The Health of Social Security

first published on Automaticfinances.com

A committee of Social Security trustees has published another report on the financial health of the Social Security System. The new report tells us what social security reports always tell us; the social security system is failing, or headed for collapse “Alarm Sounded, on Social Security” the caption reads on the Washington Post article of May 13th.

New Social Security reports allow politicians to reassure retirees of their commitment to shore up the system and make sure it remains solvent. It also allows these same politicians to recite the status quo by telling us they have only two choices: cut benefits or add another percent on to the steeply regressive payroll tax.

This time is the same as always. The article quotes unnamed administration sources who say Congress can save the system by raising payroll taxes from 12.4 to 14.4 percent, or it can cut benefits 13 percent or a combination.

As of 2009 the payroll tax for Social Security, the OASDI(Old Age Survivors and Dependents Insurance) deduction on pay stubs, continues to be 6.2 percent with an additional Medicare tax of 1.45 percent for employees. The OASDI tax is actually 12.4 because the employer has to match the employee contribution. The same matching occurs with the Medicare portion of the payroll tax, but there is a difference because OASDI has a wage cap, which stops the tax for wages over the cap.

In 2009 the cap is $106,800; in 2008 the cap was $102,000; in 2007 it was $97,500. Beginning in 1991 Congress doubled the cap on the Medicare part of the tax. In 1994 the rising cost of health care convinced a majority of Congress to lift the cap for the Medicare portion of the tax, but they did not do so for the 6.2 percent of payroll taxes going to OASDI.

The Social Security Administration reports data for the distribution of workers by compensation. The year 2007 is the most recent year reported, which shows 146.7 million workers with wages of $99,999.99 or less. It shows 8,869,798 with wages above $100,000 including 151 who earned wages of $50 million or more. In other words, 146.7 million pay a 6.2 percent payroll tax on all of their wages while 8.9 million get a special privilege and pay nothing on wages over the cap.

Someone earning a salary of $25,000 already pays $1,912.50 of payroll tax for Social Security. Raising the tax as proposed would bring it to $2,162.50, before any other taxes are paid.

If the Congress adds another percent to the employee half of the payroll tax, making it 7.2 percent, then the extra revenue will be $51.3 billion, using the same data as above.

If the Congress treated America’s wage earners equally and applied the 6.2 percent tax to all of America’s wages reported by the Social Security administration, then the additional OASDI revenue from the employee half of the tax comes to $103.9 billion dollars. Dropping the wage cap would end a lucrative privilege for the well to do and the very rich and raise lots of money for the allegedly failing Social Security system, but as always that is a topic the politicians refuse to talk about.

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Computer Billing in Health Care

First published on Automaticfinances.com

The Obama Administration is described as computer savvy. They apparently made excellent use of computer technology during the election campaign and continue to apply computer technologies in their White House duties. They have suggested over hauling America’s health care records system by computerizing records and billing, and reducing or eliminating paper billing and records. America’s health care system has lots of paper to save, but there is reason to worry about jobs.

Monthly employment in health care establishments averaged 14.6 million jobs in 2008 for health care sectors in ambulatory care, hospital care, nursing and residential care. The jobs in these sectors can be divided among three groups of occupations. The first is health care practitioners who are mostly doctor, dentist, pharmacist, nurse, therapy and technology jobs. Health care practitioners actually deliver health care to patients and the jobs tend to have college and professional degree requirements. Few can be performed without a license.

Health care practitioners are the biggest segment of health care with 5.7 million jobs, 2.2 million of them nurses. Next are health care support occupations. All of them have aide, assistant or attendant in their job title: nurses aide, therapy assistant and so on. Jobs in support occupations are 3.1 million of the 14.6 million of the health care total. The third segment might be called administration and overhead, which are jobs in managing, record keeping and billing. These are 5.8 million jobs.

In other sectors of the economy, bills tend to be a two party transaction between a customer and a vender, but seldom so in health care. One illness or injury starts a billing shuffle through separate bureaucracies at hospitals, laboratories, clinics, HMO’s, PPO’s, IPO’s, but also private insurance companies, independent billing agencies and bureaucracies at Medicare, Medicaid, Social Security, workmen’s compensation or the Veterans Administration. Medicare, Medicaid and workmen’s compensation are federal programs with federal bureaucracy, but also administered by the states through 50 separate bureaucracies.

More health care in a paper world brings growth to jobs as financial clerks and information and records clerks, which are bill and account collectors, billing and posting clerks, bookkeepers, office clerks, receptionists, and secretaries. Those jobs exceed 2.6 million for those who work within the health care industry sending out the bills. It doesn’t count the insurance company or government bureaucracy jobs for the people who take them in.

Computerized billing would lead to standardization and cost saving efficiency and better and more detailed records. It should be done, but like many good things it will have noticeable side effects. At the Obama administration jobs will be a bigger problem than they may realize.

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Parkinson's Law

Parkinson’s Law and America’s Labor Markets

"Work expands so as to fill the time available for its completion."
-C. Northcote Parkinson

Back in the 1950’s Mr. Parkinson published a book that started with Parkinson’s Law cited above. It was a thin book with big fonts and bigger margins. He had some stories with anecdotal material to support the law. I cannot remember a single one of the stories but they were unnecessary. No one contradicted Parkinson’s Law.

Notice if you reverse the first two words Parkinson’s Law becomes a policy. Expand work so as to fill the time available for its completion. Now we have a directive not a prediction. A slight variation might be, expand expenditures so as to fill your whole life with work.

Writing Parkinson’s Law as Parkinson’s Policy is important because a law usually feels like something natural and inevitable and not a decision. Policy is a decision and people make decisions. The federal government is in the best position to expand work so as to fill the time available for completion because it can tax and spend, and controls money and credit, both of which allow increasing the country’s total spending as necessary to create jobs.

Back on August 11, 2005 the Associated Press reported President Bush’s comments on a transportation-spending bill. “President Bush calls the massive $286.4 billion transportation spending bill he signed into law Wednesday a job creator.” The article goes on to describe the bill that pays for 6,000 favored projects in the districts of nearly every member of Congress. Even though the legislation is $30 billion more than the President recommended he is quoted as “proud to sign it.”

Imagine my surprise at the candor of Mr. Bush with his reputation as a devotee of free enterprise. Free enterprisers expect jobs to be part of free markets where supply and demand determine output, prices and wages as if guided by an “invisible hand” and with the Adam Smith condition that society’s bread will not be due to the benevolence of the baker, but to his self-interest.

It is easier for those outside elected office to favor free markets and its policy of waiting since they do not have to take responsibility for the unemployed. It is different for politicians like Mr. Bush who apparently understand that a job in America is a requirement.

Over the last twenty years America’s total spending and Gross Domestic Product(GDP) are up, which helps meet that job requirement, and helps counter the mordant, mournful decline of 4.3 million manufacturing jobs since 1990.

The economist's way of looking at this reality is to say "Wow, this is terrific because the economy has growth with more goods and less hours of work and now 4.3 million people can be released to produce more products and services in other industries." Economists like to talk about alternative uses and labor released for alternative employment can help raise economic growth.

Economists see a natural flow of reallocation as inevitable, but the Obama administration is not prepared to wait for the economist’s reallocation. They have adopted the Parkinson policy of filling the time available for work.

The new stimulus package is loaded up with job creating building projects: roads, rail, solar panels, windmills and plenty more. Adopting building projects as a Parkinson Policy will create jobs, as it did for Mr. Bush, and it has the advantage that Americans will have something to use when the projects are finished.

When Mr. Parkinson published his book he was more concerned about the growth of rigmarole in bureaucracies, especially government. He saw bureaucracies growing with the growth in transactions, which are recorded, counted, and taxed through many bureaucracies.

America administers dedicated taxes and charges through multiple bureaucracies for federal, state and local taxes on income, sales, property, utilities, alcohol, tobacco and charges for workmen’s compensation, unemployment insurance, social security, Medicare and a few more. Every new job in America brings action at tax bureaucracies of work and jobs in recording, filing, collecting and dispersing. There is no natural law that requires each little tax to go with each little service, but it sure is good for jobs.

Filling bureaucracies with Parkinson’s policy helps moderate the relentless tide of jobs lost to labor saving technologies and computer use in the economist’s reallocation. Ominous trends for jobs in information services, especially publishing and telecommunications, finance, even retail and wholesale trade add trouble to the jobs disappearing in manufacturing, natural resources, and agriculture.

From 2000 through 2008 publishing jobs dropped over 150 thousand while broadcasting jobs went down 27 thousand. Telecommunications jobs are off 375 thousand where jobs lost in landline service are not replaced by the trickle of new jobs in cell phones. In today’s digital world landline, cell, and cable companies offer phone services as well as Internet and cable TV services using the same or similar technologies. Their low cost to the incremental customer and the ability of individual companies to offer multiple services through one network pressures firms to consolidate, cut costs, and eliminate jobs.

It is much the same story in finance where jobs have dropped back to 2000 totals. Bank mergers and consolidations typically go with layoffs, but money and finance are nothing but computer code, which can be managed by ever fewer people. On-line banking wipes out jobs even though not everybody likes the efficient digital world. Some still want to drive to the bank and exchange paper with a teller. America now employs 600 thousand tellers. If Americans decide to go digital, America will have fewer tellers, a lot fewer.

Retail jobs are down 633 thousand for the twelve months ending April 2009, but retail job growth has been sluggish for years. Computers raise productivity especially with barcodes and inventory management, raising sales volumes per employee and reducing employment opportunities. Growth in on-line sales will reduce jobs further.

Economists continue to tell anyone who listens that jobs lost to reallocation will be replaced as more Americans resolve to “get some training” for the new high tech jobs of their future. The Bureau of Labor Statistics publishes industry and occupational data that tell a different story. Count 370 thousand new jobs in landscaping services, 300 thousand new jobs in security guard companies and investigation services, 242 thousand new jobs in janitorial services, 471 thousand new jobs in child day care, 151 thousand new jobs at telephone call centers, all since 1990. Include 90 thousand new jobs at parking lots and car washes, 92 thousand new jobs at collection agencies. No one should forget 1.187 million more jobs for those employed through temporary help agencies.

Restaurant jobs are up 3.1 million also since 1990 along with 172 thousand new jobs in gambling and casino hotels, 273 thousand new jobs at amusement parks, arcades, golf courses, country clubs, ski hills, and marinas. Include fitness centers with more jobs than all of gambling and 236 thousand new jobs since 1990. Count 255 thousand more jobs in pet supply stores, and pet care services, including veterinarian services.

These are the industries where America works when technology saves labor and we create jobs with the Parkinson policy. More jobs in computing technologies relieve the decline, but not much. If we look at all the job growth in the multiple of computing industries, by adding new jobs since 1990 in software publishers, data processing, Internet service providers, web search portals, custom computer programming, computer system design, computer services management and related services, computer and office machinery rental and leasing and computer and office machinery repair, the gain comes to 1.334 million new jobs; less than half of jobs lost in manufacturing or jobs gained in restaurants in the same period.

Engineers are high tech, but the majority of them need work in manufacturing. The just published Bureau of Labor Statistics occupational data for 2008 shows 1.516 million engineering jobs just 65 thousand more than 2000. Education jobs are up with 4.1 million more jobs since 1990, but those are mostly public jobs. As such they are part of the Parkinson Policy, hardly the economist’s solution.

The Obama administration will have nightmares trying to replace the jobs already lost, just since taking office. Economists have faith in reallocation, but America needs jobs. The Parkinson Policy will create jobs. Long live Parkinson, only he is not the solution, but solutions are topics for other articles.

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Banks and Nationalization

First published on Automaticfinances.com

In the current banking crisis there continue to be people in banking and business calling for nationalizing banks. One recent example was an article in the Atlantic Magazine titled “The Quiet Coup.” It turns out the author is from the International Monetary Fund with experience from international financial crises. He writes nationalization would not mean permanent state ownership. “It would allow the government to wipe out bank shareholders, replace failed management clean up the balance sheets, and then sell the banks back to a private sector.”

Nationalization does not solve one problem that could not be solved without it. America has to have a banking system and wiping out one to replace it with another does nothing to address the political causes of the banking crisis. America’s bankers played the central role in creating America’s banking crisis, but their influence continues to prevent the reforms that are needed.

Bankers and the financial community gained extra political power beginning in the Reagan administration, but continuing through the Clinton years and to the present. Congress slowly changed or abandoned regulatory protections that began as far back as 1933 with the Glass-Steagall Banking Act.

America’s banking regulations previously recognized the unique and paramount responsibility of commercial banks. That is to provide customers with checking account services and guarantee reserves are available to pay on customer checks. Congress passed the Glass-Steagall Act to prohibit commercial banks from diversification into other financial services such as using loanable funds to underwrite corporate security offerings.

In 1933 Congress feared a bank’s security offerings department would pressure the bank’s lending department to take risks that could lead to bank failure. They feared banks could manipulate stock prices or pressure their loan customers to buy stock offerings, or take control of other non-financial corporations.

By the 1980’s and 1990’s, the relentless pressure of financial groups and plenty of campaign contributions turned caution into compliance; Congress allowed banks to diversify and consolidate into giant risk takers too big to fail.

Million bought bank stocks because banks will never be obsolete and they had the reputation of being steady, safe and conservative investments paying steady but modest dividends. Even without nationalization those millions have lost dividend income that will never be recovered and 50 to 90 percent of stock value. Those same millions had nothing to do with the gambling and risk taking of the banks they supposedly own but do not control.

Wiping them out with no further chance to recover some of their losses is unfair but also unnecessary. The so-called toxic assets will have to be written off with or without nationalization. Reserves will have to be restored to the banking system with or without nationalization. Nationalization does not reform the banking laws but just starts the whole thing over. Nationalization does nothing to encourage anyone to invest in banks, ever.

We can be thankful the Obama Administration has been resisting these calls. We hope they continue and we hope they will get around to proposing the necessary return to cautious banking practices. Perhaps the time is not right in their political judgment. We will wait, but in the mean time nationalizing banks is a loser.

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Snowball

The SnowBall: Warren Buffett and the Business of Life, by Alice Schroeder, (New York: Bantam Dell Books, 2008), 837 pages, $35.00.

The Snowball begins in 1999 at a Sun Valley conference: an annual series of discussions and seminars. We hear a new term “elephant-bumping,” a quip defined by Buffett as getting big shots together to reassure them they are really big shots. Readers begin by meeting Buffett at retirement age and get the highlights of his conference presentation, where he confronts the big shots with some financial ideas they do not all want to hear.

Following the introduction the book chronicles Buffett’s life and career from the beginning in 1930 through September 2008. His father, Howard Buffett, was a successful stockbroker in depression era Omaha where Buffett grew up delivering papers and collecting stamps. He purchased his first stock in the spring of 1942: 3 shares of Cities Service Preferred.

Buffet graduated from Woodrow Wilson High School in Washington, DC, where he lived and spent most of his time after his father was elected to Congress in November 1942. We hear about his Washington life and go with him for his two years at the University of Pennsylvania, but then back to Nebraska where he finished college at the University of Nebraska.

It is about this time readers get the strongest whiff of the Buffett obsession with money making as a competition in itself. He was turned down at Harvard Business School but gets a special late admission to Columbia to study finance and stock analysis under Benjamin Graham and others well known in Security Analysis.

His business studies at Columbia turned out to be a transition into his lifelong career in investing. By the time he took a job on August 2, 1954 with the Graham-Newman investment partnership in New York he already had considerable knowledge and experience despite his young age of 24.

At Graham-Newman he studied Standard and Poors and Moody’s manual looking for companies his mentor, Ben Graham called Cigar butts. Cigar butts Graham defined as cheap and unloved stocks that had been cast aside like the sticky mashed stub of a stogie left on the sidewalk; a stogie that might have one last free puff.

One example turned out to be a company run as a pubic utility in New Bedford Massachusetts called the Union Street Railway. His review of the company showed it was selling for half the value of its cash in the bank. It was a real cigar butt but there would be more.

After several years Graham and Newman retired and the Graham-Newman partnership was shut down. Buffett decided to form his own partnership, which started May 1, 1956 as Buffett Associates, Ltd. It was set up as an investment partnership based in, and operated from, Omaha, Nebraska and not New York city. He had seven partners.

The author’s discussion of the partnership begins on page 201. The remaining 636 pages describe Buffett’s businesses, his investments and investment strategies over 53 years. We learn about Berkshire-Hathaway, GEICO, Kay Graham and the Washington Post and all his well known and not so well known investments, but there is much more in what is a very long book.

Business principles surface through pithy slogans and aphorisms and sometimes by example. He was one of the first to warn about, and object to, the use of derivatives and other speculations. He got to see how correct he was when he worked to rescue Salomon Brothers and Long Term Capital Management. He avoided leverage and the risk that goes with it. He was never a passive investor, but exerted his influence directly and by finding the right people to manage the companies he acquired.

Buffett sayings: Rule number one, don’t lose money. Rule number two, don’t forget rule number one. Rule number three, don’t go in to debt. There are more rules and principles.

Business issues and career decisions mix through the book with long narrative discussions of family members and their personal lives: relationships, careers and interests. Readers meet many business and personal friends, often with lengthy asides and narrative profiles. Readers go to parties and travel to many places. We learn Warren Buffet has simple tastes and the culinary habits of an eight year old, along with other personal matters.

Direct quotes from the author’s interviews run through the book and they are set in italics, an especially good feature. These interviews help the reader to understand the philosophy and strategies that brought personal and financial success. Extensive quotations from interviews let readers do more of their own interpretation unfiltered by the author.

His political views and social attitudes emerge in both the narrative and quotations. He supported civil rights when it mattered the most and progressive politics generally. He turned into a vocal opponent of the Bush tax policies and especially opposes eliminating the estate tax.

Throughout the book the author kept giving financial progress reports even from Buffett’s early years in Omaha. She wrote now Warren has $120; now Warren has $2 billion; now Warren has $7 billion and so on. It was unnecessary at least for me. I did not read the book to be counting money I wanted to learn something about a man who did something unusual that virtually no one else has ever done.

By the end of the book I felt the success of someone who is patient enough, cautious enough, hard working enough and savvy enough to do something extraordinary that he set out to do, and without losing his ethical compass. In an age of speculative failures where rogues and scoundrels are everywhere that makes him a unique success, at least in my book.

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Banks and Bailouts

First published on automaticfinances.com

Banks keep making news. One caption in the April 18th Washington Post reads "Bank Profits Mask Peril Still Lurking." Readers learn the biggest of America's banks like Citigroup and J. P. Morgan Chase are reporting large first quarter profits, but remain pessimistic about their future and the future of the economy.

The Federal government has been bailing out the nation’s banks since last summer, handing out billions in emergency reserves with as many as 500 banks mentioned, always with a press release telling the public there must be bailouts or the banks and economy will collapse.

A collapse of the financial system is more complicated than the government wants to talk about. One type of collapse would occur if banks could not clear checks for their checking account customers. You and I go to pay our phone bill and the check bounces, but it’s not our fault the bank has run out of reserves.

That could be called a calamitous collapse. Technically it could occur because the United States uses a fractional banking system, which means individual banks only hold a fraction of their checking account liabilities as reserves to pay checks. Typically the Federal Reserve requires monetary reserves around 15 percent for checking account liabilities, the rest can go to loans. When customers with checking accounts also make deposits and borrowers make their loan payments 15 percent will be enough.

When borrowers default by the billion, banks will not have reserves to pay on their checking accounts, which signals a collapse of the banking system. Not to worry though because the Federal Reserve bank has the ability and full authority to provide the necessary reserves to America’s banks and they have been doing just that.

Making sure there are reserves for checking account customers could be called an essential and adequate bailout. It is the minimum that must be done to keep payments flowing and prevent an economic collapse.

However, the government is going far beyond that minimum with its bank bailouts. They press billions more of reserves on the banks, telling them to forget about defaulters and go find some more borrowers. In effect, the government wants our banking system to lead America out of recession. It is not working though, at least not so far.

The bank profits mentioned in the article above are coming from more recent loans for spending made with the bailout reserves, but bank officials themselves are saying these loans went to other weak and potentially defaulting borrowers. Many banks, especially large ones, have been doing a large share of their business in credit cards for some time, but wages and employment are in no shape to expect credit card lending to revive the economy.

We need spending to get the economy going, but right we will have to trust the Obama spending plan and not the banks. Banks will follow America out of recession, but there is no sign yet they will lead us where we need to go.

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Henry Ford and Mass Production

First published in the pulsereview.com April 24, 2009

Mass production needs mass markets. It’s not a new idea. Back in 1914 Henry Ford opened his Model T auto plant using the assembly-line method; a new invention at the time. To the anger and indignation of the nation’s business community, he offered the unheard of high wage of $5 a day.

Apparently he knew he would be producing more cars than Americans could buy, but the higher wage would help him sell what he could produce. Now, almost a hundred years later, America can produce millions of new cars Americans cannot afford, and the industry Henry Ford founded totters on the brink of bankruptcy.

When a country does not buy what it can produce it will have idle factories and idle workers: a recession as America is having now. Back in the 1930’s during the Great Depression the Roosevelt administration adopted a policy of spending the country out of depression. Having the government borrow and spend comes with worries and conflicts over debt and deficits, but it does pump money into the spending stream and create jobs.

The Roosevelt policy was the start of a great tradition in American politics for both Republicans and Democrats, who always adopt a policy of spending America out of recession. The Obama stimulus plan is in that great tradition. In the current down turn the government plans to spend on many new projects, pumping money into states and communities and leading the way for private sector spending.

The presumption of the stimulus policy is the same as always: government spending is regarded as inferior to private spending and therefore a temporary stimulus until private sector spending takes over. But in the recession of 2009 we may want to remember Henry Ford just to remind ourselves that adequate private sector buying power cannot be assumed.

A policy to spend America back into prosperity needs people and families who return all their money to the spending stream in stable and predictable ways. A married couple supporting themselves as cashiers can be expected to spend all their money on room and board, car loans, gasoline, phone service, clothing and, we hope, a little left over for health care and entertainment.

Cashier is one of America’s two biggest jobs, which are retail salesperson and cashier. Together they make up 8 million jobs, or almost 6 percent of America’s jobs at establishments. The median wage for a cashier reported by the Bureau of Labor Statistics is $17,160, but the 90th percentile wage is still only $24,600. For a couple both earning $24,600 the Federal income and payroll taxes come to $7,656.30, not to mention state income taxes, sales taxes, utility taxes, gas taxes and a few more. Retail sales and cashier are just two jobs, the Bureau of Labor Statistics reports hundreds more with millions employed earning wages no more than cashiers.

The millions who earn low wages and pay high taxes contrast sharply with news of the very rich and news of the growing inequality of income. Corporate heads with bonus and severance packages get millions of dollars. Hedge fund managers get paid in capital gains that have favorably lower tax rates than wages.

Recently the Statistics on Income Division of the IRS published its report on the 400 individual tax returns with the highest adjusted gross incomes. It is for the years 1992 to 2006. For 2006, they report the adjusted gross income for each of the top 400 was an average of $263.3 million dollars. The top 400 taxpayers divvy up a total of $105.3 billion dollars

So often discussion of the rich and the taxes they pay, or don’t pay, starts and ends with what is fair. The rich should pay their “fair share”, whatever that might be. But in a country that expects to spend itself into prosperity, it is worth asking how and when the rich get their billions back into the spending stream?

For the stimulus plan to work any income not spent as consumption, has to make its way back into the economy as loans to borrowers. After all, mass markets need mass production, which means saving has to be turned into loans for projects that support jobs building factories, rapid rail lines, solar panels and other real capital.

Financial intermediaries, formerly known as banks, savings and loans, credit unions, finance companies, mortgage or investment banks and a few more, cumulate the savings of savers in order to make loans to borrowers. They act as intermediaries because they are like agents in the middle of a transaction between savers and borrowers. Their sole function is to channel the savings of net savers back into the spending stream as loans to net borrowers.

There was a time when it was common for borrowers to create long lived assets, but back in the 1980’s adventurous money managers starting having loanable funds to buy thousands of real estate mortgages, which they bundled for resale into an interest earning asset like a bond. They called them Collateralized Debt Obligations (CDO), or Collateralized Mortgage Obligations (CMO) and more recently, Mortgage Backed Securities (MBS). In that way mortgages could be resold to smaller investors who would not normally buy individual mortgages.

What is important to notice though is that repackaging and reselling mortgages does not create new assets. Reselling mortgages means more transactions that allow money managers to charge fees and potentially make money with price fluctuations, but nothing new or usable results from the repeated resale of mortgages.

As the 1980’s passed through the 1990’s and into the new millennium the traditional means of finance like stocks and bonds were still available, but they gave way to Mortgage Backed Securities and new and exotic investment derivatives: principal only strips, interest only strips, credit default swaps and on and on.

Reselling mortgages as Mortgage Backed Securities got so lucrative that money managers started running out of mortgages to bundle and resell. To keep it going it was necessary to start lending to unqualified homebuyers, a practice that many will remember as sub prime lending and sub prime loans.

We have to think financial intermediaries with qualified homebuyers, or qualified business and corporate borrowers, would lend to them before lending to unqualified borrowers in the sub prime lending market. Lending billions to unqualified borrowers suggests there was a large surplus of loanable funds.

It is not surprising that a bubble of surplus loanable funds and the fantastic growth in Mortgage Backed Securities took place after tax cuts that further reduced tax rates at the highest incomes, but especially for reductions in taxes on capital gains and the new tax reductions on corporate dividends. These reductions helped increase disposable incomes for the richest Americans, as the IRS data so clearly shows.

Recall a recent need for loanable funds to rebuild New Orleans following hurricane Katrina. Instead America’s loanable funds went for transactions where nothing happened, save for gambling in speculative financial derivatives. And then we realize tax cuts for the rich helped generate an immense surplus of loanable funds that were wasted on financial speculation rather than building productive capacity because millions of wage earners could not buy what America can produce.

Where are you Henry Ford when we need you? In 1975 America taxed the rich at a 70 percent marginal tax rate, but not that many years before marginal tax rates were 90 percent. Now the rich tend to pay 15 percent on capital gains and dividends.

The rich failed themselves, but they also failed the country, which is why America needs to return to taxing the rich at 90 percent.

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