The Credit Crisis: How we got here

There have been a lot of reasons bandied around for the current credit problem. There were a lot of causes of this, so many of them are right, but some more than others.

The preferred Democrat reason seems to be corporate greed. Certainly there is an element of that, but greed is always with us. You can't rationally claim that this whole thing was caused because the heads of some corporation are greedy and if we replaced them it would all get better. There are essentially two ways to run an economy. You can give power to the government or to business. At least with business you have to choose to give over your money. There were certainly instances out there of banks doing things like lying about the terms of a loan or preparing duplicate contracts so the buyer didn't sign what they read, but these instances were already illegal and I would imagine that they're fairly uncommon (though more common than they should be). The overwhelming majority of problem mortgages aren't people who were cheated, they are people who took a subprime ARM on a house where they could barely pay the artificially low teaser rate. It might be scummy that banks did this but it's not a surprise that a adjustable rate offered with a half point discount from the lowest rates in history is going to go up. The information that this was a bad deal has been around for ever and, as I'll show later, the government not only didn't discourage this, they actively encouraged it.

Barack also submitted the Gramm-Leach-Billey act, which he falsely claims McCain voted for (his running mate, by the way, actually did vote for it). That bill removed a restriction that "savings" banks couldn't also do "investment". The obvious problem with this in the current climate is that when Wachovia's investment side takes a hit, their savings side is also put at risk. I haven't delved very deeply into how much FDIC is impacted by the potential change in Debt-to-Equity (hereafter DE) ratios that this poses, but so far my savings at Wachovia is fine even though their investment side had problems and none of the major federal bailouts were operating as banks, so this can't possibly be the main culprit.

There are two actions by the Fed that have come up as issues. By far the most common is the assertion that Greenspan and later Bernanke lowered interest rates too much to avoid corrections. Certainly this seems valid. The dollar is very obviously weak even relative to other currencies that are themselves inflating. And when dollars are cheap the natural thing to do is to spend as many of them as you can, encouraging all sorts of speculation. In particular in this case it encourages people to buy houses they can't afford because the cost of the house and the interest rate (on an ARM) both look better than they are.

The other Fed action, which I was unaware of until this morning is something Bernanke implemented called the "Term Auction Facility". This was put in place at the beginning of the problems with credit. I don't know much about it, but at least one economist states that among other things it hides who is borrowing money from the Fed from other banks, which makes banks skittish about interbank loans. As I said, I haven't looked very far into this, but it's potentially a really huge deal. Anything that hides loans to banks is going to necessarily mean you can't tell how much the bank is worth. If you don't know how much banks are worth that's going to screw up interbank loans, and interbank loans are where a lot of credit comes from in our system.

The final potential problem I've seen is the Community Reinvestment Act of 1977. This is a bill that went after mortgage banks because they were only offering loans to relatively well off people. The bill requires brokers to make loans across the income spectrum and carries stiff penalties if they "redline", or only offer them to people who are well off. It was updated in 1995 to allow Fannie Mae and Freddie Mac to buy subprime loans, to allow subprime loans to be repackaged as securities. It was then weakened in 2004. There are those who argue, reasonably, that this did not contribute to the current debacle because 75% of subprime loans are made by banks not covered by the CRA and because subprime loans escalated after the bill was weakened. I'll admit this probably wasn't the prime mover, but a huge percentage of those loans were still almost certainly underwritten by Fannie or Freddie, which are quasi-government agencies authorized, by the CRA, to buy the loans. So yes, the loans were made by non-CRA banks who thought they could rake in the dough (and probably did) by using funds from a government sponsored entity and selling the bad loans off as equity for a profit later. But that GSE gave them money because of the CRA.

The last contributor is the existence and mismanagement of Fannie Mae and Freddie Mac. Fannie and Freddie are quasi-private companies that make a profit for their shareholders but are theoretically overseen by congress and had an implicit guarantee that the taxpayers would bail them out if they got in trouble. It was frequently argued that the taxpayers would not bail them out, because otherwise there would be a strong incentive to take huge risks since the potential profit from them is high and the loss would be insured by the taxpayer, but as we have seen in the last 2 weeks, we're going to pay the loss. We have known for at least 5 years that both of these government sponsored entities were behaving in ways that are clearly irresponsible and would be illegal for a private corporation. Their DE ratio was 65:1 (banks maintain 10:1), they frequently took actions that would have violated Sarbanes-Oxley if they weren't the government, and their management was known to manipulate accounting data to maximize bonuses. I know this because it was all brought up in hearings in 2003 and 2004. As you can find all over YouTube several congressman, most notably Barney Frank and Chris Dodd, thought this was much ado about nothing and fought hard to let Fannie and Freddie continue doing the great work they were doing securing bad loans for people at great risk to the taxpayer. After all, as Franklin Raines, Fannie CEO and Obama advisor, said "These assets are so riskless that the capital for holding them should be under 2%". The Republicans may not be free from fault for this, though. Though opposition to increasing oversight of Fannie and Freddie were Democrat concerns, the Republicans controlled the Congress in 2004. I haven't been able to find the bill number or roll call on the call to regulate them more heavily, but if it didn't pass the House it's the Republicans fault. They could have done it with no Democrat help so Democrat stupidity should not have prevented it from passing. (The Senate, of course, is another matter)

The Credit Crisis: An overview

This is likely the first of several parts on the current financial problems in the US Economy. I'll start by exposing my positions on this.

• We got here primarily through government interference and mismanagement in Congress, in particular Barney Frank and Chris Dodd, and in virtually every independent agency involved in finances. There was also mismanagement of private institutions, but that was a relatively minor part of the problem.
• The Democrats in the House, particularly Nancy Pelosi, bear the responsibility for the failure to pass the bailout bill on Monday and therefore the resultant Wall Street crash.
  
• The bill that was in the House on Monday was a terrible bill that didn't solve the problems that created this mess and probably isn't the best way to fix it, but it was the best we're likely to get this year and the Republicans should have passed it. (Honestly this is the part I'm least convinced of, but it's my current position.)
  

Mortgage Bailout, part 3

I really liked Krugman's column this morning, but I wanted to highlight some of the developing Paulson bailout bill. Naturally my tendency is to be against any of it because it's clearly un-Constitutional (I don't recall the "bailout dumb lenders to save the market" clause), but then so was the Community Reinvestment Act that brought us here.

I'm going to start with that statement. The media has not convinced me that Phil Gramm getting through a bill that allowed banks to issue insurance or vice versa (the Gramm-Leach-Biliey Act) had anything to do with the current problem. AIG isn't going under because it owns assets and issues insurance. It's going under because a bunch of companies put out very dumb subprime loans, securitized them, and then AIG insured them so that people wouldn't lose their money just because nobody could pay off their mortgage. Then nobody could pay off their mortgage and suddenly AIG was paying out more than they could afford. Why were banks issuing loans to people who couldn't pay? The Federal Government told them to. The Community Reinvestment Act of 1977 required that banks issue loans across the income spectrum and not just issue them to people with high income and great credit ratings (despite banks arguing that this was a dangerous practice). It was updated in 1995 (again, over vocal objections from banks) to strengthen the requirements that mortgage lenders issue loans to low and middle income people and allowing them to securitize those loans, even of subprime mortgages. True, the banks discovered that they could make a killing at this so long as house prices kept going up and a combination of cheap money created by Greenspan and phantom security granted by Fannie and Freddie helped to push them to great excess. All of these, though, are government problems. And not problems of the government insufficiently regulating banks, problems of government getting too involved.

I'm aware enough of my limitations that I'm not going to go against every economist I've read and say that not bailing out these companies would not cause the next Great Depression (and in fact it is argued that not bailing out companies caused the last one). If we have to bail out companies, I think Krugman is exactly right that in doing so we should take the companies in payment and I also think the passage of a bill giving the Secretary of the Treasury the ability to do this at any time without consulting Congress is a bit much power to give away. And I'm radically pro-Executive.

Progressives and Charity (part 2)

I'll start with this video from Good morning America this morning:




I don't want to harp on the connection between paying taxes and patriotism, as many other commentators have. What I'm curious about is when Joe decided it was time to step up. Is it only when the Democrats get elected and pass new taxes? I am not aware of anything prohibiting him from voluntarily stepping up to "help get America out of a rut". Yet here, courtesy of Byron York is his AGI and charitable giving for the last 5 years:

Year AGI Giving

        AGI            Charity            
2003    $231,375       $260
2004    $234,271       $380
2005    $321,379       $380
2006    $248,459       $380
2007    $319,853       $995

According to Byron York's story, David Wade, an official spokesman for Biden claims, among other things, that as Biden is one of the lowest paid Senators he just doesn't have piles of money to give away. How is it that he then thinks a bunch of Americans with similar income have piles of money to seize in taxes?

I can't imagine a better example of the difference between conservatives and progressives except maybe Biden's statement that Sarah Palin may be raising a child with Down Syndrome (when 80-90% of them are aborted) but her opposition to federal funding of embryonic stem cell research shows she doesn't really care about them. There are tens of millions of people in this country who make a third what he does, give away more in a month than he gives away in a year, and still don't think Washington has any business taking more of their (or Biden's) paycheck. To many others, though, they are stingy, money-grubbing conservatives who just want to hold onto their money and don't care about the poor.

Justice and Taxes

A few weeks ago I was listening to an interview with E.J. Dionne about his new book "Souled Out". He made the comment that as Christians we should all favor "a more just tax system", by which I presume he means one which taxes those who have more at an even greater rate than they do now.

Christ gives us little to go on concerning how to structure a state, so in coming up with one the founders of this country applied logic in light of scripture (after all, "In the beginning was the logos (reason, often translated 'word')") to come up with foundational precepts of Christian government. If we follow the same process I submit that we will come to the same conclusion and that that conclusion, while precluding slavery (as the founders did not) will also preclude the redistribution of wealth (as the founders did). Locke stated that all men are entitled to the fruits of his labor. This is what Jefferson meant when he said "All men are created equal;" that no man is entitled by some divine ordination to the fruits of another man's labor. Given that nothing in Christianity or reason points to some men being innately entitled to the product of another's labor, I fail to see how we can escape the conclusion that the rights to labor, and thus the property resulting from it, either belong to he who creates it or do not exist at all.

I realize I'm dodging Rousseau's position, but a full exposition on that would take more room than I want to use in a blog post. To deal with that I'll merely point out that Rousseau's theory of property mainly dealt with the produce of the land and most of the produce of labor in our industrial society is not based on agriculture. It seems irrational when the overwhelming majority of income is derived from labor to assume that the product of that labor belongs to all of society.

In order to avoid the issue of capital I'm going to take up the cause of a hypothetical CEO making $10 million per year. That $10 million is issued to him for his work in running the company, not as a result of the increase on his stock, so even if we accept Marx over Smith (as I decidedly do not) it is the product of labor and not capital. If his talents, time and effort have lead him run a major company and his efforts have produced $10 million in value (often more), how is it just to take half of that from him and give it to others who did not thus labor?

I'm not arguing that we shouldn't have a safety net for those who deserve charity (though certainly I would prefer something like churches or civic organizations to the government), but this is by nature unjust. We might feel bad for the single mom of three kids who has honestly fallen down on her luck and is trying hard to get ahead, but the just response to that cannot involve the forcible taking of another man's property to rectify it.

Compassion and government

You hear a lot about "compassionate conservatism", which is really itself a reaction to the phenomenon I noted earlier where people who don't want to take money from one group to help out another are seen as uncharitable. I would submit, though, that it is simply not possible for government to be positively act based on compassion.

I am not claiming that "compassionate conservatives" aren't really compassionate; compassion is simply a desire to help in others' times of distress. I'm sure both they and progressives really do want to help. One of my reasons for writing this is hearing E. J. Dionne speak on his book Souled Out, and he certainly seems to believe we should support government helping out the poor to be consistent with a Christian faith. I'm sure he genuinely feels compassion for the poor. My problem is that I first off don't think government solutions to reduce poverty actually do so. Even if I did, though, when Christ calls us to care for the poor I'm pretty sure he didn't mean to take extort money from our next door neighbor and use that to do it.

My first problem with a "compassionate" government is that a government doesn't have any money. I have heard people recently argue that the government owns everything produced in its borders, either through some hyper-socialist ideal or because it prints the currency.

In the former case they are going further than even Marx himself would have ventured. Marx agreed with Locke that a worker is entitled to his wages; he just rejected the idea that capital assets can add value to the product and thus thought that all value in excess of wages paid (surplus value) should be forfeit to society rather than held as profit to the capitalist. The Bible is quite clear that God owns everything, but it naturally follows from the fact that God owns you that He would also own the produce of your labor. For this to be true of the government we must accept that the government does not exist to serve the people but that it in fact owns the people. This argument has certainly been made throughout history by various tyrants, but I would submit that virtually no one actually believes it. To accept this you have to throw out our Constitution because limits on government are ridiculous if we believe we are wholly owned by the government. The only thing that makes sense at that point is absolute tyranny, whether by an individual, a group, or the majority.

The second case is even less substantial. This argument rests on the fact that the government printed Reserve Notes and thus owns them all. If this is true then it would seem reasonable that Dell could at any moment require me to give up the computer on which I write this, since their building it confers permanent ownership to them.

The government has two main ways of procuring money to support its various programs, it can tax or it can loan money. The latter is really a delayed way of taxing, so I'll ignore it. In the former what we're doing when we "give" money to the unfortunate we're "giving" what doesn't belong to us. If you are called to help the poor (and you are) then you should do so, but you should do so with the money you produced or that God entrusted to you, not by taking from someone else.

The second, and bigger, problem is that these "solutions" rarely work. When compassion guides our governance we like to think of the government as a parent who, caring for her children, sees them fall on hard times and helps them get back on their feet to get started again. The problem is that said parent is deeply involved and can make independent decisions on a case by case basis. To successfully administer compassion in our personal relationships we depend on being able to selectively enforce our own boundaries. We have to know the difference between a friend who recently lost their job, is trying hard to get a new one and has cut nearly all their expenses and a friend who has taken up drinking, has lost their job but is keeping up their destructive habit and wasting all of their money. To the former giving some money to help them make it through is a great blessing, to the latter this would only reinforce their destructive habits. The government is guided by policy and so it's almost impossible for it to distinguish these cases. As a result government policies intended to help people out more often than not exacerbate major problems.

An easy example of this is college tuition. We have a problem often harped on in the media that the cost of college tuition rises faster than the rate of inflation. Additionally a huge number of jobs require a college degree to get in, even if they don't use specific knowledge gained from any college program. The standard government solution to this is to provide more aid for people to go to college, but that's what caused the problem in the first place. Every college in this country except two (Grove City and Hillsdale) accept government money in the form of tuition assistance, often a substantial portion of their total tuition costs. Because of this they can charge more for tuition than they would be able to if they had to depend on people actually paying what college was worth and they can put people through college who are going to get a job when they get out that doesn't really require knowledge gained in college. Because there are so many college graduates out there, anybody who didn't got to college is looked on as basically lazy, so employers want somebody with a college degree, even if they don't need something covered by a specific degree program. Make people pay their own way and tuition would naturally come down as would attendance numbers and thus the number of employers requiring a degree.

We see similar problems all over the place whenever government tries to be compassionate. We go easy on illegal aliens and thus reduce the number of hard working people who have waited in line for years to get into this country who can get in. We provide aid to poor mothers and split up families while encouraging out of wedlock birth. I actually just read that the recent FLDS compound broken up was sustained mainly through taxpayer funding of the various wives in the form of welfare checks since they are legally single.

Mortgage Bailout, part 2

I had previously posted in defense of Bush's negotiated interest rate freeze. I still think that was a good idea, but the mortgage bailout in Congress really, really bothers me. I'm aware that I frequently come off as uncompassionate so let me start by stating that I feel for people who got themselves into mortgages they can't afford. I hear them all the time on the Dave Ramsey show and I wish they didn't get themselves in this situation.

Having said that here is what I see as the pros and cons of the bailout:

Pro-bailout

Real Estate values don't drop now. They're artificially high because of bad loans so they probably still drop later, but it might not be as precipitous a decline.

Some people don't lose their home.

Some people who bought mortgage backed securities (which probably includes a bunch of pension funds) don't lose value

Some mortgage banks don't go bankrupt (though most of them probably sold the securities already)

Anti-bailout

You're charging a bunch of people, the overwhelming majority of whom either don't own a home or are in a responsible mortgage, to shield a much smaller number of people from the results of their actions. This is made worse by the fact that many of the people paying are currently in a smaller house, have held off on buying a house when they could have done so irresponsibly, or have a higher interest rate than they would if they were in an ARM. This means people aren't just paying for somebody else to keep their home. They're probably at some level paying for somebody else to keep a more expensive home than they own for the same rates they're paying on theirs.

You're stabilizing house prices at an artificially high level, which means that those people who don't own a home now because they have been responsibly saving their money instead of getting a loan they couldn't afford will have to wait longer and pay more because they can't buy one sold at a discount by someone who got a loan they couldn't afford. Again this is aggravated by the fact that these people are also paying the bad loan holder to hold onto the house they would like to buy.

You're setting a precedent that the next time you hear a deal that's too good to be true on the radio and you know that a significant minority of the population is buying it, you can go ahead and take the risk because if things work out you'll get a better deal than being responsible and if they go south then you can probably get the government to bail you out if you can hold out long enough that it hits everybody else, too.

You're setting a precedent that if there are a bunch of very risky, but lucrative securities and you need to factor in the chances that the government will bail you out on the risky side to see if they're worth it.

Progressives and charity

I suspect there will be a lot made out of Obama's lack of charitable giving (his average from 2000 to 2004 was around 1% out of his 250k+ income). I'm (obviously) about to make something out of it, but I want first to state some things I don't care about. I don't think it makes any assertions about his character. A decade ago Bill Gates came under great scrutiny because he didn't give enough money away. I'm not going to stand in judgement about what somebody else chooses to do with the fruits of their labor. I also don't think it makes him a bad Christian. A fairly convincing case can be made that the Levitical tithe does not apply to Christians (though one does wonder where his heart is, given that his money certainly isn't going to the church).

What I do find interesting is that if you listen to his campaign promises he seems awfully generous with other peoples' money. The National Taxpayers Union estimates his promised new program cost at $307 billion. His statements even include promises of personal generosity such as "Obama will provide a $1.5 billion fund to assist states with start-up costs (to a paid leave program)." What this really means is that Obama will take 1.5 billion from Bill Gates and Warren Buffett (both of whom give huge percentages to charity) so that he can be so generous with it.

I hammer this not to pick on Barack, but because I'm constantly tired of conservatives being portrayed as stingy people who care nothing for the poor and want them to starve. Virtually every study I've ever seen shows that conservatives give more. Arthur Brooks ("Who Really Cares?") stated that conservative families give on average 30% more than liberal families. Studies of per-state giving frequently come up with statistics like 24 of the top 25 voted Republican in the last election. But I still have to deal with the absurd claim that conservatives don't care.

I'm not even saying that progressives don't care. The difference is that they think it's the government's job. If a conservative is touched by a situation that needs action they step in and do it (or start their own NGO to step in and do it); if a progressive sees a situation that needs action they send a letter to their congressman (or start their own 527 to lobby congressmen).

Mortgage Debt, Financial Risk, and the Bible

Sometime last week I came across this post on mortgage debt and financial risk, then a few days ago at dinner my mother-in-law was talking about her conversation with a so-called "Crown Ministries Guru" who was evidently rather condescending to her about her desire to liquidate an investment account to pay off a (lower interest) HELOC. She argued that paying off the loan is the only biblical option; he argued that it didn't make sense. I find both of these positions interesting, but the case of the guru more than the blog poster.

With respect to the blog, John argues that he is reducing his risk by having a mortgage on his house and having that money invested somewhere else. Presumably he has it in a non-insured investment since most people with this theory seek to make greater returns on the investment than the interest on the house and you're not going to get a CD or insured bond with a better return than your mortgage interest or the banks would lose money (which banks don't like doing). So his theory is that if the market for your individual house drops you've lost tons of money on your house but he has his money better diversified. The first problem with this is that if his investment drops at the same time that he loses income he might lose his house; if the housing market is down at the same time he might even lose it at a loss. You will never lose a paid off house unless a judgement is delivered on some unrelated debt (or the government decides they can get more tax money from somebody else, but that's an unrelated issue). Trent (the author of "The Simple Dollar") argues that he is ignoring this personal risk but is correct about diversifying his financial risk. He's not. Lets say that John and Tristan both have $100,000 homes. John takes out $80,000 of that and puts it in a guaranteed bond and Tristan has the house totally paid off. Both of their houses are in markets that go in a huge slump and the house price drops to $60,000. Tristan now owns a $60,000 asset (a house). John now owns a $60,000 asset with an $80,000 lien on it plus a second $80,000 in the bond, bringing both of their net worths to $60,000. It may be true that John makes more money because his outside assets he leveraged the house to buy make more money than the interest on the mortgage, but it is never true that he has reduced his risk. The same thing goes for any investment made with other peoples' money. You can make huge money buying commodoties on margin, but you can also lose your shirt. Taking out a loan and investing it can only increase your risk because you have a loan that must be repaid and an asset that you might be able to recover. Even if it's insured you're not really guaranteed you'll collect in a timely manner.

Now we get to my mother-in-law's question. Her assertion something along the lines of that if The borrower is slave to the lender, and You cannot serve two masters and that she should Leave no debt outstanding, except the continuing debt to love one another. Then it would seem unbiblical to keep debt, certainly when you can pay it off. Proverbs certainly teaches us it is unwise to be a man who strikes hands in pledge or puts up security for debts. I've taken Crown Ministries and considered taking the class to be a teacher and I'm pretty sure that it is totally contrary to the tenets of that program to argue that if you have given a pledge to stranger you should do anything but deliver yourself like a gazelle from the hunter or a fowl from the hand of the fowler. I asked her what biblical insight he provided and she said he only said that it would be foolish to keep put money in an account that gets less interest. My only response is that the foolishness of God is wiser than men.

Having said that, I'm probably about to put money in an investment account rather than pay off my mortgage, so I'm not saying keeping your mortgage around is always a bad idea. I'm not a die hard Ramseyite. I have personally paid off my student loans, for instance, but I can see that keeping them around at 3% interest (which I know exist) and sticking the money in an FDIC insured savings account with total liquidity and 5% interest makes financial sense. I wouldn't do it because I like my finances boring, but I don't think it's a bad idea. My situation is that I know my car is going to die and I'm going to need a new roof and new siding in the next 10 years so I need to build up enough liquidity to take those hits without having to get another loan which is almost certain to be worse than my current 5% loan on the house. Thus my money will not be going to paying off the home early, it will be going to a semi-liquid fund for pending expenses. I want to escape that house debt, but I also need liquidity and a wise man plans for the future.

The interest rate freeze

I saw that Bush negotiated an interest rate freeze yesterday and sat down to research it so I could rant about it. It ends up, though, that based on the available information it looks like a pretty decent solution.

The proposal first off only addresses subprime loans. That means I could not have gone out and refied my house a year ago into a crazy 3% teaser rate ARM that was going to cause me to lose my shirt in 2 years and come out way ahead of where I am now. Somebody with my credit can't use this. We're talking about people who got into a crazy 11% loan that jumped to 15% after the end of the fixed period.

It secondly doesn't even try to address people who can't afford their homes even at the introductory rate (which is probably a good portion of the subprime market). So if you got yourself into a house you couldn't afford at 11% the government isn't going to pay for you to keep your house or twist somebody's arm get them to give you a 6% loan.

The people who own securitized subprime loans were about to have huge drops from foreclosures if the government didn't bail them out so something had to happen or people would lose their houses and the securities they owed would lose a bunch of value as well. The mortgage owners (banks and traders) ended up losing some interest on a really lucrative (but really risky) security by freezing the rates, but they were going to lose a good portion of that anyway to foreclosures (and they still might). I do feel a little bad for people who own a lot of these securities (cough, CountryWide) because it's an insane risk that is only worth taking because of the incredible return on it and this deal lessens the return while keeping a lot of the risk. I would rather the government not have to use its, um, influence, to get them to agree to terms. Maybe their actuaries say the risk vs. return numbers come out best with a two year freeze, for instance. Having said that giving people who you know can't manage money a ripoff loan that has rates going into the stratosphere in 2 years makes you a financial pusher, so I'm not getting teary eyed about them losing some of their return.

Social Security

I was discussing Social Security today and came across this piece of propaganda from Rock the Vote. I'm not stating that it's any less propaganda than my blog, but it's certainly not a flat statement of the facts.

What I wanted to comment on primarily was his assertion at the beginning that "Following is a table that illustrates, in 2005 dollars, the annual benefit that Social Security can pay with no changes at all." But his table is missing some data that would be rather critical in assessing whether it in fact "illustrates" that. The most obvious is what is he assuming the inflation rate to be? It took me a while to find the assumptions on the Social Security Administration publication from which he appears to draw his data and it looks like we're assuming a 2.8% inflation rate, a 1.1% increase in average real wages, a 1.95 fertility rate, a .67% average annual death-rate decline, and an immigration rate of 900,000 persons per year (illegal and legal).

Those might actually be reasonable estimates. I suspect 2.8% is low for inflation and 1.1% is very high for increase in real wages (1985-1995 for instance averaged something like .75%).

A bigger problem is that he's assuming that the "trust fund" actually works as advertised. So while (making all the above assumptions) Social Security can continue being 12.5% of payroll and payout what he posts, we currently put a sizable part of that into the general budget by "buying" treasury notes. I've read numerous people who say that the government would never default on those notes because then the entire economy would collapse. I don't buy that.

Social Security does not have a guaranteed benefit and those notes belong to the Social Security Administration, not to individual taxpayers. It's basically like saying if my wife made all the money in the family and had all the assets you could give me money that I made a promise to pay back later and I then loaned that money to her and she spent it. If the two of use decided later that I would just forgive her the loan then you would be up a creek. You could sue me, but I don't have assets. You can't sue her because she doesn't owe you anything. That's how the "Trust Fund" works. You pay money to the SSA, they loan the money to the rest of the US government. If they later decide they're just going to shut their doors and not worry about those T-bills it doesn't hurt the rest of the market at all, the government hasn't really defaulted on anybody except itself. It's actually a little bit worse than my analogy because in my analogy you made me a loan, with Social Security you are paying taxes that are "not earmarked, and ... Congress is at liberty to spend them at will." (Helvering v. Davis (301 US 619, 645)) so the government owes itself money for those bonds but neither Congress nor the Social Security Administration owes any individual anything related to Social Security. If the benefit went away tomorrow the government would still have upheld their legal obligation (which is none).

Anyway based on the SSA estimates in 2014 things will reverse and the SSA will start having to collect on those T-bills to meet shortfalls in the program (but they won't have a shortfall excluding the "trust fund interest" until 2026 or run out of money until 2040). The problem with this is that the shortfall escalates fast:

year	shortfall (in billions of dollars)
2015	7
2020	201
2025	506
2030	908
2035	1382
2040	1908
2080	19506

Keep in mind that the current entire budget is 2.3 trillion. So we're assuming that by 2040 we're going to double income tax revenues so we can support the existing programs plus pay a nearly equal amount back to the "trust fund". By the end of his chart we're paying out 10 times the current budget to keep up with shortfalls.

I don't know at what point the taxpayers say "No more" to this, but I'm pretty sure it's before that. Personally I would rather be in just about any situation than that one. If you could offer me a program where I continue throwing 12.5% away for as long as I work and the program goes away the day I retire, I'd still take it just so I didn't leave this mess to my kids.

Fun Money

Since I haven't yet had a personal finance post on the blog, I guess I might as well throw this into the hodgepodge of stuff currently here.

Amanda and I try to live on a budget and have tried various budgeting systems, many of which we've been unhappy with. One thing that has worked for us is what we call "Fun Money". Dave Ramsey calls something similar "blow money", but it's not exactly the same thing. Nearly every budgeting system I've looked at (including Ramsey) recommends budgeting for, for instance, work lunches. Ramsey has a category "blow" for small expenses that weren't worth budgeting. For several years Amanda and I did something similar, but it had a problem.

I wanted a very expensive camera (at the time a Nikon D70 which was around $700) that I knew would never fit in our budget. I'm a long term guy so I was perfectly willing to scrimp for years to get there but our budget didn't have any way for me to save money for personal purchases. Enter fun money. What we decided on is that we would each get some amount in the budget each month to do with as we please. That would include lunches, going out with friends, any dinner on our own (for instance me before Boy Scouts), toys we buy while out, anything of that nature. Any fun money we don't use during the month gets saved in our "fun money account" (a spreadsheet, though it already came out of the budget so it's backed with real money somewhere. It's not like Social Security where we put it in a trust fund and then spend it anyway.) so that if I want an expensive camera I can not go out with my coworkers ever and in a while I can afford it. It's so far worked very well for us and I think we've actually reduced our expenses some because of it because now we know that if we impulse buy some toy it's coming out of our fun money account and not some mysterious amorphous blow money line in the budget.

Total Watering Bans, part 2

A friend sent me this link, which details a home in Marietta that's using an average of around 400,000 gallons of water per month. At the end of the story it mentions that his bill is going to go up to $2000 per month. Admittedly, I wouldn't want to pay that much for water, but in the middle of a drought it's hard for me to imagine that you can fill something around the size of an Olympic sized swimming pool for only $2000. With restrictions on particular usages, though, what he's doing is perfectly legal. It would even be legal to just stockpile a half million gallons a month so that you can sell it when we run out.

If he were a commercial user it would be even cheaper ($1139). That makes me wonder how many gallons of our water Coke is buying at $2.59 per thousand gallons so they can filter it, slap a Dasani label on it and resell it at $2 per liter.
If water is really so precious that we're going to run out of it why not just raise the cost until people quit using more than we have? And by that I don't mean raise the residential cost and subsidise commercial users while requesting that restaurants not automatically serve water when you sit down for dinner. If water were $20 or $100 per thousand gallons you wouldn't have to request it, the restaurateurs would see it in the profit margin. Some businesses that are heavy water users would either close or move, but if we're really going to run out of water then the lost jobs over Coke no longer getting cheap water from us would be more than offset by being able to keep drinking.

Of course we could also just keep selling commercial users water at $2.59 per thousand gallons. After all, we could always buy Dasani for $2 per liter when we run out.

Those poor farmers

Those of you who know me know I despise federal farm subsidies. You probably could have guessed that from earlier posts as well. They're not at the top of my list of programs to cut, but they're close.

If they gave money to keep small farmers in business, I'd still oppose them. We don't have federal programs to keep TV repairman or elevator operators or any number of the other industries that have become useless in our modern society, I don't see why we should take money from individuals who have adapted to a modern economy so we can keep inefficient farming mechanisms in place.

Having said that, that's not what farm subsidies do. NRO has an article today stating that the fourth largest recipient of your farm tax dollars is the Arkansas Department of Corrections. I don't think they would go under if I stopped paying them to farm (or maybe not to farm).

The end of that article has a quote from Collin Peterson (D, Minn) telling us that if we don't understand agriculture we should keep out of their business. I don't understand TV repair either, but I still oppose my money going to someone not repairing my TV.