Political Matrix

[oabmarcus]

By the way, it's nice to see that you and a few others here understand the root cause of the financial meltdown.  It's not hard to understand, if you're paying attention and not just guzzling down the spin of the culprits busy pointing the finger everwhere else, and NOW claiming to be fixing the system that had been working pretty well until they f*cked it up. If there's any justice after this life, Dodd and Franks will be cleaning toilets in Hell.

The Subprime Crisis: Cause, Effect, and Consequences,

Wait, just those two? No fault from Greenspan, no fault from Clinton, no fault from Reagan?

[Scarpia]

By the way, it's nice to see that you and a few others here understand the root cause of the financial meltdown.  It's not hard to understand, if you're paying attention and not just guzzling down the spin of the culprits busy pointing the finger everwhere else, and NOW claiming to be fixing the system that had been working pretty well until they f*cked it up.  If there's any justice after this life, Dodd and Franks will be cleaning toilets in Hell.

The Subprime Crisis: Cause, Effect, and Consequences,

It is certainly true that the good intentioned effort to liberalize lending standards was a major contributor to the meltdown.  However, I don't think the financial services sector is blameless.  They exploited this environment by invented loan products that no financially literate person would ever agree to, with the intention of selling the resulting loans to third parties without making fair disclosure of the true prospects of those loans.  Not that we should rely on the good wishes of bankers, but if there were regulations forcing adequate transparency and disclosure the self-interest of the financial service industry would not have been at crossed purposes with the economy as a whole.

[Philoctetes]

It is certainly true that the good intentioned effort to liberalize lending standards was a major contributor to the meltdown.  However, I don't think the financial services sector is blameless.  They exploited this environment by invented loan products that no financially literate person would ever agree to, with the intention of selling the resulting loans to third parties without making fair disclosure of the true prospects of those loans.  Not that we should rely on the good wishes of bankers, but if there were regulations forcing adequate transparency and disclosure the self-interest of the financial service industry would not have been at crossed purposes with the economy as a whole.

Fantastic post.

[Philoctetes]

Wait, just those two? No fault from Greenspan, no fault from Clinton, no fault from Reagan?

Don't forget Carter, the one who signed that silly thing into law, but I don't think anyone is denying the culpability of the government.

[oabmarcus]

Well, first off, the investor would follow one of the prime rules of investment: diversify.  Don't out all one's eggs in the same basket.   If you invest in ten companies, one may go bust and you lose one tenth of your money.  But you'll keep nine tenths of the rest.

Yes, but the point is, if one company can do this and get away with it. EVERY company will practice insider trading and get away with it. Then you diversification strategy doesn't work.

And do his own research, don't trust the company's propaganda.

How? Bribe the controller? Become drinking buddies with the CFO? You see how difficult that is? Without disclosure?

In other words, if you are foolish enough to trust all your money to one company, too bad.  Your folly does not require me to come help you.  (Of course, there would be no rule to say that I shouldn't help you--if I choose to do so.)Pharma.

really? You wouldn't be so tough, if it was you or one of your family member who got screwed.

The same sort of view informs the libertarian attitude on the "War on Drugs".  First, it's battling human nature.  Second,  anyone who wants to should be free to use drugs.  If they want to ruin their lives, or are foolish enough to risk ruining their lives,  that's their choice, and it must be allowed. 

I actually agree with you 100% here. 

But notice that your examples would all involve fraud by the company management, meaning the busted stockholders could sue them for their losses or they could be criminally prosecuted, depending on the exact circumstances.  This without any intervention from government regulation.

My examples are just one in a million ways institutions can screw you out of your money. Rating agencies can collude (they have already done it!) with bond underwriters to issue crappy bonds with AAA ratings. You can diversify the heck you want, but those AAA bonds aren't prime, and you can sue them. Sure, just like trying to sue Madoff after he turned himself in. In most cases, most of the money will be gone.

Regulation works only if there would be an iron wall by which regulators and regulatees could be divided forever.  But unfortunately the pool of potential regulators is also the same as the people work in the business that is regulated.  No one else has the requisite knowledge that is needed if regulation is to have any chance of working.

Instead what you have is a nexus of business and regulators--FDA and Big Pharma, for instance, operating hand in hand, usually to the benefit of Big Pharma.

I agree 100% with that too.

[Todd]

with the intention of selling the resulting loans to third parties without making fair disclosure of the true prospects of those loans.

This isn't necessarily the case.  The fact is that most people who created and packaged the deals disclosed what they perceived were realistic prospects for the loans, and the security tranches were specifically structured to meet those perceptions.  It's also worth noting that the security originators were required to assume ownership of the unsecured tranches, which contributed significantly to the substantial losses at some of the shops (eg, Merrill, Lehman).  Part of the irony here is that, at least early on, the firms wanted to own those tranches because they had the highest potential yield.

A big part of the problem comes down to the silly thinking that took hold across the industry; some of the underlying assumptions about asset valuation and growth were simply faulty.  Horribly, horribly faulty.  That's one of the reasons that option ARMs grew so rapidly right near the end; people were so confident in valuation growth that they were willing to accept negative amortization on even piggyback product (ie, 100%+ financing).  (Many people on the "ground level" at originators and servicers started raising red flags when option ARMs started filling the pipeline.)  And then there was the opacity of the product that some mortgage brokers provided.  Better due diligence should have been undertaken, of course, but believe it or not, the diligence that did occur was being signed off on through official processes.  None of this is to say that fraud or other malfeasance did not occur - some most certainly did - but rather that much of what happened was not the result of an intentional attempt to mislead.  Greed and stupidity took over. 

[Philoctetes]

This isn't necessarily the case.  The fact is that most people who created and packaged the deals disclosed what they perceived were realistic prospects for the loans, and the security tranches were specifically structured to meet those perceptions.  It's also worth noting that the security originators were required to assume ownership of the unsecured tranches, which contributed significantly to the substantial losses at some of the shops (eg, Merrill, Lehman).  Part of the irony here is that, at least early on, the firms wanted to own those tranches because they had the highest potential yield.

A big part of the problem comes down to the silly thinking that took hold across the industry; some of the underlying assumptions about asset valuation and growth were simply faulty.  Horribly, horribly faulty.  That's one of the reasons that option ARMs grew so rapidly right near the end; people were so confident in valuation growth that they were willing to accept negative amortization on even piggyback product (ie, 100%+ financing).  (Many people on the "ground level" at originators and servicers started raising red flags when option ARMs started filling the pipeline.)  And then there was the opacity of the product that some mortgage brokers provided.  Better due diligence should have been undertaken, of course, but believe it or not, the diligence that did occur was being signed off on through official processes.  None of this is to say that fraud or other malfeasance did not occur - some most certainly did - but rather that much of what happened was not the result of an intentional attempt to mislead.  Greed and stupidity took over.

Damn, we're on our way to having an almost legitimate topic.

[Scarpia]

This isn't necessarily the case.  The fact is that most people who created and packaged the deals disclosed what they perceived were realistic prospects for the loans, and the security tranches were specifically structured to meet those perceptions.  It's also worth noting that the security originators were required to assume ownership of the unsecured tranches, which contributed significantly to the substantial losses at some of the shops (eg, Merrill, Lehman).  Part of the irony here is that, at least early on, the firms wanted to own those tranches because they had the highest potential yield.

A big part of the problem comes down to the silly thinking that took hold across the industry; some of the underlying assumptions about asset valuation and growth were simply faulty.  Horribly, horribly faulty.  That's one of the reasons that option ARMs grew so rapidly right near the end; people were so confident in valuation growth that they were willing to accept negative amortization on even piggyback product (ie, 100%+ financing).  (Many people on the "ground level" at originators and servicers started raising red flags when option ARMs started filling the pipeline.)  And then there was the opacity of the product that some mortgage brokers provided.  Better due diligence should have been undertaken, of course, but believe it or not, the diligence that did occur was being signed off on through official processes.  None of this is to say that fraud or other malfeasance did not occur - some most certainly did - but rather that much of what happened was not the result of an intentional attempt to mislead.  Greed and stupidity took over.

I guess you could claim that under the delusion that property prices would continue to explode without bound even the most absurd mortgage terms would be justified.   In any case, the mechanism you are describing seems to hinge more on delusional financial speculation, rather than attempts by some in government to increase home ownership, although one may have facilitated the other.

[Philoctetes]

I guess you could claim that under the delusion that property prices would continue to explode without bound even the most absurd mortgage terms would be justified.   In any case, the mechanism you are describing seems to hinge more on delusional financial speculation, rather than attempts by some in government to increase home ownership, although one may have facilitated the other.

Well I think that Todd hit it on the nose, greed and stupidity. I think it was the government's backing of the housing market that make the financial market feel secure in its delusional housing price projections.

[Luke]

Sigh. Are you guys still at it, conversing in fully-formed sentences and exchanging differing but sane opinions in a rational manner without resorting to CAPS? Just quit, will you, I want to read more of Teresa's fantastical theories... 

[Todd]

I guess you could claim that under the delusion that property prices would continue to explode without bound even the most absurd mortgage terms would be justified.

I don't think it ever got that far, but close.  In 2006 and 2007, people were racing to underwrite more questionable product – not just option ARMs, but under-documented loans (eg, NINJA loans) as well – because there really was a belief that by the time the five year (or whatever timeline) recast was reached, or even a year or two hence, the property value would be such that it could be either refinanced or foreclosed profitably. 

Part of this mind-set was cynical sales pitch, but it would not have continued had the underlying assumptions not been believed, at least to some extent.

In any case, the mechanism you are describing seems to hinge more on delusional financial speculation, rather than attempts by some in government to increase home ownership, although one may have facilitated the other.

There was an element of delusional thinking, no doubt.  There were always naysayers, but as is so often the case in the corporate world (and government, too), naysayers are ignored.  The government, or Fannie and Freddie at any rate, did, recklessly, encourage and even strong arm lenders to make loans that should never have been made, but anyone who wants to try to blame the government for the meltdown is ignoring the fact that much sub-prime product had nothing to do with Fannie or Freddie.  They have standards, albeit surprisingly low ones. 

(And everyone, do remember that until they were taken into receivership, Fannie and Freddie were not backed by the full faith and credit of the Federal government.  Wink, wink.)

[oabmarcus]

Sigh. Are you guys still at it, conversing in fully-formed sentences and exchanging differing but sane opinions in a rational manner without resorting to CAPS? Just quit, will you, I want to read more of Teresa's fantastical theories... 

[DavidRoss]

Wait, just those two? No fault from Greenspan, no fault from Clinton, no fault from Reagan?

Hardly--and no one suggested such a thing.  Nor suggested no fault on the part of the greedy mortgage industry hustling to churn paper and pocket origination fees, nor the greedy jerks jumping into those no-interest ARMs in bad faith, nor the regulators and industry watchdogs asleep at the switch.  But Franks and Dodd's heinously hypocritical finger-pointing and sanctimonious blathering make them prime candidates for latrine duty in Hades.

[kishnevi]

Yes, but the point is, if one company can do this and get away with it. EVERY company will practice insider trading and get away with it. Then you diversification strategy doesn't work.

If things were that bad, people would simply stop investing, or invest only with people they know personally and trust.  IOW, the market would grind to a halt until honesty returned. 

How? Bribe the controller? Become drinking buddies with the CFO? You see how difficult that is? Without disclosure?

I didn't say the companies should not be disclose information.  I said people should not automatically take such information at face value.  And again, if you can't get the degree o information you want, you won't invest.

really? You wouldn't be so tough, if it was you or one of your family member who got screwed.

I wouldn't be me, because I don't invest in such a foolish way.  And if it was a family member, I would lay the blame for my relative's problem squarely where it should belong--with my relative, for being stupid.  No one would force him to invest that way--in fact, every source you read tells you to diversify.  If he couldn't follow that advice, that's his problem not mine.

My examples are just one in a million ways institutions can screw you out of your money. Rating agencies can collude (they have already done it!) with bond underwriters to issue crappy bonds with AAA ratings. You can diversify the heck you want, but those AAA bonds aren't prime, and you can sue them. Sure, just like trying to sue Madoff after he turned himself in. In most cases, most of the money will be gone.

Which is why you need to do as much homework as possible--and if you still don't trust them, don't invest (or at least don't invest very much).

As it is, with TARP and the rest, I'm paying for their mistakes without having any mortgate related investment.  Not even one of my own--the one on our house was paid off several years ago.

[kishnevi]

The Green Party does not have an official policy on Porn although they do support feminism, and most feminist are anti-porn as it objectifies a woman's body and turns us into sex objects. 

Does that mean feminism doesn't mind gay porn?

[Todd]

As it is, with TARP and the rest, I'm paying for their mistakes without having any mortgate related investment.

Taxpayers should be thankful for TARP.  Over half the money spent has already been recovered, and the government has collected over $25 billion in dividends and interest on top of that.  Not only will all of the TARP funds spent be recovered over time, but the taxpayers will realize a net gain, all of which will all be used to pay down the debt (a little item the evil Republicans slipped into the financial regulation bill).  And TARP prevented true economic catastrophe.  It's one of the better bailouts yet devised as far as I'm concerned.  BTW, just over half of TARP was spent, so it was cheaper than advertised.  How often can you say that about a government program?

[kishnevi]

I don't think our economical thoughts are that different if we both think in a "green way". It's all about how we weight things. Or is there a difference? Is The Green Party in USA a substitute of a real left-wing party? In Finland we do have "real" left wing parties, so The Greens don't have to fill that hole. For me to be Green doesn't mean to be a leftist. It means to be ahead of others. I want to take the best ideas from left and right for the best possible results.

Remember, these questions were for American people from an American point of view. I tried to translate my Finnish point of view to American point of view. For example, minimum wage isn't such an issue in Finland that it is in US.

Our real difference is in banning porn and violence, not in economical issues. Also, I am an atheist and against religion.

European politics seems to have a center of gravity further to the left than the United States, probably because the USA has a tradition of small government and focus on the individual that does not run as deep in Europe, and the right has a double orientation here that it may not have in Europe--both nationalist and anti-government.   From the US perspective, the European far right is really another form of the far left.  US conservatives often like to point out that the Nazis and Communists had almost the same economic philosophy--the main difference was that the Nazis were willing to let legal ownership of production remain in private hands, as long as those private hands did what the State required of them.  But the State called all the shots in the end, just as it did in the Soviet Union.

There are some extreme left parties in the US that are openly Communist or militantly Socialist in origin;  the Greens are not at that extreme, but for American purposes they are extreme enough--the furthest left people can go and still have a chance to get on the ballot (like Ralph Nader did in 2000).

I'm at the other end--libertarian, which means I belong to the far right in as much as it is focused on individualism and small government--but not the nationalist right such as the "neoCons" or the social conservatives who want to ban abortion, gay marriage, because both of those are at bottom anti-individualistic.  Strong military requires a strong government;  abortion, gay marriage, etc, have to be recognized as individual choices about which no one else has the right to interfere.

[kishnevi]

Taxpayers should be thankful for TARP.  Over half the money spent has already been recovered, and the government has collected over $25 billion in dividends and interest on top of that.  Not only will all of the TARP funds spent be recovered over time, but the taxpayers will realize a net gain, all of which will all be used to pay down the debt (a little item the evil Republicans slipped into the financial regulation bill).  And TARP prevented true economic catastrophe.  It's one of the better bailouts yet devised as far as I'm concerned.  BTW, just over half of TARP was spent, so it was cheaper than advertised.  How often can you say that about a government program?

It was wrong because it was a bailout, using imaginary money (that's what government spending now is, because of the deficit).  To be paid back with equally imaginary money thanks to the deficit and the stimulus. Did you realize the US money supply, because of all that happened, more than doubled?  Which means at some point either the money supply will have to be purposely shrunk or inflation will strike rather savagely, increasing prices either gradually or suddenly by about 100 percent.

As to economic catastrophe:  the only actual evidence is the assertions of the people who trying to convince voters that TARP was necessary.  We'll never know how true that is, beyond speculation.  But I would venture to say the most likely scenario if there was no bailout would have been a very sharp decline followed by a sharp recovery.  Without a bailout, all the bad stuff would have been shaken out of the system at once; now it lingers there, and may do so for years and years.

[Teresa]

From the US perspective, the European far right is really another form of the far left.  US conservatives often like to point out that the Nazis and Communists had almost the same economic philosophy--the main difference was that the Nazis were willing to let legal ownership of production remain in private hands, as long as those private hands did what the State required of them.  But the State called all the shots in the end, just as it did in the Soviet Union.

The problem is the misunderstanding and misrepresentation by some conservative commentators.  Neo-Nazi's, Skin Heads, and the Klu-Klux Klan consider themselves extreme right-wing.  Indeed all of the these groups are VIOLENTLY anti-communists, anti-Jewish, anti-immigration and anti-big government.  Most members of the Klu-Klux Klan are Republicans including the infamous David Duke. 

Ku Klux Klan

"Ku Klux Klan, often abbreviated KKK and informally known as The Klan, is the name of three distinct past and present right-wing organizations in the United States, which have advocated extremist reactionary currents such as white supremacy and nationalism."

[Todd]

Did you realize the US money supply, because of all that happened, more than doubled?  Which means at some point either the money supply will have to be purposely shrunk or inflation will strike rather savagely, increasing prices either gradually or suddenly by about 100 percent.

A money supply discussion!  Well, which measure of the money supply increased as much as you say?  And how would that translate into a 100% increase in prices "either gradually or suddenly"?  If you're so certain of your predictions, may I ask how much gold and/or TIPS you've bought?  Given the choice between shrinking (aka, sanitizing) the money supply and high inflation, what do you think the Fed will do?  Since the Fed is already publicizing their plans for reducing the money supply when necessary, I think the answer is clear, don't you?

As to your assertion that "[w]e'll never know how true that is, beyond speculation[,]" well, that's only partly true, if even that.  Financial collapses have happened multiple times in advanced countries, and sometimes there were robust and effective policy solutions (Sweden in the 90s, for instance), and sometimes there were not (Japan in the early 90s, most of the world in the 1930s, the US in the 1870s). 

So, a couple years ago, policy makers and elected politicians were thus faced with a choice: do nothing, and hope Ricardian (or Marshallian, if you prefer) economics works this time, or get involved in a segment of the economy that affects all others (ie, the financial sector), and hope that Keynesian economics works.  History is unambiguously clear: markets can and do fail, and market forces do not always end up establishing a "full employment" equilibrium, and they do not always shake all of the bad stuff out of the economies all at once.  Indeed, can you please provide an historical example when that did occur?  Do not try to dodge the question with some type of "governments always get involved" type response, because I want to learn about the empirical evidence you base your assertion on.  Keynesian policies and government intervention are not always or even frequently desirable, but the alternative outcome, especially in this case, was far worse.  It looks to me that you've forgotten just how bad the credit markets were at the end of 2008.  The lack of liquidity was not fabricated to sell TARP to the public.  It started in the late summer and early fall, and by winter it was worse, not better.  This begs the question: how come the bad stuff didn't shake out of the system all at once?  You said it would, so please, offer some detail of why it did not in late 2008, before TARP was in place.  Would all at once have meant three months more?  Six months?  Twelve?  Twenty-Four?  How long is all at once?  I really want to know. 

Something else that is unambiguously clear is that had the Federal government not stepped in and provided additional liquidity to firms that needed it, more institutions would have failed.  With assets being marked to market, with counter-parties no longer willing to lend, the end was near for some other institutions.  That in itself isn't a bad thing, but if that would have happened if in addition to the firms that are already gone (Lehman, Merrill, Bear Stearns, dozens of small banks, hundreds of originators, dozens of servicers) an equally large number of others would have gone too?  What if more had failed?  While the non-bank sector can certainly lend some money, it cannot offer the array of products, nor the amounts of capital, that functioning financial institutions can.  Then we would be a situation where the government may have to act as direct lender.  That's worse yet. 

Your reply strikes me as ideological and unconcerned with facts on the ground.  I'm a life-long supporter of free markets generally – you won't see me write bad things about the private sector or trade in general, and I think the second wave of globalization is one of the greatest developments in human history – but I cannot avoid looking at reality to make sure my ideology is pure.  When true economic catastrophe is imminent, in the form of collapsing financial giants that can freeze the entire financial sector, action is required.  Any political-economic system can collapse and be gone forever; given that I think the one that exists in most of the world today, including the US system, is much better than average, I found action to be warranted.  I don't think the entire system would have collapsed Soviet style, but it would have been much, much worse had no action been taken.