Thoughts on the politics of the financial crisis Posted by: McQ
on Saturday, October 11, 2008
You know, after the dot.com bust of a few years ago, you'd think we'd have learned our lessons in general. For a while there, conventional wisdom proclaimed that the old economic laws and those laws which had provided success to investors who followed them just didn't apply anymore. P/E ratios? Bah, old school. Companies which actually produce something other than vaporware? Bah, you buy on potential, not on concrete accomplishment.
And we all know the result of that debacle. Of course, compared to the one we're facing now, that was child's play.
There is plenty of blame to go around. Greedy Wall Street speculators took mega-bonuses even when they knew their leveraged companies were tottering — and someone else would pick up the tab. Crooked or stupid politicians allowed Fannie Mae and Freddie Mac to squander billions, as they raked in campaign donations and crowed about their politically correct support for millions of shaky — and now mostly defaulting — buyers.
The new national gospel became charge now/pay later and speculate, rather than put something away in case of a downturn. To provide more goodies that we hadn’t earned, politicians ignored soaring annual budget deficits and staggering national debt and kept spending.
Indeed there is plenty of blame to go around. And there is a mentality that has taken hold of a certain part of the American public that eschews the old ethic of delayed gratification, opting instead for for an entitlement mentality which encourages an attitude that each of us deserves whatever we can get however we can manage it.
Delayed gratification, earning your way and saving are obsolete ideas in this brave new world. That and again ignoring the basic rules of economics in this blind-leading-the-greedy attempt at political utopia.
I say political utopia for a reason - the basis for all of this, when all is said and done, lays at the feet of politicians and political institutions. The utopia they sought was as old as politics. Trade favors for votes. The favor was homeownership for those who couldn't afford it or qualify for it in return for their political support.
And, in their arrogance, they figured that they could build a firewall (Fannie Mae and Freddie Mac) which would insulate them from economic law. But just as gravity keeps on pulling apples from trees and bouncing them off the ground, the laws of economics inexorably had their way.
We can argue about all the greed and stupidity on Wall Street (and there's plenty) and the same things among the American public (again, plenty), but in the case of both Wall Street and the public, what we saw was a reaction to a situation. The situation was created -key word- by politicians. As most of us who've lived a few years can tell you, any situation created which allows exploitation without the perception of risk is -surprise, surprise- going to be exploited.
Of course the risk was there the entire time, it was just well hidden by economically clueless (or criminally complicit) politicians who were sure they could cover all bets. And the politicians who were benefiting from the arrangement chose to ignore the looming signs of trouble. But the laws of economics, just like they did in the dot.com bubble, had their way.
And here we are.
I've said in other posts that the one thing I have yet to see addressed is the actual role government played in setting up this crisis. I've heard a few mentions here and there of those who are responsible, but for the most part, I've seen a concerted attempt by those very people who have been named to blame shift all of this on "the market". It wasn't the market. Another favorite target of these politicians is to blame it on "Wall Street", or "predatory lenders", or "speculators". All of those are a result of the policy for which they were responsible. Without the government policy in question, there was no situation to exploit. And without a situation to exploit, there's not enough bad paper, bad mortgages, bad decisions on Wall Street or Main Street to cause this meltdown.
Heads should roll, and not just on Wall Street or Main Street. I'm talking about the heads of politicians. A lot of them. But, the cynic in me says that's not very likely to happen. Barney Frank and Chris Dodd, the two obvious candidates for losing their political heads, are likely this time next year to be sitting in exactly the same place doing precisely the same things they are now - blaming others. And that's pretty pathetic. Neither are likely to be the focus of any investigations, neither are likely to be the target of an ethics inquiry and most importantly, the policy that drove the meltdown is unlikely to be really examined or changed (and, of course, they always have Bush to blame).
Why? Because the party that will most likely be in power is the party most responsible for its existence. And it has paid them too handsomely over the years to kill it off.
So, if in fact they're driven to examine the root cause of this mess next year, don't expect anything more that cosmetic changes and bland assurances that "everything is fixed" and that "this will never happen again". Of course keep in mind, by that time, government will be so deep into the financial markets of this country that it will be difficult to determine where the "market" begins and the government's tentacles end.
In the meantime, let's all give serious thought to turning over another huge sector of our economy to them as well - health care. They couldn't screw that up as badly as they have this, could they?
One last thought. Actually it's Hanson who brings it up. It's about those old fashioned "laws" that seem to have worked so well in the past. The ones that people seem keen on dumping because, well, they just don't feed the needs of the instant gratification crowd:
Save your money. Don’t borrow what you can’t pay back. Look first at a man’s character, not his degrees. And if a promised return on an investment seems too good to be true, it probably is.
That little paragraph, if followed, can save you not only a lot of grief, but a lot of money as well. For most, it is common sense. For some, however, it will come as a revelation. For all it provides some rules of the road that will weather most political storms cause by the arrogant, inept and stupid who call themselves members of Congress and who repeatedly attempt to suspend the laws of economics for party and personal political gain.
Obama plans to turn our Income Tax System into a Welfare System. Why should I work at a job which expects I do 20, 30 or more hours of casual (aka unpaid) overtime more often than not when I get the same healthcare and close to the same income?
This analysis is half good. The fault you identify is legitimate. If you had written the article without exercising your ideological imperatives of exalting Republicans, exonerating Bush, and bowing to unrestrained market deregulation, you would actually have something here.
I agree with McQ. The seeds of the destruction were planted by CRA. But, if it were just CRA, it would have been containable. When Freddie and Fannie were "encouraged" to loosen their loan standard and accept no down payment loans and liar loans, the destruction was inevitable.
If Dodd and Barney Frank had an ounce of integrity, they would resign (and if they were Japanese, commit Hari Kari). Instead, we get Franks implying that those who were against the sub prime debacle are racist. These guys have neither honor nor integrity. It is true, we get the politicians we deserve.
David, the "exalting Republicans" you seem to see behind every post is a figment of your imagination. Saying GOPers don’t suck quite as badly as Democrats is in no way "exalting" them.
And for the current mess, it’s pretty clear the Democrats have the lion’s share of suckage, with their determination to force the financial system to subsidize home ownership for those who could not afford it. Republicans didn’t stand up to that nonsense as they should have and there were probably a few who approved, but they were not the instigators.
Bush bears plenty of blame for the silly bailout, along with master suckmeisters Pelosi, Frank, Dodd, et. al. But he didn’t create the situation.
McQ: I agree with your assessment as well as Shark’s point of why the Pols do what they do with impunity. I have long wished that we could get rid of the ’professionals’ and get back to something like the Founding Fathers intended: a vibrant cross section of citizens who are there to serve the nation (not themselves)on a temporary basis. Maybe if we canceled all their (exceedingly generous) retirement plans it would help?
I have watched with increasing alarm and no small amount of sadness over the past 18 years as the sheer arrogance and utter stupidity of our ’elected officials’ has gone from merely annoying to a jaw clenching ’are you sh*tting me?’ and each year I have lost a little more respect. Add to this the seemingly incomprehensible blindness of the American people who elect & then re-elect these buffoons and I have all but given up on the electorate coming to its senses as that would mean a significant number would have to give up their teat and spend some time thinking about what is really best for the entire nation instead of just a chosen few.
Perhaps that is the real tell here...the balance has tipped and now we must pay the price. The final verdict (in my mind anyway) will be given on Nov 4th when we see if there is still hope. Let’s pray it is not more of the same and not ’change’ no one can explain.
I do agree that there is blame throughout Washington and Wall Street for what has happened to our financial markets. But the responsibility is not nearly as narrow as you pretend.
It may well be that the Community Reinvestment Act and Fannie Mac/Freddie Mac contributed to the problem and that Democrats have had some role, perhaps a major role, in those respects. But I disagree when you — and McQ — suggest that this was the sole cause of the breakdown of our financial system, which just coincidentally all occurred in the past 2 years after the Dems regained the House.
First of all, Bush is still the president; he controls all the executive agencies and he still has veto power overt legislation. Much more importantly, however, it is simply not possible that the causes of the breakdown are limited to what McQ chose to write about. The CRA and F-F have not brought the world economic system to its knees. What has happened is that very smart people were let loose to devise clever financial instruments that so diluted risk that investors acted as though risk has been eliminated. It was of course a Ponzi scheme from the outset but so long as real estate prices kept rising it was of no moment. This resulted from excessive deregulation of the financial system, which is Bush/Republican imperative.
What has also happened is that the Bush Administration has put a trillion dollar war on the nation’s credit card. This naturally required massive borrowing and drove the debt through the ceiling, which has put sever stress on the credit markets. Moreover, Bush has fostered a credit culture in the nation-at-large. After 9/11 Bush suggested spending money was the patriotic thing to do. Even the tax rebate was just designed to generate consumer spending. Bush has encouraged just the kind of financial irrespsonsibilty that McQ’s post rails against.
Yet McQ mentions none of this. If it isn’t b/c McQ is acting as a Republican propagandist, then what is the explanation?
The test doesn’t come this November, since we’ve got a choice between Socialist(R) (or at least "ReallyHappyToCompromiseWithSocialists") and ReallySocialist(D). Empty promises of change are enough to carry the day for good reason; people are right to want "change", in general, though it gets tricky when you get down to the specifics.
The real question will be how this country reacts when the actions are actually being taken. I particularly will be looking to the reaction people will have to the idea that what this country really needs is another entitlement program in the form of universal healthcare. I suspect the Democrats will be unable to contain themselves until the economy improves enough that it sounds slightly less insane, especially as the economy may take long enough to recover that they will be running the risk of losing control of Congress. How does America react to the idea of adding yet more freeloaders to the system, at a time of recession, and at a time when people are going to be seriously wondering about medicare and social security?
If it is with anything short of a taxpayer revolt (I’m not advocating violence, what I’d want to see is a national recall petition movement), then I’ll be pretty scared.
Or, more generally, if Congress doesn’t feel the pressure to cut back spending, then it’s over. They don’t care, obviously.
The GOP had the reins of the federal government from the beginning of 2001 to the beginning of 2007. They owned both houses of Congress and the White House. VDH was perhaps one of the GOP’s biggest apologists during this period. In 2000, the federal debt was 5.7 trillion dollars. In 2007, it was 9 trillion dollars. That’s 3.3 trillion dollars in about 6 years.
That VDH - or any wingnut for that matter - would presume to lecture anyone on the issue of not living beyond ones means is beyond insane. It’s satire. It’s Onion territory. That McQ would second him on the point is - of course - expected.
Yeah Dave, this is the all Bush love, all the time blog.... snort :)
You obviously just got here.
According to this site, anyone who criticizes Bush is not only wrong, but is also mentally ill. Anyone who criticizes Bush is suffering from Bush Derangement Syndrome. (Search the archives if you don’t believe me.)
I know it sounds Stalinist to label non-worship of Bush as a symptom of mental illness, especially now, you know, in 2008, but that was, and apprently still is, the position of this site.
Name one major policy intiative or position of the Bush administration that this site has differed with. One.
"Look at a man’s character, not his degrees" ? You must have thrown that one in as a little McCain shout-out?
The Office of the Presidency of the United States of America is an office with a revolving door, filled through a job vacancy. In that sense, it’s just like any other project management job — it deals with projects that have envisioning stages, planning stages, dev stages, and stabilization and support stages. The best character on the planet (however THAT’s determined) cannot take on this job unless properly educated.
There’s SO many things that are wrong with the principle ABOVE and the rest of the Republican rhetoric — don’t even know where to start ... The biggest ones IMHO being 1) the mentality of staying-the-course, a.k.a. change is always bad and 2) lack of understanding of conservative principles 3) pure, uneducated, redneck ignorance.
For the #1, look no further than W, who effectively bankrupted the country with two undeclared wars. For the #2, looks no further than Ron Paul, a true conservative. For #3, speak with anyone from West Texas.
See you at the polls in November, suckers. I’ve been waiting for some sanity to return to the White House for a long time now.
How does anyone know how well Barack Obama was educated when he won’t release his transcripts and publications?
We know he wasn’t educated well enough in American History to know the Bill Ayres was a bomber.
We know he wasn’t educated well enough in Constitutional Law to tell the American people, ’No I will not confiscate your guns because the 2nd Amendment forbids it.’ Instead all he could say was 1)I’d never do that because I don’t have the votes and 2)the DC gun ban was constitution. The Supreme Court said otherwise to 2).
We know he wasn’t educated in economics well enough to know that forcing banks to make loans to people who won’t pay them back means bad debt will accumulate and must eventually be dealt with by people who can pay & thereby will be forced to pay for debts they have not incurred.
We know he wasn’t educated in Middle Eastern History. We know he wasn’t educated in Philosophy nor Ethics. We know he wasn’t educated in Engineering nor Technology.
So why exactly is Barack Obama the educated candidate?
Name one major policy intiative or position of the Bush administration that this site has differed with. One.
mk, there are times you are such a raving fool.
1. Prescription drug coverage expansion of Medicare
2. "No Child Left Behind" federalization of education
3. Continuing drug war
4. Harriet Meirs nomination to the Supreme Court
I could go on, but you only asked for one.
And those are just historical. Exactly two weeks ago, if you were actually paying attention to what was posted here instead of mining everything you see for an opportunity to parrot leftist talking points, you would have seen opposition to the bailout plan proposed by the Bush administration.
When the Cambrian measures were forming, They promised perpetual peace. They swore, if we gave them our weapons, that the wars of the tribes would cease. But when we disarmed They sold us and delivered us bound to our foe, And the Gods of the Copybook Headings said: "Stick to the Devil you know."
On the first Feminian Sandstones we were promised the Fuller Life (Which started by loving our neighbour and ended by loving his wife) Till our women had no more children and the men lost reason and faith, And the Gods of the Copybook Headings said: "The Wages of Sin is Death."
In the Carboniferous Epoch we were promised abundance for all, By robbing selected Peter to pay for collective Paul; But, though we had plenty of money, there was nothing our money could buy, And the Gods of the Copybook Headings said: "If you don’t work you die."
As it will be in the future, it was at the birth of Man — There are only four things certain since Social Progress began — That the Dog returns to his Vomit and the Sow returns to her Mire, And the burnt Fool’s bandaged finger goes wabbling back to the Fire — And that after this is accomplished, and the brave new world begins When all men are paid for existing and no man must pay for his sins As surely as Water will wet us, as surely as Fire will burn The Gods of the Copybook Headings with terror and slaughter return!
"It may well be that the Community Reinvestment Act and Fannie Mac/Freddie Mac contributed to the problem and that Democrats have had some role, perhaps a major role, in those respects. But I disagree when you — and McQ — suggest that this was the sole cause of the breakdown of our financial system, which just coincidentally all occurred in the past 2 years after the Dems regained the House.
First of all, Bush is still the president; he controls all the executive agencies and he still has veto power overt legislation. Much more importantly, however, it is simply not possible that the causes of the breakdown are limited to what McQ chose to write about. The CRA and F-F have not brought the world economic system to its knees. What has happened is that very smart people were let loose to devise clever financial instruments that so diluted risk that investors acted as though risk has been eliminated. It was of course a Ponzi scheme from the outset but so long as real estate prices kept rising it was of no moment. This resulted from excessive deregulation of the financial system, which is Bush/Republican imperative."
Perhaps you missed the part of McQ’s post that says the government as a whole is to blame, and not just the Democrats or Republicans.
MK, you really need to upgrade your brain so you can perceive shades of grey. There’s an entire world you’re missing out on, where you can hold a nuanced opinion of someone, neither blindly hating nor blindly adoring someone.
The reason, the only reason you think this site is a blind cheerleader for Bush is because as it obviously doesn’t hate him 24/7, the only possibility left for you to conceive of is blind admiration.
The thing about being able to see shades of grey is that the people who can hold nuanced opinions can tell when someone thinks in black and white, but the person thinking in black and white can’t conceive of the people thinking in greys. You are in the latter category, and until you move out of it you just might as well stop bothering with posting. A black-and-white thinker can’t convince a grey thinker to join them.
(The irony of the standard leftist position building in self-congratulations on their "nuance" does not escape me. The success in defining "nuanced" to mean "blind devotion to leftism" is moderately impressive.)
What has happened is that very smart people were let loose to devise clever financial instruments that so diluted risk that investors acted as though risk has been eliminated. It was of course a Ponzi scheme from the outset but so long as real estate prices kept rising it was of no moment. This resulted from excessive deregulation of the financial system, which is Bush/Republican imperative.
No, this wasn’t the result of deregulation. It was the result of CRA and Clinton Administration efforts to increase minority home ownership.
The fundamental problem was regulation designed to encourage loans, not deregulation. Deregulation is a good thing, to bad Bush hasn’t done more of it.
I explained my view clearly. You respond with cant and dogmatic ravings. No wonder you are McQ’s fans.
Perhaps you missed the part of McQ’s post that says the government as a whole is to blame, and not just the Democrats or Republicans.Or maybe you just didn’t read anything.
I read what’s written. Not what somebody else tells me is written.
No, this wasn’t the result of deregulation. It was the result of CRA and Clinton Administration efforts to increase minority home ownership. The fundamental problem was regulation designed to encourage loans, not deregulation. Deregulation is a good thing, to bad Bush hasn’t done more of it.
The situation was created -key word- by politicians.
No. Well at least not only the politicians in the USA. Certainly not just the Democrats.
A global property boom ended, because interest rates went up.
Low interest rates in 90s & 00s were the result of current account surplus countries (China, Japan, little Asian tigers, Gulf States) acting to support mainly western currencies by purchasing the debt at low rates. These countries eventually slowed on buying our western debt at low rates, because the price of oil went up and their artificially low currencies increased the effect of inflation on their own markets. They could no longer afford to extend such credit to western consumer states.
It was the result of CRA and Clinton Administration efforts to increase minority home ownership.
This is a bad law, but it seems unlikely to be the defining factor in this crisis. CRA or no CRA, during the 90s and early 00s phenomenally large amounts of credit was available at rates that made home ownership affordable to poorer people. Introducing more money into the market made house prices inflate and so a rising market made it even more affordable for poor people to take out mortgages. This was a global phenomena, the USA did only marginally worse of the resultant crash than other markets.
...the basis for all of this, when all is said and done, lays at the feet of politicians and political institutions. The utopia they sought was as old as politics.
Yes, but it is more fundamental than any single law. What needed to happen was a slowing in the credit inflows from the export surplusing countries and the only way to do that was to insist on a free currency market without artificial supports. If such a market had existed, the 90s and early 00s would have seen the USD/euro fall considerably. Westerners would have seen higher interest rates and/or higher higher inflation for the past 2 decades and the boom preceeding the bust would almost certainly not have occured.
Yeah, so you read Mallaby’s WaPo article. Nice cover for the dems.
This is a bad law, but it seems unlikely to be the defining factor in this crisis. CRA or no CRA, during the 90s and early 00s phenomenally large amounts of credit was available at rates that made home ownership affordable to poorer people. Introducing more money into the market made house prices inflate and so a rising market made it even more affordable for poor people to take out mortgages. This was a global phenomena, the USA did only marginally worse of the resultant crash than other
Yeah, well, why did the banks give them the money?
Hint, it was because they were fined for not doing so by law.
And they were sued by community orgs as well.
What was Obama’s big work in law? Suing banks for not giving these people loans.
So what about Fannie Mae, what was their role in this? There were staffed by dem appointees who allied themselves with ACORN and others to push up the rate of these loans.
And what about locking down these practices? Regulation?
All blocked by key Dem’s in congress (17 distinct attempts). Barney Frank’s boyfriend was a senior exec at Fannie Mae and Barney was part of the watchdogs.
If even one of the attempts to just try to enforce good loan practices was made this problem would not be as bad.
McQ, either your capacity for self-delusion continues to amaze me, or you’re acting very cynically and self-destructively. By misappropriating blame for this crisis, you’re dooming us to repeat it.
Federal Reserve Board data show that:
* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.
During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.
Seriously, get a clue. Real estate companies made these loans because home prices were spiraling upwards and they believed they could make money. Lots of it. Not because they were forced to by the CRA or Freddie Mac. To theorize otherwise is unsubstantiated, false, and observed. It’s black-and-white false.
All Fannie and Freddie did was buy some of these loans, and a small part of them at that, which is why you see the entire brokerage industry collapsing, and not just Fannie/Freddie. And the only reason F & F did that is not because of their "mandate" or mission but because they were partially privatized in the 80’s. They were given a mandate to make money, not just increase home ownership. That’s what introduced the corruption *and* the bad mortgage purchases.
It’s downright scary to watch you people misunderstand this crisis to further an ideology, or worse, the political gains of the Republican party.
What needed to happen was a slowing in the credit inflows from the export surplusing countries and the only way to do that was to insist on a free currency market without artificial supports. If such a market had existed, the 90s and early 00s would have seen the USD/euro fall considerably. Westerners would have seen higher interest rates and/or higher higher inflation for the past 2 decades and the boom preceeding the bust would almost certainly not have occured.
I’m curious as to why you think that would have happened. It seems to me like GDP growth and absolute size play a big role in currency values and that we’d have had a dollar stronger than the trade balance said we deserved for most of the decade regardless. Also, since interest rates are set by the Fed, I’m not seeing the high interest rates.
I agree that higher inflation and interest rates would have mitigated this crash, but I’m not sure how a market mechanism would have gotten us there under these circumstances.
Yeah, well, why did the banks give them the money?
For profit. The banks had willing suppliers of low priced credit and willing purchasers derivativised debt. The fact the CRA required them to make some transactions that were very marginal in the longterm was neither here nor there, because they could make the transaction profitably in the shortterm by selling off deritivised debt.
If even one of the attempts to just try to enforce good loan practices was made this problem would not be as bad.
Yeah, it would only be as bad as it is in the UK or Euro zone.
It is a pie in the sky wish as it requires the Chinese/Japanese/Arabs going against their shortterm interests, but if it were to happen and the Chinese yuan were to float free against the USD then the price of everythng from China/Japan/everywhere would have been going up much faster. The Fed has a longstanding commitment to maintain price stability. The only available mechanism* is to increase interest rates to make bonds attractive and increase the value of USD. Either inflation or interest rates or both would have been higher.
* Another mechanism (not available to the Fed) is that politicians stop printing more money than they take in, by raising taxes or cutting spending. Failure to do so was IMO the real culprit of the whole exercise, government splurging or tax cuts (take your pick or choose both) did as much to create the boom preceding the bust as anything.
Global crisis is not only about companies of financial services. It is about common people as well. The ones with loans, credits, mortgages. The ones with jobs to preserve, houses to retain, families to maintain, relatives to support, children to send to colleges. The ones with budgets, where every cent has its destination. How many of the people lose jobs, cars, homes? How many have to cut out the spendings, which they considered a normal part of their lives? - http://www.votetheday.com/finance-26/are-you-feeling-the-effects-of-the-financial-crisis-311