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More on Bear Stearns
Posted by: Dale Franks on Monday, March 17, 2008

Libby Spencer is blaming the Bush Administration for the current liquidity crisis.

In between my alternate bouts of vicodin-inspired sleep and horrific mouth pain—like the one I'm in now—I've been playing around in the comments section there.

You may want to stop over and participate as well.

In any case, there's an abstract of the comment activity below the fold.

After all this hectic cutting and pasting, I can feel the vicodin creeping up on me, again, so it's time for another little nap. I'll try to check back in later, after my dentist appointment later today.
(My comments are in plain text, while that of others is blockquoted—EDF)
I've been predicting the Bushenomic house of cards was going to crash for at least three years now. Of course no one listens to me. I'm not a well credentialed policy wonk. I'm just a cranky old lady who has has an unimpeded view of the street from here in my bargain basement. Unfortunately it turned out I had clearer sightline than those so safely ensconced in their ivory towers.
Huh. And this has what, exactly to do with "Bushenomics"?

I remember president Bush pushing through some tax cuts. But, oddly enough, I don't remember him setting up structural credit problems in the housing market, leading to problems in housing price declines, and increased foreclosures.

You know, sometimes—just very occasionally—the economy does things that really have nothing at all to do with what the president does.

I know. I was just shocked when I learned that. I think I was in the tenth grade at the time.
Mr. Franks, successive conservative governments starting with Reagan have demonstrated an antipathy towards any kind of government regulation, and this antipathy is based more on ideology than sound economic policy.

The savings and loan crisis during the Reagan years, for example. Deregulating the S&Ls started a speculative bubble resulting in a total collapse ... and a $600+ billion bailout borne by American taxpayers. Reagan lobbied for the total repeal of the Glass-Steagal Act.

With respect to structural credit issues, the Bush administration, like all conservatives before him, categorically rejected any/all attempts reign in predatory lending. Funny how conservative now blame borrowers but make a bucket of excuses for lenders.

Bear Stearns is an investment bank. Always has been. So, even if Glass-Steagal hadn't been repealed—a repeal signed into law by ultra-conservative president Bill Clinton in 1999—it would have nod no effect whatsoever on the current problem.

Indeed, as far as regulation goes, the majority of the subprime loans originated from firms that are not, and never have been, subject to Federal regulatory scrutiny. In 2005, 52% of subprime mortgages were issued by firms who are not subject to any federal regulation at all. Another 25% were issued by firms with only an indirect regulatory relationship with the fed. As Fed Governor Susan Bies said, "What is really frustrating about this is [federal regulators] don't have enforcement authority to do anything with these state-licensed, stand-alone mortgage lenders."

You see, those mortgage brokers are regulated by the states. Not the Federal government.

So, it doesn't matter who the "presidential appointees" are, or what the federal regulatory environment is, when that regulatory environment doesn't apply to the mortgage brokerage.

In addition, "invention of convoluted investment instruments" simply wasn't covered by the regulations either, since no regulatory scheme can cover entirely new innovations that pop up in the derivatives market, and weren't even envisioned when the regulations were promulgated.

Moreover, many of the problems that are clear now, were simply masked by rising home prices. For instance, the FDIC—while not perfect—does tend to jump in when consumers complains about predatory lending. The trouble in this case was one was complaining because as long as the homeowner had an asset whose value was appreciating, they could always sell the house, make a ton of money on the sale, and clear the mortgage. Once housing values started to decline...well, it was too late to look into the problem.

Moreover, if you're gonna require that much tougher regulation be imposed for loan standards, well, that's fine, but then no fair coming along later and complaining that low-income families can't get a mortgage, because you've implemented a regulatory regime that in effect dries up their access to credit.

It seems to me that the problem isn't that Bush is my guy, but rather that he's so not your guy that you are straining to blame Bush for things that he literally has very little to do with.

The president really isn't some economic czar, who can benevolently guide the economy by fiat. say that Bush and those he put in charge of the show had little to no effect sounds more like denial than neutral analysis to me.
Well, again, mortgage brokers aren't federally regulated. If you want to make the argument that this still points to some Bush policy or other, then, good luck with that.
After eight years, I think we can safely attribute some responsibility to his policies.
OK. Then make that argument. Which policies specifically? What were their effects? You've tossed about generalities that I'm just supposed to accept.

Connect the dots.

In the real world, this appears to me to have been a case where rising home prices provided 1) an incentive for both mortgage lenders to aggressively seek out customers, thinking that even in case of default they could get a foreclosure price later on that was higher than the loan value, and 2) an incentive for consumers to get unaffordable loans thinking they could bail out and sell the house for a profit if they couldn't swing the payments.

I don't have to call up the specter of the government bogeyman to, either. I just point out that people respond to incentives.
And as long as you're educating me, perhaps you could explain why the feds should be bailing out a non-banking institution like Bear with our money.
Well, since this is not a taxpayer-funded bailout, the whole premise of your question is incorrect. The actual money is coming from JPMorgan Chase. The Fed is guaranteeing JPMC's loans for 28 days, but none of the actual money is coming from taxpayer dollars, and won't unless for some odd reason, JPMC becomes insolvent, and guarantees are invoked.

In general, I don't believe in corporate welfare at all, so I don't really have anything to explain to you.

On the other hand, I don't think you can really sit by while BS folds overnight, unless you're willing to risk a domino effect that just blasts every investment bank in the country.

Moreover, BS doesn't just do stock market investment accounts. It provides lines of credit to an enormous number of businesses, without which, their businesses come grounding to a halt.

Are you seriously arguing that the government should stand by and do nothing while the country is plunged into a 2nd Great Depression through a combination of loss of confidence in investment banks, in addition to seriously adding to the unavailability of operating credit for business?

Really? Are you sure you've thought this through

As it happens, the government in this case prevented the overnight collapse of BS, by guaranteeing the temporary credit that JPMC extended. That keeps BS afloat with JPMC's money—NOT the taxpayers—or at least, it will until JPMC completes it's $2 a share purchase of BS.

Again, I don't hold any brief for the Bush Administration. I've spent the last seven years criticizing the Administrations fiscal and economic policies.

But, in the main, what happened over the last fifteen years would've happened anyway, no matter who was president.

Let's not forget that this inflation of home values started during the Clinton Administration. it wasn't Bill's fault either.

The plain and simple fact is that Federal regulation just doesn't apply to, or applies only indirectly to, the mortgage industry.

But, again, if you can connect the dots with specifics, then be my guest.
Oh, really? Are you suggesting that Fed rates following 9/11 had nothing to do with the current crisis? When mortgage interest rates tumbled to a level not seen since the 1950s? How can you possibly think the latest bubble is no different from all other bubbles? As if REGRESSIVE tax policies played no aprt? As if stagnant wages for the middle class played no part? As if there were no sovereign debt crisis on top of massive budget deficits? Yet, the President continues to assert that economic fundamentals are sound. What fundamentals?
OH, so you want to go back to 2001, do you? OK. Why don't we go back even further, to 2000.

That was the year, you may remember, when the dotcom bubble exploded, and the S&P began the slide that led to the loss of 40% of it's value.

On top of that, the 9/11 attacks subtracted billions of lost GDP for the year. At that time, the very real worry was that we were going into a cycle of deflation where losses in stock asset prices would lead to a general decline in asset prices in general.

What, precisely, would you have had the Fed do? Increase interest rates and bring on an even deeper recession by removing cash from the economy at the very time the economy was already struggling?

Let's not forget that prior to this, as far back as 1999, The Economist had noted, in a cover article, that it as only rising housing prices that was keeping the economies in much of the developed world afloat.

Now, your argument seems to be that, rather than responding to the deflationary fears of 8 years ago, what the fed should have done was predicted that 8 years down the road, the fed should have known the problem of a housing bubble would appear, and they should've been fighting that problem, rather than the one they were faced with at the time.

That is simply nonsense on stilts. Once the "new economy" bubble collapsed, deflation was a serious worry, and remained so for several months. I wrote about that repeatedly at the time, in posts such as this one in 2002, where I wrote:

If you lower interest rates to try to head off deflation, then people borrow more than they should, and end up with too much debt to keep economic growth going. If you don't lower interest rates, however, you could force the economy into a deflationary path, causing a recession that might be even harder to recover from. All other things being equal, the better of those two choices is to lower interest rates, so you can head off a deflation and full-scale recession. That doesn't come without a price, though. In doing so, you ease credit, and put a lot of easy money on the market, which tends to have the effect of increasing debt loads. The ultimate effect of that is to allow consumers to postpone clearing their balance sheets, which means that their purchasing power is constrained. That may not lead to a recession, but it will mean that economic growth will be slowed to an anemic rate for years as consumers slowly pay off their pile of debt.

So, let's not pretend that a) no one knew what the options were at the time, and b) no one could predict the current situation we're in now.

The world is an imperfect place, and you deal with the options you have at the time, not the options you suspect you'll have a decade hence.

The rest of your comment is similarly uninformed.

Our regressive tax policies, for instance. According to the Congressional Budget office, the real effective tax rates, by income quintile are:

Bottom Quintile: -6.2%
Second Quintile: -0.9%
Middle Quintile: 3.0%
Fourth Quintile: 5.9%
Top Quintile: 13.9%

Bottom Quintile: 4.3%
Second Quintile: 9.9%
Middle Quintile: 14.1%
Fourth Quintile: 17.3%
Top Quintile: 25.2%

But then, perhaps I misunderstand by what you mean by "regressive", since you are apparently using a definition of which I am unaware.

Finally, lets talk about stagnating middle class incomes.

The income data we have comes from the Census Bureau. They track household income. So, when you look at households, income does appear to have stagnated per household.

The trouble is, the "household" keeps changing. In 1971, 71% of households were 2-parent households. In 2006, that had fallen to 51%. Meanwhile, the number of "housholds" that have one single person have increased from 17% to 27%. So, more than a quarter of "households" now have only one person. Overall, the average number of persons in a "household" has dropped by 18%, from 3.14 to 2.57 persons.

The latter figure alone implies that income in real terms has increased substantially.

Moreover, since 1971, real GDP has tripled. So, while the share of income going to the people in the lowest quintile has declined from 4.1% of of income to 3.4% The overall increase in income means that the lowest quintile have seen real rises in income of 36% over that period.

Time prevents me from addressing the rest of your comment, but I think you see where this is going, don't you?
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Previous Comments to this Post 

Get well soon, Dale!
Written By: Ralf Goergens
I love it, love it, love IT, when the economically illiterate get put in their place in a few paragraphs by someone that actually knows what they’re talking about. AND it was done while in great pain and/or on drugs. Brilliant. Just brilliant. Good grief Dale, what would you have done to those silly little humans had you been completely functional?

And I’ll second Ralf - get well soon!
Written By: Warrior Needs Food Badly
URL: http://
QandO guys, did y’all know that v!cod!n is a blacklisted term? I swear I’m not dealing it; I was just commenting on it! I swear!
Written By: Warrior Needs Food Badly
URL: http://
Very nice, Dale. Please keep posting on this.

I’m fascinated with all the presidential politics, but I suspect that the current financial story is as important if not more so. I just don’t know enough about this stuff.

Also, what should us small creatures scurrying around in the grass do, as the elephants (dinosaurs?) stomp the earth over our heads?
Written By: huxley
URL: http://
As a former Bear Stearns employee, I can tell you that George Bush had very little to do with the company’s downturn. He never held a gun to our heads when we bought up all of those derivatives and he wasn’t playing bridge while the mortgages became worthless.
Written By: DavidPuddy
URL: http://
DavidPuddy: Are there any Democrats working at Bear Stearns ?

I mean, I noticed a while back that Citibank had put Democratic economic guru Robert Rubin in the CEO slot, only to have him jump out less than 3 months later, just before Citi went to the Saudis hat in hand, presumably leaving the "Republicans" to take the blame.

Might there have been some Democrats left at Citi ?
Written By: Neo
URL: http://
Yikes. As an economically illiterate person myself, I’m amazed some of these people bother arguing. I get the gist of market economics, cost vs. incentive, supply and demand, etc. However, when the argument turns to The Fed and interest rates, I respectfully bow out.

I’m a pretty bright guy, but when it comes to economics, you really have to know your sh*t to argue. From the above, it seems pretty easy to get smacked down if you don’t know what you’re talking about.

I guess what I’m saying is "kudos" to Dale for really knowing his stuff. And "you idiot!" to some of the more facile arguers.
Written By: ck
URL: http://
That House of Cards remark isn’t too far off though.

OK. I’m listening.

So who in the Congress was trying to do something last year to stop this ?

What is the point of having Democrats in Congress if they are going to spend all of their time .. surrendering.
Written By: Neo
URL: http://
The S&L crisis wasn’t caused by deregulation, it was caused by tax code changes.

Previously, high income earners such as doctors could buy rental property, depreciate it and deduct paper losses against their doctor incomes. Net result: losses there offset income here so much less income tax to pay. This made rental property property valuable to own; naturally, the price of rental property went up.

Savings and loan associations made perfectly solid loans based on appraisals of income-generating properties.

Then Congress changed the tax law, requiring active participatation in management and limiting the deduction for highest earners. This made rental property not-so-valuable to own so many investors walked away from it; naturally, the price of rental properties went down. Oops, the S&L’s found themselves upside down on their loans.

The law of unintended consequences cannot be repealed, no matter who is President. And blaming him for Congress’ mistakes is just silly.

Written By: joe doakes
URL: http://
"... but when it comes to economics, you really have to know your sh*t to argue. "

Naw, not really. I do it all the time.

(You may notice that I omitted the ’I am a pretty bright guy’)

A little humiliation is good for you.
Written By: timactual
URL: http://
On the other hand, a lot of humiliation is just depressing.
Written By: timactual
URL: http://
Roland Arnall, the billionaire who helped create Ameriquest Mortgage and later emerged as a symbol of the struggling sub-prime mortgage industry, has died at UCLA Medical Center.

That’s 2 "sub-prime related deaths" in one day.
Written By: Neo
URL: http://
I actually went there and was going to basically agree with you, but for some reason I couldn’t post, it wouldn’t accept my identity, apparently I have to have one of their options, and didn’t. Oh well.
Written By: Scott Erb
There is nothing more annoying than trying to explain to people that the President doesn’t really have much control over the economy.

I have tried to explain it to my wife over the years. Now I just let her be.
Written By: Harun
URL: http://
Oh, and I hope someone pointed out to this libtard that a definite factor in the number of bad loans that got made were the regulations (which Lefties proposed and cheered) that required lenders to loan money to people who and in areas which were more likely to result in defaults. And it isn’t just those laws. If I can’t turn down loans to official victim groups then I don’t have a leg to stand on to turn them down to non-victims who are in equal or better financial shape, even though I know I shouldn’t be making loans to any of them.

Same situation in government schools: I can’t discipline the minorities because I’ll have Jesse Jackson taking me to court, so I either have to implement "zero-tolerance" to remove any judgement, or I can’t discipline anyone.

Having groups to whom the rules don’t apply is a bad thing in any area.
Written By: SDN
URL: http://

Yeah, I did.

Written By: Bithead
Harun - try this: "It’s (Not) The Economy, Stupid", by Charles R. Morris — The Atlantic Online, July 1993.
Written By: Billy Beck
URL: http://www.two—
i am not an economist. the sentence that caught my attention, as i have been trying to understand this whole complicated mess, was this: "mortgage brokers are regulated by states..." ... not the federal government. While I can understand that Bush personally is not directly responsible for the current situation, what strikes me is that the REPUBLICAN PARTY is always crying about less federal govnt. intervention...let states decide how they want to handle things. here you have a perfect example of why this concept is idiotic.
My very basic understanding is that govn’t. is in place to protect people..."appropriately." Why in the world were mortgage brokers NOT regulated by the federal government? and why is the FDIC an agency that is reactive and not proactive?
finally, i have a daughter in college, accumulating debt, who receives constant mail from banks, etc., offering her significant lines of credit...she is not employed. They are mailed to her home address and i certainly do not forward them to her...but c’mon. what do banks expect when they market in such a way? the immediate gratification needs of these groups should come back and bite them. and i am glad to hear as a taxpayer i am not bailing them out. i am skeptical, but you seem to know. we’ll see how that plays out....
Written By: d.burton
URL: http://

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