[1] http://www.nceo.org/main/column.php/id/282 [2] http://online.wsj.com/article/SB122117966831526067.html
I bet you if the big money families started losing big chunks of their fortunes that there would be serious reform. Same with retirees and their pensions.
How do you think the prosecution of bankers would go if bankers put the DOJ pension at risk?
I see your point, but I think that if the whole deregulation (and thus free market) hadn't happened, a lot of the damage could have been avoided.
Also, regarding the 'regulated market' look at the massive frauds that took place at Fannie and Freddy which are essentially arms of the gov't. Look at how the Social Security System is administered if any corporate pension plan was run the same way they'd be thrown in jail (if the SEC cared to enforce the law).
Look at the pressure on those institutions to create subprime loans under the federal housing laws. Look at the Fed Reserve chief talking about how great ARM loans were. Regulators, market participants, law makers all conspired to create a toxic environment that was not stable in the long term.
Yes, a lot of damage could be avoided if the gov't, regulators and market participants weren't going around telling everyone that they had guaranteed investments.
To think that after passage of GLB we had a free market is incredibly naive.
Toss in late night infomercials promoting get rich quick house flipping and the pump was primed with people willing to fudge the paper work. And loan servicing companies willing to look the other flip crap loans with little downside. The only thing that really hurt many of these company's is they ended up with to large a loan inventory, if they been a little leaner far fewer companies would have been at risk.
Actually, they did.
See http://news.investors.com/Article/589858/201110311638/Housin... .
"At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties."
"The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining."
http://www.ots.treas.gov/_files/25022.pdf
Then there's Fannie and Freddie lying about the composition of the loans they were buying, which threw off everyone's risk evaluation.
The housing bubble could have been avoided entirely if the Fed had just placed tighter restrictions on the loans that could be made. Greenspan famously decided that he didn't want to do that - which lead to companies like Countrywide creating the loans for packaging by Wall Street, allowing them to offload all risk immediately.
My true disappointment with Obama has been his lack of real, strong re-regulation of Wall Street and a pursuit of criminal charges against many on Wall Street, but at least, immediately after he came into office, added the simple language of requiring lenders to confirm income as part of the lending process. That simple language, which would seem obvious to anyone who would lend money, could have stopped the whole thing in its tracks in my opinion.
We were running another bubble then.
Note that W also encouraged home ownership, so I'm not blaming Clinton alone.
> The CRA had nothing to do with the crisis as most of the subprime loans were made by non-CRA governed companies.
The posted link wasn't the CRA, but a policy that applied to every company that made/makes home loans.
Also, you're ignoring the role of Fannie/Freddie. A large fraction of loans are made to be sold. As the largest buyer, Fannie/Freddie have a huge effect.
Doesn't follow - if the banks were forced, as you say, to make loans, the bubble should have started then.
>The posted link wasn't the CRA, but a policy that applied to every company that made/makes home loans.
That's fine, but there is no indication, in the actual mortgage data, that banks were being forced to issue subprime mortgages. The data shows that it was mainly mortgage companies were issuing subprimes, then offloading them for packaging into CDOs by Wall Street. If you want to make that argument, it isn't enough to produce a document - the data has to support the argument and it doesn't.
>Also, you're ignoring the role of Fannie/Freddie. A large fraction of loans are made to be sold. As the largest buyer, Fannie/Freddie have a huge effect.
Not true - Fannie/Freddie were late to the subprime game and had lost marketshare. In 2006, they got started buying subprimes. Bottom line, Fannie/Freddie had an impact, but they were not the driving force behind the housing bubble.
"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."
http://www.mcclatchydc.com/2008/10/12/53802/private-sector-l...
The housing price data shows a run-up then.
Like I said, there were other factors, but without the "encouragment" to issue subprime, things would likely have been different.
> That's fine, but there is no indication, in the actual mortgage data, that banks were being forced to issue subprime mortgages. The data shows that it was mainly mortgage companies were issuing subprimes,
"banks" in this context is shorthand for anyone offering mortgages, which includes, by definition, mortgage companies. (It doesn't include banks that didn't do mortgages.) The policy cited explicitly said that.
Price data isn't what we're looking at here - we're looking at subprime mortgage origination.
>Like I said, there were other factors, but without the "encouragment" to issue subprime, things would likely have been different.
It is a bit laughable that you think companies like Countrywide had to be forced or encouraged into issuing subprime. Nothing could further from the truth - they were issuing the loans hand over fist, and constantly pushing the boundaries of acceptable loan documentation (such as giving loans to illegal immigrants). No one forced these guys to give loans - they did it because they were making a ton of money.
But let's say what your saying is true - show me documentation that shows banks actually being forced to give loans where they didn't want to. What you have is a document outlining a policy, but no data or evidence showing that it actually happened.
You really need to read this:
http://www.washingtonpost.com/business/what-caused-the-finan...
It's interesting that you think that the fed isn't part of govt and that repealing Glass-Steagall isn't either. Also, the ratings monopoly is also a govt creation. (Yes, folks could consider other things, but their ratings determine what counts for "assets" for regulated entities.)
Most items in the list in that article have govt's fingerprints all over it, and it's hardly complete. For example, it ignores fannie and freddie, the various efforts to encourage home ownership, and the like.
> What you have is a document outlining a policy, but no data or evidence showing that it actually happened.
Are you really arguing that regulated entities don't follow the rules?
If so, you don't get to argue that different rules would have made a difference.
Yes.
>It's interesting that you think that the fed isn't part of >govt and that repealing Glass-Steagall isn't either. Also, >the ratings monopoly is also a govt creation. (Yes, folks >could consider other things, but their ratings determine >what counts for "assets" for regulated entities.)
When did I ever say that the Fed isn't part of the government or that repealing G-S doesn't matter? And the rating agencies were definitely part of the problem. But here's the problem - your basic argument is that the government promoted subprime mortgages. For evidence, you cite a document which purports to say that banks and mortgage companies were forced to lend, thus causing the subprime bubble.
This idea, of course, isn't backed up by the data (as I've shown). Now if you want to move the goal posts and talk about G-S, or the Fed, I'm all ears - they definitely contributed to the subprime bubble. But the idea that the government forced banks and mortgage companies to make loans is just crap.
In fact, it is the lack of government regulation that really caused the bubble. If the Fed had just required confirmation of income, then the bubble would have been stopped in its tracks - but Greenspan refused to make the modifications. When Obama came in, it was among the first regulations put into place.
>Most items in the list in that article have govt's >fingerprints all over it, and it's hardly complete. For >example, it ignores fannie and freddie, the various >efforts to encourage home ownership, and the like.
Again, you have not presented evidence that Fannie and Freddie caused the subprime bubble. They were, in fact, losing marketshare during the bubble, while Wall Street took over the function of securitization. Are Fannie and Freddie messed up? Yes, but they didn't cause the subprime bubble.
>Are you really arguing that regulated entities don't >follow the rules? >If so, you don't get to argue that different rules would >have made a difference.
Of course I can - it's called enforcement. Some laws are enforced, other are effectively ignored. So it's a combination of both rules + enforcement. Witness the SEC not enforcing rules on Wall Street banks. Just today, a judge rejected the settlement offer from the SEC to Citibank, while pointing out that Citibank has repeatedly broken the law, and yet the SEC had not done anything about it - even though they knew Citibank had broken the law. Under Bush, the SEC become a toothless entity - it's gotten somewhat better under Obama, but it is still a captured agency in my mind.
Note - I didn't say that there was one cause, so it's unreasonable to suggest otherwise. I'm pointing out that the subprime aspect is directly traceable to a series of govt policies.
Are you arguing that Countrywide made all of their so-called liar-loans based on the threat of government sanction? If yes, what percentage of loans were forced, by the government, under enforcement threat? Where's your data?
The standards for regulated assets, which is what banks really need, are established by govt. Those standards favored Fannie and Freddie. Those standards also rely on govt-chosen rating agencies.
As to the "encouragement", W was the "ownership" president, so he was looking for ways to encourage lending.
>Govt had a big part in making things so that so that subprime loans made money.
So you're no longer arguing that the government forced banks and mortgage companies to lend?
>The standards for regulated assets, which is what banks really need, are established by govt. Those standards favored Fannie and Freddie. Those standards also rely on govt-chosen rating agencies.
Yes, they are set, but it was a lack of regulation that caused the problems, not too much regulation. Those standards had nothing to do with Fannie and Freddie. The government rating agencies is completely separate issue.
>As to the "encouragement", W was the "ownership" president, so he was looking for ways to encourage lending.
Again, are you no longer saying that the government forced lenders to lend?
Not at all.
The govt actions to make subprime profitable merely meant that there wasn't as much reason to say "i'm not sure that this makes sense".
Govt said that if your loan portfolio doesn't contain enough loans to certain people, you'll be shut down.
Govt then tried to make those loans make economic sense.
Yes, some folks arguably would have made those loans otherwise, but some wouldn't.
And you're attempting to move the goal posts once again here - by merging the two categories. Face it, you have zero evidence to back up the idea that the government actually EVER forced a bank or mortgage company to make loans. Trying to now say "the govt then tried to make these loans make economic sense" is just a junk argument.
So you have to take a step back, and look at political incentives. How are you going to convince these people to support putting their capital at risk?
It's still the correct solution.
The correct solution is to let corrupt and reckless institutions fail.
Just because the deck is stacked against the actual implementation of the correct solution because of 'big money families' and so on doesn't nullify the correctness of the solution.
See regulatory capture and moral hazard for why our system is screwed.
Power means never having to say you're sorry. If you're not part of the elite, your only realistic options are to become part of the elite, or to change the game (i.e. create a new elite including you and those you care about) in some way not easily anticipated / countered by the current elite.
Moreover, free markets have no moral content. Quite apart from unrestricted transactions creating injustice, free markets reward scarce resources in high demand. But something being in high demand does not make it virtuous - fashions change with the wind - and nor is there necessarily virtue in rewarding the owners of those scarce resources, which may be sheer luck. As a collective, we only want markets that are free to the degree that they are not also unjust; and that's a much harder problem.
And wouldn't it be great to design airplanes in a world without gravity? It would make things so much easier!
For your example just considering the airplane, the air would have no reason to stay near the earth, nor would there be any reason for the matter in the earth to coalesce.
The sun would also almost immediately explode because of the immense pressures required to produce nuclear fusion.
You can't have free markets in the way you advocate in the presence of democracy as we know it. To argue for what you want, you need to describe how we would change our governmental structure to make it work. Perhaps an authoritarian rule by a benevolent AI?
I.e. we could say "let corrupt institutions fail", but there's another powerful team that doesn't want them to fail, and can thwart our efforts. If we don't take that into account when designing the solution, we're doomed to fail.
> It's still the correct solution.
Well, no, that's what we're debating.
Does that sound naive to you? Because that, to my ears, is exactly what you are advocating. You're completely ignoring institutional mechanics with a mere handwave of "correctness".
No, it is the dumbest solution picked out of a menu of solutions. If we accept there are "too big to fail" institutions, one way to get rid of them is to wait for them to fail. Much like if we have 8 unsafe airplanes, one solution is to wait for them to crash. The other solution is to enact policies that make these institutions smaller (like I originally proposed).
Look up Free Banking on Wikipedia for Example.
Keep in mind that the economy 'failed' in 28, but it wasn't until FDR that things really got bad.
I just pulled up the a graph of US GDP from Google: http://www.housingbubblebust.com/GDP/Depression.html
FDR took office in March of 1933, which looks like when things got better.