Countdown to breathing space or disaster: Congress decides
Whether you think they’re fighting for crumbs of social justice or fiddling while Rome burns, this is the biggest test most politicians will ever face in their lives. The Executive is not doing well. Bush is playing the role of President. Both presidential candidates are still playing politics. Nobody knows how much the bail-out will cost.
According to one our cleverest commentators Anatole Kaletsky in the Times, US Treasury Secretary Hank Paulson has suddenly switched from White Knight to Darth Vader: “There was no such thing as a Paulson plan. Not only did Mr Paulson not know what he was doing. He did not know what he was talking about.”
But don’t despair. Focus and power has shifted to where the Money is voted, to the folks on the Hill. Congress has only twenty four hours left before the financial crisis becomes a disaster. I don’t know if this sentence is literally true but I wouldn’t want to test it. I’ve just heard a member of Congress’s Banking committee say that the negotiators are closing in on an agreement but Congress is waiting to see what the agreement is before they decide how to vote. That seems reasonable.
The UK and all other lesser powers simply have to hang about, dreaming their dreams and fearing their fears. Two interesting pieces in the Guardian. Seamus Milne, the paper’s house Marxist makes the case for Brown leading a left revival:
“Genuinely new policy announcements were thin on the ground in Tuesday’s speech, and there was nothing remotely of the necessary scale or symbolism of, say, a windfall tax or price controls on the gas and electricity companies. Brown’s pledge of fairness will be hard to stomach for millions of public service workers facing cuts in real wages while huge City bonuses continue to flow without restraint.
But Brown and Labour are fighting for their political survival and there is no other way to go.”
The chances of this happening are round about degrees absolute. On the international front, a sober Tim Garton Ash meditates on Bush’s path “ from hubris to nemesis ,“ hubris being lies and self-deception over Iraq and the attempt to “create our own reality,? and “the vertiginous unreality of hyper-leveraged Wall Street investment banking over the past decade.” The consequence has been the damage done to American “soft power” the world can ill do without.
Meanwhile at home Robert Peston keeps his feet on the ground and his eyes on the screen, telling us:
“The reluctance of banks to lend longer than overnight to each other – as described in my earlier note on interbank hysteria – will surely force the Bank of England to take corrective action.
If it does nothing, well then the cost of money for all of us – in the form of the interest rate we pay on loans – will soar.
Rather despairingly, it looks like a done deal. Glenn Greenwald (at Salon.com) notes:
This is no less true of McCain and to a lesser extent Obama. A fair decision – uncorrupted by the money of the lobbyists – can never be made. Wall Street greed has corrupted American democracy to its core.
The one hope that this biggest bank theft ever(since the Northern Bank job?) can he halted is from far right Republicans who baulk at the involvement of the state in the market.
Such irony!
$700 billion for the bank bailout, and a Treasury spokesperson said “we just wanted to choose a really large number.”
Detroit is next in line, and one can only presume the airlines will have their hands outstretched too.
How long can you pull money out of thin air before the serious inflation kicks in? It looks like it will only take a few more punches before this republic hits the canvas.
Unfortunately a mass collapse of the banking system will hurt everyone. It will hurt the man and woman in the street a lot more than it will hurt the boards of directors of the banks concerned.
Those of us in Europe should not be too smug about the troubles in the US because the possible effects could affect us a lot more and a lot worse than it will affect the US. The largest banks in Europe have liabilities bigger than the economies of the states in which they are headquartered. If the bail out in the US fails, our continent will be the one to suffer most because we won’t have a bail out.
Blogging generally poor here. Peston is a very good, but I find the best place to read up on this is the US Economic Blogosphere even though it can get wonkish and fly over your head. I’ll tilt left here, but both Left and Right are in general displeased with the Paulson Plan.
Briefly, have a read at Paul Krugman http://krugman.blogs.nytimes.com/
(note
http://krugman.blogs.nytimes.com/2008/09/21/thinking-the-bailout-through/)
Economists view http://economistsview.typepad.com/economistsview/
Calculated Risk http://calculatedrisk.blogspot.com/
The last one has very very handy links to the top stories on many, many other economics blogs.
I don’t pretend to understand everything that is going on in US banks and markets, but it seems to me that if Congress had paid more attention to what Bush and McCain have been suggesting over the past couple of years, particularly in relation to Freddie and Fannie whose demise has precipitated the crisis, the US economy might not be in the mess it is today.
McCain’s unheeded warning
Bush’s unheeded warnings
What Paulson is proposing is nothing less than a ‘corporate takeover’ of American democracy. By bailing out the Wall St thieves and their supporters the USA would effectively become a Fascist State -i.e rule by a corporate oligarchy
Let’s hope that Democrats do not allow themselves to be panicked into a ‘financial ‘ version of the Iraq war .
Mc Cain has already ‘panicked’ . And why would’nt he . He’s up to his neck after 20 years of pushing for ever more deregulation . To see Bush making his pathethic plea for the State to bail out the failed investment oligarchs should be a lesson to all those who still hold on the ‘idiocy’ that the ‘unregulated market ‘ knows best .
I think Bush was very magnanimous in his speech last night. He could have stuck it to the Dem-controlled Congress and said, “I told the idiots, but they wouldn’t listen!” But, of course, he is the president, he is much bigger than that.
I doubt if the Dems will reciprocate the magnanimity.
The New York Times ran an article on proposed reforms to Fannie Mae and Freddy Mac:
The Bush administration today (that is: in 2003) recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The Dem response?
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,’‘ said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
What is amazing is that, now, Barney Frank is commenting on the crisis on US television talk shows without ever being reminded of his own prominent role as one of the causes.
But if you really want to get to the root cause of the problem, this guy has it all sussed!
Looks like even Mr Clinton thinks it’s a Dem-created problem: http://patriotroom.com/?p=2402
This crisis was not produced by Fannie and Freddie. Though tighter regulation might have helped.
http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=2&oref=slogin&oref=login
http://krugman.blogs.nytimes.com/2008/07/14/innocent-bystanders/
http://krugman.blogs.nytimes.com/2008/07/16/why-fannie-and-freddie-got-so-big/
http://krugman.blogs.nytimes.com/2008/07/14/fanniefreddie-further-follies/
Fred,
You come on to Slugger and you insult everyone (Blogging generally poor here), and then you expect us to pay attention to you!
You seem to be obssessed with the NYT. Do you not have access to any objective newspapers like the WSJ, for example?
You need to get out of your little cocoon and get a life!
Right said Fred, sixcount’em. Fannie and Freddie are a consequence and a part of the problem, but not the cause of it.
If you get a chance to read Ron Suskind in…wait for it…today’s New York TImes, he makes a strong case that Bush’s original Treasury Secretary Paul O’Neill (Bono’s bud) and Alan Greenspan tried hard to save the economy from itself in 2002 at the time of the Enron and Global Crossing meltdowns, only to be done in by weak leadership from Bush and the then head of the S.E.C., and titans of industry, “many of them large Republican contributors.”
No transparency, no accountability, and here we are. I don’t think the Democrats are blameless in all this, I don’t. But trying to fob it off as the fault of the Dems, or Fannie and Freddie, is for amateurs. As the Wall Street Journal editorialises today, “the political and financial classes created this mess.” The WSJ argues the bailout can work, if more transparency and openness is put into place. I’m very much still sifting through the details , but I’m glad even the Journal is pushing for more accountability.
http://online.wsj.com/article/SB122221388577369225.html
Read It And Weep
The no good socialist, dem bastards got the US into this, and are stealing and lying about it to the very end. Would that we could have an ‘education’ bailout. It would be nice to stop the flow of racist, entitled, indoctrinated, metrosexual, baby killing ‘graduates’, who can’t read, write, pay back loans, raise a child…..
‘When I and my wife, a legal alien, bought our house, the mortgage company told me that if my wife were an illegal alien, rather than legal, we would have qualified for certain loan programs with big banks. But because she was a legal alien waiting for her green-card (which she had recently applied for), we didn’t qualify.
Mark Krikorian, an activist against illegal immigration, argues that “we’re in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people, resulting in what Sailer months ago called the “Diversity Recession” (if this doesn’t work, make that the Diversity Depression). In other words, if poor people in general, or blacks or Hispanics in particular, were less likely to be approved for a mortgage, the only possible reason was racism or classism or whatever. Thus ‘creditworthiness’ was an illegitimate, dead-white-male concept, like middleclassness. Because, after all, isn’t everyone entitled to credit?”
Another strange lending practice also popped up when I purchased a home. I ultimately left my wife off the mortgage entirely, because I was told that since she had no credit history (despite being thrifty and having savings and no debts), putting her on the mortgage would actually get us a worse, higher interest rate than if I alone applied (I received a rate of 5%, a low rate by historical standards).
Why on Earth were we treated as worse off if my wife co-signed the loan, which makes no sense economically? It’s not like having her on the loan would have made me any poorer or less able to pay.
People I’ve talked to have theorized that it is a byproduct of two things: (a) discrimination lawsuits, and (b) courts’ indulgence towards junk science.
If the bank gave loans to white people like my wife with no credit, or bad credit, the bank would later look bad if was sued for discrimination, even if it was innocent. If a “fair-housing” group later sued the bank accusing it of discrimination, supported by a misleading “regression analysis” of the bank’s lending decisions, the bank could end up having to explain, at great expense, why it loaned money to my wife, but not to many minority borrowers who also had no credit or bad credit (never mind that my wife would have had a co-signor with good credit — me).’
How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
This is all factual, verifiable TRUTH. Evidence of behavior that cased the problem…
Now, call me whatever you like, but you can’t call me a liar…. The truth seems to get you socialists off your feed and then you start with the long winded useful idiot rants of inuendo and ‘everybody knows’, ‘billions of scientists agree’, blah, blah, effin’ blah. No wonder the eeeeeeeeeyuuuuuuuuuu sucks the big one, you assholes can’t put a factual thought together if your lives depended on it. And when your lives depend on it, you whine to the US….effin wankers.
The evidence is legion.. Not that factual evidence means anything to USA hating, socialist losers..
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
THE DEAL IS DONE.
CNN, etc., for details
Intersting take on the whole affair in WSJ, will the US treasury make a killing on the deal?
http://online.wsj.com/article/SB122230704116773989.html?mod=rss_opinion_main
The New York Times seems to have more detail than the Beeb or CNN on the deal, but that’s not much
http://www.nytimes.com/2008/09/26/business/26bush.html?_r=1&hp;&oref;=slogin
Anyway folks while we wait to hear the detail what is John ‘panic ‘ McCain going to do re his debate with Obama tomorrow evening .
Red faeces all round or will he pitch up suitably ‘tempered’ by his effort to appear Presidential while ending up looking like an arse hole ?
Bfb ,
Have you ever asked yourself why there are so many illegal immigrants in the USA and why there are so many patriotic ‘pro Republican Employers’ paying ‘low wages ‘ to these people . Have you noticed the ahem ‘immigration debate ‘ in this election ? Thought so
Has it ever dawned on your thicko skull that a combination of weak American trade unions plus millions of illegal immigrants equals middle and working americans getting it in the neck .
What middle and lower income Americans are now getting from Wall St and it’s casino style gangsters is just a lot mof extra pain piled on their necks
You come on to Slugger and you insult everyone (Blogging generally poor here), and then you expect us to pay attention to you!
Sorry, but there is a lot of good stuff out there, on sites more geared to this sort of thing. It isn’t here.
You seem to be obssessed with the NYT. Do you not have access to any objective newspapers like the WSJ, for example?
I pulled out Paul Krugman’s threads because he’d followed the issue for a while and wanted to show a developing argument. I’ve browsed the WSJ on the issue, and find the argument less persuasive. Here’s another good post with graphs, that doesn’t totally exonerate the GSEs:
http://www.econbrowser.com/archives/2008/07/did_fannie_and.html
Note the 2003 line in the graphs, and how they correspond. Fannie and Freddie more than likely had some role in this, and could certainly have been an accelerate that encouraged a boom that was amplified by private investors. There is a potentially interesting debate on that, but all you and Bfb are interested in somehow pinning it on liberals, “socialists” and pinkos and pursuing an ideological agenda.
This is a crisis with many causes, which is why it’s super nasty. The Bush Administration allowed exemptions that vastly increased the amount of leverage these types of institutions were allowed from ~1:12 to 1:30. Lehman bust at 1:30.
http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html
Regulation was either lax or misguided, and the governing ideology against it – on both sides of the aisle.
http://www.cnn.com/ALLPOLITICS/stories/1999/11/12/banking.reform/index.html (though should add – bill was veto proof, to be fair)
New financial instruments destroyed transparency and allowed hubris.
http://news.bbc.co.uk/2/hi/business/2817995.stm
http://www.ft.com/cms/s/0/547fe852-24da-11dc-bf47-000b5df10621.html?nclick_check=1
Loose monetary policy to ease the last recession helped inflate asset prices.
http://www.theatlantic.com/doc/200602u/nj_crook_2006-02-14
Other, older problems (and citing Clinton or Carter Administration moves on the GSE are old. (see above)
As so often with these things, measures that were meant to reduce risk wound up amplifying it.
http://www.financialsense.com/editorials/engdahl/2008/0606.html
Of course, there was also just greed. And the old favourites this time it’s different / worsts over.
http://calculatedrisk.blogspot.com/2006/10/greenspan-worst-may-be-over-for.html
http://www.marketoracle.co.uk/Article5047.html
That’s just some links that tie with the things I’ve read over the last 3 months: about 15 minute sin Google. Some fundamental rethinking is needed in governing philosophy, how we approach markets, and how we approach regulation. But no wait! It’s always the Liberals fault! Four legs bad, two legs good! Bleeeet! Baaahhh!
And I need out of my cocoon?
Anyone who criticises Wall Street for being greedy really doesn’t get it, do they?
Good link, 6countyprod:
“I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” – John McCain, sponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, speaking in 2005
How right he was – shame Obama preferred to pocket a $105,000 contribution from Freddie Mac and Fannie Mae rather than put the interests of ordinary house owners and America first by supporting McCain’s bill to reform Freddie Mac and Fannie Mae.
Dave
Thems some super ideological filters, there.
I agree. It’s odd folks can’t admit that McCain accurately predicted the effect that government-sponsored entities such as Fannie Mae and Freddie Mac would have on the American economy and the taxpayers if they were not reformed and that he acted to reform them, attempting to avert the threats, whereas tossers like Obama were bribed to keep their little traps shut, isn’t it?
“If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” – John McCain, 2005
Worth repeating that.
I agree. It’s odd folks can’t admit that McCain accurately predicted the effect that government-sponsored entities
Well, there’s lie number one. They weren’t government-sponsored.
They are now, of course. But why are the Democrats being blamed ? At the time, Republicans controlled Congress as well as the White House.
such as Fannie Mae and Freddie Mac would have on the American economy
Run it past me once more, for the slow coaches. These two institutions are responsible for the sub-prime lending ? The private sector banks had nothing to do with it ? The investment banks who bought into those securities are blameless ?
Try this one. Warren Buffet 2003 on derivatives:
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
…
In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
I heard some Zen Buddhists use it as the path to the Englightment. Except, no wait a minute, it’d be fucking stupid to pin everything on one thing. Hang on – I said that before didn’t I? Holy motherfucking shit it’s right up there above me!
****Bzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzt!***
…Sorry forgot the right wing talking points are beamed directly in, overwhelming everything else. I mean, the drool I could live with, but the wet pants I could never handle. But anyway, you’re right. I wouldn’t blame a tape recorder, I shouldn’t really blame you either. Carry on.
I wonder how BfB can love his country so much when he has this vituperative hate of half of the citizens who live in it. I don’t agree with Republicans, but when I was in the USA a few weeks ago I met several of them, and they were all decent people. Misguided, in my opinion, but fundamentally not bad people.
I wonder why bfb spends so much time trying to convince us to vote republican when so few hear have voting rights in the new knighted states of amurica
and why a 6 county works as a sock puppet
He’s probably trolled all the American boards to death. I enjoy his posts, they’re good entertainment. Osama Bin Bob.
I can’t get over the audacity of it. Not even Gordon Brown is trying to blame the Conservatives for the current problem. Yet, apparently, this is the fault of the “socialists” and “Democrats”, who have not been in power for 12 years.
Nope, it’s just cheap credit, courtesy of that legal pyramid scheme we all call the residential property market. Nobody wanted to fix it when it was running hot, because to do so would have meant taking the blame for a smaller version of the recession we’re now likely to hit.
What’s weird is the way in the UK we’re seeing everyone gang up on the city bonuses. As if city bonuses are responsible for banks stretching and stretching and stretching their loan criteria without once being told to keep a lid on it by the authorities.
CS
What’s weird is the way in the UK we’re seeing everyone gang up on the city bonuses. As if city bonuses are responsible for banks stretching and stretching and stretching their loan criteria without once being told to keep a lid on it by the authorities.
Systemic risks. Who closed the deals? Why did they close them? The incentives were skewed to short term profit. You could lay it at lax regulation by the government, but I’d personally place the blame for that with poor management.
I’s a multiheaded hydra of a crisis. All these issues should be up for assessment.
kenseis,
I stand corrected!
Thanks for all the links. Wish I had the time to read them all.
‘I instead prefer to recognise that throughout human history in all politically complex human societies in which people encounter other individuals with whom they have no ties of family or clan relationships , government regulation has arisen precisely because it was found to be necessary for the enforcement of moral principles . Invocation of moral principles is a necessary first step for eliciting virtuous behaviour , but that alone is not a sufficient step .
To me, the conclusion that the public has the ultimate responsibility for the behaviour of even the biggest businesses is empowering and hopeful . My conclusion is not a moralistic one about who is right or wrong , admirable or selfish . My conclusion is instead a prediction , based on what I have seen happening in the past . Businesses have changed when the public came to expect and require different behaviour, and to make things difficult for businesses practicing behaviours that the public did’nt want . I predict that in the future just as in the past changes in public attitudes will be essential for changes in businesses environmental practices ‘
Excerpt from ‘Collapse ‘ Jared Diamond pp 484-485 .
Although Diamond was referring above to the environmental practices of oil, and mining and other natural resource extractive industries what he says just as easily applies to the Wall St mega thieves as they have been ‘outed’ over the past few weeks ? months / years ?.
“I agree. It’s odd folks can’t admit that McCain accurately predicted the effect that government-sponsored entities” – Dave
“Well, there’s lie number one. They weren’t government-sponsored.” – Comrade Stalin
That’s quite funny. You obviously haven’t a clue what GSE means. It means “Government Sponsored Entity.” Both Fannie Mae and Freddie Mac are government-sponsored entities. Please acquint yourself with basic facts before you post again.
As McCain explains it: “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.”
Again, he was absolutely correct. He showed foresight and geuine concern for those who would become the victims of these government-sponsored entities (the US taxpayers) whereas the Democrats were merely concerned with taking bribes from them while using them to promote a left agenda aimed at giving pooper voter access to ready credit (irrespective of whether or not they could afford it or would repay it).
Daniel Hannan hits quite a few nails on their heads with one neat blow in his Telegragh Blog a few days ago:
“The Left is rampant now, claiming that capitalism has collapsed under the weight of its own contradictions. In fact, what we have seen is the failure of state intervention. Interest rates were kept too low for too long, in Europe, Japan and the US. That was a political decision, not a market one. As recently as this year, Congress had been pushing Fannie and Freddie to assume greater liabilities. Maybe Ambrose is right that the state now has a duty to rescue its own victims. But, if too much government was the problem, how can more government be the solution?”
That neatly sums it up. GSEs such as Fannie Mae and Freddie Mac show the folly of state intervention in the free market, forcing private enterprise to substitute a political agenda for a profit agenda. Likewise, the government regulatory authority, the Federal Reserve, set interests rates at ridiculously low rates in order to promote subprime loans and niche credit programs for immigrants and widespread uptake of credit among poor people, encouraging the banks to use credit-scoring formulas that it approved to justify lending money to these high risk groups. That was a political agenda, pure and simple.
Just The Facts Ma’am
‘Now, at a cost of hundreds of billions of dollars, middle-class taxpayers are going to be forced to bail out the Democrats’ two most important constituent groups: rich Wall Street bankers and welfare recipients.
Political correctness had already ruined education, sports, science and entertainment. But it took a Democratic president with a Democratic congress for political correctness to wreck the financial industry.’
How much of the 5 trillion dollars worth of mortgage debt that has landed on the backs of US taxpayers via Fannie Mae and Freddie Mac is recoverable? Probably less than a third. Given that the Federal Reserve’s expansionary policy of using ultra-low interest rates to stimulate economic growth caused rapid house price inflation, coupled with its proffering of badly flawed credit-scoring models to lenders that had a political agenda of promoting credit to low-income groups, and given that GSEs, Fannie Mae and Freddie Mac absorbed the mortgage debt from the lenders allowing the lenders to borrow more and lend more, the whole shebang comes down to inept government intervention in the free market. When defaults and foreclosures began to rise and property values began to fall, the reality hit home that Americans had borrowed vast sums of this cheap credit proffered by government and converted into assets that were now worth considerably less than the sums they borrowed. Effectively, the government bankrupted its own country.
The problem of the affordability of housing for lower income groups is never solved by lowering interest rates or lowering standards of credit worthiness. Lower interests rates causes house price inflation, making housing less affordable for lower income groups – which led to the Federal Reserve trying to fix the problem it created by lunatic means of encouraging lenders to adopt new models of lending that allow lower income groups to borrow more money to pay the higher property prices caused by the lower interest rates, thereby leaving lower income groups fatally exposed to the risk of foreclosure and the lenders fatally exposed to the risk of bad debt when rates began their inevitable assent and when the reality of servicing a $500,000 mortgage on a $25,000 salary hit home.
The chairman of the Federal Reserve, Alan Greenspan, instructed the lenders to take “advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers” and to continue proffering “a multitude of new products, such as subprime loans and niche credit programs for immigrants.” This is what the chairman of the Federal Reserve had to say in 2005:
“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.
For some consumers, however, this reliance on technology has been disconcerting. Credit-scoring models are complex algorithms designed to predict risk. Consumer advocates have raised concerns about the transparency and completeness of the information fit to the algorithm, as well as the rigidity of the types of data used to render credit decisions. Consumer advocates contend that the lack of flexibility in the models can result in the exclusion of some consumers, such as those with little or no credit history, or misrepresentation of the risk that they pose.
To address these concerns, some firms have worked to customize credit-scoring systems to include new data and to revalue the weight of the variables employed. Also, new organizations have emerged, developing new systems for collecting alternative data, such as rent payments and other recurring payments that will enable creditors to evaluate creditworthiness of consumers who lack experience with credit.
Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits.”
[b]Continued[/b]
That is pure socialism. The man had clearly taken leave of his senses, proffering a political agenda in place of ensuring that the markets were properly monitored according to free market principles (not a paradox
) and that money was only loaned to those who could afford to repay it at rates which allowed the lenders to make a profit on the transaction and did not allow for assets to be proffered as security that were subject to rapid inflation and rapid deflation, leading to bankruptcy for both parties to the transaction.
If the banks had to assume responsibility for risks for the mortgages that they sold rather than being in a position to pass than risk on to the GSEs, then the market would not have reacted to that distortion of it by the government by selling mortgages to those who could not repay them – no matter what amount of socialist bullshit the Federal Reserve proffered. The free market was distorted by state intervention and now the state is left with the consequences of that intervention. Let the lender assume the risk, and he won’t lend money so heedlessly – and the free market will work as it is intended to. That’s the simple reality of it.
Good round up by The Economist:
http://www.economist.com/opinion/displaystory.cfm?story_id=12305746
‘Let the lender assume the risk, and he won’t lend money so heedlessly – and the free market will work as it is intended to. That’s the simple reality of it.’
Well that would be the simple reality if it were not for the ‘fact of life’ that we live in a political world . Unfortunately for the followers of Libertas and their ‘free market ‘ followers the political world we live is based on democratic principles and not just on ‘financial ‘ principles .
The ‘reason’ governments in the western world became involved with ‘housing ‘ in the first instance was because of the failure of the ‘market’ to provide housing at a price or rent that a majority of the population could afford. For the same reason Government became involved with education and health care provision .
Left to it’s own devices the ‘free market’ unregulated would deliver totalitarian states of either the left or the right . When the ‘market’ collapsed in 1929 Germany we saw the rise of Nazism as the German middle class lost it’s savings and retirement funds .
When the Berlin wall came down in 1989 people all over the world were ‘delighted’ to see the end of communism . What they did not see was how an ‘unregulated ‘ free market in Russia quickly degenerated into the overnight growth of the biggest criminal mafia that have ever walked the earth . While ordinary Russians starved or saw their pensions eaten by hyper inflation the Russia’s Wall St gangsters looted the country .
The difference between the Russian gangsters and their Wall St cousins is just a matter of degree . The only force capable of preventing a ‘descent ‘ to Russian levels of gangsterism in the USA, is the USA’s 230 year democratic tradition .
Capitalism has not collapsed even if some on the left wish it had .
What has collapsed is the neo con policies of the extreme right over the past 30 years which have naively believed that a deregulated financial market would ‘behave itself’ and would not loot the American people out of their pension or retirement funds or their social security or whatever ‘safety net ‘ provisions still remain extant under the ‘red claw ‘ capitalism so beloved of Mr Bush’s ‘compassionate ‘ conservatives . Britons will remember a certain Robert Maxwell -Mrs Thatcher’s hero of the ‘free market ‘ as he looted his British employee’s pension funds while simultaneously attempting to concoct deals with the emergent ‘mafiosi ‘ of eastern europe .
Ironically Mr Bush/ Paulson’s ‘bail out’ is faced with major opposition from the Republicans. The Democrats won’t support it unless the Republicans row in ? Yesterday’s much hyped ‘deal’ is so ‘yesterday ‘ .
So here at the end days of this discredited administration the American people are now faced with the spectacle of a Republican President having to depend on Democratic support to pass a ‘bail out ‘ package which will ‘save’ the USA form another Great Depression .
And as if that is not enough comedy ? tragicomedy we have the Republican Presidential Contender scrapping his campaign in a political stunt and flying to Washington to say absolutely ‘nothing ‘ ?
Meanwhile in the real world JP Morgan has bought out Washington Mutual as that bank faced imminent collapse due to a massive deterioration in it’s ‘credit rating’ . Had Washington Mutual been allowed to fail it would have been the biggest bank collapse in US history and the FDIC ‘fund’ i.e guarantee up to 100,000 dollars to those who keep their money in American banks would have been emptied .
So Warren Buffet ‘bails out ‘ Goldman Sachs and JP Morgan ‘bails out ‘ Washington Mutual and the FDIC ?
But will the Republicans in Congress and the Senate ‘bail out ‘ Mr Bush and Mr Paulson and now Mr McCain ?
Senator McCain can’t be too happy with these events as they are sending any remaining hope of winning the Presidency into the bin.
That is pure socialism.
The promotion of personal debt and private property ownership is not “pure socialism” to anybody but yourself Dave.
Kos of all people is backing the House Republicans stance:
http://www.dailykos.com/story/2008/9/26/1495/89691/285/610950
So now we hear Mr Paulson has been down on one knee to persuade the Democrats to support the bail out ? But hang on a minute it’s now the Republcans who are opposing the bail out . Mr Bush’s party are revolting
and also revolting against Mr Bush . That which being but taught has returned to plague the teacher . Could Republicans being playing to the gallery of public fears and lack of credibility in Wall St in the hope that this could be a way to ‘win ‘ or as Kos says snatch ‘victory’ from the jaws of defeat .
Looks like we’re into the who gets the ‘reward’ for driving the American economy into the next Great Depression and all in the middle of a Presidential election ?
Fascinating -scary -intimidating this show beats ‘reality tv ‘ by a million light years.
Meanwhile tonight’s much awaited debate recedes into the distance as Washington Mutual goes under .
Let’s face it folks this is as good /bad as it gets for political and economic junkies worldwide .
Whatever next ?
Ahah
Queenie is using the present crisis to sneak in a demand for a pay rise to keep the Saxe Coburgs in the style to which they are accustomed . Is she losing her ‘touch’ or is she touching for too much ?
Perhaps the French and Russians were right after all in removing their aristocratic sycophants /parasites on the public purse !
Yeah, so maybe it is time to start bricking it:
Discount window borrowing at record:
http://acrossthecurve.com/?p=1710
Interbank rates through the roof:
http://ftalphaville.ft.com/blog/2008/09/25/16327/what-price-risk/
Even pros terrified:
http://blogs.cfr.org/setser/2008/09/25/just-how-bad-is-it/
Oh, and a more on the GSEs role:
http://economistsview.typepad.com/economistsview/2008/09/once-again-it-w.html
Sit down folks, it’s time for:
The Ant and the Grasshopper
In a meadow on a hot summer’s day, a Grasshopper was chirping and carousing his time away. He watched scornfully as an Ant nearby struggled to store up large kernels of food and build a secure nest. The Ant pulled overtime shifts to pay off his loans and accumulate retirement funds for the future.
“Give it a rest,” the Grasshopper said. “Why bother saving and slaving and toiling and moiling? Let’s party!” The Ant demurred: “I am planning ahead for winter, and you should do the same.”
The Grasshopper blew off the Ant, squandered his supplies the rest of the season and abandoned his home while on vacation (paid for by tapping every last cent of his home equity gain) instead of holding down a job.
When winter came, the Grasshopper’s pantry was empty, and his shelter ruined from neglect. The Ant, weary from planting, harvesting, and stocking up for months, was dining comfortably in his nest.
Click here for the rest of the story…
Sit down 6 county prod -it’s time to see how much the Ants of Wall St ‘struggled ‘ these past few years
‘ Wall Street’s five biggest firms paid more than $3 billion in the last five years to their top executives, while they presided over the packaging and sale of loans that helped bring down the investment-banking system.
Merrill Lynch & Co., once the largest U.S. brokerage, paid its chief executives the most, with Stanley O’Neal taking in $172 million from 2003 to 2007 and John Thain $86 million after a month’s work last year. The company agreed to be acquired by Bank of America Corp. for about $50 billion on Sept. 15. Bear Stearns Cos.’s James “Jimmy” Cayne made $161 million before the company collapsed and was sold to JPMorgan Chase & Co. in June.
Democrats and Republicans in Congress are demanding that limits be placed on executive pay as part of the $700 billion financial rescue plan proposed by U.S. Treasury Secretary Henry Paulson. Paulson the former Goldman Sachs Group Inc. CEO, who received about $111 million between 2003 and 2006, said in testimony to Congress on Sept. 24 that he would accept such limits as part of the plan, after initially opposing them.
“Shareholders and boards should have done something about this a long time ago,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark. “They justified these levels of pay on the idea that they’re all geniuses. I think that balloon has burst.”
Note – above numbers from bloomberg.com
There’s another story out there about the ‘genius’s of Wall St.
Once upon a time a genius was appointed CEO of a Wall St Investment Bank . Being seen as a ‘genius ‘ was very important for him as it helped him not to have to answer board of directors or shareholders and allowed him to draw up his own remuneration and bonus plan . One of his important duties was however to hire his potential replacement . Thus it became necessary (for his own self esteem and longevity at the top of the pinnacle) to hire a lesser genius than himself .
And so it came to pass that when the time came for him to step down his replacement in turn had to find his own replacement -again a man or woman of lesser ‘genius ‘ who would take over the reins in due course . And thus it came to pass over a period of a generation that the top echelons of Wall St investment ‘banking ‘ became over populated with lesser ‘geniuses ‘ in a kind of reverse evolutionary process that rewarded those of lesser genius by allowing them to succeed to the top job . The steep drop in standards of intellectual rigour was alas accompanied by an even steeper drop in morals and a pronounced tendency to emulate the behaviour of the late shark eaten Robert Maxwell supreme icon of Thatcherism and looter of his employee’s pension fund.
black_kensei ,
‘Even pros terrified:’
No need to be . When all else fails they can always invest their ‘retirement funds ‘ in the Czech ‘Koruna ‘ the Polish ‘zloty’ or the Hungarian ‘forint ‘
Forget the dollar , and the euro , or the bar of gold . Go east .
‘The Czech koruna is the best-performing emerging-market currency in the past 12 months, gaining 13 percent against the euro and 16.4 percent against the dollar. The zloty has advanced 13.2 percent against the euro, and the Hungarian forint is up 4.6 percent’
ex bloomberg.com
Dave,
If Fannie Mae and Freddie Mac are responsible for the failure of banks in the USA through their evil socialist lending policies, then why are banks failing in the UK, where we have no equivalent to those two institutions ?
Incidentally, the idea of making the housing market more accessible to poor people, and hence making them become part of the property-owning class, is pure Thatcherism. Last time I checked, Thatcher wasn’t a socialist.
city_slicker_kensei:
Systemic risks. Who closed the deals? Why did they close them? The incentives were skewed to short term profit. You could lay it at lax regulation by the government, but I’d personally place the blame for that with poor management.
I’m probably being ignorant here, but at the end of the day I don’t see what risky “deals” have got to do with it. The banks are in trouble because there is a lack of confidence in the collateral behind their mortgage loan books. This has arisen due to a concern that the banks overvalued that collateral to begin with. Where do bonuses for city traders come into it ? It’s banks being insufficiently strict with lending. The banks which have operated stricter lending policies are coming out clean as a whistle. I’d happily stand corrected on what I am evidently missing from the picture.
My impression is that the government is going after the City because they’re an easy target. Demonizing those who run the Square Mile is a sure-fire way to do damage to the UK’s long term standing as a financial centre.
CS
>I’m probably being ignorant here, but at the end of the day I don’t see what risky “deals” have got to do with it. The banks are in trouble because there is a lack of confidence in the collateral behind their mortgage loan books. This has arisen due to a concern that the banks overvalued that collateral to begin with. Where do bonuses for city traders come into it ? It’s banks being insufficiently strict with lending. The banks which have operated stricter lending policies are coming out clean as a whistle. I’d happily stand corrected on what I am evidently missing from the picture.
Correct. You’ve missed most of the story. If the problem was solely that of bad mortgage assets, then the problem would be an order of magnitude smaller. The problem is what happened to those mortgages once they were accepted. They were packaged up as CDOs. A very brief explanation:
http://www.portfolio.com/interactive-features/2007/12/cdo
Ultimately these derivatives were traded. While things were booming, they yielded high profits. High profits mean big bonuses for traders, so they are incentivised to pursue them. The bonus structure only cares about the short term, so traders were not incentivised to pay heed to long term risks.
This was by no means the only problem — the rating agencies were not sufficiently independent and got things wrong; risks were hedged with Credit Default Swaps (CDS) that ultimately magnified risk and on and on. But bonus culture played its own wee part.
NB – This is a horrible explanation, and I encourage to read people that know what they are on about.
‘They were packaged up as CDOs.’
For a good read and fuller explanation of how this Wall St sub prime monster came about – ‘Bad Money ‘ By Kevin Phillips is an excellent read .
derivative_kensei:
I appreciate your patience in explaining the problem. I agree that the bonus culture played a part. My issue is that currently it’s taking the brunt of the blame in the UK. I think the fact that the risks of the mortgages behind the CDOs were understated is the real problem.
To me the fix does seem to be quite simple, ban banks from selling or repackaging their mortgage books, except in defined difficult financial scenarios.
CS
You have to remember that in the UK while there are some dodgy UK loan books, “subprime” is an American phenomenon. I don’t believe its considered that even the UK got that bad. The European banks are in trouble largely because they bought a shed load of these assets. Bonus culture is a part of that, and I justified point of anger along with CEO pay, I feel.
On the second point, I think that we have to be careful of throwing the baby out with the bath water. Banning all repackaging sounds too extreme. It may be sufficient to force the banks to keep part of the assets, and keep skin in the game. It’s unlikely that disaster will follow this route in future in any case. They’ll find a new way to screw things up.
Breathing taking graph, this one:
http://1.bp.blogspot.com/_8rpY5fQK-UQ/SNhMHX0B3qI/AAAAAAAAESg/xFVqsX1YeX8/s1600-h/Market-Cap.png
The following link clearly lays out the contribution of House Republicans to the final settlement which seems to have ‘satisfied’ most conservatives, and got them on board.
http://www.powerlineblog.com/archives/2007/03/016753.php