That demanding public
Here’s Cristopher Caldwell in Financial Times on the origins of the current financial crisis:
In a sense, the public has willed its way into government intervention by entertaining socialist expectations of a capitalist economy. Housing values were not supposed to fall and neither were any of the investments for which they served as collateral. Once enough citizens collateralise their investments with the roof over their heads, and once it becomes impossible to disentangle mortgages from other investment instruments, then the ordinary, healthy working of creative destruction will drive thousands of small-time investors from their homes. Small-time investors won’t tolerate it. Almost every institution in the financial sector, big or not so big, looks too important to fail.
Interesting. Was “the public” as a whole entertaining socialist expectations that they would be protected from ever losing a home for default on a mortgage, or from housing prices ever dropping? I’ve heard this said not just by Caldwell, but by many others.
No doubt it was true of some of that “public.” But I would hazard a guess (and this is just a guess) that most of those with such unrealistic beliefs were very young. Now, it might be the case that most of the subprime mortgage holders involved were very young, as well. Perhaps they were even the same people. But that’s hardly the entire population.
Anyone who had been through any of the earlier cycles of boom and bust in the housing market could hardly help but remember that what goes up must come down, even though this particular cycle of “up” had been going on for what seemed like an unusually long time. I know I always was aware of the possibility of the downswing; I just hoped it wouldn’t happen before I sold my own home.
My guess is that most people weren’t betting that a downtown in housing would never happen (although virtually all of us were certainly hoping)—just that it wouldn’t happen at the moment they needed to sell. I don’t think “the public” would have demanded the kind of heroic intervention we’re experiencing now if the problem had just been the driving of “thousands of small-time investors from their homes.” Having a certain number of homeowners endure foreclosures is one thing. Having the entire credit industry go down with them is quite another.
In addition, the fact that derivatives would make it exceedingly difficult or even impossible to “untangle mortgages from other investment instruments” was certainly not widely known to the general public.
More of Caldwell:
The crisis is partly an epistemological one. Few people outside of the financial industry have ever understood how the new complex derivatives work. Were they hedges or means of multiplying leverage? It turns out that few people inside the industry understood either.
If few inside the industry knew, and even fewer outside the industry were aware of the risks and the consequences to the credit system itself, it’s not clear how the fault could be laid at the feet of the public—it wasn’t the public clamoring “we want derivatives!” And I bet that most in the industry thought they knew how derivatives worked, in particular what their greater consequences might be. It’s only when the whole thing came apart that they realized how little most of them had understood what we were all getting into.
video of Senator Jim DeMint, speaking from the Senate floor on July 26, 2008, definitively tells more showcases exactly and why?
“It’s only when the whole thing came apart that they realized how little most of them had understood what we were all getting into.”
Only misunderstood and underestimated was the magnitude of the numbers of bad mortgages which were processed, during this Dimocratic party inspired social engineering project to get the underqualified and unqualified into an illusion of “authentic” home ownership. Claiming ignorance about the derivitives or misrepresentation by the lenders is just straight out dishonesty. There is nothing particularly sophisticated or complex in the repackaging of the bad loans in the form of derivitive vehicles which executive level company professionals wouldn’t have basically understood. Except for a very, very small number of home buyers who signed up for their balloon mortgages, they all knew exactly what they were getting into, a much higher payment in three to five years. So now we the taxpayers are picking up the bill, holding the bag and sliding down the slippery slope into the narcotic of socialism…
Yes, neo, but an ordinary person should be able to understand that the Community Reinvestment Act would put mortgage-holders at risk, and that the risk would spread throughout the banking system. Not brain surgery, not rocket science, just common sense and the most basic knowlege of what a bank does when it holds your money.
perfected democrat: Homeowners understood—or should have understood—that they might not be able to make their payments and that they might lose their homes. That’s very different from homeowners understanding derivatives, or what the whole thing meant for our entire system of credit.
njcommeter: same thing. I think ignorance of general economics, finance, etc. is exceedingly widespread. It’s an area I’ve been quite ignorant about myself, until my recent effort to try to learn more. I’m not talking about the basics of home ownership, or small businesses, or paying one’s bills. I’m talking about the big picture and the larger forces at work in the economy—that’s what so many people are unaware of, or have misconceptions about.
Not brain surgery, not rocket science, just common sense and the most basic knowledge of what a bank does when it holds your money.
If normal people knew that very simple scenario what about those ECO’s of banks with millions paid for their salaries what they doing bringing their banks to this sort of bankruptcy?
There is one single question why none of ECO’s of these banks and insurance companies not resigned for the chaos they put backs/Insurance Co. in? Where are the shareholders why they do not demand step down these ECO?
Why the US government not questioning these ECO for their wrong doing as we sow with ENRON boss?
Neo, again, the homeowners weren’t buying derivitives, and they didn’t need to understand them, anymore than the heart rending necessity of pondering the far reaching consequences of buying cheap imported goods from Walmart (Communist China) on Saturday afternoon; They were signing up for balloon mortgages, which I don’t believe for a minute most didn’t understand. The “professional” banking, political, government and financial community, on the other hand, were largely and knowlegeably complicit in this pyramid game. At that leve it is all about incompetence and political and financial opportunism…
I have to agree with Neo that both parties participated in the debacle now unfolding. There were, however, a number of savvy economists who DID foresee what is going on now — for example, Nouriel Roubini has been quite prescient on this for some time now. His prescription is that an RTC-like approach is not going to suffice: what we need is a New Deal-style HOLC:
http://tinyurl.com/3jujvb
Kevin Phillips, senior strategist for the Nixon campaign, has predicted and/or been involved in a number of trends, such as a Republican realignment in Congress and was involved in designing the Southern Strategy, but he has in recent years become a fierce critic of the GOP. He predicted last spring in the American Prospect that what was to come would be “unusual and potentially tragic”. He believes we’re still in the middle of the crisis, nowhere near the end:
http://www.pbs.org/moyers/journal/09192008/transcript4.html
(scroll down)
We have a combination of factors that have proven disastrous in other countries: massive government debt, ineffective regulators, and too much collusion between government and finance. In general, it was short-term at the expense of the long-term — something that always seems to win — at first — but is unsustainable.
Which brings me back to my central theme: conservatism tends to be about optimizing for the short-term and immediate, and liberalism tends to consider the long-term. You need both. Short-term optimization leads to more nimble and flexible dynamics, but it can also lead to instability in the long term, if not tempered with oversight and regulation. You need a balance. The market is not God: it is short-sighted, and doesn’t appropriately factor in long-term stability.
Until about a year and a half ago, very few people questioned the idea that house prices woud go up, fairly steeply, essentially forever.
One factor that really exacerbates bubbles is that 95% of the media always tends to hype the conventional wisdom of the moment, instead of questioning it. Thus, they add positive rather than negative feedback to the system, and this is inherently destabilizing.
“… conservatism tends to be about optimizing for the short-term and immediate, and liberalism tends to consider the long-term.”
Hmm, (as usual with Mitsu, and no taunt intended) it seems exactly the opposite to me. More specifically is the knee jerk liberal tendency to think that throwing big government money and regulation at some problem is a smart fix. However, government regulation of predatory behaviour, I would agree, sometimes has it’s legitimate, even important, place at times. But this all started with the (usual) good intentions (needless to say, but I will), of liberals stretching the limits of established conservative financial practices; Social engineering, in which the buyers were well established in advance as borderline to unaccepable credit risks, a no-brainer about what to expect when the payments doubled. But again, nobody expected the magnitude of the problem, was the problem; It still is not of the magnitude of ’29, there is, after all, a big difference between a recession and a depression. The bailouts, endless politically inspired legislative earmarks, social programs, and debt won’t kill us, but they will be inflationary…
I thought it wqas funny how he said liberals thought in the long term
Especially considering how so many of their policies are downright harmful to the people they purport to assist.
I knew we were in a bad ol’ real estate bubble when the median home in LA was $400K and the radio was playing ads:
“Intrest rates are the lowest in decades! Now is the time to get an ARM!”
Well if interest rates are the lowest, then Adjustable Rate Mortgages are cheap, ‘cuz they will only adjust upwards!
I thought to mysel: “Myself, how many idiots will get an ARM when interest rates are super-low?”
A great many idiots….
Gray: I remember thinking to myself in the DOTCOM 90s, “How can these companies have these huge stock prices and yet not have any revenues” And there would be people inthe media saying how the econmic rules no longer applied.
All of that collapsed, at least the US Govt wasn’t backing up the issuances of stock!
In a way I’m glad the mortgage thing is over. I listen to a lot of talk radio , and the mortgage company commericials were always the most annoying.
It seems they all stopped last year. Though there was a brief come back. A few of the most obnoxioujs companies were then basing their advertising on “get a foreclosed house with little money down!”
Mitsu…”liberalism tends to consider the long-term”…this may be true in liberal theory, but it is rarely true in practice. What liberalism usually tends to be driven by is short-term political advantage.
“Progressives,” and even mainstream liberals, tend to think of government as an idealized parent-figure, rather than recognizing that is is composed of people who are themselves economic actors, maximizing their own power, security, position, and income.
What I want to know is, who was writing these sub- prime mortgages? I bought a house in 2000 and the mortgage rate was 6.5%. As rates came down I refinanced to 5% and then 4%. Even though I have a high FICO score I was required to disclose my whole financial history. 3 years tax returns, all assets, all debts, the entire enchilada. I also had 20% or more equity. The appraisals were, if anything, low ball, IMAO. Even then the mortgage companies acted like they were doing me a huge favor to loan me money.
Last year my daughter, who is a therapist with her own practice, sold her condo and bought a small house. She went in with a 33% down payment but had to disclose everything and I mean everything. They asked her to pay off her car lease in advance, even though her income and debt were well within their limits. Once again, they acted like they were doing her a huge favor to loan her money at 6%.
I’m relating this because my experience has not indicated that there were mortgage lenders out there pushing money on people who couldn’t afford to pay them back. So, where were these loans being made? Does anyone have anecdotal evidence of this?
I do know one thing; there was a lot of speculation in real estate in Florida, Arizona, Las Vegas, and California. In 2005 I was in Naples, Florida and saw that people were buying houses before the foundations were poured and then selling them at a profit when when they were completed. They had no intentions of moving into these homes. A lot of them were left holding the bag when the bubble burst. Some of these may have been sub-prime borrowers, but I suspect many were speculators who walked away from the properties when they couldn’t resell them. Florida, Las Vegas, Arizona, and California suddenly had a lot of unsold houses on the market and a large number of defaults. This seemed to happen very quickly and put a real panic into the market. Normally 3-5% of mortgages go bad in a real estate downturn. Some estimate the defaults are as high as 15% this time around, but no one knows for sure. The fear mongers are certainly promoting the worst case scenarios though.
To those saying we couldn’t have predicted this, allow me to simplify it so you always can – it doesn’t take a degree in Econ. I accurately predicted the Dot com Bubble, the Housing Bubble, and I will pretty much all of them.
Rule number one: Any time an “investment” scheme requires continual gain over the short term it will eventually fail. No things about “this one is different” – nope it’s not.
Rule Number two: People are greedy. Rule number one means Easy Money, once it is well known that exists there are many that will go into it. Bubble formed.
Rule Number three: People are panicky and, along with being greedy, means they will always take the bad end of the Prisoner Dilemma for society.
Rule one and two are what create bubbles. They generally need a market to rise either a little faster than normal or for a little longer than normal. That makes it such that the people who *do* know finance made enough extra money that it becomes a money making scheme and then everyone else jumps in.
Used to be not many people played the investment games, now even people who are on the verge of chapter 7 jump in with everything they have. This time it will be different – this bubble is the real thing and will go up, see I have all this wonderful information about why from magazines, news shows, and friends. Shows like “Flip that House” were screaming “Bubble” over and over and over.
Rule three coupled with it being a bubble means that we will either have to let people eat it (as we did at the end of the dot com era) or bail them out. Bubbles just don’t slowly go away, they are effectively a legal Ponzi scheme.
True, they all have different mechanisms how they got there and this one is no different. There are all sorts of regulations and deregulations that contributed to it – and that was unknown at the time and *does* take a fairly deep understanding of economics to argue (I’m not going to remotely do that), but it was obvious to anyone with a quarter of a brain that was capable of independent non-greedy thought that it was going to bust. Further it is obvious the higher the bubble gets (in a sense, the more people involved in the Ponzi Scheme) the bigger the drop is going to be and this one got to be pretty big.
Once they pop if it is a industry vital to our economy then it gets a bail out, if not it crashes like no tomorrow. If we had an Energy bubble tomorrow (just as likely as anything else – I rather suspect one will happen once we get a real alternative energy source) when it breaks it will be massive and will have to bailed out. If we have a Video Game bubble next it will just pop and everyone will just have lost money.
Just remember – markets can’t always go up over the short term, anything that requires it to do so will eventually fail. Those that are the new entries into the Ponzi Scheme will be the ones stuck with the bill. If everyone would just hold that in their minds then the dot com bubble and the housing bubble would not have happened – it is not a bubble until everyone rushes in to get their piece of the action. Another way of putting it is that any deal that sounds too good to be true isn’t true.
Looked at from some distance, this unraveling was not hard to predict. No country in history has had such a prosperous run, from WWII until the turn of the century. But such success inevitably sows the seeds of its own destruction, as people generally come to believe that this easy life we have is quite normal, when in fact, it’s an anomaly. I think of the quote – “Some people are born on third base and go through life thinking they hit a triple”.
We’ve all (I mean that in a general sense) bought into our success story. To the point that we don’t see very clearly what got us here. But we will learn again. Basically, hard work, sacrifice, and conservative (personal and government) finances are what did it. It will again, although it will have to be pounded into people.
I’m 54 and a child of Great Depression parents, both quite poor at the time. I’ve always felt that I never had to work as hard as them. They also felt that they didn’t have to work as hard as their parents. And college students today who literally get a parental stipend for college look incredibly coddled to me. And they are expecting $85K/yr starting. (I guess it’s all relative). Can that trend run forever?
Our government realizes that the serial bailout attempts were failing. I feel this total bailout is an admission of such. My own take is that it’s gone too far and there will be no painless way out. And I mean pain, not just mental suffering.
In college I took micro and macro economics. I remember little, but I do remember a little book we read called “TANSTAAFL” – “there ain’t no such thing as a free lunch”. It’s a law of economics. You always pay – maybe not now, maybe not me, but somebody, somewhere pays.
This goes way beyond Democrat or Republican, in my opinion. It’s all of us (in the general sense). I, for one, do not expect things to magically get better and I’m preparing myself for the worst. No debt, scale back and simplify, insurance in the form of a portion of our wealth in precious metals. But mostly, simplicity.
I hope I’m wrong, but I fear I’m not. Best to all of you NEO readers.
ps. NEO, your one of the smartest people I’ve read, always surprising me with your thoughts. You compare favorably with SDB.
Hi –
First of all, thanks Neo for the hat tip… :_)
It’s all a matter of human nature. You and I all work and struggle to figure out how to save and yet do the things we want to do: none of us are the perfect and informed consumers.
The real, fundamental problem that has led us here today is that the system was gamed, legally, by those who found the loophole in the system. This loophole was the separation between those giving the mortgages and those financing them, leading to a situation where wide-spread fraud could be committed, with the fraudsters being paid for bringing in mortgages that someone else was responsible for. If all you are being paid for is volume, and not for the quality of the product, then you produce volume. Hence the mortgage brokers created the perfect storm by perpetrating large-scale fraud: this must not be forgotten, and the FBI is already going after this merry band of fraudsters.
Of course, having what I call “stupid money” fueled this. Low interest rates and expansive money suppliers meant that the those being defrauded – the mortgage holders – could keep the game going for a very long time. Add to that the ability to take the liabilities off the books – to securitize them – meant that the risk was also shunted off to those who held the securities.
If the securities had been sold on the open market, we also wouldn’t have seen the corporate failures we’ve seen: instead they were used in contractual obligations. If they had been sold over the counter, those buying them would have lost the money, end of story; by entering into contractual obligations, it meant that the problem was never going to go away, but rather would ripple through the system.
This was the great danger: that banks and other financial institutes would no longer do business with each other because of the inherent risks involved in not knowing whether your business partner would be around when the business deal was to be completed.
At the end of the day, this crisis is one of large-scale fraud by the mortgage brokers who exploited a loophole in the system, compounded by very poor due diligence on the part of the mortgage banks and even worse due diligence by those who were securitizing the business. The rating houses did an active disservice to their customers and should bear a significant part of the blame: their actions in giving the securitized debt instruments the best possible rating misled market participants as to the real risks involved.
Now, in the interests of disclosure, I work for a rating agency in Germany. We were approached asking for our opinion of such instruments, and I gave a very negative opinion, pointing out that these were not mortgages – where if someone defaults you receive the property – but rather bundled mortgages with unclear title in case of default: as such, I argued, they were inherently of very high risk, as there was no recourse in the case of failure. When it was pointed out that the risk was claimed to be minimal due to the bundling, I pointed out that it was still impossible for any recourse in case of failure, and as such these instruments were not AAA securities, but rather a form of extremely risky derivatives.
Our clients didn’t lose any money over the last couple of weeks. Sometimes that is more important than grabbing an extra 20 basis points on total return…
And some of the German banks tried to foreclose on properties in Florida which they thought they owned the mortgages on, only to be rebuked by the courts because they did not actually hold title to the properties: they merely owned the income stream from the property, which did not include the right to foreclose.
Someone didn’t realize what they were buying.
So, to sum up: wide-spread and large-scale fraud was made easy by the CRA (no subprimes, no subprime crisis!) and by the failure of regulators to keep up with business development, this was perpetuated by cheap money that wasn’t too clever about the actual risks involved, and when things turned downwards, financial institutes couldn’t escape due to the fancy footwork that brought in a few extra bucks at the cost of vastly increasing risk.
The system was gamed, and the best thing that could happen would be for the fraudsters to be caught and brought to justice. Let’s not forget this aspect of the current crisis: this was based on massive fraud by the mortgage brokers, giving credit to people who had no business getting credit.
Damn. Gremlins in the system: somehow the periods in my name and in my website link were converted to commas…
“TANSTAAFL”
That is a term that many Computer Scientist use too – it was actually scribed into the concrete of the steps going into our building at college.
Sadly we have forgotten that. I think that one way or another we are destined towards having to learn that the hard way. Obama may be it (he is IMO a great example of believing there is such a thing to an extent that *everything* else goes out the window – his whole campaign is based on There Is Such a Thing as a Free Lunch) or it will be someone later. At this point I believe it will be later, however Obama is perfectly capable of teaching us that and McCain may still loose.
I have for a long time advocated that a large part of our “problems” are that such a large portion of our population live in a situation that they have near total control of their environment. There is absolutely no reason whatsoever for them to ever have to adapt to anything – everything they have contact with adapts to their belief. That only goes so far – there are many things we *can not* control. That is a free lunch.
There is also Obama thinking problems will go away because he is there – why shouldn’t he? Really, every single problem he has ever encountered in his whole life has gone away because of that – why not these? Vote “present” and things fix themselves. Even those of us who dislike him as president admit if he was someone else (different skin color, little less ability to read speeches, different area to try and rise in politics, etc) he would have never made it – so why should he and his supporters remotely believe that it will end at the *next* level when he has passed so many?
Of course if we look at my rules then he fails the very first – anything that requires all short term gains is going to fail as that can not be sustained. He is close to the second – enough greedy people to create a bubble (we will see on election day). If elected he will trigger rule three – a bubble that bursts in a key sector of our life will have far reaching consequences. There is *no one* out there that could even bail the POTUS out (let alone given how many want the US to fail).
The only hope is one like a few here and elsewhere have expressed – he figure out simply being himself isn’t enough and he has something more than that. I have seen absolutely no evidence that he will move beyond identity politics (he never has) and no evidence that he has more (he never has). He has shown *no* growth whatsoever when presented with bumps – simply gone back to what has always worked and done it until it works.
Why the US government not questioning these ECO for their wrong doing as we sow with ENRON boss?
That’s because a number of them are buddy-buddy with Obama. Some of them gave sweetheart deals to Chris Dodd (D-CT), who also happened to be chair of a committee that oversees their industry. “Friends of Angelo”, as it where.
I’ve laid out the dots, you do the connecting and see where it goes.
The closest thing we have to the “origin” of the credit crisis are Fannie and Freddie. Together these two institutions were sanctioned by Congress to achieve leverage ratios in excess of 80x capital. The Community Redevelopment Act under Clinton was essentially expanded and placed at the forefront of a well-intentioned social policy without any regard for proper regulation of the two institutions. Anyone involved in MBS knew that this was the underlying liquidity of all of the myriad instruments (CDS, CDO, etc.) that were created around FNM’s central role as liquidity provider. Had Congress adopted Bush’s proposal in 2003 to place Fannie and Freddie under the auspices of the Treasury, we would have seen a much more stable flow of liquidity into the home sector and as such a lower leverage ratio of these two entities. It’s not that simple, but the truth is Fannie and Freddie are the reasons why the market for MBS exploded. They were in effect a house of cards. When I see Rangel, Schumer and Barney running around acting as if Congress had nothing to with this, it makes me sick. Finally, please locate for me on a map where this “main street” actually is? As far as I can tell Main Street is Wall Street, that is unless what Barry means by Main Street is Government?
Main Street is a fascade that leads to the back alley of the Democrat Party where one is mugged and then held hostage.
This is not the first time when people invent a new technology poorly understanding how it can work in some unexpected circumstances. “Challenger” fate and Chernobyl cathastrophe are other examples of this. Some financial instruments, it seems, have a destructive potential of poorly engineered nuclear reactor.
Risk estimation is a prime obligation of a lander, not of borrower. It can not be expected that bank clients have enough knowledge to judge bank liquidity.
This is the one single that is most responsible for what has happend. It’s a New York Times article from 1999. This entire saga is already foretold within:
23 Oct 1999
..
The legislation repeals the Glass-Steagall Act, or, as it is formally known, the Banking Act of 1933, which broke up the powerful House of Morgan and divided Wall Street between investment banks and commercial banks. It also makes significant changes to the Bank Holding Company Act of 1956, which had restricted what banks could do in the insurance business.
The Glass-Steagall Act was enacted after the stock market crash of 1929 and the ensuing banking crisis and Great Depression. On the day it was signed, along with the National Industrial Recovery Act and other measures, President Franklin D. Roosevelt called the package “the most important and far-reaching legislation ever enacted by the American Congress.”
…
The breakthrough in Friday’s legislation came in a backroom meeting at the Capitol soon after midnight, when a group of moderate Senate Democrats — led by Christopher Dodd of Connecticut and Charles E. Schumer of New York — forced a compromise between Gramm and the White House over the legislation’s effect on the Community Reinvestment Act, a 1977 anti-discrimination law intended to encourage lending to minorities and others historically denied access to credit.
Dodd, whose state is home to the nation’s largest insurance companies, and Schumer, with strong ties to Wall Street, have long sought legislation to repeal the Glass-Steagall Act. Both men said in interviews Friday that they moved to strike a compromise after it became apparent that the legislation might be killed, as it was last year by Gramm, over the debate about the Community Reinvestment Act.
Gramm had maintained that he did not want anything in the bill that would expand the application of the Community Reinvestment Act because it was, he said, unnecessarily burdensome to banks. He had sought a provision that would exempt thousands of smaller banks from the law. He also wanted a provision that would expose what he has described as the “extortion” committed by community groups against banks by requiring the groups to disclose any special financial deals the groups extract from the banks.
But the White House found that provision unacceptable and had its own ideas about community lending. It wanted the legislation to prevent any bank with an unsatisfactory record of making loans to the disadvantaged from expanding into new areas, like insurance or securities.
The White House had insisted that the President would veto any legislation that would scale back minority-lending requirements. Four days of intense negotiations between Summers, Gene Sperling, the President’s top economic policy adviser, and Gramm, while moving the two sides closer, failed to resolve the differences.
..
After receiving calls from executives of some of the nation’s leading financial companies, Dodd and Schumer began trying to work out a compromise. An agreement was quickly reached on the issue of banks and expanded powers — no institution would be allowed to move into any new lines of business without a satisfactory lending record.
The lawmakers bogged down on Gramm’s insistence that all community organizations disclose to the regulators what benefits they get from banks. Some Democrats expressed the fear that Gramm’s proposal would require the Boy Scouts to file reports with the regulators.
Ultimately, the following provisions were drawn up and both the White House and Gramm said they could accept them:
¶Banks will not be able to move into new lines of business unless they have satisfactory lending records.
¶Community groups will have to make disclosures to regulators about certain kinds of financial deals with banks that they have pressed to make loans under the Community Reinvestment Act.
¶Wholesale financial institutions, a new kind of business that takes large, uninsured bank deposits, cannot be affiliated with commercial banks.
¶Small banks with satisfactory or excellent track records of lending to the underserved would be reviewed less frequently under the Community Reinvestment Act. As a practical matter smaller banks are reviewed about every three years. The deal struck today allows all rural banks and banks with less than $250 million in assets to undergo examination once every five years if their last exam resulted in an “outstanding” grade and every four years if they last scored “satisfactory.”
For more than 20 years, Congress has tried unsuccessfully to rewrite the nation’s financial services laws and repeal Glass-Steagall, particularly as many other industrial nations had no similar restrictions on their banks. But until recently, the three main industries affected by the legislation — banks, securities companies and insurers — had competing interests and were able to lobby any legislation to a standstill.
That all changed in recent years as the lines between the industries began to blur and it became more broadly acknowledged that a deregulation of financial services could be beneficial to insurers, bankers and securities firms alike. Once the three industries rallied around the legislation, they became a formidable political force, raising millions of dollars for lawmakers and pressing both Republican leaders in Congress and the White House for new legislation.
http://partners.nytimes.com/library/financial/102399banks-congress.html
The market needs to take back over realistically. When it comes to buying, the price paid should be more toward the power of what the buyer believes it is worth – not the seller, not the real estate agent, not the mortgage lender. The buyer has to be able to live with the decision. Just like owning a boat…. the two happiest days of ones life are the day they buy said boat, and the day they sell it.
I have pulled in front of many a home for sale. I have looked at it from the curb and thought – oh, about 169K.
Nope. 400K plus.
Well, I’m not that stupid.
John F Opie, thank you for a crystal clear explanation.
I know I’ll never hear that from Washington, or on the news.
Neo: that’s what so many people are unaware of, or have misconceptions about.
the truth is that if the market wasnt being manipulated and forcing bankers to do things not in their interest, the general person wouldnt need to know that they are part of a agretized group that eventually will mean X to the population. even if all those homeonwers knew that this would happen and they were a part of it, they wouldnt have stopped doing what they did.
Keynes eventually discredited himself, when he denied his own ideas validity.
the basic reason we dont know what works at the higher level, is that you have free market capitalists battling command economy communists, and so the choice is between the hard truth and the sweet lie.
what has happened here is the collision of two efforts by communists who call themselves democrats and who clearly state that they are opposed to the capitalist system.
the big question is why do we let people who hate the system and want it changed to a failing command economy, make policy?
its like giving out id cards to sabateurs and ignoring all their actions because they have permission.
we know so little that we dont realize that a graduated tax or a progressive tax is unconstitutional and a soviet plank that we are committed to (among many many others we are ignorant of).
we dont even realize that the argument going on is between a free market economy and a soviet style command economy.
even worse, we dont realize that one side is trying to run the beast into the ground so that i can claim that it was broken to start with. all they ask is that we let them drive without limits for a little while and they will show you how fragile it is.
huge companies would not be possible without state protection. the process of helping create these monsters is a process of centralizing and creating a command ecnomy out of a free market one. and crisis along the way is freindly to the cause as it allows one to exploit the ignorance that one si generating in the still powerful general population (but soon to be inconsequential).
in this way, you manipulate things to be centralized, then at a later date its easier and safer to nationalize them.
the classic is the oil industry.. they hobble it and keep it small. that serves to drive up prices and allow them to get a mandate to change things their way whiel promising to fix things in excahnge for the mandate. meanwhile, this hobbling has the effect of putting all the work in the hands of a few companies.
if one were to convert to a command economy, one would want to nationalize 4 companies to get the end result, not 4,000 companies (or more).
the free market is antithesis to the commnand economy and so is antithetical to this centralizing project.
if you look at democratic policies they are all related to command economy changes, and crisis used for justification (exploiting our short term views and our ignorance).
even the PC effort is there to make being stupid seem more cache than smart… that being ignorant and a luddite is better than being a geek… and so on and so forth…
meanwhile, we are operating as if there is no such thing as economic warfare… and that all conflicts against us have stopped, and so on.
well, guess what? we are being set up that we are at the mercy of the chinese now. if the oil states and the chinese states refuse to accept dollars or debt, we no longer have the manufacturing capacity to create wealth to climb out of the hole.
the economic body, when healthy can take all manner of ticks on it. in fact its the simple fact that its so robust that we thought we could get the best of both worlds… free market productivity, and command economy socialism…
but we cant… eventually the parasites make for an anemia…
we are suffering command economy anemic episodes and we cant tell that the cure they propose is another dose of desease!!!!
forcing bankers to make bad loans, while having them account that assets that cant be sold have zero value, is a recipe for a bad ending.
their actions say that they understand capitalism so well, that they can work over 40 years to put thing in place that will hurt it later on, and hide their actions in time.
Carter a decidedly very communist president… had his seed watered by Clinton, another VERY communist president, and forced to flower. while other VERY leftist groups set the book keeping change.
as long as they keep making small adjustments that take years to propigate and cause crisis they can orchestrate a failure, and the crisis necessary for forcing a command economy as a response to the crisis.
their meddling will not be seen as the reason, and so it will not be removed. what will happen is that the crisis is planting the seeds for the further erosion of the system 10 years or more from now.
we USED to be taught all this stuff… but that was when history was history not social studies… and personell offices were not changed into soviet style human resources… and so on.
the US is either going to return to the values that founded and gave it strength, or it will become a communist state…
its already a VERY communist state as we passed the 50% mark a few years ago!
when we no longer can operate, it will be time for the fire sale, and the rest of those enemies we call freinds to move in, eradicate the present residents and replace them with their own.
all because we think that more control will lead to fewer crisis than the control had already caused crisis.
they have painted exit on the entrances and have set the buiulding on fire, and we are all running deeper into our own ends delclaring that this is the way to our rescue!
“The Capitalists will sell us the rope with which we will hang them. – lenin”
“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” – lenin
of course we dont knwo these histories so well either… so we cant even fathom that these points are coming true…
that our only method of denial was how fast they happened, not whether they are happening. as if fast rot is real and slow rot is false.
…first ascertain exactly the position of the various capitalists, then control them, influence them by restricting or enlarging, facilitating or hindering their credits, and finally they can entirely determine their fate. lenin
The surest way to destroy a nation is to debauch its currency. lenin
the communist party in the US stopped putting up candidates because they couldnt distinguish their platforms from those of the democratic party…
well, i guess that lettig communists set economic policy is working as well for america as it is working for the russisns this past 100 years…
This is a time to look carefully and choose up sides: free markets or the State? There is no in between. Freedom vs. slavery. Which is it?
A free market is not a lawless market. It is governed by natural law and judges and juries administering that law. It is governed by agreements that merchants make among themselves, and judges and juries that handle disputes that arise. It is governed by the consumer who has the say-so of whether or not to buy a product or service. Liability is assigned to those who are responsible. Losses, when they occur, are borne by those who are responsible. They are not spread to taxpayers by edict or force. A free market is not chaos. It has governance, but it does not stem from the variable and fickle authority of legislators who take bribes and lobbyist money. It stems from jurists who follow a body of jurisprudential principles.
A free market is definitely not a State-regulated and State-controlled market. Once the State starts legislating markets, the consumer’s say-so disappears. Merchant agreements become targets for anti-trust. Product innovation deteriorates. Once the State starts legislating markets, the weak sisters petition the State to halt the successful companies in their tracks. When the EU fines Microsoft an unbelievable amount of money and diddles around with the details of what Microsoft may or may not include in its operating system, there is no free market any longer.
Once the State gets into the act, it plays favorites. Some businesses that have losses are bailed out. The business does not pay the price of its errors. The losses are shifted to taxpayers. That is what is happening today. This is the opposite of a free market.
When we have a central bank that controls the amount of high-powered money in the economy and when such a bank can bail out at its own discretion whatever financial institutions it pleases and in whatever amounts it pleases, we definitely do not have a free market in money or banking. When bank deposits are insured, we have no free market in banking. When we have government-sponsored enterprises with direct lines of credit to the U.S. Treasury that buy mortgages, we do not have a free market in banking or mortgage lending or housing.
Free enterprise means that losses are borne by those responsible for them. When the U.S. government plays favorites and bails out the institutions with losses that it selects, there is no free market.
In sum, government forces wealth transfers by uncalled for violence, whereas persons exchange goods and services without such violence in a free market. The one is criminal in nature, the other peaceful. The one makes slaves of persons, the other respects their liberty.
http://www.lewrockwell.com/rozeff/rozeff222.html
so this is just another failure of a command economy (communist), not a failure of the free markets, who have been decidedly and markedly less free since our soviet revolution in the 60s to a socialist state, over a state of free men and expansive outcomes.
Truth,
Why the US government not questioning these ECO for their wrong doing as we sow with ENRON boss?
Because their wrongdoing was the DIRECT outcome from state intervention, while the ENRON situation was the INDIRECT outcome from state intervention.
In this case, they would question them and find out that they were following the policies as set forth by the Dems in the Carter admin, and the adjustments in the Clinton admin.
And the outcomes would be a direct result of such policies.
In the Enron thing, the situation was artificially created by the collision of anti market laws. However, unlike this situation leaders could choose not to take advantage of the situation that the laws created. In this case choice was created by ignorance of the implications of the laws, and what outcomes would be if you did certain things. All the other firms didn’t see the implications, and Enrons leaders saw that they could play round robbin and make more with the same material than if they couldn’t do this. What they really got snagged for is playing one market control over another.
This created the situation that if they sold power outside their market they could get more for it than if they sold it in market. What seemed even better to them was that by doing so, they could buy it back and pocket the difference. If the market was a free and open one, this false set of steps would not exist. It took a mandate from the state to create this condition by force of law, and then they took advantage of it.
In todays subprime, the state mandated directly the actions that caused the problems. They HAD to loan to bad risks, and they HAD to now consider a good loan that was still being paid in good state, as a zero on the balance because no one would buy it today.
Perfected democrat The “professional” banking, political, government and financial community, on the other hand, were largely and knowlegeably complicit in this pyramid game. At that leve it is all about incompetence and political and financial opportunism…
What your forgetting to ask is which came first… did the junk vehicles that allowed them to make loans to the poor that was being mandated exist before the mandate or after? The point is that we are forgetting that they LOST money on this. that these greedy people were forced to accept a losing deal.
Capitalism is mutuial benefit. when the state mandates that you have to find a way to sell to the poor, or your not allowed to sell to anyone in the area, then what do you do?
Well in this case, it seems that you ignore the law that mandates that they do this, and blame the guys for inventing a way to accomplish it since the state wont let them not do it.
In essence the state said… you either loan money to these poor people who cant pay, or get out of the loan business in this state.
They really had no choice other than what they did!! they withdraw all business in say NY state, and they go belly up… they stay in business in NY state, and they do business for 20 years then go belly up. the twenty years of something with the same end is a better deal, and that’s what they did.
Meanwhile, everyone that said for 20 years that we are under economic false flag warfare is called a tin hatter, and no one will listen. Except that so many of them are right, and now we the average people are now talking the same subject and its not tin hat.
MITSU,
Nouriel Roubini has been quite prescient on this for some time now. His prescription is that an RTC-like approach is not going to suffice: what we need is a New Deal-style HOLC
Socialist economists basically call doom doom doom till they are right then claim prescience. But how much prescience does it take to know that the rules of command economy ends up causing crisis? Its well documented for 100 years to the point that one could honestly say that the side that ignores it is an enemy.
However, Mitsu, you are no friend of America. your statements for a long time have shown that. so why would your advice at all be whats right? by defintino its what is wrong!!!
It was a new deal style law that created this mess!!! In other words, if it wasn’t for crypto communism creating a false mind as to why poor people don’t get loans, and backing that up with the force of a gun, they wouldn’t have done this.
The same thing happened in soviet russia when they mandated that the shop keepers sell stuff at a loss. Soon the shelves were bare… and the same thing is happening in Venezuela, as the shelves go bare as they try to mandate prices in which the person doing business cant support all their customers with their own money.
It’s the same thing here… the state mandates that these loans go out at a loss. If it wasn’t for too many of them, the financial industry would have kept doing it subsidizing the poor with the profits from wealthier deals, just as the poor are subsidized by the higher premiums on insurance holders in medicine.
Ultimately Mitsu, the New Deal things were unconstitutional, and if your going to suggest the same, your suggesting unconstitutional fixes that have been found to cause crisis which then ushers in more poison.
In a nutshell neo, we are in this shape precisely because of people like mitsu, who poison the waters with unconstitutional options and solutions designed to cause the very problems that they pretend to be fixing (ether purposefully or in ignorance).
Only a ignorant person or one with ulterior motives would suggest new deal type things, as they didn’t work when they were tried, and they made things worse, so one has to ask why suggest that non fix now?
MITSU,
Conservativism tends to be about optimizing for the short-term and immediate, and liberalism tends to consider the long-term.
You don’t know what the hell your talking about Mitsu.
Your so screwed up that you have it totally backwards and cant tell. You are a perfect example of a useful idiot. your hopped up to do something, and since you’re an idiot as to history, economics, and outcomes, your keepers get to direct you as you believe anything. even if its 180 degrees from validity.
EVERY one of the liberal programs today is about pretending to try to create everything in the short term..
Utopia — cant wait for it to develop on its own in 200 or 1000 years, we have to have totalitarianism to make it now!
Command economy — we cant wait for the slow free market to amble its way to were we want to go, we have to take control and manipulate it to get there FAST…
Of course making a law as to forcing those to make loans to bad risks, while not including how to pay for those risks, favors the long term, right? duh, it favors the short term. the short term goal was to get minorities and the poor into their own houses, long term would be so that they get to keep them.
Mitsu, if you go back through your posts you would find that you have no consistency of definition. Your terms actually have no meaning. You will drum up and say anything valid, invalid, ignorant, or silly, just to make a point. nothing is consistent. Reading you with any sense of memory is like listening to alice talking to humpty dumpty.
‘When I use a word,’ Humpty Dumpty said, in a rather scornful tone,’ it means just what I choose it to mean, neither more nor less.’
‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’
‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’
Liberals make short term now arguments… we will bring in sex education for six year olds, it will make new socialist man now, in a hurry… not later… of course we don’t know aht it did to hungary, and what it does to the population in the Long term. but we liked the short term arguments and liberals have signed on.
Abortion is sold on a short term argument. The life of the mother now, is the short term argument… the condition of society and its culture and population is the long term argument which they failed and are failing on. (russia has more abortions than babies and is totally in free fall collapse that it cant get out of. Ergo its tryuing to reclaim foreign Russians to populate it).
The argument for no fault divorce over fault divorce is short term versus long term.
The argument for welfare is short term fix now, and the long term outcome is destruction of family…
Basically the whole science of making a communist state is to get people to become progressive and more liberal in their choices, making them choose short term goals while believing or rather disbelieving long term outcomes that conservativism say is the outcome (and blame conservatives for not wanting the short term good because they are mean, not because they can see consequences).
In fact, long term is looking at consequences… and the left is decidedly against examining consequences. It serves their purpose of changing us into a communist state, of which they are nto very secretive about.
Jimmy J.
What I want to know is, who was writing these sub- prime mortgages? ….
Jimmy… the subprime stuff wasn’t open to everyone. If you were not a minority, or a woman not living in a minority community, then you were in the old way of review.
So in essence it didn’t lower the standards for everyone. Which is the mistake you’re making. Its COMMUNITY reinvestment act… if you were not in a key community, or not a minority in a key community, then you were SOL…
I do not know the color of your skin or where you or your daughter were living at the time, but I can pretty much be sure that it wasn’t one of the special political neighborhoods, and that you two weren’t connected to the local socialist orgs.
http://www.fdic.gov/regulations/community/community/12c30.html
it was for “technically for low-income, minority, and distressed neighborhoods”
and it had to do with how many they were giving out.
so if you did fit this description, and they had already given out enough to make their quota to avoid the state punishment, you also were SOL.
This is a problem with mandated things, they are not done on solid principals, and so they are not done to serve the whole market, but done to serve the law and the banks purposes. Unlike a real loan vehicle, they don’t hang the sign out for everyone they can get, but only to get their quota, then stop to limit the damage.
This probably was why they kept trying to tweak it all these years. they mandated this bad thing, but the banks did the minimal they could. So they changed it.
In this case, you had to be the first in line to get the benefit, and that probably went to the community organizers and the people that worked with them closely as they informed them to line up while they could.
It also behooved the banks to push those that could be put under a normal loan to be put in that category if they could do that. so even though they migh have been in a minority poor neighborhood, if someone walked in that could pay and cursory examination showed that, there was no mandate to help them get the socialist rate as they didn’t fit that description.
In essence, there are only a few reasons it wouldn’t apply…
You were too successful to be considered for it
You were the wrong color or lived in the wrong neighborhood
They had already made their nut, and didn’t need any more charity cases to keep the man at bay.
Artfldgr,
Thanks for the information. I suspected this was the case, but I’ve not seen anyone state it explicitly like you have.
So, it’s my opinion that 80% or more of mortgages in CMOs are probably performing properly. However, it takes a lot of financial sleuthing to discover what is okay and what has failed.
I found another piece of information about the CMO problem that sheds more light on why these instruments are so toxic. It seems that Deutsche Bank (DB) tried to foreclose on 14 mortgages in the USA that it held in a CMO. Some judge told DB that they were not the owners of the moprtgage, which was backed by the value of the property. The judge’s opinion was that DB only owned the income stream from the mortgages. Well, you can imagine what effect that had. You think you have a CMO stocked with mortgages back-stopped by real property, but no, some genius of a judge tells you that you only own the income stream. Wow, talk about devaluing the CMO. What is it really worth if it isn’t backed by the properties? This added to the distrust of the CMOs and I’m not sure that the issue has been resolved. If the CMOs’ owners own only the income stream, then the government bailout is, IMO, on very shaky ground.
Does anyone else know if this issue has been resolved? I personally think this judge was making law, rather than interpreting it. Unfortunately I can’t find the link to the article I found this in, so this is anecdotal.
Sub-prime mortgages by age group
More middle-aged.
Artfldgr:
The end of your post seems similar to what automobile insurance providers have to put up with. In order to do business in a state, they have to also insure people who have no business behind the wheel of an automobile, being alcoholics, or just incredibly bad drivers. Perhaps that is also why insurance companies try to offer all types of insurance – to spread the impending damage.
Regardless of the various ideas, reasons, fixes, and foibles, I believe we are experiencing first hand, the fall of America. As a father and brand new grandfather, I cannot fully express just how pissed off I am.
Basically, the majority of us who have “kept a clean nose” and learned to make it to one degree or another in this nation – and on their own – have been stuck with the bill paying for those who cannot. Whether you are a touchy feely liberal democrat / socialist, or a hard core money talks, bullshit walks capitalist, or are somewhere in between like most of us, there it is.
Woot!