I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It's a philosophy we've had for the last eight years - one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It's a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.
Well now, instead of prosperity trickling down, the pain has trickled up - from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.
This country can't afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market - rules that would protect American investors and consumers. And I've called for policies that grow our economy and our middle-class together. That is the change I am calling for in this campaign, and that is the change I will bring as President.
This is high-test hooey. This was not some criminal activity that the Bush administration should have been investigating more thoroughly; it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit. (These are, mind you, the same people that five years ago the Democrats wanted to help enjoy the many booms of homeownership.) Lehman, Bear, Merrill and so forth did not sneakily lend these people money in the hope of putting one over on the American taxpayer while ruining their shareholders and getting the senior executives fired. They got it wrong. Badly wrong. So did everyone else.
What, specifically, should the Bush administration have done, Senator? Don't tell me they should have beefed up SEC enforcement, since this is not a criminal problem (aside from minor lies by Bear execs after the damage was already done). Perhaps he should not have reappointed Greenspan, or appointed Ben Bernanke? Both moves were widely hailed at the time. Moreover, to believe that a Democrat could have done better is to assert that a Democratic president would have found a Fed chair who would pay less attention to unemployment, or a bank regulator who would have tried harder to prevent low-income people from buying homes. Where is this noble creature? And why didn't Barack Obama push for him at the time?
Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock. If Democratic policy is so good at protecting the little guy from asset price bubbles, how come the stock market crashed in 2000?
This kind of foolish grandstanding is not the change we need. It's just more of the same.
Wow, "jungular" is a really unfortunate typo. I'm sure someone will see that as a racist Freudian slip.
Feh...garden variety, election-season pander with a hint of the wild root showing through on the leaves. It won't go to seed until sometime next January at the earliest.
Bravo.
Obama's comments deserved ridicule. Kudos to you for even-handedness.
McCain's response to this situation was not perfect by any stretch, but at least it was a fairly balanced and accurate view of the situation... Not too much mention of the magic partisan pixie dust that fixes everything.
Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock.
Hell, this mess goes back to the 70's and the Community Redevelopment Act (or whatever it was called).
No no...
Us consumers are doing just fine, thank you. We don't need any help. Why don't you go help those guys, over there. You see them, those state and city government employees with gaping holes in their retirement funds. Yeah, help them out. We consumers are A-OK right now.
Regulation of broker capital requirements is something that has been screwed up.
I understand the SEC altered the rules back in 2004 to allow brokers to assess their own needs rather than fixing a 10:1 ratio, and so they all geared up. Now as asset values have deflated there has been a liquidity cascade with Bear Sterns & Lehman going bust and confidence in the system now shaky
If Obama can get away with saying, "The banks gave too many loans to poor people - elect a Democrat to put a stop to this." he probably deserves to be president. At least, we would deserve to have him as president.
On the other hand, "the many booms of homeownership" is a great typo.
I applaud you for being even-handed on your critique. But I can't begrudge the man for grandstanding on an issue that most people don't have a firm grasp on. Granted its not as complicated as "The Bush Doctorine", but on this issue I can't help but to think that people feel the need to blame someone(even if there is plenty to go around). Why not try to put the blame on the most unpopular president in modern history. Sure grandstanding is not change we can believe in, I think his overall proposals in many issues offer said change. So if he wants to grandstand on a convuluted economic issue that is in need of a singular scapegoat, why not?
It's not like he has "Straight Talk Express" emblazened on the side his plane or anything like that....
Why don't you ring up Professor Goolsby and ask him what the answer is to your questions?
Obama I think learned from his mother's anthropological training in his relating to others. What he presents to us relies on our knowing something of what is going on but not too much. In this case he relies on our knowing and fearing that our investments are not safe. He will blame the titular head of this at this time. He relies on our not knowing that he is the second or third largest recipient of Fannie Mae's lobbying funds in Congress and that Barney Frank (D - Mass) has led the fight to see that the GSEs were not reined in and per your point. The ubiquitous Casandra in disaster Jamie Gorelick, s Democratic insider, was also involved at Fannie Mae. Why he appointed the former head of Fannie Mae to be the head of his VP selection committee not to mention your point about pressure by the Democrats to loan only if their was an affirmative action cut in. You see something similar in the Wright affair where at one point 'my Church is not all that different from any other,' Ayers is a 'fellow in the neighborhood,' and 'not the Rezko I knew.' Also where did he misplace that essay he wrote for the economics journal about dealing with contraparty risk.
I challenge anyone to name a President known for his economic plan not named Regan, or Roosevelt. George H.W. Bush had a degree in economics but apparently forgot everything he knew about it. And lost to the man from Hope, AK.
As for what could've been done to avert this particular instance. I'd say not having a spending spree. Deficit reduction, to be blunt about it: regulatory strangulation instead of relaxation, focusing some of that good old USA attention span on combating a bloated debt, and a bloated budget, maybe enforcing the existing Steingall-Glass act even? Dare I say it but there are a myriad possible solutions to this problem. But if you go with mine, the economy will either grow sluggishly, negligibly, or recess. At least if you go too far.
But using debt, upon debt, for the purchasing of even more debt. That is ludicrous, this is going to take so long to work out if only because its so very difficult for debt to work its way out of the market and then for the market to regain traction.
While I agree in general that Obama is being way too partisan about something that has little to do with Republicans or Democrats, I do think there is or would have been room for someone to offer up some kind of regulations. It's hard to say what those could be but surely there must be a way to prevent:
1. Home owners from over leveraging their credit by purchasing a second home for investment/personal use. Ie. if you want to do this fine, but should the costs should make it more difficult. Should there be a higher bar you have to pass? That would limit Joe Schmoe from trying to be a real estate tycoon and failing abysmally. But it would also limit exceptional Steve from actually bootstraping his way into a rental income investor. Is there some middle ground requirements that we could create to prevent this?
2. Prospective home owners from purchase more home than they can afford. Just because you want it and want more space doesn't mean you should get it if you can afford it through banking trickery. I think most people I know that are struggling are in this situation and unfortunately I think the heavy handedness will not come down on preventing this type of person, but rather pass the blame solely on to people I listed in category 1. The 10 people I know that bought houses in the last 18 months including myself, 3 of them bought second/rental homes (and are doing fine so far), 3 of them bought first time homes they could more than afford and 4 of them bought homes they could not afford and are on the verge of just walking away from them.
So it would seem from my experiences, that we need to prevent people from buying too much house. In the 4 cases I know they had the option to buy a smaller cheaper house, but they instead borrowed way too much using creative financing and are screwed.
What I don't get is why are we blaming the greedy bankers when it was the greedy, gluttonous home owners who wanted to consume more than they could afford that put us into this? It's not like you blame McDonalds for making you fat -- oh wait...
"he is the second or third largest recipient of Fannie Mae's lobbying funds in Congress"
DISTORTION. Obama is #3 in total dollars from the Fan/Fred PACs PLUS individual employee contributions. He's not even in the top 100 for contributions from the PACs. He is #1 in contributions from individuals, but that's to be expected with the fundraising he has done.
One shouldn't tar the employees motives, unless you are accusing Fan/Fred of illegally pressuring employees to make contributions.
It happened under Bush's watch, so I blame him. Is there a specific law or something to point to? no. Just the general laissez faire attitude of letting the business run themselves without oversight. I think someone with a more watchful eye, better advisers would have seen this coming farther off, and could have mitigated much of the damages sooner.
Oh by the way since everyone seems to think that either Obama or Mccain is in some way a special case: shame on you. If you seriously expect any presidential candidate to be anything other than a cynical, calculating, sell-out you need to be reminded that until they become president that is all they are. For the next however many days each of them is a beast mindlessly following whatever scent it thinks will get them elected. After that they will regain their senses. But for the moment spare us all the childish outrage that someone running for the highest office in the land is this _____ (negative quality) or that _______ (personal insult). Everyone of voting age has no excuse to be so naive.
"I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock."
My, how quickly some forget. In Obama's major address to Wall Street last Spring, Obama clearly blamed deregulation on both Clinton and Bush (and Obama reiterated this criticism throughout the primaries which is one reason why Bill has been loath to embrace Obama). But Clinton isn't running for office this cycle---McCain is. And McCain embraces the economic advisors and propensity for financial deregulation that Bush does. So Obama's critique is entirely appropriate.
What I don't get is why are we blaming the greedy bankers when it was the greedy, gluttonous home owners who wanted to consume more than they could afford that put us into this?
When I bought my first house--back in 2000--the bank gave me a hard time about where my 20% downpayment was coming from (stock sales, mostly--got out just about the peak). Now if you watch HGTV (my wife is addicted), everybody is doing 80/20 financing to "avoid PMI." How the hell does 100% financing avoid PMI? It can only be that the banks are sloppy about verifying the source of funds (where "sloppy" means they don't do it).
So yes, consumers were being dumb, but they had incentives on their side: cheap money, mortgage interest deduction (including for second homes), cap gains exemption after 2 years, and apparently no PMI necessary if you're willing to play games. But the banks were also being extremely dumb by not investigating their borrowers.
Am I the only one who thinks the follwing were NOT problems:
1. Lending to bad credit risks with higher interest rates.
2. Collaterizing mortgages into products.
3. The Fed
What I felt WERE problems:
1. Mortgage brokers engaged in out-and-out fraud by writing mortgage applications for people and misleading the debtor about the terms of the mortgage and misleading the creditor as the the real risk
2. Investment banks going into the banking game but resisting the common-sense sanity checks most well-run banks use: make sure your assets outweigh your liabilities.
3. All the people in all the financial markets across the world who collectively allowed important information about risk to be washed out by these MBS schemes.
4. The GOP for treating 9/11 like a shopping-spree credit card and creating a fake growth bubble with tax-cuts AND spending increases.
Re: it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit.
No! The problem was not a lot of borrowers with bad credit: the problem was a lot of borrowers, many with sterling credit, who were allowed to take on more debt than they should have. Often enough they were allowed (even encouraged) to grossly exaggerate their income and assets, and sellers were allowed (and encouraged) to inflate the value of their homes with the help of compliant appraisors. The usual debt-to-income and loan-to-value ratios were ignored. Add in complex and deceptive loans with skyrocketing payment structures, and even if you have a 800+ FICO score that's a recipe for trouble. The rightwing talking point that this is all due to minorities and the poor is frankly barf-worthy. It isn't welfare mothers and bankrupts being foreclosed on: it's solidly middle class (and above) people who thought they should have more home than they could afford, or perhaps thought they could get rich quick on real estate.
Re: These are, mind you, the same people that five years ago the Democrats wanted to help enjoy the many booms of homeownership
Expanding home ownership has been a bipartisan project for decades. On the Right it's a truism that property ownership makes people more conservative. There were plenty of GOP ideologues who saw getting lower income people into home they owned as a chaep (no government money or bureaucrats involved) way of converting Democratic constituencies in GOP wanna-bes.
Re: Obama is being way too partisan about something that has little to do with Republicans or Democrats,
Yes, lord knows that's a first in American history! Remember how the honorable GOP refused to wave the bloody shirt of 9-11 in either 2002 or 2004?
Megan,
What are your thoughts on the comments by the Ohio Republican who used to head the House Financial Services committee, blaming the White House for blocking a GSE reform bill in 1995:
"The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis", says Mr Oxley, now vice-chairman of Nasdaq.
He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”
http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1af-000077b07658.html?nclick_check=1
Megan, you may not like it, but what the government should have done is say "ok, lenders, any loan where the principal amount GROWS as time goes on b/c the borrower isn't even able to pay the interest is not allowed. That is absurd and a recipe for disaster." And that's just for starters.
Too much regulation strangles growth. Too little encourages wild speculation that results in busts. Clinton came the closest in getting it somewhat balanced.
The only problem I have with this speech is this line: "I certainly don't fault Senator McCain for these problems..." Um, why not? He supported the economic policy that produced them.
Megan,
Though I am an Obama supporter, I must say I do agree with you to a point on this one. The economy isn't completely the President's fault...it's America's fault for being greedy, not saving, and living beyond our means.
However, the President could have done much more to change the tone of the American way of life, encouraged congress (which pretty much gave him a free ride for 6 years) to tighten regulations on Fannie and Freddie, and not launched us into a disastrous war that is bleeding our country of $500 million per day.
In sum, Obama's criticism of the President's economic attitudes and policies is valid in the general sense, but the true responsibility lies with the voters. Unfortunately, telling these hard truths doesn't quite lend it self to winning elections.
Name one specific thing that Bush has done? I don't even know where to begin. Maybe attacking a pile of regulations with shearing scissors before the delighted eyes of industry representatives, was not sending the right signal? Maybe the systematic appointment to oversight functions of people from the very industries they were supposed to supervise, was not a good idea? While we're at it, maybe an administration that appoints a young ideologue with no economic schooling to oversee the Iraq stock exchange, and that fills the offices of the Justice Dept with unqualified Federalists, was equally shoddy with its appointments in other areas? There was perhaps no one specific thing: what there was, was a general mind-set of negligence, of anything-goes, of who-cares-someone-else-will-clean-up, and most especially of greed.
And the bubble of 2000 is not comparable. Ordinary people's lives had been getting better for 8 years then, they've been getting worse for 8 years now. They lost invested money then, they're losing borrowed money now.
Given the amount of money Obama has raked in from Fannie and Freddie in a very short time (2nd only to Dodd) and given that Jim Johnson, who Obama tabbed to run his VP search, was ex-CEO of both Fannie Mae and later caught in shady dealings with Countrywide and Anthony Mozilo -- given all that, we do at least have to give Obama some for showing real Chutzpah in going on the attack on this issue. But I guess when you know that there's virtually no chance that most of the U.S. press corps will ever call you on it, you can afford to take chances.
Hear! hear! All you Republican who have asked for specifics. He did say the '21st century;' sorry on you 18th century types, oh the boldness. Everybody else who knows what the proper regulations are, please read them in (they are the change he was hoping for). For the sake of our international relations I hope he doesn't apply them to all 57 varieties (states). I'm not sure this is the change the drug lords in Michoacan were hoping for and they can be hard to bring along, it is kind of jungular down there.
I do look forward to the post where Megan discusses the fiscal conservatism of Sarah Palin.
"ok, lenders, any loan where the principal amount GROWS as time goes on b/c the borrower isn't even able to pay the interest is not allowed. That is absurd and a recipe for disaster." And that's just for starters.
I vigorously disagree with this. Had someone bought a home in a hot coastal market in, say, 1999 and sold it in 2006, he likely would have done quite well with one of these exotic loans. If some profit-seeking capitalist thinks he can make money lending money on such terms, let him. My problem is when such loans are made and then quickly turned into cash thanks to taxpayer-backed Fannie/Freddie.
Let gamblers chase risky profits. Ain't nothing wrong with this. Just don't let them do so with a government guarantee. Please please please President Mcbama, file legislation to sell off Fannie/Freddie at the first opportune moment after the crisis has passed. Taxpayers don't need to be in the mortgage business. For small scale, tightly-targeted assistance to poorer borrowers we've still got the FHA. That's enough.
Granted it's about Freddie and Fannie but it's the ideology that's important. From today's FT:
"The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.
"Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.
"Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all."
Fannie and Freddie were mostly dealing with 80% LTV type loans. The big problem was they stopped looking at where the other 20% came from (bank loans, instead of savings) and stopped verifying income. They weren't behind the exotic loans at first, in fact once the housing market heated up they became less of a player versus other banks because they were "too strict". It was only in 2006 and 2007 in an effort to prop-up housing prices they started to purchase toxic loans, at the request of our Government.
If Bush had been paying attention (or hired competent employees), he could have stopped this in its tracks. But no, everyone was making too much money and that's capitalist or libertarian or something.
Given the amount of money Obama has raked in from Fannie and Freddie in a very short time...But I guess when you know that there's virtually no chance that most of the U.S. press corps will ever call you on it, you can afford to take chances.
Er, no, Obama has not "raked in money from Fannie and Freddie in a very short time." Obama has received contributions from employees of the two firms. It is illegal for US corporations to make contributions from corporate funds to candidates for federal office. I'm picking this particular nit because I see this usage all the time, and it's just plain wrong, and it also tends to be misleading. I mean, the vast majority of people who contribute to political campaigns are employed. Would you feel better about it if a politician's contributions came mostly from unemployed people, or rich old bastards with trust funds who don't have to work?
My point is, everybody has to work somewhere, right? So, there's really nothing for the press to "call" Obama on. I mean, I seriously doubt we'd see any change in Obama's positions were he to return every contribution tomorrow morning he's received from F&F employees. In a free society that depends on free individuals to do the bulk of political campaign funding (yup, I admit to being a McCain-Feingold hater), inevitably we're going to see lots of money coming from people who work for a living. Employees, in other words. Big whup.
Obama has received contributions from employees of the two firms. It is illegal for US corporations to make contributions from corporate funds to candidates for federal office.
Yes, and we all know how that bundling/arm-twisting works. Or do you think it was just chance that Chris Dodd, chair of the Senate banking committee, just happened to be the personal favorite of all those Fannie and Freddie employees?
My point is, everybody has to work somewhere, right? So, there's really nothing for the press to "call" Obama on
Pffffttttt! You almost make me spit my coffee. Give us a friggin break--are you new around here (or do you think we are)?
It's easier to see your point when you don't adopt the bad slogans of the campaigns.
I think you misunderstand the Senator, which is understandable.
Obama was actually criticizing the philosophy that Bush/McCain/Everyone subscribes to. He even says it right there in the quote you use. The philosophy that lead to, how did you put it, "a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit."
He doesn't mention Bush...merely alluding to him with the "last eight years" comment, and he explicitly says he doesn't blame John McCain. He blames the "economic philosophy."
And I think a lot of people are going to find him purdy persuasive after this mess...
These are, mind you, the same people that five years ago the Democrats wanted to help enjoy the many booms of homeownership.
Uh, no, the "ownership society" was pure Bush Administration ideology, if you'll remember.
No problem, though. Don't let me stand in the way of trying to hang this around the neck of anybody but the guys who have been in charge for the last eight years.
Or do you think it was just chance that Chris Dodd, chair of the Senate banking committee, just happened to be the personal favorite of all those Fannie and Freddie employees?
I think there's very little "chance" at all, and a very great deal of desire to influence public policy. I just observe that contributions usually flow to politicians who already agree with the contributor, not the other way around. I'm too tired to rehash the arguments aired when McCain-Feingold was being debated, but I recall that that Freakonomics dude has done some interesting work on the subject. In short, political contributions have little effect on our world.
Many of the problems you're seeing today are the direct result of the ridiculous concept -- pushed by clowns like Phil Gramm, most libertarians, and the Republican lobbyists who turned K Street into a sewer -- of "industry self-regulation."
The idea that nothing can be done to help ward off asset bubbles is absolute nonsense. Even worse is the attitude that no course of action should ever be attempted.
Contra those who keep saying he tried to de-regulate, it appears that Bush actually did encourage Congress to do something about it.
http://gregmankiw.blogspot.com/2008/08/seeds-of-mess.html
Hans - if you think Obama bureaucrats aren't going run hog wild in the DC then you're delusional. They're all corrupt by nature. You just want us to pretend that only GOPes are corrupt.
Many of the problems you're seeing today are the direct result of the ridiculous concept -- pushed by clowns like Phil Gramm, most libertarians, and the Republican lobbyists who turned K Street into a sewer -- of "industry self-regulation."
Perhaps, but self-regulation absent the implied taxpayer guarantee might have been effective. I think this story really is a whole lot more about moral hazard than it is about ineffective government regulation.
Absent Fannie/Freddie, the secondary mortgage market wouldn't have taken off to the same degree. Sure, investors might have looked for profits in real-estate backed paper, but doing so would have been much riskier. So it would have been essential to do due diligence. And investors who actually bothered to do risk analysis -- because they risked losing their money -- wouldn't have been so eager to enable the kinds of dodgy loans that got us where we are now.
And just as greed invariably rears its ugly head whenever human beings form markets, so, too, does incompetence manifest itself whenever governments seek to regulate against human nature.
Given enough time, any system of government regulation will fail due to the simple fact that it's impossible to find enough infallible employees to administer the regulations. Better by far to accept this fact and simply remove the source of moral hazard in the first place. That way, when the inevitable failure of regulation transpires, the damage is limited, and the main losers are the investors themselves.
From the liberal rag WSJ:
Republican vice presidential nominee Sarah Palin said the nation’s financial system “needs some shakin’ up and some fixin’” at a rally here today. In comments that prefaced her stump speech, Palin offered blame but no specifics on how the campaign would handle the crisis on a morning during which the impending bankruptcy of Lehman Bros. sent markets tumbling.
“The system is outdated and needs a complete overhaul,” the Alaska governor said, echoing presidential nominee John McCain’s statement earlier today. “We’re going to put an end to the mismanagement and abuses on Wall Street,” adding that she and McCain would end “golden parachutes” for the chief executives of financial houses, which have “not run these institutions responsibly.”
Many of the problems you're seeing today are the direct result of the ridiculous concept [snip] of "industry self-regulation."
How is that possible? The industry hasn't been self-regulated in our lifetimes. You can't blame something for a disaster when that something doesn't exist.
Great find.
''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
This was said by Democrats in response a proposal FIVE YEARS AGO BY BUSH TO REFORM FANIE MAE AND FREDDIE MAC.
Now what does Obama say?
Mr. Oxley is half-handedly responsible for the flight of capital markets work from the US. Foreign issuers who once sought the prestige of the NYSE are now happier to list in London. Even Chuckie Schumer has figuered out that this was a bad deal.
Of course it's hooey, it's politics! Politics is a crude instrument. All that stuff is in the past anyway.
Roosevelt was elected with plans for handling the Depression that Hoover would have endorsed. Fundamentally at this point there is only a sliver of difference between Obama's and McCain's apparant understanding of the issues of the crisis or any solutions.
The entire political establishment has no understanding of finance outside of the silly platitudes of free market fundamentalism. Even as the system is being socialized with bailouts for the few, arranged behind closed doors by the authors of the mess with solutions that are sometimes illegal. Illegal means against the law, I have to add, I guess, in this weird age. I'm referring to the laws governing the Fed.
Now we don't know if Obama can pull an FDR and use populism to wrest control of the financial sphere from the Pigmen but we do know that McCain won't. There is no possible platform or even language Obama could use to garner votes on these issues because there is no constituency for a fundamental reassessment of the status quo, yet. Inauguration is still 4 months off and things are likely to get a lot worse. If not then perhaps it doesn't matter, in regard to things financial and monetary, who gets elected. If it does get worse then among other things the difference might involve little differences like helping citizens as opposed to sending troops into the street and highways to suppress dissent and breakdown.
That probably sounds crazy. OK. Just don't forget you heard it here first.
Take your pick.
Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock. -- MM
Democrats went along with Republican economic ideas in the '90s and early 2000s, just as Nixon instituted wage and price controls in the '70s. That doesn't mean Republicans like wage and price controls just as much as Democrats do. Most Republicans voted for Johnson's Great Society programs. That doesn't mean entitlement programs are just as Republican as they are Democratic.
In the background of both the tech-stock bubble of the late '90s and the housing bubble of the early 2000s lay the belief that there is no such thing as a wrong market -- or rather that whether or not you think a market is in a bubble, you are always less trustworthy than that market is. Democrats generally don't believe this. Republicans generally do. In an earlier post Megan wrote that she knew tech stocks were in a bubble when she heard a copy-machine repairman talking about stocks always going up. But Megan, like most Republicans, believes, as far as I can tell, that there is never a point at which government or the Federal Reserve should act on a recognition like this -- that her insight should remain a private one which affects only her own financial decisions.
I admit that I can't address the regulation issue because I lack the financial expertise to understand what regulations might have been useful in avoiding the current financial massacre. But there have been numerous economists who have argued in the last 10 years that at various points government or the Federal Reserve should have acted to pop stock and real estate bubbles. All of these economists vote Democratic. There is a clear ideological coloration to this financial crisis and pretending there isn't is silly.
We should be blaming the community organizers for thinking poor people deserve homes...
This was said by Democrats in response a proposal FIVE YEARS AGO BY BUSH TO REFORM FANIE MAE AND FREDDIE MAC. Now what does Obama say?
Huh? Is Obama Barney Frank? Is he responsible for the policy positions of all Democrats, past and present?
You remember who was controlling Congress (and all its committees) 5 years ago? And notice the decider was very persuasive in getting Congress to rubber stamp his 1 trillion (and counting) war of choice. Methinks he didn't really give a shit about reforming Freddie/Fannie or asset price bubbles.
As Jasper notes above, this crisis would not likely exist, absent Fannie's and Freddie's domination of the industry, and Fannie and Freddie successfully co-opted Congress, thus guaranteeing that their taxpayer-backed domination would continue. For the candidate of James Johnson and Franklin Raines to use rhetoric like this, and not be subjected to wide spread ridicule, from anyone with an I.Q. above 65, just demonstrates how ridiculous our political culture is.
Obama is a tiresome ass and a bore. Of course, he is also a candidate for President, so I apologize for the redundancy.
I disagree strongly with McCardle on this one. In the run up to being admitted as an attorney, I spent one summer at the SEC's division of Market Regulation under Donaldson. I was shocked and appalled at the excessive coddling of industry that was standard operating procedure and consequently chose not to return after law school. And as disturbing as practices were then under Chairman Donaldson, an industry insider appointed by Bush, the situation deteriorated even further after he was pushed out in favor of the ham-handed Republican ex-congressman Cox. The ideology of achieving "small government" by reducing or eliminating regulatory oversight is a pandemic throughout Washington and state government. The current meltdown is a direct consequence of the lack of oversight combined with the effect of Gramm Leach Bliley stripping all remaining profitability out of the basic business of banking, leaving only leveraged speculation as a possible source of income. Much the same can be said about lack of oversight causing the run of crude from $60 to $147 under Wendy Gramm's CFTC -- a surge inexplicable in terms of supply and demand fundamentals but entirely accounted for by the combination of 1) oil traders taking control of Cushing oil storage facilities 2) the subsequent reporting of false inventories 3) profiteering from highly leveraged positions 4) a complete lack of transparency into speculation via massive swap positions with investment banks and 5) an influx of highly leveraged momentum investors.
Of course the best part of all of this is that the cash (please recall all those budget surpluses under Clinton) that might have used to bail us out of this mess has been more than entirely squandered on or embezzled via the the occupation of Iraq. But lacking the funds to manage an orderly resolution of the mess, the entire country will suffer through a prolonged and uncertain period of reduced economic growth (or recession), currency depreciation and attendant inflation, diminished foreign investment, individual anxiety arising from lack of confidence in banks and the FDIC, and depleted international prestige. These effects aren't the consequence of "the invisible hand" they are the consequence of a philosophy of government that derives from the elegant yet fictional universes crafted by the likes of Ayn Rand, Milton Friedman, Myron Scholes, and Robert Merton rather from the reality that the rest of us live in.
I infer that you're proud of your Chicago MBA, but Megan, the paper is worth more as kindling.
Hey Megan,
In your previous post, Lehamn Files for Bankruptcy, you said in regards to that fiasco:
We need to shift our focus on regulation from a fruitless search for 100% safety to accepting risk, and trying to make the markets more robust to withstand it. The government should encourage, rather than discourage, multiple sources of information and analysis. It should pay more attention to outlying risks. And it should have systems in place to wind down the inevitable failures, rather than letting the outcome depend on how Hank Paulson is feeling this morning.
Isn't this something Bush could have done? The President has a bully pulpit, with Cabinet members like Paulson telling him these things are possible, from which he can move the Government towards reform. Has anyone heard the President come out and hint at a plan to be prepared for this kind of crisis besides bailout after bailout? Isn't Obama, at least from your perspective above, correct?
This is the whirlwind you reap when you spend cash like a drunken sailor during Fleet Week. (see Iraq War). The is the whirlwind you reap when you are not at least prepared for the worst (See Katrina and FEMA).
For the last eight years, administration of the federal government has been little more than an ongoing carnival of jackassery.
The same, it turns out, has been true of the administration of the country's largest banks and investment houses.
Coincidence? Causation? Copycat-ism?
You tell me.
I'm sure someone will see that as a racist Freudian slip.
Surely "Jung-ular" can't be a Freudian slip.
1.Obama and Mccain agree that more regulation is needed.
2 I don't why see the spectrum of possible actions is limited to SEC enforcement and the appointment of a decent fed chair.
3 When you say 'They got it wrong. Badly wrong. So did everyone else.' Who is everyone else? Everyone in the financial sector? Firstly - some people got it more wrong than others. Secondly - outside the sector there have been warnings about this for years.
4 There seems to be a convenient story being written about the impact of 'St. William of Little Rock.' You say - 'If Democratic policy is so good at protecting the little guy from asset price bubbles, how come the stock market crashed in 2000 ' Is that not a misleading simplification of a magnitude you have ascribed to Obama.
"please recall all those budget surpluses under Clinton"
I'm trying. If I close my eyes and wish real hard, maybe they'll be real.
http://www.letxa.com/articles/16
Megan,
All of your points are true at face value. However, Bush's bungled fingerprints are all over this crisis. Bush's first term Treasury staff was recruited from Enron, so lets just start there. There has been open hostility - as a political philosophy - to oversight by those who are supposed to be providing it since Clinton left office. Gas was $1.50 a gallon when Bush arrived and now people are relieved when it falls below four bucks. The dollar has lost at least a third of its value for the for-seeable future. The Iraq war is sucking wind out of this economy like an air mattress with a hole in it. The bottom line to all of our country's problems are that Bush really, really sucks as President, and until he is replaced with someone competent, no one will have any confidence is our financial institutions.
How about the exciting new bookkeeping practices, like counting future debt as the same as money in the bank?
The exciting new loan options cried out for transparency in bookkeeping and didn't get anything like it. As most of us who got a mortgage at our local bank found, that loan was shipped off to a distant national bank within the year. And resold a couple of times. And at some point it was clear that the low level guys had every incentive to give a loan to anything that slithered, and the people buying the securities were thinking "mortgages" with "It's a Wonderful Life" rather than "craps table in Vegas, with some guys off the street who heard you could make money here."
Bush has been in charge for 8 years and had a Republican legislature for most of that time, so the "help help the evil Democrats did this to us" isn't going to fly. If it all came up on Bill Clinton's watch, well, then, there's been almost 8 years to fix things. (Both Obama and McCain have records on transparency and regulation; however, since McCain has today been busily blaming the problem on over-regulation and government not getting out of the way of the market, I'll feel free to assume he wants me to ignore that record.)
What, specifically, should the Bush administration have done? They should have stopped deregulating everything in sight, and they should have established oversight and transparency--you know, regulations--for the exciting new debt options their deregulating was creating.
And whenever someone tries to nail Barney Frank, Mr. Housing, on the "well, you wanted us to loan money to all these poor people, didn't you" he's been able to point to a record of no such thing--encouraging more rentals and less buying. The "everyone should own a home so they build up equity!" bullshit is equiparty. And was dumb, but who was listening to Mr. Frank? No, he's a Democrat so obviously he must have made everyone buy homes they couldn't afford.
Whatever meltdowns the deregulated financial world finds itself in this year will be laid at the door of the party in charge for almost a decade. Yes, I get that shrieking "Help help we're being oppressed" is the new McCain campaign strategy and will be employed here as well. Doesn't mean I can't laugh at it, just as I did when Fiorina was huffing that Saturday Night Live was not taking Governor Palin's accomplishments seriously, and Tina Fey is sexist.
Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock.
Try not setting an example of fiscal responsibility and prudence. The recklessness of the Bush Administration in defecit spending coupled with the massive accumulation of a crushing debt is precisely the example that the financial sector and the individual borrower embraced for themselves. What is the mortgage crisis if not a parallel example of borrowing/lending/spending more than you can or should handle? I blame Bush for being an abject and utter failure in leadership regarding fiscal responsibility. Call St. William of Little Rock what you will, but his administration was never as fiscally reckless and irresponsible as the Bush Administration.
It's worth remembering, too, that two of Obama's economic advisers had a hand in this mess: former Fannie Mae CEOs Jim Johnson and Franklin Raines.
What I don't get is why are we blaming the greedy bankers when it was the greedy, gluttonous home owners who wanted to consume more than they could afford that put us into this?
Let's see: back in the days when banks kept mortgages for 30 years, they were very careful about vetting people they'd lend money to. Once they started packaging and selling off the mortgages so that repayment was someone else's problem, banks would write no-money-down mortgages to anyone with a pulse. That is, once loans that were unlikely to be repaid became assets rather than liabilities, banks did their best to create them. *That*'s what we blame them for.
2 I don't why see the spectrum of possible actions is limited to SEC enforcement and the appointment of a decent fed chair.
Let's see what Bush could have done. First, he could have explicitly stated that Fannie and Freddie debt is not backed by the government. I know it states it on the certificates, but everyone thought that was BS. The only problem is that this would have put mortgage rates up overnight, crashed the market and we'd have a recession. It would have been much milder than the unwinding now, but Bush wanted to prevent this at all costs on his watch. What we got instead is the Chinese for some reason thinking that the debt was backed by the government. I wonder why that might be?
Second, instead of using the Chinese to fund our debt and wars he could have told Americans that we need to sacrifice for our war on terror. Everyone must spend less money and purchase war bonds. What we got instead was telling everyone to spend, spend, spend.
Third, he could have reduced spending. Instead we got one of the largest increases in government spending since FDR.
the many booms of homeownership
In the current context, I can only think of one boom of homeownership -- collapsing home values. I think you mean "boon". :-)
Republican or democrat, I don't believe any candidate, or anyone period, should be able to assign blame or even try to talk about the source of the problem or the solution if they can't explain the repo market and counterparty risk.
This video of Pelosi is even worse than Obama:
http://www.cnbc.com/id/15840232?video=857175221&play=1
I have front row seats to the sky falling, and I still don't completely understand all of the moving parts of this.
I'm with GinNTonic on this one. Most of you people commenting couldn't even explain how a CDO is structured, which tranches get hit in which way when losses or prepayments happen on an asset-backed CDO, and why the investment banks that were creating asset-backed CDO's were left on the hook for billions of dollars of mortgage default losses. These are simple questions, with fairly simple answers. When you know what you're talking about, we can talk. Till then, go back to the cool-aid pail. I hear God is about to "make change". Yes we can!
Well, Gene, pretensions to expertise start to lose their cachet when the entire industry composed of said experts is revealed to be on the verge of collapse.
"Just go away and let us get a handle on this giant exploding mess we've concocted, before we bring down the country's financial system" doesn't really sound very convincing.
Megan is voting for Obama. She knows it, we all know it. Her blog is just one big self-hating concern troll. Was McCain walking the straight and narrow on these matters for the last 26 years, Megan? Any thoughts on Phil Gramm?
We don't elect saints, Megan. But we might elect McCain.
No, he's not blaming Bush. Read what he said.
He's blaming Reaganomics and free-market, anti-regulation orthodoxy. Bush is only the latest expression of that.
That may be misplaced, but Megan, get it right on what is misplaced, and where.
Boy, the histerics are out in force this evening.
Before we run head-long into overturning our entire financial system, we should keep in mind that
Mike said: "Let's see: back in the days when banks kept mortgages for 30 years, they were very careful about vetting people they'd lend money to. Once they started packaging and selling off the mortgages so that repayment was someone else's problem, banks would write no-money-down mortgages to anyone with a pulse. That is, once loans that were unlikely to be repaid became assets rather than liabilities, banks did their best to create them. *That*'s what we blame them for."
Mike, the world you describe is pre-New Deal. Once Fannie came along it became government policy for banks to resell their (conforming) mortgages.
Posted too soon:
Before we run head-long into overturning our entire financial system, we should keep in mind that financial crises happen in regulated systems as well.
Before we run head-long into overturning our entire financial system, we should keep in mind that financial crises happen in regulated systems as well.
We shouldn't run headlong into anything. If there's anything the Bush years have taught us, it's that. But we have to scrap the default bias against having rules, or enforcing them. That's what's significant about what Mike Oxley is saying today about the "one-finger salute" which the bipartisan 2005 House bill that would have reigned in imprudent lending by Fannie Mae and Freddie Mac received from "ideologues" at the White House. He's pinning the roots of the current crisis on ideological opposition to regulation. And this is the former GOP chair of the House Finances Committee and current vice head of Nasdaq talking.
I know next to nothing about finance, but in general I believe reforms should be intelligent and careful. But I also believe reforms should *happen*. Hopefully whatever regulatory changes ensue will be deliberate and thoughtful, but the question here is whether we will continue to embrace a "philosophy", as Obama aptly puts it, that the only thing wrong with free markets is that they aren't free enough, or whether we are going to move towards a philosophy that says markets need rules and boundaries to function well.
"This was not some criminal activity that the Bush administration should have been investigating more thoroughly; it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit. "
Are you referring to a passage you don't reproduce here? Where does he talk about criminal activity, or anything like it? He is talking about regulatory philosophy, saying we got way off the highway and need stop trying to drive through fields and rivers and shit. Regulatorily speaking. Are you saying that's hooey? I heard a a lot of people way smarter than anyone here saying better regulation is now clearly needed and inevitable.
Why do you go so far out of your way (and into McCain-like untruths in interpreting a clear statement as saying something it doesn't remotely) to trash Obama since you came back to blogging, but never ever seem to criticize McCain for all his insane bullshit when we all know you are voting for Obama? You go way past evenhandedness. Do you really see Obama as so barely the less bad candidate? You have expressed your horror at a McCain presidency clearly on bloggingheads. Is your rightie commenters' approval really so important to you that you are willing to sacrifice your intellectual honesty for it?
Let's not forget, the Democrats run Congress right now and have oversight responsibility. Only they've been too busy getting "Friends of Angelo" loans from Countrywide and causing bank runs (Schumer).
"[N]ame one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock."
OK: Bush, using the Office of the Comptroller of Currency, enacted regulations that preempted state laws against predatory lending, and that prevented state attorneys general from enforcing states' various consumer protection laws against national banks. States' righters should have been appalled, but weren't. States enact consumer protection laws for a reason, and the actions by the OCC - under Bush's direction - ran roughshod over the will of the people and the states' ability to protect their own citizens from overly aggressive lending and other questionable banking behavior. There's one, no?
it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit.
That's right! Blame the poor people. And those pesky community organizers. And the "cosmopolitans" who back them. They're the folks who got us in this mess! Those poor bankers and hedge fund operators were just trying to make a decent living wage.
Mark,
That was a nice summation of what was being said. You aren't using the most ridiculous strawman ever. Thanks for making this financial crisis so much clearer for me.
If anyone wants a very good explanation of the housing crisis, download This American Life's "The Global Pool of Money" episode.
and yes, there seem to be some very realistic solutions to this conundrum, but neither Republicans nor Democrats (St. William, included) took the safe route.
Gotta love Pelosi. The woman is a walking brain. Here she is on FM^2:
"What do we do with them? Are they quasi-government institutions? Are they quasi-non-government institutions?"
And yet you are still going to vote for Obama.
How many stupid statements does he get to utter and how many idiotic positions does he have to take before you realize how foolish you are?
About 7 more weeks of gaffes to go!
Just the general laissez faire attitude of letting the business run themselves without oversight.
Really?
So are you actually saying, or do you actually believe, the financial sector in America is not regulated?
You really believe this?
Tell us, who was more heavily regulated, Fannie Mae, or Lehman?
I would love to hear your answer...
And the White House is blaming Congress, specifically the "Democratic Congress"--while you may have a point about Obama's trying to use this for political gain, that is how the game is played and the Democrats are not the only one playing it.
Mike, the world you describe is pre-New Deal. Once Fannie came along it became government policy for banks to resell their (conforming) mortgages.
Securitized mortgages go back to the 30s? What nonsense.
Megan, I just hope the McCain campaign has the same grasp of this issue as you do. There was nothing that could be done. No one predicted this. No one would have ever guessed that property values wouldn't keep increasing infinitely. Not Bush's fault. It is Bill Clinton's fault. The fundamentals are strong.
Wasn't there a time when Republicans actually understood things like our banking system? Now they don't even seem to grasp the basic issues. The ignorance here is startling....
Brooksfoe--
I am not claiming that the banks aren't responsible for this. But please, give me a break. All these people saying that we needed to do X, Y, or Z instead of A, B, or C don't even know what they're talking about. How many commenters here know the answer to my questions? So before they pretend like they know the culprit behind the current crisis, they should first understand the financial structures that are at the center of this mess in the first place. Otherwise, you hear the kinds of nonsense you heard from Pelosi. And it was nonsense.
Good Lord! Can Ms. McArdle PLEASE use a spell-checker before posting? It does seriously detract from her argument, as most of learned in middle school.
Megan, you are out of your depths in this and have no idea what was knowable and preventable and what was not.
Krugman, a real economist , and Ben Stein both agree a "few million" worth of regulation could have prevented much disaster. I heard Ben Stein admit the Republicans have an "aversion" to regulation that is a partisan problem.
Innovating Our Way to Financial Crisis
http://www.nytimes.com/2007/12/03/opinion/03krugman.html?ex=1354338000&en=d6b2b44c8f0fb484&ei=5124&partner=permalink&exprod=permalink
...
But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead ... was to spread confusion, luring investors into taking on more risk than they realized.
Why was this allowed to happen? ... We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.
Shortly after this editorial was written, Treasury Secretary Paulsen did indeed warn that financial innovation sometimes gets ahead of regulation.
As far as political blame, that is likely to be partisan. I cannot say when banks began selling new exotic paper, or began selling their own paper in mass, or when the amount sold reached critical proportions in portolios, and I cannot say whether new regulatory practices would be purely executive branch or whether they would need Legislation from congress, but I can say that when it happens during your watch, you don't get to blame the guy who preceded you.
It's the feds job to know this just as it is the military/NSC/intelligence job to assess strategic threats.
A lot of what I might call inspired finger pointing in these comments. The much simpler truth is people took out loans they knew or should have known they couldn't repay. Its called greed, and it is shared blame, the borrower's, the lender's and the housing industry. Writing laws against being stupid has never worked and this case it was mass stupidity. It was all smoke and mirrors pushed by the banking industry and the housing industry and it collapsed. You can't fix dumb and the buying agents and selling agents and greedy investment bankers are good at finding dumb.
By your logic, Megan, no president should be blamed for his country's economic woe.
You wrote, "This was not some criminal activity that the Bush administration should have been investigating more thoroughly; it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit."
Are you kidding me? The job of President is always to be on the lookout for trouble, especially for the welfare of his country. Simply ignoring this basic but grave responsibility based on legality is not something to boast of, if anything, it should be the other way around.
At which point, Senator Obama revealed his plan to fix Social Security.
Obama is saying essentially what Ben Stein said to Larry King:
STEIN: And we also had a tremendous tech bubble under my friend and yours, Mr. Clinton. But they're bubbles. And it's a terrible problem that we don't have enough government supervision. I'm going to shock you and say there's a gigantic flaw in Republican policy, which is not believing in regulation. A few hundred million dollars worth of regulation would have avoided this entire problem of the credit meltdown. Maybe $20 million, $30 million of decent regulation would have avoided this entire problem in the credit meltdown. It's going to cost the taxpayers tens...
STEIN: ...maybe hundreds of billions of dollars. Supervision and regulation are not...
...
STEIN: I agree that that's a flaw in Mr. McCain's platform. He should be saying we're going to be supervising people.
We're going to be the party of Teddy Roosevelt. We're not going to let the big boys on Wall Street suck the blood out of America and then walk home rich like rich fat pigs while the rest of America is suffering.
I want to make sure I understand this crisis. As a non economist this is what I think has happened.
Bank A loans 50 people 100,000 dollars. They agree to pay the bank 200,000 -the loan plus interest- over 30 years. However, the only true asset the bank has is what comes in every month in payments. Everything else is just wishful thinking.
But that is not good enough for bankers who want to have their cake and eat it too. They want to act like the 30 years is up and they collected all the money owed. So they repackage the loans as securities and leverage it out as an investment product. They use the 10 million they are owed as collateral on 20 million of borrowing that they in turn invest (all the while paying top dollar to the CEOs and fund managers that come up with these ideas).
Fast forward a bit and 10 of the borrowers default. Not only is the bank not getting 10 of its monthly payments, but the 10 evictions cost money, time and lower the property value for the 40 other home owners. Several of whom now owe more on their house than it is worth. So five more default and walk away- cutting their losses and moving into an apartment for the next 7 years. Now the bank is only getting payments from 35 loan holders, paying for 15 foreclosures and unable to resell the empty houses for anywhere close to the value of the original loan. Now the investors that bought the investments from the loaned money are getting antsy. They want their money. So the bank says it will sell the 15 houses to raise the capital, but everyone knows it is a buyers market and the houses will only sell at a very low price. So no one wants to buy, no one can sell and what looked like a lot of money on paper turns out to be wishful thinking. Is that the problem?
I'm surprised that amongst all of the parties who are (rightly) catching the blame for this problem, the accounting firms who were auditing the financial companies seem to be overlooked.
Their job was make sure that these mortgage-backed securities were valued reasonably on the balance sheets, and apparently they weren't.
Arthur Andersen went down, and Sarbanes-Oxley (sp?) was passed, but the auditors were still allowed to do high-level analysis on the valuation of these securities (which were often based on prior-years' data, an approach that always works right up until things change).
And that was enough to pass muster, but not enough to cause the banks to write down the value of the assets in time to head off the meltdown.
That's why stronger SEC oversight might have helped. Maybe.
As a lot of these comments show, this is a complicated problem, with blame to be shared, but it just seems like the big accounting firms have managed to fly under the radar, despite the fact that THEY are the ones who purport to ensure that financial statements are reliable.
The "flaw" in Republican policy, including many that post here is to oversimplify the "ideology" of personal responsibility and to combine it with the fictitious religious belief that unregulated markets are more efficient than correctly regulated markets, which is simply not true.
There's no public interest in whether Bank A lends to unqualified Citizen B, so long as the the transaction or failure generates no social externalities. If B fails to repay, Bank A takes the hit. Who cares. If too many B's fail to repay then Bank A fails. Who cares
But allowing Bank A to socialize the risk under false pretenses is quite another matter, particular when the total amount of socialized risk poses a systemic threat, which only the Fed can know.
Allowing banks to issue their own paper whose risk is mis-graded is like allowing cattle farmers to sell beef that was fed other beef parts subject to mad cow while saying otherwise.
Its the USDA's job to insure that the cow we eat was not fed viruses or poison, when it is so labelled. (We can debate the pure ideology of whether its ok to sell "at-risk" beef as long as its labelled "at-risk", but lets not.)
Its the feds job to insure that collateralized bank paper, sold as "low-risk" is in fact low risk. There may also be public interest in preventing certain types of buyers from buying high-risk paper (e.g. cities.)
LOL! Its clintons fault??Who was in charge os the house and senate pray tell?The GOP had been fighting for this deregulation for years and now we have this mess.Thanks!
Colleen, that is only part of the problem.
Another part of the problem is that the risk in the paper sold by the banks was mis-graded or mis-understood. Another problem is that "banks" are now parts of full service financial institutions that do other lines of financial business.
If too many borrowers default, and the bank must still make good on its commercial paper, then the bank must find some other source of money to pay off the paper, but if the bank is in other lending businesses, it must maintain liquidity margins in those lines as well. (Hence there were many short term liquidity problems which began months ago in which the Fed made it much easier for "troubled" banks to borrow to meet margin requirements, until they corrected their problems.)
And "banks" loan to "banks." Other strong "banks" may have loaned the trouble "bank" money in one way or another.
Since its harder to determine who is holding risk from the bad bank, there is widespread uncertainty in all that banks securities, followed by a "flight to quality", firms and people begin to flush suspect paper from their portfolios, and stock markets start to go down.
This could put securities firms in actual trouble, but more likely it will lower everyone's perception of what they are worth and what they can afford as their portfolios diminish.
Hence consumers can pull back on spending, and the trouble has now infected the "real economy."
And banks now lend fewer dollars. If the money supply goes down, the price of money, interest, goes up. Variable rate mortgages climb.
In the meantime the housing segment of the real economy tanks, because it was over-stimulated. Banks holding foreclosed houses seek to liquidate, now there are many more houses and many few buyers. House price goes down. Banks get less from liquidated foreclosures. There are a new wave of troubled banks.
Under the weight of climbing variable mortgage rates, more defaults occur, more foreclosures occur, banks lose more money trying to liquidate foreclosures at lower prices, a new wave of banks is at risk.
Round next. Iterate until ..... crash or recovery.
To be successful, capital markets require socialized trust, and once an event happens that causes widespread mis-trust there are socialized impacts that can spread to the underlying real economy.
"There's no public interest in whether Bank A lends to unqualified Citizen B, so long as the the transaction or failure generates no social externalities. If B fails to repay, Bank A takes the hit. Who cares. If too many B's fail to repay then Bank A fails. Who cares"
Don't we care because the FDIC covers 100,000 dollars of every bank deposit? If Bank A loans out 100,000 dollars to 500 people who make 15,000 a year so they never get paid back, they will go bankrupt. Then the taxpayers have to pay back every single bank customer up to 100,000 dollars? (how many customers does a bank have? 1,000? 10,000. 100,000? How many accounts to make the 50,000,000 million it loaned out?)
That may not be a lot of money on Wall Street, but it sounds like a lot of taxpayer money to me!
I'm not defending Obama's comments, but Meagan's are completely clueless.
As someone who's worked almost ten years in risk management in the banking industry, I assign nearly all of the blame at lawmakers and the bankers who bought them.
After the last great depression, the Glass Steagall Act was passed by Congress and signed by the president to stop bank failures. The stock market crash in 1929 caused a run on the banks because those banks invested deposits in stocks, which were unregulated securities at the time.
The Gramm-Leach-Bliley Act was introduced by Senator Phil Gramm, passed by the Senate and Congress and signed by President Clinton. This bill repealed the Glass Steagall Act making it possible for commercial banks to invest federally insured deposits in unregulated securities. Such securities have risks that are unknown.
During the electoral crisis of 2000, Phil Gramm also sponsored the Commodity Futures Modernization Act, an act written by Enron Corporation, while Gramm's wife served on the board. The act made it legal for banks and insurance companies to invest in unregulated derivative securities, legalized futures backed by a single stock, and eliminate federal oversight in energy trading. First this bill enabled Enron to defraud the state of Californa of billions of dollars in electricity cost.
That wasn't the worst of it. Phil Gramm said that the Act would prevent the Securities and Exchange Commission and the Commodity Futures Trading Commission from ever regulating swaps, new derivatives that allowed the trading of cash streams like mortgages. The true risk of default on these cash streams was never known because without government regulation there was no standard and honest means of reporting the risk.
Fannie Mae and Freddie Mac traded in mortgage swaps very profitably with investment banks like Lehman Brothers in the short term because of low interest rates and a booming housing market. Commercial Banks like Washington Mutual invested deposits in these same instruments.
When the prices of these swaps collapsed, the value of commercial banks like WAMU dropped.
Of course the investment banks weren't passively involved in all of this. They played a role in buying politicians. Phil Gramm is now employed by Credit Suisse, and he's doing his best to see that the problem he created isn't fixed. Otherwise, Credit Suisse would have to recognize tens of billions of dollars in debt due to swaps and Phil and the CEO might not get their bonuses.
It's a bit difficult to fit all that into a stump speech, but a good journalist can explain it fairly clearly in a detailed article. See http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html.
So, why don't you do your job Meagan?
Thanks Paul! See, people can learn something on the internet.
I had a college professor (psych) who called Wall Street the biggest faith based organization in America. People may go to church, but they place more faith (ie wealth) in the hands of Wall Street than Rome. (Catholic school)
So some company takes a look at the banks loans and says to the market place "Hey guys, these loans look great. I would buy a bunch myself if I could." However, you are saying these validating companies were wrong. They overestimated the value of these loans so they sold for X when they were only worth X minus Y. Why would these companies do this? Are you saying it is like Arthur Anderson all over again?
From what I know, AA was hired to evaluate a companies financial health, but they would only be rehired or hired to provide other services to the company if the company liked the finished report. This created a financial incentive for AA to validate the crazier profit reporting schemes companies would come up with to hide losses and inflate profits. Are you saying these validating companies that would grade investments were colluding or stupid? Does a bank get to hire the company that will be rating its loans? That just sounds stupid!
I could tell you that won't work. It would be like my mom letting me decide when I'm ready to drive when I was 16. Luckily for the driving public the DMV was much stricter than I would be!
Or do these rating companies provide other services that they want the customer bank to buy. So if they like the way you rate their investments they will come to you for other services? I don't understand why a rating company would sign off on bad debt. Who would ever trust their judgment again? Or do they just assume the rating company will fold and all the players will just move offices, open under a new name like con artist do?
So the commercial paper is the repackaged loans? Or is it what they invested in with the profits from leveraging the repackaged loans?
Here's an explanatory tutorial with graphic: http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LOAN_GRAPHIC.html
It does not explain how ratings agencies assign higher ratings to CDOs that contains high-risk mortgages, and I do not know it myself.
The Ratings Charade
Subprime mortgages have swept into the booming collateralized debt obligation market, often in CDOs awarded the highest grades by Standard & Poor's, Moody's and Fitch.
http://www.bloomberg.com/news/marketsmag/ratings.html
This is quite a good article that points to the many flaws in the system including conflict of interest of the ratings agencies.
Don't we care because the FDIC covers 100,000 dollars of every bank deposit ...
We may be defining "public interest" differently. The decision of the US Govt to insure bank borrowers making taxpayers liable is not what I meant when using "public interest," even though you are right that taxpayers (read: you and me) are on the hook.
What I meant was that if the failure of a specific bank was isolated to only those who privately chose to do business with the bank, then the risk of failure is compartmentalized not externalized. Thus there is no real public interest in protecting individuals from the consequences of their actions. Its a private matter. In that hypothetical case, I would agree with free market purists that there is no real case for government involvement.
Dang.
I thought a Community Organizer would have seen this coming a long time ago and warned us about it.