Boo on That Mortgage Bailout!

Over at Rough Cut, the video blog of reason.tv, check out Mike Flynn saying to mortgage bailouts on CNBC's Task Force. Flynn is director of government affairs at Reason Foundation, the nonprofit that publishes the print and online editions of reason.

Click on the image below to hear a rollicking good argument against government intervention in the economy—for strapped homeowners and investment banks alot.

Comments

Bingo | April 9, 2008, 8:59pm | #

Wow, "the market didn't work" what the christ. Also nice slip where she said "well the people that made responsible choices are going to pay [for the mistakes of others]"

MK2 | April 9, 2008, 9:22pm | #

Flynn looks and sounds like a man who would be touting Jesus if the evangelicals had got to him before the libertarians did. What is it about that true-believer look? You can spot one a mile away.

SIV | April 9, 2008, 9:27pm | #

That wasn't a slip Bingo. They are justifying the actions of the Central Bank and any Government schemes as being in the "best interest" of us all(best interest of the State). Too big to fail, markets don't work, you don't want to lose your home equity and your 401k do you? Makes me wanna puke.

I expect before it is all over they will be buying structures with taxpayer dollars and bulldozing them to "stimulate" the real estate and building sectors.

MK2 | April 9, 2008, 9:33pm | #

Here's a bit of heresy for the catechism class:

Writing in today’s Financial Times, billionaire and philanthropist George Soros calls out Hank Paulson, the US Treasury Secretary for not doing enough heavy lifting to improve regulation of financial institutions. He calls for new thinking not reshuffling of regulatory agencies.

Importantly, he not only questions but denies altogether the idea that markets are self-correcting.

For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner.
Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm. Market participants cannot base their decisions on knowledge, or what economists call rational expectations. There is a two-way, reflexive interaction between the participants’ biased views and misconceptions and the real state of affairs. Instead of random deviations, reflexivity may give rise to initially self-reinforcing but eventually self-defeating boom-bust sequences or bubbles.
Soros’s credentials as a market theorist are bolstered, of course, by his record as a market practitioner. The man made a fortune, unlike the editorialists and columnists who still have to work for a living.

He is making a splash in the media today as he releases his latest book, “The New Paradigm for Financial Markets: The Credit Crisis of 2008,” as an ebook, which expands on the ideas in his opinion piece in the FT and explains why he thinks we are in the worst financial crisis since 1930.

CJR

MK2 | April 9, 2008, 9:56pm | #

"The Bush administration has resisted using taxpayers’ money because of its market fundamentalist ideology. Apart from a bipartisan fiscal stimulus, it has left the conduct of policy largely to the Fed. Yet taxpayers’ money will be needed to reduce foreclosures. Two proposals by Democrats in Congress strike a balance between the right to foreclosure and discouraging the exercise of that right. One would modify the bankruptcy laws allowing judges to modify the terms of mortgages on principal residences. Another would provide Federal Housing Administration guarantees that would enable mortgage holders to be paid off at 85 per cent of the current appraised value. These proposals will not solve the housing crisis, but go to the heart of the issue. They should be given serious consideration." --George Soros "False ideology at the heart of the financial crisis" FT.com http://www.ft.com/cms/s/0/cb619d4a-00c0-11dd-a0c5-000077b07658.html?nclick_check=1

The writer’s book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, is released as an e-book by PublicAffairs on Thursday

tarran | April 9, 2008, 10:51pm | #

MK2, given that the bursting of a bubble is a market correction, I think that Mr Soros is, once again, smoking crack.

And no, the solutions to the problems caused by Fed interventions in the economy is not to slap on more intervention, this time from politicians.

The housing melt-down is being driven by one simple phenomenon: there aren't enough buyers willing to pay high prices for houses. When the prices fall to the point that the supply once again equals demand, then the number of houses changing hands will go up again.

You can no more avoid the foreclosures and the bankruptcies associated with bad investments than you can avoid landing a glider. Sure, you can postpone the inevitable by lifting your nose up. The longer you do that, the harder you'll ultimately smack into the ground.

MK2 | April 9, 2008, 10:55pm | #

Yeah, and Soros doesn't know shit about Libertarian theology. It's like some secular humanist explaining the Bible to Jerry Falwell.

MK2 | April 9, 2008, 11:00pm | #

More outlandish heresy from that crack-smoking Soros:

The Federal Reserve has long had authority to issue rules for the mortgage industry but failed to exercise it. For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner. All the innovations – risk management, trading techniques, the alphabet soup of derivatives and synthetic financial instruments – were based on that belief. The innovations remained unregulated because authorities believe markets are self-correcting.

Regulators ought to have known better because it was their intervention that prevented the financial system from unravelling on several occasions. Their success has reinforced the misconception that markets are self-correcting.

Michael Ejercito | April 9, 2008, 11:01pm | #

The biggest problem with government non-involvement is that it is not politically popular.

Most business executives and investors are not free market supporters. When President Nixon instituted wage and price controls back in 1971, the Dow Jones Industrial Average registered its largest one-day increase up to date, and cooperation with the price controls was urged by the U.S. Chamber of Commerce. Of course, we now know that the price controls were a disaster.

mk | April 9, 2008, 11:13pm | #

Help me out here. Is there any good news in this mess for those of us who borrowed responsibly?

I'm stuck in a condo I no longer want in a neighborhood where I have counted 4 houses that are bank owned. I expect there will be more in the next few years.

If only I had the presence of mind to have rented. I fully admit that I got caught up in the "everyone has to buy a house" craze.

MK2 | April 9, 2008, 11:13pm | #

Heresy! Heresy!

"The nineteenth-century incarnation of the global capitalist system, in spite of its relative stability, was destroyed by the First World War. After the end of the war, there was a feeble attempt to reconstruct it, which came to a bad end in the crash of 1929 and the subsequent Great Depression. How much more likely is it, then, that the current version of global capitalism will also come to a bad end, given that the elements of stability that were present in the nineteenth century are now missing?

It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? ... To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism." --George Soros

MK2 | April 9, 2008, 11:18pm | #

"Help me out here. Is there any good news in this mess for those of us who borrowed responsibly?" --mk

I suppose if you got lung cancer even though you didn't smoke, you'd be screaming for medical intervention, too. Let nature (the Market) runs its course. Better luck next time.

SIV | April 9, 2008, 11:26pm | #

mk

Sell it (short if you have too)
or stop paying and let them foreclose and deal with the consequences

if you don't want to live there get out

you aren't "stuck"

MK2 | April 9, 2008, 11:29pm | #

Yeah, and if you lose your job and food prices go through the roof, try canned dog food. Stop fucking whining.

Mk2 | April 9, 2008, 11:32pm | #

Soros made billions, and he doesn't even believe in the market (not the way we do), so why can't you?

MK2 | April 9, 2008, 11:36pm | #

MK,

Try repeating the following prayer, preferably holding a $20 bill if you have one, until you fall asleep.

Hail Market,
Full of Grace,
Prosperity is with thee.
Blessed art thou among systems,
and blessed is the fruit
of thy womb, Capital.
Holy Market,
Mother of Goods,
pray for us consumers now,
and at the hour of our bankruptcy.
Amen.

Aresen | April 9, 2008, 11:56pm | #

MK2

Soros made at least one of his billions by betting against the British Government when it tried to stop the market adjustment of the value of the pound. The market (and Soros) won. Mr. Soros is a speculator, not an economist. He also dropped $1 billion+ when he trusted the Russian government not to default as it did a few years ago. He's no visionary.

Your (selective?) quotes of Soros do not prove the notion that intervention is the solution, but, for the sake of argument, let's say that it is.

What intervention do you propose? Can you predict the effects of your intervention on the market - both short and long term. The models describing the economy have thousands of independent variables, most of which are not fully described. Any solution that you do propose will confer unearned benefits on a few at the expense of the many.

Further, the market is constantly changing, with new financial instruments being constantly invented. Do you propose to ban innovation?

Your quote at 11:13 PM is particularly inapt, as 19th century capitalism experienced frequent "panics" (what we now call "severe recessions") that were far worse than any prospective losses in the current mortgage liquidity problems. (The one from 1893 to 1897 was particularly bad.) Soros must be developing historical alzheimers to have said that.

MK2 | April 10, 2008, 12:02am | #

Aresen,

Soros's quotes and actions demonstrate his total lack of your perfect understanding of economic matters. You're right. I'll take your rock-solid faith in the Market over a mere speculator's pragmatic bromides any day. I quote him only as an example of the worst kind of infidel--a financially successful one. They think they know so much!

Kolohe | April 10, 2008, 12:17am | #

Wow, even though I am on the same side as Flynn that was a terrible performance.

First and most trivially, the black jacket/black turtleneck thing:
Don't get CNBC confused with 'Red Eye.'

Second, your talking points: The woman was right about one thing, the Frank plan has some provisions that should prevent flippers from being bailed out; (whether it works is obviously a different matter). You are on much firmer, if more unpopular, ground if you just state that it even people like mk above may get stuck, nobody deserves a bailout. Don't introduce red herrings.

Third, listen to your opposition. Rather than go for the accurate but cheap and obviously prearranged shot of 'i should have bought a home in malibu', challenge her on the "Wealth in Homes is Economic Growth" Challenge her that this is a fundamentally terrible thing; it's basically micro-feudalism and is the underlying cause of the mess the economy is in today.

The last dude did end on a good point, that even though the tech sector imploded in 2000, this industry is still around;.

Aresen | April 10, 2008, 12:38am | #

MK2

I note you begged the question on intervention, so I'll ask you once more:

Postulating that intervention can be of benefit, what intervention do you propose?

Do you have the knowledge to make the proper intervention? What qualifications - studies in markets and economics and the history of regulation, or better yet, actual experience - do you bring to the job?

Do you trust the politicians to make the right decisions?

Are you suggesting that we turn regulation of the markets over to Mr. Soros, whom you deem wiser than the market?

I, personally, would refuse the job as regulator. I know that the problem of regulation is intrinsically insolvable, in that every action sets of second-, third-, fourth-, etc- order effects, many of which may be worse than the original problem.

That doesn't mean that I think markets are perfect and that all will be fine and dandy. It means that the necessary adjustments will be done most quickly if the market is allowed to work it out. People will be hurt badly no matter what action is (or is not) taken. Historical experience has shown that the sooner the adjustments are made, the sooner financial health will be restored.

tarran | April 10, 2008, 12:48am | #

The funny thing that guys like mk2 don't seem to get:

People making decisions as to how to allocate the property they own = free market.

People using violence or threats of violence to override the decisions of people who own the property = government intervention.

The notion that these problems can be solved by judicious threats of violence against property owners is laughable.

Even if you get a commissar who is perfectly altruistic, he still will preside over economic actors who are less motivated to produce since they no longer keep the benefits of their labor.

Furthermore, what these interventions will cause are having politicians exert political influence to pick and choose which firms or economic sectors prosper and which ones whither. These decisions will be done for political reasons that benefit the politician, regardless of te damage they do to everyone else.

These sorts of interventions have been tried numerous times before: Herbert Hoover and Richard Nixon leap to mind. Hoover's attempts to prevent a short, if severe, recession led to the great Depression (although the lion's share of the blame should go to FDR who managed to extend it by a decade). Nixon, of course, gave us the stag-flation of the 70's.

Most of the interventions being proposed are attempts to prevent the bad investments from collapsing. These collapses are a prerequisite for recovery. The longer the recovery is postponed the worse things are.

Mike Laursen | April 10, 2008, 1:28am | #

If Soros is such an insightful analyst, why has he completely skipped over the relevant fact that the government has been pressuring mortgage companies to provide loans to low-income, high-risk customers. Invalidates his premise that this mess is an example of free markets at work.

Unfortunately, some people will be convinced he knows what he's talking about because he uses a lot of fancy words like "reflexivity". And because he's made a lot of money investing. I've made a lot of money in the stock market, too, so I'm not impressed.

Danger Mouse | April 10, 2008, 1:46am | #

Soros is the classic example of biting the hands that feeds him.

Isaac Bartram | April 10, 2008, 7:52am | #

Soros is the classic example of biting the hands that feeds him.

Actually, no he's not. He is typical of the kind of scavenger who picks up the scraps left behind by the world's financial regulation systems.

The hands that feed him are the world's interventionist politicians. They've done nothing but benefit from his public statements.

I'm not exactly sure why we are supposed to consider him an authority on anything except gaming political systems.

Reinmoose | April 10, 2008, 9:32am | #

For real
All creating more rules by which people have to abide in order to participate in a market does is benefit those who are more knowledgable of the rules and their limitations, and harm those who are not as savvy. All this garbage, that claims to be designed to help the "common man" who was "preyed upon" by "greedy lenders" who were using the *GASP* "FREE MARKET" (that mystical thing that only those who know how to use it can benefit from - - - that doesn't actually exist), does is protect bad investments from their rightful consequences and lay the groundwork for worse investments in the future. Good job, MK2! You and your idols are so insightful and so much wiser than the rest of us because we just don't understand. Great argument you got there!

MK2 | April 10, 2008, 9:37am | #

You can't prove that God doesn't exist or that The Market isn't perfect, but here's another wicked infidel who tries. Plug your ears! Cover your eyes!

The Dilbert strategy
By Paul Krugman


Monday, March 31, 2008
PRINCETON, New Jersey: Anyone who has worked in a large organization -
or, for that matter, reads the comic strip "Dilbert" - is familiar
with the "org chart" strategy. To hide their lack of any actual ideas
about what to do, managers sometimes make a big show of rearranging
the boxes and lines that say who reports to whom.


You now understand the principle behind the Bush administration's new
proposal for financial reform: It's all about creating the appearance
of responding to the current crisis, without actually doing anything
substantive.


The financial events of the last seven months, and especially the past
few weeks, have convinced all but a few diehards that the U.S.
financial system needs major reform. Otherwise, we Americans will
lurch from crisis to crisis - and the crises will get bigger and
bigger.


The rescue of Bear Stearns, in particular, was a paradigm-changing
event.


Traditional, deposit-taking banks have been regulated since the 1930s,
because the experience of the Great Depression showed how bank
failures can threaten the whole economy. Supposedly, however, "non-
depository" institutions like Bear didn't have to be regulated,
because "market discipline" would ensure that they were run
responsibly.


When push came to shove, however, the Federal Reserve didn't dare let
market discipline run its course. Instead, it rushed to Bear's rescue,
risking billions of taxpayer dollars, because it feared that the
collapse of a major financial institution would endanger the financial
system as a whole.


And if financial players like Bear are going to receive the kind of
rescue previously limited to deposit-taking banks, the implication
seems obvious: They should be regulated like banks, too.


The Bush administration, however, has spent the last seven years
trying to do away with government oversight of the financial industry.


In fact, the new plan was originally conceived of as "promoting a
competitive financial services sector leading the world and supporting
continued economic innovation." That's banker-speak for getting rid of
regulations that annoy big financial operators.


To reverse course now, and seek expanded regulation, the
administration would have to back down on its free-market ideology -
and it would also have to face up to the fact that it was wrong. And
this administration never, ever, admits that it made a mistake.


Thus, in a draft of a speech to be delivered Monday, Henry Paulson,
the Treasury secretary, declares, "I do not believe it is fair or
accurate to blame our regulatory structure for the current turmoil."


And sure enough, according to the executive summary of the new
administration plan, regulation will be limited to institutions that
receive explicit federal guarantees - that is, institutions that are
already regulated, and have not been the source of today's problems.


As for the rest, it blithely declares that "market discipline is the
most effective tool to limit systemic risk."


The administration, then, has learned nothing from the current crisis.
Yet it needs, as a political matter, to pretend to be doing something.


So the Treasury has, with great fanfare, announced - you know what's
coming - its support for a rearrangement of the boxes on the org
chart. OCC, OTS, and CFTC are out; PFRA and CBRA are in. Whatever.


Will rearranging these boxes make any difference? I've been
disappointed to see some news outlets report as fact the
administration's cover story - the claim that lack of coordination
among regulatory agencies was an important factor in our current
problems.


The truth is that that's not at all what happened. The various
regulators actually did quite well at acting in a coordinated fashion.


Unfortunately, they coordinated in the wrong direction.


For example, there was a 2003 photo-op in which officials from
multiple agencies used pruning shears and chainsaws to chop up stacks
of banking regulations. The occasion symbolized the shared
determination of Bush appointees to suspend adult supervision just as
the financial industry was starting to run wild.


Oh, and the Bush administration actively blocked state governments
when they tried to protect families against predatory lending.


So, will the administration's plan succeed? I'm not asking whether it
will succeed in preventing future financial crises - that's not its
purpose. The question, instead, is whether it will succeed in
confusing the issue sufficiently to stand in the way of real reform.


Let's hope not. As I said, America's financial crises have been
getting bigger. A decade ago, the market disruption that followed the
collapse of Long-Term Capital Management was considered a major, scary
event; but compared with the current earthquake, the LTCM crisis was a
minor tremor.


If we don't reform the system this time, the next crisis could well be
even bigger. And I, for one, really don't want to live through a
replay of the 1930s.

Reinmoose | April 10, 2008, 9:43am | #

so then... your response, MK2, is that you don't know jack, but that you like the rantings of Paul Krugman and George Soros because they make you feel like a victim?

MK2 | April 10, 2008, 9:43am | #

Aresen,

Its very much like cancer and other complex diseases. What kind of intervention is called for? I wouldn't want to be the one trying to sort it all out and "find" a cure. Nature handles such things best. Human intervention goes against nature.

MK2 | April 10, 2008, 9:47am | #

Reinmouse,

I know they're mere rantings. I put them out there as examples of the sort of challenges to the faith that we encounter outside catechism class. I always sleep with a copy of Freidman's essays under my pillow and say the Hail Market prayer many times a day.

Citizen Nothing | April 10, 2008, 9:51am | #

And you know you don't have to cut and paste all that blather, MK2? A link would be fine.

J sub D | April 10, 2008, 9:52am | #

you don't want to lose your home equity and your 401k do you?

That argument has been directed towards me on these forums (joe?) when I said fuck all of the players in this fiasco,. irresponsible lenders, borrowers and mortgage package investers alike. Of course, a world economy meltdown wouldn't happen, real estate prices would settle at their natural level, the foolish would par for their actions, and responsibe folks will find home purchasing easier.

This bipartisan clamor for a bailout disgusts me no end.

P Brooks | April 10, 2008, 9:53am | #

I expect before it is all over they will be buying structures with taxpayer dollars and bulldozing them to "stimulate" the real estate and building sectors.

In places like greater metropolitan Indianapolis, they can bulldoze houses and return the land to agricultural cultivation (for corn ethanol).

Reinmoose | April 10, 2008, 9:54am | #

MK2 -
I think you confuse corporatism with free-marketism. I don't think you know either what you're arguing for or against, which is why you have to post other people's work. It doesn't even form a coherent argument. They're just rants about how System A(free market economics) doesn't work because System B(what we have right now) is sucking hard, so clearly what we need is System C(yet to be defined, but you can bet it includes more of what we got in System B)
Give me a break

P Brooks | April 10, 2008, 9:59am | #

The Bush administration has resisted using taxpayers’ money because of its market fundamentalist ideology.

That's a good one.

First Little Pig | April 10, 2008, 10:01am | #

The root cause of the housing bubble was government intervention. First by making mortgage debt attractive through the tax code. Second by making profits on home ownership favorable over almost any other (again through the tax code). Third by making money so damn cheap after the collapse of the tech bubble. Fourth by allowing Fannie Mae et al. to manipulate the market by purchasing mortgages from originating banks. Had that not happened, lending standards would have been tougher. True that a securitized secondary market might have developed, but without the pseudo-govies in the mix is either might not have, or would have been much much smaller.

In a truly free market, many of the short-term incentives towards home ownership would have been eliminated and only really the longer-term incentives in play. And with money more expensive and banks more thoughtful about lending standards, most of the subprime and spec market would never have evolved as it did.

Ultimately, it is the government's fault by providing all of the incentives to make the perfect storm. As those incentives of cheap money, easy credit, tax benefits, quick tax-advantaged profit and a secondary market to eliminate origination risk came together it is no surprise what happened.

Now we have pro-govt interventionists complaining that this government-created fiasco by fixed by the government. Ridiculous.

LarryA | April 10, 2008, 10:01am | #

Soros: The nineteenth-century incarnation of the global capitalist system, in spite of its relative stability, was destroyed by the First World War.
...
It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take?

Anyone who considers nineteenth century (1801-1900) society “stable” has an interesting idea of the concept. Off the top of my head: War of 1812? 54-40 or Fight? Westward expansion? Civil War? Reconstruction? Texas revolution? Indian Wars? Gold rush? California revolution? Range wars? And that was just in the U.S. Europe and its empires were so stable it caused The War to End All Wars.

Yeah. The mortgage crisis is much worse.

I'm stuck in a condo I no longer want in a neighborhood where I have counted 4 houses that are bank owned. I expect there will be more in the next few years.

If you invested responsibly at least yours won’t be one of the foreclosures. You have several options.

You can stay put for a year or so, (or longer if the government props up the market) then sell.

You can sell now and take a loss.

You can find a renter and move, while waiting for your investment to improve.

You can do a creative, for instance listing on the website (don’t have the address at work) that arranges for people to trade houses.

Capitalism works.

First Little Pig | April 10, 2008, 10:02am | #

er.. BE fixed by the government

MK2 | April 10, 2008, 10:09am | #

Reinmouse,

Non, no. You misunderstand me. I know that unlike medicine, economics is an exact science and pure truth precisely revealed and interpreted by sacred Libertarian texts. But there is a lot of heresy out there. That's all I'm saying.

Reinmoose | April 10, 2008, 10:13am | #

Some years ago it was popular in economic circles to point out that the carrot approach yielded more productivity than the stick approach. This was frequently pointed out by political economists as a refutation of the classic idea that trying to reduce costs, alone, was the best way of making goods more cheaply. While a wise observation that only very few others argued against, it was then later used as an excuse for increases in the minimum wage and for advocating laws enforcing "living wage" standards. The problem here is that they don't understand the difference between what is granted legally and what is employed as strategy. We don’t see the gains of the carrot approach through mandated wage increases because it’s not the actual amount of money that people are making that cause their increase in productivity, but rather the psychological benefit received by the employees. Once one perceives a wage rate as being entitled, the carrot approach becomes much more expensive for businesses to employ in order to see the productivity gains they otherwise would have had.

This is what happens, MK2, when something that is perceived as “wise” for a business gets confused with being wise for the economy. They are two separate things, and should not be conflated. Just because *I* may know better about what works for *me* (why you have rich people advocating stupid policies they think will help “the common man.”) does not mean that I am qualified to understand the implications of that activity if it was legislated.

Isaac Bartram | April 10, 2008, 10:29am | #

It's probably a mistake to try to understand someone like MK2.

As near as I can tell he apparently believes that advocates of free markets actually believe that THE MARKET is some kind of supernatural force or being analogous to a fundamentalist's vision of God or some primitive heathen's view of the magical forces (both benevolent and malevolent) in his world.

Since this seems to be the extent of his understanding I think it highly unlikely any kind of reasonable discourse can follow.

Sort of like trying to explain quadratic equations to a three year old. Kind of pointless.

For example:

I know that unlike medicine, economics is an exact science and pure truth precisely revealed and interpreted by sacred Libertarian texts.

Good God, man. What pure nonsense.

You seem to be good at finding quotes.

Find even one citation for anyone who ever made that absurd assertion. Let alone a libertarian.

Aresen | April 10, 2008, 10:36am | #

Note to self: Add MK2 to troll filter.

P Brooks | April 10, 2008, 10:40am | #

In addition to the "appeal to authority" we seem now to have the "appeal to net worth."

Reinmoose | April 10, 2008, 10:51am | #

Issac Bartram -
you're right. You know what they say... arguing with a fool, etc. etc.

Mo | April 10, 2008, 10:52am | #

If Soros is such an insightful analyst, why has he completely skipped over the relevant fact that the government has been pressuring mortgage companies to provide loans to low-income, high-risk customers. Invalidates his premise that this mess is an example of free markets at work.

No one held a gun to the investment banks' and hedge funds' head to make them buy these loans and leverage the hell out of them. If this was simply due to people taking on loans bigger than they could afford, it would barely be a blip on the economy. However, when you leverage something 30x, a small blip turns into a big one. Blaming the subprime borrowers for this whole mess is like blaming the stud for your losses at the track. A simple, relatively unintrusive way to prevent this is eliminate off-balance sheet transactions for liabilities. It'd be cheaper than SarbOx and would have prevented Enron as well.

FWIW, McCain supports bailouts now.

Mike Laursen | April 10, 2008, 11:20am | #

A simple, relatively unintrusive way to prevent this is eliminate off-balance sheet transactions for liabilities.

How can we fix this with simple, relatively unintrusive rules? Well, that is a much better line of thinking than, how can we fix this with an expensive bailout?

FWIW, McCain supports bailouts now.

It's not worth much.

Mo | April 10, 2008, 11:29am | #

How can we fix this with simple, relatively unintrusive rules? Well, that is a much better line of thinking than, how can we fix this with an expensive bailout?

Simple, by making GAAP and SEC rules say, "If you have liability, no off balance sheet transactions". The outcome of this is institutions will have to have holdings that can cover them and you greatly reduce the odds of a repeat of Bear Stearns. If your auditors do their job, which they generally do, it shouldn't be a problem.

This will increase friction in the financial markets because capital requirements will go up to cover these, but the Spanish avoided this mess by requiring sufficient capital coverage for those transactions and the result was that no one made them and if they did, they had the cash to eat the losses.

mk | April 10, 2008, 11:33am | #

Thanks LarryA,

The fourth is not anything I had ever heard of, very interesting.

I want to find a silver lining in all this. If I can take advantage of the down market to upgrade my living conditions then I will have made out.

Whoops, I guess by thinking about such things I am advocating for government intervention and "fucking whining". Sorry about that.
*rolls eyes*

Bryan | April 10, 2008, 1:24pm | #

Let me poise a question to you all, because this is an area where I don’t really know what I think as a limited government proponent.

Let’s say the collapse of Bear Stearns and the Housing market in general would cripple the economy and send it into a depression. Let’s say that it would so cripple the American capital markets that London and Hong Kong would become the new capital centers. Under both of these scenarios, which likely dovetail with each other, a lot of responsible people who never gambled on the housing market and were not being paid millions of dollars to make investment decisions would likely lose their jobs. Again, further spiraling down the economy.

It seems to me that in such a hypothetical, which is also entirely plausible, the libertarian maxim of government intervention to protect your stuff from others is entirely justified. The ones that really would suffer are the ones that didn’t make the poor investment decisions, but were hurt by a falling economy. Aren’t you protecting Joe American from Bear Stearns executives and Home Speculators?

I agree there should be a way to do it without rewarding the executives and speculators, but is the overall goal justified from a limited government point of view?

Mike Laursen | April 10, 2008, 1:45pm | #

Let’s say the collapse of Bear Stearns and the Housing market in general would cripple the economy and send it into a depression.

Right there, we'd be accepting assertions made by the proponents of the bailout. And what are those assertions truly based on? Have they constructed a mathematical model of the economy and simulated the effect of Bear Stearns going out of business with no bailout? Would anyone even know how to model the economy that accurately? If they did know how, "why ain't they rich"?

So, I'll make a counter-assertion, based on the shaky ground of "common sense". It's good for the economy for poorly-run companies like Bear Sterns to go out of business. As Mike Flynn points out in the video, the high tech bubble burst with no bailout, and high tech business is doing just fine.

J sub D | April 10, 2008, 1:59pm | #

Let’s say the collapse of Bear Stearns and the Housing market in general would cripple the economy and send it into a depression.

Let's say that cold fusion works and will create universal prosperity. It therefore follows ...

Aresen | April 10, 2008, 2:05pm | #

Bryan

I'd suggest you get a copy of Charles MacKay's Extraordinary Popular Delusions and the Madness of Crowds. Read about the South Sea Bubble in England and the Tulip Mania in Holland. (The book was published in the 1850s, but is one of the most important (and most overlooked) ever written.)

Both of these events caused major economic upheavals, yet Amsterdam remained one of the world's major economic centers into the 1900's and London remains one to this day.

Then contrast the results of the French financial crisis (I've forgotten the popular name) surrounding John Law. It was the intervention of the French government and the closing of the French economy that stifled the economy and ensured English and Dutch dominance for the next two centuries.

Bronwyn | April 10, 2008, 2:45pm | #

That's it. We're finished. Personal responsibility is dead.

atrevete | April 10, 2008, 2:49pm | #

How is it that people with seemingly no thoughts of their own, who only quote George Soros and Paul Krugman as though their thoughts were the word of God, call OTHER people "fundamentalist". Psychological projection anyone?

MK2 has utter blind faith in these "experts" that he seems to think no one could POSSIBLY question Soros, because, after all, he's made money! And if George Soros makes up an epithet - market fundamentalist - then how could he be wrong?

Britney Spears made a lot of money, too, why not take advice from her?

Aresen | April 10, 2008, 3:01pm | #

atrevete

Trust the collective wisdom of congress or trust the insights of Britney Spears.

Hmmm. Tough Call.

Mike Laursen | April 10, 2008, 3:16pm | #

Wow, you actually came up with a hypothetical scenario where I'd have to go with the wisdom of Congress.

Bryan | April 10, 2008, 4:11pm | #

Mike, J Sub and Aresen,

First of all, I think you guys have misunderstood me. I am not supporting the bailout. Maybe its necessary, maybe it isn't. I get that you don't think that its necessary. For the purpose of this hypothetical though, I am assuming that the disaster scenarios are accurate.

Recognizing that it is difficult for you to imagine something that you don't believe is accurate, I will try to explain why I think there is the possibility that Bear Stearns might have a more sever economic impact than Pets.com and Tulips. Our economy is based large part on the capital markets and the availability of capital is absolutely necessary for a modern economy. That's not the case for tulips or even for the internet.

If the tulip markets collapse, people who bought tulips lose there money. That's it. If the capital markets collapse, the people that loan money lose there money -- and those same people also become more hesitant to loan more money. That means that a lot of new businesses that are otherwise unconnected to the capital markets are without money for start-up and expansion. Those that are loaning out money will do so at higher interest rates, meaning that the few businesses that do get the limited amount of capital loans out there have to be more successful in order not to default. More will default though. And as they do, those people will declare bankruptcy which will affect more creditors.

I sympathize with where you guys are coming from, but the capital markets are at the center of the economy and directly control the success of all other businesses. That's just not true for other industries -- even the tech bubble, which was more of a location for commerce as opposed to the catalyst.

Aresen | April 10, 2008, 4:57pm | #

Bryan

The Tulip Mania and the South Sea Bubble were proportionately far larger in their impact on the economies than the similtaneous collapse of Bear Stearns, JP Morgan, Citibank, Bank of America, and General Motors on the same day would be in the US, which is why I suggested you read MacKay's book.

They were gigantic speculative bubbles, relative to their time and severely damaged the economies of the Holland and England respectively. However, neither of them ended the financial importance of their countries.

The fundamental productivity of the US economy would remain after even the catastrophic collapse I described above. The New York market will not be displaced in that manner.

Eventually, the Indian and Chinese markets will continue to rise. If either economy reaches the level of 30% of US per capita GDP, they will then surpass the US. New York, however, will remain the dominant market in the Western Hemisphere.

The caveat I would put on that is: given TOO MUCH regulation, capital will move elsewhere. That would end the dominance of New York more quickly than anything else.

GG | April 10, 2008, 5:11pm | #

Make no mistake, my friends. He's from the government and he's here to help:

McCain Refines Plan for Homeowners

By Dan Balz
BROOKLYN -- Two weeks after drawing criticism for saying he favored only a limited federal role to help deal with the home mortgage crisis, Republican presidential candidate John McCain sought to assure Americans he is prepared to use the government where necessary to help ease the impact of a declining economy on working families.

[...]

"Let me make it clear that that in these challenging times, I am committed to using all the resources of this government and great nation to create opportunity and make sure that every deserving American has a good job and can achieve their American dream," he said.

[...]

"Tax breaks for builders, funds to purchase homes in foreclosure, and tax credits that are not targeted to where the need is greatest do not constitute the federal help that is warranted," he said.

Instead, McCain proposed a federal program that would require individual homeowners to seek help from the federal government and, if they qualified for assistance, emerge with a restructured mortgage that would allow them to stay in their homes.

Bryan | April 10, 2008, 6:30pm | #

Areson,

I agree with you that given too much regulation, capital will likely move elsewhere on its on. I'm just not sure that you aren't discounting the size and influence of momentum and infrastructure when it comes to the current financial market.

Setting aside the domino effect that you would get (as mentioned above with businesses failing due to an inability to borrow sufficiently in a tight capital market) there is something to the notion that investment money goes to New York because that is where the established financial players are located. New York has the names that the Boards of Directors have heard of and (rightly or wrongly) have confidence in. The NY investment banks have also done most deals a number of times and don't need to reinvent the wheel. If the established players start falling though, those benefits and comparative advantages lessen. Starting fresh with a bunch of brand new investment companies, maybe it doesn't make as much sense to base it in New York. Maybe it makes more sense to base it in Hong Kong or London or India.

Again, its not an issue of how large an impact the collapse was. I admit that more money probably was directly lost in both of the downturns you mention. The point is the loss of future earning capacity. Its like if I kill the goose that lays the golden egg. The ramifications for my income production are much larger than if I kill 30 regular geese. I have no more golden eggs coming. That is the hypothetical I am considering and I don't think that you reference to the book as really addressed it.

JB | April 10, 2008, 10:45pm | #

I'm going to buy a $10 billion house and get bailed out by the government. All you suckers are going to pay for it.

Plus, once Barak "my-grandmaw's-a-cracker" Obama gets elected it will be free money for everyone. No one will have to work anymore. Can't you just feels the winds of CHANGE blowing through the graveyards?

Stock up on guns and ammo folks.

Mike Laursen | April 10, 2008, 11:20pm | #

For the purpose of this hypothetical though, I am assuming that the disaster scenarios are accurate.

OK, we can assume the scenario is true for sake of discussion. If London or Hong Kong become bigger capital markets than New York, is that necessarily bad? Would it cause job loss or would some Americans just end up with different bosses?

My point above is that there have been a lot of assertions made about what will happen to the economy. But where's the math, the computer models, the historical comparisons, the whatever that backs those assertions?

I see the press deferring a lot to the perceived expertise of the financial experts calling for the bailouts, but not a lot of skepticism that they are calling for a bailout of the very industry in which they are employed.

That's not the case for tulips or even for the internet.

I don't know about tulips, but the Internet takes a lot of capital. Servers, electricity, networks, skilled employees all require a lot of money.

Aresen | April 11, 2008, 1:00am | #

Bryan

My point is more that the underlying potential of the US Capital market is not going to be destroyed even if it suffered a 1929 style crash. There are too many basic strengths in the US economy for even a market crash - like the March 2000 NASDAQ debacle or the one in 1929 - to cause New York to lose its importance. A great deal of capital may be lost, but the underlying potential of the US market is simply too strong for New York to be displaced as a major player.

Probably the most significant fact is that, even if the US "First Team" - Goldman Sachs, Morgan-Stanley & the rest - were wiped out, New York still would have numerous "Second Team" brokerages and investment banks which would be "First Team" anywhere else in the world.

Until the Chinese and Indian economies are a par with the US in size, New York's place is secure. Even then, New York has a two-century head start in the sophistication of its investment knowledge that will see it retain its edge for a long time to come.