October 25, 2010
One out of every 34 Americans who earned wages in 2008 earned absolutely nothing — not one cent — in 2009.
The stunning figure was released earlier this month by the Social Security Administration, but apparently went unreported until it appeared today on Tax.com in a column by Pulitzer Prize-winning tax reporter David Cay Johnston.
It’s not just every 34th earner whose financial situation has been upended by the financial crisis. Average wages, median wages, and total wages have all declined — except at the very top, where they leaped dramatically, increasing five-fold.
Johnston writes that while the number of Americans earning more than $50 million fell from 131 in 2008 to 74 in 2009, those that remained at the top increased their income from an average of $91.2 million in 2008 to almost $519 million.
The wealth is astounding, says Johnston. “That’s nearly $10 million in weekly pay!… These 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers.”
And I’m in agreement with Johnston’s assessment as to the cause behind this.
It is the latest, and in this case quite dramatic, evidence that our economic policies in Washington are undermining the nation as a whole.We have created a tax system that changes continually as politicians manipulate it to extract campaign donations. We have enabled ”free trade” that is nothing of the sort, but rather tax-subsidized mechanisms that encourage American manufacturers to close their domestic factories, fire workers, and then use cheap labor in China for products they send right back to the United States. This has created enormous downward pressure on wages, and not just for factory workers.
Combined with government policies that have reduced the share of private-sector workers in unions by more than two-thirds — while our competitors in Canada, Europe, and Japan continue to have highly unionized workforces — the net effect has been disastrous for the vast majority of American workers. And of course, less money earned from labor translates into less money to finance the United States of America.
I also think the actions of the Federal Reserve are to blame here as well. Greenspan inflated a nasty bubble when he lowered interest rates far below where they should’ve been. All the cheap credit flowed into the housing sector and home prices doubled within a very short time period. As my last post indicated, the “Rent Is Too Damn High”. I honestly do want a campaign button. People who are already struggling are having to pay twice as much rent as they should be. Half of the prosperity during the Clinton years was a false prosperity induced by people borrowing against artificially inflated home equity and spending it in the economy.
You can see that during the Clinton years, Greenspan really pumped up this housing bubble. Then ironically, to further stimulate an economy cheap credit had already badly damaged, the Fed during the Bush and Obama administration continued to lower interest rates in hopes to further “stimulate” the economy. This leads to even more mal-investments and misallocation of capital resources. Once interest rates hit the floor, what’s left to do? They don’t want to increase taxes so they print money instead.
This business cycle induced by the Fed manipulating the interest rates is really a wonder to behold.
Step 1: It all begins when they lower interest rates, inflating asset bubbles and burying everyone in debts.
Step 2: Because the prices are artificially high due to cheap credit policies, once the credit faucets run dry, you run into a deflationary period as prices try to return to normal levels.
The economy begins to depend on cheap credit to survive but it’s an unsustainable course. The Fed knows it can’t continue its low interest rate policies, but if it were to increase interest rates it would bring on deflation. As Friedrich Hayek and Ludwig von Mises point out, however, there’s nothing that can be done to fix this. A price correction is inevitable. Homes and other asset bubbles are going to deflate back to true market levels.
Step 3: The politicians wet themselves when they think of deflation in a debt-driven economy, and nobody knows what to do. They try to prolong the inevitable by slowly lowering interest rates, lower and lower. This begins the “how low can you go” game. More and more economic resources are misallocated and the economy never recovers.
step 4: Interest rates hit 0 percent and the economy still isn’t being “stimulated”. They fear lowering taxes. In desperation, they oftentimes turn to printing money in stimulus programs.
The end result? Slow economic erosion.
And all of this happens because of the central bank screwing with interest rates. I hate central banks. And low interest rates aren’t the only way they can screw things up.
As you can tell from the chart, if interest rates are hiked up too high, you also get economic problems. Businesses can’t adapt quickly enough to policies like this. They don’t know what to expect. Should they expand their operations, or will credit rates ramp up out of nowhere? How can they properly perform economic calculation?
One pattern you see from the chart is that when they lower interest rates, then quickly ramp them back up, you get recessions. When Bernanke increased interest rates in 2004, this caused all kinds of economic problems — especially to all those who had taken out adjustable rate mortgages. Their payments shot up out of nowhere. This is an example of misallocation of resources. People are in homes who shouldn’t be in homes. They can’t afford them.
Government programs, such as the Community Reinvestment Act (CRA), led to considerable subprime lending (near 6% of subprime loans). In 2002, we had the American Dream Down Payment Act, subsidizing down payments for low income buyers. A lot of Republicans like to place all the blame on government programs like these, but the majority of subprime loans came from the private lending institutions, induced primarily to so by the low interest rates.
Mortgage fraud was everywhere; lending standards were lax; Rating agencies were giving triple A ratings to anyone and everyone. Wall Street went into a speculative-frenzied casino mode, betting on who will and will not default on their mortgage loans. The CDS and other derivative markets went nuts.
The recent use of subprime mortgages, adjustable rate mortgages, interest-only mortgages, and stated income loans (a subset of “Alt-A” loans, where the borrower did not have to provide documentation to substantiate the income stated on the application; these loans were also called “no doc” (no documentation) loans and, somewhat pejoratively, as “liar loans”) to finance home purchases described above have raised concerns about the quality of these loans should interest rates rise again or the borrower is unable to pay the mortgage. In many areas, particularly in those with most appreciation, non-standard loans went from almost unheard of to prevalent. For example, 80% of all mortgages initiated in San Diego region in 2004 were adjustable-rate, and 47% were interest only.
Some borrowers got around downpayment requirements by using seller-funded downpayment assistance programs (DPA), in which a seller gives money to a charitable organizations that then give the money to them. From 2000 through 2006, more than 650,000 buyers got their down payments through nonprofits. According to a Government Accountability Office study, there are higher default and foreclosure rates for these mortgages. The study also showed that sellers inflated home prices to recoup their contributions to the nonprofits. On May 4, 2006 the IRS ruled that such plans are no longer eligible for non-profit status due to the circular nature of the cash flow, in which the seller pays the charity a “fee” after closing. On October 31, 2007 the Department of Housing and Urban Development adopted new regulations banning so-called “seller-funded” downpayment programs. Most must cease providing grants on FHA loans immediately; one can operate until March 31, 2008.
Some believe that mortgage standards became lax because of a moral hazard, where each link in the mortgage chain collected profits while believing it was passing on risk. Mortgage denial rates for conventional home purchase loans, reported under the Home Mortgage Disclosure Act, have dropped noticeably, from 29 percent in 1998, to 14 percent in 2002 and 2003.
In March 2007, the United States’ subprime mortgage industry collapsed due to higher-than-expected home foreclosure rates, with more than 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale. Harper’s Magazine warned of the danger of rising interest rates for recent homebuyers holding such mortgages, as well as the U.S. economy as a whole: “The problem [is] that prices are falling even as the buyers’ total mortgage remains the same or even increases. … Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse.” Factors that could contribute to rising rates are the U.S. national debt, inflationary pressure caused by such factors as increased fuel and housing costs, and changes in foreign investments in the U.S. economy. The Fed raised rates 17 times, increasing them from 1% to 5.25%, between 2004 and 2006. BusinessWeek magazine called the option ARM “the riskiest and most complicated home loan product ever created” and warned that over one million borrowers took out $466 billion in option ARMs in 2004 through the second quarter of 2006, citing concerns that these financial products could hurt individual borrowers the most and “worsen the [housing] bust.”
Then Wall Street’s gambling got them in trouble. The banks dump all their bad assets on us, the taxpayers. Congress worried that if the casino imploded on itself, we’d all be wiped out. The banks were infused with billions. Do they learn from their wicked ways? Nah. They continue gambling and pay back the government with money they earned gambling in this casino.
Has there been any significant reform and regulation put in place? Nah.
You know what I hate about all of this? It’s all bankers, government, and big Wall Street finance groups. The “shadow banking” complex, as many economists call it. Us normal working people are pulled into this corrupt system and what are we supposed to do? These financial oligarchs are raping us.