s Gaussian Copula. There are many other articles of the same name; the one I first read was the one from Wired magazine

@jerv thanks for the article! I did read a few about the same topic long time ago but this one is quite unique in it’s focus on the Chinese quant. So shall we put all the blame on him or to those guys who believed in his equation? LOL. It’s not funny I know and I’m laughing here with a bitter taste in my mouth.

@Jaxk can’t edit my answer in my iPad and I can’t scroll down to add anything but thanks for the explanation on the department of education. I’m not paying enough attention so can’t say I can express any worthy opinion of any sort on the matter. But with regards to fannie Mae and freddie Mac causing the housing crash simply because they guarantee housing loans I have yet to scrutinize all that. I guess my question is whose job is it to make almost sure that a house buyer is financially eligible? I almost fell into the subprime mortgage trap when after I get turned down on my offer she insisted that I get another house which I thought was a fixer upper and she guaranteed the lender will approve my application, zero down of course no matter how flimsy my finances are. I said no, there is no way I could sustain it now that I had clearer picture of how it works and after sensing I’m being coerced into it. Sadly, thousands fell into that hole, taking the whole economy with them. But I still have yet to understand how fannie and Freddie caused this. If mortgages aren’t being bunched and traded as derivatives would the crash still occur? Did Fannie and freddie asked Wall Street to use mortgages as securities instruments? If that was the Chinese quant’s idea as well then he should have a special place in hell, even though I don’t believe there is one but who knows?

@mazingerz88

The whole housing bust gets fairly complex and I’ve ignored many contributing factors. I have a tendency to be a bit windy, so when I try to be brief, I leave a lot out. Everyone has a tendency to want to blame someone when things go wrong. I’m not immune to that either. If you trip and fall, it was the crack in the sidewalk that caused it, If you fall off a cliff, it was because there were no guard rails to restrain you. The worse the accident the more important it is to find someone to blame. The idea that you weren’t paying attention and fell off that cliff is not even a consideration.

So now we get to the housing bubble. Freddie and Fannie were insuring these loans with very little restraint. If you were a lender and knew you could sell a loan to them why would you put any conditions on the loan beyond those required by Freddie and Fannie. Meanwhile, Freddie and Fannie were incentivized to provide loans to low income as were the banks by congress (actually mandated). So they loosened the lending rules to accommodate that mandate. Unfortunately when you loosen the lending rules they work for everyone whether low income or not. Hell, with things like ‘Stated Income’, no one could tell how much you really made. So more people were able to afford houses and that drove the housing prices up. No one cared because even if you couldn’t make the payments, the house would be worth more than you paid so you still made money as did the lender.

The derivatives were simply a way to repackage these loans to sell to someone else. The formula created by David Li, merely provided a way to assess the risk of these packaged loans. An erroneous assessment to be sure, but most believed it to be true. And things like ‘Mark to Market’ allowed banks and financial institutions to leverage their capital beyond belief. So now we have a growing housing market, easy money for both lenders and homeowners, and a tool that shows very low risk to any of this.

By about 2005 (in fact I think it was Oct. of 2005) the housing market became saturated. Everyone that wanted a house had one and everyone that could justify it had two or three. No more new buyers. The housing market began to tumble. It didn’t crash but definitely began to slip. By 2007 it looked like it was going to stabilize. Housing prices had bottomed and the market was actually beginning to crawl back out of the slump. The gods were against it though.

Gas prices began to escalate. Draining everyone of any disposable income and most of essential income. At the same time (2008) a huge chunk of these sub prime loans were beginning to adjust. If you had a payment of $500 on your sub prime loan, it suddenly jumped to over $1,000 and you house was worth less than you paid for it. You had no means of making the payment, gas prices had robbed you of any chance at that, and you could neither sell nor refinance because the house had no equity. Foreclosure was inevitable.

As the foreclosures spiked, all those low risk derivatives became worthless (or at least worth much less). Li’s formula had seriously underestimated the downside. Meanwhile, things like ‘Mark to Market’ forced banks and lenders to reduce the value of thier assets dramatically. With the lower asset values banks needed some cash to make up the difference to avoid bankruptcy or just as bad a run on the bank. Hell, even if the bank was financially solid and the loans were good, the lower asset value forced them to come up with cash immediately whether or not they had any hand in the derivatives. So started the financial meltdown of 2008.

There is actually more to the story but I think these were the major players. A couple of points, however seem to be in order. I know we all have visions of those that lost their homes being thrown out in the street and losing everything. Whereas, I have some sympathy, I’m less sympathetic than others. If you bought a house in 2005 with a sub prime loan, you were ripe for this problem, not of your own making. But if you look at what they actually lost, it was very little. They bought a home with no money down and lived in it for three years with house payments lower than what they would have paid in rent. What exactly did they lose? Many people lost real money in this downturn but those are not the ones we want to bailout. It is those that lost very little or nothing that we’ve decided to cry for. A sad state of affairs.

This is beyond sad. Our mortage was going to be sold from Quicken loans to Freddie Mac, but last minute Quicken said no, but now it’s going to Chase, which is NOT much better!

@Jaxk I sincerely applaud your explanation on blame throwing. Am guilty as well.
Still after careful consideration, I blame it, in a philosophical level, on man’s natural affinity to accumulate things which oftentimes lead him to great progress as well as ruin. If American civilization is a CB radio, it’s leaders would be the ones in charge of turning the dial starting with big turning moves slowing all the way down to dainty tweaking. All to catch that signal, that frequency, that balance. Sadly, the reality is balance even if achieved will not last long. The signal will weaken, maybe get totally lost for any number of reasons., triggering another round of turning and tweaking.

With regards to Fannie and Freddie, obviously it needed regulations. I might also agree with Barney Frank who said they should go probably because he knew it’s now doing more harm than good. But what I need from our leaders right now is debate this issue, tweak it until they could catch a signal that Americans could hear and understand. I want something like Fannie and Freddie to still make it possible for deserving Americans to have a home but not dole it out to those who may want to fulfill that dream expecting the government to pay eventually. ( did I just say something pro republican? Shoot! )
The republicans plan is privatize mortgage lending. Would that provide a balance, catch the right frequency for progress? I can only guess.

But more seriously, we need clarity in issues not leaders who do soundbites.

@Jaxk and @jerv The derivatives were simply a way to repackage these loans to sell to someone else. Just to make sure, what is the need for this to happen, sell loans to someone else, played around like chips in a card game? If there were no derivatives, would the housing bust pull the whole economy down with it?

Derivatives are like God; if they didn’t exist, Man would invent them.

The reason for it is not a truly valid one in my mind, and is a bit complex but basically involves creating profit without the wealth to back it up. I am a bit tired to attempt to put it into intelligible or concise words, so for now I will just leave it at being due to the sort of book-keeping that would make the Mafia jealous that they couldn’t be so damned ingenious.

@jerv Its 2:21 am and im lmao! Thanks! As for how it is traded, derivatives are complex, no question but why does it need to exist? Is it like options or the futures trading, another way to play and stimulate liquidity?

@mazingerz88 The “need” was greed. There was about $5 trillion in mortgage debt between Fannia Mae and Freddie Mac. The derivatives matket mushroomed to $72 trillion a year. That is how hedge fund managers ere getting $4 billion dollar annual bonuses. All the profits went to the Casino Capitalist. All the risks went to the taxpayers. And since the crash, Wall Street has lobbied viciously to keep the game the same. They have thrown money at politicians on both sides of the isle, and they have succeeded. We still have “To big to fail.” and given the incomprehensible profits available when the gambler wins coupled with the fact that we the taxpayer cover all losses, it is only a matter of time till it happens again.

@ETpro Thank you! I was dreading that answer but I’m still trying to pinpoint whether fannie and freddie were the first dominoes that started the great toppling sequence or was it the derivatives.

@mazingerz88 That’s really a diversionary tactic pushed by those who want to leave the game rigged just as it is so they can harvest another boatload of cash from the lower income Americans. The real problem was building a financial house of cards, not the fact that a puff of gentle breeze (Fannie and Freddie) brought it down. Also, it’s important to note that only 15% od the loans in default were sub-0prime. Fully 85% were Alt-A loans, where the borrower wad not poor, but was a real estate investor, and was allowed to claim income, assets and expenses that qualified them fcr their loan/s without being required to submit any truth.

@mazingerz88

The sequence of events is the key to a lot of this. As with any major disaster, multiple things go wrong. Otherwise the system would have been able to handle. It wasn’t the earthquake that caused the disaster in Japan, it was the earthquake immediately followed by Tsunami. Multiple events.

If you recall, the sub-prime housing industry collapsed in 2007. CountryWide the largest, went belly-up (along with more than 25 others) due to massive foreclosures. There is a point to @ETpro ‘s argument that the low income housing wasn’t the problem. I don’t disagree but with caveats. If you have 10 loans at $50,000 and 1 loan at $5,000,000, when the market drops in half, you lose $250,000 on the 10 loans and $2,500,000 on the big one. In that respect you can say it wasn’t the low income that caused the problem because the big one caused ten times the loss. All true. The problem with that logic is that all 11 loans were based on the same lending rules. It was the change in lending rules that set us up for all 11 foreclosures.

The other problem comes in when you realize that home sales reached an all time high in 2005, as did sub-prime loans. In 2005, 1,283,000 new single-family houses were sold, compared with an average of 609,000. In addition, 2005 was the peak of the sub-prime loans. Most of these had a three year fixed sub-prime rate and then adjustment after the third year. Coincidentally, that brings us to 2008.

When I first heard that people were getting thier mortgage payment doubled I was skeptical. But I’ve done the calculations and if you had a sub-prime rate in 2005, the payment would actually more than double in 2008. During the period 2005–2007 the sub-prime mortgage industry had collapsed but housing was beginning to stabilize. The derivatives were still being traded hot and heavy and they had weathered the storm of foreclosures and lending bankruptcies, as predicted. No reason to believe they were in trouble. At least no obvious reason.

Everything came together in 2008. Gas prices at historic highs, Mortgages adjusting beyond what anyone could afford, and we were still reeling from the collapse of the sub-prime mortgage industry. So what was the first domino? Personally I still think it the the gas prices. They didn’t create the mess, they just gave us a gentle shove, which toppled over the cliff. Would we have gone over anyway? Probably. And there is no question the derivatives compounded our problem.

@Jaxk Thanks. But this part specially interests me, During the period 2005–2007 the sub-prime mortgage industry had collapsed but housing was beginning to stabilize.

I was under the impression sub-prime mortgage industry though separate is like a twin in the same body as that of the housing industry. It seems there is no way they won’t correlate all the time. One of the guys who made hundreds of millions betting the other way knew it will all collapse eventually when he got a sample of files proving housing loans were made without enough financial support documents. He found the obvious reason simply because he scrutinized at the bottom. The rising of gas prices as first domino makes great sense. Yet for all its useless intent but maybe not purpose, I still wish there were no derivatives domino in the line up. That would have created a gap to break the toppling sequence

@Jaxk It was so many little things all going wrong at the same time. As for the first domino, I think it may have been the ease with which one could over-extend themselves on non-mortgage credit, and here is my reasoning:

A relatively modest increase in gas prices isn’t bad; even I managed to survive it without too much hassle despite being worse off then than I am now. However, the reason I was able to do so had a lot to do with the fact that, unlike millions of Americans, I didn’t go on a buying spree and rack up all sorts of credit card debt that made it difficult for me to buy gas even before prices started to rise. I lived within my modest means and didn’t borrow against my future to have a better present while many other people looked at the easy credit as free money without realizing the implications and complications of borrowing heavily.

But that is water under the bridge. It doesn’t matter what the first domino (or the next, or the next…) was since we are in a hole now (ankle deep, but head-first) and there are so many contributing factors that trying to choose just one to fix first is a target-rich environment.

@jerv

The increase in gas was hardly modest. It went from around $2 in 2005 to over $4 in 2008. If you used a tank a weeks (~12 gallons) that means you gas went from $24/week to $48/week. Or an increase of over $100/mo. Basically another payment. Couple that with mortgage payment doubling and many people simply didn’t have that kind of room in their budget. And realistically places like California were hit hardest in the housing drop and also had the longest commutes.

None of this is to determine which to fix first. Just a way to understand what happened. If I say derivatives were not the trigger, I’m not trying to insinuate they weren’t a problem or that they didn’t have a major impact on the recession. I will say however that trying to fix this without addressing Freddie and Fannie is a bit short sited. They were afterall one of the biggest recipients of bailout funds.

@Jaxk Compared to the increases in other living costs like groceries, taxes, utilities, etcetera, I consider the extra $25/week it cost me to be relatively modest, even if it was a rather dramatic increase over the cost of a tank of gas a year prior. Yeah, my gas costs doubled, but my heating costs bent me over a barrel.

I am aware of that. I’m just saying that there are so many things that it could have been and so many things that played a part in the downfall that it is a bit difficult to grasp the full scope of it, whether you are looking at cause or effect.

@Qingu, @jerv and @Jaxk Thank you guys for your great anwers! You’re awesome.