Do we really (I mean "really") know what caused this financial crisis? Half the politics is about trying to allocate blame but if it was "bound to happen" why did it happen now? Do we really want to throw away (or can we) fiat currency, fractional reserve banking, efficiency? Redundancy is the best way to survive (take a look at biology), but isn't boom and bust the only way to really move forward?
Megan, no offense, because you're usually very knowledgable, but you're *way* off here.
This is perhaps a bigger hail mary than the Palin pick. He wagered Obama would cower and suspend things with him and then he'd look presidential and bipartisan. Obama didn't. McCain picked the one week where the media hates him more than ever to try to push this, Obama didn't help him out any, and he's getting slammed over it (Lou Dobbs and company aside). This is in no way good for him, though one could argue he had to try something like this at some point to keep up with some very disturbing falling poll numbers.
Keep dreaming if you think Obama is making the right decision to keep campaigning awhile America's economy burns down. You will lose that narrative in a landslide.
It's not marvelous. I knew and you knew and our Congress knew that GSE's like FNMA and FHLMC ('Fannie' and 'Freddie') were ticking time bombs. They were also fancy plum sinecures for powerful fixers with government connections.
Only a few congressmen (mostly Republicans, sadly) ever pointed out that the crisis would arrive eventually and we would pay for all the 'free' basis points shaved off mortgages. That's not because they didn't know. Everybody knew. They just cared more about putting their allies and supporters on the gravy train than they did about the country.
It's no mystery that serious people were against the roots of this crisis before it began. It isn't a matter of sour grapes or hindsight being perfect. Our so-called national leadership of both parties just didn't care as long as they got to keep handing out the goodies.
I'm sorry, Crusader. I was under the impression that there was some national debate and discussion going on about how to respond to the allegation that the "economy is burning down."
Further, I have been led to understand that a significant number of Americans do not think that John and Jane Q. Taxpayer handing a $700 billion check to a lame duck administration, who will in turn distribute their money to giant financial corporations, constitutes a rational response to the problem.
Seems to me that the thing we precisely need the most, is to find out what our two potential leaders for the next four years think needs to be done about the problem.
No, the credit crisis has significantly changed my political views. Before, I thought that Ron Paul was a crackpot, that mainstream economists were generally on top of things, and inflation and fractional reserves were healthy and normal aspects of the economy. Now I believe that Ron Paul was mostly right, mainstream economists have systematic blind spots, and consistent inflation is corrosive. I have essentially turned from a Megan McArdle libertarian to a Murray Rothbard/Mencius Moldbug libtertarian.
this is the most pathetically transparent move I have seen in an 8 year sea of utterly hopeless politics...if the people go for this, we will somehow sunk to a new low....again when I didn't think it was possible
Well my opponents have always been fans of murderous thugs everywhere, as well as being wrong. Thus this isn't all that surprising.
One problem is that so may people are panicking yet the have no knowledge of the subject. They have instinctual reactions against Wall Street and "malefactors of great wealth" but can't discuss the issues or explain exactly what the problems are.
These problems have come from all sides of the spectrum (John McCain, Winterspeak, yourself, the usual maoists). Sarb-Ox and Patriot should be prime examples of why we shouldn't be legislating at Mach 5. Nobody knows nothing, and there should be no permanent solutions implemented. The great thing with the Paulson blank check is that it is a one-off to a trusted individual. We can see how it goes and work on adopting some serious changes later.
The ridiculous pressures of the whole Enron debacle militate against doing ANYTHING legislatively for at least 5-10 years. Probably prosecutorially too. People get strung up and then everyone calms down and realizes that it was total BS and ridiculous over reaching. DOJ's "no lawyer" policy being a prime example. I think Sarb-Ox's fetish for mark to market will also be implicated in creating this panic.
True laissez-faire people have the advantage in this crisis because they have been predicting for may years that certain things would fall in certain ways that have come to fruition. This is also true of the goldbugs (Winterspeak), but this was a known risk of a fiat currency/fractional reserve system (i.e. the whole purpose of th FDIC) and isn't really interesting. The left just says it's all theft but made no predictions. In other words the Leftist critique is a religious one (and very similar to the idiocy of Catholic Social Thought, though don't tell the doctrinaire secularists) and neither empirical nor an argument. Talking to the left about financial matters is as useful as talking to a young earth creationist about developmental biology or oil prospecting.
I would really like someone to show me anything prospective from a leftist perspective that is both true and useful in regards to the housing crisis. Everything has been useless class warfare and gloating that capitalism doesn't work.
I just noticed the comment of the week (perhaps quarter, I don't read the right column much). Amanda Marcotte says that you can't be a feminist because you're an intellectual lightweight? Srsly?
An English Lit major from St. Edward's (we only take 2/3rds of applicants, at least 5% better than DeVry), who is best known for getting fired for bigoted remarks, serious plagiarism allegations, and illustrating her book with obviously racist imagery thinks that you're just not smart enough to be a feminist? Just when you thought she couldn't be more of a freaking joke!
You should be glad though. She thought that John Edwards was the real feminist in the race. She's got Costanza level powers of observation! If she'd accepted you into the club we'd have found that you misappropriated money to fund a secret family and cheated on your dieing spouse during the heigt of your visibility!
It's not marvelous. I knew and you knew and our Congress knew that GSE's like FNMA and FHLMC ('Fannie' and 'Freddie') were ticking time bombs. They were also fancy plum sinecures for powerful fixers with government connections.
Only a few congressmen (mostly Republicans, sadly) ever pointed out that the crisis would arrive eventually and we would pay for all the 'free' basis points shaved off mortgages. That's not because they didn't know. Everybody knew. They just cared more about putting their allies and supporters on the gravy train than they did about the country.
It's no mystery that serious people were against the roots of this crisis before it began. It isn't a matter of sour grapes or hindsight being perfect. Our so-called national leadership of both parties just didn't care as long as they got to keep handing out the goodies.
Posted by Brian Watkins, Democrat | September 24, 2008 9:45 PM
========
I 100% agree with you. Dem or Repub, the system is set up such that NOBODY in Congress was responsible enough - or honorable enough or had enough integrity - to step up and put an end to it, because they were all too busy feeding at the trough of the political contributions.
The current populist narrative that the mainstream media is pushing - that it was the greedy bankers that caused this - is about 10% true, as they weren't the ones requiring commercial banks and the GSE's to lend to people who shouldn't have been borrowing 110% of the value of a new home to allow them to buy a $500k house in Southern CA with a salary of $35k.
Yes, they sliced up these loans and sold them, but it is the origination forced by Congress that caused this.
In the vein of 'Who coulda known? Who really knows now?", I thought, since I was just there, that I would link to this gem. In the meantime, let's do another takedown of rightwing talking points:
The left just says it's all theft but made no predictions. In other words the Leftist critique is a religious one (and very similar to the idiocy of Catholic Social Thought, though don't tell the doctrinaire secularists) and neither empirical nor an argument. Talking to the left about financial matters is as useful as talking to a young earth creationist about developmental biology or oil prospecting.
Uh-huh. The patented 'left' made no predictions, eh? You mean like this guy didn't make predictions? (from the NYT)
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
No, there were predictions aplenty out there, and reasonable ones at that. But it wasn't . . . convenient, shall we say for certain parties to acknowledge the existence of such predictions. Now that it's after the fact, there's a certain subset of right-wing talking points that maintain that those who did make such predictions just 'guessed lucky'. Just like they happened to have a lucky guess about the lack of WMD's in Iraq, or had a lucky guess about the levees around New Orleans, or had a lucky guess that not upgrading infrastructure like bridges would result in a catastrophic collapse, or that mine safety really should be vigorously enforced. How many lucky guesses does the 'left' get before they are finally credited by conservatives/libertarians/right-wingers with just being more tune with reality?
I 100% agree with you. Dem or Repub, the system is set up such that NOBODY in Congress was responsible enough - or honorable enough or had enough integrity - to step up and put an end to it, because they were all too busy feeding at the trough of the political contributions.
You know, just because Ron Paul was predicting chaos and disorder doesn't mean that either (1) he is correct about what is wrong with the financial system; or (2) that his proposals would work any better.
An honest, objective assessment of the situation would fault the bipartisan desire to turn every American (and immigrant) into a homeowner. This was an objective of President Bush, as it was an objective of President Clinton before him. It was also an objective of Chris Dodd, Barney Frank, and other Dems in Congress.
That was only the part of it though, and by itself, wouldn't have been enough to cause the huge boom and bust. Another factor was the huge flood of liquidity into the U.S. from China and other countries with high savings rates. Another factor was the Fed's loose monetary policy. Still another factor was the rampant greed and dishonesty among millions of mortgage borrowers and mortgage brokers. On top of that you had financial engineers with faulty models and credulous, semi-competent rating agencies.
All together that turned into a perfect storm. If the Dems are successful in pinning this all the 'malefactors of great wealth' they'll ignore the real history here and we'll all be doomed to repeat it.
Fred -
I agree with most of your post but could you give an example of the "rampant greed" and dishonesty of the borrowers and brokers. Did they all know that this was a bubble? If not, what was dishonest about their actions (as opposed to foolish or greedy)?
Geez, Craig, that is an easy one. How about borrowers buying houses they couldn't afford in order to get them into a house and lying on their loan applications? And the dishonest brokers who originated these loans encouraged it (or committed fraud), b/c they could sell the loans to a commercial bank or to Freddie or Fannie and get their origination fees and be done with the loan? Here you go -
To ScentOfViolets, there were certain leftists who saw this coming. As noted, so did Ron Paul, John McCain, Greenspan, and George Bush. Unfortunately, most Dems with actual power to do somehting about it voted 'no' when McCain's bill came up to vote a few years back. (Although, in Obama's defense, had he been in the Senate at that time he wouldn't have voted no, he would have voted 'present'.) Here you go -
-------
Sen. John McCain [R-AZ]: Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight's report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae's former chief executive officer, OFHEO's report shows that over half of Mr. Raines' compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation.
I'm with Kevin R, I'm always right. (Too bad I resisted an urge to speculate on my blog about McCain suspending his campaign two days ago - I would have a time-stamped proof of my infinite wisdom.)
I was opposed to taking out no money down interest-only adjustable-rate loans during a period of record home price highs and record interest rate lows pretty much from day one.
What mystifie(s/d) me is why so many people DIDN'T think that was a really bad idea.
Dan writes: "I was opposed to taking out no money down interest-only adjustable-rate loans during a period of record home price highs and record interest rate lows pretty much from day one.
What mystifie(s/d) me is why so many people DIDN'T think that was a really bad idea."
It didn't happen all at once. There was no "day one." You're using hindsight and objecting to something you know nothing about and something you weren't paying attention to all along.
"Yes, they sliced up these loans and sold them, but it is the origination forced by Congress that caused this."
Give me a break. In dollar terms, most of the defaults are prime loans. I live front and center on this, and banks weren't forced to loan to my neighbors that bought million dollar homes with no downpayment. CRA loans are defaulting at a far lower rate than general subprime and at an only slightly higher rate than prime ARMs. The dollar amount of CRAs defaulting is considerably lower due to there not being nearly as many CRA loans as either prime or subprime and due to the loans being smaller in size.
In my city, median home prices are 9x median household income - consider how that could possibly be the case. Lenders specialized in the area, did everything they could to get people into houses, created demand, drove up prices, sold bigger loans to the next round of people, and with the steady climb in prices created a buying frenzy. Lenders would happily tell people they qualified for loans that they did not and falsify the paperwork. How do I know? My uncles wife did this, and just to show that karma exists, got foreclosed on herself when her lender closed and she lost her job.
So people got into homes, expected to either have their income rise to the property values or to sell for a profit as the lender promised and when prices fell they got killed. Meanwhile, the lenders raked in the loans, pawned the off on other people, and got out of town before things crumbled. This happened over the course of years and what seemed risky at first became common for those who saw the prospect of home ownership slip out of reach. And it's not the first time we did this - my area was the center of the S&L collapse as well. We've got a long and cherished history of running institutions into the ground in the chase for easy money and hanging people out to dry when it all falls apart. It wasn't primarily the fault of investors or depositors then either, though as owners of the S&L, investors were also blamed instead of management at the time.
You find these problems in regional pockets, places where conditions were right for property value run-ups - SoCal, Sacramento, Florida, etc., but they amount to a big part of the problem taken as a whole. In your area, this may not have been a problem and you see more CRA problems instead, but hanging this on CRA is absurd. A more likely culprit is Bush and Alphonso Jacksons HUD program that guaranteed loans for people putting no money down *in the middle of this lending environment*. We saw the rise of the subprimes and what it was creating when Bush announced that program in a bid to get re-elected. It was obvious to us that these people would get prayed on because the lender couldn't fail due to the FHA guarantee and because no oversight was given to the program, so it was just a ocean of fraud.
Do we really (I mean "really") know what caused this financial crisis?
Yes.
Sept7,2000
A key to appreciating credit bubble dynamics is to recognize that they are acutely self-reinforcing. Here, the focus is on processes and forces not easily characterized and certainly non-quantifiable. Credit bubbles absolutely feed on money and credit excess, which only induces an intense hunger for greater excess. What’s more, this appetite is insatiable. After all, credit bubbles are about financial wealth creation and accumulation. Lending, the creation of additional liabilities, is the mechanism, while the consequences of excess are immediate spending increases and asset inflation. Wealth is, of course, about power and one should appreciate that credit bubbles have everything to do with obtaining and retaining power. Those who control a mechanism for money and credit creation have enormous power. Those who manage vast sums of financial assets on behalf of their clients are immensely powerful. And those who attain discretion to allocate an economy’s resources possess great power. Credit bubbles by their very nature direct enormous power to the financial sector, for the financial sector, by the financial sector. And, as has developed during this historic period, as the financial sector attains sufficient financial power to dictate an economy’s reward system it achieves supreme power. With this achievement, the powerful financial sector garners and relishes in its ability to create its own financial wealth, with devastating consequences to the underlying economy and financial system.
Megan, still waiting for some cogent introspection on how this crisis has devastated the libertarian claim that deregulation and free markets are always awesome. You have been posting some good stuff on why intervention is neccessary even if problematic, but for most of america, this crisis will be the preverbial stake in the free market ideology.
It will take some time, but this immediate capitulation of free market ideology in the face of a crisis which free markets should never let happen, well, let's just say the coming wave of left policies and the abandonment of libertarian principles by mainstream thougt that is to come can only be described as self imposed.
Let me be blunt. This crisis will be as devastating to the unfettered free market movement as the collapse of the Soviet Union was for socialists.
JoeBlow - while I sadly agree with your conclusion, the premise is wrong. There hasn't been any substantial deregulation of financial services in recent history. In fact, speaking as someone who has suffered the cost, the compliance and regulatory costs of financial firms has been growing at rates in excess of 100% annually since Sarbanes-Oxley, thanks to that legislation, some unintended consequences of GLB and the complete empowerment of regulators subsequent to the Patriot Act and Spitzer's inquisition. The trouble is that regulation is enforced by numbskulls and lawyers, and that no substantive thought was given to basic leverage and solvency
So to say this crisis is a verdict on 'de-regulation' is incorrect. That it indicts the regulatory regime is certainly true, as it used its vastly expanded powers to pursue the wrong problem.
And it would seem, with this rescue plan, we are in danger of more of the same.
If by "what I was opposed to" you mean "short time horizons and masses of people running around like chicken's with their heads cut off screaming 'we've got to do something!'", then, yes.
However, it's not that marvelous. Predicting that popular government action will have bad consequences is a sure bet, but getting to say "I told you so" regarding financial woes for the next twenty years is going to be about the same level of cold comfort I get from saying it about 9/11 and the USA PATRIOT Act now.
I was around in the 1980s for the S&L crisis and everyone in the Southwest knew that the S&Ls were broke years before they collapsed. The whole thing was built on the idea of the price of oil rising forever. Once oil collapsed, the S&Ls that handed out loans to anyone and everyone were doomed. People just didn't want to face the truth. The same thing happened again with the tech bubble. I ran an Army tax center in 1999, I had SGTs who had made tens of thousands of dollars in capital gains on tech stocks like JDS Uniphase (which in its defense actually made a product people wanted to buy) and dubious internet stocks. It was pretty obvious then that it could not go on. The housing market is just a repeat. It didn't take a genius to realize that housing prices could not continue to go up forever. Yet, people believed it in large numbers.
There is a simple rule to follow; whenever large numbers of people are making a lot of money just buying and selling, rather than making things or providing services, the market can't be sustained. Small numbers of people can always make money just buying and selling. But once large numbers of people get involved, it quickly becomes a pyramid scheme where people are buying for the sole purpose of selling at a higher price. Eventually, enough people get priced out of the market that the sellers outnumber the buyers and the whole thing collapses.
I wouldn't say this mess is the result of any particular policy, although some policies helped it happen more than others. It is instead the result of large numbers of people taking leave of their senses and acting irrationally. Sometimes entire nations do this in the political realm and you get revolutionary France or Nazi Germany. Other times they do it in the economic realm and you get things like this.
Last June, I issued a challenge to everyone involved in the housing industry to help increase the number of minority families to be home owners. And what I'm talking about, I'm talking about your bankers and your brokers and developers, as well as members of faith-based community and community programs. And the response to the home owners challenge has been very strong and very gratifying. Twenty-two public and private partners have signed up to help meet our national goal. Partners in the mortgage finance industry are encouraging homeownership by purchasing more loans made by banks to African Americans, Hispanics and other minorities.
[snip]
Freddie Mae -- Fannie Mae and Freddie Mac -- I see the heads who are here; I want to thank you all for coming -- (laughter) -- have committed to provide more money for lenders. They've committed to help meet the shortage of capital available for minority home buyers.
[snip]
Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans.
Yes Fred that was a continuation of policy going all the way back to the late 1980s and covering administrations of both parties. Credit became a civil right. Any numbers that indicated that minorities were turned down more than white was evidence of racism rather than credit worthiness.
Had Bush come out and said, "we are giving too many loans to people who can't afford them and need to clean up our act", he might have prevented the disaster but would have been pillaried as a racist by the same people who today are whining about greedy wall street. There are a lot of people who had a hand in this. So many people in fact that you really have to blame the entire country rather than this or that policy or political party. One of the things that created this is an entire society so cowed by charges of racism that no one was willing to stand up and call bullshit when the community activists and organizers and jive hustlers claimed that minorities had a right to credit even if they had no means to pay the loans back.
"The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and subsequently fell — faster than almost anywhere else in the country.
"But Citigroup, the financial giant, values similar investments on its books at 61 cents on the dollar. Citigroup says its C.D.O.’s are relatively high quality because they were created before lending standards weakened in 2006."
Wachter: "... There is a critical factor that all of this misses, ... It is that the [lending ]standards [are] eroding, especially in 2006 when there [was] a dramatic decline in standards, [which] was unsustainable and that retrenched.
We had a sharp reversal, starting in 2006, of these unsustainable [lending] standards which were artificially inflating housing prices. So over this period [lending] standards eroded, artificially inflating house prices. Housing price increases and even levels could only be sustained with this unsustainable, overly liberalized credit being manufactured, which directly caused the price rise of 2006."
Can we stop pretending that the root cause of this crunch was not reasonable foreseeable, that "no regulations were relaxed", and that there was no breakdown in oversight, that the seeds of this were laid nearly seven years earlier during the prior administration, and the push for loans was made to appease Democratics desire to loan to poor
people?
All of this is BS. There was a clear change in best practices by banks that was reasonably foreseeable by an awake responsible, oversight professional.
Even if the oversight professions did not have the legal authority to act they could have brought the need to the attention of those (e.g Executive and Congress) who could give them that authority, in much the same way as the Bush administration asked for different kinds of Congressional authority to deal with a new kind of enemy, stateless terrorism.
Isn't it marvelous how the financial crisis has been caused entirely by things that you were opposed to before the crisis happened?
Traditionally we call that "foresight." I know that the people who don't have any don't often understand how it works, but there you go.
Personally I don't understand how it works where the people who ignored the warnings for over a year are entitled to make snarky remarks at the people who were proven right. Maybe you can explain it to me, Megan?
"Had Bush come out and said, "we are giving too many loans to people who can't afford them and need to clean up our act", he might have prevented the disaster ..."
Who'd have thought that the Bush Doctrine would be used preemptively to stave off a recession, with a Keynes bomb.
Hey! If Keynes is the cure, here's an idea, pass a bill to establish a lottery. Pick 30 million random taxpayers and give them $25K each, providing they use that cash as a down payment on a new home. Problem solved.
From what I can tell, it appears that the MBSes are probably not worthless. The problem is that no one really knows how much they are worth and everyone in the market is discounting them to zero because of the uncertainty. Most people are paying their mortgages and lots of ARMS and crazy mortgages given in the last few years are being paid off. Lots aren't but lots are.
This really seems to be a problem of information. The market doesn't have the information to act rationally. Moreover, there is no one outside the federal government who has enough money to buy these things in large enough quantities to make any difference. It does seem like a place where government intervention is needed. Let the feds by the paper and stabilize the market and then later sell the paper after the market stabilizes. People buy bad paper at a discount all the time and often make a killing. That is really all this is. If the feds even come close to breaking even, it will be well worth the effort.
Sorry for an off-topic request, but I would be really grateful if you could share some thoughts on Dilbert blog's observation that many more economists are democrat than republican :
Well all are talking will the bail out work. One of the main reasons for the markets to work is the confidence in the lenders and consumers. But if the confidence is not instilled in the lenders , primarily the bank, how the bail out work?
One could just throw 100 or 1000 billion but the markets could still collapse. With the extra regulations proposed by the congress it can not scare the investors more.
I think the bail out will be a small failure now instead of a meltdown.
Traditionally we call that "foresight." I know that the people who don't have any don't often understand how it works, but there you go.
Personally I don't understand how it works where the people who ignored the warnings for over a year are entitled to make snarky remarks at the people who were proven right. Maybe you can explain it to me, Megan?
Posted by Chet
Well, Chet, the way it usually unravels is that the people who were right were only 'right by accident', so it doesn't really count. Just like when those same people were right about there not being any hard evidence for WMD's in Iraq were right by accident, or when they were right about not upgrading infrastructure it would lead to some really nasty accidents like bridges collapsing. Or the way the same people were right by accident about mine safety, or the sea-worthiness of the levee's around New Orleans. Or about how lack of enforcement by agencies such as the FDA would result in an increase in tainted or unsafe products on the market, or . . .
So, since those people were only right by accident, and since it takes a truly serious person to acknowledge their mistakes, why, those are the ones that should remain in charge. All those right by accident people, well, we can't trust them to get anything right, and so they don't deserve a seat at the table.
And why are they so _angry_ anyway? They were told they were right, that others were wrong; what more do they want?
Wouldn't funding the Copenhagen Consensus do far more to reduce risk produce growth than the bailout.
In fact, I don't think the bailout does anything to reduce risk. The only ways to do that are to make penalties for default stiffer and reduce the burden of debt on the borrower.
It's not miraculous at all. After all, every other American political/economic crisis during my lifetime was caused by things I was opposed to before they happened. Why would this one be any different?
I'm not aware of any deregulation that could have contributed significantly to this.
In fact, deregulation can be credited with making banks capable of buying assets at risk, preventing this problem from blowing up faster and harder.
And we don't really have a good idea what those assets are and why they are suddenly viewed as riskier an unsellable. I posit that perhaps hedge funds were buying them before, but as hedge funds became less popular and investigations and regulation became expected, they closed shop.
Well, Chet, the way it usually unravels is that the people who were right were only 'right by accident', so it doesn't really count. Just like when those same people were right about there not being any hard evidence for WMD's in Iraq were right by accident, or when they were right about not upgrading infrastructure it would lead to some really nasty accidents like bridges collapsing. Or the way the same people were right by accident about mine safety, or the sea-worthiness of the levee's around New Orleans. Or about how lack of enforcement by agencies such as the FDA would result in an increase in tainted or unsafe products on the market, or...
Seems to me you've been trolling the comments again with theatrical demands for "evidence of" the past few days, so for consistency's sake, how about you begin with the defense of all of the above? Note that these need to be people who were saying the same thing both before and after the fully facts became known, not merely blowing with the political winds and claiming to have been right all along.
The standard rubric will suffice for your submittal, including doublespaced 12-point type with a maximum of 1" margins and not more than one figure per page. Thanks!
It didn't happen all at once. There was no "day one." You're using hindsight and objecting to something you know nothing about and something you weren't paying attention to all along.
There was a "day one", and that was the day I first considered buying a house. Immediately I was inundated with unasked-for advice from all sides, all of it telling me that interest-only was the way to go because I could just flip the house later and make piles of money, and in the meanwhile I'd get better tax breaks.
I thought all those people were idiots. I was right. That's why I have a home bought with 20% down on a fixed-rate mortgage.
You know, just because Ron Paul was predicting chaos and disorder doesn't mean that either (1) he is correct about what is wrong with the financial system; or (2) that his proposals would work any better.
Well, the point was to illustrate that there was somebody in government with the integrity to step up and say/do something. But people trivialized when they should have listened.
You know what, though, your premise is also wrong. He didn't prognosticate some vague notion of a future chaos like some 1-800 psychic. He laid out specific reasons.
He said (paraphrase), "Hey, look, the government is implicitly and explicitly backing these giants severely increasing the moral hazard with issuing too many cheap mortgages. And the Fed isn't helping by extending easy credit for too long. This will end in collapse."
And he said in 2003 when maybe something could have been done to help this problem. He called it. Nobody cared. I would suggest that at least maybe everyone should listen more.
Seems to me you've been trolling the comments again with theatrical demands for "evidence of" the past few days, so for consistency's sake, how about you begin with the defense of all of the above? Note that these need to be people who were saying the same thing both before and after the fully facts became known, not merely blowing with the political winds and claiming to have been right all along.
The standard rubric will suffice for your submittal, including doublespaced 12-point type with a maximum of 1" margins and not more than one figure per page. Thanks!
Posted by aMouseforallSeasons
Seems to me you can't back that up. Seems to me that you put more energy into weird personality clashes. Seems to me that I should take Rob's advice, consign you to the small potatoes bin, and henceforth ignore you until you grow up and play nice.
"Asking for evidence! What a Toff! Who does he think he is, saying that words should be backed up with evidence!" - That's how I'll remember you.
To those who were paying attention at the time we do know what caused this financial mess and it is directly traceable to the Clinton administration. Here is a link to a City Journal article of 2000 (yes, Virginia that is pre-Bush) warning about just such a possible mess.
To those who were paying attention at the time we do know what caused this financial mess and it is directly traceable to the Clinton administration.
I know that Clinton can be blamed for everything that's gone wrong during the Bush Administration - I mean, that's the rule, right? - but is there support for your underlying assumption that it's not the responsibility of a subsequent administration to, I don't know, review his predecessor's policies and determine whether they're good or bad?
I mean, isn't that kind of the point of electing the guy from the other party? That he's going to do something about the mistakes that were made before him? Or are Republicans a lot more interested in shrugging responsibility whenever possible?
Hey: The great thing with the Paulson blank check is that it is a one-off to a trusted individual. We can see how it goes and work on adopting some serious changes later.
This is like the creamy, nougaty center of that comment. Of this whole thread, even. I don't think I could have another bite.
Maybe we should just make like the Romans and get ourselves a dictator, eh?
I'm just pissed because I missed the gravy train. I stupidly paid off all my debts and rented and saved and here I am not getting a bailout.
If I knew the Democrats would be looking after me and getting me a slice of the pie I would have blown off the debts and got an inflated zero down mortgage on a huge house.
That's why I say no bailouts for anybody. I'm waiting for the "fail" video on facebook.
Do we really (I mean "really") know what caused this financial crisis? Half the politics is about trying to allocate blame but if it was "bound to happen" why did it happen now? Do we really want to throw away (or can we) fiat currency, fractional reserve banking, efficiency? Redundancy is the best way to survive (take a look at biology), but isn't boom and bust the only way to really move forward?
Not true! I was in favor of houses getting cheaper so that I could one day afford to buy one. Still am!
Funny how that always works out. Guess it's because I'm right all the time.
(said facetiously)
Megan, no offense, because you're usually very knowledgable, but you're *way* off here.
This is perhaps a bigger hail mary than the Palin pick. He wagered Obama would cower and suspend things with him and then he'd look presidential and bipartisan. Obama didn't. McCain picked the one week where the media hates him more than ever to try to push this, Obama didn't help him out any, and he's getting slammed over it (Lou Dobbs and company aside). This is in no way good for him, though one could argue he had to try something like this at some point to keep up with some very disturbing falling poll numbers.
Sorry, meant to post this on the previous thread. Adjust accordingly.
Adam,
Keep dreaming if you think Obama is making the right decision to keep campaigning awhile America's economy burns down. You will lose that narrative in a landslide.
It's not marvelous. I knew and you knew and our Congress knew that GSE's like FNMA and FHLMC ('Fannie' and 'Freddie') were ticking time bombs. They were also fancy plum sinecures for powerful fixers with government connections.
Only a few congressmen (mostly Republicans, sadly) ever pointed out that the crisis would arrive eventually and we would pay for all the 'free' basis points shaved off mortgages. That's not because they didn't know. Everybody knew. They just cared more about putting their allies and supporters on the gravy train than they did about the country.
It's no mystery that serious people were against the roots of this crisis before it began. It isn't a matter of sour grapes or hindsight being perfect. Our so-called national leadership of both parties just didn't care as long as they got to keep handing out the goodies.
...interesting observation.
The line used to be that failure was an orphan, but you're right, it has many fathers, too...
I'm sorry, Crusader. I was under the impression that there was some national debate and discussion going on about how to respond to the allegation that the "economy is burning down."
Further, I have been led to understand that a significant number of Americans do not think that John and Jane Q. Taxpayer handing a $700 billion check to a lame duck administration, who will in turn distribute their money to giant financial corporations, constitutes a rational response to the problem.
Seems to me that the thing we precisely need the most, is to find out what our two potential leaders for the next four years think needs to be done about the problem.
No. What's marvelous is how the financial crisis has been caused entirely by things that you supported before the crisis happened.
No, the credit crisis has significantly changed my political views. Before, I thought that Ron Paul was a crackpot, that mainstream economists were generally on top of things, and inflation and fractional reserves were healthy and normal aspects of the economy. Now I believe that Ron Paul was mostly right, mainstream economists have systematic blind spots, and consistent inflation is corrosive. I have essentially turned from a Megan McArdle libertarian to a Murray Rothbard/Mencius Moldbug libtertarian.
this is the most pathetically transparent move I have seen in an 8 year sea of utterly hopeless politics...if the people go for this, we will somehow sunk to a new low....again when I didn't think it was possible
Well my opponents have always been fans of murderous thugs everywhere, as well as being wrong. Thus this isn't all that surprising.
One problem is that so may people are panicking yet the have no knowledge of the subject. They have instinctual reactions against Wall Street and "malefactors of great wealth" but can't discuss the issues or explain exactly what the problems are.
These problems have come from all sides of the spectrum (John McCain, Winterspeak, yourself, the usual maoists). Sarb-Ox and Patriot should be prime examples of why we shouldn't be legislating at Mach 5. Nobody knows nothing, and there should be no permanent solutions implemented. The great thing with the Paulson blank check is that it is a one-off to a trusted individual. We can see how it goes and work on adopting some serious changes later.
The ridiculous pressures of the whole Enron debacle militate against doing ANYTHING legislatively for at least 5-10 years. Probably prosecutorially too. People get strung up and then everyone calms down and realizes that it was total BS and ridiculous over reaching. DOJ's "no lawyer" policy being a prime example. I think Sarb-Ox's fetish for mark to market will also be implicated in creating this panic.
True laissez-faire people have the advantage in this crisis because they have been predicting for may years that certain things would fall in certain ways that have come to fruition. This is also true of the goldbugs (Winterspeak), but this was a known risk of a fiat currency/fractional reserve system (i.e. the whole purpose of th FDIC) and isn't really interesting. The left just says it's all theft but made no predictions. In other words the Leftist critique is a religious one (and very similar to the idiocy of Catholic Social Thought, though don't tell the doctrinaire secularists) and neither empirical nor an argument. Talking to the left about financial matters is as useful as talking to a young earth creationist about developmental biology or oil prospecting.
I would really like someone to show me anything prospective from a leftist perspective that is both true and useful in regards to the housing crisis. Everything has been useless class warfare and gloating that capitalism doesn't work.
Here's a leftist perspective: I know that water runs downhill, but I pray (or hope) that it doesn't reach bottom.
Look out, Hey -- you'll be accused of creating a strawman.
I just noticed the comment of the week (perhaps quarter, I don't read the right column much). Amanda Marcotte says that you can't be a feminist because you're an intellectual lightweight? Srsly?
An English Lit major from St. Edward's (we only take 2/3rds of applicants, at least 5% better than DeVry), who is best known for getting fired for bigoted remarks, serious plagiarism allegations, and illustrating her book with obviously racist imagery thinks that you're just not smart enough to be a feminist? Just when you thought she couldn't be more of a freaking joke!
You should be glad though. She thought that John Edwards was the real feminist in the race. She's got Costanza level powers of observation! If she'd accepted you into the club we'd have found that you misappropriated money to fund a secret family and cheated on your dieing spouse during the heigt of your visibility!
It's not marvelous. I knew and you knew and our Congress knew that GSE's like FNMA and FHLMC ('Fannie' and 'Freddie') were ticking time bombs. They were also fancy plum sinecures for powerful fixers with government connections.
Only a few congressmen (mostly Republicans, sadly) ever pointed out that the crisis would arrive eventually and we would pay for all the 'free' basis points shaved off mortgages. That's not because they didn't know. Everybody knew. They just cared more about putting their allies and supporters on the gravy train than they did about the country.
It's no mystery that serious people were against the roots of this crisis before it began. It isn't a matter of sour grapes or hindsight being perfect. Our so-called national leadership of both parties just didn't care as long as they got to keep handing out the goodies.
Posted by Brian Watkins, Democrat | September 24, 2008 9:45 PM
========
I 100% agree with you. Dem or Repub, the system is set up such that NOBODY in Congress was responsible enough - or honorable enough or had enough integrity - to step up and put an end to it, because they were all too busy feeding at the trough of the political contributions.
The current populist narrative that the mainstream media is pushing - that it was the greedy bankers that caused this - is about 10% true, as they weren't the ones requiring commercial banks and the GSE's to lend to people who shouldn't have been borrowing 110% of the value of a new home to allow them to buy a $500k house in Southern CA with a salary of $35k.
Yes, they sliced up these loans and sold them, but it is the origination forced by Congress that caused this.
Stupidity? Why, yes, I was opposed to that before the meltdown and I still am.
In the vein of 'Who coulda known? Who really knows now?", I thought, since I was just there, that I would link to this gem. In the meantime, let's do another takedown of rightwing talking points:
Uh-huh. The patented 'left' made no predictions, eh? You mean like this guy didn't make predictions? (from the NYT)
No, there were predictions aplenty out there, and reasonable ones at that. But it wasn't . . . convenient, shall we say for certain parties to acknowledge the existence of such predictions. Now that it's after the fact, there's a certain subset of right-wing talking points that maintain that those who did make such predictions just 'guessed lucky'. Just like they happened to have a lucky guess about the lack of WMD's in Iraq, or had a lucky guess about the levees around New Orleans, or had a lucky guess that not upgrading infrastructure like bridges would result in a catastrophic collapse, or that mine safety really should be vigorously enforced. How many lucky guesses does the 'left' get before they are finally credited by conservatives/libertarians/right-wingers with just being more tune with reality?
That was a rhetorical question, btw.
I 100% agree with you. Dem or Repub, the system is set up such that NOBODY in Congress was responsible enough - or honorable enough or had enough integrity - to step up and put an end to it, because they were all too busy feeding at the trough of the political contributions.
Actually, there was a guy.
http://www.lewrockwell.com/paul/paul128.html
But everyone else was too busy ignoring him.
Wow. No.
???
Was that supposed to be a trick question?
Why do people think econ is predictive?
I was against Barney Frank and Chris Dodd before - and now have more reason to take this position! They should be forced to step down!
You know, just because Ron Paul was predicting chaos and disorder doesn't mean that either (1) he is correct about what is wrong with the financial system; or (2) that his proposals would work any better.
An honest, objective assessment of the situation would fault the bipartisan desire to turn every American (and immigrant) into a homeowner. This was an objective of President Bush, as it was an objective of President Clinton before him. It was also an objective of Chris Dodd, Barney Frank, and other Dems in Congress.
That was only the part of it though, and by itself, wouldn't have been enough to cause the huge boom and bust. Another factor was the huge flood of liquidity into the U.S. from China and other countries with high savings rates. Another factor was the Fed's loose monetary policy. Still another factor was the rampant greed and dishonesty among millions of mortgage borrowers and mortgage brokers. On top of that you had financial engineers with faulty models and credulous, semi-competent rating agencies.
All together that turned into a perfect storm. If the Dems are successful in pinning this all the 'malefactors of great wealth' they'll ignore the real history here and we'll all be doomed to repeat it.
Fred -
I agree with most of your post but could you give an example of the "rampant greed" and dishonesty of the borrowers and brokers. Did they all know that this was a bubble? If not, what was dishonest about their actions (as opposed to foolish or greedy)?
Geez, Craig, that is an easy one. How about borrowers buying houses they couldn't afford in order to get them into a house and lying on their loan applications? And the dishonest brokers who originated these loans encouraged it (or committed fraud), b/c they could sell the loans to a commercial bank or to Freddie or Fannie and get their origination fees and be done with the loan? Here you go -
http://www.tradingmarkets.com/.site/news/Stock%20News/1860137/
BTW, here is a good primer, writen almost a year ago -
http://www.thetrumpet.com/index.php?q=4288.2525.0.0
By the way, agree with you Fred.
To ScentOfViolets, there were certain leftists who saw this coming. As noted, so did Ron Paul, John McCain, Greenspan, and George Bush. Unfortunately, most Dems with actual power to do somehting about it voted 'no' when McCain's bill came up to vote a few years back. (Although, in Obama's defense, had he been in the Senate at that time he wouldn't have voted no, he would have voted 'present'.) Here you go -
-------
Sen. John McCain [R-AZ]: Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight's report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae's former chief executive officer, OFHEO's report shows that over half of Mr. Raines' compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation.
I'm with Kevin R, I'm always right. (Too bad I resisted an urge to speculate on my blog about McCain suspending his campaign two days ago - I would have a time-stamped proof of my infinite wisdom.)
I was opposed to taking out no money down interest-only adjustable-rate loans during a period of record home price highs and record interest rate lows pretty much from day one.
What mystifie(s/d) me is why so many people DIDN'T think that was a really bad idea.
Dan writes: "I was opposed to taking out no money down interest-only adjustable-rate loans during a period of record home price highs and record interest rate lows pretty much from day one.
What mystifie(s/d) me is why so many people DIDN'T think that was a really bad idea."
It didn't happen all at once. There was no "day one." You're using hindsight and objecting to something you know nothing about and something you weren't paying attention to all along.
"Yes, they sliced up these loans and sold them, but it is the origination forced by Congress that caused this."
Give me a break. In dollar terms, most of the defaults are prime loans. I live front and center on this, and banks weren't forced to loan to my neighbors that bought million dollar homes with no downpayment. CRA loans are defaulting at a far lower rate than general subprime and at an only slightly higher rate than prime ARMs. The dollar amount of CRAs defaulting is considerably lower due to there not being nearly as many CRA loans as either prime or subprime and due to the loans being smaller in size.
In my city, median home prices are 9x median household income - consider how that could possibly be the case. Lenders specialized in the area, did everything they could to get people into houses, created demand, drove up prices, sold bigger loans to the next round of people, and with the steady climb in prices created a buying frenzy. Lenders would happily tell people they qualified for loans that they did not and falsify the paperwork. How do I know? My uncles wife did this, and just to show that karma exists, got foreclosed on herself when her lender closed and she lost her job.
So people got into homes, expected to either have their income rise to the property values or to sell for a profit as the lender promised and when prices fell they got killed. Meanwhile, the lenders raked in the loans, pawned the off on other people, and got out of town before things crumbled. This happened over the course of years and what seemed risky at first became common for those who saw the prospect of home ownership slip out of reach. And it's not the first time we did this - my area was the center of the S&L collapse as well. We've got a long and cherished history of running institutions into the ground in the chase for easy money and hanging people out to dry when it all falls apart. It wasn't primarily the fault of investors or depositors then either, though as owners of the S&L, investors were also blamed instead of management at the time.
You find these problems in regional pockets, places where conditions were right for property value run-ups - SoCal, Sacramento, Florida, etc., but they amount to a big part of the problem taken as a whole. In your area, this may not have been a problem and you see more CRA problems instead, but hanging this on CRA is absurd. A more likely culprit is Bush and Alphonso Jacksons HUD program that guaranteed loans for people putting no money down *in the middle of this lending environment*. We saw the rise of the subprimes and what it was creating when Bush announced that program in a bid to get re-elected. It was obvious to us that these people would get prayed on because the lender couldn't fail due to the FHA guarantee and because no oversight was given to the program, so it was just a ocean of fraud.
Do we really (I mean "really") know what caused this financial crisis?
Yes.
Sept7,2000
A key to appreciating credit bubble dynamics is to recognize that they are acutely self-reinforcing. Here, the focus is on processes and forces not easily characterized and certainly non-quantifiable. Credit bubbles absolutely feed on money and credit excess, which only induces an intense hunger for greater excess. What’s more, this appetite is insatiable. After all, credit bubbles are about financial wealth creation and accumulation. Lending, the creation of additional liabilities, is the mechanism, while the consequences of excess are immediate spending increases and asset inflation. Wealth is, of course, about power and one should appreciate that credit bubbles have everything to do with obtaining and retaining power. Those who control a mechanism for money and credit creation have enormous power. Those who manage vast sums of financial assets on behalf of their clients are immensely powerful. And those who attain discretion to allocate an economy’s resources possess great power. Credit bubbles by their very nature direct enormous power to the financial sector, for the financial sector, by the financial sector. And, as has developed during this historic period, as the financial sector attains sufficient financial power to dictate an economy’s reward system it achieves supreme power. With this achievement, the powerful financial sector garners and relishes in its ability to create its own financial wealth, with devastating consequences to the underlying economy and financial system.
Credit Bubble Bulletin
http://www.prudentbear.com/index.php/creditbubblearchivedisplay?art_id=8732
Complete archive
http://www.prudentbear.com/index.php/creditbubblebulletinarchive
Too bad Republicans didn't nominate Ron Paul. They'd be on their way to a landslide victory.
Megan, still waiting for some cogent introspection on how this crisis has devastated the libertarian claim that deregulation and free markets are always awesome. You have been posting some good stuff on why intervention is neccessary even if problematic, but for most of america, this crisis will be the preverbial stake in the free market ideology.
It will take some time, but this immediate capitulation of free market ideology in the face of a crisis which free markets should never let happen, well, let's just say the coming wave of left policies and the abandonment of libertarian principles by mainstream thougt that is to come can only be described as self imposed.
Let me be blunt. This crisis will be as devastating to the unfettered free market movement as the collapse of the Soviet Union was for socialists.
JoeBlow - while I sadly agree with your conclusion, the premise is wrong. There hasn't been any substantial deregulation of financial services in recent history. In fact, speaking as someone who has suffered the cost, the compliance and regulatory costs of financial firms has been growing at rates in excess of 100% annually since Sarbanes-Oxley, thanks to that legislation, some unintended consequences of GLB and the complete empowerment of regulators subsequent to the Patriot Act and Spitzer's inquisition. The trouble is that regulation is enforced by numbskulls and lawyers, and that no substantive thought was given to basic leverage and solvency
more from me here - http://tigerhawk.blogspot.com/2008/09/few-thoughts-before-i-re-enter-fray.html
So to say this crisis is a verdict on 'de-regulation' is incorrect. That it indicts the regulatory regime is certainly true, as it used its vastly expanded powers to pursue the wrong problem.
And it would seem, with this rescue plan, we are in danger of more of the same.
If by "what I was opposed to" you mean "short time horizons and masses of people running around like chicken's with their heads cut off screaming 'we've got to do something!'", then, yes.
However, it's not that marvelous. Predicting that popular government action will have bad consequences is a sure bet, but getting to say "I told you so" regarding financial woes for the next twenty years is going to be about the same level of cold comfort I get from saying it about 9/11 and the USA PATRIOT Act now.
I was around in the 1980s for the S&L crisis and everyone in the Southwest knew that the S&Ls were broke years before they collapsed. The whole thing was built on the idea of the price of oil rising forever. Once oil collapsed, the S&Ls that handed out loans to anyone and everyone were doomed. People just didn't want to face the truth. The same thing happened again with the tech bubble. I ran an Army tax center in 1999, I had SGTs who had made tens of thousands of dollars in capital gains on tech stocks like JDS Uniphase (which in its defense actually made a product people wanted to buy) and dubious internet stocks. It was pretty obvious then that it could not go on. The housing market is just a repeat. It didn't take a genius to realize that housing prices could not continue to go up forever. Yet, people believed it in large numbers.
There is a simple rule to follow; whenever large numbers of people are making a lot of money just buying and selling, rather than making things or providing services, the market can't be sustained. Small numbers of people can always make money just buying and selling. But once large numbers of people get involved, it quickly becomes a pyramid scheme where people are buying for the sole purpose of selling at a higher price. Eventually, enough people get priced out of the market that the sellers outnumber the buyers and the whole thing collapses.
I wouldn't say this mess is the result of any particular policy, although some policies helped it happen more than others. It is instead the result of large numbers of people taking leave of their senses and acting irrationally. Sometimes entire nations do this in the political realm and you get revolutionary France or Nazi Germany. Other times they do it in the economic realm and you get things like this.
Steve Sailer posts the text of a speech Bush gave in 2002 on housing here: Bush's Speech to the White House Conference on Increasing Minority Homeownership. Like Sailer says, that was the bipartisan consensus laid out in the open. Read the whole thing, but here's a couple of snippets for you:
Yes Fred that was a continuation of policy going all the way back to the late 1980s and covering administrations of both parties. Credit became a civil right. Any numbers that indicated that minorities were turned down more than white was evidence of racism rather than credit worthiness.
Had Bush come out and said, "we are giving too many loans to people who can't afford them and need to clean up our act", he might have prevented the disaster but would have been pillaried as a racist by the same people who today are whining about greedy wall street. There are a lot of people who had a hand in this. So many people in fact that you really have to blame the entire country rather than this or that policy or political party. One of the things that created this is an entire society so cowed by charges of racism that no one was willing to stand up and call bullshit when the community activists and organizers and jive hustlers claimed that minorities had a right to credit even if they had no means to pay the loans back.
Hey Megan,
I *really* appreciate your site! It's helping a dummy like me make sense of stuff usually not on my radar.
It's like I said in Spaceballs: "Oh, you're right, and when you're right, you're right, and you, you're always right."
From todays NYT: http://www.nytimes.com/2008/09/25/business/25value.html?_r=1&adxnnl=1&oref=slogin&pagewanted=print&adxnnlx=1222354808-IlUdo/ENLWZ6PAkkCGLemA
"The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and subsequently fell — faster than almost anywhere else in the country.
"But Citigroup, the financial giant, values similar investments on its books at 61 cents on the dollar. Citigroup says its C.D.O.’s are relatively high quality because they were created before lending standards weakened in 2006."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1993
Wachter: "... There is a critical factor that all of this misses, ... It is that the [lending ]standards [are] eroding, especially in 2006 when there [was] a dramatic decline in standards, [which] was unsustainable and that retrenched.
We had a sharp reversal, starting in 2006, of these unsustainable [lending] standards which were artificially inflating housing prices. So over this period [lending] standards eroded, artificially inflating house prices. Housing price increases and even levels could only be sustained with this unsustainable, overly liberalized credit being manufactured, which directly caused the price rise of 2006."
Can we stop pretending that the root cause of this crunch was not reasonable foreseeable, that "no regulations were relaxed", and that there was no breakdown in oversight, that the seeds of this were laid nearly seven years earlier during the prior administration, and the push for loans was made to appease Democratics desire to loan to poor
people?
All of this is BS. There was a clear change in best practices by banks that was reasonably foreseeable by an awake responsible, oversight professional.
Even if the oversight professions did not have the legal authority to act they could have brought the need to the attention of those (e.g Executive and Congress) who could give them that authority, in much the same way as the Bush administration asked for different kinds of Congressional authority to deal with a new kind of enemy, stateless terrorism.
Isn't it marvelous how the financial crisis has been caused entirely by things that you were opposed to before the crisis happened?
Traditionally we call that "foresight." I know that the people who don't have any don't often understand how it works, but there you go.
Personally I don't understand how it works where the people who ignored the warnings for over a year are entitled to make snarky remarks at the people who were proven right. Maybe you can explain it to me, Megan?
"Had Bush come out and said, "we are giving too many loans to people who can't afford them and need to clean up our act", he might have prevented the disaster ..."
And yet he did - in 2003.
Caused by things I was opposed to, and cured too.
Who'd have thought that the Bush Doctrine would be used preemptively to stave off a recession, with a Keynes bomb.
Hey! If Keynes is the cure, here's an idea, pass a bill to establish a lottery. Pick 30 million random taxpayers and give them $25K each, providing they use that cash as a down payment on a new home. Problem solved.
From what I can tell, it appears that the MBSes are probably not worthless. The problem is that no one really knows how much they are worth and everyone in the market is discounting them to zero because of the uncertainty. Most people are paying their mortgages and lots of ARMS and crazy mortgages given in the last few years are being paid off. Lots aren't but lots are.
This really seems to be a problem of information. The market doesn't have the information to act rationally. Moreover, there is no one outside the federal government who has enough money to buy these things in large enough quantities to make any difference. It does seem like a place where government intervention is needed. Let the feds by the paper and stabilize the market and then later sell the paper after the market stabilizes. People buy bad paper at a discount all the time and often make a killing. That is really all this is. If the feds even come close to breaking even, it will be well worth the effort.
Sorry for an off-topic request, but I would be really grateful if you could share some thoughts on Dilbert blog's observation that many more economists are democrat than republican :
http://dilbert.com/blog/entry/dilbert_survey_of_economists__did_anyone_pay_attention/
Well all are talking will the bail out work. One of the main reasons for the markets to work is the confidence in the lenders and consumers. But if the confidence is not instilled in the lenders , primarily the bank, how the bail out work?
One could just throw 100 or 1000 billion but the markets could still collapse. With the extra regulations proposed by the congress it can not scare the investors more.
I think the bail out will be a small failure now instead of a meltdown.
Well, Chet, the way it usually unravels is that the people who were right were only 'right by accident', so it doesn't really count. Just like when those same people were right about there not being any hard evidence for WMD's in Iraq were right by accident, or when they were right about not upgrading infrastructure it would lead to some really nasty accidents like bridges collapsing. Or the way the same people were right by accident about mine safety, or the sea-worthiness of the levee's around New Orleans. Or about how lack of enforcement by agencies such as the FDA would result in an increase in tainted or unsafe products on the market, or . . .
So, since those people were only right by accident, and since it takes a truly serious person to acknowledge their mistakes, why, those are the ones that should remain in charge. All those right by accident people, well, we can't trust them to get anything right, and so they don't deserve a seat at the table.
And why are they so _angry_ anyway? They were told they were right, that others were wrong; what more do they want?
Here's my thought of the day:
Wouldn't funding the Copenhagen Consensus do far more to reduce risk produce growth than the bailout.
In fact, I don't think the bailout does anything to reduce risk. The only ways to do that are to make penalties for default stiffer and reduce the burden of debt on the borrower.
It's not miraculous at all. After all, every other American political/economic crisis during my lifetime was caused by things I was opposed to before they happened. Why would this one be any different?
I'm not aware of any deregulation that could have contributed significantly to this.
In fact, deregulation can be credited with making banks capable of buying assets at risk, preventing this problem from blowing up faster and harder.
And we don't really have a good idea what those assets are and why they are suddenly viewed as riskier an unsellable. I posit that perhaps hedge funds were buying them before, but as hedge funds became less popular and investigations and regulation became expected, they closed shop.
Well, Chet, the way it usually unravels is that the people who were right were only 'right by accident', so it doesn't really count. Just like when those same people were right about there not being any hard evidence for WMD's in Iraq were right by accident, or when they were right about not upgrading infrastructure it would lead to some really nasty accidents like bridges collapsing. Or the way the same people were right by accident about mine safety, or the sea-worthiness of the levee's around New Orleans. Or about how lack of enforcement by agencies such as the FDA would result in an increase in tainted or unsafe products on the market, or...
Seems to me you've been trolling the comments again with theatrical demands for "evidence of" the past few days, so for consistency's sake, how about you begin with the defense of all of the above? Note that these need to be people who were saying the same thing both before and after the fully facts became known, not merely blowing with the political winds and claiming to have been right all along.
The standard rubric will suffice for your submittal, including doublespaced 12-point type with a maximum of 1" margins and not more than one figure per page. Thanks!
It didn't happen all at once. There was no "day one." You're using hindsight and objecting to something you know nothing about and something you weren't paying attention to all along.
There was a "day one", and that was the day I first considered buying a house. Immediately I was inundated with unasked-for advice from all sides, all of it telling me that interest-only was the way to go because I could just flip the house later and make piles of money, and in the meanwhile I'd get better tax breaks.
I thought all those people were idiots. I was right. That's why I have a home bought with 20% down on a fixed-rate mortgage.
I bought with 10% down because the interest rate was almost exactly the same as with 20%.
You know, just because Ron Paul was predicting chaos and disorder doesn't mean that either (1) he is correct about what is wrong with the financial system; or (2) that his proposals would work any better.
Well, the point was to illustrate that there was somebody in government with the integrity to step up and say/do something. But people trivialized when they should have listened.
You know what, though, your premise is also wrong. He didn't prognosticate some vague notion of a future chaos like some 1-800 psychic. He laid out specific reasons.
He said (paraphrase), "Hey, look, the government is implicitly and explicitly backing these giants severely increasing the moral hazard with issuing too many cheap mortgages. And the Fed isn't helping by extending easy credit for too long. This will end in collapse."
And he said in 2003 when maybe something could have been done to help this problem. He called it. Nobody cared. I would suggest that at least maybe everyone should listen more.
Just sayin'.
Seems to me you can't back that up. Seems to me that you put more energy into weird personality clashes. Seems to me that I should take Rob's advice, consign you to the small potatoes bin, and henceforth ignore you until you grow up and play nice.
"Asking for evidence! What a Toff! Who does he think he is, saying that words should be backed up with evidence!" - That's how I'll remember you.
To those who were paying attention at the time we do know what caused this financial mess and it is directly traceable to the Clinton administration. Here is a link to a City Journal article of 2000 (yes, Virginia that is pre-Bush) warning about just such a possible mess.
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
As a pointy-headed professor-type from Boston, I believe the only logical response to a post like that is
Fuck You
To those who were paying attention at the time we do know what caused this financial mess and it is directly traceable to the Clinton administration.
I know that Clinton can be blamed for everything that's gone wrong during the Bush Administration - I mean, that's the rule, right? - but is there support for your underlying assumption that it's not the responsibility of a subsequent administration to, I don't know, review his predecessor's policies and determine whether they're good or bad?
I mean, isn't that kind of the point of electing the guy from the other party? That he's going to do something about the mistakes that were made before him? Or are Republicans a lot more interested in shrugging responsibility whenever possible?
Maybe we should just make like the Romans and get ourselves a dictator, eh?
New election bumper sticker:
Bernanke/Paulson for Dictator 2008!
I'm just pissed because I missed the gravy train. I stupidly paid off all my debts and rented and saved and here I am not getting a bailout.
If I knew the Democrats would be looking after me and getting me a slice of the pie I would have blown off the debts and got an inflated zero down mortgage on a huge house.
That's why I say no bailouts for anybody. I'm waiting for the "fail" video on facebook.