The fact that banks undertook more risky loans and more risky methods to make those loans obtain a profit is no social benefit nor economic benefit.

Are you slamming the quasi Austrian/Randian model of Greenspan’s economic viewpoint or are you lamenting the general lack of vision that he personally possessed to predict our current collapse?

“Then you will see the rise of the double standard — the men who live by force, yet count on those who live by trade to create the value of their looted money — the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law — men who use force to seize the wealth of disarmed victims — then money becomes its creators’ avenger. Such looters believe it safe to rob defenseless men, once they’ve passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter.

“Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

For the politicians, I’m afraid it’s a case of the Blind Men and the Elephant, compounded by political interests and fears. For the moment, I would rather have a solution than get distracted by partisan score-settling.

Having said that, Ms. Gorelick really is a piece of work: CRA, wall of separation on domestic counter-terrorism, 9/11 Commission, FNMA Board of Directors, and probably many other things than I can remember off the top of my head. She somehow emerges from all that with reputation intact, influence, and riches. Wow.

I have never been to Rochester, NH. I hope you don’t have to commute down to Boston.

Thank you for your above post. For the record, I agree with everything you have written. A few of your suggestions I have argued for elsewhere. But I still think the tipping point was Gorelick’s action (this toxic woman just keeps on giving us crap sandwiches, eh?).

Back in September I though they should suspend the mark-to-market rules for properties in trouble. I realize that a lot of people are managing to make their payments, despite the environment we are in. Just doing that step, alone, would greatly slow the deterioration of bank capital.

I continue to marvel over the fact that people still buy at the peak of the market, whether it be homes or shares of stock. My wife and I bought our first home in 1999. During that time we’ve seen the city of Rochester, NH assess the value of our property to more than double what we paid for it. It’s shocking how people are actually paying these prices for homes. But, many people believe the line that the realtors feed them: that housing prices are only going higher and higher, so suck it up and pay now!

After a few years, the kids grew enough where I could head back out and try to “catch up”. I repaired my credit enough to go house hunting. I was shocked at the prices of houses. None – and I mean none – of the houses I saw were worth near the asking price. Yet people were buying homes at lightning speed, for the same reason a dog licks his crotch. If one of the two breadwinners lost a job, the house was up for sale in 3 months. There were brand new neighborhoods in my area of the time full of big expensive homes. For sale signs popped up as regularly as the mortgage payment became due.
I never bought a house. Still don’t own one. Perhaps if they dropped even further, I would consider it. Of course now, I may be out of a job tomorrow.

It will be shown tomorrow, 2/16 at 9pm & midnight, ET as well as 3/1 at midnight ET and 3/15 at 9pm ET. I recommend it for edification on how these loans got made and how/why they got bought by Wall St.

The one business that contributed the most to the bad loans was the mortgage brokerage business. As one investor asked, “What is the one business that does $1 trillion dollars of business every year with consumers and has no regulation? Answer: The mortgage brokerage business.”

I was shocked to see the way some of these Southern California brokers were operating. They knew the loans were shaky if housing prices went down, but their rationalization was that if they didn’t do the loans, someone else would.

The program examines CDOs in some detail – at least enough to get a feel for how complex they are. They also interviewed one of the quants that did the math to put the CDOs together.

To give an example of how poisoned the well is on these instruments there is the infamous story of Narvik, Norway. They borrowed to buy some CDOs that would pay them a nice stream of income to use to cover some city expenses. These CDOs are nearly worthless today even though they are not made up of mortgages but of corporate bonds, which, if the companies they showed as being in the CDOs, should still be quite viable. However, the CDOs cannot be sold for anything like what they paid for them, although I assume the income stream is still mostly unimpaired.

I live in the Puget Sound area and I have been active in owning investment property in this area since 1995. So, I have applied for and received several loans during that bubble period. I have been mystified by these sub-primes, alt-As, and “liar’s loans” because I have never been able to get anything but a fully documented loan. And that’s with a FICO in the high 700s. It shocked me to see what the brokers were doing in S. California. It bordered on the criminal. No, it was criminal. I can only assume that Las Vegas, Arizona, and Florida had similar high flying, gun slinging mortgage brokers doing the same things.

I visited a friend in Naples, Florida in 2005. There were many, many, subdivisions springing up there and people were buying houses before the foundations were poured. Then reselling them at a profit when the houses were completed. They never had the intention of moving into them. This was a sideline business for some people. I knew that such frenetic speculation could not continue forever, but a lot of people did. The underlying belief was that home prices would continue to go up indefinitely. As long as prices went up even a little each year, all would be well. It was contrary to every thing I had seen in real estate markets over 48 years – I bought my first house in 1960.
During that time I have seen home prices fall in Florida (once), San Diego (twice) and Denver (three times). On the other hand, all the prices eventually came back and went up further…..after a time. I sold all my rental properties in 2007 because things were getting a bit frothy here. But they were never like S. California. Puget Sound is now going through a decline in real property prices and slow sales, but nothing like California, Las Vegas, Arizona, and Florida.

Personally, I’m in favor of regulating mortgage brokers going forward. Secondly, I think Wall St. has got to rein in the quants and their very creative abilities to concoct more and more exotic securities.

Alan Greenspan is interviewed during the program. I agree with his observation about greed and bad judgment. It isn’t possible to outlaw greed or bad judgment. We won’t do anything this foolish again soon, but some bubble and accompanying bust will occur sometime down the road.