Economics

Rescue or Waste?

Why the bailout isn't working

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Thank goodness Congress approved that bailout. Otherwise, the economy might be tanking.

Just a couple of weeks ago, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asked Congress to approve a $700 billion rescue of the banking industry. Without this sudden, massive infusion of federal cash, we were told, economic disaster loomed. Prompt approval, on the other hand, would assure the solvency of the financial sector, thaw frozen credit flows, and give investors a badly needed dose of confidence.

In the end, Congress approved the package—seeing as how the alternative was rising unemployment, a plunging stock market, and corporations unable to borrow to cover their short-term obligations. Now, with the bailout proceeding according to plan, Americans are confronted with…rising unemployment, a plunging stock market, and corporations unable to borrow to cover their short-term obligations.

That is not how things were supposed to go. On Sept. 25, The Washington Post endorsed the administration's effort, warning that the nation faced a replay of 1929.

"This catastrophe can be avoided," said the editorial, "and it will be if government promptly and effectively addresses the immediate cause of financial distress—the toxic build-up in unmarketable mortgage-backed securities on bank balance sheets." (My emphasis.) The Treasury plan, it said, fit the bill.

But the effort to restore confidence and stabilize markets turned out to be, pardon the expression, a bust. After the bailout was signed into law on Friday, Oct. 3, investors had all weekend to contemplate its tonic properties but found none.

On Monday, the stock market looked like it had been pushed out of an airplane. The Federal Reserve was so alarmed by the credit situation that it decided to take the radical step of lending directly to businesses.

By then the rescue package was a fading memory. Instead of being safely contained, the turmoil intensified and spread far beyond Wall Street—to financial markets in Europe, Asia, and South America. Said a Tuesday news story in The New York Times, "Three days after the plan was approved, it looks like a pebble tossed into a churning sea."

The feds had decided to fill the markets with enough cash to burn a wet mule—only to see it have no apparent impact whatsoever. But we could have had no impact whatsoever for a lot less money.

You may remember that when the House of Representatives voted against the original rescue plan, it was blamed for the subsequent 778-point drop in the Dow Jones Industrial Average. This stomach-turning development was clear proof of the urgent need for the bailout.

But if a stock market's performance is the test of a policy, this one has failed. At best, the passage of the measure did no evident good. At worst, it backfired.

Harvard economist Jeffrey Miron suspects the latter. "The bailout approach will generate uncertainty about what's going to happen," he told me. "It's quite plausible that it has not calmed markets because no one knows what it means."

Instead of stimulating productive activity by removing doubt, it has impeded it by multiplying doubt. It has also encouraged lenders to hold off dealing with their bad debt in hopes of getting a better deal from the Treasury than they can dream of getting from anyone else. But postponing the banks' rendezvous with reality will not speed recovery.

The sheer size and unprecedented nature of the intervention generates a different kind of uncertainty—about how extensively the federal government will immerse itself in the economy from now on. The spectacle of Washington nationalizing private assets is bound to dishearten millions of investors who think that generally, the most helpful economic role for government is staying out of the way.

The rescue surrenders an important principle: that private sector mistakes should be borne by the people who make them. If the bailout means we may all get the bill anytime a company implodes, it will undermine the critical incentives of the market. In the long run, that will not strengthen the economy but weaken it.

Ditto if it means we are resolved to do the impossible—namely, live indefinitely even further and further beyond our means. Which, by the way, it does.

But none of this will deter our policymakers from sticking to their approach. Waist deep in the Big Muddy, and the big fool says to push on.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

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  1. Stooooooop
    please please
    I can’t take it anymore
    just stop
    stop running Steve Chapman
    *whimpers*

  2. Harvard economist Jeffrey Miron suspects the latter. “The bailout approach will generate uncertainty about what’s going to happen,” he told me. “It’s quite plausible that it has not calmed markets because no one knows what it means.”

    Instead of stimulating productive activity by removing doubt, it has impeded it by multiplying doubt. It has also encouraged lenders to hold off dealing with their bad debt in hopes of getting a better deal from the Treasury than they can dream of getting from anyone else. But postponing the banks’ rendezvous with reality will not speed recovery.

    That actually makes a lot of sense. And Steve Chapman wrote it. Egads!

  3. When did the market begin really tanking, and when did consumer confidence really begin to take a nose dive? Why, could it have been when the administration started telling us to panic?

    The bailout proposal may have precipitated events that wouldn’t have happened, otherwise. The market had anticipated more failures of financial services companies and was really just watching to see who would buy whom and to wait for the fallout to stop raining down. Now it’s all exploding gas tanks and leather outfits.

  4. After the bailout passed I commented on one of the threads that the market would “rally” to 9k by the end of 2009. Im thinking I was off by 14 months. with some work, it can get there today.

  5. I have made money in equities on the London Stock Exchange in the last two days, no short selling required.

  6. malaise
    Malaise
    MALAISE

  7. I love this plan! I’m excited to be a part of it!

  8. When did the market begin really tanking, and when did consumer confidence really begin to take a nose dive? Why, could it have been when the administration started telling us to panic?

    This is the perfect time to panic!

    Woody

  9. My take on why the bailout has failed, so far:

    (1) We were told it was a huge panicky deal we had to do NOW NOW NOW. So how much of the $700B has been injected into the capital markets? Not a fucking cent. Treasury has decided it has months to write rules on how to spend it, and the bill is now so toxic to senior management only a fool of a CEO would take the massive haircut required to access the bailout.

    (2) To the very great extent that the markets price uncertainty, the bailout only increased their unease by showcasing the incompetence and venality of our political class.

    (3) Like uncertainty, inflation is a drag on the market, and the bailout increased fear of inflation.

  10. I “plan” to be a millionaire.

    Why isn’t there a million bucks in my checking account?

    if government promptly and effectively addresses the immediate cause of financial distress

    In other news, my pig still has to walk to work.

  11. When did the market begin really tanking, and when did consumer confidence really begin to take a nose dive? Why, could it have been when the administration started telling us to panic?

    A couple of things: first of all, hard as it is to believe, consumer confidence actually went UP a month ago (it’s certain to nosedive when they take the polls for this month).

    Secondly, the stock market doesn’t lose almost a third of its value in five months because of something the President says, especially not a President with as little credibility as this one. Something like this only happens because there’s a bubble, or because there are massive systemic problems going on.

  12. SNL should do a skit this Saturday on “Congressmen who should be shot.”

  13. I think Congress should pass an unbailout, and the president should sign it, saying, “Changed our minds. Good luck with that free market thingee.” Then we freak out for a few weeks, then things start to stabilize. Maybe we’d go into a deeper recession, but it won’t be the disaster the government is determined to create for us.

    Mike M.,

    When massive government intervention in markets is proposed (and bills supporting it are enacted), with only vague statements about what the intervention will entail, uncertainty about the future will abound. That kind of uncertainty means volatile markets. We were trending down due to the financial services sector problems, but these nosedives are all thanks to the government’s actions, in my opinion.

  14. Stagflation is coming. With $700 billion in liquidity that shouldn’t exist flooding finance over the next three months, either the economy grows in physical capacity and wealth to accurately price that money, or….

    There isn’t an increase in the size of the physical economy to absorb all that cash, so the cash itself gets cheaper…i.e. inflates. So, now the government puts us in more debt to essentially do nothing more than make our money worth less. The crimes that brought down Enron are misdemeanors compared to the crimes at work here, and the body count when all is said and done will also make Enron look rather quaint.

    Perversely, the government will be rewarded for doing this to us with hundreds of billions in stocks and tons more power.

    We’re fucked.

  15. “Your boss is a woman? This is a strange bank.”

  16. Well, that didn’t work. … What would you say to ketchup and mustard in the same bottle?

  17. “We’re Fucked” is what I say on a hourly basis.

    This will either blow over in six months and we’ll have another trillion in debt and loads of bad regulations and laws — or the loads of new $ and a tanking dollar will cause hyper-inflation and a new depression.

    President Hopey will be fucked.

    I’m buying another sack of beans this weekend.

  18. I think Congress should pass an unbailout

    I believe the technical term is “bail-in”. Though if you ask me, this economy is a severe flight risk so it shouldn’t be getting bail at all.

  19. Well, that didn’t work. … What would you say to ketchup and mustard in the same bottle?

    You can take my Goober Grape from my cold, dead, sticky hands.

  20. Barney Frank Beyond Thunderdome.

    Two chins enter. One chin leaves.

  21. I knew it was time to panic when I saw this headline: “Americans Should Remain Confident in U.S. Financial System”.

    That was September 15.

  22. What would you say to ketchup and mustard in the same bottle?

    Oh, that sounds interesting, sir.

  23. “There isn’t an increase in the size of the physical economy to absorb all that cash, so the cash itself gets cheaper…i.e. inflates.”

    I don’t know about that. Isn’t it also true that we are having enormous asset deflation? Yes, we are injecting 700 billion worth of cash, but most of that cash is going to cover losses. The end result seems to be the same amount of wealth chasing the same amount of goods.

  24. President Hopey will be fucked.

    While I would like to agree with this, I have a sinking feeling just the opposite will happen. Hopey can just blame the last administration in the same way Clinton was blamed for 9/11. And then demand sweeping new powers to fix the “out of control” markets, or whatever buzz word is in at the moment. Which he will get with many questions asked but few heard.

    That’s when I just stop thinking about it because it just gets depressing after that.

  25. SNL should do a skit this Saturday on “Congressmen who should be shot.”

    Nahh…if you could just confine Barneys activities to molesting members (heh.heh..you said member) of the House Page staff….he would have less time for more damaging activities….like legislation.

    Do you think SNL would be interested in a parody of that?

  26. stop running Steve Chapman

    I don’t see anything wrong with this article.

  27. Stagflation is coming. With $700 billion in liquidity that shouldn’t exist flooding finance over the next three months, either the economy grows in physical capacity and wealth to accurately price that money, or….

    Stagflation is here… arguably.

    And the Paul I’m quoting is not the Paul you all know [and love].

  28. “Your boss is a woman? This is a strange bank.”

    “You can’t pull the wildcard when I already have my shirt off. Can that be a rule?”

  29. It is both funny and depressing to think that Frank used to be roommates with a pimp and now, considering that his current boyfriend ripped of Freddie and Fannie for untold millions, it looks like the pimp was the more trustworty and moral roommate.

  30. “Instead of stimulating productive activity by removing doubt, it has impeded it by multiplying doubt. It has also encouraged lenders to hold off dealing with their bad debt in hopes of getting a better deal from the Treasury than they can dream of getting from anyone else. But postponing the banks’ rendezvous with reality will not speed recovery.”

    I know that you’re not going to like hearing this, but the uncertainty was caused by the government not bailing out Lehman. The reaction of the credit markets showed that people were expecting a bailout, and when they didn’t get one, they started to panic. believing that they might be on their own. I’m not defending this belief or the bailout here, but simply calling attention to the real conditions under which the market and investors were operating. Sadly, a lot of people, including you, it seems, didn’t realize how far we’ve already gone done the road of government guaranteeing bailouts such as this one in a crisis. I’ve always been in this for the long run, so, although I agree we’re going to have to answer some hard questions about government intervention in the future, maybe this time will begin with a realistic assessment.

  31. Sorry for turning into a fucking socialist, but the reason why the bailout failed is because banks don’t have any capital and the whole system is really in the can. Simple as that. So a better plan would have been to– gasp– inject capital.

    Although I really do like Greg Mankiw’s approach. Very creative. I definitely support it, for it has a nice market twist.

  32. Though if you ask me, this economy is a severe flight risk so it shouldn’t be getting bail at all.

    That got me to chuckle.

  33. One of the few pieces of good news this week was a spike in pending home sales last month. The drop in prices combined with a drop in interest rates drew in lots of buyers to start cleaning out all that foreclosure inventory.

    But wave that good news good-bye, because it won’t be duplicated any time soon. Yesterday the Treasury department decided to sucker punch the rally in Treasuries that had produced lower mortgage rates by launching a “surprise” refunding auction, and announcing that they would continue to launch “surprise” auctions until the “unnatural” rally in Treasury prices ended.

    This was a pretty transparent attempt to punish investors who had fled to Treasuries, and an attempt to flush them back into stocks by making it clear that the Treasury department would shit on any gains they might realize if Treasury prices continued to rise.

    In 24 hours the 10 year bond fell so badly that the yield rose almost half a percent in rate. Mortgage rates followed them up, going from the 5.500% range to the 6.000% range in a single day.

    So that Fed rate cut you heard about? It means nothing to the housing crisis. Mortgage rates went exactly the opposite way.

  34. Warren, go fuck yourself. Chapman did nothing wrong with this article.

  35. One of the few pieces of good news this week was a spike in pending home sales last month.

    Noticed. In my area home prices are still sinking, but purchasing has seen a recent spike. There’s a sign we’re near the bottom of the housing situation.

  36. To be fair, the desired effects of the “rescue bill” will not be noticed for months or years, if ever. To be unfair but not inaccurate, Barney Frank is a cocksucker. I have spoken.

  37. Gee fluffy you would almost think that the fed is more interested in saving wall-street’s ass than they are in ordinary individuals. The lower interest rates and people buying homes again is exactly what we want to happen. But if that happens and people in vest in bonds, the stock market suffers and Paulson and Bernake’s buddies in wall street might have settle for a bonus that is in the 10s of millions rather than 100s of millions. We can’t have that.

  38. I know that you’re not going to like hearing this, but the uncertainty was caused by the government not bailing out Lehman. The reaction of the credit markets showed that people were expecting a bailout, and when they didn’t get one, they started to panic.

    Precisely why bailouts are bad. It sets up impossible expectations. The government can’t bailout everyone, and the the more arbitrary its bailout strategy, the more uncertain the market. So bailouts must not, under any circumstances be allowed to proceed. My guess is you don’t like hearing that.

  39. Mac: You’re about to experience the hard knocks of a free market, bitch. Get ready to feel it where it hurts.
    Charlie: Your dick!
    Mac: No, not his dick. His–his wallet.

  40. “You can’t pull the wildcard when I already have my shirt off. Can that be a rule?”

    “Which one of us do you want to take you in the back and bang you?”

  41. Ditto if it means we are resolved to do the impossible-namely, live indefinitely even further and further beyond our means. Which, by the way, it does.

    No politician in a hitly-contested election can afford to tell people that we need to live within our means.

  42. No politician in a hitly-contested

    Unintentionally funny.

  43. But on a serious note, Michael, you’re correct. Traditionally, politicians telling us to turn down the thermostat and put on a sweater are doomed.

  44. The bailout was recently signed into law. I’ve read it would take about 3 months to implement. Being the bailout has yet to be implemented why are we already trying to discuss it’s failure. It’s not in effect! That’s similar to claiming the surge in Iraq failed before the surge troops entered Iraq.

    If you really though that the solution would happen in a week, you should spank yourself. Assuming you believe this is the solution, which I don’t.

  45. Let’s see if there are words of wisdom out there for how to move forward…

    http://www.npr.org/templates/story/story.php?storyId=95517447

    “If you don’t fully understand an instrument, don’t buy it,” Botin said. “If you will not buy for yourself a specific product, don’t try to sell it. If you don’t know very well your customers, don’t lend them any money. If you do all these three things, you will be a better banker, my son.”

  46. Maybe there outta be a law…

    Clause one:
    You must be able to explain a financial instrument’s workings before purchasing said instrument.

    Clause two:
    Any product sold by a bank must have been previously purchased by the members of the board and the CEO.

    Clause Three:
    No one will lend money to anyone that they don’t know well.

    Some tweaking to make the language impenetrable legalese is required, of course.

  47. “””No politician in a hitly-contested election can afford to tell people that we need to live within our means.”””

    It’s not just politicians. Our economy is based on credit. If we cut off people’s credit, they can’t spend. If they can’t spend, stores lose revenue. If stores lose revenue, they fire employees. Fired employees often can’t cover their debt payments and could default on their credit, ect ect. So the prevention of US economic collapse is to keep the credit flowing. That keeps the spending up, stores busy, people employed, ect ect.

    We should have known we were screwed when Bush advice to people after 9/11 was to keep spending.

  48. This is the perfect time to panic!

    Woody

    More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other – to total extinction. Let us pray we have the wisdom to choose correctly.

    – Nobel Prize-winning economist Woody Allen

  49. The USA economy is so bad, now Mexico is building a fence.

  50. We should have known we were screwed when Bush advice to people after 9/11 was to keep spending.

    [sigh]

    We should have known we were going to be screwed long before that.

  51. Neu:

    Ahh, good, old-school, stuffy conservative banking. It will ever have a place in the world…

  52. We should have known we were screwed when Bush advice to people after 9/11 was to keep spending.

    I never stopped spending. Did anyone stop spending? I have a house payment, gotta put gas in my car, I need a new shirt on occasion. I even buy an adult beverage from time to time.
    .
    .
    .
    Oh, you took it to mean spending beyond our means… never mind.

  53. The USA economy is so bad, now Mexico is building a fence.

    And they’re using Mexican labor!!!

  54. Neu,

    You must be able to explain a financial instrument’s workings before purchasing said instrument.

    How about a comparable rule for renters and home buyers? They have to be able to explain to a judge they know what they are getting into before signing a contract. “I didn’t know whut a balloon mort-gage wuz!”

  55. Sugarfree:

    Those are ‘regular folks’ having one of life’s rainy days. Read: protected class.

    They don’t count.

  56. They’re taking our jobs

  57. Neu Mejican,

    How’s this for advice?

    When you want to get a mortgage, go to a bank. A real bank, not something somebody set up on the internet. A bank with a building you can drive to from your house.

    If that bank says that they don’t want to give you a mortgage that large, they probably have a good reason. Don’t rip the phone number off of that flier on the utility pole next to the check cashing place; rather, find a less expensive property to buy, then go back to the bank.

    I still hear ads on the radio: “When your bank says no, we say yes!” Oh, yay! Nice work there, a-holes.

  58. How about a comparable rule for renters and home buyers?

    Do you guys really want to go down this path? How about a comparable rule for computers? Most of you could get the fuck off the intarwebz right now if that were the requirement.

  59. Here, here, joe. The bank turned you down for a reason. Maybe this is not the time to buy a house.

    My wife pointed out during the news the other day: “Did you notice that all the failing lenders are the ones that used to run commercials non-stop?”

  60. What’s this page?

    What page? Oh, that? That’s standard.

    FAIL!

  61. “Did you notice that all the failing lenders are the ones that used to run commercials non-stop?”

    Lost another 3 points of GDP growth to Ditech!

  62. Oh, hush Epi. You know I’m just going after all the people how signed on for a loan with reading or understanding it, or are lying about understanding it now. I’d love to kill the fine print excuse, if for nothing else to shut up the people around here who think ignorance is a defense for signing a dumb contract.

  63. “Countrywide is one your side!”

  64. By the way, I’d like to point out that as a result of the Treasury’s action, today is the second day in a row both stocks and bonds are down at the same time.

    That is a recipe for an even bigger disaster.

  65. Damn you superfluous “e!”

  66. You know, even evil lenders had to disclose ARMs (and their consequences) as well as the high rates and fees associated with subprime loans. Even the monthly payments for the latter were known. All of the other nonsense aside, how could someone not understand that they were getting into a mortgage that they couldn’t afford? For the ARMs, they may have gambled on an increase in equity and the ability to refinance, but I’m not sure about how flat-rate subprime loans could seem affordable–lender lies or no lender lies.

    joe,

    I strongly oppose the idea of giving out credit to people who can’t afford it. However, the consequence of that is that many people will not be able to buy a house. Ever. If our government can learn to accept that fact and reduce its meddlesome ways, then we may end up with a more rational lending system. Even unusual credit products are okay if their use is limited. Incidentally, I don’t think banks have much cleaner hands than non-bank mortgage lenders. Brokers are another story.

  67. (To the jingle for “EastWest.”)

    Call one eight hundred bank-rupt.

  68. Being the bailout has yet to be implemented why are we already trying to discuss it’s failure.

    Some of its proponents (maybe not all) claimed that it would have an immediate calming effect on market panic.

  69. Harvard economist Jeffrey Miron suspects the latter. “The bailout approach will generate uncertainty about what’s going to happen,” he told me. “It’s quite plausible that it has not calmed markets because no one knows what it means.”

    Smart dude. What real value has our economy lost in the last couple of weeks? It wasn’t MBSs; we already know those had no real value. The real value we’ve lost is long-term stability, confidence that you can make an investment with a multi-year time horizon and not have the government fuck with it.

  70. Lost another 3 points of GDP growth to Ditech!

    lmao

  71. Pro Libertate,

    Based on foreclosure rates and breakdowns of different loan types, banks have much, much cleaner hands than non-federally-insured deposit insitutions.

    They gave out a lot fewer stupid loans, and sold a lot fewer of their loans. Of course, that varies from bank to bank, but by category, banks are by far the most trustworthy.

    The ones you can drive to from your house and have been there for a while are the best of all.

    Also, very little of meltdown is a result of people buying at the lowest price point in the market. The loans that killed the financial sector are a lot more likely to be loans for $300,000 or $600,000 that bought big houses, or loans on properties that were refied out the wazoo.

    Of course the usual suspects are going to blame poor people and minorities, but the CRA-covered banks have managed to come through a lot better than their competitors, so that story doesn’t wash.

    My bank has never given out a subprime loan, and has an Outstanding CRA rating.

    Tightening standards would have a much bigger effect on lenders who seek out middle class people looking for bigger McMansions than on poorer people.

  72. I blame everyone.

  73. Chapman:

    The spectacle of Washington nationalizing private assets is bound to dishearten millions of investors who think that generally, the most helpful economic role for government is staying out of the way.

    Oh cry me a river. The reason we’re in this mess is because of these greedy, short-sighted “investors.” Who cares what they think?

    And b/c of the incompetence of the banks, many are about to get bent over and partially-nationalized in order to stave off another Great Depression.

    Excuse me while I enjoy my schadenfreude.

  74. Of course the usual suspects are going to…

    you work that strawman over, joe!

  75. Uh, yeah, nobody’s blaming lending to minorities and poor people for the meltdown. I just totally made that up.

    Still sore from that whooping, I see.

  76. Oh cry me a river. The reason we’re in this mess is because of these greedy, short-sighted “investors.” Who cares what they think?

    I hope, for the sake of preserving your purity, that you don’t own any investments (bonds, stocks, interests in mutual funds), else that’d make you a raging hypocrite.

  77. Agreeing with joe @3:01.

    Although what he says comes perilously close to holding borrowers responsible for the decision to take out a mortgage.

    I would point out, as well, that I have my mortgage with a bank that has no (that’s zip, zero, nada) buildings that anyone can drive to from their house to do their banking business. They are strictly an on-line operation, though they don’t run ads.

  78. Still sore from that whooping, I see.

    yeah….a “whooping” on an internet board. mein gott…how can I look at myself in the morning? After that “beatdown”?

  79. joe,

    I agree with all of your points about local banks. But that’s not say that local banks don’t try to do stupid things as well. We paid 20% down on our house. At the closing the bank offered us the “opportunity” to immediately open a 50% credit line on our equity. Literally a debit card that would draw on the down payment. I recoiled like they were trying to hand me a snake.

    Imagine how solvent a bank would be if they offered the equity debt card right before closing and tear up the mortgage if you accepted. Sort of a fail-safe financial IQ test.

  80. The reason we’re in this mess is because of these greedy, short-sighted “investors.”

    Yeah, nothing says “short-sighted” like investing. The real far-sighted, selfless types are the ones who finance their lifestyles with credit cards.

  81. Here’s one particular strawman I made up from the very thread that still has TAO so steamed:

    J sub D | September 29, 2008, 6:12pm | #

    I recall Thomas Sowell writing about this years ago. I can’t find the piece after cursory googling but the gist of it was if lenders are discriminating against minority applicants you would see lower default rates for minority mortgage customers and at that time you didn’t.

    Fannie Mae to invest $700 billion in minority housing
    Jet, Oct 28, 2002
    Fannie Mae, the nation’s largest source for financing home mortgages, plans to invest at least $700 billion through 2009 to provide financing to 4.6 million minority households.
    Only a fool would say this whole fuck story can be laid at the feet of increasing lending to minorities.

    Only another fool would claim that government attempts to increase mortgage approval for minority applicants had no part in it.

  82. Uh, yeah, nobody’s blaming lending to minorities and poor people for the meltdown.

    So, when you say “blaming”, do you mean:

    A) That individuals are blaiming the entire mess on pressure to lend to people who were not credit-worthy? OR
    B) That the pressure to do just that led to some undesirable consequences (such as certain securities being sold to FNM and FRM), definitely fueled by greed, caused the meltdown?

  83. Here’s one particular strawman I made up from the very thread that still has TAO so steamed

    yeah, I’m so pissed that joe-the-blind-hack refuses to see anybody else’s viewpoint.

    that’d really be foolish of me, to have that much faith in you at this point.

  84. Good instincts, SugarFree.

    RC (Harvard Law, right?),

    I’d say people at different levels of knowledge and sophistication can be more or less likely to have been manipulated or mislead. Different people in different situations have different levels of responsibility.

  85. The ones you can drive to from your house and have been there for a while are the best of all.

    Or as I called it last night, Small Town Middle America Sanity Bank (STMASB).

  86. Yeah, nothing says “short-sighted” like investing.

    Between house flippers and MBS bundlers, I’d say “short-sighted” is a pretty good term for certain investors.

  87. Your point was bullshit, TAO, and I put up the numbers to refute it. I’m not going to go out of my way to see somebody’s else’s point when it’s nonsense, just because they like the way the nonsense fits in with their political ideology.

  88. So, when you say “blaming”, do you mean:

    A) That individuals are blaiming the entire mess on pressure to lend to people who were not credit-worthy? OR
    B) That the pressure to do just that led to some undesirable consequences (such as certain securities being sold to FNM and FRM), definitely fueled by greed, caused the meltdown?

    So “poor” and “minority” are now synonymns for “credit-worthy?”

    There was a great deal of pressure to lend to people at lower credit standards, but this was a problem across the income spectrum. However much thre usual suspects turn their gaze to (surprise!) lower-income people and minorities.

  89. SugarFree | October 9, 2008, 2:52pm | #
    Neu,

    You must be able to explain a financial instrument’s workings before purchasing said instrument.

    How about a comparable rule for renters and home buyers? They have to be able to explain to a judge they know what they are getting into before signing a contract. “I didn’t know whut a balloon mort-gage wuz!”

    Sugarfree fails?

    Mortgage = Loan = financial instrument.

    I would argue that an IOU and a Lease are also financial instruments, so they would also be covered.

    Episiarch | October 9, 2008, 3:01pm | #
    How about a comparable rule for renters and home buyers?

    Do you guys really want to go down this path? How about a comparable rule for computers? Most of you could get the fuck off the intarwebz right now if that were the requirement.

    The knowledge needs to be knowledge at the appropriate level. Everyone (?) posting here, for instance, understands how to turn on computer, open browser, type comment, click on “submit comment.” Some even understand that “preview” button…

    Those people that got into ARM thinking that they would never see an “A” in the “R” or their “M,” and didn’t understand that “A” may have meant their payments went up should not have been allowed into said ARM. They would be the people that try to push the “submit comment” button with their finger and try to feed the mouse cheese.

  90. “There was a great deal of pressure to lend to people at lower credit standards, but this was a problem across the income spectrum. ”

    I think it got turned into a problem accross the income spectrum. You don’t make a lot of money lending to the ghetto. If only this were a problem of loaning to a bunch of deadbeats in the inner city.

    I think a couple of things happened. The CRM folks were pushing to loan to more people and increase home ownership. The banks took that as a license to loan to everyone with bad credit and start making stupid loans to people of all incomes. As I have pointed out in another thread, the more people are able to pay for housing with irresponsible loans, the more honest people will be priced out of the market and tempted to guy irresponsible loans. It becomes a vicious cycle.

    The problem was once the cycle started everyone started getting rich. The builders got rich because more and more people were buying homes. Home owners made money because the houses were worth more. Realators got really rich since their commissions went up. Of course the banks got rich because they were able to borrow cheap money from the fed at 2% and loan it out on exotic mortgages at 6 or 7 percent. Even better, they could package those loans into MBS and sell them and make a bundle right now. Who cares if they were ever paid off?

    What the CRA people did as much as anything was give topcover for the banks to go nuts. Everyone time someone stood up and said “hey this is getting out of hand” the CRA advoctates in Congress would call them a racist and talk about the American Dream of home ownership.

  91. John,

    I concur for the most part.

    I remember thinking along the same lines when the term “starter home” started showing up.

  92. Neu Mejican,

    You just went on the list, buddy.

  93. John,

    except for this part…

    Everyone time someone stood up and said “hey this is getting out of hand” the CRA advoctates in Congress would call them a racist and talk about the American Dream of home ownership.

    WTF?

  94. gee, joe, do you see John’s post up there? That’s been MY point all along…but you keep “whooping” on me on the internet.

    Make sure you call your mom too: “Mom, someone was wrong on the internet today and I THINK I beat him!”

  95. It all comes down to who should you trust? Not anyone selling you something, especially something expensive. If a car dealer deceives me, well, that’s to be expected. If a mortgage broker deceives me, he’s violated a sacred trust. And, incidentally, usury is a sin, but a 3,000% markup on jewelry is okay.

    I’ve always been sympathetic with the idea of getting more information into buyers’/borrowers’ hands, but I don’t know how good government disclosure regulations are in that regard. A lot of the seemingly pointless disclosures and paperwork in closing documents came from state and federal regulators. I think consumer advocates would do a lot better bypassing government and just publishing information about loans and other dangerous products (and perhaps providing a certification process for good sellers/lenders).

  96. Yippee! someone noticed me.

    [said in best zoidberg voice]

    Gasp, I’m acting astonished.

    “look at me everyone I’m a homeowner”

  97. “except for this part…

    Everyone time someone stood up and said “hey this is getting out of hand” the CRA advoctates in Congress would call them a racist and talk about the American Dream of home ownership.

    WTF?”

    People were warning that Freddie and Fannie were going to go under for years. Everytime someone said something, the CRA people would come out and say that we couldn’t pull in their lending practices because that would be racist and deprive minorities of the opportunities of home ownership. It was an alliance from hell between do gooder liberals who thought that credit was a civil right and corrupt wall street types who were making money off the subprime loans and didn’t care about the consiquences.

  98. previous post addressed to Nutrasweet.

  99. John

    Everytime someone said something, the CRA people would come out and say that we couldn’t pull in their lending practices because that would be racist and deprive minorities of the opportunities of home ownership.

    You don’t say.

    Hmmm….

    I am skeptical of this scenario.

  100. OK, Neu…

    Now I’m checking it. Twice.

  101. Neu Mejican

    Go on Youtube and watch Barney Franks performance in 2003 during the hearings on Freddie and Fannie. Home ownership and access to credit became a “civil rights issue” in the late 1990s. Now, that doesn’t mean that this whole thing is the result of poor people not paying their loans. But what it did do is make it very difficult to have an intelligent conversation about the issue. If in say 2000, Bush had come out and said “we have to stop irresponsible home lending”, I gaurentee you he would have been tagged as a racist trying to keep black people from owning homes. Like I said, the whole CRA issue gave the bankers cover to do all sorts of crazy shit.

  102. John, there are a couple of problems with this theory.

    The CR(A) folks were pushing to loan to more people and increase home ownership. The banks took that as a license to loan to everyone with bad credit and start making stupid loans to people of all incomes.

    First, the CRA only covers federally insured banks, which have much LOWER rates of bad mortgages and unaffordable mortgages and crazy-assed “no payments for a year and then we feed you to a tiger” mortgages.

    Second, the looser credit standards, whether we’re talking about Fannie and Freddie or mortgage originators, were applied across the board from the beginning. It wasn’t a case of the purse strings being opened only for smaller mortgages, and then spreading. The CRA didn’t loosen credit standards – which is why CRA-covered banks have lower default rates in CRA-covered neighborhoods than do their non-bank competitors.

    “The American Dream for Everyone” was the slogan, but it was a “get rich off the bubble” plan from the beginning. Ditech and Countrywide weren’t basing their business model on poor people.

    TAO, you see how I discussed the issue with him politely? Take a look at his post, asswipe, and see if you can figure out why.

  103. NM,

    I remember thinking along the same lines when the term “starter home” started showing up.

    I heard this term decades ago. A starter home was a small home in a crappy neighborhood. You know, for the guy just out of college making 20k a year, so he buys the 50k house. He will move up to the 100k house when hes making 40k and the 200k house at 80k.

  104. Sugarfree,

    Careful, I perform over fifty mega-checks per second!

  105. John,

    Please stop using “CRA” as a generic term for all finance-related efforts to extend home ownership. It’s not. It’s a specific act with specific provisions. Not only did it have absolutely nothing to do with the meltdown or with Fannie and Freddie (they weren’t covered by the CRA, and banks can’t sell their CRA loans to them or they lose their CRA credits), but by encouraging banks to squeeze the predatory lenders and silly-assed mortgage companies’ market share in those neighborhoods, it reduced the number of nonperforming loans and foreclosures.

  106. “The American Dream for Everyone” was the slogan, but it was a “get rich off the bubble” plan from the beginning. Ditech and Countrywide weren’t basing their business model on poor people.”

    Exactly Joe. But if anyone had said “stop”, it would have turned into a civil rights issue. My God, we can’t have people not getting home loans. The CRA issue gave the crooks wonderful moral cover to do what they did. Worse yet, people like Frank and Dodds who if they had been honest would have been all over the crooks, played right along.

  107. You know, once the new market perversions are in place, there will be new bubble opportunities for sure to take advantage of whatever that bubble will be. I call environmental “green energy” as the new bubble.

    I was thinking about this carbon-tax-credit-mess currently in the gate for ram-through. Undoubtedly there will be a provision for “making” carbon credits by actively sequestering carbon out of the atmosphere somehow. It wouldn’t apply to something common-sense like planting a tree, it would have to be a “hip” way to do it.

    So, use the Sabatier process to make natural gas. Basically, you place hydrogen and carbon dioxide together in the presence of an iron catalyst. When you do that, natural gas comes out (along with a little water and a lot of oxygen). So….

    Get a bunch of tax credits to throw up some windmills (maybe a solar panel too!). Then, use the electricity to crack water into hydrogen (there’s gotta be a tax-credit in there somewhere). Run the hydrogen through your big Sabatier reactor, getting natural gas out. Every ton of NG you make should account for a good couple hundred pounds of “carbon credit.” Then, sell the natural gas on the market, but all your costs are covered when you sell the carbon credit.

    Essentially, you sell the natural gas at market price and every dime you get for it is pure gravy – you covered all your costs by selling the carbon credit to some hapless coal plant that had no choice but to buy your crappy credit. Sweet! I can’t wait! There’s gotta be a hundred schemes out there just waiting for that bandwagon to get going.

    Anyone got any other ways to get on the Bubbles of the Future?

  108. TAO, you see how I discussed the issue with him politely? Take a look at his post, asswipe, and see if you can figure out why.

    Boy, yeah…must be one of those easy days at “work” for you.

    (they weren’t covered by the CRA, and banks can’t sell their CRA loans to them or they lose their CRA credits

    That isn’t even true, joe. It’s just not.

  109. robc,

    Let’s call it when the meme spread from what you are referencing to the idea that you bootstrap up to the McMansion.

    I am enough older than you that I remember the concept of buying a home and investing labor and capital into it to make it a better place to live over time, bit by bit, within your means.

    Back when I walked to school uphill both ways in NM dust storms.

  110. C’mon, John.

    You’re saying that the investors and brokerage houses who lost vast fortunes in these investments honestly thought they were solvent and safe, but Democratic Congressmen knew years ago that this was going to happen?

    Because Barney Frank and Chris Dodd have so much more expertise dealing with real estate derivatives, or what?

    People actually thought this system was safe. All across the board – that’s how it got so big.

  111. After the bailout passed I commented on one of the threads that the market would “rally” to 9k by the end of 2009. Im thinking I was off by 14 months. with some work, it can get there today.

    Down almost 700 to 8579.

  112. Neu,

    That’s it. A lump of coal for you. And high-sulfur coal at that. That bituminous crap.

  113. Oh, ok, Optimist. It’s “just not” true that banks lose their CRA credits if they sell the mortgages they originate in low-income neighborhoods. Because you say so?

    Lemme guess – because the Wingnut Weekly whose argument you half-remember used weasel words to imply that they could, and you didn’t bother to find anything out from credible sources.

    I’ll bet you million dollars that banks lose their CRA credits for mortgages they originate if they sell them. Ten million.

  114. John,

    access to credit became a “civil rights issue”

    Access to credit opportunities is a civil right, in a very narrow and specific sense.

    It does not include a right to actual credit, just the right to be considered for credit on equal footing…

    It is covered under that “life, liberty and pursuit of happiness thing.

  115. Sugarfree,

    You don’t scare me I’m going to shove coal so far up your stocking you’ll be coughing up diamonds.

  116. Ok, Bueller. By the way, your vest is hideous and looks retarded on you.

  117. Has Santa-bot been reading at Mises?

    Santa-Bot:
    Mobsters beating up a shopkeeper for protection money: very naughty.
    Shopkeepers not paying their protection money: exactly as naughty.

  118. Yes, CRA isn’t to blame. The everyone-must-have- affordable-housing push may very well be, though even it is just a factor (albeit a substantial one) in the overall mess. CRA is a relatively minor part of that push, in my view. Fannie and Freddie were the principal movers and shakers.

    Access to credit for any group, minority or otherwise, hasn’t been a problem for decades. Someone, somewhere, would make anyone a loan. That’s kind of how we got here in the first place. We used to laugh at the idea that a lender would discriminate on any prohibited basis, because all of the mortgage people we knew would make a loan to undead zombie Hitler, let alone blacks or other minorities. There was likely some discrimination around marginal credit decisions, but a good FICO score and income history gets you a prime loan every time.

  119. Wasn’t the Freddie/Fannie problem mainly (at least in part) that under Bush et al. the rules were loosened so that they could buy sub-prime backed MSB’s… a practice that was previously not allowed.

    Right?

  120. In other words, creative accounting to make it look like they were meeting affordable housing goals by carrying all those sub-prime mortgages on their books…or something?

  121. Buying sub-prime backed MSB’s has never been against the law. It’s just a function of reporting requirements where the regulations were “loosened.”

    Biggest reason sub-prime backed MSB’s were sold so thoroughly was because there were enough suckers out there to buy them. Everything is a good investment so long as the price keeps going up. This is no different than the dot-bomb of ~2000 in the herd-off-the-cliff source of the problem here. If housing prices were still managing their “irrational exuberance” act, we would still be adding to the problem right now…unaware it would seem of the calamity. Of course, any rational observer two years ago could tell you that housing party couldn’t last, not at those appreciations.

    What makes this different is it’s mortgages, so there are all kinds of affected parties, not just buyer and seller. Also, mortgages are pretty much kicked down by banks. Banks of course do not play with their money, they play with your money in the hopes you don’t want it back to soon. When that hope doesn’t pan out, the bank folds like a house of cards, because it is ultimately an illusion. That is a weakness in fractional banking that has no cure.

  122. Angry Optimist
    I hope, for the sake of preserving your purity, that you don’t own any investments (bonds, stocks, interests in mutual funds), else that’d make you a raging hypocrite.

    I do own some and not all investors are bad. But Chapman is full of it.

    It’s sort of like you paying taxes. It dilutes the purity of your hatred of big bad government, but you need police, firemen, etc.

    To me, the hypocrisy is mostly on the rightwing, glibertarian side.

    http://www.washingtonpost.com/wp-srv/opinions/cartoonsandvideos/toles_main.html?name=Toles&date=09182008

  123. Neu Mejican,

    Blame for all of this can be distributed so widely that it may very well be my fault as well. I worked for WaMu, after all.

    I’d say that while there was a distinctively liberal flavor to the initial motives that enabled this problem, the GOP can’t make hay of that, because they’ve played along all the while. Even the brief anti-GSE moment wasn’t really about reining in anything significant.

  124. Biggest reason sub-prime backed MSB’s were sold so thoroughly was because there were enough suckers out there to buy them.

    A situation that got worse when the stock market dropped after the dot-com bubble popped.

    And also, too, the rating companies, many of which had one division rating MBSs and another selling them.

  125. Here’s a question: Is there an industry that is doing great right now, mocking other industries’ pain? I’d like to invest there, please.

  126. Mining.

  127. Ah, mining. Mining of what?

  128. Fact is, the mortgage meltdown is pretty much a bi-partisan effort in so much as Uncle Scam’s culpability (which is considerable) is concerned.

    The political ideology cooking up the gov-programs leading to these disasters is not the problem. It is that there are gov-programs manipulating these markets.

  129. I would point out, as well, that I have my mortgage with a bank that has no (that’s zip, zero, nada) buildings that anyone can drive to from their house

    Holy crap, I was just about to take joe to task by saying “who does that?!!”

  130. Ah, mining. Mining of what?

    I predict that data mining in the financial industry will boom as people try to figure how to detangle good from bad mortgages in these “complex bundles.”

    But, I would go with things needed to make batteries…lithium, perhaps (I don’t even know who does this these days, so don’t listen to me…that would be like feeding the mouse cheese).

  131. Paul,

    Buying sub-prime backed MSB’s has never been against the law. It’s just a function of reporting requirements where the regulations were “loosened.”

    What I meant was that Fannie/Freddie were “allowed” to buy them as a way to fulfill affordable housing goals. Previously the number of sub-primes they carried did not count towards those goals.

    Correct?

  132. Pro Lib,

    Videoconferencing. Big companies spend on videoconferencing equipment during slowdowns, so they can cut their travel budgets.

  133. Videoconferencing. Big companies spend on videoconferencing equipment during slowdowns, so they can cut their travel budgets.

    Then, after weeks of fiddling with the equipment, trying to make it work, I.T. people scratching their heads, and general dissatisfaction with performance, they bag it and go back to travel.

  134. Prove that the Dow wouldn’t be at 7000 right now, instead of 8500, if the bailout hadn’t occurred? Clearly, the bailout alone didn’t fix things, but it quite possibly meant they aren’t quite as bad.

    Or not. Maybe it didn’t change things at all, or made it worse even. It’s impossible to tell one way or the other.

  135. Traditionally, politicians telling us to turn down the thermostat and put on a sweater are doomed.

    Only heating bills tell us that- and even then, many refuse to listen.

  136. BOB BARR! LESS GOVERNMENT! BOB BARR! LESS TAXES!! BOB BARR! MORE FREEDOM!!! BOB BARR… THE LIBERTARIAN PARTY’S ‘NEW’ LEADER!!!

    America’s solution… Libertarian Presidential candidate Bob Barr ‘actually’ believes in ‘reducing’ federal government spending!!! The National Taxpayers Union released a report on September 25th. It analyzes each of the three leading Presidential candidates in their ‘first year’ federal budget spending proposals as President. Barack Obama would ‘add’ $292,954,000,000 to annual spending! John McCain would ‘add’ $92,437,000,000 to annual spending! Bob Barr would ‘cut’ $200,928,000,000 from annual spending!!!

    You can read the cover letter of the report at http://www.ntu.org/main/press.php?PressID=1048&org_name=NTUF and the report at http://www.ntu.org/main/page.php?PageID=141 .

    You can read more about Bob Barr in general at http://www.bobbarr2008.com/ which is his campaign’s website. Here is one of his videos http://www.youtube.com/watch?v=t5waL8brexY and one of his articles http://www.huffingtonpost.com/bob-barr/economic-chaos-increases_b_132195.html each on the current economic ‘bailout’ problem.

    Help the Third Party Political System ‘grow’ in America by voting for Bob Barr for President of the United States!!!

    RAISE THE BARR FOR PRESIDENT! RAISE THE BARR FOR THE LIBERTARIAN PARTY!! RAISE THE BARR FOR AMERICA!!! VOTE FOR ‘THE BIGGEST CHANGE’ ON NOVEMBER 4TH!!!!!!

  137. Or not. Maybe it didn’t change things at all, or made it worse even. It’s impossible to tell one way or the other.

    The Motley Fool had an interesting article today about the stabilizing, yes stabilizing, effect off short selling on the market. Once a seller has sold short, he has an obligation to buy, which tends to counteract free falls like we’ve seen recently.

    The author laid the blame for recent losses on the ban. His hypothesis can be tested somewhat, since the ban is no longer in effect starting tomorrow.

  138. ProGLib: plastics.

    or a factory in chicago that makes miniature models of factories.

  139. I heard this term decades ago. A starter home was a small home in a crappy neighborhood. You know, for the guy just out of college making 20k a year, so he buys the 50k house. He will move up to the 100k house when hes making 40k and the 200k house at 80k.

    Ah, yes, the old 2.5X one’s annual income rule.

    Living witin one’s means is so quaint and oldfashioned.

  140. Then, after weeks of fiddling with the equipment, trying to make it work, I.T. people scratching their heads, and general dissatisfaction with performance, they bag it and go back to travel.

    Videoconferencing, and IT consultants. Sounds like a plan.

  141. Geotpf,

    “Or not. Maybe it didn’t change things at all, or made it worse even. It’s impossible to tell one way or the other.”

    it is impossible to PROVE one way or another. However, there are a lot of good reasons to believe that free-markets and the incentive structures of private property rights are the fundamental reasons for the increasing stadnards of living over the last 300 years.

    When you destroy these fundamental pillars, it makes sense that the stock market might go down.

  142. I may have a solution for anyone wanting to get out of the market. I have moved my investors money into a company called Prosidian (new concept in medical malpractice ins.-not market sensitive) that is in the final stages of getting hedge funding. The payout is 14%. I am so confident in it that I am kicking in a 2% referral for any investor referred. They have a program where if you have an SEC registered stock selling for at least $10, you can trade it into Prosidian units and really minimize your losses. For more information, contact me at capital@nobankreqd.com.

  143. It is impossible to PROVE one way or another. However, there are a lot of good reasons to believe that free-markets and the incentive structures of private property rights are the fundamental reasons for the increasing stadnards of living over the last 300 years.

    And this is relevant to the question of whther the bailout made things worse, how, exactly? Because there was a “free market” in place before the bailout?

  144. And because it is based in Nigeria, Prosidian has very low expenses.

  145. The bailout is a fart amid a hurricane because of this.

  146. Videoconferencing, and IT consultants. Sounds like a plan.

    Hoo boy…

    Hoooo boyyy…. Just gonna tip-toe right past that one.

    That innernets thing is just a fad, joe? Computers and videoconferencing….noooothing to do with eachother.

  147. Phones and IT… sounds like another plan.

    I kill me.

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