The Weiner Component #154 – President Obama & the Republican Party

Official photographic portrait of US President...

Traditionally the Republicans stand for smaller government and the Democrats for a system responsible for the welfare of it citizens.  This means that the Republicans want more individual freedom and choice for the citizens, including the right to starve or go without proper medical care through a lack of funds.  The Democrats are more socially responsible and feel a need to take care of those who cannot take care of themselves.

 

Perhaps one of the most ardent Republicans was President Ronald Reagan who continually talked about “government being the problem.”  He voiced a desire for less government but left Washington at the end of his two terms in office with a far larger government than that with which he had begun eight years earlier.

 

In line with their desire to lower federal costs and weaken or do away with Obamacare, which was based upon a Republican model, the Republicans have recently won a pyrrhic victory against the 2010 law, Affordable Health Care.  Around May 12, 2016 a Federal Judge, initially appointed by a Republican President, found the practice of the Federal Government of helping to subsidize premium payments for those who cannot afford to make them, illegal since it was not specifically mentioned in the law.  The 38 page decision by the judge who reasoned that since the law did not specifically state this practice, the act of doing so was illegal.  The judge, however, did not put her decision into immediate operation.  Instead she allowed the practice to continue until after her decision is appealed.  Way to go Republicans, attempting to balance the budget on the backs of the poor who may lose their medical coverage!

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Watching the progress of Congress by both the Republicans and the Democrats one gets the impression that nothing ever gets done.  No necessary laws ever get passed.  The House of Representatives has given itself a 110 day legislating year; they are working a three day week, not including holidays.  The Senate will meet for a somewhat longer period.

 

The two political parties began the preliminary process of choosing their presidential candidates early in 2016.  In the Republican state preliminary elections and caucuses the initial debate between the possible candidates dealt with how bad the present administration is and how a Republican president would make the country great again.  It’s as though nothing has happened since 2009 when Barack Obama was elected to the presidency.  It would seem, according to the Republican candidates that there is no history behind the present campaign.  This, of course, is not true.  The history has been ignored or edited, particularly by the Republican Party.

 

The Great Recession, which could easily have been the Greatest Depression in our history, began under the reign of the Republican President, George W. Bush toward the end of 2008, his last year as president.  He took some action but mainly left the problem for the next President, Barack Obama.

 

During his first two years in office, 2009 and 2010, President Obama changed a potential massive depression into a recession, restored the major banking houses in the United States and the automobile industry from bankruptcy by massive government loans and signed the Affordable Health Care Bill into law.

 

At the time both the House of Representatives and the Senate had Democratic majorities.  In the 2010 Midterm Election a large number of Democrats did not bother to vote and the Republicans achieved a majority in the House of Representatives, actually killing any chance for further reform since the Republican philosophy of government tends to be the opposite of that of the Democrats .  In addition since 2010 was a Census Year, the Republicans gerrymandered the states where they controlled the governorships and the legislatures making it easier for them to keep control of the House of Representatives.  In the 2012 Presidential Election the Democrats cast a million-and-a-quarter more votes were cast for Democratic candidates than for the Republican members of the House of Representatives but the Republicans still retained control of the House.  The same thing is likely to happen in the 2016 Presidential Election.

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In the 2016 Primary Elections the Republicans are quite vociferous in stating what President Obama didn’t do.  What they don’t state is that most of the things he is blamed for not doing are functions of Congress.  Congress passes the laws in the United States.  The President can sign or veto a law.  If he vetoes a law Congress can still pass it with a 2/3 majority in both Houses.

 

Basically the current Congress, which has a Republican majority in both Houses, has done virtually nothing since they achieved a Republican majority in 2014 or since the Republicans won control of the House of Representatives in 2011.  Today we have the Tea Party which is an extremely conservative section of the conservative Republican Party that is totally against Big Government and sees all economics as Micro, small economics.  Unfortunately they represent a number of seats in the House and Senate.

 

Economists today understand depressions and recessions and how to properly deal with them.  Economics exists upon two major levels: one is called Microeconomics, which deals with household finances, city, state, and business funding.  The other is Macroeconomics which deals with the Federal Government, which owns the printing presses that print and issue money.  They are two totally different entities.  Except the Republicans do not understand or accept the concept of Macroeconomics.

 

Money today has nothing behind it except the word of the government that printed it.  There is no gold or other precious metal that today stands behind any currency.  The amount in circulation is supposed to be regulated so that there is enough to easily carry out all the business functions within the nation and between nations.  Unfortunately this does not always happen and inflation or deflation can occur.  In the United States the Federal Reserve controls the amount of cash in circulation.  In most other nations there is generally a National Bank that does this.  This process is Macroeconomics.

 

The National Debt, of which the Federal Government owns over 50% of its own debt and will, at times, use it to control the amount of currency in circulation.  This was done recently by the former Chairman of the Federal Reserve, Ben Bernanke, for over a two year period adding 85 billion dollars a month to the National Cash Flow.  It was gradually ended by the current Chairperson, Janet Yellen.

 

The members of the Republican Party do not appreciate or understand any of this.  From statements made by various Congressional members of the Tea Party and other Republicans their understanding of economics is based upon raising a family, Microeconomics.  They see everything in those terms.  One has an income, taxes, and one can spend it.  If an individual or country wants to spend more he has to borrow money which, in turn, has to be paid back with interest.

 

That seems to be the limit of their understanding.  It can lead to recessions and depressions.  Donald Trump has added another level to this misunderstanding.  He seems to think the government can renege on part of its debt as he has done in business with three bankruptcies.   Statements like that can destroy the value of the dollar, particularly if he were to be elected president.

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To say that the Republicans have done nothing is to give them positive credit.  Instead they were able to get through the Budget Control Act of 2011 which began on March 1, 2013.  This was the sequester, automatic cuts across the board on all government programs with the exception of Social Security, Medicaid, federal pensions, and veteran’s benefits.  These would cover all other military and discretionary programs every year until the year 2021.  Medicare rates were reduced 2%.  Sequestration also resulted in unpaid time off to many federal government workers, this was known as furloughs.

 

These cuts during a recession tended to shrink the economy and slow recovery.  Interestingly by 2015 the military was complaining that with the sequester cuts their effectiveness was significantly decreasing.  From that time on Congress tended to pass yearly bills ignoring the effects of sequestration upon the military.

 

Also in 2013 the House of Representatives, with hefty leadership by Senator Ted Cruz who is not even a member of the House, shut down the Federal Government from October 1st through the 16th.  Government operations resumed on October 17, 2013.  800,000 government employees were indefinitely furloughed.  1.3 million other government employees were required to report for work without a known payment date.  The Republican led House wanted to defund the Patient Protection and Affordable Care Act.  They attached this to the Government Funding Bill.  The Democratic led Senate removed it from their version of the Bill before they passed it.  The Conference Committee, which consisted of representatives from both Houses of Congress, reached an impasse.  The cost of this shutdown is estimated at $20 billion.  So much for Republican frugalness!

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It should be noted that our understanding of economics has come a long way since 1929 and the Great Depression.  We understand the root causes for the economic waves that bring about these changes and we understand how to deal with them when they occur to lessen or mitigate their effects upon society.  But in order to do this we need both the President and Congress acting together as a cooperating unit.  This we have not had since 2011.

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By 2008 the Real Estate Hedge Fund industry crashed in the United States.  Properties like individual homes dropped almost overnight to a fraction of their inflated values.  Millions of people, who had been encouraged by the financial institutions to use their homes like bank accounts by continually remortgaging them, were suddenly underwater on their loans, owing more on the property than it was then worth.  Employment also phenomenally decreased.  Most banking houses were over-extended and on the point of bankruptcy.  The Bush Administration in its last year in office lent public funds to some of the banks to keep them afloat.

 

In 2009 and 2010 there were both a Democratic President and a Democratic Congress.  The massive depression that would have been greater than that of 1929 was avoided by further public loans to the banking industry.  Patient Protection and Affordable Health Care or Obamacare, which incidentally was based upon a Republican plan, came into existence.  It was passed strictly on a party basis; no Republican voted for it in either House of Congress.  The American auto industry was also saved from bankruptcy by public loans.  Incidentally it should be noted that all these loans were eventually repaid with interest.

 

From 2011 on the Republicans achieved a majority in the House of Representatives.  Thereafter no bill was passed by the House that would lessen what was then the Great Recession.  In fact the bills passed by the House tended to exacerbate the unemployment by not only shrinking the Federal Government but also curtailing the amounts of monies that went to the individual states, forcing them to reduce            some of their programs and lessoning their levels of employment.

 

Mitch McConnell, the then minority leader in the Senate, stated that the Republican goal was to make Barack Obama a one term president.  The Republican attitude from that time on was to support absolutely nothing that President Obama supported.  Economic conditions in the country became secondary next to this goal.  The House Republicans did nothing that might reflect positively upon President Obama.  When he proposed a bill to create jobs by improving the outdated infrastructure of the U.S. the bill never even came to the floor of the House of Representatives for consideration; it was totally ignored.

 

President Obama continued to attempt to work with the Republicans for the next two years with no success.  By 2012, when he ran for a second term, it would seem that he understood that there was no cooperating with the Republicans.

 

President Obama and the Chairman of the Federal Reserve, Ben Bernanke, were able to use Creative Monetary Policy to improve economic conditions in the country.  The Federal Reserve added $85 billion a month for over two years to the National Cash Flow.  They did this by spending $45 billion a month buying up mortgage paper and also by purchasing back $40 billion in government bonds monthly for over two years.  The program was finally reduced by 10 billion a month until it was completely withdrawn.

 

The effect of this action was to buy back millions of pieces of mortgages in all fifty states, each one of which had been split into hundreds of pieces.  In essence these properties belonged to no one, as no one owned over 50% of the mortgages.  Without this action by the Federal Reserve these properties would have been lingering throughout the economy for the next decade or more before they were sold for back property taxes by the local governments.  This act gave the people who had not walked away from their underwater properties and still lived in these homes the ability to continue living in them without the possibility of foreclosure.  There was no way the government could have matched up all the pieces of all the properties in all 50 states to claim ownership of any of them.  Generally the money that would have been used in paying off the loans was spent in the overall economy creating more employment.  It was a giveaway by the Federal Government which was probably more than returned in local, state, and federal taxes.

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With the upcoming Presidential Election the Republicans are blaming President Obama and the Democrats for not doing anything to run the country properly.  They seem to have forgotten the Real Estate Crash of 2008 which took off during the Reagan Administration and continued from there until the 2008 crash.  They seem to have forgotten President George W. Bush’s unnecessary war with Iraq which destabilized the Middle East and began the situation which exists there at present.  Actually they have forgotten everything negative that can be attributed to them.  And all of these things have been blamed upon President Obama and the Democrats.

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The actual Presidential Election should be interesting.  If Donald Trump is elected president he has practically promised to get rid of ISIS quickly and make America Great Again.  He seems to feel that he can solve all major international problems, whether he understands them or not, within the first 100 days or less.

 

If Hillary Clinton is elected and she has a Democratic Congress she can be expected to move successfully in the direction of solving many of America’s domestic and international problems.  If, however, the House of Representatives retains its Republican majority then the country will probably experience the same gridlock it has under President Barack Obama.

The Weiner Component #147 Part 2 – Money & the Federal Reserve

English: Paul Volcker, former head of the Fede...

English: Paul Volcker, former head of the Federal Reserve Board . (Photo credit: Wikipedia)

Unfortunately economics is not an exact science and different economists can hold different views about what should be done.   However there are basic principles that all economists adhere to and the overwhelming majority of economists do believe in the use of both Fiscal and Monetary Policy.  Many, if not most, Republicans do not believe in either of these processes.  Fiscal Policy has to do with Congress passing laws that enhance employment throughout the country.  This is extremely important at present because the overall unemployment rate is 5% and the country’s infrastructure is still well into the 20th Century; it desperately needs upgrading and modernizing.  Monetary Policy consists of the controls exercised by the Federal Reserve, essentially regulating the amount of currency in the National Cash Flow, its flow through the overall economy, and the use of money throughout the economy.  Many Republicans equally oppose this agency.

 

Basically one of the major difference between the Republicans and the Democrats is their positions upon these two uses of economics.  The Democrats believe in the overall principles of economics and using its tools while the Republicans do not.  They hold that an unfettered Free Market will make all the proper decisions within the society.  Their solution to recessions or depressions is to lower taxes for the rich, limit any kind of regulation and let the economy take off with this new financial investment.  This Supply Side Economics was first advocated by the Ronald Reagan Administration.  It didn’t work then and it isn’t going to work now.  Point of fact, it was this type of behavior that brought about the Bankers Depression of 1907, the Great Depression of 1929, and the Real Estate Crash of 2008.

 

But the Republicans seem to be oblivious to the past, particularly their own errors in the past; they are only interested in the near future and substantially ignore what has happened and their own mistakes, always proposing to do the same things again.  For example: not too long ago, Jeb Bush vowed to cut taxes for the very wealthy and for corporations when he became president.  He would reduce the top income tax bracket from 39.6% to 28% and corporate taxes from 35% down to 20%.  This would mean that those not in the upper 5 or so percent would be paying a higher percentage of their incomes in taxes.  His rationale, I assume, would be the application of Supply Side Economics which didn’t work earlier or ever.  The theory being that by lowering taxes for the rich the Federal Government would take in more tax revenue.  So much for reasonable thinking!

 

Of course Jeb Bush claims to have been a phenomenal success as the former governor of Florida.  He seems to have forgotten or ignores some of the disreputable things he did as governor.

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In 1964 Lynden B. Johnson, after finishing the late President John F. Kennedy’s term in office, won the Presidency on his own in 1964, running against Republican Conservative Barry Goldwater.  In his prior two years in office he had pushed through his “Great Society” legislation, extending, among other things, Civil Rights, the Voting Rights Act, Medicare, Medicaid, and his “War on Poverty,” that helped millions of Americans rise above the poverty level.

 

But Johnson also, it would seem, had an ego problem.  He saw himself as the most powerful man on earth.  He apparently decided that he would have the United States subdue North Viet Nam and make the country into a democratic democracy through the use of U.S. military power.  In 1964 he escalated involvement in Viet Nam, bringing military involvement from 16,000 advisors in non-combat roles in 1963 to 550,000 mostly military combatants by early 1968.  Unfortunately he was wrong; even with the use of American military might, he was unable to subdue the Viet Cong.

 

What Johnson attempted was what was generally referred to as a policy of “Guns and Butter.”   The Federal Government would continue its’ domestic policies within the country and at the same time fight and supply a major war.  It meant that the productivity and costs of what was going on within the United States would continue unabated while the additional costs, manpower, and productivity of a major military action would be added to this.  Johnson would supposedly finance this with a small temporary addition to everyone’s income tax.

 

The result of this great increase in productivity and manpower was the beginnings of an inflationary spiral that would continue to escalate gradually, for that and other reasons, and not be ended until the early 1980s with major disruptions throughout the U.S. economy.  In essence the competition between the non-war effort and the war effort for the production of goods and services would begin and continue the inflationary spiral.

 

During the time Jimmy Carter was President, from 1977 to 1981, the inflation rate had reached just under 14.8%, interest rates went up to 18%, and unemployment had risen to just under 10%.  Paul Volcker, as chairman of the Federal Reserve, attempted to stringently drop the interest rate.  He did this by raising it, making money too expensive to borrow.  A number of small businessmen complained strongly to President Carter that they were being forced into bankruptcy by this practice.  President Carter had Volcker back-off.  And the situation continued.

 

The next President, Ronald Reagan, allowed Volcker to carry out this policy.  There was a lot of ensuing misery throughout the United States.  President Reagan got on national television and told people that if there were no jobs in their area then they should go to where there were jobs.  He provided no other information.  Large numbers of individuals packed their cars and their families and took off, following rumors.  For a while there were all sorts of elderly vehicles going from city to city, their occupants looking for work.  Temporary agencies did well at this time.  It took around two years for the inflation rate to drop down to a low single digit, where it has remained since then.  The increase in homelessness that resulted from this is still with us.

 

What, in effect, happened was that the price of borrowing money became too expensive for many companies.  Higher interest rates brought about higher inflation, which in turn brought about a recession.  Multitudes of these smaller businesses that needed short term loans to keep operating could not afford the cost of these loans and went under increasing unemployment during President Ronald Reagan’s first two years in office.  A lesser demand for financial borrowing brought down the cost of loans significantly.    It would drop to a low single digit number, where it has generally stayed since that time.

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Shortly before withdrawing from the 2016 Republican Presidential race Rand Paul, one of the potentially Republican candidates, publically stated that he didn’t trust banks, particularly the biggest bank in the United States, the Federal Reserve.  He obviously considers them on the same basis as the commercial banks and the credit unions that deal directly with the public.  He doesn’t understand that the Federal Reserve is the banks’ bank and to a certain extent controls all the banks that deal directly with the public.  The FED controls all the money in the United States and generally how all the other banks do business.  Its purpose is to have the nation function at its highest level of efficiency and its major tool is the currency that the country uses.  This is Monetary Policy;

 

It’s obvious that Paul and the majority of the elected Republicans and probably some of the Democratic Congressmen could use and should be required to take at least a short course on Macroeconomics.  It would seem that being elected to public office does not require any specific knowledge.  Our Founding Fathers emphasized public education, believing that an educated person would elect the best possible people to public office.  It would seem that they were wrong; many people tend to vote more with their feelings than with their brains.

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The functions of the Federal Reserve can and have strongly affected the condition of the country.  If we briefly examine how the FED worked over the last forty years we get an image of this and also see some of the fallacies of their dealing with the welfare of the nation.  As we’ve seen Lynden Johnson’s enhanced police action in Viet Nam began an inflation spiral that eventually required drastic action to end it in the early 1980s.  Johnson underestimated the productive abilities of the United States to supply both “Guns & Butter” during his term as president in 1964 to 1968 and the result was a gradual growth of inflation for the American public over a sixteen or so year period to require drastic economic actions.

 

In 1979 then President Jimmy Carter appointed Paul Volcker to be Chairman of the Federal Reserve.  He would hold that office for eight years under Presidents Carter and Reagan.  Previously Volcker had been President of the Federal Reserve Bank of New York, one of the FED’s twelve regional banks.

 

We’ve considered his actions against the inflationary spiral.  Under his leadership the FED limited the growth of the National Cash Flow, limiting the money supply and increasing short term interest rates.  At the cost of a heavy recession in the early 1980s he was able to end a high two digit recession and bring about what turned out to be a prolonged period of economic growth.

 

Volcker was succeeded by Alan Greenspan, a conservative economist, who was appointed by President Ronald Reagan.  He chaired the FED from August 1987 to January 31, 2006 for four, four year terms, sixteen years.  Among other things he was criticized by Democrats for wanting to privatize Social Security.  The Republicans held him in awe.

 

President Reagan, who believed totally in Adam Smith’s late 18th Century concept of the Free Market, unfettered capitalism, chose a fellow conservative, economist Alan Greenspan, who shared his views on economics.  It was during this period that the banks were totally deregulated and given the freedom to act as they saw fit.  And it was during the Reagan administration that government regulation of industry was essentially done away with.   The banking institutions, whose deposits were insured by the Federal Government, were now free to act as they saw fit.  Their motivation being Adam Smith’s “invisible hand,” profit.

 

It was during the Reagan years that the mortgage crisis really began.  Prior to this time mortgages were split into a small number of pieces, each held by a separate individual, but now the concept of fractionalization of mortgages into a hundred or more pieces began.  The banks discovered that they could split mortgages into a hundred or more pieces, with a separate hedge fund owner for each piece.  Basically they sold the pieces to investors but maintained control of mortgages, charging fees for every service they performed.  In addition all the banks set up their own agency to keep control of all the property dealings throughout the United States.

 

Traditionally all the property dealings were recorded in the cities and counties where the property was located.  But this was too slow a process for the financial institutions.  They created their own single record keeping institution to keep tabs on all the mortgaging and refinancing throughout the fifty states.  This bank-owned company had so much to do that their error factor was phenomenally high.  Their records became an unfathomable mess.  In essence when it came to foreclosing on a property for nonpayment it was eventually discovered that no one owned enough of the property to foreclose.

 

Throughout the country people were encouraged to continually refinance their homes taking their ever-rising equity out of the properties that were continually going up in value.  Virtually everyone who wanted to could continually take money out of their homes which kept increasing in value.  The banks meanwhile making billions in fees while continually maintaining control of the properties.

 

What was happening from the 1980s on was that the National Cash Flow, the amount of money within the economy, was increasing exponentially.  There was a constant need for money, for all kinds of economic expansion and the banks, for a price, were supplying these funds.

 

Allan Greenspan, as Chairman of the Federal Reserve, essentially sat back and enjoyed this growing prosperity.  He basked in his treatment by Congress.  There was a need for an increase of money in the National Cash Flow on a rational level but Greenspan and his Board of Directors ignored this.  I imagine they felt that if something was going well, don’t change it.  But conditions weren’t really going well, the country was moving toward 2007 when it became obvious the Real Estate Market was headed for a crash.  This was met by denial at the banks.  Many of them raised the amount of money they would lend on a property to 125% of its appraised value.  The crash came in late 2008, toward the end of President George W. Bush’s last year in office.  By then Alan Greenspan had retired as Chairman of the Federal Reserve and been replaced by Ben Bernanke.

 

The easy money policies of the FED and the tax cuts during Greenspan’s chairmanship, which increased the National Debt, have been suggested as a leading cause of the sub-prime mortgage crisis.  Greenspan served for sixteen years.  He resigned on January 31, 2006.  Was he aware at that time of what the future held?  An interesting question, which will never be answered.

 

Ben Bernanke was appointed by George W. Bush on February 1, 2006 as Chairman of the Federal Reserve.  He started as a registered Republican and had been chairman of President Bush’s Council of Economic Advisers.  He was reappointed by President Barack Obama in 2010.  Under his guidance the country went through the Real Estate Crash in late 2008.  Working with President Obama and by the use of Creative Monetary Policy, the two were able to pull the country out of a disaster that could have been greater than the Great Depression of 1929.

 

In his 2015 book Bernanke asserted that it was only through the novel efforts of the FED, cooperating with other agencies of both the U.S. and of foreign governments that they were able to prevent an economic catastrophe far greater than the Great Depression.

 

It is interesting to note that the U.S. House of Representatives, from 2011 on, after the Republicans gained control of that body, not only did no pass any legislation to alleviate the economic crisis but they did push through bills that intensified the effects of the conditions of the sub-prime mortgage crisis by increasing unemployment.

 

Bernanke requested numerous times, both formerly and informedly, to Congress that it pass Fiscal Policy Bills, but was ignored to the point that the subject wasn’t even brought up in the House of Representatives.  This meant that any action to divert a major depression had to be taken by both the President and by the Federal Reserve.  President Obama bailed out the banks and the auto industry and, where possible, used his power of executive privilege.  For his part Bernanke after gradually lowering the interest rate the FED charged banks to 0 to encourage the banks to lend money; he came up with Creative Monetary Policy.  Meanwhile the FED continually added sums of money to the National Cash Flow.  They did this by having the FED in open market operations sell less bonds than they cashed out when they became due.

 

There were two major problems facing the nation at this time.  One was the need for more currency available throughout the economy.  It was first believed that the banks would start again financing mortgages and refinancing homes; but that didn’t happen.  Suddenly the banks were very restrictive in the way they used their funds.  It seemed almost as though the banks got burned by mortgages and didn’t want to deal with them again.  Suddenly the banks had become very stingy with their funds.

 

The second problem dealt with the millions of fractionalized mortgages.  Initially the different banks generated papers from their computers and foreclosed upon multitudes of properties that they didn’t own.  These were homes that they administered for the assorted Hedge Funds.  Initially the courts assumed that the banks would not do anything dishonest.  If fact a number of attorney’s were disbarred for stating that the banks were dishonest.  Eventually the truth came out and the different banking houses paid heavy fines and stopped their foreclosures.  Every major banking house was included in this process and eventually, taken together, the banks paid well over a trillion dollars in fines.

 

The problem was that it was almost, if not totally impossible, to put together 50.1% of many of these mortgages.  Basically no one owned the mortgages for a large percentage of these properties.  In many cases the property values had dropped far below the current debt value of the homes and the former owners had walked away from their properties leaving them vacant.  It was a major disaster that left to itself would take well over one or two decades to straighten out.

 

The major question here was: Who owned what?  These conditions virtually destroyed the housing industry.  Builders could not borrow the funds to build new homes.  And a good percentage of the older homes were so tied up that they couldn’t be sold or bought.  The effect of this was to reduce employment to every industry that was effected by new and older homes and properties.

 

What Chairman Ben Bernanke came up with was his creative Monetary Policy.  Every month for a period of well over two years, ending in 2015 the Federal Reserve spent 85 billion dollars a month.  Forty-five billion was spent on the fractionalized mortgage paper and forty billion dollars was added to the National Cash Flow.  In 2015 the expenditures were reduced 10 billion dollars a month, five billion in mortgages and five billion to the National Cash Flow.

 

By the time Bernanke’s tenure in office had ended as of February of 2014 and Janet Yellen had become the new Chairperson in charge of the Federal Reserve.  It was she who gradually ended the bond buying.  It should also be noted that the Housing Crisis is essentially over.  There is new construction and older homes are selling.  AS of February 2016 all the employment that goes along with this is now in place.  The unemployment level in the United States is down to 4.9%.  Its lowest level since the Real Estate Crash of 2008.

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This blog began with the concept that economics is not an exact science.  Using hinder sight it is easy to pick out the major trends of the last few decades but living through that period and being able to make specific recommendations as to what was needed is not always that easy.  Alan Greenspan was the FED chairman for 16 years, and according to his theories he did what was necessary to keep the country functioning properly.  But he missed the greatest problem during that period and allowed the banks endlessly and with no restrictions, to add money to the economy, bringing about a crisis that could easily have been worse than the Great Depression of 1929.

 

Ben Bernanke was the right economist at the right time to be chairman of the Federal Reserve; but despite the fact that the Republican led House of Representatives absolutely refused to go cooperate with him, he and President Obama were able to mitigate, what has been called, The Great Recession and avoid a Greater Depression than that of 1929.

 

On February 3, 2014 Ben Bernanke completed his second term of four years as Chairman of the Federal Reserve.  The new chairperson was Janet L. Yellen.  She was appointed on that same date and had served as Vice Chair from 2010 to 2014.  Prior to that she was CEO of the Federal Reserve Band of San Francisco and had been Chair of the White House Council of Economic Advisers under President Bill Clinton.  Also she was the first Democrat appointed to that office.  Ms. Yellen is credited with the ability to connect economic theory to everyday life, actually to connect abstract theory to concrete living.

 

Yellen was the one who reduced the $85 billion that was added to the economy monthly by $10 billion, $5 billion from mortgage paper and $5 billion from being added to the National Cash Flow, until 0 was reached in each account.  At that point Ms. Yellen made conditional statements that these accounts could be reopened if the need arose.

 

Presumably she had agreed with Bernanke that the time was right for these changes.  The mortgage crisis was essentially resolved, the amount of currency flowing through the economy was adequate, and inflation was low, by the beginning of 2016 it had dropped to slightly below 1%.  The issue of what to do next seems to have been raising the prime lending rate, which had been at 0% for a number of years since 2008.

 

Janet Yellen had been cautiously putting this off and then toward the end of 2015 the FED raised the discount rate ¼ of 1%.  The discount rate is what the Federal Reserve charges banks for monies borrowed from it.  This establishes the base for what banks charge the public and pay the public for money that the public deposits in them.  The banks translated this increase into a 2 to 3% increase in the interest they would charge on many long term loans.

 

There is an interesting note of irony here.  The monies that the banks lend out and from which they essentially make their profits is all the deposits made by the general public, many of whom have their pay checks automatically deposited into their accounts.  This was the basis of the monies loaned out prior to the 2008 Real Estate Crash which was also insured by the FDIC (Federal Deposit Insurance Corporation).  If these banks has gone under then the Federal Government would have been responsible for replacing all these funds up to ½ a million dollars per account.

 

Prior to the FED raising the discount rate the banks paid most of their depositors 1/10th of 1% interest for their deposits.  The overall interest that the general public received on their bank deposit accounts was under $10.00 a year, too small an amount upon which to even pay income taxes.  That translates into 1 cent in interest for every 10 dollars held by the bank for one year.

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Janet Yellen, the new Chairperson of the Federal Reserve, now has to bring the country back to prosperity, which would be full employment; but there currently are multi-forces pushing the country in different directions at the same time.  All this seems to begin with the international drop in oil prices from over $100 dollars a barrel of oil to what is currently under $30 a barrel.  What has happened with oil is that there are new methods of searching for it and the amount discovered has greatly increased the available supply.  (There are other economic costs.  Fracking tends to increase the possibilities of earthquakes by destabilizing the soil.)

 

This drop in oil prices has economically hurt many of the countries which depend upon their oil revenue to maintain their levels of prosperity.  Some examples would be Venezuela, Mexico, Brazil, Algeria Ecuador, and Egypt.  As the price of oil goes down so do their overall standards of living.  And many of these nations in order to make up the difference pump more oil, which, in turn, lowers the price per barrel even further.  While the lower price of oil noticeably lowers the inflation within many nations it also upsets the balance of trade between nations.

 

Another problem is that the dollar, despite nearly 19 trillion dollars of National Debt is currently considered the strongest currency in the world today.  Within the last few years it has slowly increased in value against all other currencies.  This means that American exports are increasing in price in other countries while their exports become less expensive in the U. S.  This, in turn, hurts American exports, which decrease, and causes the balance of trade to tilt in the direction of the other countries trading with the U.S.

 

Apparently the Japanese Government is now selling bonds within its country with a negative interest rate.  This means that for every $100 borrowed the borrower pays back less than the original amount when the debt becomes due.  China is apparently thinking along those lines with its Central Bank’s discount rate.  They want to bring their overall productivity back up to 8%.  For most countries 2 to 4% is considered a positive growth rate.

 

Within the last few months the Stock Market has gone down well over 100 points, with each point being one dollar in value.  That is the extent that many stocks have decreased in value.  Usually that indicates an oncoming major recession or depression.  What is causing the current drop?

 

Yet gradual economic growth is still occurring in the United States.  Real Estate construction is slowly still improving.  Inflation is very low.  Ultimately the United States uses 22% of the world’s productivity.  The inflation rate is in February of 2016 is 7/10ths of 1%.

 

The basic question is: What should the FED do?  Raise the discount rate another ¼ of 1%?  Leave things as they are?  What?  It would seem to be a major dilemma.  I would currently hate to have to make the decision.

 

On Wednesday, February 10, 2016, Janet L. Yellen, the Chair of the Federal Reserve Board gave her semi-annual report to the standing House Financial Services Committee on the economic condition of the nation and what the actions of the FED will or will not be.

The Weiner Component #144 – The Federal Reserve & the Rising Interest Rate

English: President George W. Bush and Presiden...

In late 2008 the major banking houses in the United States, like the Bank of America, Wells Fargo, JP Morgan Chase, and others by their reckless and irresponsible actions during the prior 28 years, virtually destroyed the Real Estate Industry bringing it to a giant crash.  Not only Real Estate but also the major banking houses themselves, like the like those already mentioned and numerous other banks stood upon the edge of total disaster.  Many of the banking houses were initially saved by President George W. Bush during his last year in office and then, with restrictions, by President Barack Obama.

 

(The CEO of Bank of America complained venomously about the restrictions, cutting executive salaries well below a million dollars.  He wanted to pay-off the government debt so executive salaries could get back to normal.)

 

For the first year of Obama’s Presidency the Fiscal Policy applied by the Democratic Congress dealt mostly with bailing out banks and other industries.  President Obama also saved the auto industry in the United States.  Ford was able to just make it without any government help but its stock tanked to under $5.00 a share for a period of time and then went up to over $14 a share.  General Motors took government loans and its stock, in a bankruptcy suite, was declared valueless by a judge.  Bail out funds and a new issue of stock saved the company.  The original stock holders lost their investment.  Chrysler was saved by a bail out.

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Household property values dropped like large bombs and exploded.  During 2008, when all the indicators foretold oncoming disaster, the bank executives were in denial, in order to continue, financing and refinancing, they raised loan values on properties to 125% of appraised value.  When the Crash came, in September of that year, a goodly percentage of the home mortgages were far above the newly appraised value of the homes.

 

Many of the banks were overextended, too much money had been invested in mortgages which had not yet been converted into fractional pieces and sold to hedge funds.  Many homeowners suddenly discovered that their homes carried greater loans than they were suddenly worth.  A number of them decided to start over and walked away from their properties, leaving empty houses behind.  Values dropped overnight; employment across the country fell significantly.  There was massive unemployment and it was continuing to decrease.  The nation was in a deep recession ready to continue falling into a deeper depression than that of 1929.  It would take at least a decade or more for the housing crisis to be resolved and for the banks to be willing to finance new construction again.

 

At first the banks generated documents on properties they administered but did not own, selling these houses, and keeping the profits for themselves.  This went on until the Courts realized or discovered what was happening; then the different banking houses stopped the illegal process.  The ownership of these homes had been so fractionalized that no one really owned them.  The records on these structures had been so sloppily put together by the banks that it was impossible to establish ownership on many of these structures.

 

The banks, in their rush to make profits, had been in such a hurry to finance and refinance their numerous deals that tracing the ownership of many of these houses was like going through an impossible maze.  They could not find fifty plus percent of the mortgage ownership.  These empty houses would be sold in a few years for back taxes.  The original hedge fund owners lost their investments as their hedge funds became valueless.

 

Many who were able to hold onto their homes would eventually see their properties rise in value.  And many who held on to their homes would eventually lose them by not being able to afford the monthly payments.  It was an impossible mess!

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From 2009 to 2010 the Federal Government had a Democratic majority in both Houses of Congress and was able to apply Fiscal Policy.  In those two years Congress with the aid of the President, Barack Obama, was able to pass Fiscal Polity bills and make executive decisions that slowed down the recession gradually turned the country in the direction of recovery.

 

After the 2010 Midterm Election the Republicans achieved a majority in the House of Representatives.  From 2011 on no Fiscal Policy Bills were passed by the House of Representatives.  In fact, at one point they refused to fund the government, effectively shutting it down for a period of time, and costing the taxpayers several billion dollars in this process.

 

The prospective of the Republicans tended to be and generally still is, what’s happening right now, this minute.  The future to them seems to be an abstraction that they do not deal with.  They seem to be penny wise and dollar stupid.  Immediate savings would be the limit of their understanding.

 

They have wasted millions on pointless hearings such as on investigating Benghazi and other causes which seem to be mainly political, attempting to embarrass a Democratic leader or cause.  And they seem to like to hold their government refinancing bills to the last moment where the bill must be passed or the government will face some sort of disaster.  In 2014 they spent over a trillion dollars financing the government for 2015 and including earmarks for every other cause they supported with friendly legislation all combined into one giant bill of over 1,000 pages that cost the government billions of dollars.  For 2016 they spent 1.25 trillion dollars effecting a 2,200 page compromise bill with the Democrats.  So much for fiscal responsibility!

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In dealing with the 2008 Real Estate Crash the Federal Reserve utilized Monetary Policy.  What happened with the Crash is that the value of a dollar dropped to five or ten cents virtually overnight.  Many people lost their employment.  Most people were also confused as to what was happening.

 

The Chairman of the Federal Reserve at this time was Ben Bernanke.  He had been originally appointed by President George W. Bush.  One of the first things he did was to lower interest rates that the FED charges banks to 0%.  The current Chairperson is Janet Yellen.  On December 16, 2015 she and her Board, which consists of the Presidents of the twelve regional Banks, raised the interest rate from 0 to ¼ of 1%.  They had held it at zero for about seven years.  The average bank account in the U.S. was receiving interest at the rate of 1/10th of 1% per year.  Generally that is not even enough yearly interest to have taxes paid on it.  Most accounts received under $10 a year.  This amount was too small to be reported to the IRS which requires a ten dollar minimum.

 

The object of this move, after the 2008 Real Estate Crash, was to make money very inexpensive to borrow.  Theoretically it was to encourage the banks to loosen their lending policies and encourage economic expansion and thus reverse the Great Recession.  That didn’t happen.  Suddenly the banks became super cautious with their lending policies.  What the banks seemed to go into at this time was investing in the futures market.  This is buying items like food crops that are still growing and assorted raw materials that have not yet been mined months in advance of their coming on the market for sale and then selling these items when they came on the market with a goodly amount of profit added to them.  Here the virtually free money lent by the Federal Reserve to the banks, actually by the taxpayer indirectly, allowed them, the banks, to raise prices on much of the goods the public needed to survive and make a goodly profit on it.

 

It should also be noted that during this period the banks were also paying millions in fines for illegal practices they were and had been engaging in.  I don’t think any of the major banking houses escaped paying numerous multimillion dollar fines.  In all, these fined added up to billions of dollars; but no one went to jail for these breaches of the laws.

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Both Bernanke and Obama had tried to get the Republican House of Representatives to pass Fiscal Policy, laws that would create jobs.  President Obama had presented them with a plan for infrastructure improvement which would create jobs and Chairman Bernanke had stated the need in numerous Congressional hearings and public speeches.  Congress not only ignored them, it passed various measures shrinking the Federal Government and actually exacerbating the recession by causing more unemployment.

 

As the cheap money policy wasn’t working on a large enough scale to noticeably affect the overall economy what was needed was a new plan to encourage economic growth. This was a new creative use of Monetary Policy and the FED came up with one that would loosen currency in the economy and end the “Housing Mess” created by the banks.  This was Creative Monetary Policy.

 

We don’t know who deserves credit for it, whether it was the President, the Chairman of the Federal Reserve, or members of his Board, or for that matter a combination of the three.  But we do know that it worked.  What they did for a period of well over two years was to add 85 billion dollars each month to the National Cash Flow or the available amount of currency in the entire economy, ending the process in 2015 by decreasing the amount by 10 billion monthly until it reached 0.  Of this money 45 billion was used to buy mortgage paper and 40 billion was just added to the existing currency in circulation.

 

In all the Federal Reserve spent over 2 trillion 7 hundred billion dollars in getting rid of the “Housing Mess” created recklessly by all the major banking houses.  If we add to that another 2 trillion dollars we get an image of what the Federal Government spent through the Federal Reserve turning the country around toward economic recovery.  These are the profits the banks and their executives made from the 1980s to late 2008.

 

Somehow I don’t remember anyone in the banking industry publically expressing any remorse.  Particularly I don’t remember any banking executive being sorry about the 2.7 trillion dollars that the public paid indirectly to end the Housing Disaster in a relatively short time.  The only public complaints that came from banking executives was that, under President Obama, they had to take enormous cuts in their million or multimillion dollar compensation packages.  The fact that millions lost their homes and savings was immaterial to them.

 

The weakening of the Dodd-Frank Bill that was passed in 2009-2010 to do away with the causes that had brought about the 2008 Real Estate Crash was going to be done away with when Mitt Romney became President in 2013.  Romney lost that election.  When the Republican dominated House of Representatives passed the bill in 2014 funding the government for the oncoming year on December 11, the Thursday before the yearly Congressional session ended, one of the measures added to the Bill slightly weakened the Dodd-Frank Law.  I suspect they had originally hoped to do completely away with the legislation in 2015 with the last minute Finance Bill that year but it got dropped at some point in the negotiations between the two political parties.

 

Why is it that I feel like a victim from both the banks and Congress?

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In all the Federal Government added trillions of dollars to the currency in circulation and rather rapidly, in a little over two years resolved the “Housing Mess” created by the banks.  By 2015 there were very few houses empty houses in the country and new construction was occurring within all 50 states.  Conditions had moved in the direction of normalization and unemployment had dropped to 5% in the United States.

 

Of the 45 billion dollars that was spent buying up fractional pieces of mortgages throughout the fifty states each month there was no direct way for the Federal Government to ever directly recoup this money.

 

Originally the banks did not like having the properties having to be registered in the counties where they were situated; it was too slow a process.  They set up their own registration agency to handle all these exchanges and were able to get the Congress to pass the legislation that they needed in order to do this.  Their major problem was that the agency was not large enough to handle all these transactions throughout the fifty states.  There had to be at least a 20% error margin; it was probably much higher.  Either the agency was too small to properly record everything or it was too understaffed to properly do this and the assorted banks were not paying enough to fund it properly, or it was a combination of these.  In any event the records were rife with inaccuracies.  It would have taken an incalculable amount of time to straighten out the mess.

 

What the government bought for its 45 billion dollars in mortgage paper a month was billions of fractional pieces of mortgages that were virtually impossible to sort.  Further these came from houses situated throughout the entire United States and its territories.  There was no way sense could have been made out of these.  What the government was doing was buying up the “Housing Mess” that the banks had created and removing “the Mess” from the market where the banks had dumped it.  They were removing “the Mess” from the society and absorbing the loss.

 

The former owners of these houses who were still living in them and paying their property taxes but making no mortgage payments were living in houses that nobody owned and upon which nobody could legally foreclose.  They were, in essence, living for free in these homes that they had formally owned.  They could keep the house for the rest of their lives.  They could even sell the property if they could find a bank that would put a mortgage on the house.  Basically they could spend the rest of their lives in these houses without paying another cent on the original mortgage as long as they paid their taxes.

 

The problem here was that no one knew who really owned those houses.  It could be the Federal Government or it could be a mortgage company or, for that matter, it could be a bank.  It could also be an individual who had purchased the full mortgage from a bank.  If an individual or a mortgage company owned the entire property they would eventually make their presence known and resolve the ownership problem.  But if the mortgage had been fractionalized it was either the government or a defunct hedge fund and impossible to determine ownership.

 

Generally the behavior of these people, who were making no more mortgage payments, was to live well.  Suddenly they had more disposable income and they tended to spent much or all of it.  The result was that this money added significantly to the amount of currency in circulation and helped to eradicate much of the results of the 2008 Real Estate Crash.  It can also be stated that these people who were paying no mortgage could no longer deduct the interest on their housing loans.  Consequently nationally the IRS collected additional billions in taxes from these people across the nation.

 

This was the creative Monetary Policy that the Federal Reserve and its Chairman, Ben Bernanke, came up with.  It worked and with some Fiscal Policy applied by Congress could have totally returned this nation to full economic health.

 

Instead the nation is still at 5% unemployment.  The Republican candidates, like Jed Bush talk about doing away with the Environmental Protection Agency (EPA) as a mean of increasing employment in the United States.  It would seem that they would like to see parts of the U.S. look like some of the Chinese cities, dark with smog at noon, filled with unbreathable air.  But they believe this would increase employment in the country, even if it does shorten lives.

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It should also be noted that the interest rate that the Federal Reserve charged banks was at 0%.  In December of 2015 the new Chairperson, Janet Yellen, announced that they were raising it to ¼ of 1% that is .025%.  That will mean that the banks will raise the interest they pay on bank deposits from 1/10th of 1% to possibly 3/10th of 1%.  For the last seven or so years the public has been funding the banks practically for free.  With this increase the interest paid by the banks might rise enough so that some people, but not too many, will have to pay the IRS a few dollars in taxes on their bank deposits in 2016.

 

We, the public, have been funding the banks with our funds, checks and so forth, practically for nothing.  These monies, up to ½ million dollars per account are guaranteed by the Federal Government through the FDIC, but the banks can and do use the money they continually receive from us in almost any way they see fit for their own profit.  In 2015 the banks are reporting significant profits.  Their executive salaries are in the millions and multi millions.  And for contributing these monies the public ends up not only paying endless fees to the banks but also considerable amounts as middle men in the Futures Market.  The banks freely take a share of the money you earn and spend for your food and other necessary products as the Middle Men in the sale of many of the items people need to survive.

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It should also be noted that with 0% interest paid by the banks mortgage rates dropped to, in some cases, below 3%.  With the Federal Reserve’s action of raising the interest rate charged banks a fraction mortgage rates still dropped.  The amount the banks now pay to the FED is minuscule.  I would assume that they will continue to rise, at least, at the same rate as the first increase.  The public does deserve some return for letting the banks use their monies.

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As a sort of footnote we should remember that the banks are necessary for the national and international economies to properly work.  But we should also note that the major reason for all the banks is to serve the public.  Today it would seem that the major banking houses of the United States and much of the Industrial World serve mainly themselves.  The public seems to be exploited for the benefit of their self-interest, profit.  We, as a nation, might be better off if there was an alternative to the current privately run banking houses in this country.  If nothing else giving the public an alternative to the current banking situation might generate a certain amount of humility in the current banking houses.

 

An alternative does exist; and that is the Federal Reserve.  All the Congress has to do is extend their powers so that they can also deal directly with the public.  They are a government agency that was created in on December 23, 1913 as a result of numerous financial panics.  Their major objective is to serve the public; that is still their major purpose.  The FED has undergone an evolution, particularly in the 1930s after the Great Depression.  If the Congress were to extend their powers they could easily take on the same functions as the private banking houses and allow the public to have a positive banking experience that would operate for the benefit of the public.

 

There are twelve Federal Reserve Districts covering the entire United States.  They can easily establish banking facilities throughout the nation.  This would also give them more ability to positively control the economy.  And they need not totally replace the current private banking houses; they could function alongside them giving the public a choice of where they want to do their banking.  Their existence in this fashion would also insure that the public gets a reasonable return on their banking accounts and it would force the private banks to stay honest.

 

It should also be noted that finances in most industrial nations are run by state owned public banks, like the bank of England or France.