PeakTrader.com

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PeakTrader:

Too much regulation hurts low income Americans and small businesses (which create the vast majority of jobs) the most. Reducing tax rates raises disposible income to raise consumption + saving = income. Lower tax rates also reduces the cost of production, particularly for small businesses.

Regulations have benefits. However, an economy may not be able to afford those benefits, particularly when the total costs are too high and exceed the total benefits. There are opportunity costs, e.g. slower job growth or higher prices for more regulations or tougher regulatory standards when they’re already excessive.

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Regulations tend to be regressive, tend to raise prices or lower real wages, and an economy cannot absorb too much regulation, resulting in slow growth, e.g. for a long period of time, until the economy becomes large enough to absorb those regulations.

And, you didn’t really answer my question. For example, would you rather have a hundred times more billionaires and a higher standard of living or no billionaires and a lower standard of living?

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Creating wealth is not a zero sum game. It not only raises living standards, it generates growth, employment, tax revenue, etc. The U.S. needs to make it easier, not harder, to create wealth.

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Yes, government increased regulations substantially, since the 1970s, in education, health care, energy, housing, small business, finance/banking, environment, manufacturing (fuel and safety standards), etc..

Federal regulations, not including state regulations, cost the U.S. $2 trillion a year.

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There should’ve been more regulations on Fannie and Freddie. The moral hazard they created and generated in the housing market turned out to be an expensive disaster.

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And, I stated before, if lending standards began to tighten when the Fed began the tightening cycle in 2004, the housing/financial crisis could’ve been averted, resulting in a milder recession.

Instead, lending accelerated, the economy peaked in 2007, and the credit market froze in 2008. It was a boom that inevitably turned into a bust.

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What Caused the Financial Crisis
November 16, 2010

“Starting in the late 1990s, the government, as a social policy to boost homeownership, required Fannie Mae and Freddie Mac to acquire increasing numbers of “affordable” housing loans. (An “affordable loan” is made to people who normally would not qualify.)

By 2007, 55 percent of all loans made by Fannie and Freddie had to be “affordable.” By June 2008, there were 27 million subprime housing loans outstanding (19.2 million of them directly owed by government or government-sponsored agencies), with an unpaid principal amount of $4.6 trillion.”

“What we know is that almost 50 percent of all mortgages outstanding in the United States in 2008 were subprime or otherwise deficient and high-risk loans.

The fact that two-thirds of these mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations, is irrefutable evidence that the government’s housing policies were responsible for most of the weak mortgages that became delinquent and defaulted in unprecedented numbers when the housing bubble collapsed.

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Bush Administration Tried to Reform Freddie and Fannie Five Years Ago
CBS News
February 19, 2009

“Karl Rove, “We were briefed as far back as 2001 about the problems with Fannie and Freddie; in fact, we moved aggressively in 2004 to regulate Fannie and Freddie, actually got a bill through the Senate Banking and Finance Committee only to have it filibustered by [Sen.] Chris Dodd.”

Rove said Fannie Mae and Freddie Mac “accelerated their imprudent behavior after we attempted to regulate them. They bought almost as much mortgage debt from 2005 through 2008” as they bought in their first 30 years of their existence.

“In fact, in 2003, when we sent our first members of the Cabinet up to talk about this on Capitol Hill, Barney Frank had a hearing in which they basically beat up everybody we sent up there in pretty vociferous language.”

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Mayor Bloomberg:

“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.

Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.

But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves.”

Michael Bloomberg is an American businessman and politician who is currently Mayor of New York City. With a net worth of $25 billion. He is the founder and 88% owner of Bloomberg L.P., a financial data-services firm.

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Mike, exchanging sub-prime loans isn’t the same as creating sub-prime loans.

No bank would lend money to people with no income and no down-payment, without the encouragement and support of government.

How did QE cause TARP to be paid-off? The Fed is making tens of billions of dollars a year on interest off those securities, which it gives to the Treasury to help pay-down those huge Obama federal budget deficits. Eventually, those securites mature or expire.

Fed Turns Over $77 Billion in Profits to the Treasury
January 10, 2012

“The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer.

Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.

Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.”

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It should be noted, the $700 billion in TARP by the Bush Administration was almost or entirely paid back, with interest, under the Obama Administration. So, those huge Obama budget deficits would’ve been even worse without the TARP repayments.

Moreover, the “recovery” is actually weaker than reflected in GDP growth, under the Obama Administration, because trade deficits shrunk substantially as a percent of GDP, which adds to GDP growth.

Let’s give credit where credit is due and show what a train wreck this “recovery” has been for the global economy, U.S. states, and U.S. households (it’s been a recoverless expansion, since June 2009). I’m amazed stronger growth hasn’t been the top priority. This depression is hurting the poor the most, and will hurt them the most in the future.

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Also, I may add, in reply to part of your statement. QE causes bond prices to rise, including for individual investors. Moreover, of course, there’s a positive correlation between risk and return, e.g. higher returns on sub-prime securities.

And, the Glass-Steagall repeal, which created efficiency, and one-stop shopping, only facilitated the poor policies created and encouraged by Congress, e.g. promoting risky loans with too-big-to-fail.

Congress created the conditions that would lead to the financial crisis, which was facilitated by Wall Street. Lenders provided too many risky loans that caused too much homebuilding and too much equity extraction on rising home prices.

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Moreover, I may add, U.S. trade deficits reached $800 billion a year (or 6% of GDP) by the mid-2000s. U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds.

Those dollars should’ve been “refunded” by the U.S. government to U.S. consumers, in the form of tax cuts, to allow the spending to go on.

However, instead, Congress directed some of those dollars into the housing market, e.g. through Fannie and Freddie, to promote the building and buying of more houses for people who really couldn’t afford them.

As long as home prices continued to rise, Congress didn’t have to fully pay for the giant social program it created.

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Mike, your statement implies so much misinformation, it’s difficult for me to directly respond to it. So, I’ll cite Wikipedia:

http://en.wikipedia.org/wiki/Federal_Reserve_System

However, I will say the ultimate purpose of the Fed is to smooth-out business cycles, to raise living standards, because economic boom/bust cycles are suboptimal (I passed the comp exams in Money & Central Banking).

The Fed creates or destroys demand deposits to increase or decrease the money supply through the money multiplier using the monetary base, which is called high powered money.

Open market operations is one way to add liquidity or drain dollars out of the economy. The Fed buys securites to increase the money supply or sells securities to decrease the money supply, including Treasury bonds at commercial banks.

When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed’s best choice, although it also attempts to keep inflation expectations low, i.e. a cautious stance. U.S. monetary policy can’t get much better.

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