Cycles of the crash: hope springs eternal
The other night I watched this PBS program on the Crash of ’29. It was made four years ago, so there were no tie-ins to the present crisis. But the mind can create them easily enough.
Each downturn was preceded by a long bull market, lulling investors into thinking that such was the natural state of things and would continue. How could people be so dumb? Just try them. The show made the point that crashes tend to happen in cycles because it takes a while for a generation to grow up that doesn’t remember the last one.
They may “remember” in a very general sense, of course. But perhaps they were children, or young adults just starting out without many assets or investments, and the previous downtown didn’t affect them all that much unless it involved widespread unemployment and they were having trouble getting work. But many remember for their entire lives, even if they were young at the time. My mother, for example, who graduated from college in 1934, remembers the Great Depression so well that she has never invested in stocks at all.
Bull markets are seductive. It is hard to resist their siren call, and even harder to have the mental discipline to get out at the peak of a long-term bull market because it seems to just keep peaking. Who wants to get off when the ride is so much fun?
The trouble is that a long-term bull market usually represents some sort of bubble, in which the success of the market drives further success. A bubble is a hollow thing filled mostly with air, and when it deflates it goes down in a hurry.
Usually, though, there are signs that this is in the offing. This was as true in October of 1929 as it was in 2008; there were indications that there was serious trouble as early as March of 1929, but a series of non-governmental bailouts postponed the inevitable. Most people did not see the crash as inevitable, although these events in the spring of 1929 ought to have told them:
The American economy shows ominous signs of trouble. Steel production is declining, construction is sluggish, car sales are down, and consumers are building up high debts because of easy credit. Yet the stock market continues its upward momentum, heedless of real economic indicators.
Shoulda, woulda, coulda. But everyone wants a piece of the action while it lasts. In another part of the PBS program, the idea was offered that Wall Street runs on two emotions: greed and fear. The first drives the bull market right up to the point of a crash, when it is replaced almost instantaneously by the second.
Hope is another emotion that is operative in the financial world. In a bull market we hope to make money, after a crash we hope that those in charge can figure a way out of the crisis. FDR’s election in 1932 represented hope that he could solve it, and he got right to work with the New Deal and some ringing rhetoric.
Until quite recently most people believed that FDR brought America out of the Depression through his policies. But a revisionist theory has emerged that FDR’s New Deal actually made things worse. We’re not going to resolve the question in this post, although here are some books to ponder.
Using my mother as a guide, however, the perception of the majority of Americans at the time—and as long as they lived—was that FDR improved things. My guess is that, for most of these people, such views would be impervious to economic analyses and charts. It was something they felt, and continue to feel.
In line with this sort of hope and trust, I noticed a current poll that indicates 72% of Americans now believe that Obama will make the changes needed to revive the economy. This is almost breathtaking in its testament to naivete and to the persistence of hope, even in people who might have reason to feel skeptical about the government’s abilities at this point.
I certainly hope Obama can find a way, but do I believe he will? No. I see no evidence for such a belief. And yet I am apparently in a rather small minority. The believers even seem to include 44% of Republicans. Wow.
[ADDENDUM: Meanwhile, officials continue to make it up as they go along. And we grow accustomed to daily 200-point drops in the Dow.]
I’m about your age, Neo, and my parents talked about the Depression a lot–they taught me smart, very conservative ways of handling money. The hopeful thing is, they all came of working age in the 30’s and talked of how their wages improved with each new job. My aunt still talks of how she once doubled her pay just by changing employers. There’s always hope.
I have to believe in the generational thing. The 70’s are the Depression for the baby boomers. But how do we convey gas lines, 17% mortgages, and double-digit unemployment to young Obama supporters?
I think one of the main reasons that so many people think Obama can turn things around is their belief that one man, GWB, screwed things up.
In other words a bad, stupid person put us in this financial and geopolitical mess. Put a righteous, smart person in and – viola – problems gone.
My parents were in their 20’s in the 1930’s and were so stung they never in their entire lives bought so much as a mutual fund. Raising their kids (including me), they never talked at all about money, for pretty much the same reason that parents don’t talk about the ravages of cancer and the details of the holocaust; it’s too horrible. One result is that I grew up without a clue about money.
My grandfather believed FDR saved his family from the ravages of Hoover. After Hoover, he swore a blood oath never to vote for a Republican, and he kept his oath, casting his last Presidential vote for Jimmy Carter.
Once I was driving my parents through Iowa, took a wrong turn, and stumbled into the town which hosts Herbert Hoover’s Presidential Library. It’s the modest library imaginable. I had great fun dragging my father through the library – wherein, of course, he pouted and felt as if her were a traitor to his own father and all his family. Anyway, you had to be there, but it was a fun few minutes for me.
One reason that facts and figures can’t sway beliefs is that those beliefs are grounded in emotion, which is never susceptible to reason. Your mention of “greed”, “hope” and “fear” lends some evidence to this.
When one is gripped by fear, perception is everything. Anything that caused that fear to go away–even if it prolonged the state first–is seen as all good.
Hope is the worst Kool-Aid for hoi polloi, especially when they are irreligious and can not invest their hope where it belongs – another, better world after life. (Does it exist or not is irrelevant here – as long as it keeps them happy and restraints them from attempts to create utopia here, everything is OK.) So we can expect return of this malady every second generation.
Each downturn was preceded by a long bull market, lulling investors into thinking that such was the natural state of things and would continue. How could people be so dumb?
Well, their solutions are similar… I guess tabula rasa is false; we converge on our biological things, and when our living reflects the long term trends of our past development (like heterosexual family predatig the existence of homo sapiens sapiens), we feel more comfortable.
Freedom is something that is rare in our past, so we are uncomfortable with the responsibility that comes with it. we each become leaders of our own futures with no one else to blame for the outcomes.
Want to see dumber? Gay people instituting the same political system that sent them to gas chambers, and gives them no life at all once attained.
Want to see dumb? Scream for the state to control outcomes, yet believe that they wont control us to do so. how can you control the outcome if you cant control the parts and actions leading to that outcome? failure to accept a life that isnt planned or controlled and a future that isnt planed and controlled, even falsely, is something we seem not to be able to handle either.
[changes to education magnified this to hasten the change to a command economy with a totalitarian ruler over it. like false self esteem. Makes em real sensitive to lifes dings if they have never been dinged before. Princess and the pea syndrome]
Of course missing from that documentary you watched is the truth that such boom and busts only happen in economies that have command principalsl to them.
Usually these principals make the promise that we can hasten the future to today.. and they tend to modify things in reality temporarily and capriciously and we lean on them like leaning on a termite ridden cane. (and are upset when the rot causes the bottom to fall out).
For instance. Fractional reserve banking has no place in the free market. one cant loan what one doesn’t have. 30 years of 1 year loans cant cover 1 30 year loan. Can it? so the bundling we see, cant be stopped since it has to do with shifting time preferences and attempting to get to the cash that will be created tomorrow by pretending its already here today.
Guess what, right now we are experiencing when the cash of tomorrow which is fake is so interdependent that there isnt enough real cash to support the structure. and like a pile of sand, its restructures.
If one is pushing all the engines full tilt, then eventually they are going to overshoot as the false rules create a false reality and eventually the false reality and the real reality diverge enough that the link breaks, and so needs to be pulled back in line.
But that’s in a normal situation, not a situation in which one side has been working for 40 years to convert a free individualist nation where the people have power to a command economy of slaves who serve a few politicos on the top, like most history and prehistory before us.
Witout a culture to help and support us in the new system of capitalism without interference by the totalitarians, or feudal lords, or such, we are too afraid of being responsible for it. and so we let it devolve to these older systems.
In the billions of years that something like man spent living, till it became man, we have never actually had a free society in which it was prosperous, communial voluntarily, generous, inventive, and much more.
No wonder we are scared and want to run back to the devil we know.
The angle we are now confronting is more scary than the masters we had so long we have it in our genetics.
I guess in a way, this is why many slaves of the antebellum wanted back to slavery. Note that that is what welfare is!! so the Africans who were slaves have always sought to be under a slave master again… this time the state…
In a way, they were successful, then welfare policies decimated that confidence, and ability to be their own masters, and so they go to crawl back to a keeper that will take care of them (but at subsistence levels like slaves of the past).
Our biology is calling us back… making us devolve because a future where we are free, responsible for ourselves, and have to accept the outcomes of the life we choose to lead is scary.
Its all a part of one system. you cant talk about boom and busts and things without talking and realizing the command economy. And since this isnt a complete command economy, that means that we are living in a soft fascist state (the third way). how long before the desire to control the outcomes makes us hurt each other. we already have, 50 million potential children are gone… our ‘posterity’ mentioned in the constititons.
Obama is going to make menshivik changes… they are going to hurt and cause a change from a free market place to a soviet command economy.
Why? because this is what leaders do when given the chance to be rulers.
Read this, and see a bit more of what supports have been removed to make such things happen. read about Sweden.
gatesofvienna.blogspot.com/2006/08/welfare-state-is-dead-long-live.html
also suggested is
http://www.brusselsjournal.com/node/2572
and to illustrate how slavery can be sold as freedom in a state where nuclear missles are called peacekeepers. (double think)
http://www.brusselsjournal.com/node/1908
enjoy… 🙂
Neo wrote, “Until quite recently most people believed that FDR brought America out of the Depression through his policies.”
In my Economics 101 class we explored that thought and we saw that there was between 20% and 25% unemployment throughout the 30’s. The unemployment situation did not change until WW2.
The tax rate changes that were ratched up from 25% upwards of 70 and then 90% did NOT stimulate the economy but extended the depression.
People can FEEL however they wish. People can FEEL that Obama and Democrats are BETTER on the economy but economic statistics and data prove them wrong over and over again.
Lazy Negligent Journalists will continue to make American stay stuck on stupid and this sentence will turn leftists off but how else can we persuade when they continue to just believe that Republicans are bad and Democrats are good.
It is imperative that we as Americans figure this out as quick as we can because the outcome of a hard depression is many people suffering. People’s health will deteriorate. Mental health will suffer. Children will suffer. More people will die and faster. This is serious stuff. National security will suffer as well – wars could be inevitable with evil leaders/dictators seeing our weakness.
Really people – Tax rate increases DO NOT HELP THE ECONOMY. The tax ratre increases that FDR passed did NOT HELP THE ECONOMY.
Proposed capital gains tax rate increases have people DIVESTING from the stock market and taking whatever gains now. It’s a spiral effect.
Raising tax rates on those who would CREATE jobs has them creating less jobs and then projections of a downturn in the economy has them tightening thier belts and decreasing their labor pool as less goods and services would be needed in a poor economy.
The people who suffer are those with less means when there are proposed tax rate increases.
The people who suffer are those who need those jobs.
The people at the top income brackets are making as much smart decisions as they can right now in order to hold onto the money that have.
We need to educate as many people as possible and quick.
Nothing short of an Obama saying to America ” – I realize my proposals were wrong headed and have people divesting. I want to assure everyone that I now understand economics and propose a capital gains tax cut, a tax cut for all income brackets and a cut in the corporate tax rate. I will lift bans on energy production and exploration and I want to further assure all employers that during my administration I am not moving forward with onerous regulations on CO2 emissions as I had originally planned. When the economic health of this country is restored we will work cooperatively with companies and technology sectors to figure out how we can best be a conduit for cleaner technologies. Thank you America for having the patience with me in quickly coming up to speed in economic understanding”.
How can anyone who’s lived through as many presidents as we have (11 for me – maybe more for some of us) take any of this rhetoric seriously? Between the foaming-at-the-mouth rhetoric about Bush and the millennial descriptions of Obama, I have to wonder what fantasy world people are living in. Are they really that desperate? Or have they been poisoned by propaganda?
Either way, they’ll be pretty disappointed when they discover that Obama’s just another President.
I don’t think Obama has too much ability to help us out of this economic mess or for that matter hurt us in the short run. I think he might actually want to ask for a recount to see if he lost the election because the next two years might become a case of ‘pin the tail on the donkey’ and he will have a hard time meeting any of his expectations.
I think the problem is that our economy and perhaps the whole world has been living large and running up a tab in real money that has just come due. I am not smart enough to understand everything that has gone on but when you export all of your blue collar jobs and you run your merchant class of store owners out of business and build an economy on service jobs and entertainment it might not be a good thing.
Add to that the expectation that every kid needs to go to college and end up in a half million dollar house with all the toys and some place along the road the point of unsustainability is reached and we might be getting real close to that tipping point.
There is plenty of blame to go around but being an 11 president guy myself I remember predictions in the 60’s when LBJ started us on this road and folks wondered how long it could last.
I do think it is time to become concerned and hope that someone has better ideas than those of the past and taking us into more socialism is not the direction we need to go.
So, that is that.
Old texan wrote, “or for that matter hurt us in the short run.”
His stated positions have people divesting from the market, tightening their belts, hording what they have to brace themselves….
You are very correct in the latter part of your note. There is a “no deal” attitude with “starter homes”. People have expected that home values will always rise and they went for teaser interest rates with no money down….
All made possible by the Democrat party and when McCain and Bush tried to reform it in 2005 and 2006 all Democrats said NO.
We are in this position because of Democrats.
Things are getting worse because of Democrat policy positions.
It is that simple….
Does anybody have any questions on this? Does anybody need a quick tutorial on what the private sector is and what tax rate changes on said private sector does to people’s behavior??
Great post Neo. it would be great to do a series on this subject.
The reason many people who survived the depression think that FDR saved them was FDR’s maniplation of the media.
He crated the foundations of today’s MSM — it was radio, print and film, not tv, but it has the same effect.
In fact, FDR prolonged the depression, perhaps even turned a normal downturn into a depression. The deocrats of today are going to do exact;ly the same thing. They want to turn the clock back 80 years.
But it is different this time: Our enemies have nukes; we do not have the great wealth to plunder that we did then; we do not have the factories or the farm population to fall back on and we are in debt up to our eyebrows.
What thet are up to is evil beyond measure.
looks like they are going to get away with it.
Note also: B. Franks was on the tube telling us that we have to nationalize the auto indistry.
Franks was one of the key culprits in the CRA/MBS meltdown that has out is in this position.
Note as well Coleman’s race being stolen in the plain light of day.
The Democrats are so arrogant and brazen. Nothing will stop them. It will take an miracle, an act of God, to stop them.
Mongoose brings up what I think is the main point: This financial breakdown will lead to the naked grab for power by the Dems, not limited to mere election gains: they will want power over every facet of our lives. FDR tried to do it, with programs such as the National Recovery Administration and its “czar” Hugh Johnson. FDR’s minions were trying to emulate Stalin’s and Mussolini’s plans, thinking they were the best blueprints for getting us out of the Depression.
It didn’t quite work out that way.
Obama and his thugs could turn out to be as bad if not worse, and I’m praying that I’m very wrong about that; but already, there are signs that this will turn out worse
Orwell writes in 1984:
The Party seeks power entirely for its own sake. We are not interested in the good of others; we are interested solely in power. Not wealth or luxury or long life or happiness: only power, pure power. What pure power means you will understand presently….
… They pretended, perhaps they even believed, that they had seized power unwillingly and for a limited time, and that just round the corner there lay a paradise where human beings would be free and equal. We are not like that. We know that no one ever seizes power with the intention of relinquishing it. Power is not a means, it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship.
For the first time in my adult life i’m ashamed of my country.
52% of Americans have just sold their soul for govt to run their lives. I can’t even begin to describe how dissappointed i am in Americans with this election.
I just know it’ll be one hell of a victory party, if by some miracle we do beat this assault on the freedom of mankind back.
Obama won’t attend single most important meeting yet to occur re worldwide economic emergency.
http://www.reuters.com/article/politicsNews/idUKTRE4AA5OX20081111?virtualBrandChannel=10339
Obama doesn’t want to upstage the President…yeah, riiiiight. He’s shown so much concern for President Bush thus far.
So rather than meet all these world leaders, learn what they are thinking, get all the input he can get on the most urgent and pressing item facing the nation, an economic crisis that we haven’t seen since the 30’s, he chooses not to go. A seat has been reserved, but he doesn’t have time to get ready. All he has to do is sit there for heaven’s sake…and LISTEN and LEARN.
If Bush invites him, how does that upstage the President? It’s just another excuse that the rpess will be too happy to buy into.
Either he doesn’t care what the other world leaders think, he doesn’t think it matters, he wants to wreck the economy, he’s afraid all will see what an empty suit he really is, or politics trumps all with him even the tanking economy.
Whichever it is, his not attending is a dereliction of duty because Bush is a lame duck, and the expectations were that if he was there something might get done.
But of COURSE the press will give him a pass. I’m sure if John McCain or Mitt Romney had won the election yet planned on skipping, the press would have given them a pass, too, right? I’m sure.
Neo,
You wrote
“The trouble is that a long-term bull market usually represents some sort of bubble. . . .”
This is not correct, Markets run in both directions, the best markets run two or three steps up for one step down. The current market (take the Dow Industrial ave for example) is where it was about 5 years ago. Five years ago, we did not consider the market a failure and argued that the Dow average would never break 10,000.
I refer you to a chart from Andex (http://www.andexcharts.com/u_home.htm) which shows how the value of a dollar has grown in various markets since 1925. In small cap stocks (admittedly the most volatile) that single dollar grew to well over $10,000 in value. That is not a bubble, but susbtantial long term growth.
Bull markets look like bubbles in the short term, but short term asset should not be invested in long term vehicles. And by examining the evidence one will find that most ten year periods yield a profit.
There’s definitely a danger when historical perspective is lost–as Warren Buffett said, you can’t teach a new dog old tricks.
On the other hand, *too much* attention to historical experience can also be dangerous, as with those whose Depression experience scared them away from stocks for life, and those generals who are always fighting the last war.
I’m an investment professional. I am trained in finance and have a graduate degree in it. My bachelors is in economics. For a living, I do research of the banking and retail sector, and report the results and my recommendations to a portfolio manager. My record isn’t perfect, and no one’s in this business is – or even close. For the record, I tend to favor an investment style called Graham – Dodd (Value Investing). I look at a company and try to see how much downside risk exists in either its balance sheet or its cash flow. I have to evaluate the business risk and the economic risk as well. I really look hard at the cash a business garners from its operations, not net income, because N.I. can be manipulated by a hundred kinds of gimmicks and one-time events.
Right now I think we are around the bottom of the bear market. There are a lot of signs of this. Unfortunately, for small investors, the small investor typically is among the last of the lemmings to sell before a recovery occurs. Right now, small investors are bailing out in buckets. Let’s look at this objectively.
Interest rates are very low.
Most of the bad news has been shaken out. There will be some remaining earnings disappointments, don’t get me wrong. But we are near the bottom.
There is a lot of excess capacity in American industry.
Oil prices are falling.
Inflation is gradually easing off and falling.
The only thing I am worried about – and I’m sure there are many on this forum who share my concerns – would be decidedly dumb moves by the new president and Congress with respect to fiscal, tax, and economic policy. A very distinct possibility, given how ideologically rigid some of these people are.
You don’t raise taxes during a recession. You don’t add on more onerous regulations or protectionist policy during a recession. In fact, you shouldn’t do these things period. But I distinctly remember during my Marxist days twenty to thirty years ago that most of my fellow-travelers didn’t know jack shit about economics or finance. I did, but to argue with those zero-sum lunatics is futile.
Fredhjr…”decidedly dumb moves by the new president and Congress with respect to fiscal, tax, and economic policy”…also energy policy. It appears quite likely that the Obama-Pelosi-Reid triumvirate, together with their “activist” allies, will make it virtually impossible for the U.S. electrical industry to add new capacity in any economical way. The result could be not only soaring electric bills for consumers, but a loss of competitiveness for a whole range of U.S. businesss.
During WWII, the U.S. and Britain conducted extensive analyses of the German economy for purposes of planning bombing campaigns to do it the maximum possible harm. It sometimes feels as if the Democrats are taking a similar approach to our own economy.
david foster,
I just don’t understand what is the matter with these people. Do they inhabit an alternative universe where everything is backwards and logic is turned upside down?
If the worst happens – and I sincerely hope that wiser counsel prevails – then my money is on the fact that some of those dopes who voted for Oobonga realize that they had a brain fart and learn from that mistake, altering course in 2012.
I’m not so partisan that I want to see the country suffer tremendously. Honestly, I don’t. There will be a human cost and not everyone who suffers will have been an Oobonga voter. But maybe this is divine retribution for the nation’s shameful, disgraceful, vicious savaging of a good man who tried to do his job right and, I think, did a lot of things right when he was in office. He defended us against terror regimes and groups, which is exactly what you want the Commander in Chief to do. We were lucky to have him. And now, for destroying this man maybe it is divine justice that we be given over to our worst instincts for an old fashioned ass-whipping that will teach us the error of our ways.
David Foster,
Liberals do not care to understand economics. Their sights are set on an egalitarian and anti-corporate philosophy. Armed with that ideology, they are like a driver, late for an appointment, who doesn’t stop at stop signs and runs red lights at intersections. Their only focus is getting to that “appointment” on time.
I, too, am in financial services and had a client (a social worker) ask me “why social engineering programs never work [economically]?” Above is one reason; like affirmative action, only the outcome is ever a real concern. Tactical economics (how to fund and pay for a program) are a troublesome detail, a red light if you will, which is dismissed as quickly as possible. Take Barney Frank’s comments on the eve of the Freddie Mac / Fannie Mae debacle; he thought all was well and that, in fact, “we” weren’t doing enoughregarding affordable housing.
This is, in great part, why greta society type social engineering programs are always doomed to failure. They are economically untenable, but that fact is ignored in light of the fact that “we aren’t doing enough.” The left’s old canard, that in the past the programs simply weren’t implemented correctly is a doomed defense. The programs can never be implemented correctly because their economic foundation is untenable.
That is why I expect a President Obama to raise taxes and institute protectionist policies even at the worse possible economic times. He, himself, admitted as much when he responded to Bill O’Reilly’s interview question with the following: “Because it’s fair.”
*great society programs
T,
I am frightened by the possibility that more intelligent and rational minds (like Volker and Buffet) will not prevail in the policy debate. My take on Oobonga is that he is an arrogant ass who thinks he knows it all, but he tries to project an image of a reasonable fellow. He’s a liar and maybe even a criminal. And when all is said and done, a very solid case can be made that he’s not even an American citizen, since his nationality was changed when he was adopted and lived in Indonesia. There is no record whatsoever that later on when he grew up in Hawai’i that he applied to be naturalized as an American citizen. There is reasonable doubt about him having even been born here. Perhaps Kenya. But it all could be put aside if he would just furnish the proof and then the lawyers and lawsuits would go away. Really. Why not just cough up the evidence and be done with it? But the fact that he has made sure that absolutely no records from his past can be looked at should pop up red flags all over the place.
So, we may have elected a non U.S. citizen to be Commander in Chief. We may have a serious Constitutional crisis on our hands, along with an economic crisis and likely foreign policy crises.
The shit is really going to hit the fan.
I am really depressed about it all. They say that depression is really repressed anger. Maybe so. But I see no viable way to vent my anger that such stupidity has been foisted upon us. I’m in the business of helping people to save for retirement and save and invest for their future dreams. I think it’s an honorable way to make a living, and to see that quite possibly these next four years are going to make it very hard for people to achieve those things is wrenching.
And Oobonga, Pelosi, and Reid making all the wrong moves is going to hurt the very people they think they are helping. It will result in less investment, less business expansion, and a deterioration of our competitive standing in the world.
Post-New Deal Keynesian economics produced a very stable, strong American economy in which the middle class prospered, income disparity was at its lowest level in American history, and it created the conditions for the stable, orderly society that was 50’s America. The irony of all this is that conservatives who hearken back to the halcyon days of the 50’s fail to recognize that it was FDR’s Keynesian policies that made it possible.
Excessive deregulation of the markets, on the other hand, have produced a series of boom-and-bust cycles, starting with the S&L crisis, the tech bubble, the LTCM collapse, the Enron/corporate governance crisis, and finally the housing/securities bubble, the worst of them all. It has also brought with it a tremendous increase in income disparity, which today has reached levels not seen since the days of the robber barons. This boom-and-bust cycle is very much reminiscent of the economy prior to the Great Depression, which, prior to the Depression was also subject to many cyclical and painful cyclical crashes.
The lessons are quite clear: excessive deregulation leads to market and economic instability. This is not to say SOME deregulation wasn’t a bad idea — it’s natural for the pendulum to swing back. But the time has come to rediscover the virtues of *some* prudent government oversight.
Oh, and by the way: it ought to be noted here that in this election, financial services professionals donated to the Obama campaign far more than to the McCain campaign — with employees of Goldman Sachs — by far the most prudent and successful of the former big five investment banks — donating to the Democrat in the highest proportion of all.
When I was in college, I studied Eighteenth-Century literature and society. Our professor had us study England’s catastrophic “South Sea Bubble,” the first really huge speculation crash of the modern era (1720) and forerunner of every one since.
Here’s a one-page, rather humorous account of it:
http://www.historic-uk.com/HistoryUK/England-History/SouthSeaBubble.htm
My parents were Goldwater Republicans. But Dad, born in 1927, still holds fast to the idea that FDR improved things; even that he “saved capitalism.” He reveres the man as his war leader (when Dad was 14 – 18 years old). My grandparents also voted Roosevelt, and my grandfather was outraged only by FDR’s attempt to pack the Supreme Court by appointing extra Justices.
When I brought up the revisionist idea that Roosevelt might have unwittingly deepened and prolonged the Depression, my father was a little shocked, and completely rejected the notion.
One more late-night thought: Bush has served as the Left’s “Goldstein,” for their daily Two Minutes’ Hate (1984). Palin is the new “Goldstein.”
Wish I could claim credit for that, but another Netizen came up with it.
Once again demonstrating Orwell’s genius about Political Man.
FredHjr & T:
One of the things I love about reading blogs on the internet is that I have the opportunity to read the insights and opinions of people who know far more about the subject at hand than I do.
I’m not a financial professional, but I’ll kick in my 2¢ worth. (Heh. Get it? 2¢?) Anyway, I’m aware that it was hamfisted government intervention that turned what should have been a severe but relatively brief recession in 1929-30 into the Great Depression. First by Hoover, then by Roosevelt.
There’s no excuse for our current government to be repeating these mistakes, and yet they are. Obama hasn’t even taken office yet, and the Republican administration and Hank Paulson are bailing out everything in sight. They are laying the groundwork for the nationalization of vast swathes of the American economy, and I think Obama will complete that task. Is there no one left in Washington who believes in the free market?
I’ve been letting my meager investments ride so far, but now I’m starting to get skittish and am thinking about selling. I’m thinking that we haven’t seen the bottom yet and may have a ways to go before getting there.
“This is a crazy notion . . . that somehow . . . the government of the United States can make it . . . unnecessary for any of its citizens to face any difficulty, to run any risk.”
Charles A. Eaton
Republican congressman from New Jersey, during the 1935 debate over Social Security
Thinking about Mitsu’s suppositions, I’m inclined to think that comparing the singular decade of the 50’s to the last 5 decades is not a relevant comparison at all. In the first place, the post WWII/Korean War years are not comparable historically and circumstantially. It’s a little like suggesting that the Vietnam War and the Iraq War are conflicts with little qualitative difference. The growth of globalization, especially China’s progress, is intrinsically tied to the demand and support from American markets. People focus on what they want to, but overall the American free enterprise model has lifted more people on the international level out of extreme poverty than ever in history. The economic miracle that is the free wheeling American style free enterprise opportunity and wealth creator has also spawned profound innovations in science, medicine, and agriculture which have raised the quality of life for everyone, including the dirt poor. Wherever it is practiced, people are significantly better off comparitively, even where there are limited natural resources and sheer geography. Socialism and marxism can’t begin to claim that magnitude of contribution in the last 100 years. Unfortunately life isn’t perfect, never was, never will be. I would rather be poor in America than in Communist China, North Korea, any arab country, or Russia. I’m not sure exactly where the slippery slope of government responsibility and intervention becomes counter productive before morphing into the abyss of totalitarian socialism, where almost everyone equally poor; But it must have something to do with the departure of the resignation that personal responsibility is part and parcel of life. Too bad life ain’t perfect for everybody…
I actually personally prefer the American risk model much better than the European social democratic model in which the government attempts to totally flatten income distribution and overly reduce risk. American entrepreneurial spirit is far more dynamic and this is certainly a virtue of our system, and something that can and should be preserved. However, one doesn’t have to go all the way towards a European-style social democratic system; we can simply reinstitute SOME controls and SOME slightly more progressive taxation to balance out the functioning of the market and stabilize it a bit. As a side note, the comparison is not between American capitalism and a Soviet-style centrally planned economy — it’s between American capitalism and European capitalism … both produce relatively prosperous countries, but European capitalism tends to be less dynamic, less creative, but also has less income disparity and more overall economic stability. I personally prefer the American style to European, but I think we’ve pushed the needle far too far in the “unregulated” direction and it needs some recalibration.
I don’t believe anyone, Democrats or Republicans, believe in totally nationalizing all the banks, like France or Sweden or something. Even this bailout is only a partial nationalization, and it should be temporary — as was the case with the New Deal. We’re all Americans here, and we all believe in the market. The difference is how much we think the market needs *some* oversight — I believe the market, and the nation, does better with some oversight, libertarians think it does better with little to no oversight. I think the results argue in favor of my view, but of course we can have a debate about it.
True. It was WWII and not FDR that brought an end to the Depression.
But in markets, perception is reality. The fact that FDR was perceived to be doing something about the economy boosted consumer and investor confidence.
That is the model President Obama will emulate.
Mitsu,
Keneysian economics (deficit spending) is a tool like a hammer; it can drive a nail, but in the wrong hands it is a deadly weapon. Deficit spending requires the self-control to not spend like a drunken sailor (congress and self control???), Unifortunately all congress has done is to mortgage our children’s future with a national debt than can never nor will never be repaid.
I do agree that some oversight is important, but government oversight rarely works because econmically speaking, congress doesn’t know its ass from its elbow.
We have yet to learn our lessons from allowing the auto industry to coalsce into the “The Big Three” (actually, the ONLY three in domestic auto production)’ and we’ve already been down this road with Chrysler. When was the last time you heard of the justice department prohibiting a merger or bringing anti-trust legislation?
Govt oversight needs to occur to prevent mega-corps from forming; remember, in business the law of the land is that big fish eat little fish. At regional levels the business cycle is much more dynamic; a smaller company can fail and be absorbed by regional economies as lost jobs are replaced by new start-ups; this is the boom-and-bust cycle you refer to. When you get to the level of GM-Ford-Chrysler and you’re talking 100,000 jobs you now have a national catastrophe, and the only institution large enough to solve the problem is a govt that doesn’t know what it’s doing. Talk about a recipe for disaster.
This is exactly what happened to Freddie Mac and Fannie Mae; they gorged themseves fat on many unworthy loans while the companies were run by people who didn’t know better or didn’t care (or both). My father used to call this “Hooray for me and to Hell with you” economics.
Sorry Seth,
Perception is not reality; it is only perception. That consumers believe a market is healthy will not avoid its bankruptcy if it is unhealthy to begin with. The subprime mtg mess is a case in point; making loans to people who couldn’t repay them never was a healthy mkt, even though it was perceived as robust, it just needed a bloated size and a tipping point to puncture the perception. In fact, the perception of its robustness is partly what caused it to become a bloated national disaster.
Mitsu wrote, “Post-New Deal Keynesian economics produced a very stable, strong American economy in which the middle class prospered, income disparity was at its lowest level in American history, and it created the conditions for the stable, orderly society that was 50’s America.”
Mitsu with all due respect, the New Deal extended/worsened the depression. From 1929 through 1940 unemployment was over 20% and up to 25%. That is neither strong nor a prospering people. The reason for those charts showing income disparity being less is …. because of a few reasons:
1) Wealth and income was torn to shreds in many families.
2) Charts show you want YOU want to see – there were VERY wealthy families like the Rockafellers and that was a disparity. What the charts you see don’t mention is that there were very few richer families as compared to today. Charts today show a big gap between the haves and have nots because there is a VERY HIGH PERCENTAGE of wealthier families compared to the early 1900’s. In this economic climate since 1981 more american families are prospering and buying mansion like homes and it throws those charts way off. It makes it look like the rich are getting richer and the poor are getting poorer.
And this is what leftists do. They tear away at prosperity. They want to bring the common denominator down. Prosperity is the reason why this country gives more in charity to other nations and it’s poor than any other nation.
Another thing:
http://www.heritage.org/research/welfare/bg2064.cfm
In the link above you see who the poor are in America. A few key points:
*Forty-three percent of all poor households actually own their own homes.
*The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)
*Nearly three-quarters of poor households own a car
*As a group, America’s poor are far from being chronically undernourished. The average consumption of protein, vitamins, and minerals is virtually the same for poor and middle-class children and, in most cases, is well above recommended norms. Poor children actually consume more meat than do higher-income children and have average protein intakes 100 percent above recommended levels.
OK Mitsu – You can decry income disparity going forward as you wish and probably will do. But can you at least admit that as a nation we are prosperous and that we have a higher percentage of people in the top 1/5th of the income bracket than EVER. Additionally, the bottom 4/5ths are actually earning a living IF they want to.
What has gotten out of wack is prices in a few areas BECAUSE of government regulation and subsidies distorting the market place. These areas are college tuition, health care, energy, etc. Prices in these areas go up higher than inflation for other sectors because of government involvement.
******
Mitsu wrote, “Excessive deregulation of the markets, on the other hand, have produced a series of boom-and-bust cycles, starting with the S&L crisis, the tech bubble, the LTCM collapse, the Enron/corporate governance crisis, and finally the housing/securities bubble, the worst of them all.”
Mitsu it was government action that caused each of these problems (except Enron). It was government regulation and mandating and the Community Reinvestment Act and ACORN lawyers walking into bank lobbys and demanding, and cronyism with Dodd and Obama receiving more from FMae and FMac protecting those organizations and practicies from the reformers like McCain. The status quoers were the ones receiving that precious cash because – this is quite a corrupt system we got. The bigger government gets the more corporations need to give to lobbyists and government officials to influence things their way. Smaller government with a flat fair tax for all corporations and individuals would have much less donations to try to influence. Make sense? It is NOT a positive that Democrats have received more from financial sector folks. This is the FIRST I’ve seen it spun that way by anybody.
We should all be able to do our taxes on a postcard. I own a business Mitsu. Wouldn’t it be nice if I could be treated with fairness and not like a bucket of money which I don’t have. Imagine a nation where INSTEAD of the BOTTOM 50% of income earners paying 3% of the income taxes, they had a higher stake at a minimum. If 150 million people payed at least $600 as a stake in investing into the “free” things they believed in like health care or roads or alternative energy, that would be $90 Billion dollars. What we have is the top 10% of income earners (That’s anyone earning over $108,000 in income – really that isn’t much) paying 71% of the income taxes in America. It is not right that 50% of Americans get to vote to take away from others in broad daylight. We are moving quickly to having the bottom 50% pay 0% of the income tax pie. No investment in America. Take take take.
Those people Mitsu are trying to PROTECT themselves at this point in time. They are divesting from the market – taking whatever gains or losses they have, tightening their belts and buying less and bracing themselves for the economics you love with misguided passion. It is not an understanding of our system that has people like you thinking a tax rate increase on the top income earners, corporations and capital gains taxes is good. It is a severe misunderstanding…..
One last comment:
Your last comment in that post about ‘some’ prudent oversight is missing the fact that we have more government control, oversight, regulation than EVER before. To call for ‘some’ is like telling a controlling parent that they should have some ‘control’ over their child.
Mitsu: What is done by the Federal government on a relatively large scale is hardly ever temporary. Bad legislation is never legislatively revoked, to my knowledge. Moral hazard and unintended consequences are ignored, most notably but hardly exclusively by 20th century Democrats.
I give you the Alternative Minimum Tax as an example: enacted to tax a literal handful of exempt fat cats, now screwing millions of decidely non-fat middle class folks. Revoke it? No, say the Dems, we need the revenues!
Mitsu, one question.
Would you rather have:
a) more dependency on government and less job opportunity – higher unemployment
b) less dependency on government and more job opportunity – lower unemployment
If you want b) – please tell us how b) is accomplished by raising tax rates on corporations, higher income earners and capital gains.
Mitsu,
Post WWII America was prosperous for these reasons, having nothing to do with FDR’s taxation of 70% at the top rate.
1. American industry was intact. Most of the rest of the world’s was bombed out.
2. The country was pretty much unscathed by the war. Our industrial base did manage to transition from a war time economy to civilian, consumer items.
3. We were the only game in town.
4. Union demands were sustainable because there was no foreign competition.
5. Our exports were booming. See my reason #1 above.
Up until the late 1960’s we experienced an extraordinary, one-time situation that can never be repeated. It had little to do with Keynesian economics. Once the rest of the world recovered from WWII, they became competitive.
Now, here is something rather dense for people who have not taken business strategic management courses or finance. Businesses, products, and business models GO THROUGH CYCLES, from early startup through mature/declining. Profit margins follow this cycle like clockwork.
Developing economies are good at snaring companies that are approaching or are already in the mature phase of the cycle. Profit margins are squeezed because the field is crowded with competitors, driving profit margins down. So, in order to grow earnings the only way to do it is to squeeze costs. Overwhelmingly, during the last thirty years or more the way this is done is by outsourcing to cheap wage countries. There is not much you can do about this. Protectionism does not work, as it spins out its own witch’s brew of deleterious effects.
A lot of the industries that were working in the 1950’s were large industries that employed a lot of people. But those companies in those industries eventually were no longer competitive using expensive union labor.
Entrepreneurship and small company growth were not robust during the fourties, fifties, sixties, and seventies. There is a reason for this: very high marginal tax rates on individuals and businesses. Once these rates were dropped during the eighties, this trend was dramatically reversed.
The way forward is to preserve an environment where small companies and small businesses and their ideas can thrive and grow. It’s not alchemy; just common sense. You need to have an environment within which small companies have a chance to grow, because at the other end of the continuum you are going to see old companies, products, and ideas either die or go overseas to developing countries.
The rest of the world has discovered that socialism fails, always has failed, and always will fail. They are LOWERING TAXES and trying to eliminate bad regulations and policies. Europe is actually trying to get away from the disastrous Kyoto Protocols, which have strangled industry and individuals with regulations and taxes that have made energy production far too expensive.
Only the United States has elected a Marxist for its CEO and Commander in Chief. And CEO of the American economy is NOT a Constitutional duty of the President. The myth of FDR propped up that error.
“England’s catastrophic “South Sea Bubble,” the first really huge speculation crash…”
For a modern-style crash on a smaller scale, Beverly, the Dutch Tulip Mania of 1636 preceded the South Sea Bubble by 84 years and wiped out people from tradesmen to nobles in the Netherlands, sometimes for a single tulip bulb. At least the South Sea Bubble was over real estate, something more intrinsically useful than tulips. But both can get vastly overpriced, and when that happens, a crash is inevitable.
I too fear that Obama will follow the worst of his instincts and impose controls and raise taxes in the interest of “fairness” that have little to do with sound economic policy. For example, why is it “fair” that the rich pay a higher percentage of their incomes, when they would still pay more money under the same rate as the rest of us? How does punishing the wealthy for being successful benefit the rest of us? Why should banks be forced to make loans to high-risk borrowers and then have taxpayers foot the bill when the loans go belly-up? Why does it make sense to restrict the growth of electrical power plants? I guess the first few months of 2009 will tell if Obama is listening to Volcker and Buffett, or Frank and Raines. If the latter, hold on for a very bumpy ride.
Once again demonstrating Orwell’s genius about Political Man.
Perhaps that demonstrates more that Orwell knew just how well the socialist mind would turn out.
The only good thing ensued from this crisis would be the disintegration of EU, jettisoning of AGW and politcorrectness. As economy deteriorates, euroskeptics and nationalists would come to power in Europe. It will be domino effect, one country after another, stopping immigration, establishing protectionist barriers and border control, like in USSR in 1989-91.
Using my mother as a guide, however, the perception of the majority of Americans at the time–and as long as they lived–was that FDR improved things. My guess is that, for most of these people, such views would be impervious to economic analyses and charts. It was something they felt, and continue to feel.
Propaganda is very powerful when it can be combined with hard power in the form of the US Presidency.
The Community Reinvestment Act had nothing whatsoever to do with the current market crash. This is simply right-wing propaganda with no empirical basis. The vast majority of loans made under that program have been paid faithfully.
The subprime crisis was created primarily by deregulation of the securities industry (it’s very complicated to explain, but that’s the short answer). It came as a result of the deregulation enacted by the Phil Gramm-sponsored repeal of the Glass-Steagall Act (as well as other factors too numerous to go into here). It’s a very easy cause-and-effect to trace. There was a lack of accountability, and a failure to oversee the risk pricing activities of Standard and Poors, Moody’s, etc. which was due to a large degree because of the policies pushed by deregulators in Washington. It is simply ludicrous to suggest that the markets would have been fine had the government just ‘deregulated more’.
Reagan ushered in a series of crashes which hadn’t been seen in previous decades. I am not saying everything Reagan did was terrible — there was excessive regulation at the time. But clearly now is the time to move the pendulum back.
You’ve been duped Mitsu.
How can corporations and GSE’s continue to carry a debt when defaulters of loans between $400,000 and $600,000 in home values with subprime rates can’t afford their home, values have plummeted and foreclosures are at record highs.
What regulation Mitsu would’ve stopped the American people from trying to have more house than they could afford and grabbing equity from their home values to buy cars, and subprime rates allowing American to afford all this?
You have the big bad corporation mentality. It is regulation that made all this possible. It is the Democrats who pushed for this ‘affordable’ housing through subprime rate mess.
When Values in homes are half of what they were – nobody is going to continue and try to pay the mortgage on said value of 2 years ago. They walk away.
What regulation Mitsu? Please. Try to treat us like we are adults and don’t just say, “It’s too complicated”. It’s really rather common sense.
Mitsu wrote, “It is simply ludicrous to suggest that the markets would have been fine had the government just ‘deregulated more’.
”
Nobody is saying that. You argued against your own false premise. it is govt regulation in the wrong direction that hurt us all. How about a situation where you have to put 10% down on your house and you have to pay a fixed 15 or 30 years rate on your house? Don’t monkey around trying to make a house fit in your budget when it doesn’t.
All of the bubbles and crashes in the last 30 years Mitsu are people generated with decision that are made that aren’t prudent.
You and many other fail to learn the lessons of these bubbles and crashes.
Live conservatively, work hard, save for the rainy day, and don’t propose tax increases on corporations, capital gains and upper income earners leading into a recession. In the other thread you said it’s ONE modest increase letting tax cuts expire. No. It is a series of tax increases creating more dependency and having people in the top 1/5th of the economy divest from the market, brace themselves, spend less and essentially hire less as they see what is coming.
Obama needs to apologize for his proposals. Let the American public know he now undestands economics. Let the American public know that he sees the light and will reduce capital gains taxes and will not raise them when he is president, lower corporate taxes and usher in a spirit of opportunity where people do not feel like they have to brace themselves for what’s coming anymore.
We need more opportunity and less government dependency. You don’t get that with tax rate increases.
Baklava, he’s been like that for a long time, way before he ever started posting at the comment section here.
I’m not saying it’s too complicated to explain, just that I can’t do it justice in the short time I have to write these posts. However, in brief, as I mentioned before, loans made under the CRA in general have performed well and have not been part of the subprime lending disaster. For example, this article in Business Week by Aaron Pressman explains it:
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
“Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley”
To understand this more clearly, the fundamental flaw that was involved in the subprime mess was the fact that the risk evaluation models of the collateralized debt obligations made the incorrect assumption that subprime mortgage defaults were independent of each other (consider this article:
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VCY-4B3MTRT-5&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_version=1&_urlVersion=0&_userid=10&md5=9ae76328fec6af8cab73eb343ca65ee5
which criticized the risk evaluation algorithms in use by S&P’s and Moody’s, etc.) Of course, it is possible that even with enhanced government oversight this error would have been overlooked, but it certainly didn’t help that, for example, credit default swaps were nearly entirely unregulated, and the securities industry as a whole was largely left alone. Even Alan Greenspan has admitted he was wrong to assume the private sector could police itself without government prodding and oversight.
You and many other fail to learn the lessons of these bubbles and crashes.
Good judgment requires a specific character or kind of character, Baklava. Some philosophical assumptions, however, will change one’s character. For example, a person that believes genetics determines merit will also naturally not be consistent with the character of the American people. He won’t be like us because he won’t believe in the same things we do about human nature, and thus, his character will be different.
Mitsu is the same way. He has certain beliefs, which when taken as a whole, produces a different judgment of things. I see it as a worse judgment of things but he sees it as the better judgment. Even if Mitsu and I or Mitsu and Neo would “agree” on a conclusion, we would never agree on the methods used to get there. Philosophies are too apart for that.
One other thing: the reason subprime mortgages skyrocketed had nothing to do with the CRA. It had to do with the fact that lenders could repackage these loans into securities and sell them off, making a tidy profit, without having to worry about long-term consequences. This entire market came into being after the 1999 deregulation sponsored by Phil Gramm. Before this, subprime mortgages were far more rare, CRA or no CRA, and even then these mortgages were made more responsibly (especially those made under the CRA).
which criticized the risk evaluation algorithms in use by S&P’s and Moody’s, etc.) Of course, it is possible that even with enhanced government oversight this error would have been overlooked, but it certainly didn’t help that, for example, credit default swaps were nearly entirely unregulated, and the securities industry as a whole was largely left alone. Even Alan Greenspan has admitted he was wrong to assume the private sector could police itself without government prodding and oversight.
A person that trusts the government, yet distrusts the companies that will corrupt the government (maybe the other way around too) once the government forces those companies to rely upon government aid (and thus special interest groups), is a person with a judgment of individuals and institutions entirely different from those that don’t trust the government.
It’s not even about the goals (good markets, healthy markets, right regulation, wrong de-regulation) anymore. Now it is about “can this person see what causes what and how the details form a greater whole and can he see the greater whole accurately or not”.
>Philosophies
Yes, we can simply say we have different assumptions, but I still believe it is quite possible to look at the empirical data and draw conclusions. The data quite clearly shows the CRA was not responsible for the subprime mess. Sure, one can argue that people “should have” made better investment decisions, but the point is, people don’t. History has shown, over and over again, that when markets are left too unregulated, they experience massive instability. Sure, maybe someday we’ll evolve to the point where people will just magically make better investment decisions without government oversight — at which point government oversight can be relaxed. Until that day, however, adding some government oversight into the mix is likely to produce better long-term economic outcomes. That is my argument.
This is somewhat akin to: should we wear seatbelts or not? If everyone was a perfect driver we wouldn’t need seatbelts, air bags, crumple zones, ABS, etc. One can say, well, people should just drive with no seatbelts because, in a perfect world, everyone would be a perfect driver, there would be no accidents, etc. However, in the real world people are not perfect drivers. They don’t always make the ideal rational choices. In such a world, it has been shown time and again that it helps to have SOME protective measures in place.
How much is a matter of calibration. It’s an empirical as well as “philosophical” question. But we can look to the actual empirical data to find some insight.
>trusts the government
Okay, one last comment. My point is, again, that it is not a matter of trusting the government vs trusting corporations. I don’t trust either, of course. Both can make mistakes, or commit crimes, etc. In my view, you have some government oversight of the private sector. You have democratic and judicial oversight of the government. You have a free press to shine a light on both. Etc. Checks and balances. I don’t believe in merely “trusting government” or “trusting” any other institution on its own. I believe in balancing powers against each other to achieve a better overall result.
Mitsu,
Baklava is correct, and you are simply wrong.
The current mtg crisis was, indeed, spawned and exacerbated by govt interference, not deregulation. It all started with the Community Reinvestment Act which FORCED banks to make imprudent loans under the penalty of govt interference in their own growth and charges of “racism.” Once the govt forced this process, these institutions, who are in business to make money, figured that they might as well make money at this since they were forced by the govt to do it anyway. Thus the process of securitization, or turning mtgs into marketable securities.
In the olden days, banks made mtgs and sat on most of that paper while the mtg was paid off over 30 years. It was to their benefit to do stringent underwriting since they were “on the hook” if the loan went bad.
The govt stepped in and said that this was not acceptable because banks were only making loans to people who could pay them back how dare they!). Thus, people who couldn’t afford to buy a house couldn’t get a loan to buy a house. The govt said that this was not fair and racist to only loan money to people who could pay it back (remember the controversy over “red-lining”?); people who couldn’t pay loans back also deserved to receive loans. Mitsu, is the illogic of the govt’s reasoning beginning to set in here?
Once the govt opened the door, the securitization process was created to make mtgs marketable securities. It was no longer in a bank’s interest to do stringent or diligent underwrtiting; the govt would accuse them of racism and they were going to sell the loan off anyway. It wouldn’t be their problem. Besides diligent underwriting was an expense that no longer benefitted them.
You are correct that this crisis represents only a small number of the total of outstanding mtgs, but so what? It is still this small number of mtgs ($700B) that has caused the crisis; a small hole can still sink a large boat. Would you say “don’t worry about that one rabid racoon since most racoons are not rabid anyway?”
Those who say that government interference didn’t cause this and dereglation did are either woefully uninformed or liars; Barney Frank and Chris Dodd are in that latter category.
Mitsu, one other comment. You seem to be trying to defend the Community Reinvestment Act as not the cause of the crisis simply because it opened the door but didn’t cause the mtg industry to do what it did.
That’s simply absurd. It DID open the door, and the govt actively pushed institutions through that door. It was a sine qua non, purely and simply. Without the CRA there is no mtg crisis. To say otherwise is like saying that the US Govt had no responsibility for the atomic age because all it did was sponsor something called the Manhattan Project.
(An aside, I hope we’re not looking at another big bomb coming out of Chicago.$)
Mitsu is correct that the inadequate models used for evaluation of CDOs played a big role in the problem. Read Nicholas Taleb’s books (Fooled by Randomness, The Black Swan) for an entertaining look at the problems with mathematics of the kind used in these models.
However, there is no reason to believe that government-controlled activities are exempt from such fallacies. Mathematical optimization models were extensively used in the control of the Soviet Union’s economy; the performance was a little bit lacking.
The data quite clearly shows the CRA was not responsible for the subprime mess.
I cannot agree that the data speaks for itself. Data is just data, it takes a human mind to interpret it and communicate what it means.
Sure, one can argue that people “should have” made better investment decisions, but the point is, people don’t.
There are many sociological stimuli that can be used to make large groups of people do one thing as opposed to another. It is not just the simple recognition that “people don’t always make optimal decisions for themselves”.
History has shown, over and over again, that when markets are left too unregulated, they experience massive instability.
The counter-logic would be that if all the regulations put into place after previous market busts doesn’t prevent future ones, what exactly is the point of the logic of saying it is lack of regulation that causes such busts? It might as well be the new regulations that were tacked on which produced unintended consequences that could be causing busts and you would never know it until one happened.
So, no, history does not show any such thing. History shows that causality works and that one or many things can lead to one or many things. But since the situation now is different, always, from the situation in the past, you cannot copper plate a template from history and believe it can be used to fix today’s problems. You are eventually going to run into the butterfly effect, combined with the fog of war (except the economic version of it).
Sure, maybe someday we’ll evolve to the point where people will just magically make better investment decisions without government oversight – at which point government oversight can be relaxed
And how do you think government oversight will work given that these “magically” evolved people would still be absent from government?
Until that day, however, adding some government oversight into the mix is likely to produce better long-term economic outcomes. That is my argument.
And my argument is that it is people that matter. People’s decisions can be predicted and modified, which means that deregulation and regulation can be both good and bad depending on who is doing it. When you speak of government and ignore the individuals in question, you are ignoring the lessons of history. History doesn’t teach that A causes B, so that means we can use it to predict and handle problems now. History teaches that human beings do A because of B and that means if you have human beings, you had better beware that they will do the same things now, for the same reasons as before, as they did it in the past.
This has nothing to do with government regulations or the details you continually pound on, Mitsu, and everything to do with the ability of individuals to judge, make decisions, and benefit from them (or suffer the consequences of them).
n such a world, it has been shown time and again that it helps to have SOME protective measures in place.
There are no such things as protective measures once you have deleted the human component from it. Deleting the human component from such things and only talking about “protection”, as it is some kind of universal physics phenomenon, does no good to human society, Mitsu.
Mitsu, is the illogic of the govt’s reasoning beginning to set in here?
Mitsu discounts the human component in large open systems and believes that government regulation is consistent enough historically as to be a law of physics. THus, like any law of physics, you can use government regulation with almost mathematical precision. De-regulation must then be the problem that caused the mortage crisis because if de-regulation was not the problem, then this would mean that somehow Mitsu’s laws of physics were wrong and Mitsu’s laws of government regulation can’t be wrong.
Mitsu can get out of this trap by accepting human limitations and fallibility but he hasn’t done so far.
I don’t believe in merely “trusting government” or “trusting” any other institution on its own. I believe in balancing powers against each other to achieve a better overall result.
By that logic you would have already recognized that both de-regulation and regulation are necessary because neither are purely solutions or problem causers.
However, you still continue with the line that de-regulation is the problem. THat’s not a balance of powers.
One can say, well, people should just drive with no seatbelts because, in a perfect world, everyone would be a perfect driver, there would be no accidents, etc.
To clarify something, when people here talk about de-regulation, they aren’t talking about a perfect world.
They are talking about how human motivations and decisions, in a free market, already balance each other out through the costs and benefits of one’s action. If something costs too much, people won’t do it (such as buying). If it costs too little, people will react another way.
One other thing: the reason subprime mortgages skyrocketed had nothing to do with the CRA. It had to do with the fact that lenders could repackage these loans into securities and sell them off, making a tidy profit, without having to worry about long-term consequences.
For example, you seem to recognize that there is this very check and balance operating in a free market but you don’t admit the influence on people’s decision making ability once the government starts making up new regulations requiring people to do things on pain of imprisonment and fines.
You’re missing half the equation here, Mitsu. It’s gonna be very hard to create any balance of power of yours given just half the balance scale.
Ymarsaker,
an excellent clarification. You make me wonder if this interpretation (that govt regulation can be used w/ mathematical precision like a law of physics) is indigenous to most people who advocate big govt (statists). It might explain quite a lot.
I’ve long said that the Democrats don’t understand foreign policy, and the Republicans don’t understand domestic policy. Not much has been posted here to change that opinion.
Value is almost entirely a matter of perception, and by playing on those perceptions in mass quantities you can create any economic upturn or downturn you want. FDR did get the US out of the Depression, by creating among the public the impression that there was value in production and/or service. Republicans, on the other hand, tend to think economics is as solid a discipline as mathematics, and never seem to be able to adjust to the fact that wealth can be created or destroyed on the whims of the public, and at the behest of the current crop of artisans and entertainers.
Arguing over the reasons why the economy tanked just before the 2008 election is like the Democrats arguing over which magic set of words will make Osama bin Laden and all his terrorists lay down their weapons and build a space elevator in the name of peace and unicorns. It’s all based from a flawed premise that there WAS anything that could have been done within the parameters set, when there quite frankly wasn’t, and still isn’t. The economy will recover when people are convinced it’s going to recover, and they’re going to be convinced by propaganda or outright lies, not by realism or reason.
I’m of several minds about the 1977 Community Reinvestment Act. Which led to the formation of Sallie Mae and Freddie Mac. I want to point out that prior to 1995, when President Clinton, Janet Reno, and Jaime Gorelick altered the way the Act was to be interpreted by the banking system, the program was not creating any serious problems. There were some underwriting standards. Clinton and Reno threw them out, and the problems began in earnest afterwards. I would maintain that the Act was never intended to put people in homes who had no realistic chance of paying back the mortgage. It was not meant to help flippers.
It’s very clear that the Dems are involved in damage control, and they are counting on the ignorance of the public – a public already primed to despise George Bush and his party – to fob it off on to those who were not the cause of the problem. One of the ways they deflect blame is to blame, in vague terms, “deregulation” or “executive compensation” (how about Jaime Gorelick’s or Mr. Raines’ compensation?) or “securitization.”
The real cause may be the legal loopholes that the Act had which allowed President Clinton and Janet Reno to threaten the banks with prosecution if they didn’t start throwing the cash to the four winds.
I’m just f***ing sick of this whole degenerate way the Dems have kicked sand in people’s eyes, they keep the system intact, get it bailed out, and no hope that the system will be corrected so that this does not happen again. The underwriting standards are not reformed one iota.
Check this out.
Link
As I said before, most economists have concluded the CRA had little or nothing to do with the current subprime crisis. It was the CDO market which created the huge incentive to sell mortgages to people who couldn’t afford them — not the CRA. There were and are underwriting standards in the CRA and as I’ve noted before, loans made under the CRA have performed generally quite well.
If you have contrary data, feel free to post it. Simply asserting the CRA is the reason for the problem, despite the total lack of empirical evidence for this is not a rational argument.
As for “balance of powers” — one thing that constantly surprises me about you guys is that you seem to think everything has to be applied to one extreme or another. I’ve already pointed out that I am not against all deregulation instituted by Reagan and continued by Bush. I am NOT saying that the state is the solution to all problems, nor even that regulation would necessarily have prevented the housing bubble.
What I am saying, and I don’t know why this is so hard to understand, is that one needs to *calibrate a balance* between regulation and deregulation, one needs to regulate in an intelligent, targeted manner, and one should make these calibration based not on ideology but on empirical evidence. To my mind it is obvious that there’s such a thing as too much regulation, and such as thing as too little.
But as I keep saying, comparisons with the Soviet Union are ridiculous. The economies of most Western European countries are vastly more regulated than ours, yet they produce comparable GDP per capita to our economy. The choice is not between the Soviet Union and the US, it is between France and the US. The standard of living is perfectly fine in France, Sweden, etc. It’s not some sort of Stalinist hell hole.
As I’ve said many times, I am not in favor of placing the balance anywhere close to where they have it in European social democratic states. For me, it should stay on the relatively deregulated end of the spectrum. However, it is obvious that we’ve gone too far in that direction and it is time to ratchet it back a bit.
Mitsu,
http://www.taxfoundation.org/publications/show/250.html
Numbers of people
1) The top 10% of income earners grew from 12.8 to 13.5 million people between 2000 and 2006 – a 5.4% growth of number of people
2) The bottom 50% of income earners grew from 64.1 to 67.8 million people between the years of 2000 to 2006 – a 5.7% growth in the number of people
Income Earned
1) You were in the top 10% of income earners if you earned $92,100 in 2000 and $108,900 in 2006 – An 18% change
2) You were in the bottom 50% of income earners if you earned $27,000 in 2000 and $32,000 in 2006 – An 18% change
Share of Taxes Paid
1) The top 10% of income earners paid 67.3 % of the income taxes in 2000 and that grew to 70.8% of the income taxes in 2006 – A 5.2% increase in the share of income taxes
2) The bottom 50% of incme earners paid 3.9% of the income taxes in 2000 and that shrunk to 3% of the income taxes in 2006 – A 14% decrease in the share of taxes.
3) For reference the group between the bottom 50% and the top 10% paid 28.8% of the income taxes in 2000 and 26.3 % of the income taxes in 2006 – A 9% decrease in their share of taxes.
Our tax structure is extremely vulnerable to revenue losses for a few reasons:
1) States tax property with high values at higher rates
2) The federal government and state governments tax income earners at the top brackets at higher rates
3) When there is an economic downturn or values in homes plummet – revenue losses into the government plummets at steep levels.
We have people like Arnold in CA and Barnery Frank and Obama saying in order to close that gap leading into a recession that we need to increase tax rates on higher incomes —– that changes behavior Mitsu. It changes people to brace themselves, hold on, tighten their belts and people see what they need to do already for a recession and you will have them holding on to even more.
Simply put – what we need is to have Obama apologize, give a cold hard recognition of his lessons learned, let people know that he wants people to ‘invest’ not ‘divest’ from the market and propose lower capital gains tax rates, lower corporate tax rates, and drop the higher income tax rates.
Mitsu wrote funnily, “incentive to sell mortgages to people who couldn’t afford them”
The regulations which ‘allowed’ this crap and the people who bought the loans share blame. I was approached about a teaser rate loan back in 1996. Do you think I took it Mitsu? NO
I am responsible. I have a 9 year old minivan. I have a modest house that I bought in 1997. I know people who got the $500,000+ houses and bought trucks and cars with equity and had subprime rates.
These things predated Bush and were not part of a ‘deregulation’ era but an era of government trying to cash in. Values increased giving governments more revenue.
We as people as Sarah said need to “never let this happen again”. This is our doing. You can’t blame a corporate big wig or a government politician alone.
All of us should learn the lessons of living a lifestyle where money doesn’t come easy. I should NOT have to pay for people making poor decisions over and over.
The safety net for the elderly and non-able bodied and our national security depend on us changing this nation so that we do not head towards depression…. A lot of people suffer in that situation.
My one post had a paragraph that should’ve read –
2) The bottom 50% of incme earners paid 3.9% of the income taxes in 2000 and that shrunk to 3% of the income taxes in 2006 – A
124% decrease in the share of taxes.FDR’s policies prolonged Depression by 7 years, UCLA economists calculate
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409
Well, yes, but France doesn’t have to do the heavy lifting we do, with respect to military power. Someone has to keep sea lanes open for commerce, and for over 200 years that has been Anglo-Saxon navies. We simply can’t afford to be French. Everyone’s economy would suffer.
That said, the per capita GDP (PPP) for 2007 show the USA at $47k and France at $33.5k. That alone is a 29% drop . . .
And we have to keep in mind the failure France’s socialist system has had attempting to assimilate immigrants. We need a free market system where people are encouraged to assimilate, learn the language, work, etc., or things will decay fast; socialism will encourage immigration and discourage assimilation.
What a mild and patient chap this Mitsu is. I wish he would stop struggling against the innumerate ideological shibboleths that keep me in fine claret by leading innocent investor lambs to slaughter.
There is an irony: when USA is attempting to introduce soft socialism, France is heading in the opposite direction, trying to privatize its railroad industry and curb entitlements to avoid economic disaster. She, probably, will fail to do so, because it is always easier to expand welfare benefits than to slash them, but the alternative is national bankruptcy. Once this almost happened in Britain, and only drastic and painful free market reforms saved her. Why to dig deeper into this hole, if eventually you would have to demolish this ruinous move?