Fifth Greatest Libertarian: Government Blameless in Bubble/Bust/Bailouts

Barry Ritholtz, whose Big Picture blog was ranked the number 5 libertarian site on Planet Earth by a recent DBKP Report, says it’s all a “big lie” that Washington, DC played a major role in the economic mismanagement of the last ten years.

We begin the story nine paragraphs into Ritholtz’s peripatetic pontification

The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

What made his comments so stunning is that he built Bloomberg Data Services on the notion that data are what matter most to investors. The terminals are found on nearly 400,000 trading desks around the world, at a cost of $1,500 a month. (Do the math — that’s over half a billion dollars a month.) Perhaps the fact that Wall Street was the source of his vast wealth biased him. But the key principle of the business that made the mayor a billionaire is that fund managers, economists, researchers and traders should ignore the squishy narrative and, instead, focus on facts. Yet he ignored his own principles to repeat statements he should have known were false.

[snip four more paragraphs of throat-clearing] 

●Fed Chair Alan Greenspan dropped rates to 1 percent…. 

●Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys…. 

●Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch….

4 Derivatives had become a uniquely unregulated financial instrument….

5 The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption”….

6 Wall Street’s compensation system was skewed toward short-term performance...

7 The demand for higher-yielding paper led Wall Street to begin bundling mortgages...

8 These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period...

9 “Innovative” mortgage products were developed to reach more subprime borrowers...

● To keep up with these newfangled originators, traditional banks developed automated underwriting systems...

● Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998...

● Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks...

The copydesk-embarrassing mishmash of bullet points and numbers is from the original story. 

Since Ritholtz doesn’t even bother to put a number on his explanations, I’m not going to bother replying to all of them. But here’s some history on Greenspan (who Ritholtz, possibly using the conspiracy theorist’s observation that the central bank is theoretically not an official government entity, seems to classify as a private sector player). Here’s a search for suspects in the real estate bubble – including the government-sponsored enterprises Fannie Mae and Freddie Mac, who repeatedly lied about the amount of garbage debt on their books. Here’s a little something on the failure of government policies supporting loan modification to do anything other than stretch out pain. Here’s something on the anti-deflationary madness that spurred many of the policies Ritholtz laments. Here’s something on Bear Stearns. The fingerprints of HUD, FHA, Treasury, the Fed, the GSEs, and both 21st-century presidential administrations are all over this stuff. 

And Glass-Steagall? Someday I hope one of these people will explain how lifting a minor technical restriction on retail bank holding companies (in 1999, not 1998) led to a crisis that was directed at (and if not for massive federal intervention, limited to) investment banks and mortgage-only lenders. But I’m sure one day one of these people will explain it. Maybe. (And by "these people" I of course mean libertarians like Barry Ritholtz.) 

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  • ||

    I give him points for going the whole screed and not mentioning the "F" institutions.

  • yonemoto||

    In reality, though, Fannie and Freddie play a bit part compared to the fact that the Fed's attempt to centrally orchestrate the economy for 60+ years built up cruft and crony capitalism (via making it necessary for Joe Mainstreet purchase "inflation-beating" investment vehicles) in the name of "stability".

  • ||

    Cruft? That sounds even worse than santorum.

  • robc||

    You arent familiar with the term cruft?

    You need to spend more time with the IT guys instead of the pure math guys.

  • The Derider||

    Wikipedia:

    In reality, "[t]he 'repeal' involved only one provision of the Act, the one preventing the same holding company from controlling both a commercial bank and an investment bank."[18] Proponents argue that repealing this provision had little impact on the financial system and even helped restore stability during the financial crisis.[18][19][20] Ten years after its repeal, detractors condemn Glass-Stegall's repeal for reestablishing conflict of interest within the financial industry and fostering "too big to fail" institutions that led to the housing market collapse and its associated financial crisis. [21]

  • The Derider||

    Conflicts of interest like, for example, if your corporation holds both a mortgage and a derivative that is predicated on the failure of the failure of that mortgage.

  • yonemoto||

    Should a farmer be disallowed from holding shorted futures in his crops to protect himself from sudden drops in demand (or herd-like mentality and overproduction by his peers?)

  • The Derider||

    The Farmer's a price-taker in both the actual market for his goods and the futures market. There's a conflict of interest but he can't do shit about it.

    This is not true for a corporation that is a price setter in both the mortgage and financial markets. They can trade against their reputation as reputable lenders to make big short term profits.

  • Paul||

    Corporations don't set the price for anything. The market does. Guess who has the biggest market distorting power?

  • The Derider||

    Every market is perfectly competitive? Farmers buying and selling hay, maybe, but not banking.

  • Cytotoxic||

    Thanks to government regulations from assholes like you.

  • The Derider||

    You don't think natural monopolies exist? Oligopolies?

    Why does profit exist?

  • Shear PWNAGE!||

    Name one.

  • Patrick||

    Hahahaha! You think profits exist because of monopolies? Hahahahaha!

  • Sam Grove||

    Banking is part of the finance industry, the most extensively regulated sector of the economy.

  • Amakudari||

    Every market is perfectly competitive? Farmers buying and selling hay, maybe, but not banking.

    Nothing's perfectly competitive, but the stock exchange and the money markets are textbook examples of nearly-perfectly competitive markets. Minimal transaction costs, commoditization of products (my share of AAPL is exactly equal to yours), few barriers to buying stock, etc.

  • chris||

    The 'perfect' meme is a socialist distraction unrelated to actual market function.

  • Amakudari||

    Mortgage lenders don't set prices. Long-term mortgage rates track the long-term Treasuries. The largest holders of Treasuries, respectively, are Social Security, the Fed, China, US households and Japan. The market for long-term debt -- which is far beyond the control of a private bank -- determines the yield on mortgages.

  • Tman||

    I love how we owe the most amount of money in the treasury to the SS lockbox.

    4. Profit!

  • The Derider||

    Banks can determine the risk associated with those mortgages they offer. Offering mortgages to riskier customers increases your profits (until they default at a higher rate). If the same bank can also create and sell a financial product that pays out if the mortgage fails, the corporation has an incentive to increase the number of risky mortgages sold while denying that information to the buyers of the financial product. That's the "conflict of interest".

  • Skr||

    You obviously have no understanding of hedging.

  • ||

    I think you mean "in order", not "respectively". The latter is used when you have two lists that are supposed to correspond to each other.

  • Amakudari||

    I just wanted to give them the respective they disserve.

  • Supreme Generalissimo Fluffy||

    You're an idiot.

    Every last market maker simultaneously holds long and short positions on the same security.

    If you don't know what a market maker is, or you don't know why they might be simultaneously short and long, shut the fuck up.

    Or maybe try to figure out why a company that provides intermediation services might connect one client who wants to go short with another client who wants to go long - and in the case of a bond instrument, might also serve as the underwriter for the security two of its clients want to make different bets on.

  • mofo||

    What is it you think you've proven with your Wikipedia copy paste?

  • Jordan||

    The words "conflict of interest" are apparently a magic talisman. No demonstration of causality needed.

  • Greamen||

  • The Derider||

    The author asked:

    Someday I hope one of these people will explain how lifting a minor technical restriction on retail bank holding companies (in 1999, not 1998) led to a crisis that was directed at (and if not for massive federal intervention, limited to) investment banks and mortgage-only lenders. But I’m sure one day one of these people will explain it. Maybe.

    And wikipedia answered. I am only its messenger.

  • mofo||

    Wikipedia didnt answer anything, it merely noted that some people think that the repeal of GS fostered a too-big to fail environment and conflict of interest. That is not the same as an explanation, Wikipedia is simply noting that those opinions exist.

    By the way, the citation for that claim, citation [21], is to the huffington post, not exactly your go to source for authoritative information on banking law, IMO.

  • The Derider||

    And the author asked for an explanation. He spent a whole paragraph complaining about it.

  • The DerpRider||

    Herp derp.

  • Supreme Generalissimo Fluffy||

    That explanation isn't responsive.

    It might help to explain why some politicians felt that they couldn't let some institutions fail.

    It does absolutely nothing to explain:

    1. How the housing bubble got started.

    2. How the housing bubble's momentum was sustained.

    3. Why subprime securities were able to appear to be sound investments based on the underlying data supplied by the housing bubble.

    4. Why securitization of loans became such a dominant practice in the mortgage industry.

    5. Why ratings companies had so much power.

    6. Why bond insurers became so critical.

    Each of these bullet points has a government policy answer.

    It's really asinine to say, "Well, the real problem was that after our sequence of government fuck-ups, the institutions whose balance sheets our policies fucked up were REALLY REALLY BIG due to Glass-Steagall."

    I don't want to know how banks got too big to fail. I want to know how they failed. That's the source of the crisis.

  • Greamen||

    Hey simply needed to provide you a quick heads up. The text in your post appear to be working off the display in Internet explorer. http://octavinsu.blogspot.com/.....ows-8.html

  • wtp||

    Bear Stearns and Lehman we're pure investment banks.

  • wtp||

    s/were/we're/

  • robc||

    you suck at that. twice.

    s/we're/were/ is what you are looking for.

  • wtp||

    s/were/we're/

  • The Derider||

    They were over-leveraged in the mortgage market when the bubble burst.

    I'm saying that repealing Glass-Stegall helped to inflate the bubble, not that it popped it.

  • Cytotoxic||

    BUT YOU'RE WRONG YOU FUCKING RETARD.

    Of the banks that busted, only one (1) was a GS-bank.

  • The Derider||

    one of those "of the failure"s shouldn't be there

  • David McElroy||

    That guy is a libertarian? I'd hate to hear what he'd sound like if he became a statist.

  • Uncle Joe||

    Maybe he'd sound like libertarians who supported wars like the one in Iraq, libertarians who are calling for more inflation, or libertarians who actually voted for Barack Obama.

  • Anyone see||

    ...a true Scotsman?

  • Juice||

    The list of staunch libertarians also includes the neo-nazi Vox Day (Vox Populi).

  • yonemoto||

    I like to think of Glass-Steagall as not the cause of the collapse, but rather a catalyst that uncovered the rot that had accumulated in our not-so-free-market, very "capital"-ist system. As an advocate of pulling bandages off quickly, I quite liked glass steagall.

  • Cytotoxic||

    The repeal of the GS or GS itself?

  • ||

    "pulling bandages off" sounds like "repeal" to me, based on the context provided by the 1st sentence.

  • Greamen||

    I am not sure if this can be a format concern or one thing to do with web browser compatibility however I thought I'd put up to let you know. http://update-seputar-software....._7534.html

  • Fist of Etiquette||

    PDF alert: There are plenty of fingerprints from federal agencies in the form of threats of discrimination investigations of lendors who don't ease their standards.

  • chris||

    All you gotta do is google red lining and Janet Reno and the sordid history will stare you in the face. I recall being highly annoyed with investigative journalist shows of that era that would send a black couple and a white couple with the same income to inquire about loans, then play gotcha with the loan officers. They would even dismiss the lo's defense that the assets of the two groups were entirely different as racist nonsense.

  • ||

    "we've switched the black couple's assets with a mountain lion, let's see if they notice the difference."

    Gotcha!, done properly.

  • Bill C||

    Ron Paul who has more credible libertarian bona fides predicted the crash in 2002 and placed most of the blame on GSE's: http://www.youtube.com/watch?v=gLm7Sw402xE

  • ||

    He's been predicting a crash for 35 years. If you wait long enough, everything will happen.

  • chris||

    That 35 year period of time includes the stagflation of the 70's and early 80's, the S&L bailout, the dot-com bubble, the housing market collapse, and the failure of Wall Street bailouts and Keynesian stimulus, so what's your point again?

  • Greamen||

    The layout look great although! Hope you get the problem solved soon. Cheers
    http://octavinsu.blogspot.com/.....-aman.html

  • Uncle Joe||

    He's been predicting a crash in the REAL ESTATE business since the early 2000s, to be exact.

    But never mind, i'm sure you'll come up with another lame excuse for why those who did predict it (Austrians like both Ron Paul and Peter Schiff), didn't actually know what the hell they were talking about.

    Any non-argument will do, right?

  • Mike E||

    Never would have guessed Lew Rockwell got more traffic than Reason.

  • ||

    I do like that Balko's site (The Agitator) gets more traffic than Cato.

  • Mike E||

    I was happy to see the list. Now I will have something to read on the weekends at the second job.

  • Uncle Joe||

    That's probably because you believed some of the anti-Rockwell rants you sometimes read in the comment sections here. They tend to diminish the influence of his website.

  • ||

    Lew's a bit to conspiratal for me.

  • Juice||

    He also loves Pat Buchanan.

  • SIV||

    I read Ritholtz regularly.He's a very smart guy and an entertaining writer. You can learn a lot from his financial writings (most of the blog). He is in no way a "libertarian" of any stripe.

  • PETE||

    Agree. He allows data to influence his opinions on markets. Automatic disqualification.

  • Coeus||

    So you're saying that data and not wishful thinking is what led him to this conclusion? If only there was someone who correctly analyzed the data ahead of time and arrived at the correct conclusion. Surely his analysis would carry more weight with a truth-seeker such as yourself than after-the fact wishful thinking.

    Here, try this:

    http://www.csaba.se/2009/09/26.....transcript

  • KPres||

    Cherry-picking data (like the dumbass stat I pointed out below) that justifies your preconceived notions =/= "allowing data to influence his opinions on markets", asswhipe.

  • Cytotoxic||

    And what data is in this article again PETEY?

  • KPres||

    Who cares? He said he looked at the data!

    He said he did! I promise!!

  • S'||

    Bloomberg was correct Government Policy of forcing the loans to the sub-primes was the cause - along with the repeal Glass Steagall

  • PETE||

    How do you explain all the terrible corporate real estate loans that were made then? What government program was forcing banks to lend money to the owners of office space?

    http://online.wsj.com/article/.....19833.html

  • KPres||

    A residential real estate bubble is going to drive a commercial one as well. The question you need to answer is, if it wasn't driven by the residential sector, then why did the rise in commercial real estate values trail the residential by 8 months to a year?

    Did your book tell you about that?

  • The Derider||

    So corporations are brilliant arbiters of price and risk until the government sticks its pinkie toe in the pool, at which point they become mindless idiots?

    Why would making bad loans in the residential sector cause them to make bad loans in the commercial sector?

  • KPres||

    When you build new subdivisions, it also creates demand for new commercial construction around the housing developments. Shopping malls, supermarkets, etc. Then the office parks want to be near the all the growth to attract better employees, so they build as well. All this demand drives up the price.

  • The DerpRider||

    I'm a fucking moron.

  • The DickRider||

    Stop mis-spelling my name!

  • PETE||

    Bailout Nation s a great book on the crisis, which I'm sure Cavanaugh hasn't read. In fact, it appears he's never even heard of Ritholz before today.

    He's the CEO of Fusion IQ (https://www.fusioniqrank.com/?q=about-us) as well as proprietor of the Big Picture.

    He looked at the data on the crisis, and came to a conclusion based on it. Sorry that his ideology didn't trump the facts.

    Here is a better post at Big Picture explaining why Bloomberg, and Tim, are wrong: http://www.ritholtz.com/blog/2.....l-meltdown

    But seriously, read Bailout Nation.

  • KPres||

    "Here’s some data to back that up: “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”"

    Anybody who says this is either too stupid or too dishonest to be taken with anything more than a grain of salt.

    Ritholz just claimed that "These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period..."

    Uhhhh....if they were issued then immediately sold, how the fuck does it matter who's doing the issuing? What matters is who's doing the BUYING. DUH!

    Oh, but I forgot, you read this book, see....

    Dumbfuck.

  • The Derider||

    It matters if the sellers have a conflict of interest that causes them to fail to reveal the true level of risk.

    Poopypants.

  • KPres||

    Ugh. Sellers NEVER want to reveal the true level of risk, and they NEVER have.

    And buyers ALWAYS want to know the true level of risk, and they always investigate to find that out.

    So if this arrangement is nothing new, why did it break down in the early 2000s?

    ....Could it be because that's EXACTLY the same time period F&F started buying unprecedented numbers of MBSs?

    http://reason.com/assets/mc/jt.....annie3.jpg

  • Tim Cavanaugh||

    Correct that I have not read Bailout Nation. Incorrect that I have not heard of Ritholtz before. I've linked to his stuff with interest in the past.

    Will take your word on the book and the longer post. But if the 1,300-word article in the Washington Post doesn't make sense, I suspect more words don't help.

  • ||

    Tim,

    1300 words is not nearly enough for such a data-intensive topic. Many things said have to be taken at face value with the assumption that research has been done. Doing the full read of the book and associated posts on TBP is well worth your time if you're going to comment intelligently on the broader subject matter.

  • KPres||

    "Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch…"

    Credit agencies take the political situation into account as well. The securities were rated highly because they knew if they failed, the system would get bailed out. Were they wrong?

    The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption”…"

    That's because Fannie and Freddie had previously been buying up all the securities, and they knew that heightened political pressure was coming, so they raised the reserve rates on the big banks so F&F could deleverage. Keep the racket going so Bush could finance his wars.

    "These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period..."

    Right, they sold them to F&F who owned over 60% of US MBSs in 2005.

    Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998...

    Well, the housing bubble started in 1994, maybe 1992, and the investment banks and commercial banks that stayed separate did just as poorly as those that did both, so that's out the window.

    The demand for higher-yielding paper led Wall Street to begin bundling mortgages...

    What? Mortgages got bundled to diversify risk, not increase yields.

  • Russ 2000||

    Actually, around '03/'04 there was a demand for higher yield. This is why F&F started buying more MBS than they had in the past - the only way they could do that was to buy riskier stuff.

    And the demand for higher yield came from government pension funds. If a bank's largest shareholders are government pension funds, it's a joke to claim that the bank is still "private".

  • Alice Bowie||

    Time and Time again, I hear that people have to take personal responsibility.

    I agree. But if one is puckered into a deal, I do have sympathy.

    Real Estate in this country took a big hit in this country. THANKS to the FACT THAT THE BORROWER WAS NOT BAILED OUT.

    Banking is alive and kicking. Jobs at the bank are great. Banks charging interests and making great profits. THANKS to the BAILOUT.

    You can look at this in two ways:

    1. The real estate market is bad, but not that bad. America is not going down. Perhaps NOT BAILING out the BANKS would have been the same.

    2. Real estate would have been preserved...along with many jobs related to real estate.

    We'll never know.

  • ||

    for fuck's sake...

    the real estate market is NOT BAD. but it is a BUYER's market.

    finally. it became one after being a seller's market for a long time, iow a bubble.

    it is not a BAD market. there is plenty of inventory at very good prices. that's not bad. it's only BAD if you bought high and are forced to unload at shitty prices COMPARED TO WHERE YOU BOUGHT

    this is such a stupid meme.

    was the stock market (let's use the dow as a proxy) a "bad market" when it was about 7k not long ago?

    no.

    it's neither bad nor good. it's bad if your average price was much higher, but it's also a great investment opp

    the only reason i was able to afford the amazing house i live in now (granted, i would never buy a house w.o putting AT LEAST 20% down) was because this so called "bad market" made it REASONABLY priced.

    we need to get over this idea that it's BAD that the real estate market crashed.

    frankly, ALL bubbles crash. they are SUPPOSED to crash. at least they are supposed to after a massive bubble.

    greater fool theory only works so long

    i get so tired of people claiming it's a "bad " real estate market. that's stupid.

  • JohnD||

    Most people would think it's bad if no one can get a loan or even afford to buy.

  • ||

    i could not give a flying fuck what most people think. i am speaking REASONABLY here, it's not based on popular perception

    the reality is that homes are much cheaper, and loans are EASY to get if you are not financially overextended.

    iow, for once - incentives MATTER. shitty credit and/or nothing for a down payment SHOULD BE cause for concern. lack of concern for such things was what helped create the bubble

    the reality is prices are much LOWER. inventory is high. that is GREAT for a buyer, and god knows it helped me.

    the idea that it's a "bad market" because people who 'bought high" got fucked (as they should in capital markets) or because irresponsible and/or undercapitalized buyers can't get loans is a ridiculous metric for "bad".

    that's my point

  • Zeb||

    Honestly. Real estate was over priced. It was a good thing that prices fell significantly in many places.

  • Juice||

    It's still overpriced.

  • ||

    true but that's debatable as to "overpriced " in regard to what metric?

    whether assets or over or undervalued is debatable based on frame of reference... in regards to what? and of course home prices (for those who buy with loans vs. cash) have to be considered in regards to interest rates.

    if house X currently costs 500k and you can buy it with a 4.65% APR 30 yr loan, it's going to cost EFFECTIVELY much less than if it cost 400k now, but rates were at 6.65% APR. rates matter when assessing cost (for those who get loans).

  • Cytotoxic||

    I don't know who this twat Ratholtz is but I am amazed Bloomberg said that. Did the Cato institute abduct him and put an explosive device up his ass that goes off if he doesn't say a certain minimum amount of sense per day.

  • موقع العراق||

    thanks

  • ||

    "It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

    You have to blame the investors who decided to invest all that money in mortgage securities--and what's the solution to that?

    There isn't one. The next bubble will likewise pop like thief in the night--completely unexpected.

    Also remember--we had a year between the time the subprime lenders cratered (see New Century) and the time that Lehman Brothers cratered.

    A whole year!

    It's not just that people are trying to pin the blame on the wrong donkey--they're not eve in the right ballpark.

    The problem isn't that the economy took a downturn after people over-invested in something they shouldn't have. The problem is that after the bubble burst, the government came in and did everything from bailouts to heaping tons of regulation on Wall Street--which was the very last thing we should have done if we wanted to claw our way out of a recession as quickly as possible!

    When you're going into recession? That's a great time deregulate! ...that's not a great time to squander people's future paychecks on bailing out Wall Street, Detroit and state government employees everywhere.

  • ||

    When you're going into recession? That's a great time deregulate!

    That's unpossible!? We'd all be living in the streets, burning our cardboard shelters to stay warm.

    And the seas would have swallow up Denver or something.

  • ||

    This is where leadership really might have made a difference!

    We can't avoid falling into a credit cycle ditch every once in a while (world of uncertainty), but we can make it easier and faster to climb back out!

    This was a finance led recession--inflation wasn't the problem! We needed financial innovation to get out of a finance led recession. The regulation we heaped on the banks, not to mention the forced mergers, etc., really slowed down the recovery.

    If things aren't getting back to normal until the deadbeat mortgage markets clear, then gumming up the innovation needed to clear those markets was the stupidest thing we could have done.

    We had a president who for a year seemed to think that the solution to our banking problems was launching a witch hunt and limiting executive pay!

    If we'd had good leadership, we might be out of this mess already. Yeah, I know, and if pig could fly...

  • ||

    Your argument presupposes that getting out of the mess relatively unscathed was a priority for the aforementioned "leadership".

  • Russ 2000||

    You have to blame the investors who decided to invest all that money in mortgage securities--and what's the solution to that?

    The bulk of the investors were/are government pension funds. They lobbied hard for regulatory changes so that they could keep those 8% returns coming.

  • ||

    no bubble pops completely unexpected(ly).

    there are always warning signs.

    one famous investor dropped out of the market in the late 20's when he rode in an elevator and heard the low wage elevator operator bragging about the "killing" he was making in the stock market, and all at 10:1 leverage!

    if that's not a "market is getting frothy as fuck" sign, NOTHING is.

    before this recent real estate crash, we had CNBC interviewing VEGAS STRIPPERS who were now wealthy real estate "flippers", there were people walking around downtown renton with sandwich boards advertisting mortgages, and i heard interviews with realtors on teevee saying about the florida market "you can't lose"

    come fucking on!

    ALL bubbles crash. period.

    it's difficult to predict exactly when (the market can remain irrational longer than the stubborn overleveraged short can hold on), but it was HARDLY unexpected

  • ||

    ●Fed Chair Alan Greenspan dropped rates to 1 percent….

    ●Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys….

    There's a bullet point conspicuously absent--because it should be absent. It's about blaming the Fed for all the easy money and low subprime adjustable interest rates...

    Despite the fact that so many of those subprime mortgages were tied to LIBOR people!

    LIBOR! ...not the Fed! LIBOR.

  • Amakudari||

    Some are, but that's bigger for commercial loans (usually 1- or 3-month LIBOR). For adjustable rate mortgages LIBOR is very volatile, so borrowers also often chose:

    CMT — 1-year constant maturity Treasuries
    MTA — 12-month rolling average of 1-year Treasuries
    COSI — Wachovia's average rate on CDs on their balance sheet
    CODI — 12-month average of 3-month CDs, which kinda tracks 3-month LIBOR
    COFI — average cost of deposits for 11th district thrifts (IIRC this wound up being dominated by WaMu, so people stopped using it)

    Now, the last three have some relation to LIBOR, but it's a very tenuous (and considerably smoothed and lagged) one. For example, Wachovia a few months before collapse embarked on a massive deposit-raising campaign where they were offering very high rates on five-year CDs. Duration probably went through the roof, and consequently COSI is still way higher than, say, 3-month LIBOR (2.09 vs 0.45).

    Banks like Countrywide and WaMu loved Treasury-based loans; Wachovia/Golden West used COSI and CODI almost exclusively, aside from a handful of COFI and Prime loans.

    And, of course, for many of the loans that defaulted the index turned out to be irrelevant. The people in those houses couldn't afford any reset. Bankers were literally working under the impression that borrowers would spend the teaser rate period building up their credit histories and salaries, and if they couldn't afford the reset they could just sell their house.

    (The Fed's role in this, IMO, is more in stuffing the economy with money, and that abundance of money leads to over/malinvestment, like in China.)

  • ||

    I appreciate all of that, but I was trying to address, specifically, people who fault--for ideological reasons--fed policy and easy money...

    The overwhelming majority of adjustable subprime mortgages were tied directly to LIBOR--not indirectly three times removed to Fed policy.

    If the Ron Paul Moonies wanted to replace the Fed with something better, chances are that better would look a lot like LIBOR.* All those subprime loans being tied to LIBOR demonstrates nothing if not that having more of a floating rate doesn't solve the problem of the Credit Cycle.

    The fundamental cause of the Credit Cycle is uncertainty about the future--and if Ron Paul and Barack Obama think they have a government solution to that problem, then they should seek the assistance of a psychiatrist.

    The Fed may exacerbate these problems with too much easy money at times, but the cycle is there regardless--even with a rate that's floating.

    I suppose the idea that the Credit Cycle--and indeed the Business Cycle itself--would disappear entirely if only we got rid of the Fed and its mistakes is head and shoulders better than the Obama Administration's belief that the credit and business cycles would disappear if only we regulated the banks heavily.

    But that isn't saying much!

    *Actually, if Congress "got rid" of the Fed, they'd probably replace it with something more beholden to Congress. ...which would be worse--much worse--than what we have now.

  • Amakudari||

    Erm, my point is that most weren't directly tied to LIBOR (plus I just wanted to give a bit of history). Commercial loans are very often LIBOR-based, but not mortgages. The most common index is actually MTA.

    In any case, right now a very large number of defaults are strategic, and those that aren't were never affordable in the first place, which means the index is pretty irrelevant. LIBOR is near zero, so if you can't afford the payments now, you can't afford them ever.

    Those who blame the Fed aren't blaming Fed Funds or T-Bills for causing too high rates. They're blaming the Fed for artificially lowering interest rates, which necessarily increased the amount of money in the system and the need to find uses for it. IMO the Fed was just another raindrop in the flood, but whether a government rate index was used isn't really material. These loans were unaffordable whether you used LIBOR, Treasuries or the average length of a word in a Greenspan speech.

  • ||

    "The Federal Reserve is in a bit of a pickle. They lowered short term borrowing rates a quarter point yesterday to ease concerns of the subprime crisis, but many of these borrowers are essentially unaffected by the reductions.

    That is because their loans are based upon the Libor rate. Libor, short for London interbank offer rate, is what 99 percent of the subprime loans and 38 percent of the Alt-A loans are based upon. And that spells trouble for the borrowers of these loans looking to refinance."

    ----December 12, 2007

    http://www.therealestateblogge.....borrowers/

    I know this isn't common knowledge. But it's true!

  • robc||

    What loans are tied to is irrelevant.

    The problem with the Fed was that easy money led to misallocation of resources. This time, that misallocation was in real estate (last time was Tech stocks).

  • ||

    "What loans are tied to is irrelevant.

    The problem with the Fed was that easy money led to misallocation of resources. This time, that misallocation was in real estate (last time was Tech stocks)."

    The misallocation of resources is unavoidable in a world of uncertainty. Fed or no Fed.

    Always has been. Always will be.

  • robc||

    The misallocation of resources is unavoidable in a world of uncertainty.

    Wrong. This is like the "all voluntary transactions benefit both parties" argument from the other day. Proper allocation may include mistakes, its what people would choose to do freely in a true free market.

  • ||

    Get this chart down, and it really gets to the heart of the matter:

    TED spread: difference between LIBOR and t-bills.

    http://en.wikipedia.org/wiki/File:Ted-Spread.png

    Look at the spikes in the TED spread in July of '07, when New Century and other Subprime lenders cratered, and September, or so, of 2008. In July of '07, you see the t-bill yield drop like a rock.

    ...you see LIBOR drop too--as the credit crunch took hold, lending standards increased dramatically. There was no more subprime--subprime borrowers couldn't refinance because no one was willing to underwrite them at their level of creditworthiness anymore. The only people who could get loans had stellar credit and then some!

    Anyway, the subprime crisis was a LIBOR crisis. Fed actions can and do sometimes make cycles worse than they would have been otherwise--but if the Fed weren't even in the equation, there would still be a cycle.

    The cycle is driven, ultimately, by uncertainty about the future. So long as the future remains uncertain, people will over invest when they shouldn't and under invest where they should.

    It works just like widgets. If I knew the price of widgest was gonna fall in the future, I wouldn't have invested in so many of them now. The Fed might make that situation worse or better depending on what it does, but the fundamental problem of uncertainty about the future wouldn't go away without the Fed.

    It's hard for people (not you--other people generally) to get their heads around the idea that there isn't anything anyone can do to get rid of the economic cycle and credit cycle. Because the whole world is telling them otherwise. The rest of the world is telling them to blame Wall Street or the Fed or Congress...

    All of those entities are to blame for the stupid things they did in reaction to the subprime crisis and the ensuing credit crunch, but they're no more to blame for the cycle itself than they are for winter or gravity.

  • robc||

    Mistakes about the future != overinvestment or underinvestment.

  • ||

    Like I said, the Fed can make things worse. They can make more money available for investment than maybe there should be.

    Just because they sometimes amplify the cycle and exacerbate its problems doesn't mean there wouldn't be a cycle there without them anyway.

    Were there boom and bust cycles before there was a Fed?

    Ron Paul's Army doesn't seem to think so.

    http://www.ronpaul.com/2009-03.....abolished/

    That's called "pandering"--something Ron Paul is excellent at.

  • robc||

    A random walk is not necessarily cycles.

    Without government intervention, I think it would be much more like a random walk.

    Take the example of a pro poker player. Lets say his long term winning rate is 2 big blinds/hour. With a standard deviation of 3 big blinds/hour (numbers completely made up, any of our poker pro readers feel free to provide better numbers). With that big a variance, their are going to be big up and down "cycles". In fact, statistically speaking, eventually he will go broke (assuming he doesnt adjust the level he plays at appropriately).

    But the ups and downs arent due to the business cycle. Im not willing to go to the position that we wouldnt have business cycles at all without the FED/other government interference, but Im not sure we would notice those cycles amongst the random walk of regular variance.

  • robc||

    From a quick google search, found one pro who claims his standard deviation is 6 times his winning rate.

    So adjust above to 2 BB/hr with SD of 12 BB/hr.

  • robc||

    Im not denying cycles in a real free market, Im saying they arent due to misallocation of funds.

    This bubble was due to misallocation. We have had real estate bubbles before, this one was different because it coincided with cheap fed rates and the crash of the stock market so there was lots of cheap money looking for a home.

  • ||

    "This bubble was due to misallocation. We have had real estate bubbles before, this one was different because it coincided with cheap fed rates and the crash of the stock market so there was lots of cheap money looking for a home."

    Two points:

    1) Misallocation is a function of uncertainty. If you want to argue that cheap money flooded the world with liquidity and made people look for places to put more of it than there needed to be--that's one argument.

    If you're saying that cheap money made people invest in real estate rather than somewhere else (misallocation), that's a separate argument. ...and its connection to Fed policy is baffling to me.

    I sold commercial real estate investments to numerous investors--and we never consulted the Fed. I made my arguments with market reports and financial analyses projecting returns into an uncertain future.

    2) The over investment you seem to be alluding to did not coincide with the crash in the stock market.

    The subprime mortgage market cratered in July of '07 with New Century going the way of the buggy whip. It took a year--a whole year--before the stock market cratered when Lehman went down a year later!

    Lehman and Bear were actually buying New Century and other subprime lenders' mortgage portfolios out of bankruptcy court at pennies on the dollar--and it was buying those subprime mortgage portfolios at pennies on the dollar that ultimately did Lehman and Bear in!

    The overinvestment you're referring to happened in 2004, 2005, 2006...

    Not 2008 when Lehman went down for the count.

  • robc||

    The over investment you seem to be alluding to did not coincide with the crash in the stock market.

    The subprime mortgage market cratered in July of '07 with New Century going the way of the buggy whip. It took a year--a whole year--before the stock market cratered when Lehman went down a year later!

    The stock market crater Im referring too was 2000. The real estate bubble started shortly thereafter. By 2004, it was clearly already a bubble to anyone paying attention. The overinvestment Im referring to was in full swing well before 2004, 2005, 2006.

  • robc||

    If you want to argue that cheap money flooded the world with liquidity and made people look for places to put more of it than there needed to be--that's one argument.

    That is exactly my argument. First it went into Tech stocks, after that crash, it went into real estate.

    Cheap money was looking for a place to be invested. There wouldnt have been that investment if rates had been kept higher and/or there was no rate driving entity.

  • Russ 2000||

    It's hard for people (not you--other people generally) to get their heads around the idea that there isn't anything anyone can do to get rid of the economic cycle and credit cycle. Because the whole world is telling them otherwise. The rest of the world is telling them to blame Wall Street or the Fed or Congress...
    If this were a purely private credit bubble you'd have a point. And the tech bubble probably was a private credit bubble. But Greenspan and Congress purposely blew a real estate bubble to counter the bursting of the tech bubble. Paul Krugman basically demanded it!

  • robc||

    Greenspan blew the tech bubble too.

    Cheap money was the policy in the 90s also.

  • ||

    OT: What do you think of Lebanese political refugees that come seeking asylum in the United States and then bitch about how they're not stuck in a country that hates them and are total victims of American tyranny?

  • Marc Jacobs||

    Speaking of the U.S. fashion industry, a handful of the few big-name designers. However, you must not forget Marc Jacobs. His designs are generally free, but the product is designed themselves. For example: Marc Jacobs Handbag, Marc by Marc Jacobs Handbag. In fact, his decks Marc by Marc Jacobs also stand out in the fashion industry. Marc by Marc Jacobs Bags as many types of styles, has also been sought after by many big Hollywood stars.

  • ||

    Ritholtz is pretty good when he sticks to market commentary and puncturing the bubbleheaded thinking and permabullish consensus that tends to emanate from CNBC and Bloomberg.

    When he veers off into political commentary he becomes pretty insufferable, particularly because of his constant insistence that he is oh-so-non-ideological and impartial, as contrasted with ... well, basically anyone who disagrees with him about how realistic it is to rely on "more & better regulation" to prevent the asset bubbles that government policy is trying so hard to inflate every minute of every trading day.

    It's like he just completely forgot about that whole period when almost everyone (*particularly* in Washington DC) was calling Alan Greenspan "Maestro" for his deft management of the economy. Regulators are just as much participants in (and contributors to) every bubble as investors and traders are.

  • Russ 2000||

    I remember perusing Ritholz's blog 3 or 4 years ago and and thinking he was basically a shit-for-brains. Occasionally he made a few intelligent points, but for the most part he's statist prick and I haven't visited his site in years. I sure would like to know what dumb fuck categorizes Ritholz as "libertarian". My guess is some fascist like Brad deLong.

  • Alan Vanneman||

    A libertarian who criticizes Wall Street? Thanks for the link, Tim!

  • Open Mind||

    I'm not a financial expert but "The Derider" sure comes across as being the most intelligent of this group

  • Open Mind||

    Has any one seen my brains? They fell right through the opening and slipped around the floor.

  • Jim||

    DBKP? What a fraud.

    This is ridiculous-most of these 'libertarian' DBKP are conservative or sites dealing with Libertarian causes. The tip-off is not one of them uses Libertarian in the name. Several even go out of their way to say they’re NOT libertarian.

    I suggest start with (non-partisan) http://www.Libertarian-International.org or the many Libertarian Party or movement sites.

  • cbone||

    Cav is such a poor writer. What a hack.

    Did Ritholtz say government was blameless? No. He disputed Bloomberg's idiotic claim that Wall Street had nothing to do with this. It's a fair point to make.

    The whole FHA forced every lender to make awful deals has been thoroughly debunked. It played a much smaller role in the downfall than the banks themselves. This was a market failure. Shit happens.

    I say this as a libertarian. I'm against huge overreactions to the bubble bursting and government overreach. I'm against the bailouts. I'm against the cronyism. But fuck, these Wall St cats fucked up bad. Really bad. And they can't just point the finger at Congress. They should have just gone bust so we can continue on with our lives.

  • Juice||

    It's not a conspiracy theory that the Fed is not entirely a government agency. It's designed that way.

  • DeDude||

    Ritholtz expose the big lie that the mortgage crisis was crated by “Congress who forced everybody to go and give mortgages to people who were on the cusp”. That induce Cavanaugh to spew out some rambling incoherent anti-gobinment piece that has nothing to do with whether the crisis was created by Congress “forcing everybody to go give mortgages to people who were on the cusp”. I guess no opportunity to rant against gobinment, however misplaced, shall go to waste. And the morons all go hu-hu-hu.

  • Juice||

    It's really an argument of religious apologetics. The article of faith is that there is no such thing as market failure. Any challenge to that faith must be met with apologetics.

  • Joe||

    You are an idiot

  • ||

    That's not what Barry wrote or meant. He was addressing the b.s. attempt by Wall Street, Bloomberg and its media cronies to deny Wall Street's major role in the crisis. Gov't screwed up big time and deserves a lot of blame. But it didn't force the banks to make/buy those loand, package them or leverage themselves 30 to 1. I love capitalism and risk taking. But not if we have to pay the losses. Some people cry socialism too often. But we do have socialism: for the banks.

  • Michael||

    Wow, I agree with the above comment. The author of this article totally misread and mangaled the meaning of Barry's article.

  • ||

    The author is clearly dwelling in an alternate universe.

  • ||

    Blaming the entire debacle on the Government is no more disingenuous than blaming it entirely on the Street, OTOH it's no less disingenuous.

    Perfect storm of stupidity.

  • ||

    I'm not sure you even read Ritholtz Big Lie article. It said no such thing. Be reasonable, not silly. NEXT

  • Mulberry Bayswater Bag||

    Way neat, some legitimate details! I recognize you generating this informative article accessible, the remainder of the web site can be higher high quality. Have a very enjoyable.

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