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29 September 2008 @ 10:27 am
Economic Questions For Which I Wish I Had Answers  

How many non-performing loans were performing before interest-rate adjustments?

What percentage of non-performing loans are primary residential as opposed to commercial or secondary residential?

What %-rate difference between the federal funds rate and incoming interest is required for a moderately well-run financial company to make a profit at a level above (but not significantly above) the T-bill rate?


Would it make sense to define "employee compensation" (compensation deductible by a company as a legitimate business expense) as all monies paid within a certain percentage of the lowest wage or salary, while "executive compensation" - the amount above that percentage - is considered similar to dividends (charges against profit and not deductible)? Would that make ridiculous executive pay more subject to the stockholder?
Current Mood: confusedwondering
Phil Parkertigertoy on September 29th, 2008 02:55 pm (UTC)
I would say "yes" on the philosophical question. My own proposal is that any compensation of any employee (executive or otherwise) greater than the salary of the President could not be considered a business expense when computing profit for tax purposes. But since I believe that the extreme disparity between the top and bottom pay within corporations is contrary to the core American values of fairness and equality and a social ill, it would make sense to place a tax penalty on it directly. (Before anyone tries to call me a communist, I'm not saying that everyone's supposed to be paid the same. Rewarding individual success is also a core American value. But a top executive being paid more in one month than a laborer working for him will make in his whole life goes too far.)
Keriskeristor on September 29th, 2008 03:14 pm (UTC)
Re. the last paragraph, if it is doing what I think it is doing then I suspect that basing it on the lowest wage in the company seems odd, since that is probably a teenage office junior or a janitor. I would suggest basing it on the highest 'staff' (non-managerial, which could be unambiguously defined as "do you have anyone working under your supervision", avoiding the problem of whether they are called managers or not) wage, so that the wages of more experienced workers wouldn't be penalised but the ridiculous and out of proportion executive rewards would be potentially subject to more stockholder scrutiny.
Bill Roperbillroper on September 29th, 2008 03:33 pm (UTC)
On the last question, I don't think it would help. It would simply function as an additional corporate tax on executive compensation.

To be honest, I don't mind paying for performance. I mind paying for bad performance.
Bill Suttonbedlamhouse on September 29th, 2008 05:58 pm (UTC)
My thought - and, of course, there are lots of pros and cons between thought and policy - is that by making ridiculous compensation levels both more transparent and less revenue-neutral, they might stabilize.

I reason this way because I feel like executive compensation is really no longer market driven, I think it has become almost price-fixed. I also think golden parachutes (or discharge compensation) defeat the entire concept of "paying for performance", since you are essentially paying no matter how the performance is.

By taxing executive compensation (above and beyond some level, and including stock options and other methods of deferred compensation) as dividends and accounting it like dividends, stockholders will see that each of those dollars is a dollar out of their pockets.

I also don't mind paying for performance, but I think executive compensation no longer fits that concept.
Maia Cmaiac on September 29th, 2008 03:36 pm (UTC)
How many non-performing loans were performing before interest-rate adjustments?

I've been wondering that myself. The Fed-based interest rates are still low, so has it really been necessary to balloon the ARM interest rates, or have the mortgage holders been doing it just because they can?

I also suspect that the usurious practices of credit-card companies have contributed to the mortgage crisis. When someone's minimum credit-card payment goes through the stratosphere, that person has less money available for other bills. And the credit card companies charge fees, raise interest rates, raise monthly payments on the flimsiest of pretexts, even when the card holder hasn't missed a payment for that card. As someone said during the Senate hearings on the credit crisis, where else are parties to a contract allowed to change the terms of the contract without the consent of the other party?

gorgeousgarygorgeousgary on September 29th, 2008 04:20 pm (UTC)
The telecommunications sector, perhaps?

Given how often we've seen a group of users complaining about an un-announced TOS change...
Cat Sitting Stillcatsittingstill on September 29th, 2008 03:53 pm (UTC)
Very good questions. I wish I knew the answers.

I don't see anything wrong with tagging the ridiculously high salaries paid Wall Street Execs with higher taxes, however we manage it.

Maybe we need a 4th tax bracket for people who make, say, over 7 million a year, measured any old way (income, stock options, whatever). You know, so we can get some revenue we can use to fix the *next* time their blunders end up holding the economy for a 700 billion ransom.
gorgeousgarygorgeousgary on September 29th, 2008 04:16 pm (UTC)
Not sure if this is what you're looking for, but at one point early on in the subprime crisis I believe I heard one of $EMPLOYER's economists say that 97% of "prime" mortgages (presumably including ARM's) and 85% of "subprime" mortgages had payments being made on time.
Maia Cmaiac on September 29th, 2008 05:24 pm (UTC)
According to Neil Cavuto of Fox Noise, the mortgage crisis was caused not by raising interest rates at a time when budgets are already being stressed by rising costs, but by "loaning to minorities".
(Anonymous) on September 29th, 2008 06:20 pm (UTC)
What ticks me off is that something very valid - that government policy pushed the idea of home ownership using vehicles that didn't effectively spread the risk, therefore encouraging loans from sources that had no business making those kinds of loans with terms that could backfire on everyone - is made racially based so now no one will listen to it again or even be able to discuss it without being accused of racism.

Just like there were high-income people who got themselves into trouble by biting off more house than they should have, so too did the same thing happen to low-income people - who happen to be over-represented by minorities - who were encouraged to take more loan than they should have.

Note that if the real-estate bubble wasn't so artificial - i.e. if values were increasing in line with reasonable market changes - most of these loans would perform and people would not have had problems (and therefore it would have been a Good Idea). For instance, after 3 years on an ARM with a loan that performed and a housing market with reasonable growth, the person could refinance out of the nasty ARM (before it hit!). The trouble was that values corrected severely and made that impossible, which then snowballed into the correction and lowered values further, affecting more people, etc. etc. etc.
Bill Suttonbedlamhouse on September 29th, 2008 06:28 pm (UTC)
That's bizarre - that was me. I must have logged out between replying to Roper and this comment.
Maia Cmaiac on September 29th, 2008 06:48 pm (UTC)
I just overheard a co-worker asking why, if the problem is people not repaying their loans, the government doesn't give money to the homeowners to make their payments. Some of the debtors got into the fix by having the wrong spending priorities (I'm thinking of a former co-worker who had her electricity shut off and bought a new $300 suit the next day, that sort of thing), but I confidently say that most of them ended up over their heads because mortgage interest rates, fuel prices, and food costs all shot up. Since nobody would want to reward irresponsibility, the government could make the grants needs-based, determined by the ratio of mortgagement payment to after-tax income or something like that. The creditors get their money, the homeowners keep their homes, and the crisis is averted.

Bailing out the debtors would help both Wall Street and Main Street. But it wouldn't satisfy the people who think everybody who can't make the mortage payment is a "deadbeat" and deny that any of the lenders were greedy and irresponsible.
Maia Cmaiac on September 29th, 2008 06:56 pm (UTC)
Also, it makes me crazy that so many people are blaming the debtors for taking on too much debt as if the debtors must have known it was too much. If a lender is not only willing to loan a given amount of money, but actually encourages a customer to borrow that much (listen to any radio station for about 2 hours and you'll know how much pressure there is to take out loans "even if you have bad credit"), then the customer is going to assume that since it would be stupid for the lender to loan out more than the debtor can afford to repay, it must be safe to borrow that much. It should have been a reasonable assumption. But now it's all, "You wicked debtor you, you should never have believed us when we told you to take out that loan!"
Bill Suttonbedlamhouse on September 29th, 2008 07:11 pm (UTC)
Well, with due consideration to those people who aren't numerically literate, most people really do know how much they can afford monthly payments to be (that's why car salesmen often put the price in those terms). Most of the subprime loans were geared toward fitting the initial payment into that monthly payment limit. It's the ARM adjustment, which had to happen to average out the return on the loan so it isn't somehow evil in-and-of-itself, that was out of reach. Most people I know (and I include myself in this, as we had one of those loans that we were simply lucky enough to have had long enough to be able to refinance it based on real value increase on our house) rationalized away the future payment ("I'll be making more money", "I can refinance it", "my house will never lose value", etc. etc. etc.)

There are too many people who don't use credit cards sensibly (and again I put myself in this category) to say that the same bad habits wouldn't roll over into these kinds of mortgages.

Yes, I think the lenders themselves got caught up in many of the same rationalizations. With few exceptions, lenders don't want to own property - they won't make as much as they would on the loan. They bought into the idea that Real Estate is a constantly positive curve and lost sight of the short-term vs. long term.

I think some of the argument is the old question of just how much the government should protect people from themselves, and how much would it hurt others if "zero-tolerance" rules are put in place? Example- don't allow any credit of any kind to be charged at interest rates over (say) 15%. What about the guy coming off of bankruptcy who is a high risk but probably able to handle a loan now? Should he be unable to get credit because creditors have to wait until his risk matches that 15%, or should he have access to higher-interest rate loans to help him get on his feet? Should the government insure that 15% lender in case the guy defaults again? Do we punish good credit users (no low interest rates for anyone either) in order to fund those higher-risk credit seekers?

These are legitimate questions with multiple answers that reflect the many philosophies of fiscal and monetary policy. There's no single right answer, but there are combinations that are better or worse.