You can perhaps understand my point of view if you think of unemployment. It is absolutely true that people are often fired because they are lazy, criminal, or stupid. But when unemployment skyrockets from 5% to 10%, it isn't because laziness, criminality, and stupidity have suddenly shot up. Some people in the class of unemployed people are all of these things, and most of them could probably have avoided unemployment if they had exercised better judgement about their choice of career or employer. But just because they could, in some theoretical universe, have avoided their involuntary redundancy, doesn't mean that we should look for ways to blame them. Systemic effects sometimes swamp personal choice.
This is how I feel about homeowners. They were caught up in a mania to buy a home, and most of the ones in trouble were at least a little greedy. They were desperate to buy rather than renting because they thought that buying a house was a way to make money without working, and they bought more house than they could afford because they thought rising prices would help them get away with it. But they were also getting bad information from the system. Home prices had been rising for two decades. How long are you supposed to ignore your lying eyes and put your faith in economic theory? Especially if you have two years of junior college and never really learned the theory?
But by the same token, I don't harbor any particular animus towards most of the bankers. The mortgage brokers and the smaller number of bankers who actively conveyed fraudulent information to the borrowers about the terms of their loans, or to the lenders about the income of the borrowers, yes. (And for all the frothing from left and right, I haven't seen anything beyond very sketchy anecdotal evidence that one type of fraud was more prevalent than the other. But most of the bankers were getting bad information from the same crazy system that was giving bad information to the borrowers about the risk of mortgages. If one banker, or a few bankers, make a bad bet, I think we can focus on stupidity and greed. But when almost all of them do, then I think it's not much more helpful to ask "What did they do to deserve this?" then it is to ask that question about the unemployed.
It's not that I don't think bankers are greedy. I'm sure they are. I also think homeowners are greedy. I think community organizers are greedy. I think greed is a trait fairly evenly distributed throughout the human race, though the focus of that greed varies quite a bit. That makes it unsatisfying as an explanation for . . . well, almost anything. It's like blaming the financial crisis on oxygen.
So all of this "Why didn't you stop this!!!!" where "you"=anyone the screecher previously disliked for any of a myriad of reasons, leaves me cold. Bernie Madoff is lying scum who should be buried in the darkest hole we can find. But doing so won't fix the sad, sad state of your 401(k). No one person, or even group of people, in America is powerful enough to bring down the economy, and thank frakking God they aren't.
It is much less satisfying, of course, to have history without villains. Oh, sure, we've got Allen Stanford and Bernie Madoff, but in some sense they're a symptom of the crisis, not a cause of it: recessions uncover what auditors can't. We want someone who can be blamed, ridden out of town on a rail, and his successors hamstrung with so many regulations that they'll have to phone up Tim Geithner and beg for permission to sneeze. Preferably, they will also be paid in Necco wafers.
But I think that the systemic fixes that will work will be ones that don't really involve blame: things like preventing banks from getting too big to fail, and empowering regulators who can oversee banks at the holding company levels, rather than having each piece of the elephant examined by a different blind man. Indeed, I think the biggest systemic fix, though temporary, has already taken place: it will be a long, long time before anyone takes those kinds of bets on asset markets again, or lets their leverage ratios get so out of control.
And I think the biggest issues are ugly, thorny questions that don't map well onto some neat ideological framework.
- Do we measure banks by a single standard, and risk that standard going wrong (as some of the Basel stuff arguably did) or do we give regulators more discretion, and risk them getting it wrong?
- Does America want to break up its banks and thereby lose its financial edge to countries willing to have national champions?
- Did the consolidation of banking in countries like Canada and Britain help or hurt?
- What's the biggest way to put the Too Big To Fail (TBTF) institutions on a diet?
- Should we require 20% downpayments, which will stabilize the housing market in the long run, but shrink prices further, and seriously delay homeownership for young people whose parents can't stake them? Homeownership is not an imperative, but it's at least arguably a boon for communities.
- What should countries--even big, rich, developed countries do--when capital flows swamp the ability of their markets to usefully absorb the investments? Some theory favors capital controls, but in practice, they are often a source of political corruption.
- (The one that comes to me at 3 am) Does the information problem inherent in investing in a foreign country mean we should rethink financial globalization? Are foreigners a source of bubbles?
This will not satisfy anyone looking to grind their ax . . . and then bury it in the head of some convenient political enemy. But there you are. The universe is not here to please us.
No one to blame, folks! It was just a bit of unfortunate circumstance. It had nothing to do with giant financial firms leveraging the hell out of packaged securities they knew were full of garbage! Let's ignore that completely!
Something that bothers me about current rhetoric, which I am surprised to hear from Ms. McCardle: all this talk about "greed." From an economic and legal standpoint, what is greed? Isn't it "wanting more than you deserve or merit?" What is lost in all the rhetoric, mainly from the Left, is: who exactly defines what each individual "deserves" or "merits?" Isn't the only way to fix "greed" having the State define what an individual deserves or merits? And don't we have enough data to see what happens to economies when that happens?
For what it's worth, I'm a big believer in living modestly. I dislike pretension and conspicuous consumption. But that is a moral issue, which each individual in a free society must determine for his or herself. Otherwise, we are not a free society.
Clarification: although I think it is foolish to rail against "greed," *fraud* is something we can and should do something about. Plenty of that has been going on.
Fair points.
You see, that's why so many of your blogger colleagues here in the Atlantic don't allow comments. Hell truly is other people.
Even if it gets ugly, please resist the temptation to do what they did. They're a bunch of sissies, really.
This whole episode reminds me of a plane crash. Generally not caused by one, large decisive event, but more the result of the aggregation of a number of smaller occurrences on the way to the ground. Brace for impact.
How about deleting that really vile comment by "Peter's Landlord." Really a new low for commenters here.
You highlight the key point that it's the same mistaken assumptions and poor choices made from the humblest subprime mortgagee to the biggest banks' CEOs that caused the global meltdown.
Readers should ponder:
* If unchecked leverage is such a horrible thing, why is the government TALF program designed to allow hedge funds to lever up new ABS purchases?
* If investors were dumb to trust credit ratings in the past, why does the TALF program also rely on them (indeed, is the govt the only one who still belives "AAA" anymore)?
* If no doc lending (mortgages) was so moronic, why are we encouraging more of it (credit cards are essentially no doc loans).
* If AIG was so dumb to sell Super Senior credit protection so way too cheaply, how stupid was Congress to sell bank deposit protection for free (see: Boston Globe story about how FDIC was banned from collecting premiums for a decade cause there weren't any bank losses on the horizon).
The list goes on and on. As I've written, the crisis is almost fractal-like: whether you drill down into the details or take a bird's eye view, the story is always the same: hubris, mistaken assumptions, poor decision making.
This is how I feel about homeowners. They were caught up in a mania to buy a home, and most of the ones in trouble were at least a little greedy. They were desperate to buy rather than renting because they thought that buying a house was a way to make money without working, and they bought more house than they could afford because they thought rising prices would help them get away with it
They were possibly also afraid that the rising prices (well past affordability for the average family--you've lived in the DC and NYC areas, you must know that) would permanently lock them out. There were probably also expectations of rising income that didn't pan out. And of course, there were the flippers.
Hey, I mostly agree, although I'd carve out a special place downunder for the ratings agencies that slapped a "AAA" on anything if revenue was produced by doing so. I suspect that this was outright fraud in many instances. A borrower who falsely claims 250k in annual income is like the guy who drinks and drives. The mortgage broker who does this with many borrowers is like a airline pilot who flys a fully loaded 747 while drunk. The ratings company analyst who slaps "AAA" on tranches of what he knows, should know, or strongly suspects to be crap, is like the engineer of a nuclear power plant, next to a major city, who starts messing around with the control rods while in the depths of a mescaline binge.
I'd just be happy if nitwits would stop claiming that the bursting of a speculative bubble which was instigagted and inflated with the full and constant aid of the government was an example of the failure of free markets.
I'm sure I'm missing something here, but it seems to me that the credit rating agencies (Moody's, S&P etc., and hearafter referred to as CRA) had an outside role in this debacle. We know that they abandoned traditional credit rating analysis when rating the mortgage backed securities. As I understand it, before the housing boom, when the CRA were rating securities they took rigorous looks at the borrowers' ability to pay when rating a security. During the boom, they switched to a tranche model that simply assigned AAA to the top tranche with progressively worse ratings as you went down. This meant that a security incorporating the toxic mortgages we have all come to know and love (2% teaser rate for 2 years, then dramatic reset to double digits after that) could actually get a AAA rating. The CRA defended these ratings, because they could point to low default rates. Well, of course -- during a housing boom, when your mortgage resets and you can no longer make the payments, what are you going to do? You don't have to default because when your house is worth 30 to 50% more than you paid for it, you can either refinance or, failing that, just sell -- make a profit, and pay off the mortgage. Presto! Low default rates! -- as long as house prices keep rising at astronomical rates, that is. But there is no way that a security with that type of reset feature would EVER have been rated anything above junk under the previous rating mechanisms. This isn't rocket science folks -- I don't know exactly what a security that has has a "toxic" reset feature should be rated - but I know one thing -- something like that should never, EVER be rated AAA.
This had huge consequences -- CRA rated mortgage backed securities were offering double digit yields while holding AAA ratings, claiming to have a similar risk profile as T-bills that were yielding, what 2%? Of course torrents of money is going to flow into these things, which of course inflated the bubble even more. And all the while the CRA, since they were (and still ARE!) paid by the issuers, had every incentive to rate these things in ridiculous ways.
My assertion -- and I'm honestly looking for someone to tell me I've got it all wrong -- is that if the CRA had continued to rate securities properly -- ie, based on the borrowers ability to PAY, not SOLELY on (unsustainably low) default rates, this crisis would not have happened, or at least it would not be nearly this bad. Of course we wouldn't have had the housing boom either, but that strikes me as a feature, not a bug. What am I missing?
What really annoys me is that the CRA, who seem MOST culpable to me, have paid the LEAST in the aftermath. People can complain all they want about Wall Street investment banks but the fact is, tens of thousands of those bankers have lost their jobs. But I haven't heard of huge blood-lettings at the CRA. Have I just missed it?
Now that Fannie Mae/Freddie Mac are under government control, I hope we take this opportunity to really reform this system so it can't happen again -- my proposal would be that Fannie/Freddie only buy mortgages that are rated by someone who has a financial interest in the rating being CORRECT -- that is if the rating later goes wrong, the rating firm gets hit with a penalty. Or at the very least, where the rating gets issued by a firm who is paid by the purchasers of the securities, not the sellers, so at least the incentives aren't at cross-purposes.
What am I missing?
Now you're ascribing emotionalism to people who disagree with you. Who is talking about assigning blame, or psssing out punishment? Is it impossible that the idea of breaking up insolvent banks and dealing with the toxic assets is arrived at because people think it stands a better chance of fixing the economy than just giving the banks money? Is it impossible that even letting banks fail (something I don't really see many people advocating) will be worse than shoveling money at them, especially as opposed to instituting a temporary tax break?
"Commenters and emailers are mad because I won't take a side and join them in their witch hunt for someone to blame for all of this." Wow. That's just terrible. That's like Gore's, "The science is settled" childishness. Is there really no discussion among economists and eonomics-oriented bloggers on how to deal with the crisis? Have we reached an evolution-vs-creationism-like point where you can't take seriously anyone who thinks a straight-up bailing out of banks is a bad idea? To think fixing the banking crisis ought to involve entities like Citi and BoA looking fundamentally different in the future is just nuts, huh?
Wow. It's stunning what's happened to your thinking over the last several months. You may be right, and many of us may be wrong, but comments like the one above are truly stunning.
Once again, I think this post misses the point. There's a difference between "looking to blame someone" and "trying to understand what went wrong."
I understand that there are hordes of angry investors with the electronic equivalent of pitchforks and torches, but I think it's worth spending some time fixing what's broken, especially if that cog contributed to the mess. Why is that such an unsavory prospect? I honestly don't understand Megan's (and CNBC's) recalcitrant posture towards any investigation of the lack of integrity in journalism today.
JD, I heard The One saying today that his new proposal to help small businesses, with borrowed money, would include the government securitizing and selling tranches of SBA loans.
You cannot make this stuff up.
"The one that comes to me at 3 am"
I think what comes to you at 3 am are Peter's swollen balls, swinging around your chin.
Got to pay the rent somehow.
This is how I feel about homeowners. They were caught up in a mania to buy a home, and most of the ones in trouble were at least a little greedy. They were desperate to buy rather than renting because they thought that buying a house was a way to make money without working, and they bought more house than they could afford because they thought rising prices would help them get away with it.
The thing is, I don't know anyone like this. Everyone I knew who bought at the height of the bubble did so for family reasons -- usually they were having (first or second) kids, and they either needed more space that was hard to come by on the rental market (second kid) or they wanted to forego the uncertainty of living year-to-year on a lease in a booming condo conversion market(first kid). Heck, that's the only reason that we bought -- with a kid on the way in 2006 and enduring two forced moves in two years when the landlord sold the building, we wanted someplace where we wouldn't have to move until we wanted to (which turned out to be 2007, though for a pleasant professional surprise).
The fact is, except for a few hyperbubble markets (California, Florida, Arizona, Nevada), most of the home sales around the country were for the standard job-kids-divorce-retirement-death reasons that they always have been, and they had nothing to do with greed. The only problem was that there was enough speculation that it meant these traditional buyers were buying into a bubble, and now a lot of them are a lost job or illness away from being screwed.
Rick, I think you are entirely correct that is would be good thing if some method could be adopted which would force ratings companies to have more substantial skin in the game. It would still have a weakness, however, in that the executives who run the ratings agencies would be exposed to the same principal/agent problem which plagues so many public corporations. If I run a ratings company, and I can figure out a way to pay myself a fifty million dollar bonus this year, what do I care if the premise of that bonus is a house of cards which will collapse three years from now?
I think paying executives a large percentage of their compensation in the form of stock grants which can't be sold until three years have passed since the executive left the firm might be a good thing.
These lines about how we get into to these crises are not new:
"I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all."
"With the Hopes that our World is built on they are utterly out of touch,
They deny that the Moon is Stilton; they deny she is even Dutch;
They deny that Wishes are Horses; they deny that a Pig has Wings;
So we worshipped the Gods of the Market Who promised these beautiful things."
"Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
Andthe Gods of the Copybook Headings limped up to explain it once more."
(Rudyard Kipling. Extracted from "The Gods of the Copybook Headings", contemporized.)
Ir is recurrent, collective, idiotic wishful thinking that is at the root of these crises. Loking for individuals to blame is just another form of the same recurrent, wishful idiocy.
Rick,
I think you are 100% correct. I'm reading "House of Cards" about the collapse of Bear Sterns and you get the impression that no one ever considered the possability that the "AAA" ratings were suspect.
"But when almost all of them do, then I think it's not much more helpful to ask "What did they do to deserve this?" then it is to ask that question about the unemployed."
I think it is more helpful to ask "how did we get to a point where our entire financial system is run by greedy and short sighted people. People have talked for years anacdotally about the rot in corporate America. The credit crises seems to put stock in those anecdotes. For at least thirty years now corporate America has hired people out of business and finance schools who have never done anything in their lives beyond go to school and count beans. We built the greatest economy in history with people who learned on the job. Then about fifty years ago we created something called the MBA. How is that working out for us? Your economy is only as good as the society that makes it up.
"Should we require 20% downpayments, which will stabilize the housing market in the long run, but shrink prices further, and seriously delay homeownership for young people whose parents can't stake them? Homeownership is not an imperative, but it's at least arguably a boon for communities."
All of your whinning for in trouble home owners ignores the flip side of that. For every foreclosed home, there is someone who gets an affordable house who wouldn't have otherwise gotten one. What about home owners? If they can't afford their payments they can go rent like the rest of the world or buy a house they can afford. If housing prices go down, yes people lose wealth but other people get to have cheaper homes. Is it really healthy for the economy for people to be spending 50% of their net incomes on mortgage payments like they do in places like Washington DC or New York? Yes it hurts like hell when a bubble contracts, but you come out better for it on the other side.
"The fact is, except for a few hyperbubble markets (California, Florida, Arizona, Nevada), most of the home sales around the country were for the standard job-kids-divorce-retirement-death reasons that they always have been, and they had nothing to do with greed. The only problem was that there was enough speculation that it meant these traditional buyers were buying into a bubble, and now a lot of them are a lost job or illness away from being screwed."
So fine then lets keep housing prices where they are and ensure that future generations have to spend most of their income just to have a roof over their head. Or how about instead let housing prices fall to a reasonable level and let the ones who bought at the top of the bubble go out and rent like the rest of the world.
Well said, Megan...for the most part.
People dwell on the part of the debacle that affirms their biases. I can understand that.
I somewhat guilty of it myself. I follow the affair all the way back to Greenspan and tend to put more blame on him and his crew than others because I tend to see the terrible job he did with interest rates as being the "first domino".
That's not say that other things didn't go wrong. A lot of things went wrong. The difference for me is that I don't think the other things that went wrong would have brought us to this point without what Greenspan did.
Without his errors at the Fed, none of the other things that people point to could have caused a big systemic problem because the flood gates that primordial level of borrowing money would not have taken hold.
Maybe I'm wrong on this...or less right than I realize. I don't know.
But being that my biggest prior in all of this is that money supply/interest rates can be misused and then justified with "bad economics" and with far-reaching ripple effects, I feel that any attempt to mainly blame factors like Fannie, Freddie, CRA or Gramm-Leach-Bliley simply says implicitly that what Greenspan did was OK and following sound monetary theory/economics and that the reality it created, which exposed glitches other factors (or created them?) and made them suspect to failure, is OK. It's not OK.
Some problems are indeed subordinate to other problems and Greenspan's careless and hubris, to me, seems like the first domino that set off the chain of events.
I don't agree that greed is evenly distributed among humanity at all levels. That's rubbish. Now, I don't BLAME bankers for being greedy, since that's exactly what they are hired and paid to be, but the idea that there is no special quality or depth to the greed of bankers is ridiculous. I didn't buy a house I couldn't afford, I wasn't taken in by it, even though they tried to talk me into a home loan every time I went into my bank. I knew that there was no way to get something for nothing. That isn't because I'm a financial wizard, it's because I'm NOT a financial wizard, and instead make decisions with common sense.
So I object to you saying that no one is really to blame, because that lets people off the hook. The reality is that ALMOST EVERYONE is to blame. The result is the same--nobody should look around for someone to blame--but everyone should take a hard look at themselves. That's what makes me mad at the bankers, not their greed but their absolute and aggressive lack of accountability.
"Preferably, they will also be paid in Necco wafers."
Please. No one deserves that.
jmo, when ignoring the possibility that a AAA rating may not have much signifigance in terms of creditworthiness means you get a lot of money desposited into your bank account, there is a very large impetus to ignore the possibility that a AAA rating may not mean much in terms of creditworthiness.
I think a huge percentage of our current state of affairs is the result of a house contructed of perverse incentives over a muti-decade period, inhabited by many segments of our economy.
BTW, I also think that primarily blaming the Fed loses a lot of support with people because the answer to that problem isn't very simple to come by.
It raises doubts that run very deep into the system and then nowhere.
To blame the Fed is to blame something very complex that lies at the cutting edge of what we think we understand about monetary economics. It makes us wonder if framework of analysis that the Fed uses is flawed and perhaps looked better than it really was...and totally by accident...as if the answer lies in econ 101 and not some far off ivory tower of cutting edge research.
That is indeed an uncomfortable feeling. I know.
I think all of the talk about "greed" misses the point. It seems to me that the problem wasn't that there was too much greed -- there has ALWAYS been a huge amount of greed on Wall Street -- but rather that the greed was not balanced by a healthy dose of fear. I don't want to create a financial system that depends upon having non-greedy "ethical" people at the heart of it. That would be wonderful, but it's unrealistic. Instead, I want to build a financial system that attracts the greedy, but also instills fear in them by punishing them when their greed gets ahead of their good sense. That's how we'll have a sustainable financial system that benefits us all.
I believe that the structure of the rating agencies -- where they were paid by issuers -- was always a time bomb. Folks have been talking about this conflict of interest well before our current boom and bust. Prior to the advent of mass securitization of mortgages, it was a somewhat contained bomb because the corporate debt market is so much smaller than the mortgage market, and, with far fewer players (corporations vs homeowners) more transparent and easier for debt buyers to evaluate, so it was hard for ratings to get so totally out of hand. But the same compensation structure that didn't do too much damage in the corporate debt market was an enormous disaster in the housing debt market.
I think if we systematically look to root out these kinds of conflicts, we have a much better shot at (re) building a better financial system.
John V., I can't attest to it's veracity but I think the point Greenspan made the other day deserves examination; that the historical correlation between the overnight rate and mortage rates became far less close after 2000, giving the Fed far less influence over mortgage rates.
"jmo, when ignoring the possibility that a AAA rating may not have much signifigance in terms of creditworthiness means you get a lot of money desposited into your bank account, there is a very large impetus to ignore the possibility that a AAA rating may not mean much in terms of creditworthiness."
Bingo. The rating companies got away with putting out shit because no one bothered to look. The WSJ had an article about a shack in Arizona that has $115,000 mortgage on it. The rating company sent some 24 year old out who looked at the house and signed off on it being worth that much.
The rating companies got paid to lie about the ratings. The banks made money by loaning based on the false ratings. So why look behind the curtain? The investment houses made money packaging up the BS loans that were based on BS ratings. Again, why ask any hard questions when everyone is getting rich?
If you want the case for blaming the Fed, read Thomas Woods's new book "Meltdown". It is an easy read (it took me about 4 hours) and does a good job of presenting the case. Also note what Megan said about it being global - all countries have their equivalent of the Fed, but not all screwed up as badly, while a few did worse.
Rick
What is that old canard? Capitalism without bankruptcy is like Christianity without hell. You are right. They really thought they were smarter than the rest of the world and had somehow licked the business cycle.
I don't remember who said it but "Blaming the collapse on greed is like blaming airplane crashes on gravity."
Will Allen writes:
This is true, and I've seen the graph -- for long term mortgage rates (15/30 year fixed). It's not true for ARMs, which are often tied more or less directly to the Fed rate (ie -- plus a certain number of points). And the percentage of mortgages that are ARM (vs long term fixed) has gone up dramatically in the last 20 years. Not to mention that I believe Greenspan himself was ENCOURAGING people to get ARMs.
Megan -- please tell me that you said "frakking" because you are a Battlestar fan. But then, don't, because then you really will be my favorite blogger bar none.
jmo, when ignoring the possibility that a AAA rating may not have much signifigance in terms of creditworthiness means you get a lot of money desposited into your bank account, there is a very large impetus to ignore the possibility that a AAA rating may not mean much in terms of creditworthiness.
But, people like Jimmy Cane and other executies held on to vast quantities of stock. Many Bear executives took all thier bonus money in stock. They had huge incentives to at least protect themselfes, if they had any idea what was about to happen they sure as hell wouldn't forgo cash compenstation in favor of stock.
I find this whole situation funny.
Of course people are upset that they lost money. I talked to someone today who socked away cash for their children's education, and need to start drawing on it next year. Someone else who was persuaded by their broker not to buy government bonds last summer. Only 3% she said. He lost 40%.
There was a discussion here a few weeks ago about the morality of defaulting on debt. I made a comment that collecting for the work I do is only possible if there is good faith on the part of the buyer. People who try my business regularly go under because they fail to take into consideration the considerable risk of non payment. This never hits the news. So now everyone has learned that if you give your money, time, resources, savings or whatever to someone else, beware.
It's been a grand old time. Now is the hangover.
Derek
She's crackin', dude. Looks like she's suffering from a severe case of acute cognitive dissonance. Ouch!
John, the problem is thast even when bankruptcy exists, the people who are responsible for the bankruptcy can get rich. If you get fifty million just before everybody figures out you weren't that smart, or just as evereybody figures that out, you were still smart enough.
As loathe as I am to try to legislatively engineer solutions to these sort of problems, given the 535 dunces and crooks which meet near the Potomoc in the shiny white buiding with the big dome, I am starting to think it may be worth considering, at least with large publicly held corporations which are deemed to pose a systemic risk if they were to fail. A substantial percentage of total compensation, in the form of stock which can't be sold until a decent interval has passed after an executive leaves, may be worth considering.
That could be true, Will (about what Greenspan said)
I don't know. Rick seems to vouch for it.
Maybe it is true. I can't comment with confidence on it since I really don't totally understand.
However, Rick also made the point above ARM's.
But if this is all true, then it would mean that mortgage rates would have still been very low...even if Greenspan had raised rates much sooner or never put them as low as they were to begin with?
If that's true then I'll admit that it's beyond my understanding and I'll plea agnosticism.
But I do recall saying to my GF (now fiance) a few years back that I couldn't understand how interest rates could be so low right now.
But that feeling...at the time...was based on the idea that heavy deficit spending and low interest rates couldn't truly exist at the same time...at least not with sound thinking. But that was based on what I understood from Rubin and Clinton.
Again, they could have made my feeling correct...but for the wrong reasons. I don't know. I really don't. But that idea of "feeling right but for the wrong reason" is something I think may have some truth for how the Fed has done its job...because of circumstances having helped them avoid the error in their thinking.
I don't know.
jmo, people ofetn lie to themselves as effectively, if not moreso, than they do to other people. I don't have any easy, sure-fire, solutions to human nature.
I think you ignore a group of home buyers who were innocent victims--those who had to move from one region to another for job reasons.
"John, the problem is thast even when bankruptcy exists, the people who are responsible for the bankruptcy can get rich. If you get fifty million just before everybody figures out you weren't that smart, or just as evereybody figures that out, you were still smart enough."
But the trustee has enormous powers to take that money back. Paying off insiders, at least for little people, is a good way to have the US Trustee take everything you have and if you are not lucky wind up in front of the US Attorney for fraud.
Megan doesn't want to believe that there is a single person or entity whom we can blame for this global problem. Former Australian Prime Minister Paul Keating disagrees.
In one of history's great ironies, the villain to our stageplay is none other than Tim Geithner. See the article in the Sydney Morning Herald from March 7 for the PM's account of how Geithner's mistakes at the IMF in the late '90s led directly to China's desire to build up its dollar reserves. That dollar buildup is at the heart of Megan's global imbalance and is arguably the ultimate cause of our current plight.
http://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html?page=-1
I think John V is correct on this:
I think Greenspan is largely right that larger macro issues are responsible for the low interest rates (end of communism, rapid industrialization of China, along with their willingness to buy so many T-bills in order to keep their currency from rising). So we probably would have had at least a mild bubble, and (hopefully) a mild recession no matter what.
I still assert, however, that if the rating agencies had done their job, we would not have had the INSANITY that we did with enormous amounts of money flowing in to fund unustainable home lending, ultimately leading to an enormous bubble that came to threaten our entire financial system. And the reason why the rating agencies didn't do their job is because they had no incentive to do so-- quite the opposite in fact. Which is why we need to fix that, and why I'm disappointed that I haven't seen any plans to do so.
Thanks, Chuck; that is fascinating, and perhaps more evidence that The Creator has a dark sense of humor. Again, you cannot make this stuff up.
So Rick,
You're saying the answer to my question is "Yes"?
If it is indeed yes, then I don't get it.
and they bought more house than they could afford because they thought rising prices would help them get away with it.
How?
I suppose they could have held on to the house fo a year or so, then sold it, and used the increase in value to help them buy their next house. But, unless the bought something smaller, all the other houses increased in value / cost as well, so they're no better off than the would have been if they just bought a house they could afford in the first place.
IOW, I can't think of any reason why I should feel sorry for someone who was so stupid as to buy "more house than they could afford."
Now, bought a nice house, then lost his job? I'll feel sorry for him.
"IOW, I can't think of any reason why I should feel sorry for someone who was so stupid as to buy "more house than they could afford."
Forget sympathy. You should loath them. The honest person trying to buy a house they can afford for the purpose of getting a tax break and having a place to live, can't compete with the jackass getting an interest only ARM with no down. Assuming similiar incomes, the jackass will out bid the honest person every time.
Here in Washington my wife and I look at houses and see two income couples trading out of houses they can afford and moving up to big houses they can only afford if both them keep their jobs. In this economy it is insane to trade out of a mortgage you can easily afford to one that you can barely afford. But they are doing it. Next year when their house is worth less than their mortgage and one of them loses their jobs, Megan can come on here and cry about how we should bail them out and make sure housing prices continue to be propped up beyond all credible belief.
Hi John V. Do you mean the answer to this question?
I think the answer is "they can't - on their own" -- but remember that there is the rest of the world out there- principally China. And China - for its own reasons - was helping us keep interest rates down by buying huge amounts of T-bills. If China ever stopped that, our interest rates would shoot up.
One can easily download the relevant datasets from Freddie Mac and the Treasury. You will find that Greenspan's argument is weak depending on where you believe a "structural break" occurred. (Greenspan's mendacious op-ed is too vague on this point.) The fact is that Greenspan held down short-term interest rates for far too long. One might conjecture that an important event in November 2004 played a role in his unwillingness to take away the punchbowl, but that seems churlish. (And yes, Greenspan encouraged people to use their accumulated home equity to better manage their debts through the use of such things as ARMs.)
Rick,
Actually, no.
In was referring to the question I posed that put into a blockquote on your previous post at 4:14pm.
Here in Washington my wife and I look at houses and see two income couples trading out of houses they can afford and moving up to big houses they can only afford if both them keep their jobs. In this economy it is insane to trade out of a mortgage you can easily afford to one that you can barely afford. But they are doing it.
You mean Washington, D.C.? If so, then that's because D.C. is a super boom town compared to most of the country, thanks in large part to federal largess. They're likely government employees with effective 100% job security and guaranteed inflation-adjusted raises.
If you mean Washington state, then yeah, it's probably a pretty boneheaded move.
"A 'sound' banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."
Keynes wasn't complimenting bankers when he made this comment.
Megan says: "I just don't happen to think that in systemic crises, looking for some person or small group who was too greedy/stupid/venal/corrupt/arrogant is much help."
Generally, I agree. However, if you want to fix a problem you first need an accurate diagnosis. It is necessary to determine the cause of a problem so that you can fix it. Unfortunately, these kinds of issues are heavily politicized the minute they occur. While there were quite a few people who reocognized that the real estate boom was an unsustainable bubble that would eventually burst, I don't remember anyone warning about the potential insolvency of the entire financial sector. The enormity of the problem wasn't really known until the end of last summer during the heat of the presidential campaign. Obama incessantly blamed "the last eight years of deregulation" before he cited Wall Street greed. Notwithstanding the fact that it was utter nonsense, the political debate established the paradigm. Conservatives were forced to point out that government policy had hugely distorted the housing market and Wall Street was largely responding to the incentives those distortions created.
This mess has now become a fight between those who want to use the recession as an excuse to expand government and those who oppose that expansion. One of the results of that political polarization, is to assign blame to the other side. I think conservative are a lot more right than liberals in accurately assigning blame, but the debate takes place within the paradigm that was established by the political class. That being the case, conservatives can't sit back and let liberals blame capitalism. And for the record, liberals politicize everything: Oklahoma City Bombing was caused by conservative talk radio; Hurricane Katrina (the hurricane itself) was George Bush's fault because the US had never ratified the Kyoto treaty and it was caused by global warming; 9-11 was George Bush's fault; AIDS was Ronald Reagan's fault, etc., etc.
If you have a complaint about the blame game, take it up with the liberal political elite.
Our biggest problems are two: the vanity to think that we can decode and control something like an economy, which is after all the aggregated actions of lots of people, most of who lack perfect information, perfect understanding and perfect temperament; and the naivete to think that mere mortals, given the tools to control economies, will have the wisdom, the humility or even enough fear of making a mistake to use them carefully and correctly.
Since Keynes, politicians have felt it their obligation to have a growing economy, even when a mild contraction would seem to be indicated. Who can blame them? It's nice to have a formula for leveling out booms and busts, but how idiotic were we to think we could give people tools with which they could keep the boom going longer than necessary without them doing so? In the long run, we've just created a different boom-bust cycle.
With the quants, we got some great tools for managing risk. That means distributing it, of course, not managing it away into nothingness. But given the tools to manage away risk from themselves toward others, who could expect senior managers who didn't understand the formulas to be the first to put on the breaks when business was booming and bonuses were plentiful?
It's not a question of who's to blame. It's a question of what's to blame. Of course we need to sit down, look at the particulars of this particular mess and try to figure out how not to do it again. But first and foremost, we need to look at ideas like "too big to fail," "managed risk," "soft landing," "this time is different" and any other notion connected with the idea that humans have gotten smart enough that the old rules no longer apply. And then we need to steel ourselves for the next mess, because the better we get at eliminating or smoothing out the small bumps along the road the more spectacular the screw-ups we will make by letting things slip through the cracks when we start to feel like we've got things all figured out.
"Megan doesn't want to believe that there is a single person or entity whom we can blame for this global problem. Former Australian Prime Minister Paul Keating disagrees."
I'm curious why this has gotten no attention from the mainstream media.
Megan, what say you?
Megan, I think this is optimistic on your part:
And I did about as well predicting this as anyone else, which is to say that I called the housing bubble, the savings glut, and the global imbalances, but not the specific disaster that would follow from them.
Lord knows I didn't do any better -- I thought the Dow at 11,000 was an excellent time to buy! Though fortunately I was too lazy to do much about it -- but I recall pretty clearly you were optimistic about stocks a year or so ago. And I also recall clearly that at about the same time you went on a video interview program, for The Guardian I believe?, and agreed with the interviewer that your general stance was "Don't panic". At a time when panicking would have been quite a sensible response. Unless "don't panic" was a hortatory injunction to the populace ("Please don't panic, despite the precarious state of the world's finances! You'll only make everything worse!").
Anyway, I really don't think you can claim to have done as well "predicting this as anyone else". You were nowhere near as pessimistic as Nouriel Roubini or Paul Krugman, and regardless of whether they got the shape of the collapse right, they were right that there was going to be a collapse. I'm pretty sure you did not think there was going to be a collapse.
"Commenters and emailers are mad because I won't take a side and join them in their witch hunt for someone to blame for all of this. "
It's not all personal. It's not just about finding villains, but about exposing the erroneous assumptions and reasoning that contributed to the problem in order to understand it, deal with it, and possibly prevent it from happening again.
We all make our own little compromises with the system--our deals with the devil--in order to function, but when we rationalize those compromises we end up apologist for the thoroughly corrupt political/social/economic regime that plagues us.
most of them could probably have avoided unemployment if they had exercised better judgment about their choice of career or employer.
Gotta love Megan; she's always there to blame the victim.
I don't blame you for your reading comprehension troubles, Mike; clearly, more than one teacher failed you deeply.
Matt--true, but I deduct points for Roubini for not having been particularly concerned about the housing trouble, and from both Krugman and Roubini for calling imminent crises from multiple sources for 5-8 years before the actual crisis. Stopped clocks and all that. Nassim Taleb came the closest, and he, too, missed the housing bubble.
I don't blame you for your reading comprehension troubles, Mike; clearly, more than one teacher failed you deeply.
Nor do I blame you for your moral obtuseness; too much Ayn Rand at an impressionable age is an all-too-common common etiology.