I've been thinking about this for awhile. How much of this current crisis is just a manifestation of the American--indeed human--will? We're always talking about politicians deluding us and Wall-Street manipulating us, and predatory lenders conning us, into doing things that aren't in our own interest. But maybe we don't want what's in our interest. Maybe we like our gas-guzzling, credit-card charging, second house buying when you can't afford it, commercial culture.
The thing I always liked about Bill Withers's "Use Me" was that it was a man's critique of a dysfunctional relationship. Unlike a lot of rappers, Withers doesn't blame the girl, he blames himself, going so far as to say, "It ain't too bad the way you using me, because I sure am using you to do that thing we do." In fact he laughs at the people trying to help him, much as one might picture people laughing at some lefty for telling them "they aren't voting their interest." In that respect, I think Bacevich's critique is a man's critique of another, very similar, dysfunctional relationship. It easy to think we've been conned into this current crisis. But what if this is the world as we want it? I think it's imperative to never forget that humans are animals. What if, in the words of Bob, we're just fulfilling the book? What if it isn't even dysfunctional? What if this is just who we are?
I too, have been thinking some of these thoughts for a while, though it probably goes down easier from Ta-Nehisi, who is not assumed to be a virulent shill for the credit card companies. Apologies if this post wanders. I have rather a lot on my mind.
In general, I think that we're approaching this crisis the wrong way when we look for a villain. One of the things that has really surprised me--so far, anyway--is just how little criminal activity we've uncovered during this crisis. There's an old accounting saying, "recessions uncover what auditors can't". Enron, Global Crossing, and MCI were not the only companies that played funny games with their books in the late 1990s. A number of technology companies played games with their books, but were able to grow enough to unwind their chicanery with little more than a slap on the wrist from the SEC. Enron, et al. were simply the ones who got caught short when the music stopped. I don't mean to say that all or most companies were guilty of this, because the overwhelming majority weren't. But the problem wasn't unique to Enron, and had they been able to carry on with it longer, there's every chance that they might have been able to get out of their bad positions and stay solvent.
By contrast, so far the worst misbehavior I've seen has been the two Bear Stearns executives who told people their fund was okay the month before it went belly up. This was a bad thing, and the people who did it no doubt richly deserve the jail terms they are going to get, and then some. But on the scale of dishonesty generally uncovered during recessions, this wouldn't normally rank high enough to trigger more than a "You boys!!!" and a finger-wag.
This probably has something to do with just how tightly regulated financial companies already are; when the SEC wants to know about every transaction you do, it's hard to get too funny with the books. Still, it's pretty impressive.
But no one wants to hear that. Everyone wants a villain: lefties want to hear that it was greedy bankers, or cold-hearted deregulators (or better yet, both!) who are entirely and 100% to blame; conservatives want to hear that it was poor people taking out loans they knew they couldn't pay off, and a pandering government that leaned on companies and the taxpayer to hand those irresponsible wretches free money.
Nature is not a novelist. Reality does not come packaged in narrative form, and rarely gifts us with either true heroes, or true villains.
It is safe to say that almost everyone involved in this mess, from the borrowers to the bankers, thought that they were getting away with something--at the very least, that they had found a way to get rich without working. It is an old saw that no one can be conned unless they are willing to believe in something for nothing, and the best cons generally get the victim to believe that he is putting one over on the con man.
It is trivial to observe that humans are imperfect; that is why institutions exist. One of the most interesting things about the emerging fields of experiemental and behavioral economics is how they contradict, and complement each other. Behavioral economics looks for all the ways that human beings do not act like the textbook rational value maximizers--and then experimental economics goes ahead and shows that when you stick them in a market, they go ahead and rationally value maximize.
These two things seem to contradict each other until you understand that a well designed institution creates things that are greater than the sums of their parts. Of course, when a badly designed institution fails, it can create a bigger mess than the sum of the individual failures. I think it was Daniel Davies, perhaps channeling George Orwell, who pointed out that unless you think that someone thrown out of work in a recession somehow deserves to be unemployed now, but did not deserve to be unemployed four months ago, you have to be at least somewhat skeptical of the rugged individualist school of economic advancement.
I'm actually not sure that what we had was bad institutional design; I'm not sure it's possible to design an institution that doesn't fail occasionally. What we certainly have, however, is institutions that have performed badly in the current environment.
So while yes, part of this story has been simple greed, a willingness to believe that we could and should massively increase consumption no matter what, I tend to take this desire as a given. The question is how you design an institution that channels those given desires into productive ends. Markets, for example, channel self-interest into exchanges that result in gains to both sides; government lobbying channels that same self-interest into rent-seeking that makes society as a whole, and at least one major party to the exhange, worse off.
What I do not think is a major part of the story is that any simple change, or any handful of people or groups, somehow brought this on the rest of us. Societies, and economies, cannot be brought down by a few people or a few bad decisions--elsewise we'd all still be living in hunter-gatherer tribes eating roast locusts for breakfast. A failure this massive can only occur if massive numbers of people had their hands in it somehow. If you want to find a villain, there's probably one handy at the nearest reflective surface.
Meg,
have you read this article from Michael Lewis yet?
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?page=0
hit's on some aspects of this post.
Amen!
No, really, thanks for stating it so eloquently. Reality does not have intent.
I can go along with the reluctance to find villains. I can't go along with the reluctance to seek causes or to reconsider institutional design. When buildings or space shuttles collapse, we expect the engineering profession to think about what went wrong, and propose better designs. We don't just accept that accidents sometimes happen.
Here we have a collosal failure, which orthodox economics does not appear to have anticipated, and which Nobel Prize winners seem to have contributed to. Maybe the right answer is just that we don't know very much and financial economics is less of a science than it purported to be. But it can't just be to shrug and ask everyone to move on.
You're more or less correct regarding villains. It is quite interesting to me to speak with nominally intelligent and educated lefties who are convinced in the face of an abundance of evidence suggesting otherwise, that (1) the financial markets and financial services companies are not regulated; (2) effective regulation is simple; and (3) regulators can corral financial innovation.
As for the righties, I do not speak with many of them but I think they are on firmer ground when they blame the poor for taking out loans they cannot afford: I have little sympathy for naivete or ignorance.
So is the fault "everyone" or "an imperfect system?" If the answer is "both" then shouldn't the logical course of action to change or mend the system than to try to change human nature?
Dave:
CDSes are not regulated. Nor are the poor the only ones who "look out loans they cannot afford", since what causes large corporations to fail are very much the same thing: taking on risk they couldn't back up. There was plenty of naivete and ignorance to go around. Unless what you're really saying is "I have little sympathy for poor people."
I refuse to believe that intelligent people just realized this ... that the kitsch premise of false consciousness - the seed from which this concept of the perpetually duped consumer sprang forth (not to mention "The Matrix" and "No Logo") - is a false one. Ta Nehisi says this as though he's just seen his own free will manifest on the Road to Damascus. I've only heard the most self delusional, conspiracy minded, pseudo-intellectual leftists actually posit seriously that a human being in America has only the illusion of choice (or free will for that matter). This, to a certain degree goes beyond mere partisan debate about markets and welfare and the like, and cuts to the very philosophical quick - questions one would have to have reconciled when first pondering Plato's cave. Well, at that point in one's education, you either move on and appreciate what you can of Plato, or you dismiss Hawthorne and Nietzsche as Puritan Old White Male and crypto-fascist respectively and continue cursing the world of forms.
Winston: CDS are neither regulated nor relevant to the issues cited by Megan. Yes, I have no sympathy for the poor. They are poor because of choices they made.
This analysis seems spot on, as far as it goes, but it seems to stop just short of the obvious, important, and almost entirely undiscussed consequence.
If, as you imply, the success or failure of institutions is determined almost entirely by the structures of the institutions and the rules by which they behave and interact, rather than the presence of heroes or villains acting within the system - then the critical, overriding issue - to the point of rendering everything else entirely irrelevant - IS the construction of those rules. As a computer programmer by trade, perhaps it's natural for me to think in those terms.
I suppose that part of the reason that goes largely undiscussed is that on some level it's so obvious as to be almost tautological. But leaving it unstated and implied means that a lot of the discussion ends up being either grounded in ideology (less taxes! less government! more safety net! more regulation! less regulation!) or specific situations (bailout GM? save Lehmann? how big a stimulus?)
I was slightly surprised when you pointed out that there hasn't been massive wrongdoing in this crisis, but I shouldn't have been, because I already knew that the system would succeed or fail based on the rules of the game, not the players or the plays.
Perhaps I'm just succumbing to the very mistake that you're cautioning us against, Megan, but I can't help but think that the greatest cause of this crisis isn't any specific brand of ideology (including deregulation) but simply the belief among those in charge of creating the rules, that there's ANY simple rule of thumb by which those rules can be established (or torn down) without need of extraordinarily careful thinking and debate about what behaviors are likely to be incentivized and de-incentivized by the proposed rule in interaction with the other rules that already exist. Or that there's some "right" set of rules that we just need to adopt or re-adopt or stick to that will never need to change to adapt to a changing world.
I don't dispute the accepted wisdom that markets do better than any centralized planner can do, at the tasks for which markets were designed. But that's the key point - a market IS a system of rules, someone had to design that system of rules, and thus the market is inherently incapable of answering questions about what those rules should be. On most important questions of policy, you can't just punt to "the market" - you have to construct a market that will correctly optimize for the outcome you're seeking.
If there's an economic discipline of "market architecture" analagous to the job description of "software architect", it should have a lot more prominence, because I've never heard of it. If there isn't - there should be!
People that are too dependent on third parties to protect their financial well-being are always easy targets for crooks. One can't help but wonder how many people, over the years, have been fleeced by investment scams in which they were promised FDIC protection for their funds, for example. Institutions, by their existence, provide the requisite backdrop for any number of cons.
It isn't an easy task to find the correct balance, but the citizenry is entirely too trusting of everyone, from the trustworthy to the regulators and the scamsters.
p.s. Loved the phrase "nature is not a novelist".
Dave:
CDSes are absolutely relevant to the issues brought up by Megan. The failure of the system to channel human greed into productive results is a key theme here, and lack of regulation on CDSes definitely have at least a major part in that failure. So when lefties talk about lack of regulation as one of the "villains," they're not entirely incorrect.
You're certainly free to feel no sympathy for the poor, but it would also be consistent, and only fair for you to feel no sympathy for the failed rich, since their situations are also caused by the choices they made, no?
L.G. Crovitz made the case, in Monday's WSJ, that credit default swaps were not the cause of the financial crisis. He faults lack of transparency; most investors, etc. not having a clue as to the value of the securities, loans, etc. they are holding. Then, questions are raised about the value of something, everyone realizes they don't know, lack of knowledge paralyses the markets, the media gins up stories about depressions, etc. etc. It will be interesting to read - in ten or twenty years time - what "really" happened here.
Winston: suffice it to say you seem not to know what you are talking about here. Credit default swaps, though presently in the news, are not the issue here, whether their market is regulated or not.
Your argument is akin to saying: "Of course Toyota is in a perilous state, because GM and Ford are."
It is a non sequitur grasping at a straw man.
Meghan,
Was greed the reason the bankers, regulators, ratings agencies got us into this mess? No, I think the real reason is a bit more troubling.
They were honestly trying to do the best job they could. To end up a I-Banker at Lehman or Bear you are usually someone who has spent your life doing everything your parents, teachers, coaches, professors has asked of you to the best of your ability. When they were asked by their bosses to generate as much revenue as possible that's what they did.
I think if we look at the great tragedies of mankind we find thatthe most egregious acts weren't committed by evil men, but by smart, hardworking, ambitious underlings who were trying to do the best job possible.
"So while yes, part of this story has been simple greed, a willingness to believe that we could and should massively increase consumption no matter what, I tend to take this desire as a given."
That's probably my one point of major disagreement with Megan's post. Greed, consumption, and their attendant desires may be inevitable aspects of human nature, but some cultures do a better job of reining them in than others. Accepting them as givens is intellectually incomplete. Like it or not, a particular kind of economic system will produce a particular kind of economic culture. And within our own society, it is particular groups, constituencies, and ideologies which have come to view unfettered wealth creation as somehow inherent to the character of America, most often because it is in their own immediate self-interest to do so. Our drive to maximize the free markets in recent decades may very well have also created the cultural space for maximizing those negative appetites. At least, that's my layman's sense of the lessons of the current crisis.
Saying CDSes aren't the cause of the crisis is misleading. It's like if I poured gasoline all over you and lit a match, and then said "the gasoline didn't cause the fire that killed you, the match did." Technically that's true, but I think the gasoline helped. Much like the gasoline in the analogy, CDSes are what made what would've been a minor burn into a potentially fatal situation.
I apologize in advance, I have little patience for spelling flames myself, but PLEASE change that title or draw a closer parallel between our economy and the feudal institution of villeinage.
Credit default swaps briefly explained: they insure against default on loans (debt). When lots of debt goes bad the spreads between the risk-free rate and the rate underlying the CDS widen. Lehman Brothers went bankrupt because the spread widened to such an extent that investors' confidence was undermined. Its stock was driven to zero as a result. (And then there is the other nefarious theory, that short sellers drove Lehman to the brink. On this theory I am agnostic.)
To assert that CDSs caused the bankruptcy, though, is to confuse cause and effect: the CDS spreads merely reflected the market's opinion of Lehman's solvency. This is much like looking at GM's stock price: GM is not near bankruptcy because its stock price is in single digits; rather, its stock price is in single digits because the market thinks its stock is essentially worthless.
Now, it may be true that that the CDS market should be regulated and should be more transparent. But those issues are not germane to the issues presented in the post.
Dave:
Well, if you believe that the worst is over and we're just looking at a regular recession like the ones we had in the near past, then sure, CDSes aren't really an issue, especially since there are already many calls for their regulation (Cox amongst them). If you're interested in why what should have been a regular recession was potentially turning into a depression, there's no doubt that CDSes are a major part of the story.
This is supposed to be a happy occasion! Let's not bicker and argue over who killed who.
This Thanksgiving I will be truly thankful for that moment of glee when I see a solid block of unsupported, unlinked, incoherent MM prose. If anyone needs a better explanation of the financial crisis, its that much of the oversight of the financial industry in the last two decades has been committed by people with about as sharp an intellect as demonstrated here.
The preeminent moral truism of our time is that greed is good. All history and philosophy shouts back: No, it isn't. That Megan seems to think that Enron is just The One That Got Caught demonstrates an ignorance that should disqualify her from stating any opinion on economic issues. But then, isn't the most entertaining part of American Idol the first week?
How do you infer from my comments that I "believe that the worst is over"? Please point out where I indicate that. I have no idea if the worst is over or not.
Of course Christopher Cox would say that credit default swaps should be regulated--that's what politicians do. I am agnostic on the question of whether they should be regulated. Politicians say things to make it look like they are doing something, whether they are conversant in the issue or not. We call this bloviation. Credit default swaps are a "major part of the story" only to the extent that they are an effect of other issues, which, to repeat, ad nauseum, are the substance of Megan's post.
Dave:
In Lehman's case that's true, and that's partly why they were allowed to fail. AIG on the other hand, was not allowed to fail, and part of the reason is that they are a major counterparty for CDSes, and their collapse could trigger the chain-reaction that would cause a potential unravelling of the economy.
Dave @2:26 says:
"...I think they are on firmer ground when they blame the poor for taking out loans they cannot afford: I have little sympathy for naivete or ignorance."
Ah yes...blame all those poor folks that lending institutions were tripping all over themselves to give money to.
What cracks me up in all this is all those high powered financial institutions led by CEO's earning tens if not hundreds of millions of dollars that, as it turns out, really had no frigging clue what junk they were buying/selling/spreading.
I guess if you're naive and ignorant but RICH that is different.
But yeah...let's save our scorn for the ignorant poor.
"A failure this massive can only occur if massive numbers of people had their hands in it somehow."
We should audit everyone in the real estate business. Some people had no hand in this disaster.
Here we have a collosal failure, which orthodox economics does not appear to have anticipated, and which Nobel Prize winners seem to have contributed to. Maybe the right answer is just that we don't know very much and financial economics is less of a science than it purported to be.
Given that, maybe we should consider altering the system so that the incentives run more towards risk-averse behavior rather than risk-seeking behavior.
Saying "orthodox economics does not appear to have anticipated" is just wrong. And were it right, it would be a damning indictment of orthodox economics.
Greed and herd behavior made this crisis as predictable as a dropped apple hitting the ground.
Another poster mentioned the Portfolio article. I recommend it highly.
The problem seems to be a breakdown in a basic assumption of capitalism. Maximizing your self-interest used to prevent lenders from making loans to people who could not repay them. Now that's a profit center. It's the role of government to align incentives within the market, and this one is clearly damaging to the nation at large.
I agree that people are in too much debt, and some of that was poor personal decisions. But many of those decisions were driven by rising housing prices, which was artificial. If the watchdogs -- especially the bond rating agencies, my choice for the villians in this -- had been properly on the case the debt spigot would have been turned off sooner. We'd still have this contraction, but it would have been a lot less painful.
"second house buying when you can't afford it"
Change the word 'second' to 'first' and you've got an even more accurate picture.
Factor in an enormous entitlement mindset that has no logical or common sense boundaries and the picture becomes clearer still.
There is no one party or elected official responsible. That so many seek same only highlights the lack of personal responsibility that has taken hold in this country, and thus a third factor here in the mix.
Read the UK papers on a regular basis and you would have seen this coming. Our socialist future is on display there in the present.
All the utopian Obamian visions of the future will do nothing to restore personal responsibility, common sense, and the notion of independence that Americans used to build this country and that are needed to survive the next decade and beyond.
Ge 6:5 The LORD saw how great man’s wickedness on the earth had become, and that every inclination of the thoughts of his heart was only evil all the time.
Ge 6:6 The LORD was grieved that he had made man on the earth, and his heart was filled with pain.
"Read the UK papers on a regular basis and you would have seen this coming. Our socialist future is on display there in the present."
Which paper are you reading?
Ahhh.....the view looks different from a disinterested 50,000 feet. We can feel free to rise above the level of individual greed and dwell instead on the larger subject of human frailty, all too abundant in our character. Of course all of our problems lies along a continuum of economic choices made by ourselves as well as the choices made for by others. Ask yourselves this. Why hasn't the dollar cratered? And with interests rates so low, why can't we just print ourselves out of this mess? And if the dollar did crash...what would be the difference?
Re: They are poor because of choices they made.
You assume that they made those choices with full foreknowledge of the long-term putcomes. But life isn't like that. Can anyone honestly say they can foresee all the far consequences of their own choices?
Shorter Dave: "I am blithely amused by lefties who seek to address weighty problems regarding economic regulation, as righties demonstrate considerably more incisiveness by blaming those who are truly responsible, the poor."
"Can anyone honestly say they can foresee all the far consequences of their own choices?"
No. The only thing you can do is try to make the right decision most of the time and hope for the best. Some mistakes are permanent, but that does not mean you have to keep making them.
The first post is an interesting article. Does anyone else feel like we may have made a huge mistake promising Wall Street so much money?
Kind of makes you wonder if Megan's spelling of the title of the post was intentional, rather than just an attempt to be cute.
If there's an economic discipline of "market architecture" analagous to the job description of "software architect", it should have a lot more prominence, because I've never heard of it. If there isn't - there should be!
There is. It's called "regulation". For Megan's view of it (and my view of her thoughts), read the post entitled "Damned If They Do..." and comments about 6 posts down.
Yes, I have no sympathy for the poor. They are poor because of choices they made.
Yeah, those poor dumbasses chose the wrong parents.
What I wonder is why we don't have a financial equivalent of Underwriters Laboratories. I know absolutely nothing about any of the electrical devices in my house however I know most of them have a "UL" code which indicates a degree of safety and soundness...so I can buy a TV and not have it at risk of blowing up in my living room and starting a fire.
However when taking out a mortgage - and the average person is not an MBA or CFA - how can the consumer know what is toxic and cause his mortgage to blow up? Again we don't expect people to have degrees in electrical engineering to buy a toaster and you shouldn't need a CFA to take out a mortgage.
On CDS comments, as an ex banker, I do think these were valuable tools however what was missing was the exchange settlement. For example when you buy ag or energy futures on the CME you have to post margin so that you post your mark-to-market losses every day. In CDS as with other over-the-counter product there is no similar posting requirement (or, when your contracts do require collateral posting it is too late ie that is the AIG problem that it couldn't post collateral on the rating downgrade). If I sold protection on say GM when it was trading at par I should be posting margin on the way down on its bonds.
So, I take it that then that libertarianism and all it's works have been discredited? That it is going to vanish into the primordial ylem, with only disconnected fragments remaining?
Or is this yet another apologia - "I'm still right, dammit" - along with an assertion that all we need to do is regulate lightly, plow the failures under, and act like none of this ever happened?
The left's track record for addressing "weighty problems" in economic regulation is beyond abysmal. SOX anyone?
I'm sure the next round of rules will catch the bad guys, though.
I think that this underlies how culture matters. The U.S. has a strong streak of consumerism, with desires for things that one cannot afford 'now'. For (modest) homes, this is understandable, as with (modest) cars. For other things (now labled as 'doo dads', including non-modest homes) this is not the case.
Just like an army of Davids can do positive things, what we're seeing here is that they can do pretty bad things as well.
And for those who say that the poor don't choose poverty, I'd argue that they do ('they do' being defined as 'most'). They may not understand the full effects of their choices, but choosing to watch TV instead of studying in high school will likely lead to poverty. Choosing to use recreational drugs will likely to lead to poverty (particularly if you are already poor). Choices have consequences, even if you aren't aware of them. That's why it is important for parents to teach their kids values like self control, delayed gratification, hard work, thrift, etc. These characteristics are more likely to lead someone out of poverty than looking for villains.
And Gene, it isn't just a matter of parents. My older brother goofed off in college, dropped out, and hovers around the poverty level. I'm not rich, but I'm not doing badly either. He made different choices from me, and the consequences are pretty obvious to me.
This will get lost in the noise, but here's my quickie diagnosis:
- The economy is fundamentally unstable - during booms, everyone pushes for more growth, until it breaks. During busts, everyone pulls back to avoid the pain. Completely natural, but the feedback is the reverse of what it should be. To properly control a system, you need to slow when you get too fast, and speed up when you get too slow. The idea of the government increasing spending during recessions is a nod to this idea, but since they never cut spending during booms, it doesn't work.
- Recessions clean out the excessively risky players. The longer you go without a recession, the more risks get taken. Go too long and you get a crash. Like forest fires, if you put them all out, you build up fuel and risk a conflagration that kills the trees instead of just singeing them. But no one wants forest fires, or recessions, so we continue to try and put them out. This crash is all the recessions we should have had from 1982 to 2007, all rolled into one.
- We keep forgetting that the damage is done during the bubble, when we make stupid investments. The crash is just waking up to realize all the money is gone. Your SF Bay Area 3 bed 2 bath isn't worth $700,000 and never was. Nothing can make it worth that much (in real dollars.) Get over it.
- Everyone talks about "greed", but overconfidence is the real culprit. Look at how many mortgage brokers giving out stupid loans also bought overpriced houses and nice cars. They've lost it all now, just like their customers. If they had just been crooks, they would have saved the money, knowing this was going to end in tears.
- The solution going forwards is more transparency. No, we can't control financial innovation (and it does have some benefits), but it was insane to let "too big to fail" banks make deals in secret and off balance sheet. I'd dump a lot of the regulation and just make all banks and financial institutions run naked -- every transaction published to the web ASAP. Dump officially sanctioned rating agencies too, and let any old accounting firm add up all the deals that have been published and come up with a rating. Let accounting firms come up with ways to guarantee their ratings.
- The best way to handle this now is to extend unemployment insurance and other welfare to people actually at risk of ending up on the street. Clean up the banking system by chartering new banks, giving them the good assets of failed banks, and letting the rest burn to the ground.
- What we are doing now with these endless bailouts is following the Japanese route, which will lead to 20 years of slump instead of a short, sharp recession.
- Along with the libertarians, I do believe government regulation will make the economy worse. For me, the free market is iPhones and Toyotas and stores full of products. Government is the post office, the DMV, the IRS and (increasingly) the medical system. Why anyone in their right mind would turn from one to the other is beyond me.
You misspelled 'universal.'
Xanthippas: Thank you for stating concisely what I said loquaciously. I could not agree with your concision more.
Re: This crash is all the recessions we should have had from 1982 to 2007, all rolled into one.
I seem to recall recessions in 1991 and 2001. I'm not sure what other recessions we should have had. The 1991 recessions was the result of the S&L collapse (plus the oil price collapse of the late 80s). The 2001 recessions was the result of the tech bubble collapse.
An 'all have done poorly and all should have C-'s' post. Sounds early English enlightenment. My candidate for (a) correctable systemic error lies in the following. In 2002 it was well known that Greenspan was concerned about deflation and so goosed (an arcane economic term) the money supply. 'Everybody' knew prices weren't going down. This idea is somewhere in the neighborhood of 'you can't lose money buying a house' and so people 'bet the ranch.' Deflation occured for some 80 years from 1813 on. We grew. I think it is a systemic error to 'outlaw' deflation. 'Preventing it' as with the current bubble may make it more likely and more severe. Gas prices may in fact be a relevant current model. We have such a productive world economic system that the marginal product is perhaps (often) less than the current price; people have less money and prices may be driven down.
"However when taking out a mortgage - and the average person is not an MBA or CFA - how can the consumer know what is toxic and cause his mortgage to blow up? Again we don't expect people to have degrees in electrical engineering to buy a toaster and you shouldn't need a CFA to take out a mortgage."
This is just silly. The terms comes as part of the disclosure. It's there in black and white, IIRC the "toxic" mortgage I took to buy my first apt, you have to sign or at least initial them. If anyone takes out a mortgage they don't understand, it's because they are willfully ignorant or stupid. There's a limit to how much you can protect people from being stupid.
When I bought my apartment it was a very down market with very tight credit. No one wanted to lend on one BR co-op under any conditions, except for one community bank and they want to hedge against what they perceived as risk with a ARM. My payment potentially could have doubled if interest rates returned to the heights seen in the late 70s/early 80s. By my reckoning if they had, the apartment still would have been a cheap place to live in Manhattan. Your urge to save people from their own ignorance or stupidity would have kept me paying rent.
What's missing from TNC's and MM's posts is that it doesn't matter whether or not anyone is to blame for the storm, or whether or not anyone sounded the alarm soon enough loud enough whatever.
This shit happens. It happens regularly enough that you can count on it. You can plan on it. If it's not a recession, then it's planes flying into buildings. If it's not planes flying into buildings then it's huge storms coming ashore in low lying areas. If it's not storms it's tech busts. If it's not tech busts than it's earthquakes. if it's not earthquakes, it's a tsunami. If it's not a tsunami, it's a wildfire.
Whatever it is, the "unimaginable" happens with alarming frequency. Maybe no one can foresee the particular form or the exact time and place, but you can pretty much count on a serious fuck up once or twice a decade. People should plan for it. Businesses should plan for it. Governments should plan for it, cause it's not a matter of "if", it's matter of "when".
Forget the villains, and check out the "victims" of this so-called global recession:
http://acreofindependence.com/2008/11/26/is-this-a-depression/
No Designer Jeans This Year!!
No, the fault is NOT with "everyone." There are a whole lot of people who were prudent with their money, lived within their means and did not go on a wild credit binge like a lot of other folks. It is the grossest miscarriage of justice imaginable for the miscreants to charge their excesses off to the general tax fund for the prudent and imprudent alike, for the prudent people did not go to the party. Why should they suffer from the hangover simply because there were more people who partied than not? It is the careful and patient, the savers who are being punished here for having done no wrong. They cry out for redress and have none as Congress attempts to perpetuate the credit binge at the national level. Don't you dare, any of you, try to pass this off as a market weakness. The weakness was in the lies told by borrowers about their income, the lies fabricated by the brokers, the banks, the CDO peddlers and everyone else in the chain. Liars and theives should be punished, not rewarded, yet what do we see?
Last week, I saw an offer made to a debtor in an active bankrutpcy case. The lender offered them a workout of their loan, reamortizing all missed payments into a 25-year loan with interest at a fixed rate of four percent (4%). FOUR PERCENT. People with an 800+ credit score never got a four percent rate! This person had overcommitted on their loan, gotten so far behind that they had to file for bankruptcy and they're not only forgiven and get to keep the house, but they get to do so at a four percent rate. Unbelievable. Why didn't everyone do that? Why wouldn't they right now? Stop paying your mortgage and after a few months the lender will give you far better terms than it will give to others who pay their bills on time.
As for whether the credit-bingers were "conned" well, let's be absurdly generous for a moment and say they were willing dupes. Unsophisticated people will always take what seems like a good deal or a sure thing. Sometimes they will take things they know are risky or bad over the long run, but they really, really want the short-term advantage. This is stupidity and cupidity combined, and those chips should fall where they may.
The only thing which is certain is the old agage: if it looks too good to be true, it probably is. If more people had been conservative, skeptical, analytical, this would not have happened. Don't you dare try to whitewash this into some deus ex machina which could not have been avoided or which simply requires proper regulation. Our businesses require honest dealing, nothing more.
Dave: You're welcome, though really you're only furthering your irrelevance to the conversation.
Well, it's interesting that all "miscreants" are to blame but the only anecdote you offer is one about a debtor who, legitimately I presume, enters bankruptcy and makes an arrangement with their creditor that is financially beneficial to both. I don't think you need to work in the bankruptcy field to know that bankruptcy is highly damaging to a person's credit score. And if it's Ch 13, they'll pay their debts in some fashion or another. So I'm not entirely sure how someone who is forced into bankruptcy, whose credit rating is severely tarnished, and who manages to hang onto their home by the skin of their teeth, is someone who is quite on par with financiers who made millions concocting securities that didn't possess nearly the value that they were sold for that have brought down entire banks. Yes quite a few people are to blame in this mess, but not everyone is morally blameworthy to the same extent.
Ask yourselves this. Why hasn't the dollar cratered? And with interests rates so low, why can't we just print ourselves out of this mess? And if the dollar did crash...what would be the difference?
Because there is a flight to quality. Big investors would rather be holding Treasuries right now, instead of stocks, despite the massive amounts being put out by said Treasury. The Fed/Treasury is trying to print ourselves out of the mess. Have you been paying attention lately? Have you looked at the Fed's balance sheet lately? It's increased over a trillion dollars in around six months time. If the dollar did/does crash? It's only a matter of time, my boy. Only a matter of time. Just like the crash of the housing market. If the dollar does crash, be ready for out of control inflation. I suggest you start reading Nouriel Roubini, Barry Ritholtz and Calculated Risk.
This is just silly. The terms comes as part of the disclosure. It's there in black and white, IIRC the "toxic" mortgage I took to buy my first apt, you have to sign or at least initial them. If anyone takes out a mortgage they don't understand, it's because they are willfully ignorant or stupid. There's a limit to how much you can protect people from being stupid.
Do you really think everyone reads all the fine print on the mortgage documents? Most people just want the basics(like monthly payment and such). It's part of the reason why no one should buy a house with out having an attorney. I bet a lot of people aren't told that. I must admit, since I've never bought a house(or condo) that I don't know if anyone brings a lawyer to the office where they get their mortgage. I know people bring one to the real estate agent's office when they sign the papers to sign the house. I imagine a lot of people believe the loan officer at the bank is being honest with them about the mortgage so I don't fault the buyer as much as I fault the loan officer/bank.
Re: If the dollar does crash, be ready for out of control inflation.
Odd. Most doomsayers are predicting out-of-control deflation right now.
Odd. Most doomsayers are predicting out-of-control deflation right now.
Except you can't fill up your car for free. So there is a limit. There is deflation right now, but what do you think will happen later when interest rates go up?
I don’t think a discussion of will, or cognition of what is in our best interest, either individually or collectively, can explain what happened. These forces have existed always, and following that trail will lead to saying the present mess was inevitable. I know I can’t comprehend the immense complexity of a “meltdown,” so I try to reduce it to a droplet: some time ago, a lender provided a mortgage to a borrower who, in the informed judgement of the lender, would probably be unable to repay the loan. This was the butterfly’s belch which started a hurricane. It wasn’t illegal, nor could we make it so, and there were myriad reasons why it might have happened. But what is clear to me is that it was a breach of ethics on the part of the lender. It is unethical to lend money to someone who can’t repay, because that is to their harm. And no one is discussing ethics, because the mere association of the word with “Wall Street” seems absurd. But this is at a higher level of integration. Within professional societies there are enforceable ethical codes and standards of practice which could inform the systemic reorganizations underway in banking.
Jeffrey: Greed, consumption, and their attendant desires may be inevitable aspects of human nature, but some cultures do a better job of reining them in than others.
Can you please tell us which cultures you think do a better job of reining them in, and on what evidence you think so?
And within our own society, it is particular groups, constituencies, and ideologies which have come to view unfettered wealth creation as somehow inherent to the character of America, most often because it is in their own immediate self-interest to do so.
If this is right, then this is a change from most traditional cultures, where particular groups, constituencies, and ideologies favour fettering other groups, constituencies, and ideologies from creating any wealth, leaving the way free for the favoured few to make money. For example, the efforts by Christians in medieval Europe to stop Jews from owning land and the system of extra taxes, extorted loans etc on Jews when they went into money-lending, the taxes levied by medieval Muslim countries on non-Muslims, the guild system, the monopolies on imports given out by Tudor kings in England to their favourites, quotas that protect manufacturing companies, etc.
Fettering wealth creation is in the immediate self-interest of an awful lot of people when it means putting your competitiors out of business. I get the distinct impression in the USA that likely a majority of people still favour fettering wealth creation in their immediate self-interest. I am prepared to believe though that the USA has a larger constituency of people who favour unfettered wealth creation than many other cultures. Just I have my doubts about a majority.
Funnily enough, JKC, my mother's in real estate, and as far as I know, no one *does* buy an apartment without using an attorney, even attorneys. There's a seller's lawyer and a buyer's lawyer to make sure nothing's wrong with the papers.
I have to agree with the conservatives on this one; these mortgages are not blowing up with exotic provisions buried in the fine print. They're becoming problems because the interest rate has reset higher. Every mortgage is legally required to come with a term sheet that spells out, among other things, the interest rate and whether or not it's adjustable. That sheet sits on top of the documents. Anyone who got taken in by their mortgage was either seriously defrauded by their mortgage broker (not the bank), who hid the term sheet from them; or they didn't bother to read ANYTHING about their mortgage. More likely, they knew it was adjustable, and were speculating that they'd be able to build up enough equity to refinance to a better deal by the time the rate reset. My sympathy is extensive, but not that extensive. There is no coherent description of the mortgage market that does not put at least 50% of the blame on borrowers who were inexucsably irresponsible, any more than there is any coherent description that does not put a similar share on bankers who took unconscionable risks with other peoples' money.
Re: There is deflation right now, but what do you think will happen later when interest rates go up?
Interest rates will not go up until the economy improves. The relevant historical experience is Japan in the 90s. The Japanese kept their interest rates at nominal levels (even zero) for years and eventually their government started spending like drunken sailers too-- which didn't do them much good, but also did not lead to hyperinflation or complete collapse. The Armageddon talk is really out of line here. Yes our national debt is going much higher-- but our economy has sustained far higher indebtedness. Check out the stats for the WWII years.
"I have to agree with the conservatives on this one; these mortgages are not blowing up with exotic provisions buried in the fine print."
This is not a liberal/conservative issue. This is a lucid/delusional issue.
Hi -
At the risk of sounding like a broken record, if there hadn't been any subprimes, there wouldn't be this crisis.
Basically, the US political system made the decision to make housing increasingly affordable: this was a Good Thing.
It then gave tax breaks to average folks to make this possible: this was a Good Thing.
It went bad when ACORN drove the CRA via Carter into law, requiring banks to make loans to people who should be renting, not owning. It went bad when CRA 2 came along and Clinton made it into law that allowed securitization of mortgages (both good and bad).
This is what happens when governments mandate something that is unsustainable (subprimes) and makes it legal to get around the economics of the situation (securitization). The unsustainability remains, making it legal to get around it doesn't change the fact that there were too many loans made to people who a) under proper due diligence shouldn't have gotten them and b) were speculating that housing prices would rise forever, using cheap money that enabled such speculation.
Having everyone own their own house is A Nice Idea. That is all that it is, though, and the sooner politicians realize that they can't legislate the economy to behave the way they want it to without creating false incentives and have it blow up in their face, the better.
I only fear that this last is A Nice Idea, too...
I've been looking at RE in Portland, ME for about four years now; I've talked with dozens of agents; my brother was a mortgage underwriter for the first two of those years.
And during that time, the notion that an ARM could be refinanced into a fixed-rate mortgage based on the increase in the homes value was pretty much industry gospel.
I'm guessing a lot of folks got baptized in the fires of finance in just this way, no? Are these the stupid poor that Dave speaks of with such distain? (To my ears, these are most likely fist-time home buyers, most likely young parents, just starting out in the world.)
Portland has fewer foreclosures then national average. But there are a lot of empty homes on the market. No furniture, no curtains, no heat.
And there are a lot of families living poor; 11 people in a house trailor, 8 people in a two-bedroom apartment.
Dave may be an asshole about the poor, maybe he lost a lot of money recently because of his own poor choices. But there's something seriously wrong with big, empty house next door to an apartment with eight people living in it. Just can't put my finger on it. . .
At least they have a home, today. A family. That's something to be thankful for. I'm thankful for mine, they've seen me through a terrible illness, and I love them very much.
Zic: "But there's something seriously wrong with big, empty house next door to an apartment with eight people living in it. Just can't put my finger on it..."
I have an idea what's wrong. The natural market reaction is for someone to try to get pennies on the dollar by renting on the cheap (perhaps to those neighbors).
On the other hand, maybe another bailout is coming. What if the bailout is restricted to houses which are not rented out? What if you have to kick people out at bailout time, and they cause trouble? What if prices go back up, and you can't get rid of your tenants?
Better to leave the place empty. Not worth all that risk for pennies on the dollar.
Re: What if prices go back up, and you can't get rid of your tenants?
Few if any residential leases are written for longer than a year's term. If houses are selling at a good clip again (which I don't foresee for quite a while) you simply give the tenants due and proper notice that you will not renew as the lease end date approaches.
Alternatively you could do a month-to-month lease so you don't even have to wait a year.
What happens if they don't move out? Well, once you sell the house it isn't your problem any more, it's the new owner's.
Megan, I bet someone has already pointed out that "villein" is not the same as "villain"?
HUMAN GREED. Incurable disease.
Back in December 1929, because Winston Churchill was in America; and paid to write columns for British consumption; he wrote an excellent piece on THE GREAT DEPRESSION.
Churchill pointed out that in parliamentary systems, when you get a failure of economics on a grand scale, people, in an uproar, demand that their government fold its tents and leave.
On the other hand, the US Constitution represents STABILITY. When the Civil War broke out, no one forced Lincoln from Office. When the great calamity of BLACK MONDAY came (10/29/1929), no one forced Herbert Hoover from office.
In America you need to wait for the election cycle. And, people, do.
Then, Churchill pointed out that UNLIKE European states, America had excellent CLEAN UP legislation in place; or coming down the pike. So that the mess (including all the losses) fell on the backs of those greedy enough to invest. Who just didn't get out in time.
If you heard the cries to Congress? You'd be aware most American voters were screaming: NO BAIL OUT!
But a Trillion Dollar bailout, it was.
Why? Because the investment bankers, interested in profits, began selling the worst crap. Which they wrapped in Moody's TRIPLE AAA BOND RATING STATUS.
These bonds, because they were Triple AAA ... were backed by our Treasury's PROMISE they'd be repaid.
That's where the money "went." So that this nation can keep borrowing from other nations. We were that good at attracting capital.
Sure, the "poor people" will be blamed. They were tempted to buy houses they couldn't afford. And, they no longer had to deal with landlords; where if they didn't pay rent, they'd be kicked out of their apartments. And, landlords got good at figuring out the good tenants from the bad. Because? Sometimes you're just better off with an empty apartment.
But these stinking mortgages became a PROFIT to the investment bankers, who devised selling "split apart rations" of crap; mingled in to a few good mortgages, where the monthy payments were made on time by homeowners.
What kept this flying was the outrageous climb in home prices!
You might be concerned about buying something you can't afford. But the poor? Why would they care? They thought they were giving "free candy." And, those that bought early? Found they could "buy" without anything down. And, then? As the values went up and up ... because there were lots of customers! Which is a key to driving prices UP ... nobody ADMITTED to the problem. We saw Wall Street handing out profit-bonuses based on CRAP!
They were selling this to other nations! ANd, to pension funds. People, whom by law, always look to see if the TRIPLE AAA label is attached.
The lying began when this label was, in fact, attached. And, nobody admitted to what would happen if there was suddenly a default rate on mortgage payments ... in any one of these collateralized packages of C.D.O.s and/or C.M.O's ... (Collateralized Debt and Mortgage "obligations.") When the rate reached 14% and kept climbing higher ... all the gas went out of the balloon.
Of course, so many people just get their eyes to glaze over when you talk about FIGURES and MATH. And, then? The documents prepared to sell this crap by Wall Streeters, were sufficiently obtuse NO. ONE. KNEW. WHAT. THEY. MEANT !!!
Only that you were gonna profit.
SUCKERS.
Oh, yeah. They're waiting to "see" the bailout.
Know where that is? Only in a few pockets. And, most people will pay the bills, without gaining access to a single dollar.
Our system cleans up bad debts in just that way. Equity in home ownership? For lots of people: GONE.
Back to square one? Why would you want to go into debt to buy a home, when you get nothing but losses when you look at balance sheets?
And, if you kill the golden goose?
Which is what happens when you kill one of the economy's best engines. Home sales. But you kill it when you exceed a ratio of debt that's 3 to 1.
In other words? You can't borrow more than you can pay back.
Even if your brain freezes over when numbers begin to get discussed.
We don't have a parliamentary system (thank goodness.) You can't fire anybody.
Supply-side economics posits that when you give rich folk more money to invest, they do so in a way in which benefits trickle down. The reality is that they plow their cash into alpha-chasing Ponzi schemes.
No financial engineering, no crisis. Loans go bad all the time. This is on the folks who mispriced risk.
All the rest is just the usual assumption that any government activity is an encroachment on white privilege. I'll take the post office over Lehman Brothers, thank you.
Ps Megan this comment is priceless: "Funnily enough, JKC, my mother's in real estate, and as far as I know, no one *does* buy an apartment without using an attorney, even attorneys. There's a seller's lawyer and a buyer's lawyer to make sure nothing's wrong with the papers."
You may or may not be aware that most of the real estate exchanged in this mania did not border Central Park. "As far as I know" indeed.
On the other hand, the UAW are evil, communist motherf***ers. Right, Megan?
Jonf: "you simply give the tenants due and proper notice that you will not renew as the lease end date approaches...
Alternatively you could do a month-to-month lease so you don't even have to wait a year.
What happens if they don't move out? Well, once you sell the house it isn't your problem any more, it's the new owner's."
What I was hinting at is that in many localities, it's basically impossible to get rid of tenants.
An example: I know a guy in Hoboken NJ paying about $400/month for an apt with a river view (market rent: about $3000). He is renting month to month, and his landlord just can't get rid of him (after 6 years of attempts). The local department of housing/rent control/raping landlords will simply not allow it.
In such localities, only an idiot will buy a house that has any tenants.
"...If houses are selling at a good clip again (which I don't foresee for quite a while)..."
Houses may not sell, but is another bailout really that implausible? To paraphrase various people, "after spending $700 billion on wall street, and $25 billion on the UAW, how can anyone oppose bailing out troubled homeowners?"
Of course, does someone renting out an investment property qualify as a "troubled homeowner"?
Re: What I was hinting at is that in many localities, it's basically impossible to get rid of tenants.
Tenants with enough money to hire a good lawyer can certainly fight an eviction, and if there's a disabled family member it can indeed take a very long while. However most people who end up being evicted really are kicked out of the house pretty pronto, and many will simply pack up and leave as soon as they receive the notice. Where do you think all those empty, post-foreclosure houses are coming from (along with heart-breaking tales of pets left behind)? On rare occasion it can be hard to get a tenant out, but most of the time it goes down in less than a month.
One possible villain: almost doubling the national debt in 8 years?
KIA: I think I read every comment and surprisingly, it was only yours that took issue with MM's willingness to spread the blame around evenly.
I'm sure there are many people out there, you and me included KIA, that are financially responsible, live in houses we can afford, drive cars we can afford ( I dont even have a car!), don't recklessly rack up credit card debt, and do the things that everyone else seems to have forgotten for last 8+ years.
If you want to find the real villains here, then follow the money.
** I think the spelling of 'villein' is actually intentional, which raises an interesting point about MM's perspective on this crisis.
Villeins were the ones subject to a lord. They were the dominated, not the dominators. So, when MM says "Unhand that economy, villein", she is saying that whoever is destroying the credit market and holding our economy in his grip, is actually the the subject of domination, the one being dominated. We should feel sorry for the criminal activity of those responsible?
Obviously not, which is my point above, 'villein' is they key to this whole post. As the last line implies, MM wants YOU to feel bad about YOUR involvement in this crisis. And part of her strategy in doing so, is to portray those who are actually guilty, as themselves victims, helpless 'villeins'.
I always thought the snarky comments were unfair before, and sometimes they are, but honestly, of all the voices at the Atlantic, yours is the weakest.
Interesting that you want to "wonder" about such things AFTER the election. Perhaps the right time to "wonder" might've been back in September, when there was still something meaningful that could've been done, like the election.
It seems to me that the likes of you (and Ta-Nehisi) are trying to sneak up on the argument that the man who won the election has no idea what to do with the economy, never has, and never will. I'm almost afraid to see how bad things are going to have to get before you all recognize that handing the election off, based on the economy, was a very foolish basis on which to make a decision.
This seems like a strange piece of self-investigation; that there are no villains in a system (those acting with malice or conscious indifference to others) does not imply that every player made the most rational long-term choice, that those with asymmetrical power and information had a far greater impact than those with less.
Those who've read Roger Lowenstein's "When Genius Failed" (especially in the wake of the current fiasco) will remember the recurring puzzling in the book about Alan Greenspan's failure to regulate derivative markets, which ultimately leads to Long Term Capital's collapse and bailout. Is Alan Greenspan a "villain", someone acting incompetently or corruptly? No. Was the deregulation of derivative markets solely the responsibility of Greenspan? Again, no. However, Greenspan's assessment that such markets would self-regulate and that players would rationally assess the risks now seems utterly wrong. Would the decision of a fed chairman to at least try and reulate such markets have had a greater impact that a house buyer in Podunk not to seek a loan? Yes.
Again, this seems like a curiously limited self-examination. It takes the premises that 1) in the events leading to the crisis, there were no egregiously corrupt or malicious players 2) in discussions of the crisis ideological straw men have been raised (as they are in every debate), and therefore, such an economic crisis is inevitable due to human nature, and no better decision by any player could have remedied this. History is constituted of the interactions of non-malicious players which lead to catastrophic results; the actions of such players can be found wanting (yes, even without the advangtage of hindsight), and the contemporary examinations of such actions can sometimes be found wanting as well.
"conservatives want to hear that it was poor people taking out loans they knew they couldn't pay off, and a pandering government that leaned on companies and the taxpayer to hand those irresponsible wretches free money."
This is not accurate. The initial blame goes to the 'pandering government' and the groups such as ACORN that apparently really thought that they were helping poor people by getting them loans they couldn't handle. The poor people themselves are somewhat to blame, as is pretty much everyone here (including banks, credit rating agencies, etc.), but they bear no special, initiating blame.
I agree that the blame should be spread around to many people, but it's still important to know how it started, and the pandering government played a major role in that.
This is important, because if we react by banning all 'complicated derivatives' and other financial innovation, there will be a heavy price. We have to ask ourselves if the proper solution is more heavy-handed micro-management by the same politicians that helped start the bad loan problem.
BREAKING..."Jane Galt": Rational, profit- maximizing Schumpeterian speculators are NOT responsible for the global turmoil caused by market failures in the 600 trillion dollar derivatives...
Yawn and epic denial.
No, I took issue as well. The intellectual dishonesty is appalling. It is nothing less than a rather ham-handed attempt to provide cover for the conservative and libertarian ideas that got us into this mess in the first place. Far from admitting that - if not thoroughly debunked - libertarianism, American Style has to reexamine a few of its key ideas, this is just a stubborn, willful refusal to acknowledge any failure at all.
Especially since there were many people who Got It Right. Curiously, the same people who turned out to be right on so many other things as well. This most definitely was not a 'Who could have known?' moment. Here's Krugman:
I think he's right in saying the sort of guff Megan is spreading around is just so much cover for this:
That's what Megan's post is really all about: laying down covering fire against any sort of real reform, any sort of regulatory environment that has any real teeth. This is precisely the sort of thing that alerts me to the fact that libertarians aren't serious about 'ideas', and never have been. They're a propaganda outfit pure and simple. Divided into two categories, admittedly, the professional (and cynical) disinformation outfits, and the spear-carriers, the useful idiots that were so useful to the Communists fifty years ago. Though they aren't so innocent themselves; they're reminiscent of those Thomas defenders who insisted that he would never watch pornography, only to admit much later, after the door had been closed that, yeah, he was nailed dead to rights on the pornographic movie rentals.
"almost everyone involved in this mess, from the borrowers to the bankers, thought that they were getting away with something--at the very least, that they had found a way to get rich without working."
Because this country promotes work and discourages attempting to get money without working.
That's why ordinary income, *work* income, is taxed at 15%, and long term capital gains, *non-work* income, is taxed at up to 35%.
Yes, we do respect work.
I've wondered this was a case of monumental greed, or a matter of everyone turning their heads and getting a share. There were the CEO's who got fantasticlly wealthy. But there were also real-estate agents collecting commissions on what they had to know were bad loans. Not enough for a castle in Scotland, but probably enough for a vacation in Disneyland. There were the banks getting a commission. The heads of fannie mae and freedie mac were certainly making money. The stockholders of those two companies were getting richer. Chris Dodd was getting his house at a discount. There had to be a lot of people who were buying houses they knew they couldn't afford. How many were duped by real-estate agents and how many were hoping to make a killing on the increased house value before the AMR changed to the higher rate? How many people were going to buy, make $20,000 in home improvements, and sell at an $80,000 profit. How many did just that. The real estate market had become distorted. It was not a matter of "what is it worth?" It was a matter of "...how much can you borrow?"
I agree with Ms. McArdle. There is probably not one big villain in this, but many many smaller villains.
heroes and villains are always oversimplified categories. they work well in fairytales but they should stay there. i agree with some other posters that although we shouldn't seek a villain, we should analyze cause and effect. it's the good vs. evil argument that's not productive. we hear it a lot tossed to and fro between conservatives and lib. illuminati--and neither should flatter themselves to be the sole executers of the evil one's desires, or the ultimate do-gooders.
"The question is how you design an institution that channels those given desires into productive ends."
Righto. 'zactly. Which rather puts paid to the more ardent libertarian vision, whose sine qua non is eviscerate, rather than foster, effective institutions.
Megan McCargle said:
"My sympathy is extensive, but not that extensive. There is no coherent description of the mortgage market that does not put at least 50% of the blame on borrowers who were inexucsably irresponsible, any more than there is any coherent description that does not put a similar share on bankers who took unconscionable risks with other peoples' money."
This begs the question, and a genuinely "coherent" answer,who was responsible for the artificially inflated 'appraised' values of the real estate; the greedy borrowers, or the plausible deniability of the greedy bankers?
Folks, there is nothing surprising or unsual about what is happening in the economy. What we saw in October was an old fashioned Panic. A couple of generations ago, schoolchildren learned about them in history class. The US had Panics in 1819, 1837, 1857, 1873, and 1893 resulting from real estate bubbles. And Panics in 1884, 1907 and 1932 due to bubbles in other asset classes.
Bubble cause Panics. No amount of regulation can stop bubbles from happening. It's not like they didn't try. After the bubble of 1720 derivatives and short selling were actually banned for decades (yes they had derivatives nearly four centuries ago--there is no true innovation in finance; the same old stuff gets recycled with new names.)
They tried strictly regulating money creation by the British Central Bank in 1845. Didn't stop the bubble and subsequent panic in 1847. America opted for a central bank after the 1907 Panic, but that didn't work all that well after 1929.
As long as income inequality is high, the rich will have the wherewithal to bid up asset prices to a point where a bubble can form. For nearly half a century after WW II, high taxes in the US kept income inequality too small to achieve the sort of sustained bull market needed to ignite a bubble.
It wasn't until the great boom of the 1990's that the rich finally had enough funds to bid up stocks to the highest levels ever seen and then some, an event that showed how "it was different this time". Only then did an old fashioned bubble develop in stocks. This bubble had *official* sanction by the passage of the 1997 capital gains tax cut which was *intended* to produce capital gains from a stock market that was *already* overvalued.
This bubble was deflated without event by aggressive Fed action that encouraged funds fleeing the stock market to go into real estate. And then in 2003, the government sanctioned *another* bubble by passing another decrease in capital gains taxes intended to stimulate capital gains in an overvalued real estate market.
This time the Fed was unable to deflate the bubble safely and so we got a Panic. Once again, central banks cannot stop these things, not in 1847, not in 1929 and not today.
Now if we end up with a full-scale Depression, it will take a long time to "recharge" and we won't have another Panic for maybe 20 years. If we manage to avoid a Depression, then we will be right back here within 10 years, unless taxes on the rich are raised worldwide to "drain the swamp" of cash available for asset purchase (i.e. investment).
It's really as simple as that. You can run a high tax, Panic-free economy like we did over 1945-1981 with the problems attendant to that, or you can continue the low-tax policy in place since 1981 and get periodic Panics.
There really is no free lunch. Each type of policy has its drawbacks. What we are going through now is one of the drawbacks of the low-tax economic policy.
Well said "Mike Alexander"!
What is your take on what our society can do to reign in the corruptive influences "the rich" appear to have on our government; aside from taxing away the economic disparity?