Economics

The Frank-Obama Rescue Plan: Easier Money To the Rescue!

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Do you remember the one about how lending too much money to too many people helped cause the financial crisis? You know, the one about how, in the words of Candidate Obama, "Lenders tricked people into buying homes they couldn't afford and some folks knew they couldn't afford them and bought them anyway"?

Well things are different now. The real problem, says Rep. Barney Frank (D-Mass.) is that banks didn't give out enough cash under President Bush. But not to worry:

House Financial Services Committee Chairman Barney Frank said President Barack Obama will require banks receiving government aid to lend more to businesses and consumers, saying the Bush administration "made a mistake" by not setting stricter rules for institutions getting funds from the $700 billion financial-rescue package.

"I think you're going to see the Obama administration, having learned from that, push for much more lending," Frank said today on ABC's This Week. "There are going to be some real rules in there."

Indeed, Obama pledged in his weekly radio address to "lower mortgage costs" as part of a plan to get credit and money out into the economy.

Once again, let's review: We got into this mess because of what Obama castigated as "an era of easy money, in which we were allowed and even encouraged to spend without limits; to borrow instead of save." And we'll get out it precisely by…spending and borrowing more, especially on overvalued property.

More here.

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  1. It’s the new era of responsibilty.

    Meaning whatever Obama says is responsible at any given moment is responsible – even when it’s not.

  2. It would be funny if it weren’t so destructive.

  3. It’s certainly not Barney Frank’s fault for not making sure those restrictions were in the first bailout bill. Nope, let’s pass a blank check so we can say we did something, and then blame it on the other party when it doesn’t actually, you know, do something.

  4. This is really starting to make the “helicopter drop” seem like a sensible plan.

  5. So the problem was that financial institutions weren’t lending enough money?

    If only the damned Dutch hadn’t stopped buying those tulip bulbs.

  6. Shorter Nick:

    Too much lending during one period, and too little during another?

    That’s unpossible!

  7. Zoinks! *we’re doomed*

  8. Easy money is evil when the other party uses it to obtain political power, but is good when your party of choice does. The winners write the histories.

  9. Shorter Joe:

    Now the RIGHT PEOPLE are in charge.

    *zzzzzzzzzzz*

  10. That’s funny, I didn’t think I wrote anything about people.

    I thought I wrote something about the condition of the economy.

    Here, let me look at that again:

    Too much lending during one period, and too little during another?

    That’s unpossible!

    Nope. Sorry, FAIL.

  11. Until things change, I’m going to blame the voters. Frank and Obama are giving them what they think they want — and so far history has failed to prove they are wrong about what the voters want.

  12. Q: Are banks overcorrecting for previous practices of lending more than is desireable, and lending less than is desireable?

    A: ZOMG! Yoo are teh partisan!

  13. Considering that Barney was a major pusher of lending too much before, this isn’t surprising.

  14. But this is probably different because if the mortgage rates stay artificially low people can afford to continue to pay interest payments on an overvalued home for the rest of their lives without ever being evicted from it or actually having any equity in it. Isn’t that good? Before wasn’t the problem that they didn’t have any equity, but they were increasingly incapable of making the payments because the interest rates were increasing?

    In all seriousness though, who says those DC suburb 3BR homes aren’t worth $800,000?

  15. Ok, neither of my last statements were serious

  16. joe continues to amuse, no?

    Now, his rather quaint belief is, apparently, that the federal government that totally botched its previous attempt to loosen up credit standards in the mortgage market over the last decade or so absolutely has to go in and loosen up credit standards in the mortgage market, and that the very same people driving the previous botch are just the ones to get this right.

    Because now there’s a Dem President. And he accuses others of being partisan. Really, its just too much.

    Don’t ever change, joe!

  17. BARNEY…big plush purple dinosaur…major financial yahoo…YOU DECIDE.

  18. By the way, I don’t mean the “I love you, you love me” purple dinosaur Barney. I wish I did.

  19. I just got the approval for my 4.5% fixed refi.
    You know the coming hyperinflation? Bring it on, bitches!

  20. The stated purpose of the bailout funds was to avoid a systemic collapse by providing additional capital so banks would not go out of business and start cascading defaults throughout the economy.

    That means that if the banks took the capital and just added it to their balance sheets, while continuing to toughen lending standards, the bailout was working as designed. The bailout funds were supposed to provide the banks the breathing space they needed to fix their balance sheets. If they aren’t going to fix their balance sheets, then the bailout was always a waste of time and the way it was sold to the public was a lie.

  21. But this is probably different because if the mortgage rates stay artificially low people can afford to continue to pay interest payments on an overvalued home for the rest of their lives without ever being evicted from it or actually having any equity in it. Isn’t that good?

    No, its not. It increases the amount of dead capital clogging up our financial system, as those overvalued/underpriced mortgages aren’t going anywhere.

    It will also dry up the secondary market for mortgages, as artificially underpriced mortgages can only support artificially underpriced MBS’s, which won’t move. If the banks can’t resell their current mortgages, they can’t write new ones.

  22. Because now there’s a Dem President.

    That’s the only difference you can come up with between the situation in 2006 and 2009 – the party of the president?

    Really?

    The issue at hand is whether or not lending is too tight now, in 2009, and the only possible reason you can imagine someone thinking the answer to that question is different than three years ago is the party of the current president.

    Wow. That manages to combine partisan blinkers and a complete lack of awareness of the world around in a rather impressive manner.

    Maybe you people should worry a little less about political parties, and a little more about the objective reality of what’s going on around you.

    Come on, RC. Come on, P Brooks – I want you to say that I’m wrong, and that there’s no way there is shortage of lending activity right now.

    I dare you. I double dog dare you.

    Or, you can talk about zomg teh Democrats some more.

  23. Q: Are banks overcorrecting for previous practices of lending more than is desireable, and lending less than is desireable?

    No.

  24. Too much lending during one period, and too little during another?

    That’s unpossible!

    Actually, it is.

    As economic conditions worsen, there are fewer economically sound lending opportunities by definition.

    Unless the bailout funds were intended to be used to allow the banks to deliberately make unsound loans – which is not what we were previously told.

  25. So joe, you think loosening lending standards is the right move right now? Why? Please explain.

  26. It will also dry up the secondary market for mortgages, as artificially underpriced mortgages can only support artificially underpriced MBS’s, which won’t move.

    Holy sh*t, you really are completely detached from reality.

    Not only is a there absolutely no possibility that there is inadequate credit being extended – of course not, only the most blind partisan could even ask that question – but it would be a major problem if the secondary mortgage market cooled off, or if MBSs weren’t selling.

    Good lord.

  27. the situation in 20062008 and 2009

    FTFY. The overloaning continued well into 2008. Well, late 2007 anyway. We werent hearing of credit crunches until fall of 2008.

    So, no, there really isnt much difference between the two periods economically. Well, in one we were heading towards a recession, in the other we are there. Not a big difference, IMO.

  28. joe,

    Come on, RC. Come on, P Brooks – I want you to say that I’m wrong, and that there’s no way there is shortage of lending activity right now.

    I dare you. I double dog dare you.

    You didnt dare me, but I met your dare at pretty much the same time you were posting this.

  29. Fluffy,

    As economic conditions worsen, there are fewer economically sound lending opportunities by definition.

    Exactly. Standard business cycle.

    Also, best cure for a recession? Time. That is the point of a frickin cycle, it cycles. You dont need stimulus, time will cure all the ills.

  30. Fluffy,

    As economic conditions worsen, there are fewer economically sound lending opportunities by definition.

    Sure, absolutely, but that doesn’t mean that overcorrection is impossible. For one example, during the early 90s – after the S&L collapse – banks that had no connection tot he problem started calling performing loans in large numbers. There’s evidence of similar behavior today.

    Saying “As economic conditions worsen, there are fewer economically sound lending opportunities by definition” and concluding that there isn’t too little lending going on in the inverse of saying “As economic conditions improve, there are more sound lending opportunities by definition,” and concluding that there cannot be too much lending going on.

  31. Did Barney Frank get a new boyfriend at Citigroup?

  32. Am I the only one here who’s terrified to be living in a country of drooling morons? I mean, I’m not claiming to be some kind of genius, but damn. It seems like 99% of the population doesn’t even understand simple economic concepts like supply and demand.

  33. It also seems that some people are fighting tooth and nail the idea of living within their means and saving money. They are *not* trying to hear that at all. Rather, they want the government to do something, anything, to allow them to continue the lifestyle to which they’re accustomed. Which means middle managers living in monstrous houses, with monstrous TVs, driving monstrous SUVs which consume monstrous amounts of gas to dine on monstrous portions at a chain restaurant every night.

    Sorry if I come across like a judgemental liberal, but it has always seemed to me that the typical middle-class American lifestyle is nonsensical and unsustainable. It was bought on credit, but now that the bill is coming due, nobody wants to pay it. There is only so many times one can refinance a debt…

  34. joe,

    Overcorrection occurs, it is part of what drives the cycle, just as over/under production do. That is because of the lag between signals and decisions. The arent overcorrecting based on the signals they are receiving – they will start loaning again when the signals are better, which will probably be 3-6 months after they should be doing it.

  35. Episiarch,

    I don’t think the entirety of the decision not to lend is the result of standards – of there not being would-be-borrowers with good credit and reliable income to pay back the loand – but of financial institutions making the decision that they don’t want to be in the lending business right now, owing to their internal financial situation.

    I think the assumption that pushing for more lending means pushing for irrationally loose standards is, in the current financial situation, unwarranted.

  36. Bank lending and asset values tends to be procyclical – which is why the fed exists: to try and counter the trend. Joe, if this is your point, you are correct. I think the problem was in 2003, congress was trying to expand the housing bubble by jamming subprime down the GSE’s throats – at exactly the time it should have been reigning in excessive lending – ie. during a boom. This was congresses decision, not that of the central bank – though Greenspan made his own different errors.

  37. robc,

    So, no, there really isnt much difference between the two periods economically.

    There is a huge different between the two periods in terms of the situation of the financial sector, and its willingness to extend credit. As you say, even as late as 2007, there was a great deal of loose credit being extended. That’s not exactly the situation right now.

  38. that there’s no way there is shortage of lending activity right now.

    Difficult to say, depends on how one defines ‘shortage’.

    There is the fact that most of the credit crisis indicators are back to where they were prior to the Sept meltdown and TARP 1. So to me it looks like either the financial rescue plan worked, or since I really don’t believe that, at the very least another round of the same is no longer required.

  39. Every disagreeable and bad thing that Bush did was justified by the “extraordinary circumstances” of 9/11. Our new overlords. . .and their supporters. . .appear willing to justify their disagreeable and bad policies on the extraordinary circumstances of the recession. And I’m sure they’ll do the same in whatever foreign policy crisis that arises in the next few years (just read a Los Angeles Times article about rendition not going away, for instance, and that’s without a new crisis).

    And the beat goes on.

  40. joe,

    that they don’t want to be in the lending business right now, owing to their internal financial situation.

    I think the assumption that pushing for more lending means pushing for irrationally loose standards is, in the current financial situation, unwarranted.

    Those two statements are in contradiction. Pushing for more lending is irrational, based on the internal financial situations. It seems to me it is probably rational to hold off on lending for now – the banks will loosen when the time is right (actually, as I said above, probably a bit after the time is right).

    However, better 6 months too late than 1 month too early. Misreading and loosening too early, what with their internal state, seems a recipe for going under.

  41. As you say, even as late as 2007, there was a great deal of loose credit being extended. That’s not exactly the situation right now.

    The loose credit was the thing we were measuring. The economic situation, OTHER THAN THAT, was very similar to now. Crashing vs Crashed was the only difference.

  42. but of financial institutions making the decision that they don’t want to be in the lending business right now, owing to their internal financial situation

    Which is their decision to make, and Barney wants to force them to act differently. Why does this seem like a good idea to you?

  43. robc,

    Standard business cycle?

    Are you claiming that the situation the financial sector is in is a consequence of, and is acting in a manner consistent with, the standard business cycle?

    I don’t buy it. This is not a situation where the economy turned south, and the financial sector became less profitable, causing some banks to fail, which happens in every downturn. This is a situation where the cascade of failure, which spread because of over-leveraging, in the financial sector itself was the cause of the downturn. BTW, the last time that happened was 1929.

    If the standard business cycle was the driving force of how our economy was doing, we’d be in the sweet spot of the recovery from the 2001 recession.

  44. I used to be a fan of Frank (insofar as you can be a fan of someone who disagrees with so many of your views). I am less so now, but I seriously doubt he’ll ever be voted out, no matter how much I want it now.

    The candidates I’ve seen run against him have been either minor and crazy, or major but incredibly homophobic. (seriously, the last republican running against him had a campaign site that basically just said gay, gay, gay, gay, gay, gay, gay, gay, gay, gay, gay, gay, gay, gay. Have you heard, the gay’s the word? gay, gay, gay, gay, gay, gay, gay.)

  45. robc,

    They are not in contradiction. Lending standards and a bank’s business model are two different subjects. There is nothing contradictory about saying that a company’s internal business model of the moment – to abjure lending in order to bolster their cash situation – leads them to reject loans that are perfectly prudent.

    It only appears to be a contradiction if you assume the very point in dispute – whether banks are or are not making fewer loans than would be rational based on the credit status and prospects of their applicants.

  46. banks are given the special priviledge of lending holding a fraction in reserve. In exchange for this priviledge, they submit to regulation. I have some sympathy with the idea that they can be expected to lend. On the other hand, the monetary conditions are intended to allow them to shore up their balance sheets by borrowing free money and lending it profitably. It seems they are lending, only to fewer people than previously. I think time is needed for some of these loans to work out, before confidence starts to return.

  47. If the standard business cycle was the driving force of how our economy was doing, we’d be in the sweet spot of the recovery from the 2001 recession.

    Not true, standard cycle theory implies at least 4 cycles with differing time periods. It is quite possible for one cycle to be down in 2001 and a larger cycle to be responsible for this recession.

    I do think this one is a confluence of two factors. One, the obvious, being the bust in the housing market. However, I think the bust occurred when it did because of pressure from the cycle.

    After the 90s, I disbelieve “This time it is different” from whichever side it is coming from. It wasnt true for the tech bubble, or the housing bubble, or this housing crash.

    I also believe “Every time is different, history doesnt repeat”. This isnt a contradiction. This recession isnt like any other, it has a factor that never occurred before. Housing bubbles have never crashed nationwide before, they have always been localized.

    But, I think the timing of the housing bubble had to do with an oncoming recession. Why did the bubble burst in 2007 and not 2004? There needs to be an external event to burst the bubble. In this case, the start of an economic slowdown meant there wasnt enough capital to keep driving the prices upwards. Would we have hit “official” recession without the housing stuff too? Maybe not, maybe it would have been just a slowdown that never went negative. Or maybe it would have been.

  48. robc,

    The loose credit was the thing we were measuring. The economic situation, OTHER THAN THAT, was very similar to now.

    The dispute at hand is about the availability of credit.

    Episiarch,

    Which is their decision to make, and Barney wants to force them to act differently. You do know that we’re talking about companies that received $350 billion in TARP money, right? No, it is not “their decision” to decide what to do with that money.

  49. joe,

    It only appears to be a contradiction if you assume the very point in dispute – whether banks are or are not making fewer loans than would be rational based on the credit status and prospects of their applicants.

    I see the problem, you are missing one key element, you list two.

    Rational decisions should be based on these 3:

    1. Credit status of applicants
    2. Prospects of applicants
    3. Internal finances of bank

    Risk levels change based on 3. A bank with no debt and plenty of capital and a current default rate of 0% needs lower standards of #1 and #2 than a bank teetering on the edge of bankruptcy.

  50. joe,

    The dispute at hand is about the availability of credit.

    The subdispute I was commenting on was that the underlying economic factors at the time of easy credit vs now werent different. You claimed they were, because you sited 2006 as a time of easy credit. My point was that easy credit extended to 2007/2008 when the economic conditions were more similar to today than to 2006.

  51. No, it is not “their decision” to decide what to do with that money.

    True. However, it is madness for an architect of over-lending in the first place to dictate lending against the banks’ wishes now.

    Barney is the last guy who should be dictating shit. Just because they gave the banks the money in the first place doesn’t mean they have to interfere with internal decisions, you know.

  52. Derrick @ 11:06 wins the thread.

  53. robc,

    After the 90s, I disbelieve “This time it is different” from whichever side it is coming from. It wasnt true for the tech bubble, or the housing bubble, or this housing crash.

    I don’t believe “this time is different.” I believe this is a standard, cascading-failure-induced depressionary cycle, like the eight or so that took place between 1800 and 1930. I think we’re looking at a fairly familiar, though long-absent, problem.

    But, I think the timing of the housing bubble had to do with an oncoming recession. Maybe. 2007 was six years after the 2001 recession, so it’s in the window. I tended to look at the slow growth of the 2002-2007 period, the “jobless recovery” as being like, say, 1992-1993 – the slow, early stages of a recovery that didn’t have much momentum behind it. Maybe you’re right, at 2006-7 really was the top of a cycle, and the low job growth was a structural problem. You make a good point.

    But, even if we assume that, a crash in the housing market would have put us into a plain ol’ recession. We didn’t see a cascade of failure throughout the financial sector and freeze-up of credit in 2001, or 1991, or 1982. I’m saying, we can separate out the effects of the cycle in housing prices from the collapse of the financial sector brought about by one overleveraged investment bank not being able to pay back another, and the credit shortage and (potentially) deflation it produced.

  54. Even if nothing else was going on, a shift away from high risk loans will result in lower interest rates.

    Consider a world where there are two kinds of mortgages, high risk and low risk. There is only a fixed quantity of mortgage lending.

    In the initial equilibrium, the equilibrium interest rate on high risk interest mortgages is high, but the quantity is negative. In reality, no high risk mortgates are made. The high interest rate isn’t observed.

    All mortgate fiance goes to low risk mortgates, generating a “low” mortgate interst rate.

    For sound or foolish reasons, lenders are more willing to make high risk mortgages. The supply increases, the equilibrium interst rate falls, and the quantity moves from negative to positive. That is, high risk mortgates are now made at these high interest rates. A higher interest rate would have been needed before, but no transations occured, so those weren’t observed. Suddenly, high risk mortgates at high interest rates are observed.

    Meanwhile, the supply of low risk mortgates falls as funds are moved from low risk mortgages to fund high risk mortgages, and interest rates in that market rise. The quantity of low risk mortgages fall, and the funds are now going to the high risk mortgages.

    What do we see? Higher mortgate interest rates. Really high ones for the high risk mortgages and higher ones for the low risk mortgates too.

    No, let’s suppose that we reverse. Those high risk mortgates were a bad idea after all. The interest rate that would be required is higher, but the quantity is negative. Really, zero. None of this high interest rates on risky mortgates now.

    But the mortgage funds go to the low risk market, and the equilibrium interest rate falls. All we observe is lower interest rates on low risk mortgages.

    Morgage interest rates should be lower. The people borrowing this money aren’t getting into trouble. By assumption, they are good risks.

    It is not at all obvious that there should be less lending in total, just because some people borrowed too much. Perhaps when they were borrowing too much, other people who would not have gotten into trouble borrowed too little.

    While my simple example of fixed quantity mortgage credit is unrealistic, think of it as a metaphor for the broader economy.

    I think too much credit did go into housing. That isn’t because there was too much credit so much as the credit should have gone elsewhere. And I don’t mean that there should have been some other bubble. As a rule, a little bit all over the place is what one would expect would be appropriate. But, perhaps a lot of it somewhere, but not a bubble.

    All that said, having the goverment increase its ownership in banks on the condition they expand their lending isn’t a policy I support.

    I just don’t think the notion that some people borrowed more than they should implies that now there should be less lending altogether.

  55. robc,

    I’m not “missing” the fact that it is rational, on the level of an individual bank, to include internal financial situation when making loans.

    My point is that what is rational at that individual level is producing irrational, destructive effects at the aggregate level.

    Like a bank run, it can be rational for each person to withdraw all of their money, but the sum of those rational decisions can be quite irrational, inefficient, and destructive.

  56. Episiarch,

    Barney is the last guy who should be dictating shit.

    Oh, please. I can’t believe you of all people drank this Kool Aid about Barney Frank.

    The Executive Director of FM Watch, an oversight group that works to reform the GSEs, singled out Barney Frank as one of the good guys, who helped to pass important reform legislation to make them more stable when the Democrats took over in 2006.

    http://www.house.gov/frank/fanfredarticletext101808.html

  57. NJ: Any other Democrats?

    Griffith: Well, [Rep.] Barney Frank [of Massachusetts]. The Senate Banking Committee produced a very good bill in 2004. It was S. 190 and never got to the Senate floor. Then the House introduced a bill, which it passed, but we couldn’t get a bill to the floor of the Senate. Then after the 2006 election when everyone thought FM Policy Focus’s issues would be tough sledding with Democrats in the majority, Barney Frank, as the new chairman of the House Financial Services Committee, stepped up and said, “I am convinced we need to do something.” He sat down with Treasury Secretary Hank Paulson and frankly upset people in the Senate and Republicans in the House. But they came up with a bill that was excellent, and it was the bill that largely became law.

  58. joe,

    I disagree a bit, the sum of the decisions can be destructive, but that isnt necessarily either irrational or inefficient.

    I dont buy trying to change policy “as a whole” because the point is that banks are individual entities and need to act in their own rational best interest. If that means that there is “too little” loaning on the whole then so be it.

    No matter what, trying to force the banks to loan more is going to cause them to endanger themselves but acting outside their own best interest. Some banks wont survive it.

    I think this comes down to a basic premise difference. Im not a utilitarian, I wont sacrifice A to improve B, C and D.

    If what A needs to do to stay around hurts the economy as a whole, then Im okay with that.

  59. Come on, RC. Come on, P Brooks – I want you to say that I’m wrong, and that there’s no way there is shortage of lending activity right now.

    I’ll say it: You. Are. Wrong.

    Even during the “credit crunch” of late 2008, there was sill more credit flowing through banks than in early 2008, which was a record high.

  60. Reason’s reporting on the financial metldown, and the efforts to address it, frequently falls into this same trap: assuming that any effort to arrest to the collapse is an effort to inflate things back to where they were; and that the consequence of the bubbles’ collapse cannot be a “reverse bubble,” where irrational anti-exuberance is driving decision-making, but must instead represent a reversion to a rational baseline.

    This was true of their commentary on the housing/mortgage collapse, and of the financial/credit collapse that it spawned.

  61. the point is that banks are individual entities and need to act in their own rational best interest. If that means that there is “too little” loaning on the whole then so be it. Not with $350 billion of public money they don’t. Piper, tune.

    No matter what, trying to force the banks to loan more is going to cause them to endanger themselves but acting outside their own best interest. Some banks wont survive it. So be it. If Citi lends out its TARP money, goes under, and some other bank or buys up and services those performing loans, or if their still-profitable loan servicing department gets spun off in the bankruptcy judgemen, that’s fine with me. The purpose of that money shouldn’t be to save individual corporations, but to get a working credit market up and running again.

  62. Anyway, good thread, gotta take the kid to the dentist.

    It’s good to see that there are quite a few people who can actually discuss this stuff beyond yammering about the President being a Democrat.

  63. joe,

    I oppose TARP money in general so I have a problem arguing what is “right” to do with that money. Send it back to me is the only right thing to do with it. 🙂

    I dont tell welfare recipients what to do with their money, I dont see the difference.

  64. Guys, guys, guys,

    This administration will not be spending “taxpayer money without wisdom or discipline”. Nor will they be “focused on scoring political points instead of the problems they were sent here to solve”.

    Thus sayeth the messiah.

  65. Guys, guys, guys,

    This administration will not be spending “taxpayer money without wisdom or discipline”. Nor will they be “focused on scoring political points instead of the problems they were sent here to solve”.

    Thus sayeth the messiah.

  66. Yammering about the President being a Democrat.

  67. I certainly don’t see this issue as a partisan one. It might’ve been possible to do so if Bush hadn’t decided to play Chicken Little before his departure, but it’s a bipartisan clusterfuck.

    I think the major fallacy here is the assumption that a global strategy of “saving banking” scales down to forcing individual banks to act against their best interest. I oppose the bailout for a variety of reasons, but if we’re going down that path, let’s at least let the market determine the appropriate timing for credit to become more available. There’s still a lot of money out there to lend without the bailout money, too. In fact, there’s tons of money out there–the lenders just don’t want to lend it right this minute.

  68. Sorry ’bout the double post. It’s a shame Reason furloughed the server squirrels, now I have to find someone else to blame.

  69. Question: What the fuck is wrong with Frank’s voice? He sounds like a Fraggle…

  70. Frank was born with a cleft palate.

  71. Frank was born with a cleft palate.

    Scientifically speaking, can we blame that for his politics at all?

  72. I said:

    It will also dry up the secondary market for mortgages, as artificially underpriced mortgages can only support artificially underpriced MBS’s, which won’t move.

    joe riposted:

    Holy sh*t, you really are completely detached from reality.

    An MBS has its value determined by its cash flow and the quality of its loans. The cash flow is driven by the size of the loan pool and the interest rate on those loans. Artificially low interest rate = artificially low cash flow = lower value security, no?

    In addition, regulatory lending requirements that force banks into making lower quality loans (to marginal borrowers, on inflated values, take your pick), also lower the value of the MBS.

    A lower value security will move only at a lower price, thus reducing the capital returned to the banks for reinvestment in more mortgages. Exactly where is my logic wrong, here, joe?

    Not only is a there absolutely no possibility that there is inadequate credit being extended – of course not, only the most blind partisan could even ask that question –

    Anyone can ask that question, joe. Its the way you, Barney Frank, and the others who presumed the answer to that question in the past was “yes” because of partisan political interests, to catastrophic results, and are now presuming the same answer again for the same reasons, that I question.

    but it would be a major problem if the secondary mortgage market cooled off, or if MBSs weren’t selling.

    Indeed it would. And, as I point out above, the policy that you support virtually guarantees this will happen.

  73. I think the major fallacy here is the assumption that a global strategy of “saving banking” scales down to forcing individual banks to act against their best interest.

    It’s a short step from a “market failure” to assuming individual market actors can’t make decisions on their own. Why is anybody surprised by this?

  74. Solana,

    I don’t think so. But I was surprised to learn that clefting is more prevalent in Native Americans than any other ethnic group. Another random fact to spout at dinner parties to distract everyone while my wife steals prescription meds.

  75. Another random fact to spout at dinner parties to distract everyone while my wife steals prescription meds.

    You could just get the vet to prescribe them for the dog, and then take them yourself. I know a lady that did this with prozac and valium.

  76. Nice tip!

  77. Sorry, my last comment was meant for the Superbowl thread.

  78. Franklin Harris,

    Since there doesn’t seem to be any accompanying information about how the figure on the chart you linked to was produced, I can’t say exactly why it’s misleading, but here are the hard numbers on the actual variable that matters – lending to businesses and individuals:

    http://www.loanpricing.com/newsroom_files/press_release_4Q08.htm

  79. Bill Woolsey,

    Some interesting hypotheses – why do you think more propensity to lend would cause the risky interest rate to drop, while at the same time causing the low risk rate to rise. You state this more as an assumption. I think the data would show that in the boom, rates fell across the board compared to risk free rates of lending. I think it’s more correct to say the spread narrowed more for risky loans than it did for low risk loans.

    I don’t think there are a ton of mortgages being originated right now – at any rate – depite the wide spreads available to banks. It’s not really a question of risk, as it is one of the cost of balance sheet. banks want to be the last one to survive – therefore hoarding capital is a better strategy than lending.

  80. domo,

    I don’t think there are a ton of mortgages being originated right now – at any rate – depite the wide spreads available to banks.

    Not the impression I got from the closing company when I closed on my refi in December. They were slammed. Pulling people out of the back and training them to do closings because they couldnt keep up.

  81. robc,

    I shall check with my broker… you are actually probably right – 30 year fixed rates are crazy low – where fancy stuff still seems to be at a massive premium – so maybe people are doing their refi’s differently. I’d bet the Fed is encouraging this behavior. Get ready for the inflation!

  82. joe from your link-

    Loan issuance contracted across all segments, but it was leveraged loans where the credit crunch hit hardest.

    This strikes me as an unalloyed good thing. And I’ll repeat again what I linked to above, that per the calculated risk blog (no right wing shill) has posted numbers that by per his prefered meterics, the worst of the credit crunch is past.

  83. robc,

    seems that I’m getting the same spiel from my guy – he confirms 30 year fixed are going like hotcakes. the spreads for anything else seem pretty exhorbitant, and helocs are only going up 70% of (conservative) appraisals – vs. 80-90% of dream value pricing.

    I wonder if the fed is using Freddie/fannie in conservatorship to absorb all this fixed paper? short term deflation expectations have been cut in half the last week or so.

  84. Kolohe, swap spreads would indicate this as well. I think it’s fair to say we are past the disaster phase of the downturn, and into the long slog of dissappointments which occurr while waiting for a recovery.

  85. 30 year fixed rates are crazy low

    I’ll probably commit to my refi this week, at around 5%.

    By the time the Fed inflates away all the “stimulus” debt, my house will be practically free.

  86. The market sees my house as approaching “free”. King County, on the other hand…

  87. Kolohe,

    Well, that just confirms what we already know – that fiscal efforts to either pump up or slow down the economy come at a point long far past the time for action. The Hayekian knowledge problem probably has something to say about that.

  88. I think you could print “Predatory Loan Agreement” in a 36-point font across the top of the loan agreement, and some folks would still sign at the bottom.

  89. “Sorry if I come across like a judgemental liberal, but it has always seemed to me that the typical middle-class American lifestyle is nonsensical and unsustainable”

    What a crock of shit. Your depiction of what constitutes middle class is a crock of shit too.

    A typical middle-class family is two working parents with a couple of kids. They are making enough to survive and that’s about it. They don’t make enough to, as you claim “(live) in monstrous houses, with monstrous TVs, driving monstrous SUVs which consume monstrous amounts of gas to dine on monstrous portions at a chain restaurant every night.”

  90. Sorry if I come across like a judgemental liberal, but it has always seemed to me that the typical middle-class American lifestyle is nonsensical and unsustainable.

    So, you’re broke with a degree in Basket Weaving, huh Derrick?

    Poor little guy is still munching on Ramen and dreaming of the Rise of the Proletarian.

  91. “By the time the Fed inflates away all the “stimulus” debt, my house will be practically free.”

    Hey that’s an idea.

    My house is actually paid off but if we’re going have an inflation rate that would make the Weimar Republic jealous to pay for Dear Leaders spending spree, I should take out a new mortgage on it and invest the money in a bunch of oil, gas and other commodity type investments to clean up on both ends of the deal.

  92. Off-topic, but kind of relevant in a spending-spree, poor fiduciary conduct, what’s-your-house-worth kind of way.

    This guy was ours, now he belongs to everyone. Guys, your houses are going to become a lot more expensive… and not in a good way.

  93. The problem is that we’re trying to push looser credit to stimulate growth, without first allowing people to pay down debt and the economy to tighten up on efficiency.

    Recessions are kind of opportunities to trim the fat from everyone’s budget. People start looking at the prices in the grocery store and shopping for bargains more. Which in turn encourages businesses to get more efficient so they can lower prices. Up and down the supply chain, everyone starts looking for places they can save money.

    But, we still havn’t gotten rid of the bloat from the previous era of debt-fuelled bubble-economy. The current policy is more aimed at keeping that bubble inflated and keeping people locked in the earlier paradigm of borrow-and-spend, rather than allowing the economy to really restructure itself.

    It could be that what we end up with next is less driven by borrowing and consumer spending, but instead they are trying to resiciate an economic paradigm that has run it’s course.

    Hopefully, in 5 years we won’t have everyone scrutinizing “housing starts” as an economic determinant. If so, we will probably be better off for it.

  94. RC,

    You aren’t detached from reality because you think MBSs are going to become cheaper. You’re detached from reality because you think that would be a bad thing.

  95. joe,
    You’re arguing as if the government can somehow know what the “correct” amount of lending is.

    Not only can they not, but you’re talking about the same people who thought it would be a good idea to have effectively negative interest rates in the early 2000s.

    But even if we did have the right people in place, calculating how much lending “ought” to be occuring under a given set of economic conditions is an impossibility.

    It’s entirely plausible to me that the bank’s current lending is perfectly appropriate, since so many people out there have built up bad debt and bad credit histories. In any case, there is no way that I would trust some government bureaucracy to look over the banks shoulders and make judgements about what loans ought to be made.

    Seriously, it doesn’t take much imagination to see where that would lead.

  96. Kolohe,

    I’d agree that lenders pulling back from leveraged loans is a good thing. It’s that “spread across all segments” part that’s the bear.

    domoarrigato,

    I think it’s fair to say we are past the disaster phase of the downturn, and into the long slog of dissappointments which occurr while waiting for a recovery. There’s the financial markets, and then there’s the actual economy. We may be at the bottom in the former, but the latter is going to take some time to turn around.

  97. Hazel,

    It’s entirely plausible to me that the bank’s current lending is perfectly appropriate. Appropriate for whom? Do you understand that there are different parties with different interests here?

    By the time the Fed inflates away all the “stimulus” debt, my house will be practically free.

    This is crazy. We’re looking at, if we’re lucky, avoiding a deflationary spiral, and you’re talking about runaway inflation? Have you looked at the amount the value that has been lost, compared to the size of the TARP and stimulus bills?

  98. Hazel, do you even understand that the purpose of TARP wasn’t to make the recipients profitable, but to get lending going again?

  99. joe,

    Why not skip the middle man and just lend the money directly to borrowers?

  100. TARP was a dumb idea from the get-go.

    The notion that it’s the government’s job to get lending going again pre-supposes that the government knows how much lending should be occuring.

    Maybe the market is overreacting – we don’t know. But how do we know that the government’s judgements about what amount of lending ought to be occuring are any more rational than the market’s judgements?

  101. “But even if we did have the right people in place, calculating how much lending “ought” to be occuring under a given set of economic conditions is an impossibility.”

    Not to someone like Joe, who believes in Central Planning. It’s why he chose the degree he did.

  102. Look at a free market as a very complex imperfect servo system, one that occasionally hunts or has excessive dynamic lag. The servo arrives at the right solution eventually, but it may take longer than people are happy with.

    Then look at politicians as partially trained technicians randomly tweaking the various input and feedback mechanisms in order to try to get what they percieve as the correct solution.

    This will cut down on hunting.

    It also increases lag.

    Well than this will decrease lag.

    Now the sytem is oscillating out of control.

    Well we’ll just attenuate this input.

    Now the system is moving at snail’s pace.

    Then we’ll amplify this one.

    Oh fuck, the whole thing is broke now.

    It’s not a perfect analogy, but it’s a pretty good one. Recessions happen. They end. They are necessary an unavoidable. Massive adjustments unwisely made with an eye to scoring political points is not the right method to shorten them.

    Nine years after FDR got elected, unemoployment was higher than it is right now.

  103. There’s the financial markets, and then there’s the actual economy. We may be at the bottom in the former, but the latter is going to take some time to turn around.

    And that is precisely the point of what many people are saying here. The tools needed back in Sept are *completely* different than the tools needed now (if you even concur that tools are needed. For the sake of arugument, say they are).

    In that case, Frank is completely off-base with his assertions that ‘TARP was badly done, we’ll do it better this go around’. It doesn’t matter now if TARP was done badly or even done at all, in the context of figuring out what to do going forward. Because we need nothing like TARP at the present juncture.

    The stimulus is a seperate issue. I also think we should scale down the stimulus (make it focused on just tiding people over – e.g. unemployment bennefits, food stamps, and the like, which the stimulus backers tout as having the biggest multiplier effect anyway), and do everything ‘infrstructury’ based on long term plans and projects. Doing these things as ‘stimulus’ gives a greater propensity for crappy projects, as well as potentially getting us into a push-pull fiscal effect where we can’t curb the spending without retracting economic growth. This is indeed what we saw in the middle of the depression, that cuts in the budget around 37 lead to a recession within the context of the depression. Krugman et al like to point out but for the opposite reason.

  104. My house is actually paid off but if we’re going have an inflation rate that would make the Weimar Republic jealous to pay for Dear Leaders spending spree, I should take out a new mortgage on it and invest the money in a bunch of oil, gas and other commodity type investments to clean up on both ends of the deal.

    Classic leveraged arbitrage play. Like all leveraged strategies, it leverages risk as well as return, of course.

    You aren’t detached from reality because you think MBSs are going to become cheaper. You’re detached from reality because you think that would be a bad thing.

    I think it would be a bad thing for the government to arbitrarily set standards for mortgage lenders that, in effect, make it impossible to sell an MBS at something other than a steep discount, yes.

    Why do I think that’s a bad thing? Because it will mean that, over time, the flow of capital to banks for mortgage spending will be choked down. The joe/Frank approach will cause dead capital to pile up in the financial system, which is exactly the problem that we are supposed to be trying to solve. And, oddly, exactly the problem that the Frank approach caused once already, although by different means.

  105. There’s also this issue:

    joe:Appropriate for whom? Do you understand that there are different parties with different interests here?

    You’re sounding kind of Hayekian here. That’s one of his central points, that once you get the state involved it has to select whose interests are going to be served and inevitably ends up picking winners at others’ expense.

    More lending right now might be good for some segments of society, but it might not be in the interest of the banks and their shareholders, and consequently, that might be bad for the public in general in the long run. You’re sort of suggesting that the interests of people who have a stake in stable banks be sacrificed in favor of those who have a stake in easier credit.

    Even if it were clear that one group’s was relatively small and wealthy (and it’s not), it wouldn’t be just for the government to step in and just decide that those people should lose their money.

    Suggesting that it’s okay if the government runs a few banks into the ground because it’s in the larger public’s interest to stimulate the economy strikes me as reckless and short sighted.

    If the government caused a bank to fail by forcing it to lend excessively, it would almost certainly cause shareholders and depositers to start fleeing financial institutions that received TARP money.

    Hmm. Come to think of it… maybe that’s not such a bad idea.

  106. You’re sort of suggesting that the interests of people who have a stake in stable banks be sacrificed in favor of those who have a stake in easier credit.

    There are those among us who believe that this bias is precisely what set up the possibility of the financial services crash in the first place.

  107. Hazel,

    I tried to make the same point (but poorly) this morning. Yours is better. However, one problem with the last thing, some of the banks took TARP money against their will. Well, they were strong armed into taking it. Should banks that took money as a favor to the government to set proper precedent be forced to use it against their own interest?

    I like to think my refinance with BB&T was with part of their TARP money. 🙂

  108. “More lending right now might be good for some segments of society, but it might not be in the interest of the banks and their shareholders, and consequently, that might be bad for the public in general in the long run. You’re sort of suggesting that the interests of people who have a stake in stable banks be sacrificed in favor of those who have a stake in easier credit.”

    Not to mention the interests of the taxpayers in NOT having to bail out more bad loans than they’re already being forced to .

  109. A shift of funds from low risk to high risk mortgages is an increase in the supply of high risk loans and a decrease in the supply of low risk loans. The interest rates on high risk loans fall and the interest rates on low risk loans rise.

    If the market clearing quantity for high risk loans in negative, then it is a corner solution, no transactions. So, the shift from low risk to high risk loans appears as just an increase in interest rates. Higher rates for the low risk loans because supply has decreased. And, suddenly, new loans appearing that weren’t made before at high interest rates. The average interest rate is higher.

    Revese this, and the average interest rate is lower.

    This argument is about allocating a fixed quantity of credit across different risk classes of assets.

    Moving to financing low risk borrowers should result in lower interest rates. Some of the competition from high risk projects is cut out.

    Anyway, the “problem” is that if interest rates fall to much, so that market clearing interest rates for some assets are less than zero, then the result is an increase in the demand for money. That market clears through a general deflation of prices.

    Most people can’t see this because they can’t see money as just another assets.

  110. joe

    There’s the financial markets, and then there’s the actual economy. We may be at the bottom in the former, but the latter is going to take some time to turn around.

    Agreed, the real economy is actually not that bad off – maybe a few % isn’t profitable at higher lending costs and will go away. it will take some time to bottom out with all this government meddling – but then thats the point. Long slow recession vs. quick brutal collapse.

    By the time the Fed inflates away all the “stimulus” debt, my house will be practically free.

    This is crazy. We’re looking at, if we’re lucky, avoiding a deflationary spiral, and you’re talking about runaway inflation? Have you looked at the amount the value that has been lost, compared to the size of the TARP and stimulus bills?

    Word. cut off some zeros if you need to – to make your palms stop sweating. Put it in terms of your household budget: $1 = $1 billion.

    Pro Libertate | February 2, 2009, 2:41pm | #
    joe,

    Why not skip the middle man and just lend the money directly to borrowers?

    Cuz then you couldn’t recapitalize banks at the same time.

  111. joe,

    Why not skip the middle man and just lend the money directly to borrowers?

    I’ve asked that myself, Pro Lib. Why not have the government be the lender, and let the failing banks make some scratch servicing the loans? The only satisfactory answer I’ve gotten in that doing it this way will not only get the government money into the credit markets, but will leverage private investment as well.

    I’m not sure how much I buy that.

    But how do we know that the government’s judgements about what amount of lending ought to be occuring are any more rational than the market’s judgements?

    Hazel,

    That’s a good question. Usually, of course, they wouldn’t. In this particular point in history, though, the lending market is being driven not by judgements about the viability of borrowers, but by the fact that a great deal of the money that would have been lent out has dried up – for reasons having nothing to do with the viability of, and wisdom of lending to, businesses, but with the fact that another department of those lenders’ businesses failed so spectacularly that they brought down the whole company.

    So it’s really not a question of substituting judgement about lending, but of deciding that the TAX PAYER DOLLARS provided for lending should be lent out based on ordinary judgments about credit-worthiness, rather than being used to prop up money-losing divisions of those lenders’ businesses.

    Tipsy,

    Not to someone like Joe. HA HA! See above.

    I’ve made a great many people who assume my opinions are as simplistic as their own look foolish. Now, one more.

  112. RC writes,

    I think it would be a bad thing for the government to arbitrarily set standards for mortgage lenders that, in effect, make it impossible to sell an MBS at something other than a steep discount, yes. MBSs SHOULD be sold a steep discount from where they were. They were absurdly overpriced, owing to the failure of the private sector boy geniuses to adequate understand and price the risk – you know, the same boy geniuses whose judgement about lending and internal accounting can’t possibly be questioned.

    Hazel, you sound particularly Hayekian, in that you don’t seem to understand, even in the level of theory, that there is something called the public interest, and that economics is not a zero-sum game.

    Suggesting that it’s okay if the government runs a few banks into the ground because it’s in the larger public’s interest to stimulate the economy strikes me as reckless and short sighted. The GOVERNMENT running them into the ground? THE GOVERNMENT?!?

    Do you have even a passing familiarity with what has been going on in the financial industry over the past year? These banks are so many billions of dollars below the ground that they need to be rescued by taxpayer dollars, and you’re describing an insistence that those dollars be used to benefit the public as “the government running banks into the ground?” Good lord!

  113. You’re sort of suggesting that the interests of people who have a stake in stable banks be sacrificed in favor of those who have a stake in easier credit.

    “Sacrificed” in this sentence means “not propped up with taxpayer dollars as much as they might like.”

    Even if it were clear that one group’s was relatively small and wealthy (and it’s not), it wouldn’t be just for the government to step in and just decide that those people should lose their money.

    They’re already lost THEIR money. The question is how much claim they have on OURS.

  114. Domoarrigato,

    Agreed, the real economy is actually not that bad off Uh, WHAT? The GDP fell 3.8% last quarter. Not “fell at an annual rate of 3.8% last quarter,” but fell, in real terms, 3.8%! In a single quarter!!! Projections for this quarter are for a 5% QUARTERLY decline in GDP.

  115. Between RC Dean and Hazel’s odes to the brilliance of the people running, oh, say, Citibank and Merrill-Lynch, and acting aghast at the thought of someone second-guessing their lending practices, you’d almost forget that the people whose judgments are being second-guessed drove their businesses so far into the ground that they needed several hundred billion dollars in TARP money to keep from destorying the decades-old investment houses they ran.

  116. “Uh, WHAT? The GDP fell 3.8% last quarter. Not “fell at an annual rate of 3.8% last quarter,” but fell, in real terms, 3.8%! In a single quarter!!! Projections for this quarter are for a 5% QUARTERLY decline in GDP.”

    sure. last quarter. we’ll see where this thing equalizes – but we were in recession for some quarters before it showed up in GDP. it’s frankly a pretty lagging indicator. It will rebound sharply too. dont extrapolate current quarters in the down direction, any more than the bankers did on the upside. that is all.

  117. what matters is the trend. compared to productivity – we will probably shed 3-4% gdp and move the trend line down to close to 0-1% for a while.

  118. Joe, I was referring, of course, to your suggestion above:

    So be it. If Citi lends out its TARP money, goes under, and some other bank or buys up and services those performing loans, or if their still-profitable loan servicing department gets spun off in the bankruptcy judgemen, that’s fine with me. The purpose of that money shouldn’t be to save individual corporations, but to get a working credit market up and running again.

    I’m certainly not suggesting that those companies are well managed. But getting the government to force them to make loans strikes me as merely compounding the stupidity of the government bailing them out in the first place. The government has no particular expertise in loan management, and is even less likely to make rational judgements than the managers that currently control them.

    In particular, government officials are going to be prone to making judgements based on political, rather than financial, considerations.

    “Sacrificed” in this sentence means “not propped up with taxpayer dollars as much as they might like.”

    They’re already lost THEIR money. The question is how much claim they have on OURS.

    I’m not the one defending TARP here. Again, you’re eludicating how intrinsically corrupt the entire bailout scheme is from beginning to end, in that it puts the state in the position of picking winners in the market. They’ve already bailed out the share holders, so now they have to bailout the mortgage holders too? And the taxpayers foot the bill either way? This is a good idea why?

    I’d be much happier if they just let the banks go into Chapter 11, instead of funnelling my money into an incompetently managed bank overseen by a team of central planners and bureaucrats intent on micromanaging who gets a loan. Personally, I think I’d do a better job lending out my money myself. Maybe I’ll start a micro-credit agency. Maybe I’ll deposit it in a small local bank that isn’t burdened with bad debt.

  119. Oh yeah … or maybe I’ll buy some worthless crap, so the government doesn’t have to get me credit from a bank, so that I’ll have money to buy some worthless crap. To stimulate the economy. So people who make worthless crap will keep having jobs.

  120. Yes, Hazel, the fact that the performance of the companies that need TARP money to avoid bankruptcy has done nothing to shatter your certainty that the Titans of Wall Street are super terrific money managers was clear the first time.

    I’m not the one defending TARP here. No, you’re the one insisting that if we do spend TARP money, we not dictate terms to the recipients. Once again, that was clear the first time.

  121. Just keep repeating that, joe, and maybe you’ll manage to convince yourself that’s what I said.

    It really doesn’t do much your your argument that a team of central planners is needed to run these banks and force them to make loans according to government policy.

    The current situation is simply illustrative of the massive stupuidity of TARP.

    Rather than let firms go bankrupt, we give them a shitload of money, then, because we’ve suddenly realize “Oh my God! These people don’t know how to run a bank!” (as if that weren’t obvious from the need for a bailout), you install some federal bureaucrat to run them instead.

    Um yeah, having a team of bureaucrats indirectly micromanaging a half-bankrupt corporation because we think they’re incompetent, but don’t want to let them entirely go bankrupt. SURELY this is the best way to manage the economy. I mean, only a MORON would dispute THAT.

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