Friday, December 14, 2007

Krugman fuels my economic rants


Why do people feel the economy isn't growing under Bush despite everyone on TV saying times are great? Because for 80% of us it is slow growth.
Here’s what the numbers say about percentage gains in after-tax income from 2003 to 2005:

Bottom quintile: 2%
Next quintile: 2.4%
Middle quintile: 3.9%
Fourth quintile: 3.7%
Top quintile: 16%
Top 10%: 20.9%
Top 5%: 27.7%
Top 1%: 43.5%
It was a boom, all right — but only for a few people.
Krugman's column today is on why the addition of mountains of cash to desperate banks isn't working well. There is a huge looming negative equity crisis in America's housing market so banks really are in deep trouble. These gifts of money to banks, many billions lent at rates guaranteed to be profitable for banks, won't restore confidence but are needed to cover huge losses.

An example of how the tax-payer funded bailouts work. BofA puts out its hand for reserve bank money, receives $10 billion at say 3%, This money is immediately placed in government paper paying 5% while they look for profitable loans to make at 10% to 18%. BofA also expands its consumer credit offers (intro rates 10% - 20%) but raises poor credit interest penalties (24% - 36%) and conditions that trigger them. Indirectly the taxpayer funds the money lent at lower rates then the government pays for 100% secure investments.

These huge piles of money gifts to banks were extensively used in the Savings and Loan debacle. Like last time, perhaps only institutions who were truly horrendous at money managing and concentrated on the bad loans will go under while the large players profit from the taxpayer funded bailouts.

There is a huge amount of fraud in these bad mortgages, similar to the worst of the savings and loans in the prior crisis. I have a relative suffering some harm from this. Despite being a financial expert she has bad credit and needing a new house took a subprime loan. She made sure that the the rate adjustments were very limited each year and had a maximum total adjustment. She was lied to and didn't catch it on how long the prepayment penalty would last. It ended up being 3 years - $12,000. If Congress was really interested in solving a lot of sub-prime problems it would eliminate these prepayment penalties which reward the lenders for putting people in bad loans.

Here is the paper Krugman references which shows that unless you are in the top 5% bracket in household incomes Democratic presidents are better for your pocketbook.

Brother Jim emailed me the first link.

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