You know, if I didn’t know better, I’d say the Bush administration might be attempting to mislead the country in order to ram something through Congress. Not that they’d ever do something like that, of course! Still, this does make a guy wonder:
[Deputy White House Press Secretary Tony] Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.
So…um…this, uh, emergency plan that was pulled together because of this emergency that nobody could have predicted would happen was in the pipeline for months.
Huh. It’s almost as if the Bush administration is using the façade of an emergency to force through a plan that they’ve been prepping for a long time, hoping that by cranking up the perceived threat level to neon pink, they can force Democrats in Congress to take a politically risky stand right before an election, to benefit the GOP. When have I seen this before? When indeed?
It’s a trap. No deal without the GOP equally on the hook. These are their buddies. Let them take the risk.
Let me see if I get this right.
A bunch of banks fraudulently loaned money to people. Then they fraudulently sold the loans to Fannie and Freddy. Then Fannie and Freddy fraudulently sold them to a bunch of people.
What part of all that requires a $700B bailout? How many people will be going to jail whenever some solution that doesn’t require rewarding fraud is devised?
The woes of Fannie and Freddie have been predictable for at least the last ten years. It’s not surprising that there were plans in the works.
It’s understandable that you’d want Republican Congressional buy-in to any bailout plan, especially given the bipartisan nature of the disaster, but I doubt it’s going to happen. Republicans are sniffing the air and detecting that nothing the government does is going to be popular; the Bushies can stand the popularity hit (how do you further harm a burning man drowning in acid?) but the Reps think they can get more mileage by loyally pointing out the flaws in any perceived plan.
Democrats run Congress, so they’re stuck with it.
FCH, it’s not so much fraud as it was just terrible, politically-pressured lending. (There were some frauds, but of a fairly benign sort; people pretending that they had the resources to make their mortgages. They didn’t intend to NOT make their mortgage, they just couldn’t get one on the strength of what they could legitimately write down on the application, so they made shit up.)
Robert’s right about the issues of Fannie Mae, etc., being known for years. Sen. McCain co-sponsored a bill to increase oversight and regulation of Fannie Mae and gave a speech on the floor of the Senate pointing out a Federal report that they had inflated their numbers to help their execs make their bonuses, but the Democrats killed it.
FCH, it’s not so much fraud as it was just terrible, politically-pressured lending. (There were some frauds, but of a fairly benign sort; people pretending that they had the resources to make their mortgages. They didn’t intend to NOT make their mortgage, they just couldn’t get one on the strength of what they could legitimately write down on the application, so they made shit up.).
This is a question I keep asking; how much of this was the lenders cooking the numbers and how much of this was homeowners cooking their numbers? There was certainly pressure from Congress to make more loans to people who couldn’t normally afford housing loans – it’s not hard to figure that this would mean loaning money to people who couldn’t afford to pay it back.
Ron,
There’s a way to loan money to people who are at higher risk for being unable to pay — higher down payments or higher interest rates. Yes, there were Congressional mandates to increase home ownership levels, but that doesn’t mean increasing the level of home ownership of unaffordable homes.
Understanding economics requires that one understand supply and demand, while understanding the relationship of demand on prices, and the relationship of ready credit to prices. Congressional mandates to increase home ownership means only that affordable housing be promoted — and that can be done by limiting the size of loans to those that can cover what can be built, not what the builders want to build because it increases their profits. It’s still possible, for example, to buy a new home in Austin for under $150K. Yes, that’s not exactly “affordable” for many, but it’s typically a better credit risk — all things being equal — than a $200 or $300K home in this town.
The current mortgage meltdown wasn’t just “the poor” — there are many middle and upper middle class people who are caught up in ARM reset foolishness. The theory behind these ARMs was that they were “temporary financing” — the person was expected to refinance after their home had appreciated and the debt-to-equity ratio was more favorable. Well, apparently no one bothered to calculate the probability that this was going to be a disaster because the real estate market IS cyclical, and a down-cycle means disaster for that sort of leverage strategy, which wasn’t required to increase home ownership in the first place. Once ARMs started to reset, which they were going to do, disaster was just a few people being unable to refinance away — forced sales depress prices, depressed prices reduce equity, reduced equity makes it harder to refinance, which forces still more sales. The entire undertaking was destined to fail from the start.
The bottom line problem is that the concept of the “starter home” seems to have been lost somewhere in the most recent cycle. My house, which I bought 4 years after my divorce, is a “starter home” — it’s literally the smallest floorplan in my entire subdivision. Yet I have countless friends, much younger and in a much weaker financial situations, who have homes with significantly larger floorplans and the mortgages that go with it. Why? Because a bank was willing to loan someone who was still in grad school the money.
Why? Because a bank was willing to loan someone who was still in grad school the money.
And also because your friends were willing to take the loan. As you note, it’s not impossible to buy a smaller home.
By no means all, but certainly a considerable fraction, of the current mortgage woes are the direct result of people taking on more loan than they could afford. Unscrupulous lenders played their part, but unscrupulous lenders are heroin dealers. Heroin dealers provide you with the smack, but they don’t tie you down and force you to start taking heroin; they certainly don’t tell you to overdose yourself and die, because they’d much rather you stay alive and continue to buy their product. They’re just willing to facilitate your bad decision.
Robert,
I doubt the lenders said “I’m going to give you a loan that you are likely to default on and lose everything. Still interested?” The ARMs that are causing most of the problems were doomed to fail. Negative amortization, for all the rates of negative amortization I’ve seen, were higher than the long term inflation rate.
Unless they did that, they weren’t “facilitating” anything — they were engaging in fraud and I’d like to see them do some time. It’s called “predatory lending” for a reason. When someone tells you something is “affordable”, they need to be telling the truth. And those ARMs were not “affordable” during the lifetime of the mortgage.
Back during the refi mania a few years back I almost refi’d my house. I ran the numbers (and this was a 15 year fixed I looked at) and they didn’t make sense. The lender was pressuring me to refinance, so I spent an HOUR on the phone explaining to this guy (it was a guy) why the loan was a bad idea.
The WSJ editorial board deserves much kudos. They’ve been railing against freddie and fannie for a loooong time now. I recall pondering their editorials more than 10yrs ago as salesman at a buldge bracket firm.
At the time I thought they were being political, railing against fannie and freddie b/c they were quasi-governmental, icons of the new deal, and out to help the poor, so I never recomended a sell…but now I see they were correct.
Yeah, people will pressure you. I’m not sure that becomes predatory or fraudulent, however. Lies, on the other hand, are a different story.
Why didn’t you just hang up?
Fannie and Freddie have had a mandate to increase the number of low income home buyers for 30 years. I know that the claim that that is what caused the mortgage crisis is the Republican message of the week, but it makes absolutely no sense.
Robert and RonF, you are claiming that a policy that existed for 30 years suddenly caused the housing bubble and the mortgage collapse, and that the financial industry engaging in massive credit-default swaps over the past 8 years (starting immediately after the passage of the Gramm-Leach-Bliley Act), thereby convincing each other that the original lenders were safe from the effects of default, while simultaneously claiming the credit-defaults as assets (because the original lenders paid a small sum to maintain the swap), and then building a world of securities based on these “assets” had nothing to do with the collapse. The fact that lenders started giving “liars loans” (no documentation required) and then NINJAs (No-income no-job no-assets) was, in your highly informed estimation, caused by the banks suddenly having difficulty making sufficient loans to poor people, and had nothing to do with lenders believing that they had protected themselves from default. The fact that in this period many people pursued the occupation of flipping houses, taking unpayable ARMs, waiting 6 months to a year and then reselling the house for a profit (an occupation doomed to abject failure the moment the housing bubble cooled), was, in your claims, caused by the requirement that Fannie and Freddie push banks to make housing loans to poor people.
Charles:
Fannie and Freddie may have had a mandate to increase the number of low income home buyers for 30 years, but the mandate evolved considerably. The Clinton admin, for example, pushed banks to extend home mortgages to individuals whose credit prevented them from qualifying for conventional loans while simultaneously pushing Fannie to ease credit requirements on loans purchased from these banks and other lenders. HUD wanted 50% of Fannie and Freddies portfolio be made up of loans to low and moderate-income borrowers. Everyone knew at the time that this meant considerably more risk , and down payment requirements were reduced as well, but the move was intended to increase the number of minority home owners , so everyone looked the other way.
By 2003 Fannie and Freddie accounting scandals began to hit the fan, fanned by the WSJ excellent reporting on the matter. McCain and Greenspan called for more regulation (blocked by the dems) and the 2 companies were asked to justify their government subsidy, which they did by pointing to their affordable housing mission. Around this time their subprime portfolios grew enormously.
Now Fannie and Freddie are not regular companies, they’re government sponsored and essentially make the mortgage market. They provided the liquidity for these subprime mortgages, and if they wanted more of them to justify their existence, the ibanks and lenders would produce them. Without this market lenders would have to bear the risk themselves and ibankers would have to rely on private investors, like hedge funds, to take the risks off their books.
This is not to say your criticisms of the ibankers and lenders are unjustified, but rather to warn against trying to pigeonhole this crises into narrow ideological narratives like: dereguation led to this ,or socialism for the rich, or the rich screwed the poor.
All these narratives have truth lurking within them, to be sure, but they are contradicted by powerful counternarratives. I don’t know what the repeal of glass-steagel really has to do with this (though I’m open to argument) other than to try to attach this scandal to the vague concept of deregulation that the repeal represents and coincidentally occured during the same time. I think even Obama would agree as I saw he had Robert Rubin by his side the other day.
Speaking purely politically though, I’m sure the simplistic “Republican deregulaion led to this” narrative will win the day (people do like to keep things simple, and a rule of thumb is the executive and his philosophy gets blamed for what happened under his watch even if it wasn’t his fault) and its no surprise to see Obama’s poll numbers skyrocketing. McCain latest gambit is an indication that he knows he needs a Hail Mary here, and if anyone can pull it off he can, but at the end of the day counter-narratives are hard to pull off when a simple slogan will do. So the people will probably deliver Obama to the White House, and I have no problem with that.
History, however, may have a different delivery.
Federal policies have been a contributing factor to this, but there’s also the simple issue of greed; people who wanted to make a quick buck making loans and then selling the risk to someone else, and people who wanted to live in a house they couldn’t really afford.
Someone wants to sell me an ARM. I say, “What’s my monthly payment going to be?” Well, it’ll be $x, which you can afford. “Hm. Let me think. Yeah, I probably can afford $x/month, although it’s a bit of a stretch. What’s the ‘A’ stand for in ARM?” Adjustable. “What’s that mean?” It can change. It can go up or down. “How do I know how high it can go?” You don’t. But don’t worry. “F**k all don’t worry! Easy for you to say. Maybe I should buy a smaller house.”
Poor != stupid. Poor != victim.
People who lied should suffer for that; but how much of this is people lying to themselves? They all should suffer for their bad decisions. I should not.
Well, sure, but has ‘greed’ really changed so much over the last 30 years that it accounts for this? I’d agree that greed plays a part, but I also think that greed has remained more or less constant for more or less forever.
What has changed, though, is the specific legal framework governing how greed gets acted on.
—Myca
Charles, I haven’t said anything close to anything that appears in your very nice rant, so thanks but no thanks on THAT argument. All I said was that there’s plenty of blame to go around, and consumers own some of it. It would not surprise me in the least to discover that you are right in much of what you say; I am not a financier or financial expert.
I bought my last house on a 3 year ARM. The terms were so good for three years that the bank was basically giving me money for free. It actually made more sense to keep the money in an interest bearing checking account than make a lager down payment. I knew I was moving in less than that time so i wasn’t worried about how year 4 caught the bank up and year 5 turned me upside down.
My fall back plan was a refi after 3 years.
I knew what I was getting into and the girl that sold me the loan was clueless. We read the terms together and it worked out okay.
So these things aren’t all bad. But I’m a smart guy with a good job and had a fall back plan for my “in case things don’t work out plan” I feel bad for the sap that used one of these to buy a house when they should have been renting.
Current house is on a nice stable 30 year fixed.
Had no idea this had been in the works for so long. We linked to this post in our Bailout 101 post at the CA NOW blog: http://www.canow.org/canoworg/2008/09/bailout-101.html
What has changed, though, is the specific legal framework governing how greed gets acted on.
True. What has also changed has been the sense of entitlement – that people are entitled to own a home at income levels that 30 years ago could not support home ownership. That, too, is greed. And that, too, has been supported by a changed legal framework.
From comment 1, this thread has gone off the rails. Fannie and Freddie played a part in the mortgage crisis, yes, but not a particularly big one. They have been losing market share as part of the real estate market over the past several years. They trailed a raging speculation bubble in the private lending market.
The real issue is that at the start of the year, there were five major private investment firms in the US, and now there are two.
We’ve had subsidized housing and government mandated help for the poor for the better part of a century. That doesn’t cause depressions; on the contrary, they cure them. And they remain a staple of every prosperous, equal opportunity nation in the world. Government help for the poor is not the problem.
On the contrary, what government did wrong was to cave into the manic deregulation crowd, which caused the explosion of shaky lending practices and mortgage backed credit derivatives. These people caused the current situation; and these people are those who have been trying to axe government help to the poor since the pogey lines of the 19th century. And now they are trying to spin crisis they caused into support for their agenda. Well, sorry guys; a complete dearth of shame or sense of responsibility will not make up for a lack of truth in argument, nor turn lies into truth.
Manju, the idea that the repeal of Glass-Steagall was significantly responsible has been widespread, from commentators across the spectrum.
How it works is very simple. When there is no line between commercial and investment banking, there arise clear conflicts of interest as banks start taking stupid risks with people’s money. You have situations such as a retail bank turning mortgage debt into collateral and then an investment firm taking on all these liabilities, bundling them in with futures, swaps, etc., and then unloading them onto unsuspecting individual investors. Why would the investment firm do that, you ask? Perhaps because it and the bank are one and the same? Integrating every sector of the finance industry together is just begging for a repeat of the sort of loopy, leveraged speculation that led to the Great Depression.
Criticism of Fannie and Freddie is okay. Clearly, they played a part. And criticizing Barney Frank and the Democrats while praising McCain for trying to push regulation of them is also warranted – some regulation would have been better than none. But it’s all for naught if you ignore the broad market trends of which they were but a part.
At least one good thing may have come out of all this: the rigid, anti-government dogma that has plagued economics for the past few decades has been dealt a body blow this year. (Recall that earlier this same year the World Bank essentially disowned and apologized for the hellish failure that was the Washington Consensus.) Maybe a phoenix will rise from the ashes, flowers from the volcanic silt, et cetera, et cetera.
Robert and RonF, I’m not going to argue that consumers share none of the blame, because they do. The individual consumers who took on debt they can’t handle are ruining the game for those consumers who didn’t, just as corporations who played fast, loose, and stupid with the rules have wrecked it for the corporations that didn’t. I don’t think that’s the argument Charles (and I) are arguing against, though.
The argument I am against is the idea that some vague government desire to help the poor caused a major or even a minor part of the current situation; that’s a different horse from blaming the individual indebted, many of whom are, yes, poor. (So yes, I’m defending big government help for the poor while not really defending the poor as such. I’m like a right wing libertarian’s political wet dream come stickily, stickily true.) The former doesn’t parse because that same vague mandate, in some or another, has formed an integral bedrock of the real estate market for three-quarters of a century. Why hasn’t it caused catastrophic Depression-esque collapses before, either here or in any other similar countries?
By contrast, the generally agreed upon deregulation narrative doesn’t have these glaring flaws; it has a historical precedent, as pretty much the same thing happened during the 1920’s, (only with the blue chip industries before they were blue chips, and not real estate) not to mention the dot com bubble. (Analysts identified three parallel pernicious bubbles back during the day: dot com startups, housing, and credit. The latter two appear to be bursting at once, although that isn’t too surprising given how much finance is dependent on real estate.) When the Republican nominee for president adopts more regulation as part of his mantra, you know that the idea is mainstream and the debate essentially decided. On the contrary, I have yet to hear this “forcing companies to help the poor wrecked holy amounts of shit” narrative from any credible, mainstream sources, leading me to conclude that all of this is coming from an echo chamber on right wing blogs and the like.
Perhaps, though I’m curious as to why the cutoff point you chose is 30 years. Why not go back 60? Fewer income levels back then as compared to today would have supported home ownership, as suburban sprawl had only just started – yet, America really hit the ball out of the park w/r/t homeownership back then. Could 1940’s/50’s era housing policy have channeled people’s childish sense of entitlement in the correct way as to create a true opportunity society? I say yes, and apply the same principles today sans the obscene amounts of racism, and we’re good to go.
And a pre-emptive sorry for posting three in a row. I don’t usually do this…
I’m quite sure you’re almost DEAD wrong here, sylphhead. The scenario you just painted simply did not happen in any meaningful degree.
First of all, securities were not dumped on individual investors. Unlike the Clinton-era internet scandals, where worthless stock was dumped on individual investors, and real longstanding wall street conflict of interests were exposed (between ibanking and brokerage/research) the vast majority of these securities were sold to institutional investors (which tells you it was not a scam, b/c these are sophisticated investors)…most notably Fannie and Freddie (And don’t play down their role b/c its ideologically inconvenient…they are massive govt backed organizations that created the bulk of liquidity for these securities) but also insurance companies like AIG and of course Hedge Funds.
Now, lets look at the firms most involved in the crises. First on the buy side (investors in the mortgage securities): Freddie, Fannie, and AIG. – the first two are govt-sponsored mortgage investors, the latter an insurance and money management company. All did nothing that they couldn’t’t do under glass-steagall. Insurance companies traditionally take your premiums and invest them. Fannie and Freddie mandate is to purchase mortgages in the secondary market thus providing the liquidity for affordable housing. The Glass Steagall repeal changed none of that.
The ibanks in question–Bear, Lehman, Goldman, Merrill, and Morgan,–all operated as if glass steagall were still in place…independent investment banks and brokerages, with virtualy no commercial banking activities and even less retail commercial banking. If you haven’t noticed, the precise opposite of what your saying is happening now, with Goldman and Morgan becoming bank holding companies in order to slove the problem (something outlawed under glass-steagel) and Merrill selling itself to BoA, a commercial bank…also illegal under glass steagall.
In fact the firms that took the most advantage of the repeal–BoA, JPMorganChase, and Citi–are still standing and, especially the first two, have had the least amount to do with this scandal, having avoided the mistakes (with the exception of Citi) of the firms that operated as if Glass Steagel were still in place. How do you explain that?
Stop trying to pigeonhole this into the ideological narrative that it was caused by deregulation. This is not to say there isn’t any truth to that narrative, but there’s a lot more significant things than that going on here.
Fannie and Freddie took in credit derivatives and zero interest loans that ended causing this crisis, but did not create them; private lending firms did. They, of courses, did buy them, in copious amounts, which was a huge mistake. So yes, any legislation, including Republican legislation, to limit their purchases would probably have prevented the private market bubble from getting as out of hand as it did. So to that extent, right-wingers and libertarians have a point. But, these new talking points that have been just handed out, that blame them for everything… I don’t think right-wingers and libertarians really think they can fool the American people with such selective half-truths and tripe. At this point, they’re really trying to fool themselves.
Your statements on Glass Steagall reflect a dogmatic blindness so acute it should qualify for several workplace benefits. Qualified sources have acknowledged, in hindsight, the dangerous conflicts of interest that G-L-B has created. The actual record does not fit the newly decided libertarian argument , as newly formed CitiFinancial actually played the largest role in the subprime debacle during its nascent years. Back during this June 2007 profile of Goldman Sachs, when they were getting fat off subprime loans, they actually call out the repeal of Glass-Steagall by name:
But oh, how hubris comes before a fall. And it should also be noted that the same article talks of how shiny new financial instruments have been creating a new kind of money over the past ten years – which is essentially my argument, except back then they spoke of it in an approving tone.
In addition to the existing dangers to G-L-B already noted, it should be added that it just plain reduces oversight (it’s an interview with former SEC chairman Arthur Levitt, you’ll have to read through a bit), as well as creating overly large and interconnected financial behemoths that come with the moral hazard of knowing they can’t fail.
Diverse, majority opinion does not agree with your ideologically motivated rewrite of recent history.
You can keep clinging to a failing libertarian doctrine that blindly, angrily denies any role to deregulation (or at least lowballs it several orders of magnitude below that which passes the laugh test), a role even the captains of finance have come to accept. Or you can rejoin the real world. And by all means, keep using the word “ideology” as if you have none, and that this ideology which you don’t have is so definitely not sticking out like an elephant’s goiter.
In Massachusetts, the legislature has recognized that predatory lending can exist in a variety of situations.
As a real estate attorney and also someone who does foreclosure defense (I don’t touch the bank side) I can attest to the fact that loans are complex. Really complex. Attorneys, title agents, and even banks screw them up all the time. It is absolutely no surprise that a standard consumer is going to–pretty frequently–end up in a loan that they don’t like, or that they didn’t expect, or that they didn’t really process at the time what it would cost.
Are they willfully blind? Perhaps they are, sometimes or to some degree. But although some argue that they should “know better,” they are assisted in their blindness by people whose JOB IT IS to know better. Why are we blaming the consumer?
In the end it comes down to is simple: people take risks with their home. There is nothing wrong in principle with taking an educated risk. We do not feel especially sorry for the people who make a good gamble and lose, since they also had an opportunity to win. It sucks to lose a bet, but losing doesn’t mean that it was a bad bet per se.
Unfortunately, most people are not mentally capable of understanding the real costs and benefits of many loans, so they take BAD risks and lose their home. We do–or should–feel sorry for those folks. We look at their loans and wonder how the hell they could have made their decisions. the reason is simple, which is that they were basically preyed upon by those who DID know the risks, and who DID know the costs and benefits.
On the other hand, some people really are in serious denial. People come into my office every week looking to give their homes back. One of the first things I tell them is insulting (to some) and a but hard assed, but true:
“You have lost your home, or you are about to lose your home. You have very little money left. I will be happy to get you your home back if I can, but unless you can show me a severely changed circumstance, you will still end up with no home and no money. If you do not end up keeping your home two years from now, you will be MUCH better off spending the money on rent.”
Some clients get it. Some do not. of the ones that do not, I tend to refuse to work with them. A typical conversation goes like this (had one just this week:)
“If you can just get me my house, I will make the payments again!”
“How? you haven’t made a payment in 8 months. your payment was $2500/month. You have avoided paying $20,000 in payments over the past 8 months–saving $20,000–and you still have no money in the bank. You owe $7500 on your credit cards. You are complaining about giving me a $3000 retainer. How on earth do you expect to make $2500 payments?”
“Just get me the house and I will make the payments.”
“Um…. no. i will not take your money only to have you foreclosed again in 4 months. It’s not what I do. You need to show me that you can make the payments, or you need to hire another lawyer.”
“Just get me the house and I will make the payments. trust me.”
“Nobody is going to trust you when you can’t even make them now. And if you are not making your payments and you can’t tell me how you are going to come up with an extra $30,000/year in income, I don’t see why they would.”
“Are you saying i am a liar?…”
etc.
They were created in response to the demand from Fannie and Freddie, who more or less make the mortgage market, as I outlined in some detail in #10. Part of the reason lenders felt comfortable making such loans, is that they knew they could sell them to investors, professional investors btw, not individuals. I’m open to other causes, such s demand from arbitrageurs, but you haven’t provided anything but a vague assertion that they were created by private firms, apparently before demand emerged in the secondary market.
True, in theory; but that didn’t happen here did it? The only institutions too big to fail–AIG, Freddie, and Fannie–had nothing to do with the repeal of glass-steagall.
Yes, and noticed I acknowledged Citi’s role. But why have you not addressed the role of Goldman, Merrill, Morgan, Lehman, and Bear (independent Ibvnks with virtually no commercial banking activity)…or relative lack of role of BoA or JPMorgan, (firms that took advantage of the repeal)? Because it doesn’t fit your ideological narrative?
Perhaps Goldman did not want to compete with behemoths like Citi? Either way, the quotes you provided say nothing about the subprime mess. Its just more vagueness. Yes behoumoths have more conflicts of interests, obviously, but its unclear how these conflicts contributed to this crises, unlike the internet bust where the connection was clear. In other words, this could easily have been done under glass-steagall, as the major players involved, with the exception of Citi, all existed by in large as if glass steagall were still in place.
sylphhead, i think you just got caught using an overly simplistic ideological narrative, and are now trying to do a turnaround. i’m open to criticism of deregulation, but your glass-steagall criticism doesn’t hold up under examination. you’re not offering any specific criticism, just a vague correlation between deregulation and this crises, which as i said has some truth lurking in it, just not the ones you point out.
I don’t have all the answers here, but i think the real reguration may be needed in regards to margin requirements and leverage vis a vis these newly designed securities. There’s nothing wrong with ideology, and I don’t blame anti-free market ideologues for trying to see how this may fit into their philosophy, but at the end of the day we need to find the actual specific connections betwen dereg and this crises that need to be fixed, not general vague ones.
Having said that, speaking purely politically—since the rule of thumb is that the Executive and his Philosophy (and Party) gets blamed for what happened under his watch even if it wasn’t all his fault, even if the other party controls congress, and even if he didn’t follow his stated philopsophy— I’m sure your simplistic “Republican Deregulation Caused This” narrative will win the day and deliver Obama to the White House, which I have no problem with.
So congrats on a political winner for progressives in America, for once. Well played.
Try following the links that I gave you. There are a lot, but for instance, the Goldman Sachs article mentions mortgage backed instruments and subprime directly (it’s true that the quoted segment itself does not). Your continued assertions about the roles of different companies is simply not corroborated by what the informed body of opinion is saying, so I no more have to explain your assertions than I do that the king of France isn’t bald.
[EDIT: There is a problem with the link, as it brings you up to the NYT prescription page. Try Googling the name of the article “Goldman Runs Risks, Reaps Rewards”, which should let all of you bypass that.]
Manju, no one is going to buy that the arguments you’ve seriously made so far are that of a disinterested spirit or fence-straddling appraiser of truth. If you don’t want to be seen as a winger ideologue, don’t quack like one. So far, despite your nebulous hints at there being many different causes to this crisis beyond any one ideology’s proscription (a truism that I doubt anyone would disagree with), the only one you actually proposed was that Democrats helping poor people over a decade ago caused the lion’s share of this crisis, a position I have not heard from any informed commenter or analyst from any camp during the past week, and only from wounded, bellicose right/libertarian types on the internet. (Frankly, I doubt even Congressional Republicans would agree with it.)
Now, on the other hand, if you want to argue that certain types of regulation are good while others are bad, while being just as specific about the former as you are about the latter, then I’d be more willing to buy that.
I don’t have the nitty-gritty down, nor do I know most of the details; if I did, I’d be the one canceling debates, ducking Letterman, and marching down to Washington to solve the problem single-handedly. What I do grasp is the basic, big picture.
The single biggest problem is that hedge funds and private equity firms pretty much entirely escape the regulatory framework set by the New Deal. Hedge funds didn’t play that big a role this time around, but they did during the dot com bubble, without which our present crisis wouldn’t have happened, and formed part of the loose ethical financial culture of the 90’s of which the problems of today are a continuous extension.
… to which the remedy proposed is this…
[Source]
That should be the first thing to happen.
Second would be to extend, give some teeth to, and then actually enforce Sarbanes-Oxley. Many of the same problems during the 90’s are still with us today, such as rampant dishonesty in the securities market whereby the guys dealing in securities are the same ones that are underwriting their value.
After that, one could go a million different ways. But those two are the most crucial steps.
The article mentions neither, and you completely misread it. The conflict of interest Blankfeild referred to is not between commercial and investment banking, but between Ibanking and the hedgefund/proprietary trading business that they recently got into. They got into this biz, not b/c glass-steagell banned ibanks from doing it (it didn’t) but b/c the fall of glass-staegel meant commercial banks would compete for their ibanking biz, thereby forcing Goldman to look for new ways to generate revenue.
To be clear, Wall Street has long been divided between sell-side banks, banks that underwrite and sell stock and bonds to the public (merrill, morgan, etc) and buy -side firms (mutual funds like fidelity, hedge funds, etc). Glass-Steagel did not prevent sell-side banks from doing buy side biz, but Goldman long avoided this b/c they didn’t want to compete with their own customers (buy side firms). Ergo, the conflict of interest. But this conflict may not be too problematic, since if a salesman is selling something to himself, it means he really believes in its, doesn’t it? On the other hand, the buy-side biz is more risky, since you put your own money at risk. But sometimes it good to know the person selling you something owns it too.
Be that as it may, Blankfield was in no way substantiating the theoretical and imaginary scenario you portrayed in #18. You misunderstood him.
I make specific arguments and you refer to imaginary authority and an imaginary consensus. Look, I’ll keep it simple for you. Only one major culprit in theis crises had a major ibanking and commercial banking operation: Citigroup. and even then, they are still around. The two other major banks that took advantage of the repeal, BoA and JPMorgan, by and large avoided the subprime mess. But a pletora of firms that existed as if Glass-Steagell were still in place, got caught in the flood.
Just today, WaMu, a pure commercial bank with no ibanking activity to speak off, went bankrupt and was bought by JPMorgan, a combined ibank and commercial bank. If you haven’t noticed, far from going away from the repeal, banks and ibanks are now merging in order to resolve the crises.
So not only is you dead wrong, but almost the precise opposite of what you laid out in #18 occurred. The repeal of Glas-Steagel appears to be helping to solve this crises.
There is actually an interpretation of the importance of the partial repeal of Glass-Steagall that runs exactly opposite to sylphhead’s explanation:
Allowing hybrid institutions was intended to create institutions that could weather both up periods (when iBanks do better) and down times (when commercial banks do better). The current crisis demonstrates that the Act succeeded. BoA and JPMorganChase are doing okay (although there is a question of exactly how many failing institutions JPMorganChase can actually be forced to eat before it becomes unstable itself).
But by creating the new hybrid institutions, the Act put severe competitive pressure on the iBanks and the commercial banks. The hybrids could do everything the traditionals could do, but they also had the expectation of grater safety (now proven true), so the traditionals needed to be more profitable to investors in order to compete in the stock market. This (the argument goes) drove the traditionals into ever riskier positions in the mortgage derivative markets.
I don’t know if I buy this argument either. I’d have to know a lot more about the financial markets than I do to be able to judge whether any of that actually happened, or whether it is simple a just-so story.
A better example of insane deregulation that clearly created the grounds for the current crisis than the repeal of Glass-Steagall is the Commodity Futures Modernization Act or 2000, which forbade the regulation of credit default swaps (as well as creating the Enron loophole).
Couldn’t have happened to a nicer bunch.