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It is thus, not hard to understand how a failure in a highly regulated market might sway the intelligentsia to lose whatever begrudging faith in markets they had to begin with. For them, these markets failed precisely because they weren't regulated enough. We hear this pronouncement already without so much as an eye batted during the presidential debates. And in the end this greed bashing populism begins to sound more and more poisonous to me, due to the fact that it is founded upon ignorance, is presented by the allegedly enlightened, and represents nothing more than a gussied up and sanitized version of The Protocols of the Elders of Zion for a politically correct and color-blind era.
This is simply cognitive dissonance on display.
"— the kind in which a central monetary authority manipulates money and credit"
That's been going on since 1917.... it got bad when the Libertarian Greenspan took over. I'm all for nationalizing the Fed. I can guarantee you the Wall Street gangs was never for it.
-the central government taxes and redistributes $3 trillion a year
Nothing new here to explain the current problem except for a shift in re-distribution choking off the middle class and wealth inequality approaching that seen prior to the last Great Depression
-huge government-sponsored enterprises create a taxpayer-backed duopoly in the mortgage business, tax laws encourage excessive use of debt financing, and government pressures banks to make bad loans
Wall Street lobbyist were behind all the changes because they saw easy money. These loans would never have been an issue without giving into wall Streets desire to securitize them and to do so in an opaque unregulated fashion.
The real changer in the room was a de-regulatory change allowing securitization of mortgages and other assets that wasn't legal before and then allowing unregulated complex financial instruments to run rampant on wall Street.
Wall Street got its way on all these things. The disaster was caused by decreasing regulations and oversight. Those facts are so clearly obvious.
It's time for you all to stop the insulting insinuations that deregulation had nothing to do with this and own up to the fact that you are possessed of a failed politico-social ideology.
How many times is history going to have to repeat itself before you all realize this?
On whose part? Maybe yours. Scoffing at true and fundamental statements does not make them go away.
That's been going on since 1917.... it got bad when the Libertarian Greenspan took over. I'm all for nationalizing the Fed. I can guarantee you the Wall Street gangs was never for it.
What a dumb statement. Firstly, it was 1913. Secondly, it doesn't matter how "libertarian" Greenspan was in his private life. He certainly wasn't as Fed chairman. The Fed is practically nationalized for all intents and purposes. It operates as an arm of the government. Dunce.
Wall Street lobbyist were behind all the changes because they saw easy money.
Ignorant hack that you are.
Muirego: "Wealth inequality" and the religious invocation of "the last Great Depression" are not an argument. One would think especially that someone reading this blog might grasp that inequality is hardly the most important thing in the world.
(And which "Wall Street lobbyist[s]" were behind creating Fannie and Freddie? Roosevelt's New Deal was a tool of Wall Street? Or just Johnson's attempt to get it off the Budget? Please explain this; your evidence must be very interesting and secret.
I mean, I'm assuming you do realise that the "taxpayer-backed duopoly in the mortgage business" refers to Fannie Mae and Freddie Mac. The idea that they're a creation of Wall Street lobbying is facially absurd, but I'm open to actual evidence.)
Please also to explain exactly which "deregulation" you think allowed securitization of mortgages? FNMA started doing that in 1938. Naming a specific statutory change would be helpful.
But this is the question I ask all the Neoliberals not willing to own up to their disaster.
Tell me how this crisis would have happened with out the repeal of The Glass Steagall Act.
I can see no way this would have happened if we kept banking and investment institutions sperate.
But Wall Street didn't like the boring consistent good old fashion returns they were getting.. They needed more....More ..MOre..MORe...MORE.... and after 8 or 9 lobbying efforts too big too fail institutions were allowed to grow... loans securitization was allowed and financial pyramidal products like derivative and credit defaults swaps ( completely the creation of unattended marketeers) were allowed to infest the market just as Wall Street wanted.
We left the Wall Street Babies alone to play with their loaded gun and the predicatable results have occured once again.
Now their system is crashing and you're left making boldly obviously lame excuses to protect a bankrupt ideology.
Recovery this time may suck worse then the last deprssion you guys caused because you guys got your way with globalization and now we don't make anything to grow the economy. We shipped all our manufacturing overseas in the interst of FREE MARKETS. The only thing we have been making at your ideologies advice is debt and credit. And now the wall has been hit.
Wake up dunder brains and kepp your Free hand of the market off of me!
The whole MBS business is a creation of the lobbying of Lew Ranieri and the boys at Salomon Brothers. Before Lew created the first MBS in the 70s, Fannie and Freddie simply bought, sold, and guaranteed pools of mortgages -- a very boring business with a limited market. Ranieri convinced lawmakers and regulators to let Salomon Brothers slice and dice those mortgage pools into 2-, 5-, and 10-year bonds, and thus a thriving market was born.
But you haven't really come up with a reasonable explanation of how GLB caused it to happen. The firms going under are the pure investment banks and pure commercial banks. The diversified banks are the ones that seem to be surviving, to date.
Whenever you have a business that borrows over the short term and lends over the long term, you have tremendous potential for illiquidity problems, which we are seeing here. The markets are being roiled by a lack of transparency. No one knows whether counterparties are solvent or not. Everyone claims that they are solvent, but then Lehman's debt is settled for 10 cents on the dollar. The *market* is not clearing this up spontaneously. I don't see companies spontaneously opening their books showing the specifics about the financial assets that they own. Without the SEC, there would be even *less* disclosure. AIG ran amok and wrote billions of credit default swaps, because the regulations concerning those instruments did not exist. Consequently, they have hundred of billions of dollars in liabilities. How is the *market* supposed to regulate such hidden risk taking? In the court room after hundreds of billions in losses?
Here are the facts: there have been economic crises before the Fed was created and after the Fed was created (although many fewer than before). There have been many crises in a much less regulated regime and fewer in a highly regulated regime. Why do libertarians keep claiming that if we just had a purer free market, we'd have fewer crises?
Markets have a tendency to boom and bust. Unless that tendency is controlled and ameliorated, you are going to have great plunges in gdp.
Sheesh.
Here's the bottom line: the financial industry is THE most heavily regulated sector in the economy. thats a fact. It is simply incontestable.
Now you can argue about whether this regulation was enough? or too much? in terms of quantity or good? or bad? in terms of quality.
You then realize that the next bubble and crisis has always happened no matter how much regulation was on the plate. If simply hitting the PLUS button on regulation was enuf, socialism wud've been grand. But therein comes the "Knowledge Problem" in the socialist calculation debate. Perhaps then you realize BETTER regulation is the answer. And this is certainly a possible answer. Then you realize you have to find out what BETTER means. what does it mean? By constraints of reality, this will be limited to, at best, the smartest and best minds that the regulators can use to design regulations. If these people can regulate to perfection, this situation again bumps up into the socialist calculation debate.
So what is one to do?
Then maybe deregulation is the answer?
Perhaps, but the problem with deregulation is, when done piecemeal, it again runs into the knowledge problem as arbitrage opportunities are created with each deregulation, maybe even more so than with regulation. So unless a whole sector is completely deregulated (save for some transparency regulations), this might not work.
So what is someone to do?
Economists are still working at it.
The dilemma between regulation and deregulation as some kind of crossroads of ideology is entirely false, not to mention reckless and harmful. I am reminded of the months following 9/11 when the debate was framed as a dilemma between more terrorist attacks and the immediate dismantling of civil liberty.
This point would be a slam dunk if the derivatives market was, in fact, " thoroughly saturated with government regulation". But it isn't, so, um, not so much.
And to extend the basketball metaphor, anyone who claimed that Allen Iverson is not an NBA player because NBA players are tall would be committing the same rudimentary error that you do here.
Yes, the industry is the most heavily regulated. I know that because I've worked in the industry for more than ten years. However, when it is unregulated derivatives and unregulated insurance contracts, bought with debt in massive quanitities because of the SEC's 2004 exemption of certain players from regulatory leverage limits that caused the problems, the obvious argument is for MORE regulation. The bottom line is that the regulated parts of the system functioned properly. The unregulated sectors took on more and more risk and leverage because no one was looking and it became so cancerous that it now threatens the entire system.
If you think that SOX caused this current mess, you are horribly ill-informed. Do you also think the CRA caused the sub-prime housing mess? Silly.
"Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent."
These are stunning rates obviously. How could this disaster not have been seen from the day this story was published in the first week of August? (Actually the danger was fully exposed in the Financial Times in April, see: http://ftalphaville.ft.com/blog/2008/04/10/1222...) But certainly it should have been clear that when the September payment came due, it was all going to be over.
As this amazing foreclosure rate starved the mortgage-backed CDOs of their monthly income stream and the banks exhausted themselves, soon becoming unable to make good on the payment, the various bank holders should have been protected by the CDSs.
These CDSs exist basically as insurance policies on the income stream. From these facts now come the questions we should ask before we get into the regulation discussion:
What seems interesting to me is that the CDSs themselves didn't seemed to be adequately "re-insured" with outside parties, parties who weren't already avenues of the trade.
Really only a few institutions seemed to do the most business in these, repackaging them on to sell to other banks across the globe. The question here is why did these few institutions, with so much capital sloshing around from the mid-aughts and apparently no place to put it, shove it all here?
Fannie & Freddie had a special group of regulators, a little bureau of about 200 people. Why didn't they have a clue?
Also, why did so much of the CDS appear to end up at AIG? Why did so much lodge in 1 place? Why didn't AIG in effect successfully "re-insure?" Insurance and re-insurance after all is something AIG certainly knew how to do.
Was this a case of a banking culture in which you have your set of close-knit partners, and you primarily do business only among yourselves? Or - considering AIG history, which caused Eliot Spitzer to go after it - was something else going on?
After Spitzer, AIG apparently had its own group of regulators, who actually sat in its Connecticut offices to watch what was going down. Why didn't they see this either?
Part of the problem here is that the business practices seem poorly understood. Journalists don't explain it well, even in financial papers.
But what I have read in some places makes it seem as if investment bank X issued mortgage-backed CDOs, sold those to normal banks - who apparently weren't making any money in their traditional business as that fell to a commodity, with everyone giving away free checking, free this, free that and so they needed the CDO income stream - and then those banks bought CDSs on investment bank X with AIG - who then may have done sold those back to X, in essence, self-insuring X with X?
Is this right? Is this a fair description of the circle? If not, could I please get a better explanation? Only when we have a clearer idea of how the circular trade developed could we hope to discover where any new regulation should be.
I made no causal connection between SarbOx and the financial mess. My point was
about the whole narrative of "deregulation caused this" being adopted reflexively.
And yes your facts are correct. Again like I said people will ignore my point about the knowledge problem, as you just did. Webgrrl just demonstrated and Warren Buffet concedes that OFHEO Frannie's regulator sat on its hands, collecting paychecks for 200 regulators for 2 companies for the taxpayers. What makes you think "MORE regulation" will be effectively in this regard, unless you think regulators have clairvoyance...then go back to my post before the previous one.
sigh
And of course the agencies. The SEC is supposed to look after Moody's et al, albeit through some distant process, right? (People have been screaming for more SEC oversight of rating agencies since like, 2004: http://www.afponline.org/pub/gr/i_ratingoversig...) How could every MBS basically get a platinum rating? Huh? Clue 2. Can we imprison the raters for fraud? Meanwhile, the SEC sat on its hands. Can we imprison them for nonfeasance?
Then we have to ask about the risk managers at institutions. So these guys are incented to take on risk: Hey that nasty bottom tranche gives me 10% or whatever! Yummy! And Moodys tells me it's airtight! Yeah my boring quants say the model shows some ugly possibilities waaay out there in the tail, but hey, that's only a tiny risk for year 2 or 3. By the time the thing would explode, I'll have pocketed my FU bonus money! Screw my Famous Name White Shoe Institution, I wanna retire ASAP. But it won't happen anyway, the economy's still OK now, everybody says so. Stupid nerds.
But then the manager should have seen that NY Times piece or others like it. Clue 3.
And he should have said, By my ostentatious watch! I have 20 days to save my fricking hide! So why didn't they? Why didn't they save themselves? Was it already too late? "No way out, no way out, no way out?"
Did the manager instead say, Thank God I have a CDS on this Lehman stuff with AIG! I'm sooo golden! Really, you'd think the managers would have immediately raised the alarm for their own self-preservation.
Finally we come to AIG. Certainly they should have seen same NYTimes-type story and also acted to maintain their own lives. Did they also do nothing? (I guess we've also learned that Citadel and Pacific held this stuff too.)
So at what point exactly did all these failures collect? It seems to me that while we could bicker for a looong time about why the regulators snoozed, we should still ask ourselves why the rating agencies appeared to lie, and why neither the managers nor the swap guys acted. I mean, I guess I understand why the managers did nothing - they already had their bonuses. But AIG, why didn't AIG stop the madness?
We can regulate til the cows give homogenized milk, but if the other incentives are outta whack, what good will it do? I am haunted as to why the managers and swappers waltzed on the deck of their own personal Titanic.
Brad Delong has pointed out how this was a catastrophic failure of risk
management in 4 points in the chain, and then he goes on to completely
ignore the bottom of the chain - the subprime mortgages itself,
the underwriting practices attacked by congress, whether for "ownership
society" reasons or low-income-ppl-deserve-a-home-too reasons. Arnold
Kling has pointed out that the pseudo-semi-privatization of Frannie was a
way for President Johnson to move liabilities off the governments books
in time of an unpopular war.
So that is the government failure.
And then we have market failure in risk management by the ibankers
and firms like Countrywide.
Simply screaming more regulation does not seem to re-align all these
incentives for the public good.