Dichotomy

by Rex May
baloocartoons.com

Bush Tax Cuts

In January of 2003, a local tax preparer, David Oenbring, sent me this note concerning tax cuts for only the wealthy:

...The common theme is that the plan only benefits the wealthy and the little guy gets nothing. As a tax professional I know that nearly all taxes are paid by the wealthy, after all they are the ones with the money. According to figures from my 2003 Income Tax Quickfinder Handbook the top 25% of taxpayers (those earning over $52,965) pay 84% of all federal income tax. So any reasonable person could assume that any reduction in tax rates would benefit them the most.

But what about the assertion that the poor people get nothing? For that comparison I turned to my tax preparation software and examined the returns of the mythical couple of Joe and Mary Taxpayer. They are married with two children. Both are in low wage jobs earning only $25,000 annually between them.

They have worked since 2000 without a raise and need every penny to survive so both have elected to have no income tax withheld from their paychecks. By any standards they qualify as working poor. I prepared returns for them for tax years 2000 (the last year of Clinton influenced tax policy) and for 2001 and 2002 (the first two years of Bush influenced tax policy). The results cast serious doubt on the claims that the poor received no benefit from the Bush tax policy.

In 2000 Joe and Mary had $971 tax on their combined income of $25,000. They were entitled to a Child Tax Credit of $500 per child, which reduced their tax to $0. The remaining $29 of the credit was lost. The Earned Income Tax Credit (EITC) then gave them a refundable tax credit of $1,290, which was their refund. Nebraska, being less generous, insisted on $212 in tax.

In 2001, the first year of the Bush tax plan, Joe and Mary had only $874 in tax on their combined income of $25,000. This year they qualify for a child tax credit of $600 per child. This again reduces their tax to $0 but now the remaining $326 of the credit ($1200 - $874 = $326) has become refundable. That amount adds to the EITC of $1,494 to give them a total refund of $1,820. Still the spoiler, Nebraska wants $192 in income tax.

This year, the second of the Bush tax plan, their income tax has fallen to $518, only 53% of the tax burden under Clinton. Again, the total available Child Tax Credit of $1,200 reduces this to $0. The remaining $682 of the credit is again refundable and adds to the EITC of $1,928 for a total refund of $2,610. Still not caught up in the spirit of giving, Nebraska insists on $171 of income tax.

So in only two years under a president whose tax policies presumably only benefit the wealthy, Joe and Mary Taxpayer have had a net 103% increase in the amount of free money the government hands them every tax season. (Refundable tax credits are not counted as income and are tax free) Now could someone please explain to me again how the Bush tax plan only benefits the rich?

Update:  By 2008, the top 1% pd 38% of income taxes, the top 5% paid 58% of income taxes, the top 10% paid 70% of income taxes and the top 25% paid 86% of ALL income taxes. 47% paid NO INCOME TAX.

Credit Default Swaps and Financial Collapse

Where did Credit Default Swaps originate and why?
If you spend some time poking around the history of the Community Redevelopment Act in Wikipedia, you can see how unintended consequences crept into the process as features were added or modified. Of course, the Income Tax mortgage loan deduction skewed the market and encouraged home ownership, too.
Passed in 1977, CRA addressed discrimination in loans. The original ideas were sound.

The Act mandates that all banking institutions that receive FDIC insurance be evaluated by Federal banking agencies to determine if the bank offers credit (in a manner consistent with safe and sound operation as per Section 802(b) and Section 804(1)) in all communities in which they are chartered to do business.^[3]

But somewhere along the way...

the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was enacted by the 101st Congress and signed into law by President George H. W. Bush in the wake of the savings and loan crisis of the 1980s. As part of the subsequent general reform of the banking industry, FIRREA added section 807 (12. U.S.C. § 2906) to the existing CRA statutes in an effort to improve the area concerning insured depository institution examinations.
The public section introduced a four-tiered CRA examination rating system with performance levels of 'Outstanding', 'Satisfactory', 'Needs to Improve', or 'Substantial Noncompliance', each supplemented with a written synopsis of the agencies' evaluation reasoning using any available facts to support their conclusions.^[40][46]
According to Ben Bernanke, this law greatly increased the ability of advocacy groups, researchers, and other analysts to "perform more-sophisticated, quantitative analyses of banks' records", thereby influencing the lending policies of banks. Over time, community groups and nonprofit organizations established "more-formalized and more-productive partnerships with banks."^[4]

The above partnerships caused banks to change their lending practices to generate higher CRA ratings, but, as some loans were not up to the banks' original lending standards, the banks made every attempt to reduce risk by offloading those loans to third parties.

With the passage of this Act [FDICIA] in December 1991, section 807 (12. U.S.C. § 2906) was amended to required the inclusion of any examination data relevant in determining an institutions CRA rating as well.^[4][47] A week earlier that same December, the existing CRA statute was amended once again upon the enactment of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991. It allowed the Resolution Trust Corporation (RTC) to make available any branch of any savings association located in any predominantly minority neighborhood to any minority depository institution or women's depository institution, the amount of the contribution or the amount of the loss incurred in connection with such activity would go towards meeting the credit needs of the institution's community and would be taken into consideration when CRA examinations were evaluated.^[48]

These changes, year by year, increased the ability of community groups to influence bankers into making loans that made them uncomfortable in order to stay in compliance with the laws.

...portions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 indirectly afftected the CRA practices at the time in requiring Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing.^[4] In October 2000, to expand the secondary market [bankers selling loans] for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of "MyCommunityMortgage" loans.^[49][50] In November 2000 Fannie Mae announced that "HUD" would soon require it to dedicate 50% of its business to low- and moderate-income families."

None of these changes were for any purpose other than 'improving' the bill because of unintended consequences of prior legislative changes.

In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.^[52]

The stage was being set for nervous banks holding CRA loans which were becoming progressively more risky to create subsidiaries to take them off their books. Many moved loans to Freddie and Fannie for the security of government backing.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which repealed restrictions on interstate banking, listed the Community Reinvestment Act ratings received by the out-of-state bank as a consideration when determining whether to allow interstate branches.^[53][54]

Adding CRA ratings to the criteria for expansion created an adverse incentive to make riskier and riskier loans or purchase these loans from brokers who made their income based on a percentage of the size of the loan, not its security.

According to Bernanke, a surge in bank merger and acquisition activities followed the passing of the act, and advocacy groups increasingly used the public comment process to protest bank applications on Community Reinvestment Act grounds. When applications were highly contested, federal agencies held public hearings to allow public comment on the bank's lending record. In response many institutions established separate business units and subsidiary corporations to facilitate CRA-related lending. Local and regional public-private partnerships and multi-bank loan consortia were formed to expand and manage such CRA-related lending.^[4]

The amount of red above shows how the problem was growing more and more tangled year by year.

In July 1993, President Bill Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden.^[55] Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton's strategy to "deal with the problems of the inner city and distressed rural communities". Discussing the reasons for the Clinton administration's proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen, Secretary of the Treasury.., affirmed his belief that availability of credit should not depend on where a person lives, "The only thing that ought to matter on a loan application is whether or not you can pay it back, not where you live." Bentsen said that the proposed changes would "make it easier for lenders to show how they're complying with the Community Reinvestment Act"...

Bentsen, above, is saying that even a neighborhood with 5 empty homes cannot be considered as criteria for ability for resale of the home if the homeowner defaults. The family may have an excellent credit history but if the unexpected happens and they cannot pay their loan payments, the bank cannot sell the home to recoup portions of its investment.

[1995] Information about banking institutions' CRA ratings was made available via web page for public review as well.^[36] The Office of the Comptroller of the Currency (OCC) also moved to revise its regulation structure allowing lenders subject to the CRA to claim community development loan credits for loans made to help finance the environmental cleanup or redevelopment of industrial sites when it was part of an effort to revitalize the low- and moderate-income community where the site was located.^[57]

No one can fault the good intentions of the changes taking place but the result of Credit Default Swaps was growing beneath the surface. A bank employee and loan officers who reported to the lender on the soundness of loans, was replaced with professionals who sold their loans as a percentage of the loan amount. Loans themselves became a commodity and the larger the loan, first or second mortgage, the higher the commission. Again, unintended consequence of well intended changes that grew into a tangled web obscuring the bubbles growing risk. The bigger the loan, the higher the payout so brokers over estimated values to increase their commission.

William A. Niskanen's 1995 criticism of both the 1993 and 1994 sets of proposals for political favoritism in allocating credit, for micromanagement by regulators and for the lack of assurances that banks would not be expected to operate at a loss to achieve CRA compliance. He predicted the proposed changes would be very costly to the economy and the banking system in general

When criticized,

agencies jointly reported their final amended regulations for implementing the Community Reinvestment Act in the Federal Register on May 4, 1995. The final amended regulations replaced the existing CRA regulations in their entirety.[59

So here we see the entire CRA being replaced in 1995 resulting in yet more unintended consequences. In 1999, Gramm-Leach-Bliley Act let "smaller banks be reviewed less frequently for CRA compliance by the addition of §2908. (Small Bank Regulatory Relief) directly to Chapter 30, (the existing CRA laws), itself. The 1999 Act also mandated two studies to be conducted in connection with the "Community Reinvestment Act":^[64]

On signing the "Gramm-Leach-Bliley Act", President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act".^[67]

The Office of Thrift Supervision (OTS) proposed revising and started to solicit public comment regarding the complete alignment of its CRA rule with the CRA rules of the other three federal banking agencies in November 2006....
OTS Director.., John Reich announced the final decision to go ahead and implement the proposed revisions ... Reich stated, "OTS is making these revisions to promote consistency and facilitate objective evaluations of CRA performance across the banking and thrift industries.

And here is Bernanke as late as 2007 recommending more access to Credit Default Swaps to add government support for the CRA-related loans [translate: 'scary' loans based on less then sound banking principles.]

In 2007, Ben Bernanke suggested further increasing the presence of Fannie Mae & Freddie Mac in the affordable housing market to help banks fulfill their CRA obligations by providing them with more opportunities to securitize CRA-related loans.^[77]

In a 2000 report for the US Treasury, several economists concluded that the CRA had the intended impact of improving access to credit for minority and low-to-moderate-income consumers.^[86]

Never mentioned in the above report were NINJA loans borrower with "no income, no job and no assets". Whereas most lenders require the borrower to show a stable stream of income or sufficient collateral, a NINJA loan ignores the verification process." The cycle was complete and set to collapse.
Not mentioned above are contributing factors like the federal reserve maintaining an artificially low interest rate for too long which encouraged borrowing and their inflated dollars to produce the money for loans as Americans slipped into a negative savings rate.
Included in what had become a financial disaster was a flawed formula used on Wall Street to assign value to Credit Default Swaps. David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk.

How much of this debacle was caused by the 'free market' or 'capitalism?' I rest my case! And multiple boards of 'officials' in DC who seek the underlying issues will never find unintended consequences of well intentioned laws over the years as the culprit.