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Author Topic: All the Devils Are Here: Everyone was to blame in financial crisis
philnotfil
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Two interesting interviews with the authors of a new book about the financial crisis.

marketplace.org

quote:
HOBSON: I want to start on June 29, 2001 -- a dramatic point in your book. Josh Rosner who was working at a research firm at the time, starts to discover that people are taking out a lot of sub prime mortgages using smaller down payments and he writes a paper called "A Home Without Equity is Just a Rental with Debt." And he gets a call.

MCLEAN: He gets a call from a man named Charles Kindleberger and Charles is a famous guy in Wall Street lore. He wrote a book called "Manias, Panics and Crashes." And Josh doesn't realize who this is at first. And Josh thinks, "OK, well fine I'll meet with him when I have time." And then Kindlerberger says his name, and it's really this great moment because it shows you that people who understood bubbles recognized what was forming here as early as 2001.

quote:
HOBSON: Do you think it was regulators not paying attention to what was going on, or did they know what was happening and they just chose to ignore it?

MCLEAN: I think regulators chose to ignore the crisis for a couple of reasons. One was this ideology that the market is always right. Secondly, the regulators were extremely susceptible to the arguments that the industry put forward. "Derivatives are innovation, innovation is good, we don't want to squash innovation" to home ownership "We need to extend credit to people, we don't want to do anything to stop the flow of credit, now do we?"

marketplace.org

quote:
NOCERA: They began as a way to allow banks and the savings and loan industry to make more loans. The idea is a great idea; it allows for more home ownership, it allows for more capital to be freed up. Over time, they became unbelievably powerful politically, and they became the most powerful force in the mortgage marketplace, especially for prime loans. And part of the thing that we discovered in the book is at least part of the rise of sub-prime lending was a way for Wall Street and industry to get around having to conform to Fannie and Freddie's rules. Then, as you get further along, Fannie and Freddie start to lose more and more business to the sub-prime lenders, and they think, 'Oh my god, we have to get into this business too.' You know, there has been a lot of political hay made about the role of Fannie and Freddie, but we wound up thinking that Fannie and Freddie was not a leader in sub-prime -- they were a follower.

RYSSDAL: Let me ask you this, as long as you've brought up sub-primes: what good did they wind up doing for us? The banks lost money, people lost their houses -- why? Why did this happen?

NOCERA: They turned out to do much less good than they were promoted as doing. And that was always the fact. Sub-prime was supposed to be a way to allow more people to own homes, and that in America is the American dream. We care about that a lot. In fact, the number of new homes that were financed by sub-prime lending was far, far smaller than you would think. Most of the sub-prime lending, in fact, went to refinancing and cash-out refinancing, and you use it for whatever -- vacation, who knows.


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cb
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This is always the outcome of governmental overreach and intrusion that is supposedly for the good of the people. There is simply too much opportunity for corruption, malfeasance and cronyism when a central government the size of ours inserts itself into the free market. If there is a need for oversight or regulation it should be on a state, municipal and local level only where there is direct accountability...not through federal interdiction.
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Wayward Son
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quote:
There is simply too much opportunity for corruption, malfeasance and cronyism when a central government the size of ours inserts itself into the free market. If there is a need for oversight or regulation it should be on a state, municipal and local level only where there is direct accountability...not through federal interdiction.
Except that there is plenty of corruption, malfeasance and cronyism in the free market all ready. Much of "government intrusion" in the free market is intended to mitigate these problems.

And while state, municipal and local level oversight and regulation is a fine idea, how does that work with national and international companies, that simply are bigger than any individual state, municipality or locale? [Wink]

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The Drake
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Yes, let us return to the free market and eliminate the SEC and the FDIC. Why have any rules at all? Surely there is no need to guarantee a free market run on deposits by federally insuring savings accounts! And why shouldn't the casual investor be able to freely purchase stocks in fictional companies, ones that have no actual assets. Surely the 33 Act should be repealed, such that material facts need no longer to be reported. Why force companies to disclose their balance, income, and cash flow statements instead of letting the free market fly unfettered?

In case anyone didn't notice, I'm being sarcastic.

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JWatts
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quote:
Originally posted by Wayward Son:
Except that there is plenty of corruption, malfeasance and cronyism in the free market all ready.

Which is irrelevant to governmental corruption, unless you think that government shouldn't be left out. I'm sure that's the motivation for the occasional politician. Blagojavich comes to mind.

quote:
Originally posted by Wayward Son:
Much of "government intrusion" in the free market is intended to mitigate these problems.

But much has nothing to do with this. Very few people dispute that government shouldn't be involved in prosecuting crime. But many dispute that government should be a major player in every section to the economy.
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Pyrtolin
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quote:
Originally posted by cb:
This is always the outcome of governmental overreach and intrusion that is supposedly for the good of the people. There is simply too much opportunity for corruption, malfeasance and cronyism when a central government the size of ours inserts itself into the free market. If there is a need for oversight or regulation it should be on a state, municipal and local level only where there is direct accountability...not through federal interdiction.

Wait, let me get this straight. Based on the example above, private industry forms a shadow market for predatory loans to evade government regulations restricting predatory loans, eventually drags the government standards down as well, and your response is, essentially "Well if the government wouldn't have tried to prevent us from making predatory loans in the first place, we wouldn't have had to go elsewhere to do it."?

That's like saying "It's the bank's fault- if they didn't have such good security, I wouldn't have to resort to robbing little old ladies."

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G2
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quote:
Originally posted by Pyrtolin:
Wait, let me get this straight. Based on the example above, private industry forms a shadow market for predatory loans to evade government regulations restricting predatory loans, eventually drags the government standards down as well, and your response is, essentially "Well if the government wouldn't have tried to prevent us from making predatory loans in the first place, we wouldn't have had to go elsewhere to do it."?

That's like saying "It's the bank's fault- if they didn't have such good security, I wouldn't have to resort to robbing little old ladies."

You have it 100% backwards.
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Pyrtolin
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quote:
Originally posted by G2:
You have it 100% backwards.

Not according to the actual historical data or anything more grounded in fact than such blind assertions.
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G2
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quote:
Originally posted by Pyrtolin:
quote:
Originally posted by G2:
You have it 100% backwards.

Not according to the actual historical data or anything more grounded in fact than such blind assertions.
Yes, according to the actual historical data or anything more grounded in fact than your blind assertions, you have it 100% backwards. Dude, you think AT&T and other huge companies like that run their entire corporate accounting systems on Excel spreadsheets. Do you really think you know what you're talking about here?
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philnotfil
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So when the author says:
quote:
And part of the thing that we discovered in the book is at least part of the rise of sub-prime lending was a way for Wall Street and industry to get around having to conform to Fannie and Freddie's rules. Then, as you get further along, Fannie and Freddie start to lose more and more business to the sub-prime lenders, and they think, 'Oh my god, we have to get into this business too.' You know, there has been a lot of political hay made about the role of Fannie and Freddie, but we wound up thinking that Fannie and Freddie was not a leader in sub-prime -- they were a follower.
He is mistaken?
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Pyrtolin
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Nice- now you're combining outright lies, ad hominem attacks, and argument by assertion.

Yes I know what I'm talking about- I'm talking about exactly what was said in the quotes at the top of the thread. The predatory shadow market sprung up to get around the regulated mortgage market. Eventually the more regulated market was dragged in behind it because of an unwillingness to suppress the "innovation" by forcing it to adhere to better standards and once F/F's standards had been relaxed and the collapse started, they became the dumping ground for the worst of the garbage.

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flydye
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quote:
Originally posted by The Drake:
Yes, let us return to the free market and eliminate the SEC and the FDIC. Why have any rules at all? Surely there is no need to guarantee a free market run on deposits by federally insuring savings accounts! And why shouldn't the casual investor be able to freely purchase stocks in fictional companies, ones that have no actual assets. Surely the 33 Act should be repealed, such that material facts need no longer to be reported. Why force companies to disclose their balance, income, and cash flow statements instead of letting the free market fly unfettered?

In case anyone didn't notice, I'm being sarcastic.

I'm glad you clarified.
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Colin JM0397
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I know it's hard for those who think big, strong government is the snake oil that cures all, but this mess is just as much due to government failure and collusion. More the fault of the government when you look at all the laws overridden/passed at the request of the bankers.
http://www.ritholtz.com/blog/2010/11/dear-uncle-sucker/
quote:
DEAR Uncle Sucker,

I was about to send you a thank you note for bailing out the economy...but then some nice men dressed in Ninja outfits came in and shot me full of truth serum. That led me to make one more set of edits to my letter thanking you for saving the economy.

It also helped me recall some things I seemed to have forgotten in my other public pronunciations about the bailouts.

I suddenly recalled who it was who allowed the banks to run wild in the first place: You. Your behavior before, during and after the crisis was the epitome of a corrupt and irresponsible government. You rewarded incompetency, created moral hazard, punished the prudent, and engaged in the single biggest transfer of wealth from the citizenry of the United States to the Wall Street insiders who created the mess in the first place.

Kudos.

Before I get to the bailouts, I have to remind you that in:

-1999, you passed the Financial Services Modernization Act. This repealed Glass-Steagall, the law that had successfully kept main street banking safely separated from Wall Street for seven decades. Even the 1987 market crash had no impact on Main Street credit availability, thanks to Glass-Steagall.

-1997-2010, you allowed the Credit Rating Agencies to change their business model, from Investor pays to Underwriter pays - a business structure known as Payola. This change effectively allowed banks to purchase their AAA ratings, and was ignored by the SEC and other regulators.

-2000, you passed the Commodities Futures Modernization Act. It allowed the shadow banking industry to develop without any oversight by the Commodity Futures Trading Commission, the SEC, or the state insurance regulators. This led to rampant creation of credit-default swaps, CDOs, and other financial weapons of mass destruction - and the demise of AIG.

-2001-04, the Fed, under Alan Greenspan, irresponsibly dropped fund rates to 1%. This set off an inflationary spiral in housing, commodities, and in most assets priced in dollars or credit.

-1999-07, the Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability.

-2004, the SEC waived its leverage rules, allowing the 5 biggest Wall Street firms to go from 12 to 1 to 20, 30 and even 40 to 1. Ironically, this rule was called the "Bear Stearns Exemption."

These actions and rule changes were requested by the banking industry. Rather than behave as adult supervision, you indulged the reckless kiddies, looking the other way as they acted out. You were the grand enabler of the finance sector's misbehavior. Hence, you helped create the mess by allowing the banking sector to run roughshod over decades of successful constraints. (Kudos again on that).



[ November 19, 2010, 08:50 AM: Message edited by: Colin JM0397 ]

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KidTokyo
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Can we please stop putting "government" on trial, as if we actually had the option of not having one?

Government is a tool. It can do great things, and it can perpetrate atrocities. If we're adults, we look at the details, and try to learn from mistakes without going to extremes -- just like individuals in their own lives.

But saying that government is "all good" or "all evil" is like being forced to chose between megalomania and suicide as the only options for personal growth.

[ November 19, 2010, 09:19 AM: Message edited by: KidTokyo ]

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KidTokyo
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Colin,

Your example starts of citing Glass-Steagal, which was definitely a "big government" legistlation.

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Colin JM0397
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I didn't say anything about big/small government. Those who feel government is the cure for all that ails have a huge blind spot to seeing that government is many times the cause for much that ails us.

Government collusion with their financiers (and peers) in the banking industry removed protections such as G-S - it has nothing to do if it's "big" or "small" government.

This is not about any 'ism - it's about plain old corruption that goes to the highest levels in this country.

Everyone is busy pointing fingers at the opposing 'ism. Very few are looking at the whole picture and calling it like it is, and very few will be critical to their "side", so the discussion is ripe with strawmen and dissonance on all sides.

It's all such BS.

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Pyrtolin
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quote:
I know it's hard for those who think big, strong government is the snake oil that cures all, but this mess is just as much due to government failure and collusion. More the fault of the government when you look at all the laws overridden/passed at the request of the bankers.
Security as a whole isn't worthless because a given guard fell asleep on his watch.

I do agree with the entire list of failures there, but they're failures to properly regulate, not failures cause by regulation; they make it very clear that, without proper regulation, we'd go back to things like this being regular events rather than the effects of catastrophic failure as corruption weakens the safeguards.

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Colin JM0397
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And, for all the partisans of any color, proper safeguards do not denote "big government" any more than removing said safeguards resulted in "the free market” running amok.
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Wayward Son
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quote:
And, for all the partisans of any color, proper safeguards do not denote "big government" any more than removing said safeguards resulted in "the free market” running amok.
Just remember, Colin, that government tends to be reactive rather than proactive.

Which means that government regulations tend to be enacted only after the "free market" all ready ran amok.

So removing regulations implies the real possibility of the "free market" running amok again. [Eek!]

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JWatts
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quote:
Originally posted by Wayward Son:
So removing regulations implies the real possibility of the "free market" running amok again. [Eek!]

There isn't anything much resembling a "free market" in the US and hasn't been since WW2.

Heaven forbid that adults be allowed to choose whether they can wear a seat belt or not, smoke a joint or charge another adult for sex.

[ November 19, 2010, 02:22 PM: Message edited by: JWatts ]

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Wayward Son
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Actually, if you look at the history of this country, there has never been an absolutely "free market," even during the Colonial Days.

But even the "freer unfree market" we had in the past has run amok from time to time. [Smile]

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philnotfil
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There has never been a free market, but it is still a useful theoretical construct.
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Colin JM0397
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There would be no need to even reactively try out new-fangled ideas; simply start by rolling back that list I linked to, revoke the "bank" designation for the investment houses, and then let the market do its work (ie let those too big to fail actually fail and the FDIC go in and do what they are supposed to do).

Other than that, again the whole thing is one big pile of strawmen. The “conservatives” blame big government; the “liberals/progressives” blame the free market & greed. They are both right and both wrong.

It’s like the government is a rich parent, the banks their 16-year old punk kid. The kid was never allowed to drive dad’s Ferrari and things were fine. Then junior pestered dad for the keys and to take the speed governor off, and dad gave in. He handed the keys to junior and said “be safe now!”. Junior then drove that Ferrari at 150 mph and off a cliff. However, dad managed to install a James Bond like ejection seat with parachute to protect junior (magically just before it went off the cliff). Junior came home and said “hey dad, how about the keys to the Lamborghini now?” and dad handed them over.

Dad and junior are both guilty. Junior should have never driven so recklessly, but dad should have never given him the keys.

[ November 19, 2010, 04:59 PM: Message edited by: Colin JM0397 ]

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Pyrtolin
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quote:
let those too big to fail actually fail and the FDIC go in and do what they are supposed to do
Problem is that the FDIC doesn't cover the institutions in question. The FDIC exists to prevent bank runs, which it did fairly well through this whole mess, but it doesn't cover the investment end of things, which is where the problems were.

This is actually something that's been directly addressed in the Dodd-Frank bill by granting the FDIC Orderly Liquidation Authority over such institutions and establishing the eponymous fund that they have to pay into to cover the costs associated with such an action. Now failing when you get too big means that, while yes, you do effectively get bailed out using money that you paid to insure against just such and event, but you're taken out of the game and your assets are sold off to other institutions very similar to how the FDIC deals with a commercial bank under similar circumstances.

It's a shame that Kaufmann's amendment to it that would have prevented "too big to fail" in the first place and chopped up the current banks into smaller pieces failed, but the authority to do just what you suggest is actually now in place, where we didn't have it before (and didn't bother to build it into TARP, since that wasn't originally its purpose anyway.).

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Star Pilot 111
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cb :This is always the outcome of governmental overreach and intrusion that is supposedly for the good of the people. There is simply too much opportunity for corruption, malfeasance and cronyism when a central government the size of ours inserts itself into the free market. If there is a need for oversight or regulation it should be on a state, municipal and local level only where there is direct accountability...not through federal interdiction.
_______________________________________________________________________________

I think the Constitution says it's supposed to protect the country's citizens. I think that means from outside the country AND inside the country.

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Star Pilot 111
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I forgot to mention. Most of the power (gov and non-gov)in our country these days seems to be in it for themslves.
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