Wednesday, September 17, 2008

The no-doc borrower-in-chief

National Review's Ramesh Ponnuru --

[quoting Joe Biden] "We should try to correct the problems that caused this [financial crisis]. And what's caused this? The profligate tax cuts to the very, very wealthy that John [McCain] wants to continue."

Note that the first culprit Biden mentions is tax cuts. I think it is very hard to connect the "tax cuts for the rich" with no-doc loans, but Biden has a very high IQ (just ask him). Clearly, the solution is higher taxes.

Fed chairman Ben Bernanke, back when he was Fed governor --

A second issue concerns the uses of international credit in the United States and other industrial countries with external deficits. Because investment by businesses in equipment and structures has been relatively low in recent years (for cyclical and other reasons) and because the tax and financial systems in the United States and many other countries are designed to promote homeownership, much of the recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things. However, in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be.

So in fact there is a link between tax cuts, huge deficits (since it's the tax cuts to the rich that result in the most foregone revenue), the foreign capital inflow to help finance those deficits (and to meet the private sector borrowing needs with the government sucking in so much available savings), and the riding of a housing bubble (such as no-doc loans) and the financial mess the country is now in.

Another way to think about the question: would the financial world really look the same without the $2 trillion in public debt that George Bush has added in the last 8 years?

UPDATE 15 OCTOBER: Bernanke is even clearer about the link between capital inflows and the crisis --

Large inflows of capital into the United States and other countries stimulated a reaching for yield, an underpricing of risk, excessive leverage, and the development of complex and opaque financial instruments that seemed to work well during the credit boom but have been shown to be fragile under stress. The unwinding of these developments, including a sharp deleveraging and a headlong retreat from credit risk, led to highly strained conditions in financial markets and a tightening of credit that has hamstrung economic growth.

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