Q: When did state and federal budgeting change from a Cash basis to an Accrual basis? I'm thinking that with all of the smoke and mirrors available to our legislators using Accrual based accounting, it's time to return to a Cash based budget. Why isn't anyone exploring this?

Submitted by J. L. Hickman from St. Louis, MO

A: The federal government moved to allow accrual based accounting for taxpayers near the end of WWI. The federal government still reports its books on a cash basis, but the comptroller general also includes an accural estimate, which is much larger. I wrote a story in 2006 that explained Washington's funny math, and it seems downright prescient when looking at today's deficit. It may give those blaming Obama for deficits pause for thought: http://www.mcclatchydc.com/2006/09/28/14855/deficit-comes-in-below-projections.html#storylink=misearch For the accrual accounting, costs are recognized when goods are used or services are performed. Cash accounting records costs when cash payments are made for goods received or services performed. The Government Accountability Office has a good report on the two.. here: http://www.gao.gov/special.pubs/longterm/deficit/

Answered 02/02/11 15:05:59 by Kevin Hall and Tony Pugh

Q: When and how can I get a printed copy of the final Financial Crises Inquiry Commission report?

Submitted by John Yarcusko from Madison, Ohio

A: I believe it is available now, you can to the Financial Crisis Inquiry Commission website and get it in pdf form for free. www.fcic.gov .... here's a link if you want to buy it off Amazon.com, I'm sure you can buy it online from other booksellers too... http://www.amazon.com/Financial-Crisis-Inquiry-Report-Commission/dp/1610390415/ref=sr_1_1?ie=UTF8&s=books&qid=1296676392&sr=1-1

Answered 02/02/11 14:54:15 by Kevin Hall and Tony Pugh

Q: Are you aware of AB 138 (Beall) which proposes government use of the Elder Index developed at UCLA, and provides far more stringent analysis of elder poverty than census and other indicators.

Submitted by Ruth Gottstein from Volcano, California

A: I was not but will pass it on to Tony Pugh, as I assume that's to whom you were directing your remarks.

Answered 02/02/11 14:51:30 by Kevin Hall and Tony Pugh

Q: In the FCIC dissent, Peter Wallison points to GSEs holding 19m of 26 million of subprime mortgages as evidence of their primary culpability in the bubble/meltdown, rather than Wall St. Does he have a strong argument, or is that a dodge?

Submitted by Dennis THompson from Phila, pa.

A: He has been very misleading with the number. Subprime lending was dominated by Wall St, where the modus operandi was "a rolling loan gathers no loss." the investment banks took Fannie and Freddie's market share, capturing more than half the market. Fannie and Freddie got into the subprime game late, in response to losing market share, and got burned since they got in as the bottom fell out. But they had much higher underwriting standards throughout the boom years and to suggest they drove this process is just sheer nonsense.

Answered 01/14/11 10:41:10 by Kevin Hall and Tony Pugh

Q: Just today heard an update concerning the housing market in Florida. House prices continue to fall; there is a glut of real estate available; foreclosures and short sales are at an all time high and yet new housing continues to be built. Won't this continued development further exacerbate the problem? Why does building of new houses continue here in Florida? Thank you.

Submitted by Joe Green from Lake Worth, FL

A: As a Floridian who lives up north, your question is my question. Just amazing. The baby boom retirement will fill some of that housing, but all the inland building just seems quite odd and unsustainable. sorry on the delayed response

Answered 01/14/11 10:30:43 by Kevin Hall and Tony Pugh

Q: I highlighted this massive fraud in FLORIDA /BANKS ATTORNEYS /LUBERT ADLER INVESTMENTS /DEVELOPER /ALL STEALING MILLIONS OF DOLLARS . THIS MOVING NOW INTO A MASIVE CLASS WE HOPE .iTS A MOVIE /BOOK /WITH DRUG /MONEY LAUNDERING YOU NAME IT ,WITH SOME SERIOUS DUDES INVOLVED .CONTACT ME AS I HAVE PAPERWORK SUPPORTING THIS ITS UNREAL 011 44 7808793867 YIOU ASKED ME WAY BACK FOR MORE INFO

Submitted by charles mckinlay from kissimmee

A: Someone should reach out to you soon

Answered 12/02/10 10:27:22 by Kevin Hall and Tony Pugh

Q: It was only a few years ago I realized that the Federal Reserve was not a direct government agency, but a quasi agency of sorts, and that our government actually can be indebted to them. I realize this is a simplified version. In your story you relate that the Feds lent money to all of these banks, including foreign banks but no harm was brought to the US. How does a quasi system have it good in both worlds? They are not really accountable to us (US) they lend us money(?) and they can do as they please internationally? I am sorry for being so naive. Rick

Submitted by Rick Davis from Glenwood Springs Co

A: They are accountable, the appointments are confirmed by Congress, selected by White House and the Fed's books are mostly public. They do report the minutes of the meetings with a short lag, the complete transcript with a longer lag under the auspices that immediate disclosure would subject Fed policymakers to political pressure. There are rules that the Fed operates under that determine how much risk it again take, what it can take as collateral etc but these were short-term loans that were repaid in full, given at a discount because markets had effectively seized up. One of the interesting disclosures in the documents were that the Fed lent to Lehman Brothers, accepting treasury bonds as collateral. That is the safest debt out there and nobody would touch it from Lehman, it underscores how seized up the markets were at that point. There was no clear authority on how to resolve failing globally interconnected banks and remember most of the investment banks had no Fed supervision UNTIL they became bank holding companies in the middle of the crisis in order to obtain this short-term lending from the Fed. The Fed saved the day, regardless of what political points politicans are now trying to win.

Answered 12/02/10 10:26:58 by Kevin Hall and Tony Pugh

Q: First, thanks to you both for the detailed answer to my question about CDOs and leverage. That was great. This question also is about CDOs. In the Senate hearing on Goldman Sachs, an internal email written in July 2007 goes like this (clearly abbreviated): "Post (...our risk reduction program consisted of: (1) selling index outright (2) buying single name protection (3) buying protection on super-senior portions of the BBB/BBB-index .... *** That is good for us position-wise, bad for account who wrote that protection ... but could hurt our CDO pipeline position as CDOs will be hard to do.)" I don’t understand the reference to “super-senior portions of the BBB/BBB-index”. Isn’t super senior a tranche rated above even AAA? Or am I missing something? Thanks for reading this.

Submitted by Simon Burnett from Hamburg, Germany

A: Here's an answer from Greg Gordon, sorry on the delay in responding... Greetings and thanks for your inquiry. Don’t you love Wall Street speak, written in ways that no one else can decipher? First of all, super senior tranches are part of a CDO structure, and are not a result of a Wall Street ratings agency’s pronouncement of which grade of risk the security falls in. Here’s how it worked: The Wall Street firms pooled various securities together and ran them past the ratings agencies, which bestowed ratings on each of several tranches of securities. Then a new special purpose vehicle (company) was set up to effectively run the deal, usually through two identically named companies, one in Delaware and one in the Cayman Islands. Wall Street firms then marketed the CDO, but with a new set of tranches – topped by the super seniors who always got paid first. Investors bought notes in these tranches, effectively securing a priority position in the overall CDO. So that as the securities defaulted, the folks holding the bottom, or “equity” piece of the CDO would get paid last. The CDO would typically be over-collateralized – meaning that there were more securities in the package than the actual face, or notional, value of the CDO to give extra comfort to investors, but it was largely all the same stuff, and so it really didn’t amount to much more security. AIG, which sold over $60 billion in protection to U.S. and European banks on the CDOs (using credit-default swaps), only insured the super senior tranches, but all of the securities plummeted in value when things crashed and the contracts required AIG to post collateral commensurate with the declining value. AIG didn’t have the money to do so, triggering the panic among banks that were required to post the same collateral to clients who had originally bought protection on the same securities from them. Your question, however, appears to relate to yet another kind of bet – on the private ABX exchange in London. In this case, firms effectively bought swaps on an index that tracked the performance of baskets of subprime mortgage securities. I suspect, but cannot say that I am certain, that this bet was on a slice of the lowest investment-grade subprime mortgage securities --- the BBBs. Why? Because Goldman knew they’d be the first investment-grade securities to default, and since it was on a super senior part of the basket, they’d actually have a chance of finding somebody to take the other side of their bet on a housing downturn. But I must admit that I didn’t know there was such a super senior position on the ABX. I’m sorry that I cannot answer this definitively, but the statement that the bet is on an index suggests that I’m on track, because I do not know of another index where CDS trades were being made.

Answered 11/16/10 15:17:03 by Kevin Hall and Tony Pugh

Q: Why were the synthetic credit default swaps paid off 100 cents on the dollar ?

Submitted by Michael from Syracuse, NY

A: This answer from Greg Gordon, and sorry on the delay, my fault in not getting the question to him: NY Fed officials initially said that they approached foreign banks and asked them to take a haircut and they refused, saying that would be a default on the contracts. So they concluded that U.S. banks also must be paid 100 cents on the dollar. Later, it was disclosed that UBS offered to take a small discount – a couple of percent, but no one else did. It also was later disclosed that French regulatory authorities would have backed reduced payments for such French banking giants as Societe Generale, Calyon and Agricole. One issue that arose is that banks such as Goldman Sachs contended that they were acting as an intermediary on behalf of clients on many of the CDS contracts and would owe the clients the full face value, so if they collected less from AIG via the NY Fed, they would have been impaired for those amounts. Was that enough to send these investment banks into insolvency? It seems unlikely.

Answered 11/16/10 11:33:33 by Kevin Hall and Tony Pugh

Q: Did Hank Paulson pay tax on his required divestiture of his stock in Goldman Sachs when he became Treasury Secretary or did he use Internal Code Section 1043 to defer or eliminate his gain?

Submitted by Joe Blicharz from Reno, Nv

A: This answer from Greg Gordon: I saw the issue about Paulson’s taxes while researching the last story about his regulatory inaction and in a brief search, I didn’t get to the answer from the documents that I stumbled upon. The movie “Inside Job” claims that he got a special waiver that enabled him to avoid $50 million in taxes.

Answered 11/16/10 11:32:20 by Kevin Hall and Tony Pugh

Q: Hi, I find McClatchy news and commentary to be one of the better sources of information, so I thought I'd take advantage of your Q&A. An article was posted titled: Social Security surplus hit by joblessness, early retirement My understanding is that any Social Security contributions in excess of current benefits paid are taken into the government's general fund and expended. My question has two parts: 1. What entry is made in the Social Security Administration accounting records to recognize these transfers? 2. What financial documents, e.g., Treasury Bonds/Notes, etc., are received by the Social Security Administration in recognition of the amounts transferred? Since there's a delay of unknown length between question and answer, please forward any answer to me via email. Thank you in advance, jeb

Submitted by jeb from Portland, Oregon

A: Your email doesnt show up here so I can't forward, an apologies for a delay in response, was traveling, off, then traveling again. My understanding is that in lieu of a lock box (Al Gore's famous word), the incoming revenue is spent and an IOU in the form of Treasury debt is left in its place. Here's how Social Security Administration describes it: "As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary. Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government. " And here's a link to its FAQ: http://www.ssa.gov/OACT/ProgData/fundFAQ.html

Answered 11/16/10 11:14:10 by Kevin Hall and Tony Pugh

Q: I live in Alcona county, an area that has been hit very hard by the economic situation. Our weekly local paper shows an average of 7 homes in the process of repossession. Many have already lost their homes and property. My question: is there any possibility that these foreclosures will be looked at again now that the "robo-signing" has been exposed, or are these cases beyond any help if the home has already been taken from those owners, and if the house has not been resold?

Submitted by Jane Unkovich from Glennie, MI

A: Sorry on the delayed response, was on the road and off a bit in recent weeks, there are some lawyers working to help people retake their foreclosed homes when the foreclosure involved paperwork errors, one if Michael Pines out in California. This is a huge issue, subject of hearing in Congress this week, but the stalemate continues. Banks want consumers to take the loss, lawmakers unwilling to let homeowners fight through bankruptcy and the longer this drags on more and more people see their homes valued at less than the mortgage they carry. With the new makeup in Congress, I have a hard time seeing a government program to absorb shared losses so there's little indication of a thaw in this problem.

Answered 11/16/10 11:09:06 by Kevin Hall and Tony Pugh

Q: Mr. Hall or Mr. Pugh Do your bank open new accounts without a signature? Can your bank open a new account with just a verbal to open a new account; again without signature?

Submitted by sandra from la mesa

A: I'd go to a consumer agency with that question, sorry on the delayed response, but I would find it hard to believe you can do it verbally without a signature

Answered 11/16/10 11:06:21 by Kevin Hall and Tony Pugh

Q: On July 19, 2009 you wrote about the toxic assets then still on the books of the large banks and the danger they represented to the economy. The COP report on the TARP in August of 2009 reiterated this point. Where are these toxic assets now? If they are still on the banks' books, are they any less of a danger to the economy?

Submitted by morley gorsky from toronto ontario canada

A: Great question, sorry on the delayed response. The beauty of the stress tests on the largest banks is they were the equivalent of the game of find the pea under the shell. It shifted the conversation away from toxic assets to capital on hand, the accounting rules were relaxed so banks didnt have to put a present day value on this mortgage-backed securities and other instruments of structured finance. They're still there festering on bank balance sheets, they just dont have to be marked to present pricing in an illiquid market. Some big banks like Goldman Sachs largely do mark them to market but I don't think Citi, Bank of America and several others do. The hope is that at some point a secondary market for these complex products comes back to life and they get repackaged and woven into new issuance etc, perhaps a Brady Bond type phenomena, but that won't happen until the reform of Fannie and Freddie happens, and the first shot in that fight comes in January with an administration proposal for a fix. It's hard to see how these two entities get out from government receivership anytime soon.

Answered 11/16/10 11:01:44 by Kevin Hall and Tony Pugh

Q: When politicians say that thousands of jobs will be created from alternative energy, how does that help the current unemployment funk, when the majority of the people currently unemployed are people that probably wouldn't have the right degrees for the jobs created?

Submitted by Jade Hound from Watertown, SD

A: Good question, clearly they wont all get jobs now. The idea is to lead in the creation of a new sector, government providing the incentives for these new alternatives. The problem is price signals are off right now. With oil in the $70-80 range, people feel little urgency to move swiftly to alternative energy. Just wait a couple of years when the US growth picks up and emerging powers keep growing, will are likely to look back at this period as a missed opportunity to get ahead of a problem. Oil will not remain this cheap.

Answered 11/16/10 10:58:02 by Kevin Hall and Tony Pugh

Q: As a member of congress you become aware of the need to expand the economy to reduce unemploymnet. What two options do you have?

Submitted by Belinda from Arlington, Texas

A: Your question hits the nail on the head of today's debate. Can government spur employment, thus reducing unemployment. Americans just said through the ballot box that they think the answer is no, despite most economists suggesting that the recovery act/stimulus was instrumental in returning the country to an albeit slow growth path and prevent much deeper jobs losses. Same to be said about auto bailout. Most economists think government stepping in when private sector is impaired is a necessary solution, conservatives believe market signals will return things to normal. The problem is the skeletal structure of mortgage lending is in tatters, lots of US economic activity feeds off housing, and high unemployment is reducing demand for goods and services. If government spending is removed from the equation, you get a smaller economy with higher unemployment and less activity. My bet is a long slog for a couple more years.

Answered 11/16/10 10:56:06 by Kevin Hall and Tony Pugh

Q: I'm a newbie in economics, i'm reffering to arthur o'sullivan's book : urban economics. he formulating land market value as R (income per year) divided by interest rate. okay, my question is, why western economic depend so much on interest rate, like o'sullivan's formula, can you please explain to me why to determine land market value, you must use interest rate?

Submitted by ichsan from Bandung, Indonesia

A: I think you are better off sending this question to an economics blog, of which there are many. An economist would do a better job explaining that than an economic journalist. I can, but would leave teaching to the teachers.

Answered 11/16/10 10:52:39 by Kevin Hall and Tony Pugh

Q: Given the steady increase in work productivity, why not reduce the work-week to 36 hours. Would not this create about 10% "extra" jobs? Thanks, Sam Veneer

Submitted by Sam Veneer from Pueblo, CO

A: Nice idea but won't happen, if we make market-friendly reforms to healthcare and label the president a socialist, the chances of adopting Europe's soft work weeks are slim and none. Sadly, the reality is otherwise, the workweek for men and women has risen considerably and wages are flat. Former Labor Secretary Robert Reich touches on this in his very readable book Aftershock. Recommended reading.

Answered 11/16/10 10:51:24 by Kevin Hall and Tony Pugh

Q: If the Bush tax cuts were allowed to expire, how much revenue would the government collect over ten years, and how much would this amount cut into the defecit?

Submitted by Fred Como from Burnt Hills, NY

A: My recollection is that if Bush tax cuts expire in total, you are looking at $2.5 trillion to $3 trillion. if you let just the top 2 percent expire you save $700 billion but still are looking at $2.3 trillion roughly in lost revenue over 10 years. if bush tax cuts expire and the AMT is not patched, then you look at around $4 trillion in revenue coming to the federal coffers over 10 years. Sorry on the delayed response, fell through the cracks.

Answered 11/16/10 10:49:43 by Kevin Hall and Tony Pugh

Q: Relates to collateralized debt obligations (CDOs). They are said to be leveraged. Are they all leveraged? I understand that leverage means borrowed money, but I don't understand the mechanics of leveraging CDOs. Where does the borrowed money come from? Thanks for reading this.

Submitted by Simon Burnett from Hamburg, Germany

A: When people talk about leveraging it means, as you suggested, borrowing funds, or taking on debt, to enhance the bet made on a particular stock or in this case a security, called a collateralized debt obligation. The borrowed money came from hedge funds, pension funds, private investors, other Wall Street investment banks... What blew up the investment banks was they funded themselves with overnight financing and forms of short-term funding. And when credit tightened amid deterioration of complex securitized products, they found themselves in what they described as a liquidity crunch. Simply put they couldnt get short term borrowing and didn't trust each other's accounting, both things they needed for survival. It's humorous (in a dark way) to think back to their arguments in 2008 that they weren't insolvent, they just faced a liquidity crisis. If you depend on borrowed money to keep the engine turning, and the borrowed money goes away, you are overleveraged and insolvent. I can't tell Best Buy sorry I can't pay off my flat screen TV, I have a liquidity crunch but trust me, I'm solvent. The line didn't go over too well in 2008 either. Here's description that's not too technical of how leverage worked, I can't attest to the blogger, whose colorful website and commentary are nothing if not provocative. But his description is a good one. http://boombustblog.com/reggie-middleton/2009/04/20/who-is-the-newest-riskiest-bank-on-the-street/

Answered 10/07/10 17:49:11 by Kevin Hall and Tony Pugh