October 11, 2008

Is it Greenspan's fault?

Peter S. Goodman has some clearly written analysis:
Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading....

“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan [wrote in his memoir "The Age of Turbulence"]. “The worst have failed; investors no longer fund them and are not likely to in the future.”...

“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan [said in a speech]. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”

As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
Much more at the link.

55 comments:

Michael_H said...

Greenspan repeatedly refused to reign in the supply of money. An abundance of money was rightly dumped into the banking system after 9/11 to keep markets calm and orderly. That oversupply should have been corrected beginning in 2003, but wasn't.

The runaway lending should have been slowed by imposition of higher interest rates, it wasn't.

Greenspan cannot bear the full brunt of this disaster, however. The refusal of the Banking Committee to reign Fannie and Freddie was a big part of the problem, as was treating mortgage loans an an entitlement.

I can't help but wonder why the role of monetary speculators in the current collapse has not been covered in any media. I have no doubt that George Soros fared well. Of course, a journalist who wanted to write such an article would have to, you know, understand finance. So that won't happen.

I also wonder how much of the collapse can be attributed to the Arab countries withdrawing their money from US depositories, as they did in the weeks leading up to 9/11. No reporting on that topic, either.

Last, the U.S. financial market wouldn't be as unstable as it is if the dollars weren't being sent overseas in purchase of oil. Yet the Dems continue to block domestic production.

Look at the countries that are now strengthening - Russia, Brazil, Venezuela, Iran - all have tapped into their oil fields and are boldened by the resultant economic power. While we sit by, made increasingly vulnerable and weak, thanks to the Dems and their green allies.

Original George said...

"Ah, progress. Spurred by deregulation, the financial inventors have been working overtime. They've churned out a vast array of new instruments and created whole new markets. It's now possible for even the average citizen or company to take a financial position almost instantaneously in just about anything, anywhere. What only 15 years ago was an oppressively restrictive financial system has been recast in a pluralistic, almost anything goes mold. . . .by stoking a pervasive desire to beat the game, innovation and deregulation have tilted the axis of the financial system away from investment toward speculation. The U.S. has evolved into what Lord Keynes might have called a `casino society'—a nation obsessively devoted to high-stakes financial maneuvering as a shortcut to wealth."

That was in Business Week in 1985.

Today it's Fail Safe.

The NASDAQ opened in 1971. (That 'AQ' stands for 'Automated Quotations.') Then options trading in 1973, and the next thing you know Dom DeLuise spills coffee in the computer, and the Vindicators are loose.

There is an unusually lucid article explaining credit default swaps in the new Fortune.

(These are basically unregulated no-money-down contracts insuring all manner of risky stuff in which anyone can place bets as to whether any else's stuff will default.)

"Let's say you're writing fire insurance policies, and every time you get the [premium], you spend it. You just assume that no houses are going to burn down. And all of a sudden there's a huge fire and they all burn down. What do you do? You just close up shop."

There are $54.6 trillion in outstanding CDS contracts.

World GDP is $54.3 trillion.

The value of all stocks on the NYSE is $50 trillion.

What's been happening is that the fighters have been ordered to go to afterburners and overtake.

----

“[Greenspan] had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”

Does that description remind you someone running for president?

Ann Althouse said...

"Does that description remind you someone running for president?"

No. We are hardly even sure what Obama is talking about when he's in oracle mode. And people who like him when he's being messiah-y mainly like him as a person who makes them feel good, not as someone who is selling any specific ideas.

peter hoh said...

When I attended the VP debate party hosted by a conservative radio station, an older gentleman told me that he blamed Jewish bankers in general and Greenspan in particular. He also insisted that Greenspan had become a Democrat.

Original George said...

You're scaring me, Professor.

Here is full-tilt boogie oracle mode:

"Ultimately I am an imperfect vessel for your hopes and dreams."

…I went down to the potter’s house, and behold, he was working at the wheel. And the vessel that he was making from clay was marred {blemished, imperfect, stained} in the hand of the potter; so he made it over, reworking it into another vessel as it seemed good to the potter to make it” (Jeremiah 18:3-4).

God is our Potter {Master} and we are His earthen vessels. He chooses cracked, imperfect, broken vessels to shape and mold to His perfection. He wants vessels that will yield to the filling of His Spirit and reshaping into His image {likeness} __ vessels that will be formed and filled with love, joy, peace, longsuffering, gentleness, goodness, faith, meekness, and self-control (Gal. 5:22-23). God’s desire is to have all His chosen vessels transformed and Spirit-filled.

God is holy and the vessels that He chooses to shape and mold must be different than those in the world. There are plenty of broken, imperfect, stained vessels around who need the Potter's {Master's} touch, and when they yield to Him, He will not cast them out. Vessels that yield {surrender} to the Potter’s touch confess and believe that they are broken, imperfect vessels who need the Potter’s touch in order to be made brand new {whole} (Romans 10:9-10).

For whatsoever is on the inside of a vessel will surely come out. If it is filled with pride, anger, lust, selfishness, greed, envy, backbiting, and jealousy that’s what will spill out on others. Dry (bitter, angry) vessels will crack and break under pressure. However, if the vessel has yielded totally to the Potter’s reshaping and molding it will be filled with love, forgiveness, peace, joy, patience, and self-control, which will then pour onto others. For instance, a vessel that is filled with anger and pride cannot hold love and humility. The Word of God states, “…Neither can a salt spring furnish fresh water” (James 3:12).

rhhardin said...

It looks like stages of a project.

1. Enthusiasm
2. Disillusionment
3. Panic
4. Search for the guilty
5. Punishment of the innocent
6. Praise and honors for the non-participants

Sociology always kicks in.

EnigmatiCore said...

Well is is teachers fault? oh no
Is it mommies fault? oh no
Is it the presidents fault? oh no
Well is it johnnys fault? ohhhhh nooooo!

rhhardin said...

One of John Gall's laws of systems

Fail-safe systems fail by failing to fail safe.

You could apply to to a system that has made risk disappear.

rhhardin said...

The current best explanation is that regulations made sub prime mortgage packages come out rated safer than ordinary mortages to ordinary buyers, and accordingly requiring less capital from banks to hold them.

So they displaced good loans with bad ones.

SGT Ted said...

I think it's an erffort to pin the blame on capitalism and deflect responsibility from politicians who failed to reign in "ninja" loans because those types of loans were instrumental in their home ownership "affirmative action" scheme they were implementing thru Freddy Mae.

Obama himself thought these loans were great until the wheels came off and is now pushing the "deregulation" meme talking point, when it was deregulation that has allowed some of the deposit banks buy up some of the failing Mortgage banks, which has helped mitigate losses.

The Democrats are neck deep in this and they have a vested interest in deflecting blame to others, so they can retain power and gain even more of it by counting on their illiterate economic populism and a coming regulatory "fix" which will prolong the pain, much like FDRs New Deal prolonged the GD by 7 years.

chickenlittle said...

Is it Greenspan's fault?

Absolutely not. But that was the meme going on housing bubble blogs beginning around 2004.

How is Greenspan to blame for people's response to cheaper money?

rhhardin said...

In turn, he showed a resolute faith that those participating in financial markets would act responsibly.

Would respond to incentives, that must have meant in the original.

1jpb said...

My gut tells me to blame the Over The Counter products, because the leverage and secrecy are so great. These products don't have capital requirements, so an institution can, in theory, create an infinite number of them. And, everything is fine until folks try to draw on too many of them, then everything falls apart.

(Of course an institution may have felt perfectly hedged because they covered their derivatives with derivatives from other institutions, so they didn't think they needed to have capital. The problem is that everyone is covering everyone else, and nobody has actual capital to pay up. All they have is mostly worthless IOUs from each other. And, it's even worse because there are a lot of speculators in the OTC market, and they don't even care about the underlying products--they're into inventing money.)

But, in my own mind, I don't have the clear line between the high level worldwide credit freeze and these derivatives. (Presumably it's some sort of problem along the lines of the the Lehman blowup.)

But, because of the secrecy, nobody knows exactly who has what, but folks who are more connected than me know more about who has what. That's why they're very worried that their counter parties (including the most "solid" banking institutions) could have big problems.

The more knowable (and maybe more important) problem is the reduction of capital reserves. Institutions need to maintain capital requirements. If capital has taken a hit there would be a mandatory reduction in lending capacity. And, this reduction has a multiple effect, i.e. one dollar less capital results in approximately ten dollars less lending (this ratio is very rough, the actual ratio depends on the institution and then it depends on the different classifications of loan types within each institution--riskier loans require more capital reserves.)

P.S.
One indication that our political leaders are working on a different level than their rhetoric suggests is the fact that the "rescue" is now being focused on the equity injections.

Pretty much all economists have always said that this is the best way to help institutions recapitalize (1) buying the toxic stuff doesn't do much to the balance sheet and the most effective pricing is basically unknowable, (2) the additional capital from an injection can be directly used to satisfy capital requirements, which results in a 10x (or so) impact on money lent.

But, the right wing folks don't like "nationalization" (which this recapitalization is not) so the package was sold as a toxic asset purchase program, even though the fine print allowed for the equity injections.

My only point is that we don't really know what's going on. It's impossible for outsiders to know what insiders know.

But, we should all (including right wing folks) be extremely grateful that the Fed is going to do capital injections.

Again, right wing theory: FAIL.

PJ said...

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.

You call that clearly written? He has a two-sentence paragraph here in which the second sentence bears no discernable relationship to the first. What the hell is that "In turn" supposed to signify? It purports to illuminate a relationship between Greenspan's professed ideology and his alleged "resolute trust" in the "responsib[ility]" of individual market participants. But as far as I know, neither libertarian theory nor even Ayn Rand calls for anyone to resolutely trust market players to act responsibly. The "In turn" implies a relationship that is neither obvious nor demonstrated.

It's also interesting that Goodman uses a word associated with religion -- "preached" -- when describing Greenspan's belief that markets have the power to create wealth. Isn't it by now accepted as an empirical fact that, whatever their alleged demerits, markets do create more wealth than government-planned economies?

William said...

Gay marriage and abortion are such great issues. You do not need a Wharton background to form and express an opinion....I get the sense that busts are endemic to capitalism, and that this one is going to be the big one for this century. We like to draw moral lessons from disasters. I should not have built so close to the seashore; I should not have gone walking so late at night; I should have cut back on the BBQ, etc. The simple fact is that shit happens and, if you live long enough, you will get drenched in a storm. The frightening moral to this story is that there is no moral to this story. At any rate, I have plenty of people to commiserate with.

PatCA said...

He lost me in para 1, where he cited Soros as a cautious, sober-minded market expert. Come on!

The whole article is a thinly veiled call for government control of free enterprise with...hmmm,...Obama would you say, at its helm?

Ann Althouse said...

PJ: "You call that clearly written? He has a two-sentence paragraph here in which the second sentence bears no discernable relationship to the first. What the hell is that "In turn" supposed to signify? It purports to illuminate a relationship between Greenspan's professed ideology and his alleged "resolute trust" in the "responsib[ility]" of individual market participants. But as far as I know, neither libertarian theory nor even Ayn Rand calls for anyone to resolutely trust market players to act responsibly. The "In turn" implies a relationship that is neither obvious nor demonstrated."

These ideas are connected in "The Age of Turbulence." There is a big chapter on capitalism and trust. Acting in your own self-interest, you need to inspire trust to be successful.

AJ Lynch said...

I saw a headline today that said "World leaders meet, discuss new, different ideas".

Of course, I suggested "how about some new, different LEADERS (and I don't mean you Barack)."

We could fix economic lethargy here just by opening the borders even more if that is possible.

A substantive increase in population will create jobs, demand for apts and starter homes, restaurants, increase tax collections, etc. (my preference is to get the Swedish Bikini team to immigrate here first).

We should consider doing that before it gets really bad here. If we wait, they may decide to go to another country. Heh.

Revenant said...

It isn't the fault of any one person, organization, political party, economic philosophy, government entity, corporation, action, or group. This is the result of mistake after mistake being made by millions of people.

AJ Lynch said...

Rev:

I disagree with your millions.

Maybe hundreds of govt regulators, Congress critters and bank officials (I include Fannie/Freddie) decided that fundamental accounting and financial reporting guidelines did not apply to them or their NGO. As a result, outside investors made decisions because the securities were "backed by the full faith of he US govt". And the US govt guaranteed a bunch of bad home loans. That provided most of the fuel for this enormous fire.

Sure many many people bought homes they could not afford when the ARM kicked in but the govt OK'd and enabled their bad decision.

In the meantime, RE agents, title companies,construction workers and companies, moving businesses, Home Depot/ Lowe's made a killing too. As did local and state govt who collected more and more RE taxes and transfer fees.

Paul Snively said...

This is going to turn to have been the most important paper written in the last century, IMHO.

Original George said...

Your bank will be closed on Monday.

Columbus Day. No mail delivery either.

The stock market will be open.

1jpb said...

Revenant,

Thanks for the BS.

There have been high level folks warning about these derivative problems for many years.

By the way at least two of these folks (Soros and Buffet) have also been warning us that R leadership is full of BS in other economic respects too.

Are you ready to listen to them about some of their non-derivative opinions?

Of course you're not. You know better--they just got lucky on that one.

Brilliant.

AJ Lynch said...

George mentioned "Columbus Day".

If Mort were here, he'd call you and Columbus a racist. Heh.

AJ Lynch said...

1JPB:

FYI George Soros is an America hating lowlife bastard. Soros spends billions buying political influence yet has he ever given big bucks to a charity?

If you had any balls or brains, you'd ask why doesn't Soros use his money to let's say double a big-city's school budget for ten years to see if it gets results.

No Soros would rather give billions to the far-left destroy- America non-profit extremists.

He is all about gaining dictatorial political power.

1jpb said...

AJ,

I do have some problems with his recent book, but they are very minor compared to the wisdom of his assessment.

It's not that he's breaking ground, but he puts together a lot of already known concepts into a reasonable framework.

The same cannot be said of your silly rant.

So, if you're keeping track, the evidence indicates that Soros is more knowledgeable than you.

Maybe you can try to raise your game so that you can exceed his expertise. (I'm not holding my breath.)

hdhouse said...

Greenspan on his own may not have been fatal.

Greenspan coupled with a Bush vacation presidency and a republican majority became the hot wire where the pigeons came to roost.

It wasn't the year or two of cheap money but the years and years of cheap money that got us here...but in tandem with a trade policy and unnecessary "friend of George" breaks.

Look at the big picture guys.

David said...

If it's Greenspan's fault, it's because he was too deferential to Congress on Frannie and Freddie. He warned, but when the fools in Congress ignored his and other warnings, no one had the courage or power to really call them out.

Greenspan is essentially right that the market rejected the bad products in derivatives, with one huge exception--mortgage derivatives, which were allowed to grow and mutate largely because of the huge leverage and dishonest accounting of Frannie and Freddie. This was in turn enabled by the implicit federal guarantee, which is what permitted Fran and Fred to expand their assets past $7 trillion in a structure that no private company could have sustained.

There were many other bad decisions made: regulatory permission for the investment banks to increase their leverage, failure to understand and regulate the credit default swap market, extraordinarily lax risk management by institutions that should have known better, massive deficit spending by the federal government, and last but not least, keeping money too cheap for too long after 9/11.

But at the corrupt and toxic core of all of this were Freddie, Frannie and the elected politicians who protected them. Frannie and Freddie provided the liquidity for the rest of the profligacy. Without them, a variety of market restraints would have come into play.

Congress is now going to investigate this. It's like having the arsonists investigate the cause of all those terrible fires we have been having.

AJ Lynch said...

So 1JPB:

Here is what I asked in my comment:

1- Soros spends billions buying political influence yet has he ever given big bucks to a charity?

2-If you had any balls or brains, you'd ask why doesn't Soros use his money to let's say double a big-city's school budget for ten years to see if it gets results.

Care to respond to those questions?

blake said...

Soros can hardly be considered a hero if he knew about this in advance.

He spends billions getting Dems elected and promoting left-leaning viewpoints. He couldn't have spent some of that cash to spread the word about the danger he supposedly foretold?

Or did he want it to happen?

Joe said...

Greenspan has great culpability in spurring on various bubble by keeping interest rates too low for too long. His involvement with Long-Term Capital Management was disgraceful and contributed to that attitude on Wall Street that the government wouldn't let them fail, leading them to make increasingly risky investments.

Congress forcing Fannie Mae and Freddie Mac to adopt the "loans for losers" program was the second part of this disaster. What makes it all the more insane is that a house is actually a piss poor investment in most regions of the country.

The third part of this is the derivatives market. This has been a disaster waiting to happen. Without the disaster here, the loans for losers program would have been contained.

(One thing in common with the last two items were improper capitalization. Incidentally, this is the same problem that happened in 1929 and many (most?) other crashes.)

1jpb said...

AJ,

That's because I dismissed your comments as a rant unworthy of a response. Sorry if that wasn't clear enough.

My bad.

Blake,

Do you feel the same about Buffet, who has been giving warnings for many years? These folks are to blame because the R administration ignored them. That makes sense.

Don't forget that BHO is to blame for us going into Iraq w/o satisfactory WMD evidence and w/o an understanding of the negative repercussions, because he warned us about these flaws but Bush ignored him.

Sometimes you seem smart. Then you make comments like this. Or, on your blog you commented that war is easy (just send more folks to be killed and injured) but paper pushing is tough.

Joe,

You don't understand how Fannie and Freddie fit in the world of subprime. They only touched the best of so called subprime. Folks needed to go to the Wall Street created products to find the true subprime (the nasty ARMs with prepays, very limited fixed periods, ridiculous underwriting, and so on.) (I've personally increased a bank's home loan profitability by more than 200% over three years by knowing where loans should go to maximize the bank's profits and competitiveness compared to others in the market. I am an expert regarding who was doing what, and how they differed.)

Many of you don't understand that the word subprime means very different things to Fannie/Freddie versus what it means to a pure subprime company. In the business there would be no mistaking Fannie/Freddie for a real subprime lender. (As a matter of fact, "government loans" were generally known to be more open to risk than Fannie/Freddie; government loans are VA/FHA/Rural, but they're paperwork hassles unlike the true subprime stuff.)

Trumpit said...

" While we sit by, made increasingly vulnerable and weak, thanks to the Dems and their green allies."

You're a big, disgusting idiot.

blake said...

1jpb,

You have this idea that I'm a Republican. I'm not. I really hate lies, though, and we're awash in them here.

Crediting Soros with "knowing about" something without assigning some responsibility to him to make that knowledge public is insane. It's like giving Obama credit for writing a letter about it.

Where were the attempts to stop this from happening? The Reps are to blame for not pushing harder and the Dems are to blame for not just obstructing but facilitating the meltdown, not just in pushing banks to loan to unqualified borrowers (hello, Barack Obama suing Citigroup on behalf of ACORN), but for Reid, et al, saying stupid things that cause wild reactions in the markets.

Or, on your blog you commented that war is easy (just send more folks to be killed and injured) but paper pushing is tough.

You have me confused with someone else. I don't blog about war.

Unless maybe I was quoting Zapp Brannigan: "You see, killbots have a preset kill limit. Knowing their weakness, I sent wave after wave of my own men at them until they reached their limit and shut down."

PJ said...

The Professor: These ideas are connected in "The Age of Turbulence." There is a big chapter on capitalism and trust. Acting in your own self-interest, you need to inspire trust to be successful.

Perhaps I shouldn't reply without reading "The Age of Turbulence" (and perhaps Mr. Goodman should not assume familiarity with it if he wants me to credit him with clear exposition). But I'll venture this far: it is one thing to say that the profit motive incents market players to act responsibly so as to inspire trust, and it is another to say that Randian or libertarian theory rests on the notion that market participants can be (and ought to be) counted on to act responsibly even when they have incentives to do otherwise.

The government has distorted any theoretical market incentive to responsibility in several ways. For example, a consumer protection program like that offered by the FDIC severely diminishes the importance of trust in a banking relationship, because there is little downside to depositing with whomever is making the riskiest investments in town (and can thus offer depositors the highest return until the investments go blooey). And the government may also intentionally seek to overcome any market incentive to act responsibly by promoting or subsidizing irresponsible behavior, as occurred with subprime mortgages. One can't expect normal market incentives and disciplines to operate reliably when the government has its thumb on the scale.

I'm not suggesting that markets never fail or that government has no role in maintaining a well-functioning marketplace. And I'm not suggesting that government intervention is the only thing that's creating incentives to irresponsibility in modern markets. I'm only suggesting that if Alan Greenspan expected market participants to behave responsibly in the face of plain incentives to recklessness, it was because he had bad judgment, not because he was led astray by libertarian or Randian ideology.

1jpb said...

Blake,

Your regurgitation of right wing paper thin talking points proves that you don't know what you're talking about. You bring nothing to the table that you haven't been fed by right wingers. You don't think for yourself. Your happy to run with hype, rather than dig for truth. At least you have a lot of company, on both sides of the aisle

And, you did make such a comment, it was in the comment section of your blog. I think you were going back and forth with Trooper. It was not too long ago, but I'm too lazy to look for it. I think that post may have had four comments total, so that may help you find it if you want to look (and if more folks haven't commented.)

skaus said...

A friend pointed out the part where Greenspan says that derivatives work fine without regulation except "the people using them got greedy."

Who could have anticipated that?

Having said that, the first thing Obama should do is banish Robert Rubin from his group of advisors.

blake said...

1jpb,

Wow, so not only do you not address my completely non-partisan point (with great power comes great responsibility, dude, just ask Spiderman), you're quoting from a back-and-forth from a comments thread you can't produce, but which is supposed to define my philosophy toward war?

And I'm the one not thinking?

David said...

1jpb--do you have any idea how stupid you sound when you say that Frannie and Freddie bought only the "best" subprime. If they were buying such good assets, how come they essentially went bankrupt and needed the feds to bail them out? Do you have any idea how bad (think nonexistent) the underwriting was on even prime and so called Alt-A loans? This all came from Frannie and Freddie, which gave a false sense of security with their so called insurance and provided (via the implicit taxpayer guarantee) the capital for Countrywide and their ilk to sell trillions (!) in lousy debt.

You are either unusually ignorant or unusually partisan. Stick to subjects you know something about.

kynefski said...

We seem to have some well-informed people here, so I was hoping somebody could provide me some simple information. I apologize if this is inappropriate to the forum.

For the past ten years, my dollar cost averaged retirement savings have been going into a balanced fund. To date, I've lost part of my contributions. (Shoulda checked drawer on the enrollment form.)

So here's my question: A performance comparison reports, for this fund, 10 year average annual total returns of 4.2%.

What does average annual total returns mean if it doesn't have anything to do with what's happened to my contributions over that time span? I'm guessing it means annual returns averaged over ten years (which seems kind of useless for guidance), but I honestly don't know, and I was hoping one of youse could help me.

1jpb said...

Blake,

I don't care enough to go and look for the comment.

But, the point of your comment was the financial mess. To help you remember your actual quote was closer to:

A screw-up in war management is easier to handle because you can send more troops to make up for the deficit but financial mismanagement is a more difficult problem to remedy.

Don't misunderstand me, I don't think that you meant to discount the sacrifices of our soldiers. But, I do see this comment as more evidence that your thinking is very shallow. You're blind to balance; and you have a limited capacity for measuring and weighting circumstances to discern influential and trivial factors.

It's hilarious to see that you believe Soros, BHO, Buffet, and others are responsible for the actions of the Executive branch because the Executive ignored these folks. But, you can't comprehend why this is hilarious. That makes it even better.

Good stuff.

David,

Your comments sound mostly like regurgitated talking points. Or the perspective of someone very low on the totem pole (e.g. you give no clue that you understand the characteristics and variation of underwriting at Fannie/Freddie or anywhere else.)

I don't want to trade places with you.

blake said...

1jpb,

I never said Buffet was responsible. And I don't know what role Soros played, if any. He likes to hide those things.

But BHO has a direct, documented role: He successfully sued Citigroup for not making the kinds of loans that caused the mortgage part of this issue.

I guess I find that less amusing than you do.

blake said...

I don't care enough to go and look for the comment.

Then I don't care to put much stock in your judgment about what it means. Fair enough?

blake said...

Oh, regarding Soros and the rest of 'em, you're the one saying they were the prophets here and the administration ignored them. So, show me the money: Where are these reams of warnings?

Obama claims to have written a letter: He could start by showing us the letter and then he could explain why he didn't follow this up with some legislation.

I know Buffet wants to start a dumb-ass windfarm: he's managed to make me aware of that. Are you seriously saying that he couldn't have done the same thing with this crisis? That he has no influence?

Come on, up your game rather than just accusing people of being stupid. That's just trolling.

Andrew said...

Greenspan isn't to blame. He is but a prominent booster of an ideology that's to blame.

A component of this ideology, that Greenspan preached, is the strawman false dichotomy argument that the only choices are no regulation and too much regulation.

As Goldilocks and every law professor knows, there's often a third bowl of soup that's "just right."

But outside the self-serving ideology, the greed motivation of Wall Street and other sources of big campaign donations infects both parties.

In a democracy, the people get the government they deserve. Both the market and the electorate can be gamed, unless enough people know better and do what's needed to prevent it.

AJ Lynch said...

Blake:

I do know BHO wrote a few letters for Tony Rescko but they were just form letters. No biggie according to Obama.

PJ said...

Andrew, I agree with most of what you've said, but I'm mystified by your invocation of ideology. Does the ideology to which you refer -- the one that has that false dichotomy as a component -- have a name?

Sloanasaurus said...

The current best explanation is that regulations made sub prime mortgage packages come out rated safer than ordinary mortages to ordinary buyers, and accordingly requiring less capital from banks to hold them.

So they displaced good loans with bad ones.


This is exactly right. The credit crunch is not occurring becuase of swaps or other complex derivatives. it is occurring becuase what was thought to be a AAA asset - mortgages - are not. This is causing the credit crunch, which is in turn causing reduced lending which leads to reduced economic activity which leads to recession.

The credit crunch will end when banks have enough capital to start lending and those lending to banks perceive that they have enough capital to lend.

Easy money did inflate the value of homes. The inflation, however, did not create the bad loans, the bad loans were caused mostly by erroneous government policy.

David said...

1pjb--Totem pole? What are you doing, pulling rank? What the hell is your experience that you are an expert? Comment sections of blogs are pretty low on the totem pole generally, and we both are here. We're not lecturing at Aspen Institute, or teaching at Stanford, we are posting on a fucking blog. In the comments. One of the better blogs, but a blog nonetheless.

As to talking points, whose points do you think I am following? What the hell difference does it make what Soros or Buffet warned? Or McCain? Or Obama? Did Bush have his head any further up his butt than Chris Dodd, Barney Frank, Chuck Schumer, Nancy Pelosi or Senator Bennett, or Chris Cox or Treasury Secretary Bob Rubin who got $20 million a year to pick his nose at Citibank?

The Dems had one guy, John Corzine, who actually understands all of this. Did they give him a prominent role? For that matter, did he seek one, or did he decide not to rock the boat too hard?

To ascribe fault to one ideology or another is pointless. The only ideology that most of these people share is lust for power and prestige. That's not a conservative or liberal thing, it's a issue of the low nature of our national politics and politicians. This is why Obama is going to win, even if we do not know very much about who he is, what he believes or how he will act. He's created a plausible hope that he will be different, that he might actually believe his own words.

Does he? I'm going to vote for him like a majority of American voters probably will, and then we will find out.

To ignore the central role of Frannie and Freddie, to act like they were not corrupt or did not fail, paints you as a hack. Your Totem Pole comment confirms it.

This crisis comes from the systemic shortsightedness of our politicians on both sides of the aisle, and their incredible willingness, through gerrymandering, complex and restrictive campaign finance rules and vast overspending to take care of themselves first.

As for the "right wing folks" opposing the bailouts, I did not see the Democrats (who had the majority) rushing to approval either. The Republicans still don't know what hit them, that the era of deregulation ended in September of 2008 with bangs and whimpers, and the lefties are scrambling to make sure that no one believes that their pet institutions--Frannie and Freddie--were at the center of the mess.

For the record, I do not want you to be me either.

1jpb said...

Does this mean anything to y'all:

"Federal Reserve Board data show that:

_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics."

Of course not, the data means nothing to many of you.

Additionally, this breakdown doesn't identify that so called subprime loans meant different things to the GSEs then they meant to Wall Street. The terms and requirements were much more problematic with the Wall Street products.

But, y'all don't care about data, you've been programed by professional conservatives. So carry on.

blake said...

1jpb--

Does it mean anything to you that private banks were forced by the government to make sub-prime loans?

Gratuitous reversal: "Or have you been programmed by professional commies?"

1jpb said...

blake,

Thanks for conformation that reality and data have no influence on your thinking.

Also, could you name American communists who make their livings by being communist?

P.S.
I'd offer you a shovel, but you already seem very well equipped.

blake said...

1jpb--

You chose to address the snark rather than the substance--which is, of course, the danger of including the snark.

I think most disagreements actually come down to a disagreement on facts. (This is why political campaigns throw so much crap into the air.)

Not that people can't have the same facts and come to different conclusions, since we almost never have all the facts. But the odds of us coming to a meaningful agreement are next to nothing if we have "different facts".

Let's try to get to the root of where our facts disagree.

I want to know if you agree with the assessment that the government forced banks to make bad loans.

Do you agree there is a thing called the CRA? Do you agree that lawsuits were used to give it teeth? Do you agree that its influence was expanded in the '90s? And do you agree that this had a significant impact on lending practices?

Just for starters, answer those four questions. If you don't answer them, I'll assume you're not really interested in exchanging ideas and leave you to your insults.

1jpb said...

Blake,

I'm not going to itemize what is already in a data rich link I've provided.

And, it doesn't matter because your questioning proves that you can't even comprehend the information contained in the small excerpt I put in my comment.

Your mind is full of right wing talking points, and you're incapable of discerning the importance of data and reality. As a result you (and many others) are the victim of the professional conservatives that control your thinking, rather than data and facts.

It's intriguing that you strongly think you know what caused this mess, even though your narrative is disproved by reality.

Even when you're exposed to reality and actual data your brain can't overcome the fictional narrative that professional conservatives have placed inside your mind.

Absolutely fascinating.

P.S.
The only reason I pick on you more than some others is because in many ways you seem to be very intelligent.

But, your mind is unable to size up a full set of data to determine the relative importance and influence of different facts and fiction. You have a problem with the proverbial trees and forest.

I put a forest in front of you, but you cling to a couple trees. Odd.

blake said...

You've made your choice.

Enjoy preaching to the choir.