Fun Family Feud!

When I come across a juicy left-leaning article or liberal piece of information, I quickly pass it on to my ultra-conservative family via email. I hope that this constant barrage will gradually indoctrinate them. I sent my family an email about national debt the other day, and it resulted in the following exchange with my Uncle Mike. This is my first email:

National Debt When Jimmy Carter arrived at the White House:

$660 billion.

Added during Carter's four years: $337 billion.

Added during Ronald Reagan's eight years: $1.6 trillion.

Added during George H. W. Bush's four years: $1.6 trillion.

Added during Bill Clinton's eight years: $1.5 trillion.

Added during George W. Bush's seven years, nine months: $4.5 trillion.

Portion of the $9.5 trillion added to the national debt during the past 31 years and seven months that came during Republican presidencies: $7.7 trillion.

Percentage of that $7.7 trillion added during George W. Bush's two terms: 58%.

Could somebody explain again what "fiscal conservative" means?

My uncle Mike, who is decently wealthy, had the following response:

Jeremy,

I'm not annoyed at all, and thoroughly enjoy this type of discussion.

It has been a while since I took Political Science, but I seem to recall that the President has no authority whatsoever over national spending. Isn't that the legislative branch? Since the President has no control over either tax rates or expenditures, this analysis is quite meaningless. It would be informative if it compared the percentage of national debt when the Congress was controlled by Democrats vs. Republicans. Could you find that analysis?

BTW, this banking mess was started by the idea that the government needed to enable more people to buy houses. Sounds great, right? Who could argue? Anybody who would suggest otherwise is clearly an oppressor of the masses, and probably a racist to boot.

The government pushed for Fannie and Freddie to lower their qualification requirements, to guarantee loans that they had not previously guaranteed. Adjustable rate loans with low teaser rates to make it possible for more people to qualify based upon initial monthly payments. 100% loan values when previously 80% was the maximum (That rule was in place to ensure that Fannie and Freddie could take a 20% drop in market value before their guarantee had to be met. Basically, Fannie and Freddie went from guaranteeing that home prices would not drop by more than 20% to guaranteeing that home prices would not drop PERIOD.) Then they offered no-documentation loans for those who still could not qualify or were just frauds. These policies, NOT deregulation, caused a massive increase in the demand for homes, which naturally caused a dramatic increase in the price of homes. Fannie and Freddie were now effectively guaranteeing that the 50% home price increases seen over the past 8 years or so would never retreat.

Which party do you think was most influential in pushing these new policies and regulations through? Which party would think that, "it's not fair" that only wealthy people can afford a big house in the suburbs? Which party's current VP and Presidential candidates were amongst the top 5 recipients of campaign contributions from Fannie and Freddie?

Here is what it comes down to:
Do you believe people are entitled to what they earn through their talents, efforts, and decisions? (Capitalism)
Or do you believe that everyone should have the same rewards, regardless of their talents, efforts, and decisions? (Communism)

Do you believe that EVERYONE is entitled to a big house in the suburbs? Your presidential candidate certainly does!

Mike

Well, I hate those damn Reds. He almost had me convinced. Here's my response:

Hey Mike,

I appreciate your response, and I enjoy your writing. But, before I can agree with your relegating this presidential election to Capitalism vs. Communism, I must disagree with you on some of your assumptions.

First, if the President has no control over spending, why are we spending any time at all worrying about the tax policies and spending proposals of McCain and Obama? You are correct that the legislative branch must approve or disapprove a budget. However, the president composes the budget. Legislators are largely constrained to either approving or disapproving a spending proposal. Congress does have an effect on the ultimate amount of spending, but the president wields a great deal of power in the tax policies and spending that ultimately gets approved. And, the Bush administration was unfortunately backed by a spend-now-pay-later Republican majority in Congress from 2003 - 2007. I will try to find some analysis of Republican versus Democrat spending when each had control of Congress.

This is from Paul Krugman, a professor at Princeton, who just won the Nobel Prize in Economics today. His analysis seems to directly contradict yours. Here's part of what he wrote:

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

Okay, its me again. “Owning a home lies at the heart of the American dream.” A quote from Bush following his proposal in 2002 for a set of policy initiatives designed to increase homeownership. He's a republican, right? Here's a clip from a 2004 White House press release from the Bush administration:

Expanding Homeownership. The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security. In June 2002, President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade. Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago. President Bush's initiative to dismantle the barriers to homeownership includes:

American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families;

Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes;

Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and

Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners.

So, the Bush administration saw increasing homeownership as an end goal. The result? No foresight into reasonable regulations and safeguards against predatory lending. Further, the deregulated banking environment (McCain: The Deregulator!) allowed for commoditization and securitization of the mortgages, resulting in the mortgage-backed security. These securities allowed private lenders to issue no-collateral, no-documentation loans that they could pass off to investors in a matter of days. This relived them completely of their obligation to lend responsibly.

Further, here's a clip from a New York Times article about McCain's disingenuous ties with Freddie and Fannie:

It turns out that the Washington firm of Rick Davis, Mr. McCain’s campaign manager, was profiting handsomely from Freddie retainers until the government took over the mortgage-finance companies last month amid the credit crisis.

Mr. McCain insisted that Mr. Davis had no involvement with his business for several years. But he appears to have been benefiting from the $15,000 a month that Freddie paid the firm from the end of 2005 through last August. Previously, Mr. Davis was paid nearly $2 million across five years in running a group set up by Fannie and Freddie officials to beat back stricter regulation.

The good, the bad and the ugly of lobbying are well known, but it’s a stretch for a man with 25 years in Washington to demonize it. His brain trust is heavy with consultants and lobbyists. Other McCain aides with past ties to the lending companies are the strategist Charlie Black; Wayne Berman, deputy campaign finance chairman; and Mark Buse, chief of staff at Mr. McCain’s Senate office.

When a lack of regulation in the mortgage industry lead to this crisis, and republicans pushed for more homeownership without further oversight, I don't see how McCain comes out on top. Obama certainly doesn't believe EVERYONE is entitled to a big house in the suburbs, and neither does McCain. However, McCain believed, up until a few months ago, that Wall Street and our nation's economy should operate with as little regulation and oversight as possible. This collapse of our economy has proven that this ultra-free market stance simply doesn't hold water. McCain has said himself that he doesn't know much about the economy. His advisors? Phil Gramm, a likely choice for Treasury secretary, is a huge deregulator who took special care while in the Senate to prevent oversight of financial derivatives. The very derivatives that lead to the collapse of AIG and Lehman. House Republicans recently recommended, as a solution for the financial crisis, that we eliminate capital gains taxes. A troubled financial institution has no capital gains to tax! The intellectual state of the Republican party is in a sorry state.

Okay, I've gone on long enough. I hope you can see, at least, that I am not of my beliefs because I believe in socialism or communism. Quite the opposite, I see realism and intelligence in the Democratic party right now, and don't see Obama as having the socialist doctrine you assign to him.



Jeremy

Hawt business, I thought. But, there's no convincing my Uncle Mike. Here's the finale. He sounds pretty reasonable until he starts talking about forced labor camps...

Jeremy,

You have a significant advantage in time to do research on this topic! I’m also disappointed that you would find a Princeton Nobel prize economist’s opinions more credible than mine!

The President makes a budget proposal, but my recollection is that the congress just calls this “DOA” and creates their own budget. I don’t think the congress is limited in any way by the President’s budget proposal. The President’s only choices are to veto the congressional budget or approve. Congress has refused to allow him a line-item veto, so he has to approve or disapprove the congressional budget in its entirety. But like I said, it has been a long time since I took Government class. The tax policies of McCain and Obama are fairly meaningless, other than their ability to convince Congress to follow these policies or veto proposals that differ from their policies. The Executive branch has much more to do with foreign policy than it does with the economy, but the American public doesn’t realize that and blames the President for everything. I think the American public should select Congressmen based primarily upon fiscal policy and Presidents based primarily upon Foreign policy.

I am also fairly certain that the President cannot pass laws to prevent the creation of mortgage-based financial derivatives – that would again be up to congress. Who has been in charge of all of the congressional finance committees in the recent past? Weren’t both Obama and Biden chairmen of certain finance committees, which is why Freddie and Fannie gave them so much money?

Its pretty clear that both parties had ties to Fannie and Freddie, and thanks for reminding me about sub-prime not being guaranteed by them. However, I believe that they lowered their limits for what they accepted for their guarantees, making their “prime” mortgages more risky. The run-up in prices (bubble) also erased the safety margin that the down payment requirements were meant to provide. I also think that the government regulators (not de-regulators) forced them to lower these limits several years ago. I would appreciate it if you would set me straight on these topics if I am mistaken.

Overall, do you really think that Republicans were more heavily involved than the Democrats in efforts to increase home ownership by people who could not afford them? Is that really the Republican M.O.? There is nothing wrong with that goal, but the methods were disastrous - reasonably predictably so.

Do you not also agree that Obama’s proposal to increase taxes on people making over $250K while reducing taxes for everyone else is income redistribution? Isn’t income redistribution the very heart of communism?

What is fair about using the rules of democracy to enable the majority to confiscate the earnings or belongings of a minority? Is that just OK since the minority is rich in this case? Would you also be in favor if the employed majority voted to force the unemployed minority into forced labor camps? Or if the majority of people over age 25 voted to confiscate the earnings and belongings of those under age 25? What’s the difference?

The financial crash certainly has narrowed the asset gap between the rich and the poor, but I’d prefer that the poor get rich rather than the rich get poor! I think history shows that attempts to ensure that the rich and poor share the same standard of living results in everyone having a very poor standard of living. The US Constitution calls for equal opportunities for all, not equal assets for all.

Finally, I think it is trouble for our country whenever EITHER party has control over both the congress and the presidency!

Mike