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Who was looking at the numbers? Who was minding the store? These were the questions I was asking myself back in the fall of 2007, when the sub-prime mortgage crisis began.

I was questioning and focusing on the mortgage products that were the root causes, the ARM (Adjustable Rate Mortgage) and the Sub-prime (no documentation).

If these were the reasons for the default tsunami, begun in 2006-2007, why wasn’t someone, anyone, in the know (i.e. Chairman of the Federal Reserve Alan Greenspan), looking at the individual mortgage products to see if they were indeed based on truthful, fact-based documents.

In the 90′s, when I took a course to become a certified loan officer, I asked my instructor, “What was the historical breakdown of all approved mortgage products.” He stated: Fixed rate – 80%; Jumbo – 10%; ARM/Sub-prime – 10%. In 2000. the Arm/Sub-prime was 17% of the total and in 2005, the ARM/Sub-prime was up to 44%.

A deviant trend had been established in the last decade without any logical reason. If any regulator had bothered to investigate, they would have found the answer – rampant fraud.

In January 28, 2008, I read a small article in the Wall Street Journal about the due diligence (quality control) in the mortgage business, of companies that verify the data and documents of the approved mortgage application. New York Attorney General Andrew Cuomo had gained the cooperation and testimony of Clayton Holdings (founded in 2005; Shelton, Conn.), a due diligence company for the investment bankers, in a criminal investigation to determine the depth of the fraud perpetrated. They did. Another company, Watterson-Prime (Bellevue , Wash.) was also under investigation.

If someone, anyone in authority, had bothered to see and investigate the aberrant trend of approved mortgage products, the sub-prime mortgage crisis would have been stopped in its tracks in June 2006.

Warren Nystrom
Swisshelm Park, Pa.

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David Sirota

By David Sirota
Political journalist, best-selling author and syndicated newspaper columnist

During the recent fight over extending unemployment benefits, conservatives trotted out the shibboleth that says the program fosters sloth. Sen. Judd Gregg, for instance, said added unemployment benefits mean people are “encouraged not to go look for work.” Columnist Pat Buchanan said expanding these benefits means “more people will hold off going back looking for a job.” And Fox News’ Charles Payne applauded the effort to deny future unemployment checks because he said it would compel layabouts “to get off the sofa.”

The thesis undergirding all the rhetoric was summed up by conservative commentator Ben Stein, who insisted that “the people who have been laid off and cannot find work are generally people with poor work habits and poor personalities.”

The idea is that unemployment has nothing to do with structural economic forces or rigged public policies and everything to do with individual motivation. Yes, we’re asked to believe that the 15 million jobless Americans are all George Costanzas — parasitic loafers occasionally pretending to seek work as latex salesmen, but really just aiming to decompress on a refrigerator-equipped recliner during a lifelong Summer of George.

Of course, this storyline makes no sense. From liberal Paul Krugman to archconservative Alan Greenspan, economists agree that joblessness is not caused by unemployment benefits. With five applicants for every one job opening, the overarching problem is a lack of available positions — not a dearth of personal initiative. (more…)

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

In recent weeks there has been a serious effort by the conservatives and even many centrists to whip up anger at public sector workers over their pensions.  

Their basic line is that public sector workers get better pensions on average than their private sector counterparts.  At the same time, most state and local pension funds have large shortfalls, implying additional government revenue will be needed to keep them solvent.

This is supposed to make people really angry at public sector workers.  The Right Wing noise factory has been whipping up hostility against public employees, sensing they may have another ACORN on their hands.  A New York Times columnist even called on retired public employees to give back pensions for which they worked and have solid legal claims.

 We should recognize the attack on public sector workers for what it is: A sleazy case of scapegoating intended to divert people’s attention from the real villains in this economy, the Wall Street boys and the inept economic policymakers who took the economy — and peoples’ jobs, pensions and home mortgages — to ruin and seem intent on leaving it there. 

The basic facts are straightforward.  Adjusting for education and experience, public sector workers actually get paid slightly less on average than their counterparts in the private sector.  It is likely the lower pay is largely or fully offset by a better benefit package, but it is likely the difference in benefit packages between public and private sector workers is not as large as it may seem. (more…)

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Last week, the Fed announced that it would use the proceeds from retired mortgage-backed securities to buy up more government bonds. This may have a very modest effect in keeping long-term interest rates low, thereby giving a small boost to the economy.

Such a measure would be reasonable if the economy was basically fine and just in need of a modest lift. But this is not the case.

The unemployment rate is 9.5% and virtually certain to rise in the second half of the year. Job growth has basically stopped and GDP is likely to be in the range of 1-2% in the next four quarters, as state and local governments cut back spending, the stimulus phases down and the housing market resumes its slide.

In this scenario, the Fed should be taking aggressive steps to bring the economy back to full employment. After all, this is part of its job description. Its responsibility is to promote price stability and full employment. There is no concern about price stability in the sense of the rate of inflation being too high right now. Therefore, the Fed’s responsibility should be to do everything within its power to reach full employment; obviously, we are nowhere close now.

Its chairman, Ben Bernanke, even knows exactly what needs to be done, as the Wall Street Journal recently reminded us. He wrote a paper back in 1999 about Japan’s stagnant economy and mild deflation. Following a recommendation by Paul Krugman, he urged Japan’s central bank to target an inflation rate in the range of 3-4%. (more…)

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

Herbert Hoover’s disciples are making noises even as America moves closer towards a double dip recession.

Fed Chair Alan Greenspan tells the New York Times all the Bush tax cuts should expire as scheduled, even those that benefit the middle class and not the rich. His reason: the nation’s looming deficit requires it.

On Sunday, former Treasury Secretary Robert Rubin, appearing on CNN, says any further effort to stimulate the economy would be “counter productive,” and that policy makers instead should craft a deficit-reduction plan.

Greenspan is only partly wrong. The Bush tax cuts should expire for the top 2 percent of filers (those earning over $250,000) because they save rather than spend a large portion of their incomes, and we need all the spending we can get. The cuts should be extended for everyone else because they’ll spend them. The top 2 percent now receive almost a quarter of total national income, which is one reason why the middle class doesn’t have the purchasing power to lift the economy on its own. The best way to give them even more purchasing power would be to give the middle class a larger tax cut — say, a payroll tax holiday on the first $20,000 of income.

Rubin is entirely wrong. As Friday’s jobs report shows, the gap between total private spending (consumers plus business plus net exports), on the one side, and the nation’s capacity to produce goods and services at or near full employment, on the other, is still a chasm. So government needs to do more spending now, in the short term, in order to get people back to work and the economy back on track.

In 1999, both Greenspan and Rubin urged Congress to repeal the Glass-Steagall Act that had safely separated commercial from investment banking. In 2000 they argued against allowing the Commodity Futures Trading Corporation to regulate derivatives. Until recently, Rubin ran the executive committee at Citigroup, whose excesses required a massive taxpayer bailout. In 2001 Greenspan supported the Bush tax cuts that blew a gigantic hole in the federal deficit and mostly benefited the wealthy. In 2002 he lowered interest rates to near zero but refused to oversee how banks were using their almost-free borrowings.

Both Greenspan and Rubin are deficit hawks. So was Herbert Hoover and so was Hoover’s Treasury Secretary Andrew Mellon. And look what Hoover and Mellon got us into. When we least need him, Hoover is being exhumed.

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Cross-posted from Robert Reich’s Blog

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Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three presidential administrations, most recently as secretary of labor under President Bill Clinton. He has written twelve books, including “The Work of Nations,” “Locked in the Cabinet,” and his most recent book, “Supercapitalism.” His “Marketplace” commentaries can be found on publicradio.com and iTunes. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

It is amazing that angry mobs have not risen up and chased all the economists out of the country. While the greed of the Wall Street gang provided the fuel for the bubble, the economists played an essential role as enablers. This was most directly true for economists in policymaking positions, like Alan Greenspan at the Fed.

It was Greenspan’s job to stop the housing bubble. A competent and honest Fed chair would have recognized the bubble by 2002 and taken whatever steps were necessary to rein it in. And we should be 100 percent clear, in spite of all the song and dance about how the financial reform bill will prevent another bailout, the Fed absolutely had all the tools needed to stop this disaster. They just lacked either the competence or the integrity, or both.

But the economists in policymaking positions are just the beginning. There are thousands of macroeconomists across the country, in government, academia and private industry who track the economy as a full-time job. It is actually a well-paid job, with many drawing six-figure salaries and big name types getting close to $1 million a year.

Given the high pay for this profession, it was reasonable to expect that they would be able to see something like the $8 trillion housing bubble that eventually wrecked the economy when it collapsed. But you can count on your fingers the number of economists who raised warnings about the housing bubble. The rest either did not see it, or didn’t think it worth mentioning. (more…)

Richard Eskow

By Richard (RJ) Eskow
Senior Fellow, Campaign for America’s Future

There’s a battle going on between those who are defending Social Security – that is to say, the “good guys” – and those like economist Alice Rivlin and Wall Street banker/giveaway king Neel Kashkari, who would cut it. The attackers pretend to see nuances that don’t exist, slanting their arguments to make benefits reductions seem inevitable and even humane. True to form, Rivlin frightens Americans with the idea that we need to “save” Social Security, then proposes to “reassure” them … by cutting it.

Fortunately the defenders are getting reinforcements. A new coalition of organizations is uniting under the “Strengthen Social Security” banner, including major unions like the AFL-CIO, SEIU, and AFSCME, the National Organization of Women, MoveOn, and the National Education Association, as well as 60-plus other organizations representing over 30 million Americans. (Note: I am associated with that coalition through my affiliation with the Campaign for America’s Future.)

In this corner, hailing from the great state of Nevada …

Harry Reid told attendees at the Netroots Nation conference that “Social Security is the most successful social program in the history of the world,” while condemning the “fear tactics of those who say Social Security is going broke. It’s not.” That’s a good start. Nancy Pelosi was even stronger, and considerably more specific, telling conference attendees that she opposes raising the retirement age. Pelosi added:

“To change Social Security in order to balance the budget, they aren’t the same thing in my view. When you talk about reducing the deficit and Social Security, you’re talking about apples and oranges.” (more…)

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

It is amazing how people in Washington are so forgiving — of each other. We have close to 15 million people unemployed and more than 8 million people under-employed because the folks managing our economy were incompetent.

In spite of the efforts of economists and policy types to portray the cause of the economic collapse as being complicated, it wasn’t. It was really really simple. Prior to the downturn the economy was being driven by an $8 trillion housing bubble. This led to a boom in residential construction. (A separate bubble in commercial real estate led to a boom in non-residential construction.) The equity generated by the housing bubble also led to a surge in consumption, with the saving rate falling to almost zero at the peak of the bubble.

It was inevitable that the bubble burst. Bubbles do that. They lead to an over-supply and eventually we run out of suckers willing or able to pay bubble-inflated prices for houses. The collapse caused the economy to lose $1.2 trillion in annual demand from the private sector. Annual construction spending fell back by close to $600 billion and consumption fell by roughly the same amount as a result of the loss of housing wealth.

There is no mechanism that allows the economy to easily replace this much demand. Hence we were guaranteed a severe downturn, without massive amounts of spending by the government. (more…)

Dave Johnson

By Dave Johnson
Fellow with Campaign for America’s Future

Ah, the things we forget.

This was then: Federal Reserve Chair Alan Greenspan greenlighted the Bush tax cuts, saying that Clinton was paying down the country’s debt too fast as a result of modest taxes on the wealthy. So the Bush tax cuts for the rich passed, which immediately brought us the huge, huge deficits. Bush called the deficits “Incredibly positive news” because they would force a debt crisis.

In the 80′s Alan Greenspan’s Social Security Commission raised taxes and cut benefits on working people, providing a huge amount of revenue which was then handed out as tax cuts for the rich. And now, rather than pay back that money borrowed from Social Security from where it went, our elites are insisting that Social Security must be cut back, we must all work until 70, etc.

Decades earlier Alan Greenspan was smack in the center of the Ayn Rand* cult that called the non-wealthy “parasites,”

Mr. Greenspan had married a member of Rand’s inner circle, known as the Collective, that met every Saturday night in her New York apartment. . . . Mr. Greenspan wrote: ” ‘Atlas Shrugged’ is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

This is now: Greenspan Calls for Congress to Let All Bush Tax Cuts Expire. (more…)

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

When I was a small boy at the start of the 1950s, my father gave me my first economics lesson. “Bobby,” he said with obvious concern, “you and your children and your children’s children will be repaying the national debt created by Franklin D. Roosevelt.”

I didn’t know what a national debt was, but I remember being scared out of my wits.

Dad was wrong, of course. Even though the national debt then was a much higher percentage of the national economy than it is today, it shrank as the economy boomed. My children have never mentioned FDR’s debt. My granddaughter (almost 2) will never pay a penny of it.

Dad, now 96 and still in good health, recognizes how wrong he was then. He admits FDR’s deficit spending not only won World War II but it also got America out of the Great Depression.

But now another gaggle of deficit hawks is warning us against more federal spending. “The current federal debt explosion is being driven by an inability to stem new spending initiatives,” warns Alan Greenspan in Friday’s Wall Street Journal, calling for budget cuts and saying “the fears of budget contraction inducing a renewed decline of economic activity are misplaced.”

My dad learned from his mistakes. Alan Greenspan obviously didn’t.

Contrary to Greenspan, today’s debt is not being driven by new spending initiatives. It’s being driven by policies that Greenspan himself bears major responsibility for.

Greenspan supported George W. Bush’s gigantic tax cut in 2001 (that went mostly to the rich), and uttered no warnings about W’s subsequent spending frenzy on the military and a Medicare drug benefit (corporate welfare for Big Pharma) — all of which contributed massively to today’s debt. Greenspan also lowered short-term interest rates to zero in 2002 but refused to monitor what Wall Street was doing with all this free money. Years before that, he urged Congress to repeal the Glass-Steagall Act and he opposed oversight of derivative trading. All this contributed to Wall Street’s implosion in 2008 that led to massive bailout, and a huge contraction of the economy that required the stimulus package. These account for most of the rest of today’s debt.

If there’s a single American more responsible for today’s “federal debt explosion” than Alan Greenspan, I don’t know him.

But we can manage the Greenspan Debt if we get the U.S. economy growing again. The only way to do that when consumers can’t and won’t spend and when corporations won’t invest is for the federal government to pick up the slack.

For Greenspan now to say we don’t need more stimulus — when 15 million Americans are still out of work, when retail sales are dropping, when the rate of mortgage delinquencies is still in the stratosphere, when Europe and Japan are tightening their belts — is like Tony Hayward saying the Gulf spill shouldn’t worry us.

America’s long-term debt bomb is a future problem to be sure. But it has nothing to do with current spending initiatives. It will be due mainly to baby boomers’ demands for health care.

Our immediate challenge is to get enough demand back into the economy to pull ourselves out of the deep hole Greenspan helped create. That will require more deficit spending in the short term — relief to state and local governments, extended unemployment benefits, a one-year payroll tax holiday on the first $20K of income.

The $55 billion jobs bill now before Congress isn’t nearly big enough. Yet evidently it’s too big for Senate deficit hawks who blocked it Thursday before leaving town. Presumably Greenspan approves of this devastating lack of responsibility.

My father is a wise and loving man. I wish him a wonderful Father’s Day (the first of which was celebrated, incidentally, just four years before Dad was born).

Greenspan I can live without.

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Cross-posted from Robert Reich’s Blog

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Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org.