News about the pinheaded things by politicians and governemt.
Posts tagged Democrats
Object Lesson on the Dangers of Out-Sourcing
Sep 24th
No,I don’t mean out-sourcing jobs. I’m talking about the out-sourcing of financial policies. The Unites States has let other countries determine our financial policies, and it had had extreme repercussions. It’s what led to our financial melt down.
Commercial Bank regulations are basically set by the banking regulators of the 20 largest economies (the G-20). In 2001, a rule was implemented by the G-20 that forced U.S. Banks had to hold a much larger capitol cushion for mortgage loans than for mortgage-backed securities.
The result was predictable. U.S. Banks shifted from holding mortgages to holding mortgage-backed securities. Why? Because they could invest more of their capitol. Investing more capitol results in higher returns.
For example, take a Bank with $1 Billion in capitol. If it needs a 50% cushion for mortgages, it can only invest $500 Million. If it only needs a 10% cushion for mortgage-backed securities, it can invest $900 Million in those instead. Shifting to mortgage-backed securities made sense because it allowed the bank to make more money on their investments. This was true even if the securites provided a lower return.
In the above, being able to invest 40% more money in the securities means the mortgages had to have a rate of return at least 40% higher than the securites before they became a viable alternative.
This meant that the mortgage-backed securities did not need to be high-return in order to be attractive to U.S. Banks. The fact is, they weren’t. The Banks primarily bought AAA rated securities. These are low-risk, low yield investments.
Investing in low-risk, low-yield investments is not supposed to expose the investor to high risks. These did, because the nature of the risk was hidden to the end buyer (i.e. the Banks.)
That is not the fault of the Banks buying these securities, it instead lies with the ones giving the loans or bundling them into investments.
Why were risky loans being given out? Pressure from the Government.
Ever heard of Red-Lining? Well, the government began pushing loans to areas that weren’t initially being serviced by loan companies. The reason they weren’t giveing out loans to people in those areas was that they were credit risks. The Government is responsible for the risky behavior, and it wasn’t the Banks buying the mortgage-backed securities that knew of the risky nature of the loans.
And who was bundling the risky loans to disguise the risk? Try Fannie Mae and Freddie Mac.
Two organizations created by the Government and run to a large degree by people coming out of Government service. (Usually the Clinton Administration.)
Then there were the changes to accounting rules that the Government imposed after Enron. That basically cut the legs out from under any body that had bought these securities once people began defaulting on the mortgages. Basically, the Bank was forced to mark the security as worth nothing on its balance sheet.
This was despite the fact that only a small portion of the mortgages backing the security being defaulted on.
Think about that, the Government tells these Banks to treat an asset that has value as being valueless. Is it any wonder they wound-up in financial trouble?
The Government changes the incentives so that mortgage-backed securities become more attractive. They increase the risk of these securities mortgage companies to give loans to people with bad credit. They hide the risk by bundling the mortgages. Then they force the people that buy the “risky” investments to treat them as having no value.
And the Government blames the actions of the Bankers?
Frankly, it didn’t take a genius to see the fiasco coming. After all, if George Bush could see it coming and push for needed changes to stem the disaster it must have been fairly obvious.
In fact, he tried multiple times to change the financial regulations to keep the crisis from occuring.
It’s the Democrats that were running Congress at the time that prevented these attempts that apparently couldn’t see the writing on the wall. Even worse, they’re still running things, and still in charge of financial regulations along with the G-20 that initiated the entire fiasco.
How Unexpected, Democrats Want to Raise Taxes
Jul 13th
Raise your hand if you saw this one coming: Democrats in the House of Representatives announced they were planning to raise taxes. Of course, they announce it late Friday afternoon in an attempt to ensure that the story gets missed by the media.
The tax hike targets high income tax earners and is slated to raise $540 Billion over ten years, in order to pay (in part) for Barack Obama’s Health Care Reform Plan. The rest of the money to pay for the $1 Trillion cost over ten years would come from cuts to Medicare and Medicaid.
The tax comes in the form of a surtax on higher income tax players, and was decided on after plans to tax health care benefits were scrapped due to the intense negative reaction. Other options discussed includes extended the Medicare payroll tax.
A White House aide said the surtax would be 1% for single tax filers earning over $280,000 a year and over $350,000 a tear for couples. The additional amounts for tax filers earning greater amounts (over $500,000 and over $1 Million) with an additional 1.5% for the first group and another 3% for the latter.
Charles Rangel, the head of the House Ways and Means Committee, has suggested that an additional surtax could be set to automatically occur if the Medicare and Medicaid savings failed to occur.
The surtax on higher income wage earners would be on top of the tax hike that will occur in 2010 as the tax cuts implemented under George Bush expire. The top tax rate would be 39.6% after the cuts expire and the surtax proposed by Rangle and his fellow Democrats in the House of Representatives could add an additional 5.5% on top of that. A total of 45.1% for the top wage earners. With a possibility of an extension of the Medicare payroll tax and an additional surtax in 2013 in there are no savings in Medicare/Medicaid.
There’s an additional problem for the Democratic plan. The numbers just don’t add up. If the proposed surtax had been implemented for the 2006 tax period (the last period there are numbers for at the IRS web site) the surtax would have raised roughly $38 Billion. That is $17 Billion short of the amount needed to raise $540 Billion over a ten year period.
What’s worse is that there has been a recession since those numbers were posted. Recession tend to reduce the amount of tax revenues generated by taxing high income wage earners. You also need to factor in the fact the wealthy individuals are those most able to determine what form the money they earn takes. Raise Income Taxes too much and they start having their money come in as Capitol Gains (if the economy is still strong) or as non-taxable income. (Ever heard of tax-free Munis?)
How hard are people going to work if the Federal Government takes half of what they earn?
Then there’s the economic impact of raising taxes, especially on the higher income earners. Many of the higher wage earners are business owners who report their company’s profits as personal income. Raising taxes on these people removes money from the company that it can use to hire new employees or to expand it’s operations. This slows economic growth, and if you raise taxes enough you can actually cause theeconomy to shrink.
Raising taxes at any time is usually a bad idea. Raising taxes on the people that produce jobs in the middle of a Recession is just idiotic.
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