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I think that the thing that a lot of people missed, is that even with the mass panic on Wedensday and Thursday, the market still showed an overall gain for the week. What that really means is that once people took a moment, calmed down, and looked at the situation, they determined that things were still relatively stable and secure. What we experienced last week was essentally an economic earthquake. There was some unsteadiness and a lot of panic, but once people got outside and realized nothing had fallen down, they calmed down. There is still some insecurity in peoples minds, but I think that it is being driven more by media commentators who are out there saying "oh, last week we were at the doorstep of October 1929" that is driving it, rather than any serious economic problems.
There certainly is plenty of blame to go around for both Democrats and Republicans. But keep in mind that more so than a political point of view, it is the underlying system that is the problem.
So even though "politicaly correct" mortgage law was passed around 2003 to require more bank loans to people that were more likely to be poor and more likely to default, political correctness was not the sole motivation.
What law are you talking about? Are you talking about expansion of the FHA?
I am talking about the Community Reinvestment Act, which was changed in 2005, not 2003 as I guessed earlier.
The essential motivation was that the Federal Reserve was desperate to paper over the last big bubble, which was the tech stock crash in 2000. During the late 90s the Federal Reserve created a stock market bubble which eventually crashed. At that point, the economy was poised to tip over into a recession. Greenspan cranked out even more fiat money, and managed to get the economy racing again, but at the cost of creating an even bigger bubble, this time in real estate.
Bunch of things in here, I don't get NPC Dave.
How did the fed create a stock market bubble?
Why does the fed care about a past bubble?
Why do they want to 'paper' it over? What does that even mean?
The federal reserve isn't on the hook for stock market performance, nor are they politically accountable in that way, AFIK.
Fiat money? What was that? Do you mean treasury bonds?
No, I am not talking about treasury bonds. I am talking about the Federal Reserve either printing money for nothing, or issuing electronic digital money to banks, which can then loan it out. Fractional reserve lending makes money multiply through borrowing.
In the 1990s, the internet and tech stocks were the hot thing. This newly created money was lent to capital investment groups and funds which began bidding up prices for these...
Great. Thanks NPC Dave. That was a much more cogent statement of your position. I still disagree on various aspects of your intepretation, but it doesn't sound like hoo-ha to me any more.
Here's where I'm not fully on board with your analysis (Spoiled because it got stupid long again):
1. I don't think the Community Reinvestment Act funneled enough money to be significant contributer to this problem; so the characterization of 'politically correct' laws favoring the poor as the root cause of the meltdown still strikes me as grandstanding at worse and a misconception at best. I'm looking at congressional deregualtion of investment banks in 1999 as the contributing regulatory cause. Stupid big post early explaining why I think that.
2. AFIK, the Federal reserve doesn't print money.
3. The Federal reserve, as we both discussed, sets the overnight and fed funds rates. Here's a link to the full deal for those who are interested: The Fed
4. The Federal Reserve also manages and participates in an open market around reserve balances, usually lending to banks overnight so they can make their reserve requirements levels. Here's the details for the mentally hardy: Fed Lending. The Fed also trades in securities to keep the reserve market essentially a 0 sum game.
5. Nothing makes money multiply. I find your word choice confusing, sorry. I'm in total agreement that lowering the fed funds rate (using a variety of tools) gooses the banks in the sense that they will lend more if they know its cheaper to cover their bets with central bank loans at the end of the day. And yes, this in turn is an inflationary pressure because it increases the money supply. We agree on that.
Fed Funds and Reserve lending does not increase the money supply on its own; though, again, I agree it can affect the velocity of money and have an inflationary effect.
6. The fact that the fed reduces the fed funds rate on any given day, incentivizing banks to inject more money in to the economy doesn't dictate how that money gets leant or spent. To say the Fed caused a tech stock bubble is, to my mind, a drammatic oversimplification and an innacurate blame-shifting to a (by and large) poorly understood but essential financial oversight agency.
7. 'Fiat' money is one of those terms that raises my eyebrow. It reads to me like loaded jargon that helps beg the question. Just because more credit is available, doesn't automatically mean it will be poorly invested. Nor does it necessarily mean businesses will overborrow, which term by the way would be circularly defined if 'overborrow' means 'borrow in a way that is bad borrowing'. Borrowing is and has been the fundamental driver of GDP growth for decades. It can only be bad after the fact, if indeeed an investment decision was poor. Lots of borrowing by businesses helps businesses expand and create jobs.
8. Increased credit is an inflationary pressure, but that's not always a bad thing. Sometimes it is. Sometimes its not. It's more like surfing than binary switches.
9. Here's where I really disagree with your characterizations: managing the business cycle by throttling open credit and throttling back credit in response to the economies changing need isn't, to my mind, 'papering over'. It's one of the primary tools used to prevent the economy from overheating or collapsing. Keeping the business cycle narrow, manageable, and not overly inflationary or deflationary is one of the primary functions of the fed. Not some game they're pulling off or wool that they're yanking over our eyes. To say, perjoratively, that they are 'papering over' a problem when they use their primary tool for coping with such problems seems flat out wrong to me.
10. The business cycle, so far in modern economic history, is an ongoing, recurring thing. It'll get bad and it'll get worse, to say that they successfully managed things in 2001 by staving off a recession and that those "staving off" actions a return of recession later? Nah. Not buying it. One can over throttle credit and under throttle credit. One can over regulate the use of credit and under regulate it. But the recessionary cycle is coming round, regardless.
I might be more inclined to agree with the statement that excessive availability of credit made this recessionary cycle more difficult than anticipated to counter. However, the active deregulation of the use of that credit, allowed components and agents within the financial
system to compromise the integrity of the entire system.
11. The fed doesn't issue money when they make a loan. The fed moves the pile of deposits, that banks put into it, from bank to bank, usually on an overnight basis. It's not new money.
Banks who know its cheaper to cover their (usually overnight) loan reserve requirements by borrowing from the central bank will tend to lend more money instead of retaining it. Sometimes lots of lending. This is not new money. It's an increase in circulation/velocity and available supply but not 'new'. Not 'new' in the "the mint printed more" sense. Also the money released into circulation by the Fed creating a more favorable lending spread usually goes into low-liquidity applications -- like houses or factories. For example, moving it from a bank vault to a house. But not leaving it circulating around the economy. This tends to minimize inflationary effects. Not elimintate them, sure, but its easy to overstate the issue.
Now, when commercial banks allow instruments like HELCs or 'financing out' we can see inflationary problems. And yes, if the feds response is to lower again and this really was the primary driver of inflation, that can be a mistake and a bad cycle.
But the factors affecting inflation at any one time are multitude. And they push both up and down. To talk as if the fed funds rate and commerical bank lending are the only factors in balancing inflation -- or even the most important -- is just innacurate, because the weighted significance of the various important factors changes month to month.
It requires ongoing management, not a snapshot.
12. I don't see Goldman's and Morgan's becoming commerical banks as a bailout, at all. Also the article didn't say anything about either institution swapping 'bad investments'. If you've another article around, I'd like to see that, too. Also, Goldman and Morgan are stil laround because they don't have that kind of bad investment exposure.
And just pointing to an increase in the stock price as proof of collusion is, I think, not enough. The stock took a hit because the whole finance sector took a hit. Any company that gets a new source of revenue will see its price go up. So what?
There are lots of other reasons it makes sense to have Goldman and Morgan become bank holding companys. Ways that are good for the US financial system but outside both banks investment models. Including the fact that they'll then be regulated in their ability to invest or handle mortgages related lending and mortgage backed securities. I'd have to check my news files but I'm pretty sure of the two Goldman has never wanted to be a commercial bank and Morgan has.
It's hard to tell from the Bloomberg article precisely which kinds of 'direct loans from the central bank' G & M now have access to. Some of it sounds like standard depository overnight lending. It also sounds like some of the temporary emergency loans for commercial banks may now be on the table for them. Which makes sense if they are becoming commercial banks (in part).
You may be right in that this was just an illegal move to prop up Goldman's stock price at worst, or a 'kill two birds' move (one of which is illegal) at best. But neither firm was suffering in a way that required a bailout, and making the two institutions that didn't buy into this MBS/subprime mess take on the task of keeping standard deposit banks alive and well, may also not be a bad thing for we average Americans. I don't think the Bloomberg article alone gives enough information to say, definitively.
13. AFIK there is no law that says the Fed must be the 'lender of last resort'. That has simply been the practice, by and large (though not always -- S&L, for example). The Feds mandate (to oversimplify) is to protect the health of the American financial system. If the health of the financial system is at risk, stepping in before bankruptcy is exactly what the Fed is mandated to do, because bankruptcy is precisely the risk to the health of the system.
I don't think one can fairly make generalized statements like this. The particulars of any given threat must be assessed on their own merits. Problems like this always have strongly unique and specific components.
14. I just don't see Paulson trying to prop up prices. Prices of what? Milk? Share prices in companies? Morgan and Goldman definitely hadn't lost trillions. Lehman went into the tank. Poof. Bear Sterns is gone, acquired. Nothing there to prop up. WaMu is on the block.
15. Once again, what's this 'taxpayers' throwing money anywhere? Where is the plan that says, "hey you, living over there, pay more taxes?" I haven't heard concrete word one on a plan to finance this with taxes.
What I have heard is Bernacke (sp?) tell congress he has the powers to write up to $800 billion ($100 billion over the bailout amount - $20 billion over if you take out the AIG commitment) in Treasury bills. I have heard about putting Goldman and Morgan in a position to maintain deposit accounts, buy up failing banks, etc. -- which probably involves a conflict of interest for Paulson but certainly benefits the average American and lightens the pressure on the fed.
And I have heard the speculation that if the government buys the mortgage backed securities and housing prices never come back, then the government will have spent, say, $10 for something that winds up being worth $5. Then they characterized that $5 loss as a money the American taxpayers lost. On which I call BS, since we only lost it if we paid for it with tax money as opposed to, say, t-bill money (t-bill interest payments being covered by treasury investments of a portion of the principal).
Moreover, if it were to come down to it that a portion of t-bill interest on the $700 billion had to be paid for with tax money, then (a) that doesn't need to result in a tax increase. It might. But it certainly doesn't need to be, and (b) that's interest payments over 30 years, a much much easier burden for the economy and the taxpayer to bear and (c) in this hypothetical scenario we're talking about a portion of the interest on a portion of the value, over 30 years; so definitely a much lower figure.
But the notion that housing prices won't go back up in the next 30 years, jamming the Gov't with write-downs is pretty ludicrous. Its part of the exact same thinking that got us into this mess in the first places: replace "prices will always go up" with "prices will never go up". Prices always go up and down.
This is a solution the US government can afford -- without taking a dime out of yours or my pockets.
16. I can't agree with you. Characterizing the situation as choice between letting unspecified company's fail or having a depression/recession is just not correct, IMO. My understanding of the complex American financial system is that letting the company's holding the nations mortgage backed securities out-and-out fail (go bankrupt) is exactly what will cause a depression.
Driving this past weekend, I've heard ads from a mortgage bank offering sub-prime home loans. Proof that people don't learn...Maybe, maybe not. 'sub-prime' technically just means below the prime rate (typically the WSJ Prime Rate). It doesn't necessarily mean they are offering below prime rates to people who are sh*tty loan risks. That's become kind of a slang usage for 'sub-prime' since many banks, in the past, did just that.Not as far as I know. I've been in mortgage lending for 10 years so this topic hits very close to home for me.
"Sub-Prime" loans have pretty much nothing to do with the Prime rate. For that matter, Prime rate almost has nothing to do with mortgage loans (directly) aside from HELOCs. Prime rate is a (somewhat) arbitrary number that the Federal Government comes up with that is directly related to the rate at which they lend to financial institutions. Mortgage rates are much more determined by the popularity (plus or minus) of Mortgage Backed Securities on Wall Street. "Prime Loans" are essentially "A-Paper" loans or loans that can be sold directly to Fannie Mae, Freddie Mac and/or GNMA (FHA and VA loans). There are certain things that they look for to approve these loans -- years employed at the same job, debt to income ratio, financial reserves, etc. -- pretty much anything outside of those guidelines became "sub-prime". (Jumbo loans are kind of outside this.)
Subprime loans aren't necessarily "bad" -- they are just higher risk. Someone with a financial disaster with medical bills, a self-employed borrower, etc. Part of the problem with this whole thing is that these loans were serious money makers -- in (at least) two ways. 1) Because they are higher risk, the interest rates can be higher -- often times much higher -- so investors were very interested in getting a higher return on their dollar. and 2) Because they weren't as highly regulated as standard FNMA and Freddie products, it was easier to get people qualified...
You're dead right. I had my terminology mixed up. Thanks!
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Here is one thing to consider. Chris Dodd, the chairman of the Senate Banking Comittee is pushing for big bailouts for homeowners. Who holds most of those mortgages right now? Freddie and Fannie. Chris Dodd is also the biggest recipent of donations from Freddie and Fannie. Of course with Freddie and Fannie's bailout, the government is now the major stockholder in those bad mortgages, so the majority of the mortgage bailout money will go to Freddie and Fannie, which in turn means the money goes back to the government. If you thought the bailout package was convaluted before, wait until the government starts paying itself money to cover bad mortgages.
Here is one thing to consider. Chris Dodd, the chairman of the Senate Banking Comittee is pushing for big bailouts for homeowners. Who holds most of those mortgages right now? Freddie and Fannie. Chris Dodd is also the biggest recipent of donations from Freddie and Fannie. Of course with Freddie and Fannie's bailout, the government is now the major stockholder in those bad mortgages, so the majority of the mortgage bailout money will go to Freddie and Fannie, which in turn means the money goes back to the government. If you thought the bailout package was convaluted before, wait until the government starts paying itself money to cover bad mortgages.
Damn skippy. And its tough because that complexity needs to be hit head on. Oversimplification and those who would use it to take advantage of an under-informed electorate (and hell, lets face it - most of us are uniformed when it comes to this stuff, and I include myself of course) could ruin our lives for decades to come.
Especially if we allow [i]anyone's[i] sound bite renditions prompt us to get vocal on our congresspeople. Not that anyone here has been dishing out soundbites. Its just so difficult and so hard to be informed on such a complex topic -- that, as David pointed out, continues to grow more complex while we watch -- and so vital that we advocate through our representatives on an informed basis.
I also agree that economics and finance should absolutely be a part of our high school curricula, nation wide.
Who's going to invade? Mexico? Canada? Cuba maybe?
Why would you disband the Army and how would you propose defending our nation?
Venezuela?
Venezuela?Who's going to invade? Mexico? Canada? Cuba maybe?
Why would you disband the Army and how would you propose defending our nation?
Well the warning will be when they start training their infantry battalions in long distance swimming.
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Venezuela?Well the warning will be when they start training their infantry battalions in long distance swimming.
They'll get confused hearing about the ice cap melting and being able to circumnavigate the globe and try to come at us by surprise by sailing down towawrds Antarctica.
After ten brutal years of bitter trench warfare taking Antarctica from the penguins, they'll come around the other side and finally reach Australia, where an incontinent koala will incapacitate the last straggler.
In his hands, he'll be holding a map of the North Pole, that they've spent the last decade 'updating' because it didn't look anything like where they were...
[threadjack]
America borrows money from China.
Just think about that for a minute.
Isn't that like some dude with an SUV bumming drinks off some blokes who ride bikes to a factory job?
"Hey, come on dudes, I'm wearing those shoes you made, cut me some slack!"
[/threadjack]
Venezuela?Well the warning will be when they start training their infantry battalions in long distance swimming.They'll get confused hearing about the ice cap melting and being able to circumnavigate the globe and try to come at us by surprise by sailing down towawrds Antarctica.
After ten brutal years of bitter trench warfare taking Antarctica from the penguins, they'll come around the other side and finally reach Australia, where an incontinent koala will incapacitate the last straggler.
In his hands, he'll be holding a map of the North Pole, that they've spent the last decade 'updating' because it didn't look anything like where they were...
lol. yet another failed end around.
Should clarify that the point is not failed. I was referring to the army taking an end around.
Venezuala. The New Cuba.
The Bay of Pulled Pork Invasion? The Venezualan Erectile Dysfunction Crisis? GAStro instead of Castro?
Come on. There's lots of material there.
Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.
I wonder why did he do that? Why didn't he blame the Republican congress that was in power at the time?
Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.
Wow! If/when a link becomes available that would be something to see. I wonder if that will get picked up by the 'mainstream' media? Not holding my breath.
His recent stint on Letterman was a bit weird too. He avoided using Obama's name, and kept acting like 'if Hillary was the candidate..' Chris Rock, who followed Bill, had a field day with that.
This is one weird election year!
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Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.Wow! If/when a link becomes available that would be something to see. I wonder if that will get picked up by the 'mainstream' media? Not holding my breath.
His recent stint on Letterman was a bit weird too. He avoided using Obama's name, and kept acting like 'if Hillary was the candidate..' Chris Rock, who followed Bill, had a field day with that.
This is one weird election year!
Here ya go.Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.Wow! If/when a link becomes available that would be something to see. I wonder if that will get picked up by the 'mainstream' media? Not holding my breath.
His recent stint on Letterman was a bit weird too. He avoided using Obama's name, and kept acting like 'if Hillary was the candidate..' Chris Rock, who followed Bill, had a field day with that.
This is one weird election year!
Thx!
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Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.I wonder why did he do that? Why didn't he blame the Republican congress that was in power at the time?
A few people I talked to, including some of my students, think he is trying to sabotage Obama so Hillary can run again in 2012.
A few people I talked to, including some of my students, think he is trying to sabotage Obama so Hillary can run again in 2012.
If true, that is just [tone=sarcasm] brilliant [/tone].
A few people I talked to, including some of my students, think he is trying to sabotage Obama so Hillary can run again in 2012.Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.I wonder why did he do that? Why didn't he blame the Republican congress that was in power at the time?
Wouldn't surprise me. He still kind of acts like she's still running. No surprise that Obama didn't pick her as the VP candidate.
Another part of his MO is also to deflect any blame he, as President, might have had on things.
What a tangled web we weave...
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Maybe Bill was being completely honest about the democrats sabotaging his work...
Yeah, that didn't sound convincing to me, either.
Lou, Moff Rimner, thank you for your very informative and on-topic posts. I hope you add more comments once the particulars of the $700 billion arrangement get put in public print. From the draft I saw, it was pretty scary how broad they left many definitions.
On a side note, a friend of mine made an observation that irks me. He mentioned that a CEO of a company that is projected to lose millions of dollars, and then gets a government bailout, gets a huge windfall bonus as a small percent of that bailout because his company did so much better than the projected loss.
On a side note, a friend of mine made an observation that irks me. He mentioned that a CEO of a company that is projected to lose millions of dollars, and then gets a government bailout, gets a huge windfall bonus as a small percent of that bailout because his company did so much better than the projected loss.
I think that's the part that got nixed because both parties screamed bloody murder. At least they say it got nixed in the final form.
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Lou, Moff Rimner, thank you for your very informative and on-topic posts. I hope you add more comments once the particulars of the $700 billion arrangement get put in public print. From the draft I saw, it was pretty scary how broad they left many definitions.
Thanks, but I'm not sure how much I actually contribute. My direct knowledge of this stuff is pretty limited and I try not to post from a position of knowing when I don't know.
From my point of view and with respect to my job (mortgage lending) it really doesn't matter what the government does or doesn't do. What matters is how it affects people's perception of how this might affect things. The more I've been in this business, the more I've realized that "reality" and "truth" are summarily ignored. But if people feel like there is more safety in investing again, then they will do it, the values will go up and it will stimulate the economy (or what have you).
More than what the document(s) actually says, I'm more interested in whether or not they can actually sell it to the world.
Regardless of what happens, people will still need to buy homes and people will still need to refinance their homes at times. How that "looks" might change a bit but there will still be a market for mortgage lending.
EDIT: Every day I get someone who asks me how rates will be affected by all of this. To which I reply -- "They will change".
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Back to the original point, did anyone see Bill Clinton on Good Morning America? He completely threw his own party under the bus, saying that they blocked reforms that he proposed when he was president and that was what caused the current crisis. When I heard it I was literally too stunned to move.I wonder why did he do that? Why didn't he blame the Republican congress that was in power at the time?
two words: hillary 2012...
I'm not an expert on the subject, but my family is heavily involved with both the real estate and mortgage markets...and business finance for that matter.
I think two things that aren't getting mentioned in the political debate over this are these two:
1) Transparency and the ability to determine value in the secondary market was indeed a problem. I'm not for regulation of business on basic principle, but if mortgages are being bundled and sold on the open market with no way to determine either the value or the risk of that purchase...well I think that's a problem that can be solved. I consider this more of a matter of consumer protection. We shouldn't do anything like go back to 15 and 30 year fixed rates only, but we should at least have the right to say if you are selling mortgages there has to be some kind of halfway reasonable method to determine value and risk. Let lenders make any loan they want, but if they want to sell it after they make it, then saying they have to make loans that have methods of assessment is fair.
2) Fannie and Freddie, and what basically worked out to an open line of credit were a big driving force behind this. This organization had a political agenda behind it, and I think that's dangerous. People are trying to make the argument that redlining laws were a large part of the cause but really that's a minor problem compared to the other driving forces behind this bubble like the existence and political goals of fannie and freddie. We should really question if something like this is really a good thing to have exist. Also, before we start bashing free markets, we should really take a look at the quasi-government agencies (now fully government I guess) that probably shouldn't even exist under a free market concept.
two words: hillary 2012...I *liked* Bill Clinton, but I fear Hillary. She's creepy.
And yeah, that's my educated grown-up articulated reason for not liking her as a Presidential candidate. She creeps me the **** out.
My problem was that I liked Hillary Clinton, but Bill Clinton - with his slick manner and sexual picadillos - creeps me out. :(
(B.T.W., I do think that the who "Monica-gate" impeachment was a HUGE waste of Our Government's time and resources.)
You are correct that the Federal Reserve doesn't control how the money gets lent out or how it gets spent. But the business cyle you refer to, the boom and bust cycle, is caused by fractional reserve banking. Fractional reserve banking precedes the Federal Reserve, and you can trace just about every single big bust/crash in economic history since the 17th century to fractional reserve banking, with a notable exception being the Dutch tulip mania. That exception had other causes but those causes duplicated in some ways the effects of fractional reserve banking.
Would it be fair to say that Fannie and Freddie do control how the money gets lent out?
Here's a small article on how fannie and freddie might have been part of the problem. It's fairly politically charged and doesn't mention the contributing factors the republicans made to this problem, but I think the assessment of fannie and freddie, and how they helped drive the bubble is fairly accurate.
Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.
How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.
It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges. Among other problems, economists at the Federal Reserve and Congressional Budget Office had begun to study them in detail, and found that -- despite their subsidized borrowing rates -- they did not significantly reduce mortgage interest rates. In the wake of Freddie's 2003 accounting scandal, Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation of the GSEs and limitations on the growth of their highly profitable, but risky, retained portfolios.
If they were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing? The answer was their affordable-housing mission. So it was that, beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.
The strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.
In light of the collapse of Fannie and Freddie, both John McCain and Barack Obama now criticize the risk-tolerant regulatory regime that produced the current crisis. But Sen. McCain's criticisms are at least credible, since he has been pointing to systemic risks in the mortgage market and trying to do something about them for years. In contrast, Sen. Obama's conversion as a financial reformer marks a reversal from his actions in previous years, when he did nothing to disturb the status quo. The first head of Mr. Obama's vice-presidential search committee, Jim Johnson, a former chairman of Fannie Mae, was the one who announced Fannie's original affordable-housing program in 1991 -- just as Congress was taking up the first GSE regulatory legislation.
In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.
Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.
As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.
If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.
Contributor, RPG Superstar 2008 Top 6
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Folks, if you like transparency in business, you like regulation. Without regulation, business can and will be completely opaque whenever it suits them.
Also, it never ceases to amaze me how free market koolaid drinkers refuse to admit anything is ever the fault of the market - capitalism in raw form or even under-regulated form is boom-and-bust. Welcome to bust, population US.
Coming back to the election, isn't it convinient how McCain was a factor in SNL (a member of the Keating 5, in fact), a big booster of energy deregulation (AKA how Enron pumped billions out of California), and was a supporter of the financial deregulation that led to this latest economic collapse? And we want to give this guy more control over the economy why, again?
I know. Politics. Sorry.
Well we don't have a completely unregulated market now. That being said, there is a big difference between severely restricting the types of loans out there and saying there can be a wide variety as long as there is a method for determining their risk by being able to actually see truthful info on the loans.
Either way, it wasn't the driving force behind this. Before they could be bought and sold in a nonsensical frenzy, the capital force behind frenzy needed to injected. Transparency is a problem related...not the root source.
I brought up transparency because many people don't seem to think it's a good thing, but I don't see it as hampering the market. Strict regulations on what loans can be made would, and it may not secure us from this problem in the future either way.
As an analogy:
One day you are walking around town and are spotted by two corrupt cops... lets call them "Fannie" and "Freddie" for no good reason. Now these two cops basically can do whatever they want because the police force doesn't really keep track of them... in fact you might say they have taken measures to encourage them to engage in ruthless behavior.
These two cops sneak up on you on the side of your eye-patch. You never see them coming...and they clobber you with sticks.
Rather than blaming the corrupt cops or the police force that encourages this kind of behavior, you blame your eyepatch, because if you weren't wearing it, you would have seen the attack coming.
Now is walking around town with an eyepatch on smart? Probably not. Can it break your face all by it's lonesome? No. Was it the root cause of the attack against you? No.
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I know that this might sound like paranoid nutcase dribble, but as I look at the current economic crisis I have begun to notice a pattern. While everyone else is on the verge of collapse, there is one group that is not only thriving, but expanding, and no I'm not talking about the government. J.P. Morgan Chase has been a big factor in two of the three major collapses that have occured in the past few months. First Bear Stern started to go under, the Feds rushed in, seized control, and sold it to J.P. Morgan Chase. Then yesterday the same thing happened with WaMu, who was on the verge of a deal with CitiGroup for them to buy out the bank. The only piece that J.P. Morgan Chase did not gobble up was Lehman Brothers, and that is also the same group that government decided not to save. Interestingly, just after the collapse in 1929, J.P. Morgan went around gobbling up banks at that time as well. I haven't figured out what it means yet, but it is something to think about.
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I know that this might sound like paranoid nutcase dribble, but as I look at the current economic crisis I have begun to notice a pattern. While everyone else is on the verge of collapse, there is one group that is not only thriving, but expanding, and no I'm not talking about the government. J.P. Morgan Chase has been a big factor in two of the three major collapses that have occured in the past few months. First Bear Stern started to go under, the Feds rushed in, seized control, and sold it to J.P. Morgan Chase. Then yesterday the same thing happened with WaMu, who was on the verge of a deal with CitiGroup for them to buy out the bank. The only piece that J.P. Morgan Chase did not gobble up was Lehman Brothers, and that is also the same group that government decided not to save. Interestingly, just after the collapse in 1929, J.P. Morgan went around gobbling up banks at that time as well. I haven't figured out what it means yet, but it is something to think about.
They're coming for you next!
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I know that this might sound like paranoid nutcase dribble, but as I look at the current economic crisis I have begun to notice a pattern. While everyone else is on the verge of collapse, there is one group that is not only thriving, but expanding, and no I'm not talking about the government. J.P. Morgan Chase has been a big factor in two of the three major collapses that have occured in the past few months. First Bear Stern started to go under, the Feds rushed in, seized control, and sold it to J.P. Morgan Chase. Then yesterday the same thing happened with WaMu, who was on the verge of a deal with CitiGroup for them to buy out the bank. The only piece that J.P. Morgan Chase did not gobble up was Lehman Brothers, and that is also the same group that government decided not to save. Interestingly, just after the collapse in 1929, J.P. Morgan went around gobbling up banks at that time as well. I haven't figured out what it means yet, but it is something to think about.They're coming for you next!
I bank at WaMu, so they already came for me ;p
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I know that this might sound like paranoid nutcase dribble, but as I look at the current economic crisis I have begun to notice a pattern. While everyone else is on the verge of collapse, there is one group that is not only thriving, but expanding, and no I'm not talking about the government. J.P. Morgan Chase has been a big factor in two of the three major collapses that have occured in the past few months.
Even on some of the nuttier sites, I'm not seeing anything particularly nutty about this (which doesn't invalidate your feeling that something might be 'up').
They do seem to have been the big 'winner' in this whole debacle, 'though, it's true.
Warren Buffet / Berkshire-Hathaway seem to be riding through it pretty nicely as well, although they aren't profitting from it the way JPMorganChaseCitiBankEtc are. It seems like the smartest investors, the 'old money' who've been doing this for 30 years or more, are doing okay, and only the young turks who jumped to make money on the latest fancy schemes are losing their shirts (and banks).
My whacky conspiracy-theory-of-the-minute has nothing to do with politics (or the economy). I think Fox released a craptacularly boring X-Files 2 movie this summer to boost viewership for Fringe, since they were afraid that X-Files fans (who are kinda strong-opinioned and enthusiastic) would knee-jerk react against Fringe, and by releasing a horrible X-Files movie, they'd condition those fans to accept that 'they can't go back' and that it's time to accept something new.
X-Files 2, designed to plant the nail in the coffin of that franchise, so that fans could mourn and move on and be willing to take a chance on the new show, making it an hour and a half long marketing device...
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J.P. Morgan is doing fine right now because they chose not to invest nearly as heavily into mortgage-backing as their competitors did. While they made less in the short run (fewer high-risk/reward ventures), they didn't lose nearly as much collateral value with the housing bubble burst. It is doing so well for the simple reason of smart, safe business practices, not a conspiracy.
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J.P. Morgan is doing fine right now because they chose not to invest nearly as heavily into mortgage-backing as their competitors did. While they made less in the short run (fewer high-risk/reward ventures), they didn't lose nearly as much collateral value with the housing bubble burst. It is doing so well for the simple reason of smart, safe business practices, not a conspiracy.
Like I said, it was just a trend I noticed. If someone else had said it, I would have most likely felt it was crazy talk. I'm not a big believer in conspiracy theories. No buisness lasts as long as J.P. Morgan by making bad buisness decisions.
As an analogy:
** spoiler omitted **
The problem with your analogy is that transparency means more than just the one person wearing an eyepatch. One of (the many) reasons why the bad morgage-back securities sold so well was that no one was sure what was in them.
It's like buying a paper-wrapped sandwich with no ingredient label. Sure, you're not quite sure what you're getting, but you're getting a great deal. And in this case everyone was just planning to sell it to the next guy, who would know even less, because there wouldn't even be anyone to ask questions of at that point. When the time came to unwrap it and eat the sandwich, it turned out to have been utterly rotten the whole time. The people who made the sandwich knew it was no good, but they got to cover it in paper and sell it anyway. Sure, the people buying it should have know it was too good to be true, but that's greed compounded by ignorance, as opposed to just greed.
If the same sandwich was wrapped in plastic and had an ingredient label, perhaps it wouldn't have changed hands so many times, if at all.
Remember: The assumptions that make the 'free market' so efficient require that both buyer and seller know as much as possible. The more ignorance, the less efficient the market becomes.
J.P. Morgan is doing fine right now because they chose not to invest nearly as heavily into mortgage-backing as their competitors did. While they made less in the short run (fewer high-risk/reward ventures), they didn't lose nearly as much collateral value with the housing bubble burst. It is doing so well for the simple reason of smart, safe business practices, not a conspiracy.
(Remember that this is a gaming board. :D)
It is always about conspiracy!
6. The fact that the fed reduces the fed funds rate on any given day, incentivizing banks to inject more money in to the economy doesn't dictate how that money gets leant or spent. To say the Fed caused a tech stock bubble is, to my mind, a drammatic oversimplification and an innacurate blame-shifting to a (by and large) poorly understood but essential financial oversight agency.7. 'Fiat' money is one of those terms that raises my eyebrow. It reads to me like loaded jargon that helps beg the question. Just because more credit is available, doesn't automatically mean it will be poorly invested. Nor does it necessarily mean businesses will overborrow, which term by the way would be circularly defined if 'overborrow' means 'borrow in a way that is bad borrowing'. Borrowing is and has been the fundamental driver of GDP growth for decades. It can only be bad after the fact, if indeeed an investment decision was poor. Lots of borrowing by businesses helps businesses expand and create jobs.
8. Increased credit is an inflationary pressure, but that's not always a bad thing. Sometimes it is. Sometimes its not. It's more like surfing than binary switches.
9. Here's where I really disagree with your characterizations: managing the business cycle by throttling open credit and throttling back credit in response to the economies changing need isn't, to my mind, 'papering over'. It's one of the primary tools used to prevent the economy from overheating or collapsing. Keeping the business cycle narrow, manageable, and not overly inflationary or deflationary is one of the primary functions of the fed. Not some game they're pulling off or wool that they're yanking over our eyes. To say, perjoratively, that they are 'papering over' a problem when they use their primary tool for coping with such problems seems flat out wrong to me.
10. The business cycle, so far in modern economic history, is an ongoing, recurring thing. It'll get bad and it'll get worse, to say that they successfully managed things in...
Hey NPC Dave, I'm going to drop this thread of discussion. I almost completely disagree with you and the articles you cited on the origins of the business cycle. In short, the depository structure, in my model, acts as an amplifying factor at certain threshold junctures. Even a runaway amplifying factor, but within structured parameters there are no significant problems. In my model, depository structure is not the driving cause of the business cycle.
But I think you gathered by now we don't subscribe to the same economic paradigm.
That said, I don't think a debate on the origin of the business cycle would be useful for this thread -- or something I have the time to pursue.
So, without conceding the point, I'd like to agree to disagree.
Later!
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I know that this might sound like paranoid nutcase dribble, but as I look at the current economic crisis I have begun to notice a pattern. While everyone else is on the verge of collapse, there is one group that is not only thriving, but expanding, and no I'm not talking about the government. J.P. Morgan Chase has been a big factor in two of the three major collapses that have occured in the past few months. First Bear Stern started to go under, the Feds rushed in, seized control, and sold it to J.P. Morgan Chase. Then yesterday the same thing happened with WaMu, who was on the verge of a deal with CitiGroup for them to buy out the bank. The only piece that J.P. Morgan Chase did not gobble up was Lehman Brothers, and that is also the same group that government decided not to save. Interestingly, just after the collapse in 1929, J.P. Morgan went around gobbling up banks at that time as well. I haven't figured out what it means yet, but it is something to think about.
What it means is that JP Morgan has a relatively conservative balance sheet and a deposit base to allow it not to worry so much about wholesale funding. It is also debatable to what extent JP Moargan is "doing well" out of this - it still has to work out the problems with its acquisitions. Many, many takeovers end up destroying value - especially those done at haste. Though I'm sure the government loans help.