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Sociology The Scientific Study of Societies, Social Groups and Social interactions Sociological Imagination Teaching yourself to think about how societal institutions and social interactions are shaped by the social context. For instance: Will you get married and why? – Your image of love and marriage and the image of most of the world are vastly different because of your culture. – Ideas about love and marriage are socially constructed. If you had to marry, without every meeting the person you were to marry, someone of your parent’s choice, would it work? Use your Sociological Imagination Why the Olympics? Why do people love/hate Obama? Why did George Zimmerman shoot Trayvon Martin? Explain 911 attack from Al Qaeda’s perspective and/or our response from our’s? Why do all cultures have religion? What’s happening in Syria and why? Which theory explains it best? Why are you here, right now, in this room? Why did you choose that outfit? Should they shut Strasburg down? From a cultural perspective Points of View: not mutually exclusive, different points of view Functionalism: views social activity and institutions as evolved to facilitates the smooth operating of societies. Conflict Theory: views societal institutions as conservative, in which power elites conflict with oppressed groups to maintain power. Social movement form to “fight the power.”(Think American Revolution, Protestant reformation, Al Qaeda, Civil Rights Movement.) – Society is dynamic, constantly evolving. Points of View Feminist Theory: looks at the ways society treats women. Symbolic Interactions: Looks at social interactions at the micro level. Language and symbols are interpreted to facilitate interactions. (What do your clothes/language tell others about you?) Rational Choice Theory: People always act in their own self-interest and try to do what’s best for them. Symbolic interaction Change? Ethnic stuff. Ethnic group/ethnicity: – shared cultural values and norms that separate one group from another. – Shared, distinct awareness of of common cultural identity. Mormons? Ethnocentric: being centered around one’s own ethnic group, not liking others. Race in society Race: socially constructed belief that biological difference in skin color, hair and facial structure proved a difference in other more complex polygenetic qualities. – Doesn’t mean there aren’t differences, only that those differences are caused socially, not biologically. Eugenics: the pseudoscience that supported above. Self-fulfilling prophecy: when a belief creates the predicted behaviors of a group. Labeling a group “angry” makes them angry. Stereotype threat: when a group that has a belief held about them then internalizes that belief themselves, then perform differently on tests when made aware of their of status. VERY significant results. Just World Phenomenon: tendency to believe world is rational, bad things happen to bad people, makes us feel safe. How? Experiments: – Cause and Effect: – Butt patting Surveys: – Correlations: poverty and low performance; Alabama and being Democrat; Woman and voting for Obama or being Pro Choice. Ethnographies: actually living among social groups, recording complex social patterns. – Not generalizable to others. – Sewar Children. What is Culture? The Values, Norms and Artifacts of a society. – Values: abstract beliefs of the importance of different constructs: family, caring for others, the nation-state, religion, yourself. – Norms: are unwritten rules a society about behaviors in specific social situations, reinforced overtly or subtly. – Artifacts: material goods created by societies. Iphones, chariots, sports stadia. What do they tell you about the society? – Memes: Bits of culture that are passed on virally through observation and imitation. “that’s a clown question, bro” Knuckle bump Hat on backward Baggie jeans/skinny jeans/mom jeans “da bomb” How do you get your culture? Through a process called Socialization. Socialization occurs through socialization agents: family, friends, school, nation, religion, etc. Socialization occurs as agents reward or punish you for “acting right.” May be overt or subtle. – “Look how nicely you share” – “What were you thinking?” – A sideway glance. Social Capital: The social knowledge and connections that enable people to accomplish their goals and extend their influence. This what you get from your family and community that you use to succeed in your culture. – – – – – – Money Education Cultural values Good looks Ability to get on with people Social norms that have been socialized. Power Power is the ability to force others to do what you want. Authority: the permission from society to exert power. Traditional societies – Loosely defined borders – Multiple ethnicities: often semi-autonomous (tributes) Nation States – – – – Well-defined, defended borders All nations today More homogenous Central government controls all of civil life. Failed States Often in regions that HAD traditional states (Kingdoms, Empires) but are now Nation-states. Often many ethnicities within Borders drawn for them by exiting imperialists. Word Trend: Democracy 119 of 192 countries deemed democracies. 2.3 Billion still live in countries considered “not free.” Most Western Nations are “liberal democracies”: – Multiparty elections – Free market, competitive capitalism – If winners, then losers? U.S. Government The U.S. is a representative democracy: elected officials represent the general cultural values of the voters who elect them. Voters with similar cultures tend to cluster in the same areas, developing cultural sub-nations. – Arlington ALWAYS votes Democratic. Competing Interests U.S. system is one of competing interests: – Businesses, Unions, Single issue groups: Abortion, Women’s rights, farm workers, NRA – Left out: those without money. Internet is widening the Net and reducing the power of money Today’s Democracies either have a Multiparty of Two-Party system Parliamentary Systems. – Members of Parliament elect the Prime Minister. – Have many political parties that form coalitions to select the Prime Minister – Multiparty systems creates a wide variety of political thought within legislature, compromised required. Compare the Two based on Influence from Interest Groups A Billion Spent of Presidential PACs Our’s Britain’s United States: Two party system More likely to develop wide schisms between political parties. Compromise required for actions. The Wider the schism, the less likelihood for action. – House of Reps (435): a simple majority of 218 required to pass anything – In Senate (100): a Super Majority of 60 Required these days. (filibuster) – To override Presidential veto:2/3 of each. Party of the President MATTERS. So, Is the U.S. less democratic than Parliamentary systems? Probably not, its system is just different. There are many competing interests. Unions, Interest Groups like Unions and the NRA, Lobbyists, and PACs all vie with CASH and influence to influence the elections and electorate in local, state and federal offices. Those without money and who don’t vote are left out: poor, homeless, young etc. The United States has tens of thousands of elected offices and the combination provides lots of representations. U.S. Democracy: Voting Patterns Increasing distrust of government and whether or not your vote matters, reducing vote. U.S. has an awful turnout: 38th in world – – – – – – U.S. Europe Asia S. America Mexico Africa 48% 74 70 62 60 55 In 2008 Women Obama 54% McCain 46 Men Obama 43 McCain 57 18-49 Obama 2 to 1 Women vote in larger numbers 55% to 45% This year Republicans having been working hard to limit voting of constituencies that traditionaly vote Democratic. (Immigrants, poor Blacks) Republicans have been more successful at electing local politicians and judges. Women in the Power Elite? U. S. ranks 71st in World in women in power positions. – Tied with Turkmenistan and Rwanda Not offered by two parties as candidates. Traditional power elites have been White, Protestant, Wealthy, Males. – Felt a responsibility of that status. – Very unrepresentative of population. Today: as independents have increased, more economic diversity in candidates. Does Money Buy Elections? Citizens United vs. Federal Election Board In a Supreme Court decision it was ruled that corporations have the same right of free speech as individuals. Money=Speech. Therefore, corporations can give as much money as they want to PACs, that fund many election campaigns. Obama/Alito The Big Sort In the U.S., people tend to move into regions and neighborhoods with similar thinking people: For instance, “the People’s Republic of Arlington barely even nominates Republicans for office. Gerrymandering even makes the ‘regional cultures” more pronounced. The Supreme Court One of the biggest results of this years election is the possible replacement of 3 judges on the Court having significant influence on law for the next 20-30 years. Could be significant in Roe v. Wade. – Scalia: very conservative: 76 – Ginsberg: very liberal; 79 – Kennedy: moderately conservative, swing vote in recent years. 76 Psychological concepts to Note Group Polarization: Psychological concept that the more you are with groups of people with a specific value, the more like the group you will become. – Immigrants to a community will become more like the culture than they were before. – The culture changes the people more than the people change the culture. In Group Out Group Bias: Once established as an out group, in groups form negative stereotypes about the outgroup, confirming biases and scapegoating Belief Bias: twist logic to make ideas fit you existing belief. Confirmation Bias: seek information that confirms, ignore contrary. Electoral College The President is elected by the electoral college, which is filled by electors that come from all the states. Each state gets its number of electors based on its representatives (population) and Senators (2 each regardless of population) This system gives states with small population more weight than they deserve (based on pop.) because each state gets credit for their two senators. Wyoming 3 Electors for 568,000 people; Kansas get 6 for a population of 3 million 6 x more people, 2x the electors. So Sometimes(3), Presidents are elected with a minority of votes: George W. Bush, for instance. Gore: 48.33% Bush 47.8% Nader 2.75% Real Debate Republicans: Private – – – – – – – – Free Market/Limited government: let markets determine rights and privileges. Minimal Regulation on Business activities. Small Taxes, Small Benefits, small government Limited protections for poor, unemployed. Social conservative: no Gay marriage, no abortion (rape/incest). Limited control of business uses of the environment. Strong military Democrats: Public – – – Welfare/Socialist State Not communist: Social protections. Government actively involved in helping communities/people: Public/Private Partnerships. – – Regulate business to stop abuses. Higher taxes for Bigger benefits, more protection for poor, elderly, unemployed. “We built it” Retirement Health care Unemployment Help the poor Socially Progressive: Pro Gay marriage; Pro Choice; Environmental protections Electoral College It requires 270 Electoral votes to be elected President. Real Clear Politics (mid August): About 237 votes will probably go to Obama (California and New York always vote Democratic.) About 191 will go to the Romney: (Since the 60s, Republicans usually get the solid South.) There are about 110 swing state votes left. Romney needs to sweep most to win. (79 out of 100) Obama can win with Florida only. Or several combinations of smaller states. These Swing States Will determine the 2012 President Electoral Votes in Swing Will determine Presidency Obama needs 23 to Win, Romney 79 Fla 29 Ohio 18 North Car 15 Virginia 13 Colorado 9 Wisconsin 10 (Ryan) Iowa 6 NH 4 Nevada 6 Total 110 Obama Needs 33 Romney needs 79 America’s Cultural Nations: Colin Woodward suggests America is made up of 11 cultural nations with widely different cultural beliefs established by their histories. These cultural differences explain why we are so divided politically. (and always have been) American Nations: Colin Woodward Remember These are Broad cultural trends. They say NOTHING about and individual. Woodward attempts to explain regional values and voting patterns based on the cultures of these regions. Yankeedom: New England, Upper Midwest: Mich, N Ohio, Wisc. N.Ind Utopian: City on the Hill. – Collectivists: planned community – Egalitarian: no elites – Predestined – Education Imp., literacy for Bible reading, business; Ivy league schools – Progressive use of government to help community Yankeedom: New England Belief in Science, evolution and global warming Public Protestants Hoped God would favor community; Chosen People: needs to be reflected by policies. Allegorical biblical interpretation Became more religiously tolerant over time (UU) Women’s vote, Abolitionists, Gay Marriage movement all started here. New England: Progressive American Revolution Began here Abolition began here. American higher education began here Transcendentalists movement began here. Utopian Movements began here. Women’s Suffrage movement began here Universal health care began here Gay Marriage first legalized here. Midlanders: Pa, Del, Md, Northern Va; some midwest, Iowa, Missouri Established by German Protestant refugees: Pacifists. – Quakers – Amish – Mennonites Very tolerant of others. Strong community values. Valued education – Ben Franklin – First Library – Many newspapers Public Protestants Progressive, Unions. New Netherlands: New York city and environs The business district, whatever is good for business. Welcomed all; think New York City Always been multiethnic (first to welcome Jewish people) Supports established Federal power: likes stability and control. Good for business. Financed and built most of early nations infrastructure: Vanderbilt, Rockefeller, J.P. Morgan. Home of the Industrial revolution (at least the financing) Progressive Movement Started here and Yankeedom as a response to Industrial abuse. The Left Coast: coastal area of California, Oregon and Washington Very similar to Yankeedom, settled by New Englanders (Progressive) and Borderlanders (fierce independents) Proud trendsetters Progressive in Politics Think: U. Berkley, Portland, Seattle. Education very important Environmentalist, Hollywood limousine liberals Tidewater: Coastal Va. No. Carolina Old Virginny Hierarchal status: like English nobility. Hierarchy: – White tobacco farmers. – freed indentured, poor whites; – African-Americans. Education for Aristocrats only (UVA, Private colleges): not much spending on public education. No federal involvement: Thomas Jefferson/antifederalists. Little spending on infrastructure well into the 1960s Borderlanders: Greater Appalachia: W.Va, West Va. W. Carolina, W. Ga, Ozarks, Kentucky, So Ohio, S. Indiana, Tenn Scots Irish: escaping English abuse. Highly Clannish Belief Local Control by elders. Warrior Class, VERY INDEPENDENT Education less imp. Know your letters. Frontiersman: cities not planned, random, no schools Think: Guns, God and Nascar Borderlanders: Appalachia, W. Ga. Kentucky, Tennesee, Arkansas, S. Missouri. Fought as much against Tidewater elite in Revolution as British. Used Whiskey as currency: Whisky Rebellion, Bootleggers. NOT slave owners, generally. Fought equally North and South in CW. Area ecology raped by New York Industrialists need for timber, then coal, fueled anti Yankee sentiments. (and Civil War, reconstruction) Been impoverished since the beginning. Borderlanders: Greater Appalachia Private Protestant, – Personal redemption; – Emotional, – Literal interpretation of Bible Belief in rapture, return to Jerusalem for 2nd coming. Question scientific theories like evolution and global warming Social conservatives: Guns, Gods and NASCAR, anti Gay Marriage, Pro Life; State’s Rights. Resent interference from “carbetbaggers” Creation Museum Petersburg, Ky. Deep South: Ga. S. Carolina, Ala., Mississippi, Louisiana, Texas Plantation Cotton chattel slavery: from sugar islands and Ga. Deeply hierarchal social order: – – – – Aristocratic whites, poor whites, blacks. More radical than Tidewater South shall rise again! Civil War: war of Yankee aggression. State’s Rights. Feds are carpetbaggers; Blacks and poor whites in direct economic competition: sharecroppers No education for blacks and poor whites. No need. No Money for schools Under economic stress since Civil War. Deep South Emotional, private Protestants. Personal redemption. Literal interpretation of Bible Belief in Rapture: return to Jerusalem for 2nd coming. Question scientific theories: Evolution, global warming. Pro Gun, Pro Life (one abortion clinic surviving in Mississippi, home of Roe.V Wade. Texas v. NY) Gone With the Wind Not that long ago Far West: Nevada, Wyoming, Idaho, Dakotas, Montana, Utah, Colorado Sparsely populated. Not overly religious compared with Dixie (except Utah) Controlled politically Mining, corporate interests and mega ranchers Much land owned by Feds, resented. Formed out of Railroad tracts sold to farmers from East. Can go either direction: some battlegrounds states, differ with Dixie and Borderlanders on some issues. EPA is a pain vs. Environmentalists. Belief in individualism. Pro Gun. El Norte: Parts of Texas, Nevada, Ariz. New Mexico, Colorado, Calif. Here before English, left over from Spanish Conquest. Closer culturally to Northern Mexicans than whites or So. Mexicans. Never had much political power: that’s changing. Areas they live, controlled by whites. Caesar Chaves: United Farm Workers. The Republican Coalition: historically conservative Tidewater: hierarchal Greater Appalachia/Borderlanders: fiercly independent, clannish. Deep South: VERY anti Yankee, hierarchal. (Mostly) Far West: independent. Guns. Federal Lands. Consistently votes anti-federal, State’s and local rights. – – – – Small Government Against Obamacare Suspicious of welfare Less regulation of industry (right to work states) – – – – – anti-Gay marriage, pro Life, Anti-immigrant. Question Science: evolution, global warming. Strong supporters of Israeli control of Jerusalem, Holy Land. Socially conservative: The Democratic Coalition: consistently Progressive Yankeedom: most progressive, communal. New Netherlands: business and finance. Midlanders: toleration, communal. Left Coast: progressive, new ideas. Have voted progressive, regardless of Political Party of time. (yesterday’s Republicans, today’s Democrats) – – – – – – – Pro Gay Marriage; Pro Choice Pro Obamacare or Single Payer. Pro Science. Dream Act For Government regulation of industry. Federal government seen as ally Swing States are often split culturally Virginia: – Northern Virginia is more midlander culturally. Arlington/Alexandria should be in New England. Fairfax Moderate/conservative. – Everything South is more Tidewater. – West is Borderlander. Red and Blue 2012: Obama needs 23-50 Romney needs 79 Predict based on Cultural Natures Obama needs 23, Romney 79 RCP With Polls Real Clear Politics Map http://www.realclearpolitics.com/epolls/20 12/president/2012_elections_electoral_coll ege_map.html LA Times LA Times Electoral Map Today’s Economic/Government Theory Market Oriented States: – Free markets work, Government stay out: Tea Party Republicans. Welfare States/Socialism: – People’s needs are a social right: – Unemployment insurance, health care and retirement guaranteed. Democrats State Centered: – The government should control, help and guide economy: China. – Usually Single Party. Economic Systems Free Market Capitalism: – unregulated, investment and return system. – Winners get rich, losers try again. – Creative Destruction, some get wiped out to make way for innovation – Adam Smith: Wealth of Nation (1776), suggested this is the best system. – Forced on South American countries in 1980s and was very effective. Economic System Socialism: – System of market capitalism, where the government makes sure the losers have economic protections through unemployment insurance, health care, guaranteed retirement, etc. – Embraced by all the industrialized European countries – Supported by high tax rates. Question of sustainablility. Economic Theories in the Election and beyond John Maynard Keynes: Keynesian economics. Economist from Depression. – Democratic vision – Stimulus and Tarp were good ideas. Friederich Hayek/Chicago school/Austrian school. – Tea Party Republicans. – Stimulus Bad: tax cuts Good – Lowering the budget deficits and National debt most important. Trickle-down: Reagan era,(Laffer curve). – Current Republican vision. – Reduced taxes on wealth and money will “trickle down” through the economy. – Economy will grow so big that tax revenues will incresase. http://www.youtube.com/watch?v=d0nERTFo-Sk If tax rates go up, you eventually get less tax revenue, as economy shrinks. Gross Domestic Product All the money (value) generated by our whole economy in a year. U.S. :Approximately 15 Trillion, largest in world, by far. About the same as whole European Union. China about 7 Trillion Per Capita (ppp) 45,000 U.S. (China 8400) GDP Comparison: industrialized world Just to give you an idea: U.S. about 45K 2008 Crash/Recession/Depression Monetary vs. Fiscal Fiscal Policy: Spending is what the government spends its money on: defense and domestic. Right now: – Approximately 15 Trillion in debt. – Running trillion dollar yearly deficits. Debt: how do we stand? By 2030, 200% of GDP Monetary Policy Is how much money flows into the economy and how fast it flows. Quantitative Easing: paying bills with printed money Controlled by the Federal Reserve, an independent board. Sets interest rates (prime) Prints money About 40% of the money we borrow we borrow from the Fed, they print it. – Watch for inflation, very low now. Keynesian The Economy can be controlled manipulating fiscal and monetary policy. A recession is when the GDP shrinks. Fixes: – Fiscal policy: spend more money (Obama) – Monetary policy: lower interest rates and print money. – If prices go up (inflation), raise interest rates. Keynesian Critics (Tea Party Republicans) Say that Keynesian practices distort the free markets, creating booms and busts, picking winners and losers. Left to itself, the Free Markets will create the best, most efficient economy. There will be business cycles, but they will be moderate. Worked in South America. Hayek (Tea Party) The government should stay out of the economics business, sound policies aren’t sexy but they work. Keep government debt low, money will build up in banks, lowering interest rates naturally. If inflation starts, interest rates naturally will go up, through market forces. Regulations also distort market, let the market control what businesses do. If they mess up, people won’t by their products, and they’ll go bankrupt. That fear will keep them in line. Hayek Critics (Democrats) We tried this unregulated economy and got the Great Depression. Do you want to wait until we have a mass die off from tainted food before the business that produced it goes out of business? Trickle Down (Republicans) Reagan Era scheme. (George H.W. Bush called “voodoo economics”). Reduce taxes on rich. The will then invest money and hire people and increase the size of the GDP until the economy grows so much, the government will acutally bring in more money in taxes. Sort of a Keynesian plan, where government uses fiscal and monetary policy to control the economy. Trickle down Critics (including David Stockman, Reagan’s budget chief) It has never worked. It increases debt, without increasing GDP Only benefits the rich. Ryan Budget Large cuts in domestic spending to reduce debt and “bend the curve.” Large Tax cuts for rich and middle class. Change Medicare and Social Security to a more private, market-based plan. Give seniors vouchers so that they can buy their health insurance on private market. Reduce regulations on businesses. Differences in Economic Plans. Obama – Cut taxes on Middle Class to stimulate growth. Economic growth will increase revenue enough to slow debt – Cut some spending but leave entitlements largely uncut – Cut defense – AFA (Obamacare) bend curve of Heath Care costs. Romney – Cut Taxes on Wealthy and Middle Class – Leave Defense – Get rid of AFA (Obamacare) – Dramatically cut spending on Entitlements: Social Security Medicaid Medicare (Ryan) Unemployment Welfare. PreObamacare Health Care Seniors: covered by Medicare (government insurance.) Well-employed: covered in combination with employers. – Typically 2/3 employer; 1/3 Employee – If you lose your job, you lose insurance. Working poor: uninsured, use emergency room. Poor: covered by Medicaid (government insurance) What to Do? Attempts to take the 50 million uninsured and put them in a subsidized private market for health insurance, so they don’t have to use the emergency room as their primary health provider. About 70% of bankruptcy are caused by health related problems. Average bill for hospital care over $20,000. (includes those who don’t have insurance and those who do, but can’t afford out of pocket costs. Currently Medicare (65 +) Insured through employer Uninsured Medicaid (poor) 50 million 150 Million 50 million 60 Million Under Affordable Care Act Obamacare Medicare: 50 Million Insured: 200 Million Uninsured: small number paying taxes/penalty. Medicaid: expanded to 80 million or so. (Many Red states saying they will not accept the Federal money designed to help.) Eligibility by State: notice cultural trend? Is Race an Issue? Obamacare Seniors: Medicare: No Change. Well-employed No Change, except – Can take insurance with you – Can’t be denied: prexisting conditions. – Kids can stay until 27 – No lifetime cap – Free well care, women’s care – No discrimination for sex Obamacare: The Mandate Working poor/not insured (young and fearless): – Must buy health insurance from “exchanges”. – If can’t afford, government pays/helps. – If can afford, you have to buy or pay a “tax” (Mandate) – No more emergency room “tax” on the rest of us. Currently, unpaid “bills” are passed on to government or rest of us in higher prices: $60 aspirins, etc. Obamacare Poor: covered by Medicaid. – Increase in number by about 20 million expected. Ryan Plan: designed to bend the curve in 10 years. Seniors: given vouchers to pay for health insurance. – If not enough, burden shifts to them. – Vouchers indexed to inflation: currently health insurance goes up twice that rate. Ryan assumes increases will decreast because of competition. Well-employed: no change Working Poor: – back to emergency room, cost passed on. – charity Poor: Medicaid reduced numbers qualify. Single Payer (Liberal position) Health Care is right, not a commodity. Everyone gets Medicare coverage. Done everywhere but here. Very expensive, but government control means government control of prices – See Japan, Britain, France. Ain’t gonna happen, too many interest groups aligned against it. – Obama didn’t even try, angered liberal base. Former Vs. Obamacare (ACA, 2014) Formerly: Seniors: Medicare (50m) Well-employed: employer based(120m) Uninsured: (50m) – go to emergency room, – pay out of pocket, – deficits passed along Poor: Medicaid (50m) – VARIES BY STATE Obamacare: Seniors: Medicare Well-employed: employer based. *Protecton laws. Uninsured: Must buy, government help working poor. Poor: Medicaid. – Expanded – Paid by fed. Major Complaints Government forcing people to buy a product. Health Care NOT a right! Government will be able regulate industry, distorting economics, inefficient. – Death Panels! Profit based health care: – More effective – cheaper Major supports Health care currently doesn’t cover everyone, it’s a right in an industrialized economy. Health Insurance companies – work to maximize profits, kick off sick, exclude those who are potentially more expensive, charge whatever the market will bear. If government controls prices, it can reduce costs for nation. If people want more, they can still buy it. Here’s the Problem and Ryan’s Point Medicare WILL bankrupt the country, probably by 2030. – He’s right, but what to do? We spend 16-18% of GDP on Health Care. Next closest about 12% and they cover everyone. Opponents to nationalized believe our’s is better, not supported by statistics. Ryan’s Medicare Indexed to Inflation Offers option to stay on current Medicare or Buy Privately Assumes cost decline because of competition. Higher cost for those who can afford, lower for those who can’t. Doesn’t start for 10 years. As percent of GDP What’s Happening? http://theincidentaleconomist.com/ wordpress/health-outcomes-reportcards-by-country/ The U.S. Econonmy How To Buy a House Normally, when you buy a house you must -bring some of your own money (5%) -borrow money from the bank the repayment of which is called a mortgage. Your money Mortgage Loan from PLUS + You buy House Regular mortgage You, then, repay the bank every month for your mortgage. You make monthly Payments to bank. If you don’t pay the bank, the bank forecloses on you and takes your house and sells it to someone else to get their Mortgage money back. And you lose the money you put in: Mortgage Back Securities If enough people buy houses, the Banks would run out of money to lend as mortgages, so there needs to be a way for banks to get more money, so they can make more loans. – So, the bank sells all their mortgages in big bundles of mortgages called Mortgage Backed Securities: – They take fees for their effort, those are their profits. – More mortgages, more fees, more profits. Fannie and Freddie Fannie and Freddie are called Secondary lenders. – They buy the Mortgaged Back Securities from the banks. Mortgage Back Securities >> ^ ^ ^ ---- <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< Banks get their money back, to make new mortgages. : : : : So The more mortgages a bank places the more money in FEES they made: And So Does Freddie and Fannie because they sell their Mortgage Back Securities Fannie and Freddie Sold the Mortgage Back Securities they bought from Banks to INSTITUTIONAL INVESTORS: like big Insurance Companies, Pension Funds, Oil Rich Nations, OTHER nations, and Billionaires and Fannie and Freddie Make Fees and they get richer and richer. Ultimately The money for House Mortgages comes from these Institutional Investors who need long term return on their money: Institutional investors>>>>>Fannie and Freddie>>>To Mortgage Banker>>>>to house buyer>>>>>House Seller All in all, pretty safe system. Most people repay because regulations required: *Buyers required to use some of their own money. No moral Hazard. *The Bank Checked the borrower’s credit history. *The Bank Made sure the borrower had a job that pays enough to make the mortgage payment. In the late 1990s Bill Clinton signed bill getting rid of Glass Steagall The Depression Because of the Great Depression the GlassSteagall Act was passed, to prevent commercial banks from making risky investments. – Commercial Banks: take money from depositors and lend it to homeowners and consumers at interest. Deposits are insured by government. – Wall Street Banks: take money from big money investors and invest it into business at high risk/high reward. If you lose: tough In 2000 George W. Bush is elected, – He’s a free market capitalist and hates regulations, – So doesn’t strickly enforce regulations against Wall Street Bankers. Wall Street Banker Some Terms GDP: all the goods and services a country produces: its WEALTH. Fiscal Policy: How much money the government taxes and spends. Monetary Policy: set by the Federal Reserve Bank: – How much money is in the Economy. – How high or low interest rates will be. After 911 Fear of Recession (shrinking of GDP) So, Bush wants to STIMULATE the economy by increasing Real Estate purchasing. (Irony alert: Keynesian) The FED lowers interest rates, making a new home owners payment to bank less: – Monthly payment = Amount of mortgage and interest. Wall Street Gets in the Game Wall Street wanted to get into the lucrative housing Mortgage game. Created something called a SUB Prime Mortgage. No pesky regulations of banking How Subprime Mortgages Differed from Conventional Ones No Down Payment Required. (Moral Hazard) Bad Credit History OK! More risk, more gain! Unverified Income: Liar Loans. ARMS: Adjustable Rate, Sub Prime Mortgages In the first few years, these mortgages had VERY low payments. (Anyone could afford) After the first few years, the Payments went WAY up. (Almost no one could afford). The Gimmick: After the first few years, you could borrow another mortgage with a low payment and pay off the first one. Sub Prime Mortgages Original Mortgage: $500,000-payment low for two years, then goes way up. Go to bank create another mortgage for $500,000 with a low payment first few years: use money to pay off Original one. People often borrowed $550,000, paid off original one, and kept the leftover $50,000 to buy things with. Win Win Win Everybody Wins: – Sellers have more buyers to buy their house (demand skyrockets) – Buyers with no way to pay back loan, gets the American Dream. – Mortgage Bankers make fees everytime a loan is made or refinanced. – The High, newly created demand, makes home prices for everyone go way up. But who would buy Mortgage Back Securities based on these shady loans? Wall Street, that’s who. They funneled Trillions into the Amerian housing market. The only way they could lose is if housing prices quit going up, or horrors, went down. Wall Street Would sell these “subprime” mortgage backed securities. To “Insitutional investors” – Insurance Companies (AIG) – Pension funds (Va Teachers retirement plan) – Nation States: (Iceland, etc) – Mutual Funds (IRAs) Rating Agencies Rated this Junk: AAA In 2008 Prices for houses rose so high that even with Sub Prime Mortgages, demand went down. (Predictable). When Demand dropped, Prices dropped. Dropped Fast. Owners with Sub primes Walked away, leaving a glut of houses on the Market. (moral hazard) Prices dropped further: 9 Trillion dollars evaporated from economy. Anyone who made money from housing, was laid off. Unemployment rates skyrocketed. Obama elected Preident. TARP Banks lost So much money that we were endanger of the entire banking system collapsing, wore that the Great Depression. U.S. Government (and European govts) bail out the banks to save the economy. Recession Reocurs because of out of work workers. What to do? – Stimulate: spend money to keep the economy moving and raise taxes on wealthy. or – Cut spending: making everything Worse. Liquidity Trap Businesses had money, but no one to buy their goods. Money stopped flowing through economy. People with Money were scared to spend so paid of debt and saved. Lowered demand further. So, the spender of last resort is the government. Most Economist wanted to take a Keynesian Stimulus Course Congress okayed about 800 Billion, about ½ what economist believed would be necessary. The national debt Ballooned because of: Bush Tax cuts to EVERYONE, including wealthy. Bush Drugs for seniors. Two Wars: Afghanistan and Iraq. The lose of Tax Revenue because of Recession. The Stimulus package and Tarp (the least expensive) to save the economy. This doesn’t include Medicaid Plan B, which was a trillion of it. Should we freak out? Should we raise taxes? The Debate Do you keep spending and cut taxes on the middle class spenders to get out of the Recession? – Increases debt in the short term – Increases size of economy increasing tax revenues and shrinking “relative size” of debt. Do you cut the budget and slow spending from the government and CUT taxes further? – If we get debt down and Lower taxes on Wealthy “investors” they will hirer workers to stimulate the economy.