Blowing the Whistle on the Mortgage Bubble
pbs.org
pbs.org
http://cybercemetery.unt.edu/archive/fcic/20110310201200/htt...
I don't agree with every stylistic choice, but that's some of the best professional writing in the fling-a-firecracker-outside-of-your-silo circumstance that I've ever seen. ("I do not believe our company has recognized the material financial losses inevitably associated with the above Citi liability." is accountant-speak for "THE WORLD IS ON FIRE!")
[NB I'm pretty sure I've read they were considering going to what sounded awfully like a wartime "emergency" government if the UK banking sector had collapsed.]
"Before the 2008 collapse and the general financial crisis, RBS Group was very briefly the largest bank in the world and for some time was the second largest bank in the UK and Europe"
http://en.wikipedia.org/wiki/The_Royal_Bank_of_Scotland_Grou...
Of course, it depends how you decide on the size of a bank... Also they had been on an insane binge of acquisitions, including the ABN Amro deal which was possibly the worst acquisition in history (paying tens of billions with one ring folder of information for due diligence - what could possibly go wrong!).
What I mean by that is that as the buyer of a product, you usually would go out and read the reviews, kick the tires, etcetera. At this time, many buyers of investments didn't do that at all.
Our sales guys didn't understand the product for sure, but if they had a customer who asked the right question they would have arranged a conference call with me or a colleague, no issue. That happened like, one time.
I think the concern that my firm had at this time was principally related to the likelihood that emails like this would hit the public domain at some point.
Edit: shameless plug. My stealth mode thing should change this a little bit (for certain investors).
Plugging a stealth mode startup? C'mon man spill it, you know you want to, and now we're all curious.
It's new. A lot of what you get from an is along the lines of "Oh, you want this money in seven years huh? You should probably just buy a bunch of bonds." That's crazy. A .15% change in interest rates will wipe out a year's worth of interest on the long bond.
My thing is an invented modification of a CDO/CLO that keeps your global risk sensible while making sure that your short term objectives are preferentially met. It also makes really customized risks available at almost no cost.
It's cool. PM me for details.
A target date fund approaches your goals by varying the percentage of the portfolio invested in bonds and cash.
My approach doesn't rely on those fixed income instruments to mitigate risk, so isn't exposed to rising interest rates as directly.
In short, it's a new kind of target date fund (in a sense) that is smarter in the present environment.
I'm not sure it's really fair to say that consumers were equally complicit, though - the people being paid to understand this stuff probably had more intent.
I've got to say that the problem for me comes down to one of competence versus theivery. I don't think that the guys I worked with were outright thieves. I do think they were not especially competent in recommending investments.
These guys are salesmen. They could be selling you printers, but they're selling investments instead. They really are not paid to understand the stuff...they are paid to move product.
When I say that the consumers are equally complicit, what I really mean is that in many cases they just listened to a sales pitch and accepted it as truth.
Not to say that there weren't defrauded consumers or evil salesmen. I'm sure there are individual cases of fraud. I just think it's a really complex system with overlapping spheres of incompetence that defies easy characterization as "fraud" or "not fraud."
We can strenuously agree it's broken though.
If you tell me something that you know or should know to be false, I act on what you told me, and you benefit from my action, then by definition I have been defrauded.
Salesman: "By a MagicSuperAwesomeLotto ticket! There's no chance to win 50 million if you don't buy one. It's definitely a very risky investment. But it's an extremely small loss and the payout could make you generationally rich. We sell them in increments of $1, $5, and $50 if you want 50x chance to win, and we accept wire transfers."
Client: "So do I have to match all the picks in a row to get a payout?"
Salesman: "I'm not sure. It's a new product. We'll have to check."
Client: "Oh don't bother. I'll take $5,000 of them."
Overheard... "What a moron."
Calling consumers 'complicit' for failing to understand a company's offerings significantly better than their own salespeople is at the very least insulting.
Again, I agree this is broken. My only point is that saying things are "fraud" is harder than I think you expect.
The problem is that saying "I want X% return with Y risk, show me suitable investments" introduces two problems. The first is that risk is not easily quantifiable[1] and also that there are likely many things that are plausibly suitable for that requirement.
If you are dealing with a salesperson, they are required only to present stuff that has a reasonable likelihood of meeting your goals.
If they're working with someone who is a fiduciary, that fiduciary is required to do the extra analysis, but many people are not lucky enough to work with folks who are held to that higher standard.
In my view, every consumer when transacting with every salesperson should use their own judgment to make sure that the products they are being sold are sensible and suitable for them.
Failing to do that -- to just walk into a store and buy what the salesperson (not your personal shopper or your sister or someone who actually cares) says is best -- is just a bad idea.
I hope that adds some clarity as to where I'm coming from.
[1]Quanta exist, but are not comprehensively descriptive. Any metric will not comprehensively describe risk, especially because there are behavioral factors (your own changing attitude towards risk over time) that need to be incorporated into a thoughtful assessment.
All consumers are all the "buyers" of junk mortgages in the end, but there's no way that we knew how junk they were when the executives were willfully defrauding us.
That reminds me of the Homer Simpson quote: "Marge, it takes two to lie. One to lie and one to listen."
Customers in aggregate do not act as a collective unit. If banks, mortgage brokers, and others are lying, encouraging lying, falsifying, and otherwise systematically subverting the system, the fault lies squarely with them.
Interesting business ethics you've got there. Remind me never to to business (or pleasure) with you.
After reading the whole thing, I was a little shocked to realize the answer is "No, there was no one important who would listen." The accountant who essentially documented the impending collapse of Citigroup in less than 2 pages was interviewed by the SEC and then never heard from them again. Then there's this guy:
> The congressional responses were, “Thank you for your letter, and thank you for your interest.” And, “We’ll look into this,” basically.
> I also wrote letters to just about every television journalist, and network journalist that I could get my hands on. Sent as e-mail with attachments and never received any response. [I wrote to] CNN and Fox News. ABC News, NBC News, CBS. My daughter was working at that time with one of the network affiliates in Phoenix, and she knew how upset I was about this whole thing. So she put me in contact with their consumer reporter, who does the consumer complaints and that sort of thing. He came out to my house and interviewed me for about 45 minutes. And I gave him documentation, and tried to as best I could to explain the situation to someone that was basically ignorant of the mortgage industry. Never heard another word. …
> During the mortgage meltdown, [Fox News host] Bill O’Reilly was having a temper tantrum on his show where he was going off about, “Why didn’t I hear about this? Why didn’t somebody tell me about all this that was going on?” And I almost threw my shoe through the television set. Ask my wife — I was screaming and yelling, “I did try to let you know.” ‘Cause he had been one of the ones that I had sent e-mails and attachments with all of this stuff. …
What the hell are these people supposed to do? Start posting their warnings all over the internet and hope it goes viral? What are the chances that would work vs. the chances they'd all be dismissed as conspiracy theorist crackpots?
It's easy to think "If I were in any of their positions, I would've gotten the entire country's attention", but it seems people at every level are determined to be ignorant as long as it's profitable.
"When I tried to resolve the previous difficulties with Jo Dawson [HBOS group risk director 2004-2005 who eventually replaced Moore], she leant over the table – she stood up – pointed at me and said 'I'm warning you. Don't you make an effin' enemy out of me'," he said."
http://www.guardian.co.uk/business/2012/oct/30/hbos-whistleb...
Lots of people saw this coming. Peter Schiff, among other Austrians, were ringing alarm bells for years. That's part of the problem. People think, "How big a problem can it really be if you're on year number four of telling us what a problem this will be? Surely if it was as bad as you say, it would have happened already/we wouldn't be making all this money." If you read Michael Lewis' The Big Short, you'll get a nice profile of five or six guys who not only saw this coming, but actually timed it perfectly and made fortunes.
You can't solve problems like these by convincing one "important" person of anything, even if its the truth.
I think Upton Sinclair said "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
Everybody loved the real estate bubble. We were all going to be rich forever and not have to do any work.
I think even if the President (regardless of party) had tried to stop the bubble, he would have been laughed out of office.
The problem is timing. Many, many people saw this collapse coming, and most of them got hosed by betting on it. In the above example, say that you borrowed and sold 10,000 shares of Genworth Financial stock on January 1, 2007 because you knew they were sitting on a pile of bad mortgages and the stock price would tank when the music stopped. If you agreed to give that stock back on July 1, 2007, you would have lost money, because the stock went up. If you had just made this bet a few months later, as a few people did, you would have made a killing.
Likely a lot more approaches than I can think of are available to an entity with hundreds of millions of dollars with which to place a bet. I don't know the specific marketplace and id's when you start to get into products like credit-default swaps, but in general the derivative market allows two parties with opposing views of the future to bet against each other.
Suffice to say that you would create a position with a "short" effect for yourself on the soon-to-be-declining securities: through buying puts (pay now, get cash at expiration if the security's price drops), selling calls (get cash now, bear risk of the security price going up until expiration), shorting a security ("borrow" it now and plan to buy it back at a lower price later if you win, or a higher price if you lose) or sell a put + buy a call (same risk as shorting only no need to borrow the security and lower cost than simply buying a put, and more upside than selling a call).
The difference between institutions and mortals like us is that they are allowed to carry relatively massive positions compared to their capital, presumably because they are supposed to know what they're doing. So a player with $100M could probably take a $2B short position because of the leverage he's allowed, say 20:1 (probably conservative - I've heard of firms reaching 100:1). The effect is that a 5% move in the right direction doubles that $100M, and a 5% move in the wrong direction wipes out the player.
At least in theory said player's PhD quants in the "risk management" department minimize the daily volatility of the net effect of all of the bets placed by different specialists within the organization by placing still more bets. We've all seen stories of traders taking positions though that somehow didn't get flagged or adequately hedged by risk management.
Aside from the rare rogue trader, this obviously doesn't always work and companies "blow up" by accruing a loss larger than their capital. (unless say they're selected to be "bailed out" with extra capital) A "blow up" can cascade because of counter-party risk, meaning that firms on the other side of these trades won't get paid. That's why we had AIG get massively bailed out.
Due to SEC regulations however, we mortals are limited to about 2:1 leverage (or 4:1 intraday) for securities. Options and futures can effect a higher ratio though. If a retail investor gets squeezed, he must immediately deposit more cash or the brokerage will liquidate it for him involuntarily. If he still owes, it becomes a debt like any other.
"But we just found more oil!"
And we will, until we don't.
CalculatedRisk was a pleasure to read. She and CR were not super bears. They were measured, cautious and thoughtful -- reason to be ignored when everyone else is making money.
There were reports on radio/TV - and not exactly places focused on the economy - about the housing bubble issues, and a potential collapse of epic proportions as early as 2005, IIRC. It was bad enough in 2007 that I decided to pull entirely out of the stock market, and I'm anything but a financial expert.
Everybody closed their eyes and hoped it wouldn't be them.
There is a scene in the Fifth Element where Gary Oldman knocks a glass off the table to demonstrate how destruction is "good" for the world because it gives all the support actors a chance to play their role. Its a pretty chilling example when you realize that there are people who actually think that way on a daily basis.
I heard a story when visiting London, which may have been completely fabricated, in the context of comparing the morals of banking vs gambling. It told of a book maker who learned that a critical soccer player's girlfriend was planning to commit suicide. Rather than report that information to the authorities to save the girl he used it to bet against the team (the favorite) and won a much bigger return than he would have otherwise when her attempted suicide kept their star from playing. Part of our discussion was whether or not the 'criminal element' which was attracted to gambling (I grew up in Las Vegas just as they were cleaning out the Mafia influence there) was the same or different than the people attracted to Banking. In both contexts 'score keeping' was a simple metric of how much money you had.
If you are an "important person" and someone communicates to you that something is rotten in the bowels of the system and its going to come exploding out in a vile smelly mess. You might ask yourself, "What am I going to do with this information?" What would a gambler do? What would a banker do? What would a politician do?
If you are a TV news conglomerate you might say, "Hmm its one small story of abuse now, but if it really does take out a big chunk of the financial industry its going to be huge! Lets sit on it and plan on how we're going to get big market share from people tuning into us for our indepth coverage!"
If the person getting the information convinces themselves that there is nothing they personally can do to stop it, they can give themselves permission to exploit it (which is usually, but not always, easier). If you can profit handsomely if it happens, and not so much if it doesn't, then what? You see a shark in the water do you yell "Shark!" or do you start recording video thinking about the 10 million YouTube views this will get if you catch it eating someone?
Its Ethics 101. It's why you fire people in your company for even minor ethical violations. It's why you volunteer to run oversight on a local public utilities commission or school board. It's why you go back into the store and return the extra $10 they gave you in change, or pay for product you absently stuck in your pocket and wasn't charged for. It's why you stop interacting with people who aren't ethical.
Morality and ethics don't count for anything in a contemporary society where punishment for misdeeds exists only for those who cannot afford to buy their freedom.
You might be interested in post-70s studies concerning the primate theory of mind in this respect. Primates seem naturally programmed to steal but only when they think they can get away with it. I have been following the work of Laurie Santos at Yale on the question of primate theory of mind and her studies of capuchin monkeys. Her work is highly experimental and interesting and she is very engaging.[0]
She set up field studies to test whether primates use knowledge of whether they are being observed to decide when it's ok to steal and it is clear that they do. [1]
When your family is hungry, you will steal so long as you believe you can get away with it and not deprive them further. Primates want to be seen by peers as ethical because it is advantageous (it will be easier to steal in the future) but in reality generally are deceitful at every opportunity.
It seems that we are indeed generally ethical in relations because of cultural discipline/punish power dynamics, not out of any sense of moral duty. I think the only way to rescue Cicero is to discover the underlying mathematical model by which doing the "right" thing and the "advantageous" thing are always the same. If no such model exists, it's just so much hyperbole rambling of parent to child.
Only penalty was a month's worth of profit. Not one person will serve a day in prison.
But hey, don't unlock your phone, it's a felony. Or download and free journal articles.
Yes, there appears to be an allusion to Aaron's particular case. However, one could certainly see where a particular journal publisher holds the copyright on many excellent articles made available online for a fee having to protect their copyright from some unscrupulous academician using their paid acces to liberate those writings. And how, given the predilection of prosecutors to scare would-be defendants, automating that task might see the threat of criminal charges.
To actually respond to your comment, it may be legal to download free articles (and it's probably legal to download articles for which you've paid), but is it legal to distribute someone else's copyrighted work without their permission? Price doesn't matter.
Edit: no offense. Not sure if I grok your comment or you grok'd GPs.
To a close approximation, no one wanted to hear the warnings.
To find culprits, most Americans need only look in the mirror.
Without looking up the statistics, I doubt it was 'most' Americans, aka 50%+. You heard a lot about 'flipping', but I don't think the majority of the country was engaged in that, even if you include the financial enablers. It had an outsized effect on the entire economy for sure, though.
There are a number of metals that have much more useful applications than gold. From what I've read, gold's intrinsic value was ultimately a western idea that, again, stemmed from a confidence in it's value. When the Spanish discovered gold in central Mexico, the Aztecs had no idea what they were so excited about -- it had no intrinsic value to them. There's a great discussion of the history of gold as money in "The Ascent of Money"
Computer electronics have more gold per ton than a gold mine, because of golds physical conducting properties.
So gold is needed to make efficient computers, which can again be used to produce real value in terms of production. I think that is fair to call that intristic value.
Gold's value is it's uselessness! It's value is derived from the network effect of other producers willing to trade their services/goods in the future for the gold you have stored.
Currency is for earning and spending. there is no bound to how much currency can be conjured to claim on goods from the real world. When the currency system fails under the weight of debt incurred in that currency - then those holding physical tangible goods will do well against those whose wealth is denominated in an arrangement of 1's and 0's.
Aside from that it's ideal for currency because it's fungible (all gold the same, so exchange is easy), portable (small amount is worth a lot, also easy to melt down into smaller lumps), durable (doesn't rust or rot).
It's a virtuous circle whereby its intrinsic physical properties and luxury status make it a good choice for money/currency, which then gives it a new dimension of value as that idea spreads.
In the absence of other people and their ideas of value, given enough cotton paper I could make clothing or a fire. Given enough gold I could probably make a bludgeoning weapon...
Both have fairly minor value in the absence of shared delusion. And even beyond that, what the hell is 'intrinsic' value? Has the universe decreed that there is a property of matter called 'value'? Like particle spin, or atomic number?
If there is a high demand for fiat money -- observable through a rise in interest rates, a measure of the inter-temporal preference for money now versus later -- the Federal Reserve can print more. If there is a high demand for gold money, at the margins we can produce more, but basically the supply is fixed. This limits the rate at which the real economy can grow.
Many people who favor a return to a "gold standard" do so because they have experienced inflation, but have never experienced a deflation. Deflations in general are more painful than inflations.
I don't believe this is true if you allow speculation and credit in the economy. AFAIK even on the gold standard banks were not required to be able to satisfy every gold-backed bill they distributed out.
Of course, it helps more than having no scarce item would, but if the problem continued then people would eventually shift to trade in something else while conserving their gold-backed currencies to pay government taxes.
Meh.
And gold has been used in jewelry, art, decoration as well as monetary purposes for 1000s of years.
I would expect at the least, American readers to be familiar with the "Continental currency" and its devaluation to 1% of it previous value: http://en.wikipedia.org/wiki/Early_American_currency#Contine...
Indeed, we're all taught in high school about things "not being worth a Continental" during the American Revolution.
This doesn't really disprove my point though. No one believed in the government backing the Continental currency (for good reason as it turned out, the Articles of Confederation later gave way to the Constitution).
You're saying gold is valuable, but again, it's because people give it value. Whatever contribution of value gold makes to our electronics is included in the component cost, you could as well be arguing that plastic, glue, or lithium is intrinsically valuable.
And if we theoretically started finding gold nuggets in every square meter of soil in every home in America then guess what: the perceived value of gold would drop. This has happened throughout history: The Roman Empire switched to using gold coins instead of silver in response to an oversupply of silver being found in their new colonies. The finding of gold in the New World caused prices in Europe to shoot up as a result (people had more gold money to spend but the same amount of goods to buy, so the goods simply became more expensive).
Gold, like _everything else_, is worth exactly what people think it is worth.
If Obama had given execs the kind of treatment Larry Summers and the other half of his team wanted (heads on sticks to put it lightly) it would have rocked the investment world and brought much more pain to our economy than many could bear. The American people would have seen justice, but most likely at a substantial cost to the American way of life with ripple (tsunami?) effects seen and felt around the world.
Why anyone would expect Obama to carry through such threats when his staff has mostly been from these very same groups is beyond me. If anything its more like, you guys are going on pikes unless you play ball, here let me connect you to my campaign finance coordinator. Geitner protected his buddies. The real collapse would have been the money available to the various campaigns that eat it up directly or indirectly.
Washington is the one percent, they own Wall Street more than Wall Street owns them. They excuse themselves from insider trading, tax issues, and the like. How are the executives at Fannie and Freddie any different from those at other lending groups? Simple, they have/had better political connections.
Which means that system deserved to crash, die, burn to ashes, and leave us clean ground on which to rebuild.
I'm talking about the fact that the system does not work. It was and is ruining people's lives, and all the bail-outs (which have become systemic) did is prop it up for its few "winners" at the expense of everyone else. Economically speaking, the West is being transformed into Japan: a zombie economy run for zombie banks through zombie companies by ever-more-impoverished workers and propped up at the taxpayers' expense.
That's the duty of the Executive branch.
"we have a responsibility in the person of our President; he cannot act improperly, and hide either his negligence or inattention; [...] far from being above the laws, he is amenable to them in his private character as a citizen, and in his public character by impeachment." -James Wilson (a Founding Father of the US)
"Not but that crimes of a strictly legal character fall within the scope of the power [of impeachment]; but that it has a more enlarged operation, and reaches, what are aptly termed political offenses, growing out of personal misconduct or gross neglect, or usurpation, or habitual disregard of the public interests, various in their character, and so indefinable in their actual involutions, that it is almost impossible to provide systematically for them by positive law." -Joseph Story (Supreme Court Justice, 1811-1845)
This was a lesson we needed to learn as a nation, not one we just need to blame on bankers. Many people participated in the fraud, many banks were complicit with the fraud. That means we should be locking up home buyers right along with the bankers. In fact many of the people interviewed here as whistle-blowers went on being complicit with fraud. None (except the one executive) quit their jobs or even protested in a significant fashion. They all just kept doing work they knew was wrong.
Disclosure: Im an ex-Journalist and an ex-Banker.
I found the programme to be very interesting and raise important points but as always, it IS very hard to prove criminal actions in cases like these and while some might be greedy they might not actually be criminal.
That said; it seems that some knew about these unsavory dealings and hopefully they will face justice.
The most outrageous part in my mind was where Assistant AG Lanny Breuer (who just resigned) gave a speech in which he talked about how he loses sleep at night over concerns about what bringing a lawsuit against a big Wall Street corporation could do.
Imagine if you applied that argument to prosecuting drug cartels! "Just think of all the poor footmen and couriers who might lose their jobs if we prosecute their ringleader"
If you apply for a loan and misrepresent your financial situation, this is not fraud (which is a crime) it's a lie, and lying is NOT a crime. You can say you're a teacher making a million a year and what's supposed to happen is the application should be denied (and may be your credit score might suffer).
It is the responsibility of the bank, not the applicant, to make sure that the applicant can repay the loan. Issuing a loan to someone who you know is misrepresenting one's financial situation is fraud and a crime. When such a loan is issued, it is the bank defrauding the applicant (not the other way around). It's essentially loan sharking or extortion, which is a felony. In doing so the bank is also failing in its fiduciary responsibility to the depositors, which is a (separate) crime as well.
Lying is absolutely a crime if it's considered perjury, and many (all?) loan applications require you to certify the accuracy of statements under penalty of perjury.
But borrowing is a special case. Because if the responsibility were entirely on the borrower, then it would be advantageous to the bank that you lie on the application. Then they could take all your material possessions as soon as you fail to make a payment and send you to prison to boot. (Which is not far from what happened with the mortgage crisis.)
This is how loan sharking works, and why it is illegal.
If someone issues you a loan that you cannot repay, it is the issuer's loss, it's as simple as that. If the issuer knew you couldn't repay it, it's not just their loss, but they're also committing a crime.
Your belief is that by intentionally misrepresenting yourself to a bank and obtaining a loan you otherwise would not have been able to obtain, that is, willfully and knowingly entering into a contract in bad faith -- you are the victim of a crime. That is ludicrous at its face.
If someone issues you a loan in good faith, and you cannot repay, it is indeed their loss. They have not committed crime however.
In the case of a personal loan if you fail to repay, the bank can go to court and get a judgement against you. With that judgement they might be able to make a claim on such assets as to make themselves whole. They cannot "take all of your material possessions" let alone send you to prison. This is very far from what happened...
In the case of a mortgage, the can foreclose on the property, liquidate it and use the proceeds to make themselves whole. Note that anything collected in excess of the loan must be passed back to the borrower. (This rarely happens, because if the property were worth more than the loan, the borrower would just sell or refinance.) After a foreclosure and sale, if the bank is still not whole, in many states they may not come after the borrower for the balance (this is called "no-recourse") in other states they can ("recourse"). In the industry so called "subprime" loans were often referred to a "home equity", because there was an acknowledgement that these were borrowers were greater risk, but the loan was guaranteed by the value of the home, and as long as home prices did not drop significantly they were of little risk.
It is almost never advantageous for the bank for the not to repay a loan, as the most the bank can do is be made whole by recovery, and almost never is.
Finally that is not how loan sharking works.
What I said is that it is a crime if at the time of issuance the lender has reasons to believe you cannot repay the loan. That is a crime, and that is a form of extortion (or loan sharking).
People who misrepresented themselves engaged in fraud. There is no requirement for the bank to assume bad faith on the part of the lender.
If a bank made a loan to someone who could not repay it, they are likely to take a loss. The fraud, where it happened, was when the bank sold this loan. At that point, the idea of 'willful blindness' and 'prudent man' came into play, when banks materially misrepresented the loans they were selling as having been prudently underwritten. But the victim was the buyer of the loan, not the borrower.
After months of discussions, prosecutors decided against a criminal indictment, but only after securing record penalties and wide-ranging sanctions.
http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9...
"This process has highlighted some unacceptable shortcomings that HSBC deeply regrets," said Levey in written testimony. "While our old model served us well historically, it does not work in an interconnected world where transactions cross borders instantaneously and where weaknesses in one jurisdiction can be quickly exported to others."
WASHINGTON – Global banking giant HSBC and its U.S. affiliate exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls, a Senate Permanent Subcommittee on Investigations probe has found.
http://www.hsgac.senate.gov/subcommittees/investigations/med...
what I came away with was how durable secrets are
here was this billion dollar opportunity that a bunch of people became insanely rich exploiting
and it wasn't a secret at all
a bunch of people where doing everything they could to tell people how overpriced the housing market was, and the opportunity still persisted
it seems like there is so much noise in the world, that signal becomes indistuinghable
http://www.npr.org/blogs/money/2012/03/16/148751661/the-frid...
http://www.thisamericanlife.org/radio-archives/episode/405/t...
The Frontline episode 'The Warning' is related and also good:
EDIT for a typo.
more tragicomedy, with some great work by NYT euphemism writer "suggests bad behavior"
Just as today many economists are ringing the alarm bells: the governments public debt issues (both in U.S., Japan and many countries in the Eurozone) are going to end up very badly.
Many central banks (including in the U.S.) have basically become bad banks. Anyone holding medium and long-term public government debt (like many insurance products) are basically bankrupt because governments are going to default.
If you think 2008 was bad, wait until the house of cards collapse. It shall make 1929 look like a cute event.
Some economists are predicting a worlwide GDP drop of as much as 25%.
Of course economists that you see on Fox news and CNN like Krugman (sure, lets create a one trillion $ coin, it's a good idea: why not then create 16 of these and be done with our public debt?) either totally lost it or are playing the game that the state asked them to play: propaganda.
Capitalism cannot work if the cost of printing money is zero (quantitative easing).
Actually I don't think we're living in a capitalistic world. I think we live in a socialist world bent on confiscating savings (at the benefit of the state) using inflation. But the system has its limit.
And who are you going to prosecute and hold responsible once everything collapses? The states are basically forcing everyone into buying their junk bonds.
Do you really think anyone would buy government bonds seen the current situation?
The people responsible for this are very very high up the chain. They're desperately trying to prevent the house of socialist cards from falling apart.
"The problem of socialism is that at one point you run out of other people's money". And that's where we're arriving now.
Of course they're going to pretend that it's not the states that created the state debt but "evil" capitalists. What a joke : (
We do not live in a socialist world. If you had any comprehension of what the word meant you would stop using it.
Just because we haven't obtained the socialist paradise, doesn't mean we aren't living under a socialist order. It's the means that define socialism, not achievement of the goals.
The means are "social" control of the means of production; whether it is by direct seizure of the state, proletariat masses, or small anarcho-syndicalist communes; or indirect by legislation, regulation, licensing, taxation, the SEC, central banks or control of the value of currency and savings; doesn't matter.
And the trend is towards more of that because the goals of most of these initiatives are the goals of distributing goods to (almost) everyone, so that when the private component fails, the social component will expand to rectify the situation.
Get a grip. Just because you haven't obtained your Libertarian paradise (which AFAICT would be hell on earth and quickly devolve back to Feudalism) doesn't mean that the word and the political philosophy don't still have distinct meanings.
Socialism is not an all encompassing term for 'anything a Libertarian disagrees with'.
I cannot understand the political philosophy of socialism any better than I can understand another's faith, nor do I try. Socialist agendas may not be marked as such on the packaging, but that doesn't mean the ingredients didn't come from the same farm.
I have no great plan for society. I am of the mind that the "problem" of stable society is as insoluble as determining what the product prices should be in a marketless society. So, I also don't think anyone else socialist or otherwise has a great plan for society (visions perhaps, but nothing practically actionable), but I don't think that stops policymakers from tinkering when they can.
I have no idea what a Libertarian paradise would be, and I have offered none. Since I have no power to stop the looming dissolution of social order, nor predict the exact time or nature of the chaos; I can only hope to eek out an existence somewhere. But I will continue to remind men such that they may listen, that it was not the pursuit of liberty that brought man's enslavement, but the pursuit of enslavement.
Current society is not run on principles or aims anything like the means of production being in the ownership of the workers.
You can pretend all you like that "OMG Socialism!" is taking over the world, but the reality is far from it in both aims and current direction.
You don't have to understand another's religion or political views to understand what those things are, and you have failed.
As for the looming dissolution of social order - LMFAO. You're a wingnut. Get help.
you know, years ago the deficit scolds said the US would turn into Greece "within two years". they were wrong. they said inflation would spike. they were wrong. and here you go doing the same thing again.
the US will never default on its debt. period. it's the law. they will just use inflation to pay it if they have to. more likely the economy will return to growth and a combination of forces will keep it under control.
yes this is a tax on savings. act accordingly. it's not the end of the world, we have all kinds of taxes. this one exists for a good reason.
Inflation did spike but what happened was that the definition was redefined in a deceptive way.
Look at cereal prices and volumes. Prices have spiked and the containers/volumes have shrunk, but that's not taken into account under measures that exclude food prices. Energy prices have spiked. Gold prices have been running for more than 12 years.
It's not to say we are seeing hyperinflation, but the CPI and other measures have changed in such a way that it makes inflation appear low.
http://voxrationalis.wordpress.com/2011/05/15/the-absurdity-...
Also MIT collects a large amount of data using online prices to determine inflation rates http://bpp.mit.edu/usa/
So the inflation calculations might indeed be inaccurate but there isn't much solid data to back it up.
I personally find it better to focus on issues that have lots of data such as the debt crisis [1], the growing costs of SS and medicare and the harmful effects of industry/government collusion [2] which are all very real and can be proven.
[1] http://www.amazon.com/Endgame-Debt-Supercycle-Changes-Everyt...
It seems unlikely to me that the US has really had >7% yearly inflation for well over a decade. So what gives? The most compelling counterargument is simply that the charts in your link don't reflect reality.
The key thing here, though, is "fixed". Sometimes companies will make adjustments to the product to reduce costs, and those adjustments make the apparent inflation appear lower than they really are. For example, a jeweler can quote the same price for jewelry next year (assuming gold price rises) if they use less gold and more base metals in the jewelry. CPI measure would say that there was no change, although for all intents and purposes there was a change.
I think the issue is that there probably isn't a "true" inflation. The main contention seems to be between those who use inflation as a measure of cost of living, and those who use it as a measure of policy-driven change in the value of money. Both views have their uses. Personally, I prefer the growth in money supply view because it seems to be less susceptible to manipulation by an agenda. The basket of goods is by necessity a small sample of the total cost of living, and I think that the main complaint lodged against it is that the goods are chosen and changed over time in order to portray a picture that's better than it would otherwise be. shadowstats.com has more information on how the CPI changes with selections in the basket of goods.
Using the money supply as the definition of inflation gets closer to the viewpoint I care about, which is trying to get a sense of how policy is changing the value of my savings and income. I like to look at a simple ratio of money supply growth to GDP growth for some idea of how policy is changing the value of money, but this too is fraught with danger because it ignores important things like technical innovation, changing resource bases, and money velocity. So, I think it's a matter of personal preference and probably the best policy is to look at it from as many angles as possible if it's something that's important for your decision making.
1. The US and the Eurozone are suffering from very different problems. The debt in the US is likely to stabilize at around 80% GDP (source: http://krugman.blogs.nytimes.com/2013/01/24/tim-geithner-is-...). European countries are in quite a bit of trouble, but it will most likely take the the form of a slow and painful recovery. Greece has already partially defaulted on its debt (and the world didn't end).
2. There is no reason to assume that many (American?) banks will collapse anytime soon. The realistic worst-case scenario is another multi-trillion dollar bailout at the expense of the taxpayer.
3. The trillion dollar coin idea was a legal gimmick to counter another legal gimmick (debt ceiling). Minting a trillion dollar coin is not substantially different from conventional methods of "printing money" (there are some differences: e.g. no interest is paid on currency). The trillion dollar coin wouldn't be used to pay off the public debt. Minting coins to pay off the public debt is a bad idea, and not a single economist seriously suggested doing that. To reiterate: the trillion dollar coin is a legal trick and has almost no impact on the actual economy.
4. The cost of printing money isn't zero in all situations. Which is why printing money can partially fix some financial problems, but not all of them. Printing money is a good idea for instance when there is a shortage of money in the economy (i.e. risk of deflation). Printing money is never a substitute for real economic activity.
5. Inflation certainly works like a tax. Those with money are hurt by inflation and those with net debt benefit from it. It also encourages investment, which is why most economists think a little inflation is a good thing.
6. US Government bonds are in very high demand. Hence the low interest rate on them.
7. Your crazy rants about how the US is a socialist state don't have any bearing on reality.
To say what should be obvious: Republicans don’t care about the deficit. They care about exploiting the deficit to pursue their goal of dismantling the social insurance system. They want a fiscal crisis; they need it; they’re enjoying it.
The comment by Krugman about Republicans wanting a fiscal crisis to dismantle the welfare system is somewhat hyperbolic. However there are plenty Republicans who claim to care about the deficit but when push comes to shove go for tax cuts instead and then point at the lack of revenues to justify cuts in the welfare system.
See here: https://en.wikipedia.org/wiki/United_States_public_debt#Meas... and refer to the first paragraph of the article of a definition of the two debt types.
You are out of your mind. Absolutely, 100 percent out of your mind.
Krugman dwells into conspiracy theory when he argues that republicans "enjoy" the deficit and with a nice slight of hand assigns the full responsibility for it to them. From random partisan hacks, sure, that how it goes, but for someone that likes to remind everyone that he has a nobel price, perhaps, just perhaps, we can expect a higher standard?
Ugh. I try my best not to be snarky on here, but here is the wiki explaining what socialism is:
http://en.wikipedia.org/wiki/Socialism
Don't worry, you don't have to read past the first sentence to reveal your complete and utter misunderstanding of the term.
The trend, over the years, has been overwhelming in favor of private ownership of the economic means of production. You're going to need to come up with another word to decry what ails you policy wise if accuracy, not dogma, is your goal.
PolySci 101. It ain't that difficult. Do I really need to GTFY on HN?
Best just to flag all political articles and rid them from the site, as they pretty much inevitably end up with discussions like this.
Edit: The comment I mean. OP's article isn't overtly political in any way. It was incredibly interesting. Even just for the insight regarding the mechanisms of QA on a purely physical level. I never imagined underwriters jetting around the nation, going into box filled hotel rooms to get busy underwriting. Learn something new every day.
Much better read
Of course, not many people understand that psychology (for price tolerance) and sociology (for price determination) are not the same thing; so trying to understand why any old "economic system" won't do, and why society's governing structure cannot just be changed like an operating system.
Also, I don't see why if using the correct word is called "accurate," then using the wrong word is called "dogma" instead of "inaccurate." Your implication was that someone who uses the word socialist when they mean to use another word isn't thinking for themselves, I suppose, but you don't actually have any reason to think that, and even if you did, you would still want to stick to educating them instead of snarkily insulting them.
Finally, I'd like you to imagine what Hacker News would be like if people corrected technical ignorance with "CS 101. It ain't that difficult." It's a completely unhelpful thing to say. If you believe someone should actually take a 100-level political science class, then please be helpful and suggest a free university course.
I do believe you meant to help so I hope you'll incorporate these suggestions the next time you correct a political post.
I believe linking to the wiki and clearly directing him to the exact place in the wiki (the first line) communicates the information very effectively. Barrier to entry is zero and if he wants to keep reading he can go more in depth.
>I don't see why if using the correct word is called "accurate," then using the wrong word is called "dogma"
Using the wrong word is not, by definition, dogma. Dogma was inferred from other verbiage in his post, and is my opinion and the impression I got from his language.
>I'd like you to imagine what Hacker News would be like if people corrected technical ignorance with...
See above, -I don't really think this was technical ignorance. Of course I could be wrong, but that's not the premise I'm working with, or the impression I got. Hence the snark.
But as I already mentioned, I shouldn't have bothered to reply at all to what I saw as a dogmatic post. I think there's and adage about what to do when you're coming up short with niceties that applies here...
These are contradictory. Governments don't have to default if they inflate their debt away.
Also, money is just pieces of paper or a number in a computer. You shouldn't keep most of your savings in money. Cash is just an agreed upon number meant to help with short term transactions. It's a tool for trading. You don't have real savings until you have something more err... real, like stocks or actual stuff. Inflation can't touch that. If you feel bonds don't offer a good enough return given inflation risks just don't buy bonds! No reason to panic. The world GDP won't drop 25% unless we run out of key natural resources or face some kind of catastrophe, things that would happen regardless of "socialism".
Government debt matters but not in the way you seem to think.
Consider e.g. Argentina's official inflation statistics versus 3rd party estimates. The difference is not explained by Argentina being a bunch of meanies but rather the system of incentives and particularly Public Choice Theory.
> These are contradictory. Governments don't have to default if they inflate their debt away.
The reconciling position is that inflation used this way is simply default via other means. The holders of debt will not get back what they are owed in terms of purchasing power -- a nominal repayment rather than a real repayment.
In plain English--the government is taking a smaller piece of a smaller pie. No wonder our debt level has climbed.
And yet U.S. Treasury bond rates are still extremely low--which indicates that people are still very eager to invest in them. Why? Because despite obvious problems to solve, the U.S. government is still more secure than other options. As long as that is true, we can continue to finance.
So to talk about doom and gloom, you need to make a case for where all the money will go if it abandons the U.S. The typical candidates have been Europe or China. Well, Europe is in even worse shape, and China is heavily dependent on the U.S. for its own growth.
If Social Security weren't buying government bonds (ok, not technically treasuries), that same debt would be issued as Treasuries or similar. Greater supply of treasuries means higher interest rates.
If the Fed weren't buying treasuries in the open market, demand would decline and the market interest rate would go up. Primary dealer bids are influenced by the market rate for treasuries, so the interest rate on new debt would go up.
Social Security gets special bonds specifically to avoid the bond market distortions you describe. They have been purchasing these bonds in high volume for decades prior to the financial crisis, and marketable Treasury rates were much higher for most of that time.
In addition, in 2011, SS tax receipts dropped below expenditures for the first time since 1983, so SS stopped purchasing these special bonds in any significant net volume. (The trust fund is still cash flow positive due to interest earned on bonds they already hold.)
As for the Fed's purchasing program, Treasury rates were historically low before Fed started buying. In fact the historically low rates were why they started buying Treasuries in the first place--with interest rates bottomed out, QE was one of the only levers left to them. You've got the cause and effect backwards.
My understanding is that, all other things being equal, when government/government controlled agencies purchase government debt ("cause"), the result ("effect") is lower interest rates. Here it is, directly from the head of the Fed regarding the rationale behind QE2:
"What we're doing is lowering interest rates by buying treasury securities and, by lowering interest rates, we hope to stimulate the economy to grow faster." - Ben Bernake
This is the fundamental idea behind reserve banking -- the central bank controls interest rates by manipulating the money supply via the purchase of government bonds:
"When the Central Bank cuts the target rate, they must simultaneously increase the monetary base by buying government securities. The growth of the monetary base creates a surplus in the banks, the supply of funds overnight increases, the demand falls and the overnight rate falls.
...
By controlling overnight interest rates, the central bank will affect the interest rates with longer maturity." - Essentials of Macroeconomics
Is there anything in the above that you disagree with?
They were already effectively zero because there has been such strong demand for U.S. Treasury bonds from customers both domestic and foreign, which was my point at the beginning.
I really, really hate this sentiment. "Oh look, it's yesterday's news!". It doesn't matter. It should be repeated every day on every station until something is done about this. How can we claim our "society" is anything more than an illusion when people can be arrested for tampering with devices they purchase, but people who steal billions get a small fine for it.
The only thing Madoff did wrong was he didn't steal enough.
I'm a big fan. They aren't perfect (who is), but they take reporting and informing very seriously, and they dive deep. I've always gotten a lot whenever I've actually sat down to watch. I really need to watch more.
For example, in order to really report on why prosecutions did not happen, you would think they would take some time to explain how federal law defines certain crimes. But, they never did that at all--instead they ask people for a sort of gut reaction as to whether something seemed fraudulent. But of course the word "fraud" has a number of very specific legal definitions in a number of different laws.
One could argue that that is ok, because the real point is that the language of the laws themselves allow people to get away with fraud (in a gut-check sense). But again, to make that point they would have had to get specific about what the law does and does not say.
So while I found this episode entertaining and interesting as always, I did not find it illuminating.
edit: forgot a word
That said, it's really obvious how much work and thought goes into these. If you compare anything of this complexity against perfection, it will always come up short. But I don't know of another news show that consistently hits the level of quality that Frontline does.
Honest question: Does anyone have any suggestions for reporting they think is in the same league? I'd love to check it out.
TV delivers a ton of information, but most of that information is emotional--i.e. facial expressions, tone of voice, etc. A voice on TV cannot speak facts nearly as fast as as you can read them.
That's nonsense. The following exchange takes place in the documentary where Breuer admits the reason these banks aren't prosecuted is because it is basically government policy not to...
""" MARTIN SMITH: You gave a speech before the New York Bar Association. And in that speech, you made a reference to losing sleep at night, worrying about what a lawsuit might result in at a large financial institution.
LANNY BREUER: Right.
MARTIN SMITH: Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?
LANNY BREUER: Well, I think I am pursuing justice. And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case, there’s some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it’s a factor we need to know and understand. """
http://www.zerohedge.com/news/2013-01-23/assistant-attorney-...
And the reason for that is that it was government policy that created the situation in the first place: wanting everyone to own a home, whether they could afford it or not, and allowing banks to play games to offset the inevitable losses from being forced to give mortgages to people who couldn't afford them. And it was government policy that called a lot of the shots once things started to go south: they were telling banks who had to merge with who, who had to declare bankruptcy, etc.
I'm not saying the banks aren't culpable: they took risks with money that wasn't theirs to risk, it was their depositors'. But the government is culpable too.
The total amount of support given to the banks was far greater than the total amount of ALL residential mortgages everywhere in the USA. Total support given in all the various ways was over $10 Trillion, while the total value of all residential mortgages is under $4 Trillion.
Support given by the government, right? That would make the government, if anything, more culpable.
total value of all residential mortgages
It's true that my previous comment applied to residential mortgages, but as I understand it, the real estate bubble was not limited to residential; it included commercial and industrial real estate as well. Certainly in my local area there has been lots of overbuilding of office and industrial space. So the correct number to compare with the total of government support given is the total of all mortgages, not just residential.
No it's not that hard to prove their was fraud. It just takes forever to bring up Federal Grand Juries for some many cases of fraud.
The Fed Grand Jury I was on one was dealing with financial crimes from 5-6 years ago. They had so much evidence. My lesson was that only the big fish get fried in federal financial crimes, because everyone else gets immunity to compel their grand jury testimony. (if you can't be prosecuted you are unable to take the 5th and remain silent -- you must testify)
It's disgusting because we don't get to say Aaron Swartz lived in a "freedom of information bubble".
Aaron Swartz downloaded some documents – was to be thrown in jail and eventually died by his own hand, perceivably because of the weight of the hammer being dropped down on him.
BUT...wreck the entire economy, cause thousands to lose their home, their job, their careers? NOTHING. What the fuck is going on?