XPost: ba.politics, dc.media, soc.penpals   
   XPost: alt.burningman   
   From: lbernstein@xsachs.com   
      
   Bill Clinton is giving the keynote speech at the Democratic   
   National Convention tonight.   
   The idea is to make people feel nostalgic for the last time when   
   the economy was really booming, and hope that some of that rubs   
   off on Obama.   
      
   However, in the New York Post, Charlie Gasparino uses the   
   occasion to remind everyone that the seeds of our current   
   economic malaise were planted during the Clinton years.   
      
   Basically, it was under Clinton that Fannie and Freddie really   
   began blowing the housing bubble, issuing epic amounts of   
   mortgage-backed debt.   
      
   The story that Gasparino tells is basically: Liberal Bill   
   Clinton thought he could use government to make everyone a   
   homeowner and so naturally this ended in disaster.   
      
   Gasparino specifically cites the controversial Community   
   Reinvestment Act, a popular conservative bogeyman:   
      
   How did they do this? Through rigorous enforcement of housing   
   mandates such as the Community Reinvestment Act, and by prodding   
   mortgage giants Fannie Mae and Freddie Mac to make loans to   
   people with lower credit scores (and to buy loans that had been   
   made by banks and, later, “innovators” like Countrywide).   
      
   The Housing Department was Fannie and Freddie’s top regulator —   
   and under Cuomo the mortgage giants were forced to start ramping   
   up programs to issue more subprime loans to the riskiest of   
   borrowers.   
      
   That's interesting. But the truth is far more complicated. And   
   more interesting.   
      
   Clinton's Budget Legacy   
      
   In addition to being remembered for a strong economy, Bill   
   Clinton is remembered as the last President to preside over   
   balanced budgets.   
      
   Given the salience of the national debt issue in American   
   politics today, the surpluses are a major mark of pride for the   
   former President (and arguably the entire country). They   
   shouldn't be.   
      
   "I think it is safe to say that we are still suffering the   
   harmful effects of the Clinton budget surpluses," says Stephanie   
   Kelton, an economics professor at the University of Missouri   
   Kansas City.   
      
   To understand why, you first need to understand that the   
   components of GDP looks like this:   
      
    \mathrm{GDP} =   
   C + I + G + \left ( \mathrm{X} - M \right )   
      
   In the above equation, C is private consumption (spending). I is   
   investment spending. G is government spending. And 'X-M' is   
   exports-minus imports (essentially the trade surpus).   
      
   Here's a chart of the government budget around the years during   
   and right after Clinton, in case you need a reminder that the   
   government was in surplus near the end of his tenure.   
      
   image   
   Business Insider, Bloomberg   
   If the government is in surplus, it means that the government is   
   taking in more cash than it's spending, which is the opposite of   
   stimulus.   
      
   It's also well known that the US trade deficit exploded during   
   the late 90s, which means that 'X-M' was also a huge drag on GDP   
   during his years.   
      
   image   
   Business Insider, Bloomberg   
   So the trade deficit was subtracting from GDP, and the   
   government was sucking up more money from the private sector   
   than it was pushing out.   
      
   There was only one "sector" of the economy left to compensate:   
   Private consumption. And private consumption compensated for the   
   drags from government and trade in two ways.   
      
   First, the household savings rate collapsed during the Clinton   
   years.   
      
   savings rate   
   Business Insider, Bloomberg   
   And even more ominously, household debt began to surge.   
      
   household debt   
   Business Insider, Bloomberg   
   So already you can see how the crisis started to germinate under   
   Clinton.   
      
   As his trade and budget policies became a drag on the economy,   
   households spent and went into debt like never before.   
      
   Economist Stephanie Kelton expounded further in an email to   
   Business Insider:   
      
   "Now, you might ask, "What's the matter with a negative private   
   sector balance?".  We had that during the Clinton boom, and we   
   had low inflation, decent growth and very low unemployment.  The   
   Goldilocks economy, as it was known.  The great moderation.   
   Again, few economists saw what was happening with any degree of   
   clarity.  My colleagues at the Levy Institute were not fooled.   
   Wynne Godley wrote brilliant stuff during this period.  While   
   the CBO was predicting surpluses "as far as the eye can see"   
   (15+ years in their forecasts), Wynne said it would never   
   happen.  He knew it couldn't because the government could only   
   run surpluses for 15+ years if the domestic private sector ran   
   deficits for 15+ years.  The CBO had it all wrong, and they had   
   it wrong because they did not understand the implications of   
   their forecast for the rest of the economy.  The private sector   
   cannot survive in negative territory.  It cannot go on, year   
   after year, spending more than its income.  It is not like the   
   US government.  It cannot support rising indebtedness in   
   perpetuity.  It is not a currency issuer.  Eventually, something   
   will give.  And when it does, the private sector will retrench,   
   the economy will contract, and the government's budget will move   
   back into deficit."   
      
   But this is only part of the story. What about what Charlie   
   Gasparino wrote about above?   
      
   The Fannie and Freddie Boom   
      
   When the government is running a surplus, it no longer has to   
   issue much debt. But risk-free government bonds are a crucial   
   component of portfolios for all kinds of financial institutions,   
   and for mom & pop investors who like the safety of regularly   
   Treasury payouts. The yield on the 10-year bond was over 5% back   
   in those days... nothing to sneeze at for people planning for a   
   retirement.   
      
   This created a bit of a crisis.   
      
   Bond trader Kevin Ferry, a veteran of the scene, told Business   
   Insider about the panic that was unfolding over the government's   
   lack of debt.   
      
   "OMG, they were all saying... there wasn't going to be any   
   paper!"   
      
   How did the markets react?   
      
   "Lo and behold... [Fannie and Freddie] issuance "SURGED" in the   
   late 90s," said Ferry.   
      
   Everything changed. While the government dramatically slowed   
   down issuance of Treasuries, Fannie and Freddie picked up the   
   baton and started selling debt like never before.   
      
   "Prior to those years there were not regular [Fannie and   
   Freddie] auctions."   
      
   "The system wanted it."   
      
   "The fear was that there wasn't going to be any.... There was no   
   bill auctions."   
      
   "The brokers were calling up ma & pa and said there's no more T-   
   Bill auctions!"   
      
   And the data bears this out.   
      
   Total agency issuance of mortgage backed securities spiked in   
   1998 and 1999, and from then on they never looked back.   
      
   fannie freddie issuance   
   Business Insider, Bloomberg   
   And just to drive home the point again, about how the 1998-1999   
   spike in issuance was the mirror image of the the annual change   
   in the size of the government debt.   
      
   image   
   FRED   
   Note that both government debt and agency issuance spiked in the   
   early 2000s, but that was during a recession, when the private   
   sector dramatically scaled back its activity form the late 90s.   
      
   How Clinton Destroyed The Economy   
      
   The bottom line is that the signature achievement of the Clinton   
      
   [continued in next message]   
      
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    * Origin: you cannot sedate... all the things you hate (1:229/2)