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...and I want a pony!
Posted by: Lance on Monday, September 29, 2008

Larry Summers and Mark Thoma argue that if done right the bailout will mean we can solve this crisis and still have everything we want, tax cuts, health care spending and all kinds of other goodies. Larry argues:

Just as a family that goes on a $500,000 vacation is $500,000 poorer but a family that buys a $500,000 home is only poorer if it overpays, the impact of the $700bn programme on the fiscal position depends on how it is deployed and how the economy performs. The American experience with financial support programmes is somewhat encouraging. The Chrysler bail-out, President Bill Clinton’s emergency loans to Mexico, and the Depression-era support programmes for housing and financial sectors all ultimately made profits for taxpayers...
Maybe, but Alex Tabarrok finds this optimism a bit ironic:
Does this sound familiar? I can hear it now. A vacation sir is consumption but a home, ah a home, that's investment. Investments pay off. Just look at the American experience. Rising home prices! Never a downturn. Isn't that encouraging? Hell, at prices like these you can hardly afford not to buy. Yes sir, a home that's a wise investment. And that makes you sir, a wise investor. And a wise investor, well a wise investor can certainly afford a nice vacation.
How the economy performs isn't really the issue as much as the housing market. Chrysler was bailed out at a cyclical low, we are not at a cyclical low in housing, we aren't even at a cyclical average. We aren't even close.

Nor was Chrysler such a rousing success anyway. The bailout of Detroit only postponed the pain for the American auto industry and kept them from either going out of business or becoming better, if probably somewhat smaller organizations, and the costs to us all will eventually be pretty damn high. That isn't even factoring in cementing the idea of "too big to fail" in corporate America. That encourages larger organizations rather than more profitable ones to be created.
 
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Nor was Chrysler such a rousing success anyway. The bailout of Detroit only postponed the pain for the American auto industry and kept them from either going out of business or becoming better, if probably somewhat smaller organizations, and the costs to us all will eventually be pretty damn high.
I have to disagree with this account completely. Firstly Chrysler was a tiny sliver of US marketshare at the time. So it was far from bailing out ’Detroit’.

As for the Chrysler bailout. It wasn’t an infusion of cash from the government. It was loan co-signing from the government. Not all of which was tapped. And all of that was paided back.

They did quite well comparitively with new models like the Intrepid, etc. which turned out well for them.

Chrysler did learn from their lessons. In fact they were so afraid of a repeat performance they built up a $12 billion dollar rainy day fund.

Unfortunately that made them a victim of their own success. They became a take over target. Daimler took them over because of that with some underhanded help of Eaton who now lives behind a moat. They raided the rainy day fund promptly. Then proceeded to raid chysler further by forcing chrysler to do things like buy overpriced parts from Mercedes. And then add mismanagement to the mix as well due to not understanding that segment of the market.

Sorry, Chrysler bounced back nicely until Daimler got a hold of them.
 
Written By: jpm100
URL: http://
This is the best graphic I could find, look at Chrysler’s marketshare compared to GM & Ford’s. Note Daimler took over in ~98.

http://economistsview.typepad.com/photos/uncategorized/auto21706.gif
 
Written By: jpm100
URL: http://
Chrysler’s failure, arguably, was caused by their own actions, though.
I’m less than convinced, given the current failrues were government-caused, that the two situations can be directly compared.

 
Written By: Bithead
URL: http://bitsblog.florack.us
JPM,

I don’t argue with any of what you said. By bailing out Detroit (which is why said Detroit, not Chrysler) I am not talking about just the loan to Chrysler, but a host of actions our government has taken to protect them (and their larger competitors) and put off restructuring. My complaint about the bailout (and yes, a government backed loan is a bailout) of Chrysler in particular, if you notice, is not about whether they made good on it, but on its longer term implications. Not just for Chrysler, but Detroit and our economy in general. In the long run the bailout of Chrysler has cost us more than it benefited us, whether or not Chrysler paid the loan back, or returned to profitability. Moral hazard has an effect.

Daimler may have screwed them up even worse, but Chrysler, rainy day fund or not, was not a viable ongoing concern when it was purchased. Neither is Ford or GM in my opinion. That was apparent by the early nineties at the latest. So, putting off Chrysler’s day of reckoning for a few years was hardly worth the long term cost to our economy of keeping these staggering giants going without a fundamental restructuring of their businesses.

Bithead,

Certainly government incentives distorted behavior, but that hardly makes this a government caused failure. We can be angry at our government for their actions, but that hardly means there is a moral argument (as opposed to a prudential one) for us paying for Wall Streets stupidity. Nobody forced them to act in the way they did for the most part, our government just encouraged/allowed them to play with dynamite (leverage in a housing bubble.) They didn’t have to do so. We are the victims here, not Wall Street.
 
Written By: Lance
URL: http://asecondhandconjecture.com
Certainly, Lance, Government misrepresented itself to those private concerns. And in any event, it was make those bad loans or be labeled ’racist’ by the government and be prepared to take the monetary penalties such a change would entail, both in fines from government backed ’civil rights’ groups and from the bad publicity.

And I submit to you we all are paying for that ’affordable housing for all’ nonsense, now, either way.
 
Written By: Bithead
URL: http://bitsblog.florack.us
To expand on this just a bit... it’s going to be a little hard, to argue as Dale does, (And I think correctly) that...
The Community Reinvestment Act is about as pure an example of fascism as you’re likely to find. Its sole purpose is to require private firms to advance government aims. They might as well have called it the "Strength Through Joy Act".

We really need to have debate about CRA. If the government wants to ensure that non-credit-worthy people receive home loans, even if their ability to pay for them is questionable, then the government, not private-sector companies, should be footing the bill
.... and then turn around and suggest as Nancy Pelosi does that the government bears does not bear direct responsibility for the problem and it’s depth.
 
Written By: Bithead
URL: http://bitsblog.florack.us
"The bailout of Detroit only postponed the pain for the American auto industry and kept them from either going out of business or becoming better, if probably somewhat smaller organizations"

Lance your idea of the Chrysler bailout as a comparative analogy just does not fit. I think it weakens and detracts from your argument.


 
Written By: coaster
URL: http://
Coaster,

I didn’t make the Chrysler analogy, Summers did. I agree, it doesn’t hold up as an analogy to the present situation, which is my point.

Bithead,

It is in no way supporting the CRA or any other act which helped lead us here to note that the vast majority of troubled loans were in no way associated with the CRA or any similar government program. One could argue that having Fannie and Freddie ready to absorb some of that dodgy paper enabled it, but doesn’t justify it. One might also argue that Freddie and Fannie’s dominance in more conventional loan securitization made going into less conventional mortgage securitization a more attractive option, but it still doesn’t justify being stupid about it. As I was arguing back when people were minimizing the potential disaster we were facing (for most of the last two years) this is not a subprime problem anyway. It is an over priced housing market problem.

These institutions gambled that housing wouldn’t fall a great deal, and it has. They didn’t need to do that, whoever the loans were given to. Subprime loans were the first to blow up, and loans made in the last two years the first to go, because they had the least equity and the shoddiest lending standards. The subprime industry though is just the canary in the coal mine. Since that is true, for CRA to be the cause, as opposed to a contributing factor, one would have to believe that this administration pushed for such an action. Do you buy that?

Also, nothing the government did justifies (as opposed to partially explain) their expanded use of leverage, the weakening of credit standards across the board, the accounting shenanigans and much much more. This crisis may not have existed without government encouragement and enabling, but in the end they did make the decisions. I can promise you, your local bank may have worried about being called racist, Goldman and Lehman never let concern over it cross their mind when they bought and securitised these instruments with built in leverage (on top of their own) ignored the likelihood of default, ignored and/or encouraged fraud and liar loans (which were not subprime) moved them to off balance sheet entities which issued short term paper against risky long term liabilities or a host of other sins.

Markets do not eliminate stupidity or greed, they are just supposed to make you pay a penalty when you combine them. Feeling sorry for them because the government encouraged the initial development of subprime (which in the short term was extremely profitable, and thus encouraged them to go way beyond any government mandate) doesn’t excuse any of the rest. It also short circuits the markets ability to correct itself. It is up to us to correct the governments failures. Besides, the government doesn’t foot bills, or take responsibility, we do.

No matter what government does, it does not in any way excuse Wall Street from making colossal mistakes of their own.
 
Written By: Lance
URL: http://asecondhandconjecture.com
Since that is true, for CRA to be the cause, as opposed to a contributing factor, one would have to believe that this administration pushed for such an action. Do you buy that?
Actually, to a large degree, I do. does the phrase "Ownership soeicty" mean anything? And certainly, Bush didn’ move against Clinton’s expansion of CRA.

Wall Street didn’t make these mistakes on heir own. They were told to march, and in what direction, or face governmental reprisals.


 
Written By: Bithead
URL: http://bitsblog.florack.us
Wait, you are claiming that in 2006-7 Bush ramped up pressure on the banks, mortgage brokers and Wall Street compared to prior years so that they dropped lending standards across the board for millions of people not addressed by CRA at all? I would love to see actual evidence of that.

I do agree with you on the whole ownership society crap, but people buying McMansions in suburban Las Vegas just don’t seem to fit the CRA narrative. This has been primarily a suburban, middle class America phenomena. Also, the vast majority of people defaulting are white, which undercuts the race issue. The CRA is dumb, as I pointed out it was part of the start of this whole thing. It is hardly responsible for Wall Street’s errors or the explosion in dodgy lending across the board.

In fact, other policies were much more responsible for this, but still. If you offer me a subsidy, and then I use that subsidy to do something really stupid as opposed to just acting on the subsidy and getting my little bit of rent seeking, it is my fault, regardless of how stupid the subsidy was. The subsidy may be pointed at as giving exactly the wrong incentive, and maybe we should expect under those circumstances for some people to do exactly what they did, but they still did it, and it isn’t our fault.
 
Written By: Lance
URL: http://asecondhandconjecture.com
Wait, you are claiming that in 2006-7 Bush ramped up pressure on the banks, mortgage brokers and Wall Street compared to prior years so that they dropped lending standards across the board for millions of people not addressed by CRA at all? I would love to see actual evidence of that.
No, I’m saying Clinton did that.
In 1997.
I do agree with you on the whole ownership society crap, but people buying McMansions in suburban Las Vegas just don’t seem to fit the CRA narrative
More than granted. Still, CRA was the mechenism.
Also, the vast majority of people defaulting are white, which undercuts the race issue.
Well, you’ve just fallen over a little known secret among the race pimps; Most people on welfare are WHITE. Yet, when welfare cuts are considered, it’s a move against black people, suppsoedly. And certainly, I wuld consdier CRA to be an extension of welfare.
The CRA is dumb, as I pointed out it was part of the start of this whole thing. It is hardly responsible for Wall Street’s errors or the explosion in dodgy lending across the board.


What you’re failing to understand here is that the new policies in terms of what is and is not a valid loan, were by nature of being ’fair’, not limited to the ’poor’, but to all who wanted loans. If any kind of deliniation of policy had been inserted between ’rich’ and the ’poor ’, how long do you suppose it’d be before lawsuits started flying around like so many bats?

When the LTV, LTI and other elegibility factors were altered to help the poor into housing, the banks were forced by legal (and lawsuit) considerations to extend such value scales to ALL comers.
 
Written By: Bithead
URL: http://bitsblog.florack.us
And I had thought to avoid saying ths, but I suppose now I should;

To the degree that the American people... voters... supported CRA’s expansion in it’s seeking fo a free lunch, yes, we citizens are also responsible for the failures.

Alas, as is pointed out elsewhere on this site, the ones who are responsible for this happening... the ones who deamdned the free lunch the loudst... are mostly not the ones who pay taxes, and thereby are not going to be the ones paying to fix the problem. But I see that as a matter of tax law fairness, which is only indirectly tied to the whole bailout question, morally speaking.

 
Written By: Bithead
URL: http://bitsblog.florack.us
No, I’m saying Clinton did that.
In 1997.
But Bithead, my point is that the loans in 2006-7 were demonstrably of poorer quality than previous Bush years. Tremendously so.

You are ignoring the point that most of the credit losses will eventually come from people who are not poor credit risks but bought in a housing bubble, and loans to businesses and consumers in general. So even the subprime problem is not the main problem anyway.

Nor, despite your claims to the contrary, does the CRA explain most lenders behavior. They wouldn’t, and haven’t, made that argument. They set up their lending operations because they thought they were profitable. They set them up after CRA, and many targeted the riskiest homebuyers.

You can say they were encouraged by the government, but they were not forced to enter that market specifically. They never even tried to build other markets. They weren’t profitable, and it isn’t my fault they misjudged the market. I know this firsthand because I know some people who specifically entered the market to go after subprime loans and sell them off. I told them that was crazy. I cannot count how many times I warned people and was hit with all kinds of bogus arguments about Real Estate never really going down by people in lending, home building and homebuyers.

Nothing required lenders to make that the largest segment of their business, especially in 2006-7.

Also, none of that changes Wall Streets mistakes with securitization, buying loans in a bubble, leverage, etc. You are excusing them and morally justifying bailing them out on the basis of only one factor.

I have no problem with your outrage at government policy, but it does not absolve people of the mistakes they made. Period.

You are starting to remind me of people on the left excusing criminal behavior because of their environment. That may explain why they made bad decisions (in fact, it is a better argument) but it doesn’t absolve them or justify criminal acts.
 
Written By: Lance
URL: http://asecondhandconjecture.com
But Bithead, my point is that the loans in 2006-7 were demonstrably of poorer quality than previous Bush years. Tremendously so.
I suppose a chunk of that was market conditions. The number of bad loans invariably goes up at the leading edge of an economic downturn. I suppose further that the problem was those conditions butted up against weaker loan requirements.

Now this, along with all of the things I’ve listed doesn’t exonerate bankers completely. But in combo, they explain most of it. What we have here is the result of political types making bank policy so as to secure votes with OPM... specifically, the bank’s money.
They wouldn’t, and haven’t, made that argument
For the same reason nobody else has made the argument; THey’d be called racist, and be drummed out of business. As we discussed, it’s not true, of course, but a look at the current political climate will tell you a charge need not be true to be effective.

 
Written By: Bithead
URL: http://bitsblog.florack.us
Chrysler’s failure, arguably, was caused by their own actions, though.
I’m less than convinced, given the current failrues were government-caused, that the two situations can be directly compared.
Actually Chrysler and the other US automakers problems were government induced.

Carter (sound familiar), put heavy regulations on US makers at an abnormal pace. He ramped in Emissions, Safety, and Fuel Economy standards at pace faster than US companies produced a new car.

Granted the customer shift in demand made the FE standards somewhat moot, but then again not.

Instead of introducing properly developed lines of cars and living with the lower volumes of current product, all producted had to be revamped. Many car lines need to be retrofitted with pollution equipment. Small engines had to be shoehorned in cars. It wasn’t pretty. And Quality suffered.

And coincidentally all three standards rewarded small cars. Something Japan was already making, so they just had to port them in larger numbers to the US market. And it wasn’t foresight on the Japanese part, it was the cars they were already making for their market.

So the companies had to meet ridiculous pacing on standards, compete with someone already making the necessary product, do it during the economic downturn of the late 70’s and early 80’s, and then live down the quality stumble coping with that caused.

Personally, I saw it at the time as the first anti-capitalist/corporate regulatory salvo for reasons I didn’t understand at the time. Reinforced by a media that gleefully put the blame on US corporations. The realization he was a closet social!st does explain some of it. A successful implementation of a regulatory version of CLOWARD-PIVEN STRATEGY against a manufacturer.
 
Written By: jpm100
URL: http://
Bithead,

Believe what you want, but this is something I have studied to death. Standards were reduced in 2006-7 to keep the party going. It had nothing to do with the CRA. The downturn made them go bust, it didn’t cause them to lower standards.
 
Written By: Lance
URL: http://riskandreturn.net
JPM,

Okay, but that still doesn’t argue against my point about the bailout being counterproductive in the long run.

You are right though, the automakers are less culpable than the people we are trying to bailout now.

I am not criticizing management (though I could) but pointing out that the industry for a number of reasons was problematic and the bailouts (in various forms) did nothing to address those problems and set in place moral hazard. Less than a decade after the loan to Chrysler the industry was under severe stress again and is now on life support.
 
Written By: Lance
URL: http://riskandreturn.net
Believe what you want, but this is something I have studied to death. Standards were reduced in 2006-7 to keep the party going
Ah, but WHY, Lance?
Could it be because F&F were buying it up as fast as they could generate them, thereby minimizing their risk?

Again, the problem is government.
 
Written By: Bithead
URL: http://bitsblog.florack.us
Could it be because F&F were buying it up as fast as they could generate them, thereby minimizing their risk?
That is part of it, but hardly excuses it.

More importantly, if that were the main issue then F&F would be the end of it. Instead huge amounts of it was repackaged and sold to investors around the world by investment banks and banks, or kept on their balance sheet. If it stayed on Freddie and Fannie’s balance sheet, or was guaranteed by them then the banks and Investment banks wouldn’t be in such trouble, just F&F.

The issue we are discussing isn’t government role in this crisis, we agree on that, but the culpability of private actors.

Once again, you are excusing behavior because of the governments policies. How is that any different from many liberals excusing gang bangers behavior because of poor social policies?
 
Written By: Lance
URL: http://riskandreturn.net
More importantly, if that were the main issue then F&F would be the end of it. Instead huge amounts of it was repackaged and sold to investors around the world by investment banks and banks, or kept on their balance sheet. If it stayed on Freddie and Fannie’s balance sheet, or was guaranteed by them then the banks and Investment banks wouldn’t be in such trouble, just F&F.
No market, however constructed is ever that isolated seggragated.

The fact is, the private actors were driven by government action, and without that government action the priavte actors would not have done what they did. As a matter of logic, then, the lion’s share of the blame here rests on government.

Which is exactly, by the way, why the little speech in the well by Pelosi yesterday is so out of line.
 
Written By: Bithead
URL: http://bitsblog.florack.us
And by the way, Lance, I’m sure you don’t know this, but I spent about a decade attached to an HE division of a national level bank, though because of contractual obligations, I can’t say much more about that, directly. The reason I bring this up, though is I’ve seen this stuff first hand, for years.

I congratulate you on your study of the issue; most wouldn’t go so far, and as a result your observations are more accurate than most.

Me.... I didn’t need to study it. I LIVED it.

 
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URL: http://bitsblog.florack.us
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