One Trillion Dollars!

The bailout of the banking industry--which seems to be calming traders--could cost you $1,000,000,000,000. Yes, that's the right number of zeros.

Congressional leaders said after meeting Thursday evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that as much as $1 trillion could be needed to avoid an imminent meltdown of the U.S. financial system. 

Paulson announced plans Friday morning for a "bold approach" that will cost hundreds of billions of dollars. At a news conference at Treasury headquarters, he called for a "temporary asset relief program" to take bad mortgages off the books of the nation's financial institutions. Congressional leaders had left Washington on Friday, but Paulson planned to confer with them over the weekend.

"We're talking hundreds of billions," Paulson told reporters. "This needs to be big enough to make a real difference and get to the heart of the problem."

Makes sense. AIG had a trillion dollars in assets before this week. But if this was a serious country, wouldn't this prompt Obama and McCain to stop talking about how they're going to spend more of our money? All we hear from this is some babbling about firing Chris Cox and blaming the other guy for having the wrong advisors. Oh, and insisting they were right all along.

Earlier this year, a lot of people noticed that an election between a non-white Democrat who upset the frontrunner and an old moderate Republican mirrored the final election in the TV series The West Wing. In the episode "The Cold," President Jed Bartlet summons Democrat Matt Santos and Republican Arnold Vinick into the Oval Office to inform that that he's going to be spending a (paltry-sounding) $70 billion on a defensive war in Kazakhstan.

VINICK
What's this going to cost?

BARTLET
It depends on how long we stay.

SANTOS
It doesn't matter. The first 100 days in office are the most productive of the whole term and there's no way we can extricate ourselves from from something like this in three months. It's not about the money. You're blowing any political capital we might have by forcing us to fight a war.

VINICK
Do we have an estimate?

BARTLET
First twelve months: 70 billion.

VINICK
I can say goodbye to my tax cut. Your education plan is certainly off the table.

Ah, fiction.

Comments

[affenkopf]

More socialism for Wall Street.

[Invisible Finger]

One Million Million Dollars would've been funnier.

[Invisible Finger]

Congress required action when individual Congresscum realized they lost 95% of their wealth.

[Lefiti]

In the face of this rampant heresy, let us bow our heads and pray.

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.

[Warren]

Hey, I've got a good idea. Why doesn't the government just give everybody a million dollars. Then we'd all be rich!

We are SOOOO fucked.

[Episiarch]

Somebody pinch me, I'd like to wake up now.

[Lefiti]

Warren

You have always been SOOOO fucked in the brains department. Your little libertarian cult will weather this storm because it has no connection whatever to reality, so relax.

[newsandverse]

BAILOUTS TO FAILOUTS: A NEWS AND VERSE EXTRA
A guide to contemporary use

BAILOUT=Rescue, by government, of important economic entity

AILOUT=Rescue of healthcare industry
ALEOUT=Rescue of Bennigan's
BALEOUT=Rescue of Columbian or Jamaican economy (see also: cotton, hay)
BRAILLEOUT=Rescue you can't see coming
DALEOUT=Rescue of NASCAR (see also: Roy Rogers)
FLAILOUT=Rescue by FEMA
FRAILOUT=Rescue of an elderly presidential candidate
GALEOUT=Rescue of Jim Cantore (see also: HAILOUT)
GRAILOUT=Rescue of Michael Palin (see also: Monty Python, Indiana Jones)
NAILOUT=Rescue of construction firm (see also: Asian salon, Press-on)
MALEOUT=Rescue of sexist political candidate
MAILOUT=Rescue by white, powdery substance (see also: FBI)
EMAILOUT=Rescue of Gov. Palin's Yahoo! account
BLACKMAILOUT=Rescue by extortion
BLACKMALEOUT=Rescue by Dem. Presidential candidate
PAILOUT=Rescue by trickle-down economics
PALEOUT=Rescue by goth
QUAYLEOUT=Rescue of any unqualified Vice-presidential candidate
SALEOUT=Rescue of pandering political campaign
SCALEOUT=Rescue of Weight Watchers (see also: America's Biggest Loser)
SHALEOUT=Rescue of oil company (see also: Gulf of Mexico, ANWR)
SNAILOUT=Any rescue involving US Postal Service
STALEOUT=Rescue of lipstick jokes (see also: Pigs, Pit Bulls, Estee Lauder)
VEILOUT=Rescue at the altar
VAILOUT=Rescue of anyone who pays $100+ to fall down a mountain
SURVEILOUT=###REDACTED BY HOMELAND SECURITY###
ZALEOUT=Rescue of cheap wedding rings

FAILOUT=Destiny of most bailouts

http://www.newsandverse.com
...ripped from the headlines

[Episiarch]

Hey Edward Lefiti, are you stroking off right now with your left hand or your right? I just want to know if your handle is a double entendre.

[BDB]

Don't worry, we can weaken the dollar enough to the point where that won't be so much money!

[joe]

How much of that trillion is the equivalent of a grant, and how much will be recouped in the form of a loan or the future profits of companies the feds take over?

I know, I know, it's ideologically unacceptable either way, but on the ground, there's a big difference between the government recovering several hundered billion dollars it disburses vs. not.

[Jake Boone]

We'll return to Lefiti's incessant shrieking after this important message:

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[;-)]

A trillion here; a trillion there; soon you're talking about real money

[J sub D]

Imagine if the Secretary of the treasury, with POTUS backing, had said this when I wrote it.

J sub D | September 6, 2007, 10:53am | #

Who am I supposed to bail out? People who took mortages out on houses they couldn't afford, or those who gave them the mortages? To both groups my response is "You made your bed, now lie in it."

Responsible financial management practices on Wall Street would have started more than a year ago. Yeah, on the books much money would have been lost. By those who made the fucking bed.

Instead Wall Street went carelessly forward knowing that Uncle Sam had their backs. I see that we are propping up those with fucked up business practices and letting people stop mortgage payments without penalty (likely a government backed re-finance on better terms).

Warren's right. Let's mainline just one more time and then we can get off the junk. Tomorrow. Or next week. Hmmm, maybe we should wait until November 5th. For today it's "Can I have some fentanyl mixed in with my blow, please?"

[Jessup Reilly]

Wow, right when I though it couldnt get any worse. I wonder where all this money is going to come from. Gas and Groceries pretty muich takes it all as it is.

JIff
http://www.anonymize.us.tc

[BDB]

Jake-

Does this filter work for people without email or screen names?

I'd really like to filter this anonymity douchebag/bot. I installed the plug in but I can't get it to work.

[nj]

No big deal. I have a solution: print more money!

Sigh, we are so fucked

[Lefiti]

It would be so much better to let all this play out on its own. Losing jobs, life savings and homes--all this builds character. If you're going to survive the vicissitudes of the free market, you need character. I was hoping to see my 401K wiped out, forcing me to get serious about dieting. Alas, The nanny state's intevention has ruined my self-improvement program once again.

[Episiarch]

Lefiti, answer my question.

[Fluffy]

How much of that trillion is the equivalent of a grant, and how much will be recouped in the form of a loan or the future profits of companies the feds take over?

I know, I know, it's ideologically unacceptable either way, but on the ground, there's a big difference between the government recovering several hundered billion dollars it disburses vs. not.

That is a fair question, joe.

But I'd also like you to comment on your previous claims, during the infamous goldbug debates during the height of the Ron Paul campaign, that the record of the Fed at managing the monetary system was good.

It's been a good record, if you just disregard the fact that each new intervention has raised the stakes by an order of magnitude.

[blaupanzer]

Jeff Taylor addressed this last month.

Like some tinhorn dictatorship, we just print money and expect everyone to keep taking it. Anyone remember stagflation (no growth, high interest, high unemployment)? We're going to see a repeat as the creditors demand a premium to even take dollars.

All this is due to the repeal of the protections established after the Great Depression, including the restrictions on using "leveraged money" (money borrowed to be leant out again in a kind of pyramid scheme). One act of Congress (Congressman Phil Gramm and his Republican cronies in the early 2000's) was to repeal the Glass-Stiegal Act, one of the key laws meant to stop another stock market Crash due to leveraged buying.

[New Cassandra]

Wow - that money could have been more wisely spent over 10 months in Iraq.

[joe]

Fluffy,

OK. Monetarism has absolutely nothing to do with this problem. Zero percent of this problem was caused by inflation. Zero percent of it was caused by moving interest rates around. What changed between the 65 years when the Fed's management of interest rates worked like a charm, and this ongoing disaster, had nothing to do with the Fed, raising or lowering rates. What changed was the regulatory regime.

You want to blame the Fed for something? Blame it for dragging its feet on implementing the regulations on investment banks mandated by the 1994 bill, not the fact that we have a central bank at all.

[Winslow Theramin]

I've basically been waiting my entire life for the financial system to collapse. I've been stock-piling gold, silver, copper (and some tin for bronze) for well over a decade now.

For about 2 hours yesterday, I thought all my planning was finally going to bear fruit, and suddenly the Fed steps in a destroys it all. Now how much longer are we going to have to wait?

[Jake Boone]

Does this filter work for people without email or screen names?

I'd really like to filter this anonymity douchebag/bot. I installed the plug in but I can't get it to work.

The douchebot changes email addresses, so it'll be tough to permanently filter it. However, it reuses each address for a while, so if you throw the new email into the filter each time you see one of its posts, you'll cut back on the number you see.

Check your commas, if the filter isn't working. Losing a comma at the end of a line is a pretty common error (I did it myself).

[Don the libertarian Democrat]

Make sure you keep that headline for the next time.

[P Brooks]

It's only little pieces of paper; no big deal. When we run out, we print more.

[Rex Rhino]

How much of that trillion is the equivalent of a grant, and how much will be recouped in the form of a loan or the future profits of companies the feds take over?

I know, I know, it's ideologically unacceptable either way, but on the ground, there's a big difference between the government recovering several hundered billion dollars it disburses vs. not.

Not exactly. It doesn't matter if the government gets the dollars back, if the bailout causes the dollars to become worthless.

[robc]

joe,

You dont need an extensive regulatory regime (there are some very basic ones needed, but you know Im not an anarchist, so we wont go there) if you are willing to let people/businesses fail.

[robc]

The problem is the people who dont see failure as a postivie sign. Failure is a sign that the market is functioning properly.

[James B.]

All this is due to the repeal of the protections established after the Great Depression, including the restrictions on using "leveraged money" (money borrowed to be leant out again in a kind of pyramid scheme). One act of Congress (Congressman Phil Gramm and his Republican cronies in the early 2000's) was to repeal the Glass-Stiegal Act, one of the key laws meant to stop another stock market Crash due to leveraged buying.

Actually passed in 1999 with a Senate vote of 90-8 (including Biden and Dodd) and signed by Clinton.

[Billy Beck]

"My kids bought me an insurance company! Sweet children: they don't even have jobs yet."

Jim Henley cracked that one.

You people are pikers.

[Pinette]

Um, CNBC reported that we had already reached $1.43 trillion in commitments to these bailouts. and that was before the $585 billion that we've committed in the last two days. We should be close to 2 trillion by now.

[joe]

robc,

When failure cascades, we get depressions. I rather enjoyed the 70 years we went without them, after they happened every 20-30 years prior to that.

But you're right - if you're willing to see shennigans in the financial sector cause the economy to go into depression, you don't need regulations.

I'm not.

[joe]

Actually passed in 1999 with a Senate vote of 90-8 (including Biden and Dodd) and signed by Clinton.

Untrue. That is the vote on the conference report, after the bill passed both houses in different forms.

The actual bill, when before the Senate, barely passed, with Dodd, Biden, and Reid voting against, along with just about all of the Democrats.

[robc]

joe,

The failures wouldnt have cascaded without the government interference to begin with. The bubble never would have grown that big. the housing bubble was supported, in part by lower fed interest rates, in part by fannie/freddie, in part by a billion other things, that if they hadnt existed would have caused the bubble to have burst much earlier, with much less consequences.

Since we havent even hit recession yet, expected a depression without the bailouts seems questionable. We may get there anyway, I think the bailouts make it MORE likely, not less. That said, depressions are a great buying opportunity.

[kinnath]

People prevented the natural reclamation of forest fires in yellowstone for a hundred years or so. This eventually lead to a massive fire that wiped out huge chunks of the park. The forest service now recognizes that letting fires happen when nature makes them happen is better for the long term health of the park.

How is that so hard to understand in the broader scope of the world?

[joe]

Roll Call vote on Phil Gramm's 1998 Glass-Steagel repeal bill:

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00105

[robc]

joe,

That is the vote on the conference report, after the bill passed both houses in different forms.

The conference report is the final version of the bill. That is the most important version to vote against if you oppose a bill.

If you vote against the initial senate version and then vote for the final version, that means you think the conference made it better.

[Fluffy]

Zero percent of it was caused by moving interest rates around.

Joe, come on. This statement is absolutely ludicrous.

You're going to sit there and try to say that the real estate bubble had no connection to interest rate policy?

Wow, Alan Greenspan should come over your house and blow you tonight for that kind of press.

[Rhywun]

So the winners appear to be: bankers, banking executives, stupid homeowners, and bankers. At some point the general public is going to balk at propping up these people's lifestyles. Right?

[Fluffy]

The Fed has been in place since 1917, joe.

There was a panic in 1919-20.

There was a panic in 1929 followed by The Big One.

We had stagflation in the 70's.

We had a smaller real estate bubble and a smaller financial system crash in the early 1990's.

And now we had a BIG real estate bubble leading to a major financial system event, the outcome of which is currently unknown.

How can you claim that the Fed has made the system more stable? And that's not even considering the record of other currencies managed in a similar way.

[joe]

robc,

The failures wouldnt have cascaded without the government interference to begin with. History says otherwise. Depressions caused by cascading financial sector failures (ie, bank runs causing bank failures causing liquidity/investment collapses and calling of loans) happened quite frequently prior to the New Deal, and ceased to exist under it. So no, cascading failures are most certaily NOT impossible absent government involvement; history shows them to be much more likely.

The bubble never would have grown that big. Perhaps not, but then, speculative bubbles have been with us forever. This issue is irrelevant, however. The collapse of a bubble in the HOUSING and REAL ESTATE markets would not have turned into a cascade of failure across wide swaths of the financial sector were it not for the "innovative," "dynamic" financial instruments, known today as Big Shitpile, which never should have been allowed, and would not have been allowed if the Gramm bill and other acts of negligence hadn't purposely left the store unminded.

Bubbles pop. The internet bubble popped - but it didn't sent the entire financial system into turmoil, like this has.

That said, depressions are a great buying opportunity. If you've got any money. You know, like the heavily-regulated Bank of America.

[Hugh Akston]

You want to blame the Fed for something? Blame it for dragging its feet on implementing the regulations on investment banks mandated by the 1994 bill, not the fact that we have a central bank at all.

joe,

I'm not familiar with this bill. Would it have mandated that mortgage lenders not lend at low interest rates to high-risk borrowers?

[Fluffy]

Blame it for dragging its feet on implementing the regulations on investment banks mandated by the 1994 bill

Describe the manner in which the 1994 bill would have prevented the large-scale securitization of subprime loans - in the context of a macroeconomic environment where those loans were showing stable repayment.

Because unless they would have done that, just about any regulatory change you can contemplate would have been window dressing.

[joe]

robc,

If you vote against the initial senate version and then vote for the final version, that means you think the conference made it better. That is an astounding misstatement of how the legislative process works.

Fluffy,

You're going to sit there and try to say that the real estate bubble had no connection to interest rate policy? Answered, at 12:11 PM. The popping of the bubble would not have wiped out wide swaths of the financial sector without the shady investment vehicles that have proliferated. It would have just been bad for the real estate market.

The Fed has been in place since 1917, joe. But neither it, nor the federal code, were engaging in much oversight and regulation of the financial sector - which is why I've been talking about the regulatory regime set up by the New Deal, and not the Fed.

How can you claim that the Fed has made the system more stable? Did the joe in your head spend the threat talking about the Fed? Because the joe in this reality has been talking about the New Deal-era regulatory regime that REPLACED what existed in 1917, 1919, and 1929.

Also, you know as well as I do that the stagflation of the 70s was caused by oil prices and wage-and-price controls. Remind me, what was it that is universally acknowledged to have tamed inflation in the early 80s? Oh, right: Fed policy.

[Fluffy]

The collapse of a bubble in the HOUSING and REAL ESTATE markets would not have turned into a cascade of failure across wide swaths of the financial sector were it not for the "innovative," "dynamic" financial instruments, known today as Big Shitpile, which never should have been allowed, and would not have been allowed if the Gramm bill and other acts of negligence hadn't purposely left the store unminded.

This is simply false.

The growth of the securitization market was actually aided by bank regulations, which created an incentive to bundle loans and move them off your books, while pretending to insure against losses with bond insurance and interest rate hedges.

The impulse to securitization became irresistible because the underlying loans appeared to show solid repayment histories. They only did so because they were made in an environment of rising real estate prices - but for a regulator to have stopped the process, you would have needed a regulator who recognized the bubble while it was happening. And during the bubble, all the regulators - and the Congress - denied it was a bubble.

[Fluffy]

Also, you know as well as I do that the stagflation of the 70s was caused by oil prices and wage-and-price controls. Remind me, what was it that is universally acknowledged to have tamed inflation in the early 80s? Oh, right: Fed policy.

The pre-Volcker Fed was also accomodationist in policy in the face of rising inflation.

So you're basically asking me to credit the Fed with solving an inflation problem it had helped to create.

Fine - it was very nice of the Fed to stop beating its wife. For a while.

Happy now?

[Y. S.]

In Soviet America, Cox Sucks You!

[Mr. Nice Guy]

fluffy
I think joe is obviously pointing to New Deal legislation and regulatory agencies as well as its effect on Fed policy in keeping the usual boom and bust stuff away.

And, you have to admit, boom and bust cycles have been rare since then and were pretty common before.

[Y.S.]

Chyort voz'mi! wrong thread!

[matt2]

That said, depressions are a great buying opportunity. If you've got any money. You know, like the heavily-regulated taxpayer-subsidized Bank of America.

[robc]

And during the bubble, all the regulators - and the Congress - denied it was a bubble.

Not all of Congress however. Paul saw the bubble and suggested fixing it by eliminating Freddie/Fannie guarantees.

I think if he has succeeded in 2002, then the bubble would have deflated well before it ever grew. In fact, joe and his ilk would have blamed that deregulation for the fall in the housing market that would have occurred 4-6 years ago, instead of crediting it for preventing the uber-bubble that never happened.

[robc]

MNG,

And, you have to admit, boom and bust cycles have been rare since then and were pretty common before.

As I have said before, and joe has even agreed that I might be right about, longterm, boom/bust cycles lead to greater growth than managed growth without the cycles.

Boom/Bust cycles are a sign of a healthy economy.

[Rhywun]

Chyort voz'mi! wrong thread!

I dunno... it seemed fitting to me.

[joe]

Fluffy,

The growth of the securitization market was actually aided by bank regulations, which created an incentive to bundle loans and move them off your books, while pretending to insure against losses with bond insurance and interest rate hedges.

The more-regulated banking sector has much, much less exposure to this collapse. Most of the shady subprime loans, which begat the shady bundled mortgage derivatives, came not from the banking sector, but from the non-bank lenders, who flooded into the lending market with the repeal of Glass-Steagel, and who were allowed to bundle the mortgages with much less oversight.

The pre-Volcker Fed was also accomodationist in policy in the face of rising inflation. Only one of us is lumping all Fed actions into the same pile without bothering to distinguish between good and bad policies, and it ain't me, babe.

Perhaps you're thinking of my ilk? You seem to attribute an awful lot to my ilk, I've noticed.

MNG,

And, you have to admit, boom and bust cycles have been rare since then and were pretty common before. Well, the cycles haven't gone away. It's just that the busts haven't been as nasty. Until this one.

[joe]

Describe the manner in which the 1994 bill would have prevented the large-scale securitization of subprime loans

It would not have forbidden that action, just made it much less common, as there would have been a much smaller amount of shady subprime loans made in the first place.

[robc]

It's just that the busts haven't been as nasty. Until this one.

pressure built up in the system. Every time that Fed action prevented a bad bust before it increased the pressure that would need to be realeased with the next.

They are trying to prevent it again. EVENTUALLY, we are going to have a nasty bust. The past minimizing of the busts has a price.

[Fluffy]

It would not have forbidden that action, just made it much less common, as there would have been a much smaller amount of shady subprime loans made in the first place.

What regulatory mechanism would have made this the case, joe?

You keep forgetting that our current foreclosure crisis was preceded by years of historically low foreclosure rates.

And because of that, you are daydreaming about some fantasy regulation that would have stopped firms from making loans that were being repaid. Without ever actually describing how that would have taken place.

Mark-to-market for bonds? That wouldn't have helped during the bubble, because during the bubble these securities were quite liquid and their market value was high.

Stricter risk-based capital requirements? Again, that doesn't help protect you against loans that are being repaid.

[joe]

Libertarians like to point out that backstopping and low-prime Fed policies can create moral hazards, but artifically increasing the upside to risky behavior while softening the downside.

And they are right. While these programs do good things - like keeping slowdowns from turning into stalls, and keeping people and businesses from being completely wiped out by the irresponsible actions of others - they do so at the cost of reducing markt discipline.

This is exactly why it's so important to replace that market discipline with regulatory discipline, so long as that backstopping is in place.

Reasonable people can disagree about whether we should have a system of backstopping and regulation, or no such system. But only the most unreasonable people are going to try to tear down the regulatory regime while leaving the backstopping in place. And yet, that's exactly what the Republicans and some of the DLC Democrats have been doing for a decade and a half.

[joe]

pressure built up in the system.

Lots of metaphors about forest fires and steam valves, but very little to back it up.

We're just going to pretend that there wasn't a massive change in policy in the area of financial regulation immediately prior to this debacle? And postulate that it was the inevitable consequence of the earlier policy, even though nothing similar happened under that policy, while it used to happen all the time before it was adopted?

Look, I know the "correlation does not prove causation" retreat, but correlation sure as hell does not prove a negative causal relationship. Particularly when there is a very plausible, well documented explanation of the causual relationship that explains the data.

[robc]

joe,

Its hard to run parallel economic systems to test the metaphors. But, from looking around, it seems the places with the strictest controls had the hardest falls when they finally came. Does that mean the pressure/fire metaphors are accurate? No. But, they seem to have some basis in fact.

Did the change in regulations have an effect? Sure, along with the things you deny too, like Fed fucking around with interest rates. Look, the government WANTED people buying houses, they did lots of things both actively and passively (new regulations and eliminated other regulations) that encouraged it. Which was the bigger cause, the regulations or the deregulations? Hard to say, lets just blame the government.

BTW, your argument on the Fed, only accepting the good Fed policies and not the bad is a form of the "if we only elected the right people argument". I cant prove it, but the right people dont exist. Well, I can get any christian to accept it, its a fundamental part of the belief. Atheist Libertarians seem to get it too.

And I agree with the paragraph and backstopping. Deregulation with backstopping is stupid. But what have a been pushing? Letting people fail hard.

[R C Dean]

We're just going to pretend that there wasn't a massive change in policy in the area of financial regulation immediately prior to this debacle?

Yeah, but Sarbanes-Oxley may have actually contributed to the problem, rather than helping prevent it.

[joe]

robc,

But, from looking around, it seems the places with the strictest controls had the hardest falls when they finally came.

I'm not sure what you're talking about. Here in the states, the strictly-regulated banks are doing a lot better than the non-banks in this crisis. The stricty-regulated stock market recovered from the tech bubble collapse and didn't send the financial system into meltdown.

Did the change in regulations have an effect? Sure, along with the things you deny too, like Fed fucking around with interest rates. The Fed fucking around with interest rates may or may not have contributed to a housing bubble, but that's irrelevant to the question. The question is, why did this collapsing bubble turn into a series of cascadign collapsed across the economic system, when no other popping bubble did that for 80 years? The answer to that question is found in the shady mortgage-backed securities, the shady loans that preceded them, and shady credit-default swaps. All the Fed's monetarism did is make it more profitable to invest. You might as well blame the economic growth fostered by the internet, then. The point is, not everything people do to make money during an economic boom is equal. Some things, like building up a tower of debt backed by junk that's going to vanish on the off chance real estate prices don't rise forever, are really dangerous.

I certainly hope you're not "looking around" at, say, Cuba, as if a meaningful parallel exists between communism and the regulation of financial markets. That would just be silly.

BTW, your argument on the Fed, only accepting the good Fed policies and not the bad is a form of the "if we only elected the right people argument". No, it's not, any more than your argument that the government should move in a more libertarian direction, which I can just as accurately describe as "If only we elected the right LIBERTARIAN people." This isn't about people, it's about policies.

But what have a been pushing? Letting people fail hard. I can respect the argument that we should try to get to a place where the economy works as you describe; disagree, but still respect. However, what's going on outside our windows isn't the "letting people fail hard" that you want to see.

In the forest-fire metaphor, doing nothing about this situation is the equivalent of letting megafires grow and grow, because you don't like the fire-suppression regime that made them happen. They aren't natural fires, and they aren't going to have the same consquences of natural fires if allowed to burn unimpeded; what they're going to do is wiope out the ecosystem and the human settlements that you want to ultimately make safer. The way you get back to that system is to selectively clear during appropriate times, until the forest is back to something like a natural state, and THEN let natural forest fires burn.

[joe]

Over WHERE, RC Dean? I'm supposed to look over WHERE? I can't see what you're waving your hand at.

[Fluffy]

We're just going to pretend that there wasn't a massive change in policy in the area of financial regulation immediately prior to this debacle?

Joe, this current debacle is just the big brother of the S&L collapse. That was another banking system disaster coming on the heels of an asset price bubble fed by a combination of Fed over-easing and, on the fiscal policy side, deficit spending.

This time the Fed easing was greater, the deficit spending was greater, and the bubble was larger. BOOM! Baby fall down.

You are indeed allowing correlation to imitate causation. But the change in Glass-Steagall that occurred in 1999 had nothing to do with this crisis.

Consider the fate of Lehman. Lehman had a subsidiary mortgage company called Aurora Home Services. Aurora was a major Alt-A wholesaler and conduit whose product lineup was "secretly" behind the products offered by several other major mortgage wholesalers. The products offered by Aurora played a large part in destroying Lehman.

To avoid this happening, we would have needed a regulation that prevented an investment bank from owning a mortgage company - and no such regulation ever existed or was contemplated. Deregulation wasn't necessary for a bank to own a mortgage company; they've owned them for decades. The only difference between what happened with Aurora was the product line - and the product line, as I keep stressing, came into existence because the housing bubble created the data-driven illusion that these products were sound. When presented with data that show Alt-A loans being repaid, the natural response of the market was to offer more of these types of loans. And no regulator was going to stop it, because that wasn't what the regulators were looking for.

[Invisible Finger]

When failure cascades, we get depressions.

That's because the regulations freeze assets. The depression happened because people couldn't recover ANY of their money, let alone 20% of it that would at least kept some molasses-like liquidity in the system.

the Fed and Treasury are trying to prevent the feeze-up, but it'll result in steep inflation starting in 2010 or so.

The philosophical arguments are fun, but please don't let your ideologies (on either side) keep you from protecting yourself (ala Mr. Montgomery Ward) in the existing reality.

[henry]

Will this finally get the GOP apologists to admit their party is a fraud and sham?

By the way, all of this is being done with borrowed money--mostly from the Chinese and Arabs. Imagine if FDR had financed the New Deal with lending from the Nazis and Japs and you have a fair analogy.

[Gabe]

The decreasing regulation that Joe refers to was put into place by the same political bankster elites who LOVE, LOVE, LOVE the federal reserve. The deregulation was not just generic "deregulation", it was limited deregulation aimed to benefit targeted specific people who are wealthy enough to phone up the president, talk to a couple lobbyist and get specific legislation passed at their whims. The thousands of pages of new regulations written intot he tax code every year are passed byt hese same people. The people getting direct benefit from bailouts are these same people.

Yet Joe would have us beleive taht allowing these same people to right some new regulations will suddenly make the system better!....insanity.

[joe]

Fluffy,

Joe, this current debacle is just the big brother of the S&L collapse.

...which was also a problem of no one minding the store. S&Ls were, just like so many financial institutions today, making loans on the basis of junk and hoping its value wouldn't collapse. Boy, good thing nobody stopped lenders from doing THAT after the S&L fiasco!

The only difference between what happened with Aurora was the product line - and the product line, as I keep stressing, came into existence because the housing bubble created the data-driven illusion that these products were sound. When presented with data that show Alt-A loans being repaid, the natural response of the market was to offer more of these types of loans. And no regulator was going to stop it, because that wasn't what the regulators were looking for.

There are always going to be boy-geniuses who come up with an innovative "product line." Financial-sector regulation is like collecting the trash - yes, there's going to be more trash next week. That's why we keep garbagemen on staff. Damn straight no one was contemplating them...at least, no one in a position to do anything about it, because the regulatory agencies were captured by people with an ideological aversion to the jobs to oversight, and even if someone did try to get ahead of the curve, their bosses and Congress stymied them.

The failure to keep up with novel scams is a regulatory failure, too.

[Paul]

I can say goodbye to my tax cut. Your education plan is certainly off the table.

I'm confused, which one is the Republican?

But seriously, is anyone else as pissed as I am at the government right now? Bailing out mother fuckers.

[joe]

Gabe, too, cannot talk policy, so he talks about people.

Great minds talk about ideas.

Mediocre minds talk about things.

Small minds talk about people.

[Invisible Finger]

The more-regulated banking sector has much, much less exposure to this collapse. Most of the shady subprime loans, which begat the shady bundled mortgage derivatives, came not from the banking sector, but from the non-bank lenders,

The even shadier Alt-A and OptionARM loans came from the retial banking sector.

Most of those were the result of lobbying because non-bank lenders were kicking their asses and wanted regulatory changes.

Outside of Paul and maybe Flake, the rest of Congress was all on board for these changes for the sake of "affordability."

[joe]

Yet Joe would have us beleive taht allowing these same people

Really, Gabe? You think I want "the same people" who pushed through that targeted deregulation to, like Phil Gramm for example, to continue to dictate regulatory policy?

Really? Is that what you see me arguing?

[gabe]

the fed is a big culprit in this. They artificially juiced up the economy with NEGATIVE real interest rates. When certain elites have access to money at negative interest rates the GDP gets a boost and W is happy, however it is only a matter of time before ridiculous malinvestmetn takes place.

If it hadn't been subprime loans based it would have been a extra "humanitarian war" somewhere or "carbon offsett mania" or some other malinvestment with "bi-partisian" political support.

[Gabe]

if we must ahve a fed juicing the money supply to "smooth" out the economy as the fed supporters advise, then I suggest a fairer way to do it would be for the government to just mailout checks more often....to every person in the country. As it stands now JP Morgan gets a benefit of roughly 300 billion dollars and my family gets more debt...doesn't seem fair.

[Paul]

There are always going to be boy-geniuses who come up with an innovative "product line."

Exactly. Which is why the risk MUST BE LEFT WITH THE GODDAMNED INVESTORS AND BANKS, AND NOT WITH THE TAXPAYERS!

WHEN BANKS KNOW THEY'RE GOING TO GET BAILED OUT, THEY WILL CONTINUE TO PRODUCE COMPLEX FINANCIAL INSTRUMENTS WHICH OUTPACE REGULATION.

That's how this fucking thing works. Stop. Stop it. Just fucking stop!!!!!!!!!

The instruments are meant to be complicated. That way investors and regulators get bogged down in the rules, and look past the obvious: Debt is expanding to 35 times assets. Everyone seems to know now that debt is 35 x assets. But they're so busy looking at the rules of the instruments and dealing with regulations, that they miss this blatantly obvious fact. Enron did the exact same thing. It created complex instruments which overwhelmed the traditional profit centers which resulted in a collapse.

A ponzi scheme is still a ponzi scheme, no matter how many sciency, financial-y sounding terms you stick on it. Ponzi schemes are illegal, we're done regulating. Now go outside and play, the government will not be providing any band-aids. Jail sentences are long. Have fun.

But this time, for sure, pinkie promise, MORE Sarbanes-Oxley-like regulation will fix this. We just didn't go far enough. Just not quite far enough.

Stupid bastards and religious freaks, there's no shortage.

[joe]

The even shadier Alt-A and OptionARM loans came from the retial banking sector. And the retail banking sector was required to have enough capital to cover their losses and not go out of business if the loand went bad. Not so for the non-banks.

Most of those were the result of lobbying because non-bank lenders were kicking their asses and wanted regulatory changes. Kicking their asses, because the actions that caused this financial meltdown were 1) making them a great deal of money in the short run and 2) completely unregulated.

Yep, regulatory failure let the worst actors have free reign, which put pressure on the more responsible to lower their standards, too.

Outside of Paul and maybe Flake, the rest of Congress was all on board for these changes for the sake of "affordability." Yep, between the Kool-Aid drinkers, the bribed, and the people who just went along because they didn't know any better, Deregulatory Fever was very widespread. The good news is, I don't think we're going to see as many people coming down with it for a while.

[Invisible Finger]

The more-regulated banking sector has much, much less exposure to this collapse.

This same toxic loand shit is all over the more regulated sector. C&D loans, along with residential, are being priced by the market right now at 20% of stated value and that is what is causing the drop.

Banks won't sell their assets for what the market syas they are worth, so money flow slows to a trickle. And now the banks are caught in a squeeze - they need to sell assets and they don't want to sell them for their fair market value because they still won't have enough money. Hence, Paulson and Bernanke are trying to pour hot water over the ice. IMO, they'll need to pump in about 15 trillion because the leverage pyramids are so many levels. They don't want to inflate that much, but they aren't going to have much choice.

[Paul]

. Kicking their asses, because the actions that caused this financial meltdown were 1) making them a great deal of money in the short run and 2) completely unregulated.

And fully backed by the Federal government.

[Jim Bob]

Jake Boone,

Thanks.

[Gabe]

Joe,

the same groups who paid lobbyist to work with Phil Gramm will pay lobbyist to "work with" the new regulators. You think Goldman and JP Morgan won't have a say if Obama is president?

[Invisible Finger]

Zero percent of it was caused by moving interest rates around.

joe is fairly correct on this. Interest rates are a price, and prices are determined by supply and demand. The Fed cotrols the interbank lending rate, that's all. The increased supply of credit was caused by new regulations allowing more leverage - first the European Union did it, then Asia. The US was the last to do so, after seeing smaller banks get swallowed up by foreign companies.

[joe]

Paul,

In the real world, when the economy ran like that (ie, before the New Deal's financial regulation) depressions happened every 20-30 years. So obviously, the absence of backstopping doesn't stop the boy geniuses from causing the whole system to shut down.

You know what did? New Deal and post New Deal regulation.

Yeah, stupid bastard religious freaks who can't adjust their theology to the real world evidence sure are a dime a dozen. Paul.

[Mr. Nice Guy]

"But this time, for sure, pinkie promise, MORE Sarbanes-Oxley-like regulation will fix this. We just didn't go far enough. Just not quite far enough."

If only the deregulation had gone far enough, this wouldn't have happened...Gee, that was easy...

[Jim Bob]

lol@ Dave W. coming standard with the ignore script. That's fuckin' funny!

[Mr. Nice Guy]

I thought I heard that the Gramm bill explicitly kept some of the junkier financial products involved in this mess from being regulated?

Then we get this mess that involves those junky financial products.

So it strikes me as reasonable to think that maybe had there been better regulation this could have been headed off.

[Paul]

. Kicking their asses, because the actions that caused this financial meltdown were 1) making them a great deal of money in the short run and 2) completely unregulated.

And fully backed by the Federal government.

Oh, sorry, my bad. Fully backed by:

Paul [last name deleted]
5*5* 3* Ave **
Se*ttl* W*, 98***

That's who's fully backing it.

Fuck it, now I'm angry.

Living in Seattle, oh let me tell you how many people were dangling... "innovative loans" in front of my eyes when I bought my house in the late nineties. Oh how I could have had that quaint Tudor in Madison Park, if only I took the interest-only ARM they were offering.

But me and my simple-minded non-college, high-school only education and bean-counting economics attitude thought "These things are a really bad idea" and I bought the slightly dowdier house with an un-hip location using a traditional fixed-interest loan.

I'm lookin' around and thinking... "what crisis?"

Everytime I hear some dip-shit politician talk about how they want to help people out who are having one of "life's rainy days", I wanna go all Lee Harvey Oswald on 'em.

[joe]

And fully backed by the Federal government.

Fine. Regulation and oversight reduce these disasters, and promises of bailouts increase them.

That's why it's even more important to have a solid regulatory regime when there's a backstop in place, as I discussed above.

[jtuf]

DC plans to fix Wall St. OK, now it's time to reduce your exposure to stocks.

[Paul]

If only the deregulation had gone far enough, this wouldn't have happened...Gee, that was easy...

Oh, you are so very, very very wrong. Arguing with the libertarian in your head, I see.

This stuff WILL happen, but the risk remains WITH THE INVESTORS! When financial institutions agree to regulation, they also negotiate backing. See how this works?

[joe]

I'm lookin' around and thinking... "what crisis?"

This is who still thinks financial deregulation is teh awesome: people who think that whether they can pay their own mortgage is the determinant of the strength of the economy.

Dude, look out the window.

[Paul]

Fine. Regulation and oversight reduce these disasters,

I might might even agree with you on this point, joe, except that bailout ALWAYS follows regulation. Always. It's called protection. Sure we'll operate with your rules, but what if we fail?

[joe]

This stuff WILL happen, but the risk remains WITH THE INVESTORS!

Uh, yeah. Remember in the 1900s, when bank runs never had any consequences beyond those faced by depositors and investors?

Oh, wait....

[Billy Beck]

"Joe": "I rather enjoyed the 70 years we went without them, after they happened every 20-30 years prior to that."

{snicker} Got data? Show your work, asshole. I want to see these "depressions every 20-30 years prior to that". Cough 'em up or FAIL.

[Richard]

If for some reason you can't use the superior INCIF troll filter there's an alternative at:

http://www.heurtley.com/richard/xtroll

[jtuf]

What I don't get is why this news sparked a global stock ralley. For all the talk about the world hating Bush and thinking he is an idiot, they are awfully enthusiastic about putting their financial future in his hands.

[joe]

I might might even agree with you on this point, joe, except that bailout ALWAYS follows regulation. Always.

Really? Please list for me the bailouts in the financial sector in the four decades following the adoption of the New Deal system of financial regulation.

Please list for me the bailouts of investors that took place after the 1987 and 2001 stock market collapses.

[Paul]

Dude, look out the window.

I did, and I read the papers. And I keep reading stories about well-heeled people who pushed their loans to the bleeding edge, and then saw their house payment increase dramatically when the priciple came due.

The paper keeps writing these sob-stories about forclosure, and it's always some (formerly) affluent yuppie (some of them are even financial planners, for chrissakes!) losing their home because interest rates went up, and their ziggy-zaggy "innovative loan product" zigged when they thought it would zag.

[Rhywun]

Well, the Dow's back up another 400 points. Crisis averted. Nothing to see here. Move along.

[Invisible Finger]

And the retail banking sector was required to have enough capital to cover their losses and not go out of business if the loand went bad. Not so for the non-banks.

A distinction without a difference. When Lehman (a non-bank) had a rating drop, they had to come up with more collateral. They couldn't and collapsed. Same with AIG.

Some kind of discipline made them come up with more collateral. If it wasn't government regulation, it was market discipline. Since you said there was no regulation, it must have been the market.

[joe]

Billy Beck,

Panic of 1819 1819-1824: The first major financial crisis in the United States featured widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing

Panic of 1837 1837-1843: A sharp downturn in the American economy was caused by bank failures and lack of confidence in the paper currency. Speculation markets were greatly affected when American banks stopped payment in specie (gold and silver coinage).

Panic of 1857 1857-1860 of the Ohio Life Insurance and Trust Company burst a European speculative bubble in United States railroads and caused a loss of confidence in American banks. Over 5,000 businesses failed within the first year of the Panic, and unemployment was accompanied by protest meetings in urban areas.

Panic of 1873 1873-1879: Economic problems in Europe prompted the failure of the Jay Cooke & Company, the largest bank in the United States, which bursted the post-Civil War speculative bubble.

Panic of 1893 1893-1896: Failure of the United States Reading Railroad and withdrawal of European investment lead to a stock market and banking collapse. This Panic was also precipitated in part by a run on the gold supply.

Panic of 1907 1907-1908: A run on Knickerbocker Trust Company stock on October 22, 1907 set events in motion that would later lead to the Great Depression in the United States

Great Depression 1929-1939: Stock markets crashed worldwide, and a banking collapse took place in the United States.

Seven depressionis, 110 years. That works out to one every 15.7 years.

You got me; I underestimated how frequently cascading financial-sector failures sent our country into depression before the New Deal. Thanks for asking.

[joe]

{snicker} Got data? Show your work, asshole. I want to see these "depressions every 20-30 years prior to that". Cough 'em up or FAIL.

Lawlz, Billy Beck. Go stand in the corner until I say you can leave, and try to keep a civil tongue in your head. There's obviously plenty of room for it.

[joe]

Paul,

In the absence of mortgage-backed derivatives, the losses would have stayed with those borrowers and their lenders.

Good thing no regulations stopped the growth of those junk products, eh? Aren't we just so much more free and prosperous?

[joe]

Invisible Finger, you aren't making any sense.

A distinction without a difference. When Lehman (a non-bank) had a rating drop, they had to come up with more collateral. They couldn't and collapsed. Same with AIG.

Yes, that's exactly what I said - they were making these loans and didn't have the real assets to cover them. Had they been subject to the same regulations as banks, they would have only made the loans and bought the loans they could cover with their assets, and when the market demanded that they come up with it, it would have been there.

I just said that.

[joe]

Oh, BTW Billy Beck,

http://en.wikipedia.org/wiki/List_of_recessions

[adrian]

Solid Regulatory Backstop created by Political Jesus will solve this.

I won't hold my breath.

[Paul]

Panic of 1907 1907-1908: A run on Knickerbocker Trust Company stock on October 22, 1907 set events in motion that would later lead to the Great Depression in the United States

Joe, for your reading pleasure:

Following a failed attempt by copper speculator and bank president F.A. Heinze to corner the U.S. copper market, depositors rushed to pull their money from trusts associated with Heinze. The trusts, largely unregulated, were outside of the voluntary clearinghouse system-coalitions of banks that extended each other credit-that protected most banks from runs. John Pierpont Morgan, along with other bankers he organized, provided $30 million to stabilize the trusts; the U.S. Treasury pitched in another $25 million. Morgan even asked New York clergy to implore their congregations to stay calm. The crisis prompted the creation of the Federal Reserve System six years later.

I noticed your list of recessions following the creation of the Fed.

We had the savings and loan bailout, followed by regulation, FDIC insuring. As you pointed out, boy-geniuses continued to create complex financial instruments based on crap.

You see, joe, this is a place where you and I agree. I have no love of the corporate world, I've made that known dozens of times on this blog. These creepy fund managers and financial whiz-boys get no love from me. Their cheesy plastic smiles, their $1,200 dollar suits, and their repeated answers to the question "So, how do you make your money" is always "It's kind of complicated.", followed by an Enron-esque meltdown a few years later, also followed by the cries for "regulation!" and "we can't let this happen again!!!".

It's the remedy where we disagree. You're convinced that I'm suggesting regulation breaks the system. While sometimes it does break things within the system, it doesn't do anything overall to fix it. My proof: See current events.

[Invisible Finger]

and didn't have the real assets to cover them.

Wha? WaMu is subject to regulation like you claim - and they made loans exactly like you said regulation prevents them from making.

What's unreal about the assets? The assets were purchased at price X and listed on the balance sheet at the same value. Even the most brutal government regulator would've said it was on the up-and-up.

I'm not having an ideological argument. I'm just trying to point out factual and logical misstatements, it's not an attack.

[Fluffy]

Damn straight no one was contemplating them...at least, no one in a position to do anything about it, because the regulatory agencies were captured by people with an ideological aversion to the jobs to oversight, and even if someone did try to get ahead of the curve, their bosses and Congress stymied them.

No one was in a position to do anything about it.

Joe, this entire argument started because I claimed the debacle was the result of monetary and fiscal policy, and you claimed it was the result of deregulation.

You have yet to describe what regulation was removed that would have prevented the problem.

The closest you've come is to talk about the repeal of certain elements of Glass-Steagall. The 1999 reform of Glass Steagal allowed investment banks, commercial banks, and financial services companies like insurers to merge. The major example of a post-Glass-Steagall enterprise is Citigroup. Lehman, Bear Stearns, Fannie and Freddie, etc., are NOT examples of post-Glass-Steagall organizations.

When the behavior that was deregulated isn't the behavior that led to the crisis, and the behavior that did lead to the crisis is behavior that was permitted by regulation both before and after the reform of Glass-Steagall, I do not see how you can continue to assert that deregulation caused the crisis. It's an empty Atriotic talking point and nothing more.

It would not have mattered what personnel were occupying the regulatory bodies we currently have in place, Joe. Have you ever been through a banking audit? I have. Prior to 2006 the regulators would come in looking for several things: consumer protection errors and omissions [things like failing to make the proper disclosures]; non-arm's-length transactions [things like excessive lending to relatives or business associates of directors]; non-performing loans not being properly disclosed; failure to comply with HMDA and CRA regulations; things like that.

You know what they weren't doing? Looking at performing loans to tell you why you shouldn't have made those performing loans.

This means that if macroeconomic conditions were stimulated by government in a way that temporarily made shitty loans perform very well and look like investment-grade or near-investment-grade loans, nobody was going to see it and no regulator was going to be able to stop it.

That to me pretty much demonstrates that if we're looking for a bad actor in this crisis, we can't look at the regulators, and we can't look at the deregulators. We have to look at the people who created the macroeconomic conditions that made the system run wild. And who might those persons have been, joe?

BTW, just as an aside, comparing the Panics of the 19th century with the Great Depression, the S&L failure, or our current situation is really inappropriate. The Panics were minor league compared to what we've experienced in the last 100 years, during the Fed era. The Panics, at least in the US, were historically noteworthy only because they seemed extreme at the time; in terms of their actual economic impact for wealth destruction and the like, they were modest by the standards of the last 18 months.

[joe]

Paul,

What I put up there was a list of DEPRESSIONS, not recessions. I listed every single depression since the creation of the Fed - that is, the single depression since the creation of the Fed, the 1929 Great Depression. Since then, we've had only recession, no depressions. The business cycle will always be with us, but depressions need not.

Thanks for the reading. Yep, another example of a financial crisis in an unregulated fiancial sector, which led to a bailout. That'll happen when there' isn't sufficient oversight in the financial sector. That'll happen.

My proof: See current events. Uh, you mean the collapse of the financial sector brought about by shady, debt-backed deals without adequate standards and security? That's MY proof - and no, poiting out that there are other, more heavily-regulated aspects of the financial market doesn't mean you get to take it from me.

[joe]

Invisible Finger,

Wha? WaMu is subject to regulation like you claim - and they made loans exactly like you said regulation prevents them from making. But they didn't make as many, because they weren't allowed to.

And what's more, many of those assets were, themselves, junk-backed securities, so yet again, we see the roots of this in regulatory failure allowing this crap to infiltrate throughout the system.

[joe]

Fluffy,

The 2000 bill pushed through by Phil Gramm specifically forbade the government from regulating these junk-mortgage backed securities. This has been pointed out several times. Please stop pretending it hasn't, and please stop pretending not to have seen my argument about "innovative" financial transactions requiring someone to mind the store and keep up with the garbage.

[joe]

BTW, just as an aside, comparing the Panics of the 19th century with the Great Depression, the S&L failure, or our current situation is really inappropriate. The Panics were minor league compared to what we've experienced in the last 100 years, during the Fed era.

Bull. There has been one (1) actual depression in the last century - a period when the GDP actually shrank to a significant degree - and that was the Great Depression. The panics of the 19th century were actual depressions. Everything we've had since the Great Depression - that is, since the modern regulatory state was set up - has been a mere recession.

[robc]

joe,

However, what's going on outside our windows isn't the "letting people fail hard" that you want to see.

Actually...

Hail Eris!!

[robc]

The business cycle will always be with us, but depressions need not.

Wrong. We will eventually have another one. And it will be bad. Not having depressions is a bad idea.

[Fluffy]

The 2000 bill pushed through by Phil Gramm specifically forbade the government from regulating these junk-mortgage backed securities.

Link.

Also, provide a link to proposed regulations that were precluded by Gramm-Leach.

Mortgage securitizations have existed since the 70's. They weren't invented in 1999, when Glass-Steagall was amended by Gramm's bill.

[Invisible Finger]

And what's more, many of those assets were, themselves, junk-backed securities

As a thrift these would be the bulk of assets of WaMu and wouldn't raise eyebrows from a regulator. To prevent the exposure, you'd pretty much have to make building societies illegal. Or you'd have to force 20% down, limited DTI underwriting on thrifts. It was Congress and local governments that sold underwiting standards down the river in the name of "affordability" - which begat increased demand which begat increased prices which begat reduced affordability which begat calls for even less stringent underwriting.

The large investment banks had reached their limit in exposure to these securities a few years ago. But when Fannie And Freddie got into the market for them the supply increased and the value of the older ones started dropping much faster - no actuary could have foreseen the huge runup by Fannie and Freddie.

[zig zag man]

When war on some drugs testing began in earnest in the '80's, all the propaganda warned of how much money illegal drug users were costing companies in productivity and absenteeism, let's say millions of dollars.

This is TRILLIONS of dollars, lost or stolen, depending on whose side you believe.

If it was lost, there's some serious irresponsibility going on in our markets. I

If it was stolen, then we're talking criminal activity and people should be doing the perp walk for that.

Yet, I have to take a drug test for any number of jobs which are responsible for far less than what these pinstripped bandits cost us.

[TrickyVic]

"""Zero percent of it was caused by moving interest rates around."""

So foreclosures that resulted from people that could no longer afford their morgage when the interest rates of an ARM increased had nothing to do with this?

[Paul]

The business cycle will always be with us, but depressions need not.

?!! You're a brave man, joe. A reckelssly brave man. You do understand that there are differences between a burgeoning industrial economy, and a sophisticated, complex and diverse service based economy, right? Depressions probably will happen, but may be relegated to limited sectors, or mitigated by global economic activity. Even then, we might just get stung by a global depression. And why worry? We'll get bailed out... RIGHT? And besides, we're going to have all these new regulations, so really, we've beat the business cycle.

Yep, another example of a financial crisis in an unregulated fiancial sector, which led to a bailout. That'll happen when there' isn't sufficient oversight in the financial sector. That'll happen.

So we're back in agreement. No matter how much you try to regulate, another sector, somewhere, pops up that's not regulated. And these 'unregulated' sectors are popping up at an increasing rate. Savings and Loan scandal. Enron. Sub-prime mortgage industry. And we also agree that when an island of non-regulated sectors do appear, that a bailout is imminent.

NPR did a segment the other day reporting that some of the failing financial firms which fall into the slightly-too-small-to-bail-out category are thinking of merging together, so they can form a too-big-enough-to-fail enterprise. These guys are BANKING on bailouts. And guess what, the very people in the middle of this mess will be the ones calling for regulation.

I hear yet another report of the financial sector where one analyst said that these financial instruments were so complicated, that even the CEO's and fund managers didn't fully understand them. If that isn't the very definition of risk, then I don't know what is.

Regulators were asleep at the switch. OF COURSE THEY WERE. And they will be again when super-genius quiz-boy invents a new and fantastically never-before-seen debt instrument (unregulated, natch) and causes another economic blowout. But don't worry, it's just a matter of maintenance, right? You know, like street sweeping. Keep adjusting the regs, making new ones etc. You don't "solve" the trash problem by regulating garbage disposal...

[TrickyVic]

"""If it was lost, there's some serious irresponsibility going on in our markets."""

Lost as in losing side of a gamble? The irresponsibility part is people thinking they can't lose.

[Secretary Of Treasury, Mr. Rob]

How y'all doin' today?

[Paul]

Lost as in losing side of a gamble? The irresponsibility part is people thinking they can't lose.

They can't.

Fail.

Bailout.

Regulate.

Fail.

Bailout.

Regulate.
...
..
.

How y'all doin' today?

I'm doin' fine... sittin' here in my fixed rate mortgage. Looking at the ex-financial planner driving down the street loaded with all his posessions and a sign on his car: Got foreclosed, Puyallup or Bust!

[Paul]

That's why it's even more important to have a solid regulatory regime when there's a backstop in place, as I discussed above.

Missed this one earlier. Should I hold my breath? God I so hope Obama becomes president. And no, I'm not being sarcastic.

[adrian]

biggest 2 day rally since just before great depression. cool chart.

Click

[atrevete]

"It would be so much better to let all this play out on its own. Losing jobs, life savings and homes--all this builds character."

Lefetiti, you are pathetic. You keep repeating that dumb "prayer", which would be funny to a third grader when he got tired of fart jokes.

And why oh why is someone ENTITLED to a job, home, or even life savings, if they are careless with it? Just because someone WANTS a $500,000 home, and is able to pull a few strings and buy it, is he ENTITLED to simply default on the payments? Or is he ENTITLED to get $600,000 for it if he has to sell it because he can't make payments?

If the system failed, it's because of dumb asses like you.

[atrevete]

The paper keeps writing these sob-stories about forclosure, and it's always some (formerly) affluent yuppie (some of them are even financial planners, for chrissakes!) losing their home because interest rates went up, and their ziggy-zaggy "innovative loan product" zigged when they thought it would zag."

Exactly. Why is it some kind of tragedy that the formerly affluent have to now rent a smaller or more modest house?

[Doug]

"I'm from the government, and I'm here to help."

Run like hell.

[Paul]

I have a legit question for the group:

Some of these financial institutions are writing off as much as $1 billion in debt. If they're writing off $1 billion in sub-prime mortgage debt, what happens to the mortgagees? If I'm a homeowner whose debt gets 'written off', what's the result of that for me?

[voxpo]

Panic of 1893 1893-1896: Failure of the United States Reading Railroad and withdrawal of European investment lead to a stock market and banking collapse. This Panic was also precipitated in part by a run on the gold supply.

"With the end of the Civil War, the country experienced feverish, unregulated growth, especially in the railroad industry, with the government giving massive land grants and subsidies to railroads. Thus, the massive overbuilding of the nation's railroads, and the overinvestment by bankers of depositors' funds in the railroads laid the foundation for the Panic and the depression that followed."
http://en.wikipedia.org/wiki/Great_railroad_strike_of_1877#Economic_conditions_in_the_1870s

[Syd]

Just to complicate things, the Panics of 1873 and 1893 were the accent marks of what is called the Long Depression, which lasted from 1873 until 1896. The end points were the periods of deepest misery, although the farmers were having problems through the whole period, which led to the Free Silver movement.

[Alkioki]

There are a lot of simplistic arguments in this blog. What will probably happen is the govt will buy "boxes" of mortgages that will include both good and bad ones. It will be a headache to separate the good from the bad and to negotiate deals with mortgagees or implement foreclosures on homes that are valuable assets. There has been insufficient time to do this work so the "boxes" have not been saleable to anyone; hence the illiquidity of the owners of these boxes. Big government headaches and bureaucracy will follow. But the cost will probably be the giant bureaucracy more than losses on the mortgages (assuming govt does not overpay). Maybe govt should pay only half and share the return over the half)... At least there will be more jobs, though not terribly productive ones.

[Invisible Finger]

Some of these financial institutions are writing off as much as $1 billion in debt. If they're writing off $1 billion in sub-prime mortgage debt, what happens to the mortgagees? If I'm a homeowner whose debt gets 'written off', what's the result of that for me?

Depends on whether you are paying your mortgage or not. You ain't gettin' a free house, if that's what you were wondering.

[joe]

So, if you're really afraid of the moral hazard created by the government bailing out companies that are "too big to fail" - if it's really something you're concerned about, you really think it's a danger - now that the government has signed on to two such huge bailouts, there's really only one solution left to that hazard:

Disgorgement.

The political will among the public plainly exists. So, are you really worried about the incentive structure being created? Or is that just something you say?

Lemme guess: the people who, two minutes ago, were piling up illicit fortunes while misallocating capital away from the most rational destinations because of a market distortion, (their risk being implicitly underwritten by the government) are suddenly going to transform into the paragons of productivity, and every penny's worth of the money artificially steered their way by the governmental intervention (ie, the implicit and now explicit guarantee) is suddenly going to be the fruits of labor secured with the sweat of their brow.

[Invisible Finger]

unregulated growth, especially in the railroad industry, with the government giving massive land grants and subsidies to railroads.

This is why so much written "history" contains overdoses of doublethink.

The growth is "unregulated" but there were "massive land grants and subsidies". Logically, that is massive regulation, not unregulation. So the author's stupidity and economic bias is blatant in the writeup. As George Carlin said, language gives you away.

[Invisible Finger]

joe, can you re-write that? There were so many parenthicals I couldn't keep your point and your sarcasm straight.

[voxpo]

there's really only one solution left to that hazard: Disgorgement.

That's fine for actual law-breakers. But how is it a solution for dealing with executives who acted legally in a distorted market?

[economist (now very drunk)]

Shit, last bottle. Now I have to drive to the liquor store and get another few.

[Paul]

Depends on whether you are paying your mortgage or not. You ain't gettin' a free house, if that's what you were wondering.

No, I know that no one's going to get a free house. I was just wondering what would happen to debt written off if there were no government bailouts (err, infusements of capital) to cover illiquid debt.

I know what's going to happen with a bailout. The government will own the debt and then oversee the collection, or ultimate writeoff of said debts...which presumably will result in evictions and foreclosures for those that fail, are failing or have already failed to maintain their mortgage payments.

[Seamus]

Some of these financial institutions are writing off as much as $1 billion in debt. If they're writing off $1 billion in sub-prime mortgage debt, what happens to the mortgagees? If I'm a homeowner whose debt gets 'written off', what's the result of that for me?

What it means is that the lender realizes that you aren't going to pay him what you owe under the mortgage, nor is he going to get what he thought was the value of his collateral when he throws you out on the street and auctions your house off in a foreclosure sale, so he has to write down the value of the mortgage on his books to what it's really worth, not what it says on its face.

[Seamus]

Bull. There has been one (1) actual depression in the last century - a period when the GDP actually shrank to a significant degree - and that was the Great Depression. The panics of the 19th century were actual depressions. Everything we've had since the Great Depression - that is, since the modern regulatory state was set up - has been a mere recession.

That's only because we've changed the definitions. Except that the "depressions" that took place in the 19th century are what we'd call"recessions" if they took place today. There's a reason we call what happened in the 30s the *Great* Depression--it's because it was of a magnitude that dwarfed all those earlier depressions. And in fact, it permanently transformed the use of the term "depression," which now is used only for contractions that resemble the Big One in the 30s.

(In fact, IIRC, the term "recession" was popularized about 1937 to refer to the downturn that was then taking place. It would have been called a "depression" under the old standards, but that word had become too scary, so the government geniuses came up with the term "recession" to make the contraction sound less severe.)

(Similarly, before the 1940s, people used the term "concentration camp" for camps like the ones the Spanish used to detain Cubans, the British used to detain Boers, and the American used to detain the issei and nisei. After 1945, it has tended to be reserved for death camps, or used by people who are trying to make a Nazi analogy.)

[Seamus]

If you vote against the initial senate version and then vote for the final version, that means you think the conference made it better. That is an astounding misstatement of how the legislative process works.

Much better simply to say that Biden and Dodd were against S. 900 (the Glass-Steagall repeal) before they were for it.