Ask the Economist Issues Beyond Palo Alto, posted by Tyler Hanley, online editor of Palo Alto Online, on Sep 30, 2008 at 3:57 pm Tyler Hanley is a member (registered user) of Palo Alto Online
Economist Stephen Levy of Palo Alto will be online live to answer your questions about the economic crisis facing the nation and California and its local impacts.
Levy is director and senior economist of the Palo Alto-based Center for Continuing Study of the California Economy -- a private research organization founded in 1969 to provide an independent assessment of economic and demographic trends in California.
Levy has degrees in economics from MIT and Stanford University and has a reputation for being a frank and provocative speaker.
Visit this thread to participate in the discussion on Wednesday (Oct. 1), from 11 a.m. to 1 p.m.
Posted by Alan Cooper, a resident of the Old Palo Alto neighborhood, on Sep 30, 2008 at 4:33 pm
A question/comment for the expert economist on Wednesday's forum:
Why can't "the Fed" do the bailout? This is their job, and they have already committed 600 billion dollars to help banks and private corporations with their liquidity and bad debts. And, they are currently looking for ways to commit more money. "The Fed" only need ask the Treasury to print the needed money (i.e., that's how they get their funds), but taxpayers have to work hard for their earnings (and taxes). Why should taxpayers commit 700 billion of their hart-earned tax dollars to fund the bailout?
Posted by wondering, a resident of the Fairmeadow neighborhood, on Sep 30, 2008 at 4:59 pm
Why doesn't the Congress NATIONALIZE the banks? This would guarantee cash and credit flows until the situation is under control, after which the banks could be auctioned off the the highest bidders, or reassigned to the private sector in some other way?
Posted by Richard, a resident of Menlo Park, on Sep 30, 2008 at 11:14 pm
What do you think of the proposal of economist Allan Meltzer that the federal government loan the banks money, with the troubled securities as collateral, and collect interest -- rather than buy the securities?
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 10:07 am
Background for the online--Background 1
The immediate cause of the current financial system turmoil is the wave of lending for home purchases that occurred from 2004 through 2007. Many loans were made and houses purchased where 1) loans were made to borrowers who could not reasonably be expected to pay back the loans and 2) homes were purchased at high prices on the expectation that home values would continue to go up.
It was this expectation that home prices would go up that allowed both parties (borrowers and lenders) to overlook the risks involved and to make loans that did not meet conventional criteria of prudence.
Home prices were in fact too high as many economists were warning and have since dropped substantially, particualrly in places (like the San Joaquin Valley) where prices doubled in five years and where many loans now in default were made.
As a result lenders have seen a serious decline in the value of their asset base as these home loans are now worth less than face value. Some banks and financial institutions that held large amounts of mortgages bundled together and sold to investors have gone bankrupt or been merged into other financial institutions.
Three direct results have followed.
1. Financial institutions have less money to lend and are more cautious about lending.
2. Banks are less able to attract new money or hold existing deposits becasue people are worried that they will be the next to fail.
3. There is a general decline in confidence in the financial system and the economy.
This trail of events has led to the legislation Congress defeated on Monday and is now in the process of revising for another vote this week.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 10:53 am
Background for the online--Background 2
There is substantial anger among residents that the bailout/resuce plan is a giveaway to greedy and irresponsible Wall Street types.
While there is potential for taxpayer loss, I think the anger overlooks three important other factors--1) we are all in this together because the real economy will spiral downward if confidence is not restored; 2) taxpayers are at risk even if "nothing" is done--there is no way to avoid taxpayer risk and 3) there may be no losses to taxpayers if the bailout/rescue works.
Tom Friedman wrote today on why our fate is CONNECTED in this crisis.
If the banking system shrinks as has been happening there will be less money to lend and less confidence to lend. It will be harder for businesses to get money for payroll, inventory or expansion.
Recent stories range from a Midwest restaurant chain that was denied credit for expansion to Duke Power and ATT annoucning they will cut back on investments if credit is harder to get or more expensive. And you will hear more and more stories from local small businesses or families who cannot get credit or families who are having trouble getting college loans.
And many of us are connected to the financial turmoit through our investment portfoliios and retirment accounts. For example, a stroy today reported that the San Mateo Community College District capital improvement fund had invested in Lehman and had lost nearly $25 million from the wipeout of share value.
The main reason for the bailout/rescue plan is not to help financial institutions only but to get lending going again so the economy does not go into a more serious downward spiral as companies and consumers cut back on spending.
There will be a recession over the next few months but, hopefully, we have learned from the 1930s that we have the tools to avoid cascading into a Depression.
2. Taxpayers are already on the hook. The federal government guarantees deposits in financial institutions and will repay depositors if their bank goes bankrupt. So there is a taxpayer interest in preventing a cascading of bankruptcies. Also the federal government will spend more money if the recession worsens in terms of stimulus efforts. So there is no way for taxpayers to opt out of participation in the costs of the turmoil.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:04 am
Background for online--Background 3
While there are different ways to structure a bailout/rescue package, none of them need require short-term borrowing on the part of the federal government and whether taxpayers gain or lose will depend primarily on how quickly the housing market stabilizes and whether and how soon home values rise.
Under the Paulsen plan as amended and as will be voted on later today, the main element is having the federal government acquire the so-called toxic or bad loans from financial institutions.
The debate over accountability and oversight is really to develop a procedure where THE GOVT DOES NOT OVERPAY FOR THE TOXIC LOANS. The fear of a giveaway is that the government will pay too much in order to make banks solvent and then taxpayers will not get all our money back as we have paid more for the loans than they are worth.
The intent of independent oversight and the reverse auction whereby lenders bid to sell their bad loans and the governments takes the lowest bids is an attempt to make sure we do not pay too much.
There is still risk as I am sure readers will point out and question but that is the attempt at this point.
The other provisions are to assure residents that their money is safe so they will continue to keep money in banks and in money market funds, which are primary providers of short-term funding to banks. The higher FDIC deposit guarantees and the guarantees passed last week for money market investors are directly to keep that flow of funds to lenders going.
In the end it is all about not allowing credit (lending) to dry up and put the real economy into a deeper downward spiral.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:14 am
I think some of the loans can be renegotiated successfuly and some may have borrowers that cannot make any reasonable payment schedule. It seems a better option than massive foreclosures.
The government should be prudent about renegotiating because we have the same options as lenders-to renegotiate or foreclose.
The hope before the recent turmoil was that lenders would realize that there were losses that could not be avoided and renegotiate voluntarily since foreclosure is so costly to them. This did not happen very much.
The foreclosures act as a drag on the housing market and delay the time when prices will reach bottom and stabilize. So there is a common interest in avoiding foreclosure if a modified repayment arrangement is possible.
Both lenders and borrowers have already suffered the loss in value of the home so no one need worry that parties will escape financial losses.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:19 am
There are parts of the package that are being done without Congressional authority. The fed is making more credit available and we have guaranteed money market funds so investors will keep buying bank CDs.
I don't think the Fed has the legal mandate to buy toxic loans and I know that many parts of the package relating to the conditions accompanying the bailout/rescue need Congressional approval.
I think a large part is the desire (or fear) that pushed toward a bipartisan approach. It is why the Democrats did not vote on their package on a party line vote and probably why the administration went to Congress.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:25 am
Nationalizing the banks or some version of this is favored by many economists. The most talked about version would have the government getting preferred stock to a controlling interest in exchange for an infusuion of capital.
Posted by Stephen Levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:33 am
Allan Meltzer is a fine economist and his suggestion is one of the ways to infuse capital into the system.
I think the renegotiation of some of the troubled loans is essential to minimize foreclosures and shorten the downward pressure on housing markets.
In January I wrote that it seemed obvious (I was wrong) that lenders would voluntarily renegotiate since they and borrowers had mutual interests in minimizing losses and if that had happened more voluntary rescue measures might have made sense.
I worry that Meltzer's proposal will not jumpstart renegotiations, even when this is in everyone's interest.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:35 am
I like the mark to market rule. But the main point is that while modifying it (which seems to be in the Senate package) would help the balance sheets of financial institutions, I do not think it helps to move the housing market toward stability.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 11:54 am
Confused by bailout,
I think many people feel that the bailout/rescue plan unfairly helps people who took risks and lost, for example by lending to people who bought homes they could not afford.
I don't see the package exactly that way.
I think imprudent buyers and lenders are bearing great losses. The problem is that there is "collateral damage" in the sense that others are bearing losses also and future losses will hurt everyone in the eocnomy.
If there were a way just to "punish the imprudent" it would have great support. But letting the imprudent lenders fail and the imprudent borrowers get even more wiped out hurts us as well.
It is the downward spiral effect on the economy from falling home prices and tightening or disappearing credit that is a call for governement action to minimize the fallout of private imprudence.
This is also why the TERMS of the transactions where the feds buy the toxic loans and the terms of any renegotiation are important. For example, the government can ask all parties (including homeowners who are helped) to share with taxpayers any future gains the value of homes and associated loans.
Posted by Dave, a resident of the Old Palo Alto neighborhood, on Oct 1, 2008 at 12:03 pm
"Nationalizing the banks or some version of this is favored by many economists."
The links in this post are both to Paul Krugman columns. Krugman links to The American Prospect and cites favorably James Galbraith and Brad DeLong.
It is fair to say that all these people are on the far left of the political and economic spectrum. I doubt if there are many, if any, centrist, right wing, or libertarian economists who are so favorably disposed to nationalizing the banks.
The left wingers may be right in this case, but it is misleading to say that "many economists" favor nationalization without a qualifier. It's actually "liberal economists" who support this scheme. Failure to note this borders on dishonesty.
Posted by Dave, a resident of the Old Palo Alto neighborhood, on Oct 1, 2008 at 12:22 pm
Susan gets to what seems to be the heart of the cause of this problem. Congress pressed banks to give loans to people who could not afford them using the argument that increasing homeownership was good policy. CRA funded lawyers pushed banks (willingly in many instances) into granting loans with no credit checks, verification or other safeguards. Freddie and Fannie ended up guaranteeing these "toxic" loans as Congress pressured Fannie and Freddie's oversight bodies to loosen standards and reserve requirements (while Congress members received fat contributions from Fannie and Freddie).
The geniuses on Wall Street made it worse with the derivatives that his (for a while) the lack of collateral to back these loans.
But Congress is the root villain here.
The proper course of action for Fannie, Freddie and CRA, would be to fold them up and get politicians out of the banking business where they corrupt the system and themselves.
Posted by David Altman, a resident of Menlo Park, on Oct 1, 2008 at 12:45 pm
I agree with Tom Friedman on this issue. Regardless of how much we hate "Wall ST" and would like them to suffer the consequences, we're sitting in the same boat and a leak at their end sinks us too. Question: What is your opinion on Steven Wallman's article in today's Chronicle on "How to solve the credit crisis with no bailout" (pg B9).
It seems cheaper but does not have the prospect of eventually costing
Posted by Susan, a resident of the Midtown neighborhood, on Oct 1, 2008 at 12:48 pm
But shouldn't any major fix include a correction of the causes of this meltdown? You mentioned that the subprimes were lent in such places as the San Joaquin Valley. Is there a suprime crisis in Palo Alto? Unless we understand the causes of the subprime mess, we will probably just continue along the same path, once major federal money is dumped into the system.
I am not convinced that this bill needs to be rushed through, although I agree that Congress needs to stay at its job until it is fixed. I think we have a month or so to get this one right.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 1:03 pm
I liked Wallman's article.
One main point IS to minimize foreclosures and stablize the housing market.
I think the bailout/rescue is 1) the quickest way to achieve what Wallman suggests and 2) has the important added function of more quiclky restoring the lending capacity of banks.
The critical factor linking the two approaches is that the "workout" process will take time. I think having the federal government own the loans is probably a safer approach than forcing banks to renegotiate, which they have chosen not to do voluntarily.
I don't see how Wallman's approach alone quickly infuses confidence so that banks can get funds and make loans.
Posted by John, a resident of the Fairmeadow neighborhood, on Oct 1, 2008 at 1:05 pm
You say you like "mark to market". However, if it is modified, doesn't this reduce pressure on the banks? If so, doesn't this allow banks to offer easier credit? If so, doesn't this help the housing market?
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 1:10 pm
I think that there was pressure for imprudent borrowing on the part of prospective homeowners who were in over their head. I told the community groups I was working with back in January that they had some complicity in the overheated housing market.
But I think there is complicity all around including a system where the money is made on generating, not holding, the loans becasue lenders will sell the loans and get money to make more loans. I am sure there were also unethical mortgage brokers.
There are always two parties to a financial transaction so there is plenty of blame to go around.
In response to your earlier post, the national policy of favoring and aiding homeownership by low income families has been around for a long time and should be debated on its merit. I don't think it was a primary cause of where we are now.
I am not convinced that the bill needs to be rushed through and if there were bipartisan voices in favor of a measured approach and if everyone agreed to stay on and not go home and campaign, that might work out best.
But that is a lot of ifs and I am skeptical that waiting could be presented in a way that gained confidence from voters.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 1, 2008 at 1:21 pm
I am not sure of how the modified mark to market would work.
For those of you who don't have a clue as to what we are talking about, the "mark to market" provision is what caused the balance sheets of financial institutions to reflect that some of their loans were worth less than previously thought--they had to "mark to market" the current value of their loans.
I think the rule is a step toward honest accounting, particulary when the value of the asset (loan) is not likely to recover for a long time.
Changing the balance sheet might have allowed some firms not to go bankrupt but it does not address the problem that everyone would know that their financial statements were fictitious. Nor would it encourage renegotiation of existing loans or bring confidence to depostors or investors.
Posted by James, a resident of the Midtown neighborhood, on Oct 1, 2008 at 1:32 pm
"money is made on generating, not holding, the loans becasue lenders will sell the loans and get money to make more loans. I am sure there were also unethical mortgage brokers."
My son-in-law is one of those unethical brokers, in my opinion. He sold ninja loans to anyone who could sign his or her name. I asked him how they could possibly pay on the reset, or if they miss one paycheck, and he said that it is not his problem, becasue he sells his loan to Fannie, which was actually pressuring brokers, like himself, to sell to minorities (he is a minority himself). He assured me that it is risk-free from his end.
I agree with those who think Fannie is in the middle of this, and we need to reform Fannie.
Posted by Tyler Hanley, online editor of Palo Alto Online, on Oct 1, 2008 at 2:08 pm Tyler Hanley is a member (registered user) of Palo Alto Online
We would like to thank everyone for participating in this Q&A, and especially a big thank you to Stephen Levy for taking the time to respond to these queries about the economic crisis and its local impacts. Stephen will continue to answer questions when he is available to do so, so please feel free to keep posting your questions here. We hope to do more live online Q&A sessions like this in the future.
Posted by Irvin Rushall, a resident of East Palo Alto, on Oct 1, 2008 at 2:52 pm
I have an idea that would allow me to support a "bailout" package. What if the government stepped in and offered to purchase the toxic mortgages from various companies WITH RECOURSE...and then created a new "stock" that would allow the public to participate in that ownership. The Feds would be the driving force...poised to make a profit and would allow people like me to participate at whatever level we would feel comfortable. This would keep the government from putting up all the money and taking all the risk. It would provide needed liquidity and at the same time force the distressed companies to transfer paper in a business-like manner and it would all be done under the capitalistic system I love and trust.
Posted by Irvin Rushall, a resident of the Old Palo Alto neighborhood, on Oct 1, 2008 at 3:49 pm
I have an idea that would allow me to support a "bailout" package. What if the government stepped in and offered to purchase the toxic mortgages from various companies WITH RECOURSE...and then created a new "stock" that would allow the public to participate in that ownership. The Feds would be the driving force...poised to make a profit and would allow people like me to participate at whatever level we would feel comfortable. This would keep the government from putting up all the money and taking all the risk. It would provide needed liquidity and at the same time force the distressed companies to transfer paper in a business-like manner and it would all be done under the capitalistic system I love and trust.
Posted by a, a resident of the St. Claire Gardens neighborhood, on Oct 1, 2008 at 5:00 pm
If a business owners needs a loan from a bank to make payroll, it seems to me that this business owner ought not be doing business as he has a cash flow problem. Giving a taxpayer bailout to a business owner who cannot make payroll based on existing business structure does not seem reasonable. Why put a man who's business is failing further in debt? He better find a new business.
Posted by Richard, a resident of Menlo Park, on Oct 1, 2008 at 11:56 pm
Will this bailout have any bearing on the market for "credit default swaps"? I understand this market vastly exceeds the size of the regulated stock and bond market, and is a key reason for the financial freeze.
The credit default swap market is unregulated, I understand. How can a single nation regulate such global financial creations?
Posted by stephen levy, a resident of the University South neighborhood, on Oct 2, 2008 at 1:44 pm
That's an interesting idea. I think the critical factor in any of the alternatives that have federal participation is making sure that we do not pay too much. This raises the question of how to identify and value the toxic loans, some of which or many of which are bundled with other loans in mortgage backed securities.
Clearly if buyers are paying fair value today, there is less risk to buyers and possibly your idea or the idea that the feds could qucikly resell loans to the private sector--probably after terms are renegotitated so that borrowers are likely not to default.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 2, 2008 at 2:01 pm
Mike Collins on a separate post asks
I am trying to understand the magnitude of the mortgage melt down. It seems to me that only about one out of 20 or so mortgages are in trouble. (That is based on an estimate that I heard on NPR.) And, of course many more will go bad in the next few years. The banks that own these are highly leveraged, so one can see why they are impacted.
My question revolves around the low price that is being considered for the securities that are being purchased. I have heard prices as low as 22% on the dollar for some of these assets. If 90% of these loans will perform and the remaining ones do have salvage value, it would seem that whoever buys these, including our goverment, is getting a deal. What is your take on this. It would appear that there is little risk if we (that is the treasury) picks these up at 40% or 50% of face value.
You have identified the critical point--how much does the government pay and how does the government get help in fairly valuing the assets. The procedure I anticipate is a reverse auction where the lenders offer to sell toxic loans to the government at a stated price.
In theory the government then accepts the lowest bids. There is still the problem of assessing whether the discount offered by lenders is an adequate write down of the loan's face value.
I think that the government intends to buy and lenders intend to offer only the "toxic" loans so the fact that a large percent are "good" loans is true but not relevant. If the government has to buy a package of good and bad loans, then your point is right-on.
The hope is that the government will buy the bad loans at favorable prices/discounts and that there IS upside potential for taxpayers.
Posted by Piece of the Pie?, a resident of the Meadow Park neighborhood, on Oct 2, 2008 at 2:22 pm
Under the modified bill, when the government buys toxic debt, will it also get a piece of the company from which it buys the debt? Also, who would decide if we pay 20 cents or 80 cents on the dollar for the toxic debt?
Posted by stephen levy, a resident of the University South neighborhood, on Oct 2, 2008 at 2:31 pm
Piece of the Pie,
My understanding is that under the current proposal the government will not get equity in the lender's company. There is an alternative proposal discussed in some of the top posts where the government, instead of buying loans, would take an equity position in lender's companies.
The valuation question is The key issue in determining the risk and potential upside to taxpayers. As I said in the above post, I think the government hopes to evaluate and get fair bids through a reverse auction process with the advice of the oversight committees.
One of the key fears is that the government will pay too much in order to bail out lenders.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 2, 2008 at 2:55 pm
The shareholders have been nearly wiped out. I wouldn't consider this "bailed out, scott free".
To the extent that these organizations have received special treatment, it is because they serve a public purpose.
This is a very complicated and sometimes emotional discussion regarding the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Below is the Wikipedia description of these government sponsored enterprises (GSEs).
The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education. Congress created the first GSE in 1916 with the creation of the Farm Credit System; it initiated GSEs in the home finance segment of the economy with the creation of the Federal Home Loan Banks in 1932; and it targeted education when it chartered Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become a fully private institution via legislation in 1995). The residential mortgage borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. Together, the three mortgage finance GSEs (Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks) have severaltrillion dollars of on-balance sheet assets.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 2, 2008 at 3:01 pm
It is also true that Fannie Mae and Freddie Mac tocuh more than half of all home loans generated in the U.S. The feeling was and I agree that a complete collapse of these entities would harm the economy.
One of the difficult truths in the bailout/resuce is that sometimes helping people who have not acted prudently prevents more serious collateral damage--in this case a downward spiral in the economy.
It is a balancing act that sometimes offends the sense that people who acted poorly should bear the full consequences of their actions.
Posted by James, a resident of the Midtown neighborhood, on Oct 2, 2008 at 3:44 pm
If you read my first post, on this (your) thread, I said that my son-in-law was a willing participant in the Fannie fraud (I cannot grasp any other word for it).
Ninja loans are pure fraud, in my opinion. Fannie not only bought them up, but promoted them. My very basic question for you is whether, or not, you think Fannie should stop buying and promoting ninja loans? Or do you think that, since Fannie "serves a public purpose", it should continue to push this fraud?
I believe there can be no solution without accountability. However, there can be no accountability, without understanding the root cause.
Stephen, please give us your honest view about how Fannie/Freddie caused this crisis. My son-in-law already has. Do you agree with him?
Posted by stephen levy, a resident of the University South neighborhood, on Oct 3, 2008 at 9:37 am
I think there is multiple blame.
There is fault in many parts of the process where the loans were first made--on the part of borrowers who knew they were over their head and maybe knew they were lying on application forms, blame for mortgage brokers who convinced themselves and lenders that these loans were risk free becasue the market could only go up or just committed fraud and fault on the part of first lenders who turned the other cheek.
But you are right that there was fault on the part of organizations who bought these loans and bought mortgage backed securities.
There seems to have been a clear abdication of any kind of review process by organizations like Fannie Mae and Freddie Mac that treated these loans as if they were risk free.
I don't think Fannie Mae and Freddie Mac alone created the crisis but were certainly one of a number of participants who did not identify the enormous risk that we are now seeing in imprudent loans and bloated housing prices.
Posted by James, a resident of the Midtown neighborhood, on Oct 3, 2008 at 10:47 am
My question is whether or not Fannie/Freddie should STOP buying subprime loans, going forward? Unless they rewrite their regulations, this problem will continue, once this immediate crisis fades from our memories.
Posted by James, a resident of the Midtown neighborhood, on Oct 3, 2008 at 7:13 pm
"I am not in favor of a rigid rule--if judgment is lacking there is always a way to get around rules."
Of course there ways around rules, however we can prosecute those who break the rules. Remember Enron? You seem to be saying that Sarbanes-Oxley, as flawed as it may be, should not have been passed, because unethical individuals can always get around it.
I don't think we can, once again, trust Fannie/Freddie to get it right. If F/F are continued to be allowed to buy suprimes, we will, over time, be right back where we are now.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 3, 2008 at 7:39 pm
james, I agree with you 100%. I don't understand why nobody in public office is stating the obvious..the root cause of this mess..Congress regulating F and F through a revived and strengthened Community Reinvestment Act, who refused to back up/buy from mortgage companies that did not follow the rules set in place by congress, therefore setting the rules for mortgage companies and brokers to sell mortgages to people with virtually no hope of affording them, because none of the parties bore any risk for either buying or selling the mortgages. On top of that, Standard and Poor and Moody's re-defined risk assessments, such that what were defined as high risk investments suddenly looked low risk when bundled in a shady way, which contributed to ignorance in buying risks.
The consequences were removed from the actions. I have no pity for the majority of people who made bets in buying mortgages with no money down and a huge ARM..they made their beds and should pay the price. I pite the rest of us poor blokes who played by the rules and are now stuck with the price of the folly of the fools and the greedy.
I truly hope there is a 9/11 type commission to get at the root cause, and put in place actions to prevent this travesty from happening again.
Posted by OhlonePar, a resident of the Duveneck/St. Francis neighborhood, on Oct 4, 2008 at 2:34 am
There's an excellent article in the NY Times on the disastrous results of the 2004 rule change that allowed the big Wall Street firms to leverage themselves at insane levels and at the SEC's lack of oversight.
Makes it quite clear that this was a big part of the Wall St. crash and burn.
You're not going to find a single cause because there wasn't one. There are several factors that together created a catastrophe.
Posted by mortgage derivatives are not the problem, a resident of the Charleston Meadows neighborhood, on Oct 4, 2008 at 8:28 am
Look. Bad loans can be grouped together, and the flow of payments or principal can be sliced and diced and resold any way you want to do it.
If you buy the principal for a set of bad loans, you know some portion will not be repaid, and if you buy this, you either know something about the range of the likely portion of failure in various economic scenarios or you are willing to gamble sight unseen.
This is fine and the way the system is supposed to work. It even allows people who otherwise could not afford a house to afford one. Whether they lied or not.
The balance preventing this from getting out of hand is financial loss for those who buy these sliced/diced loans when things go bad. That's what we have now.
The problem is this bailout. It is distorting the impact of bad choices to the point where those bad choices will continue to be made, and it will cost us a very significant inflation tax over the next decades.
I hear as a justification for passing this bill that now, in order to borrow to buy a house, you need a significant (20%?) down payment and good credit! Heaven forbid, that you should have a strong likelihood of repaying a loan that you obtain!
This whole thing is either keystone cops, or there is shenanigans going on in the federal government.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 4, 2008 at 10:26 am
One major foundation of this mess was the widespread attitude that buying houses posed no risk becasue housing prices would always go up or at the very worst not go down.
As to blame I think there is fault all around.
But there is an ominous connection between this thread and another thread on the Weekly Forum asserting that home prices here are immune from decline.
It seems so little time ago that we learned that a dot.com name did not guarantee stock appreciation for us to be repeating the attitude about local housing prices that in its national form allowed the escalating approval of loans that should not have been made.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 5, 2008 at 8:59 am
I think the CA economy will weaken over the next 12 months with increasing job losses, rising unemployment and continued pressure on home prices. We are in the beginning of a mild to moderate recession.
Consumer behavior in the face if income and wealth losses will determine how deep and long the recession becomes along with how well the rescue package works in stabilizing the housing market.
I think a second stimulus package is needed to prevent a serious recession.
State and local budgets could make this year look like the easy budget year.
So a significant turnaround is not likely for a year at least.
I know the phrase "fudamentals are strong" has taken a beating recently but if you think long term enough, the state's economic base has great potential. Now is not the dot.com bust or the aeroapace shrinkage of earlier recessions where parts of CA's economic base disappeared. This is more a cyclical event although it could be very long and has uncovered our vulnerability to imprudent personal spenidng and oversight behavior.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 5, 2008 at 9:10 am
As I read the article it is an attempt to tell the history toward making a statement about candidates in the Presidential election.
It is true that there has been a policy of increasing homeownership among low income groups. But there are four major reasons to be skeptical of placing political blame here.
One, I think the push for broader homeownership was fairly widespread and no political party rose in opposition.
Two, the time in discussion in the article has a Republican president and majority in both houses of Congress so the conclusion grants almost mystical powers to the community groups and their supporters to control policy that Republicans allegedly opposed.
Three, the enormous run up in housing prices that created the conditions for a fall happened before 2006 and mostly happened before the spread of subprime lending.
Four, there is a curious morality to the argument. Even if you argue that Fannie Mae, etc "left the door open" for unethical behavior by turning the other cheek, no one forced borrowers to enter into loans they could not pay or to first lenders in the communities to make bad loans simply because they could sell them later to investors.
I am comfortable with my earlier statements that there is a lot of fault to go around stemming mainly from the widely circulated view that home prices posed no downside risk.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 5, 2008 at 9:47 am
My biggest point is that the REGULATION of Fannie and Freddie, causing them to say "lend to the riskiest or we don't back you up", is the root cause of this problem. That was the beginning of your point of decoupling consequences from risk, from the mortgage lenders down to the mortgage takers.
It is the REGULATION started by the Community Reinvestment Act under Carter, and strengthened under Clinton, that started this ball rolling. Any attempts at whistle blowing and changing the risk set-up were blocked by charges of "racism" in the finance committee run by Barney, and, absolutely we agree, by the lack of will to take on yet another unwinnable fight, given who controls the vast majority of media and how difficult to understand this whole process was ( and is).
Mucking with private markets for social engineering is...socialism...and destroys the normal, healthy relationship of consequences to choices for all involved.
This, combined with the changes by Moody's and Standard and Poor's risk scales, combined with newer, "improved" computer modeling allowing bundling of mortgage risk packages, combined with the great new insurance of betting FOR an ever rising housing market...
and, here we are.
We must insist on a 9/11 type Commission to tease out all the causes and not let this happen again. Who will have the courage to call for this Commission? Who has already called for it?
Posted by OhlonePar, a resident of the Duveneck/St. Francis neighborhood, on Oct 5, 2008 at 11:19 am
Once again, your bias is interfering with your logic.
As Robert Reich pointed out recently--there's no such thing as a free and natural market. Markets don't exist in the wild. They're man-made and they've always been managed at some level (you should see some of the rules regarding bakers in medieval London.).
A lot of regulation came in under Roosevelt--it didn't turn us into a socialist country. It did give us a way of adjusting and regulating the markets for 50 years.
Again, the problem with your blame game is that Bush has been in office for eight years and the GOP held congress for 10 of the past 12. They had the clout to change or undo any problematic regulations.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 5, 2008 at 12:31 pm
Let's try to get sober here.
The driving issue in this financial meltdown is subprime loans. It is NOT caused, primarily, by the so-called "housing bubble". Eliminate the subprimes, and the free market of housing prices wanders up and down, according to supply and demand in a given area.
Subprimes, driven by Fannie/Freddie (pressured by CRA), set the conditions for both internal and external fraudulence, nationwide...and this was driven, without a doubt, by Dems who wanted to extend home ownership to those who could not afford it. The GOP, which wanted an ownership society, was complacent, but it was not the primary causal source. That is why you and Stephen Levy are wrong, when you claim that the issue happened under the GOP watch, and thus they (GOP) should be held accountable.
Wall Street followed the lead of F/F, it did NOT lead it. The conservative margin rules were relaxed, BECAUSE F/F forced a false paradigm (i.e increase home ownership from 'X' percent to 'Y' percent, with securitized paper, implicity backed by the government, and increased profits to Wall Street).
I welcome a full congressional hearing on this massive issue. Let it start next week! Perhpas Stephen Levy will be called to testify. If so, he will get crushed by the evidence that is in front of him, yet he denies. He can join Barney Frank, who should also be put under the spotlight.
OP, you are skating off the end of the glacier on this one.
If the essential issue is not defined, then it will just repeat itself. This is a SUBPRIME loan issue...the rest is follow-on. The Dems own 75% of this disaster.
Occam's razor, indeed! Let us explore the obvious. At some point, even Stpehen Levy might want to join us! Stephen, you cannot hide under a rock. Yes, there is blame to go around, but you are hiding behind that explanation. Perhaps you were part of the subprime problem? When did you first identify, publicly, the F/F fraud? McCain, I notice, warned about it in 2005. Greenspan at about that time.
Posted by Adapt or perish, a resident of the Greenmeadow neighborhood, on Oct 5, 2008 at 4:34 pm
The meltdown was driven by the credit bubble and the risky loans made as he bubble inflated. The extreme riskiness was something built into the system by the Congress and regulators.
Eliminate the extreme riskiness (regulate the markets properly), and the extreme volatility we are seeing would not appear.
The primary fault lies with those who favored deregulation: the Republicans. (Obviously, this was abetted by lenders and borrowers who entered into the riskies behavior.)
FF, CRA: that is all a red herring being offered to you by the people who caused the meltdown.
I admire your tenacity in shirking responsibility, but it is not adaptive in this scenario. The Republicans are about to enter at least 8 years of being in the minority, in part because they caused this issue and in part because they shirk the ongoing responsibility. During their time in the minority, the republicans will be much more effective if they engage with the issues rather than in spin.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 5, 2008 at 5:29 pm
"The meltdown was driven by the credit bubble and the risky loans made as he bubble inflated"
Adapt, Yes! However you do not seem to know what you just admitted. No matter what the Fed interest rate was/is, if lending standards had been maintained, there would be NO subprime loans. The central, causal issue is SUBPRIME LOANS, period.
If this thing had been held to conservative banking standards, 20% down (skin in the game), good/excellent credit rating, proven income, 30-year fixed rate loan...then there would be no crisis, period. However, Fannie/Freddie pressured the political system to lower standards. We are now suffering for this fact.
I will say, again, this is NOT a housing bubble problem, per se. It is a SUBPRIME mortgage issue.
Until we get that one straight, we are doomed to go through this financial crisis again and again.
Posted by adapt or perish, a resident of the Greenmeadow neighborhood, on Oct 5, 2008 at 5:45 pm
"The central, causal issue is SUBPRIME LOANS, period." No, not exactly. It was the credit bubble. This includes all the leveraging that Wall Street got up to, those wacky derivatives, and housing prices, etc. Otherwise we would merely have a housing price collapse, and this is worse than that.
Again, the problem was deregulation (by the republicans). Not just in mortgages, but all over wall street.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 5, 2008 at 6:39 pm
Adapt, no. All the Wall Street derivative stuff was an effect, not a primary cause. Until you get that one right, you miss the real issue, and we will all be subject to a repeat performance.
The housing credit bubble, was not really a bubble, as long as it was constrained to conservative banking standards. However, Fannie/Freddie forced the standards downwards...that is the cause of the so-called "housing bubble".
We should, from all sides, be demanding congressional hearings (9-11 type), starting next week!
Posted by NAC, a resident of the Old Palo Alto neighborhood, on Oct 5, 2008 at 6:48 pm
Thanks so much for continuing to take the time to reply to the articles on this thread.
What are the likely effects of the bail out plan on (1) the exchange rate of the dollar and (2) inflation? It feels as though, if we continue to keep issuing more money, the net worth of the dollar should continue to drop and along with it prices for imported commodities should rise.
Or is it now possible that the world is so economically linked that "we're all in it together" internationally too, so the effect on all major currencies (Euro, Dollar, even Yuan) is likely to be similar thus not making any relative fall particularly bad?
Posted by Jeff, a resident of the Downtown North neighborhood, on Oct 5, 2008 at 10:47 pm
"the time in discussion in the article has a Republican president and majority in both houses of Congress so the conclusion grants almost mystical powers to the community groups and their supporters to control policy that Republicans allegedly opposed."
Levy is letting his politics get in the way of sound analysis on politics. He should stick to economics.
In fact the Senate Banking Committee voted out a bill to regulate Fannie and Freddie in 2005 - all Republicans in favor, all Democrats opposed. The bill died under threat of filibister (by the Democrats) in the full Senate.
There's lots of blame to go around in this, but to pretend that the Democrats weren't the prime enablers of Fannie and Freddie's semi-criminal practices is dishonest.
Posted by Terry, a resident of Menlo Park, on Oct 5, 2008 at 11:37 pm
To say that private institutions were only following Congress's orders and got themselves into this mess is pretty weak. That's like saying Congress held a gun to WallStreet's head to make bad loans... you don't think WallStreet was a willing participant when it reaped record profits and bonuses? You don't think WallStreet influences policy decisions with lobbyists and campaign contributions? You don't think this bailout was put forth with banking interests in mind? I would argue, bankers (with the help of the FED) have influence over Congress, not the other way around... the bailout passing is quite evidence of that.
This isn't a Republican vs Democrat problem, but more of a WallStreet issue. They levered themselves up to 30x times, made 60+ trillions worth of CDS, and went ahead and devised up CDOs with AAA ratings. This is not contained to subprime, and the poor underwriting also extended into Alt-A loans and HELOCs.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 6, 2008 at 7:00 am
I am sorry this has gotten political. I thought there was another thread on the Weekly started by Gary where he attempted a civil discsusion of the causes and associated blame with respect to bad loans. It is a worhtwhile discussion to have without the politics.
In the very beginning of assessing blame there was concern about fraudulent loan practices on the ground in communities. I have no way of knowing how much of this occurred but here is an interesting article from today's LA Times.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 6, 2008 at 7:17 pm
I am cautious about predicting exchange rates.
The global economy is much more interconnected than I expected in the sense that economies around the world are contracting. This will hurt us as foreign strength has boosted our exports (here for Silicon Valley as well) and for all countries to decline at once multiplies the difficulty in getting growth going again.
There was a period when the rest of the world was growing more rapidly than the US, which may have aided the decline in the dollar but also aided our export growth.
There may be some residual energy that the US is the safest place to hold large amounts of capital in Treasury notes in a time of worldwide financial turmoil that is boosting the dollar.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 6, 2008 at 7:25 pm
This was posted on the other economist thread
If credit is tight and demand for credit is high, why are interest rates staying so slow?
Posted by Jay Hall, a resident of another community, 7 hours ago
Where there is tight credit and high interest rates is where there is perceived credit risk. People are only willing to lend in any kind of risky situation for higher interest rates and even then lending is way down.
The inlation outlook has improved both with falling energy prices but also with the economic slowdown. So the inflation risk component of interest rates has fallen.
The very low interest rates are on very short term and US treasury debt where there is a tremendous amount of investment money seeking safety. But many interest rates are up, even on relatively safe municipal bonds.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 7, 2008 at 9:14 am
“I think that the responsibility that the Democrats have may rest more in resisting any efforts by the Republicans and the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac.” (Bill Clinton)
There are a number of YouTube clips out there showing how Dems tried to block GOP attempts to tighten up the RSEs. Here is just one example:
The Dems are now busy holding investigations of the bad guys. Yesterday they grilled Richard Fuld of Lehman Bros. They will aim at large insitutional failures for the next several days. However, suprise, surprise, there will be NO investigation of Fannie or Freddie.
We are, indeed, doomed to repeat this disaster, as long as Dems control the agenda or threaten vetoes (via filibuster).
As long as there is no attempt to get at the primary cause of this deal (subprime loans, encouraged by F/F?), then politics cannot be separated from the search for causes. If the Dems would just step up to the plate, and be honest about what happened, I, for one, would not rant about them.
Posted by Ken, a resident of the Midtown neighborhood, on Oct 7, 2008 at 5:06 pm
A couple of weeks ago, I got a call from from my niece and her husband. They both have solid jobs in the the health care industry, combined income about $180k/ They are now broke, and were whining about needing a loan from me. They said they were just doing what everybody else does: Borrow against the 'equity' in their home, in order to live an extravagent lifestyle. There was never a scintilla of cutback in their minds. Their two kids are unbelievably spoiled. They have major parties at least once a month. They travel overseas on a yearly basis. OK, got the picture? BTW, they were not rich kids...they just got good jobs, and are very liberal in their politics (Obama all the way!).
I asked them what their cutbacks would be. I could hear the deer-in-the-headlights pause, as they could not figure out an answer. They came up with some pablum about not going to Starbucks anymore. I then asked them how they thought this meltdown came about. They were very quick to answer that it was all due to Republican greed. I asked them about Fannie Mae and Freddie Mac. They had never heard those terms. Just to feed a little more bait to the minnows, I asked them if they thought economic justice was served, if low income people could get loans with no down payment. Like an autonomic response, they said, "Of course, poor people deserve to own their own homes, too!".
I then told them they would need to go to their bank for a workout. They asked me waht a "workout" is. I told them they were about to find out. Then I told them I love them, but I would not be wasting any money on them. They need a workout, as in "no pain, no gain".
Then I said goodbye.
I think they are about to go through the gowing up process. At that point, they will vote Republican for the rest of their lives.
Posted by makes sense to me, a resident of the Green Acres neighborhood, on Oct 8, 2008 at 10:58 pm
If the American people ever allow banks to control the issuance of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children will wake up homeless on the continent their fathers occupied. The issuing of money should be taken from the banks and restored to Congress and the people to whom it belongs. - Thomas Jefferson.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 9, 2008 at 7:25 am
These are very difficult and scary times. So if readers have additional questions about the local, state or national economy I will continue to answer your questions.
The "political" nature of recent posts seems to overlook that there was a housing bubble way before there were subprime loans and imprudent purchases were made by families using regular loans. Moreover, no political forces made investors buy loans that were overpriced and no political pressure forced mortgage brokers to mislead families about the terms of loans or risks involved.
And some families made poor decisions, not by being forced by political parties, but by the same mistaken "there is no risk becasue housing prices won't go down" fantasy that everyone seemed to be caught up in and has been recently claimed once again for home values in Palo Alto quite apart from the political party of the advocates for such a view.
It is certainly true that government sponsored enterprises like Fannie Mae in retrospect did not provide the kind of oversight and prudence we would hope for but it is silly to argue that these organizations (and Democrats) were primarily responsible for the many layers of imprudence from borrowers overreaching to investors buying overpriced loans.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 13, 2008 at 1:55 pm
I just finished reading a story about Hank Greenberg (former AIG CEO) in "Fortune". The essence of the problem at AIG is:
..."No matter what historical default scenario was plugged in (risk models), the hazards were small. Generations of data didn't lie - American homeowners paid their mortgages.
Until they didn't"
Now, my question is why did they stop paying, and just walk away? I know several people who bought at the top of the last housing boom, then went underwater for a long time, yet they stayed with it and eventually did just fine. Could it be that they did not have subprime loans? And they had skin in the game with a 20% down payment? And they had 30 year fixed rate loans? And had to prove a source of income?
I disagree with Stephen Levy, that this meltdown is the result of a housing bubble bust. It is the result of subprime loans. The subprimes contributed to the housing bubble, but their main effect was high default rates by homeowners (who had little, if any, skin in the game).
We need to understand the causes of subprime loans...housing bubbles have always corrected themselves, post WWII, without a meltdown...but that was before subprimes became the rule of the day.
Posted by OhlonePar, a resident of the Duveneck/St. Francis neighborhood, on Oct 13, 2008 at 9:53 pm
Gary, 20 percent down and 30-year-fixed became almost unheard of around here in the past few years. This was true of people with excellent credit. And, yes, such loans contributed to the housing bubbles, but not all of them were subprime by a long shot.
Maybe you had to be out there trying to get a house, but finding a traditional loan was a challenge--we had a 20 percent down and we were seen as kind of retro freaks, frankly. (Glad to be retro these days.)
Now 20 percent isn't enough for your average house in PA--basically, it's become impossible to get a jumbo loan, so you're expected to make up the difference, apparently.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 14, 2008 at 4:05 pm
I hear you. Sounds like you dug deep and put some skin in the game.
Look, this subprime thing is a monster that infected the entire system. At that level, there is immense blame to be shared. My point is that the monster was started by a relaxation of traditional loan standards, and this is where the investigation of casues should start.
This is not, primarily,a housing bubble problem. It is a subprime issue.
I congratulate you on being retro on this issue. You are a liberal, but you seem to have conservative personal economic standards. I know many people like you, and some of them are silently suffering, as they realize that they, having played the game stright, will be forced to pay (via taxation, at a minimum) to bail out those who chose to play the casino game, with no skin in the game.
Once this thing shakes out, we should be back on track with traditional conservative loan standards. At that point, all of us retros will be back in the driver's seat...and feeling better about having done it the right way.
I think you and I can, at some basic level, agree on this one.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 14, 2008 at 6:38 pm
I am all ears, honestly. Please explain how deregulation allowed AIG to make unreasonable risk assesments. Derivatives, of various kinds, are a form of leverage/insurance. However, I fail to see how this meltdown occurred, in the absence of subprimes.
Posted by R Wray, a resident of the Palo Verde neighborhood, on Oct 14, 2008 at 6:40 pm
The source of the problem is fiat money, artificially low interest rates and social engineering to give all a house--all the result of government regulation. To ascribe the problem to "deregulation" is gross ignorance.
Posted by The Actual Source, a resident of the Midtown neighborhood, on Oct 14, 2008 at 9:09 pm
"Please explain how deregulation allowed AIG to make unreasonable risk assesments. Derivatives, of various kinds, are a form of leverage/insurance."
This is common knowledge, Gary, and has been explained many times in great detail. Derivatives are not a form of insurance, they are simply a complicated device whose value depends, in various ways, on underlying commodities. They can be USED as insurance. However, AIG insured others, thus making them a WAGER for AIG. They bet, they lost, we lost. (They were also betting we would bail them out.)
You need to google deregulation, swaps, and derivatives. The subprime mess is only a tiny part of the overall picture. The real cause has been deregulation.
Posted by OhlonePar, a resident of the Duveneck/St. Francis neighborhood, on Oct 14, 2008 at 9:41 pm
I blame this far more on deregulation and moral hazard than subprime loans. If the risk hadn't been separated from the original lender you know darn well that they would have been a lot more careful making those original loans.
And, yes, we've known for years that we were getting screwed by the system--we knew the prices were artificially high because credit was too easy to get. This, of course, led to massive speculation and the housing bubble. We waited a long time, but eventually for personal reasons, we had to play.
So we bought high, though it's been okay because of Palo Alto's weird little market and because even with our credit and 20 percent down it's hard to get a mortgage right now (and prices in PA haven't dropped. In fact our house does seem to be worth more than we paid for it--at least this week.)
Plenty of liberals are big on personal responsibility--it's why we don't want the Sarah Palins of the world telling us what are values should be. It's why I don't think much of how she makes a big deal about family values while not actually put her family first. If you're going to talk the talk, then walk the walk. (And that goes double for anyone who thinks their religious beliefs should apply to all.)
I'm not anti-business, anti-capitalist or anti free enterprise. I don't, however, see businesses as something that shouldn't be regulated. It doesn't work very well--and I think it's asking corporations who are primarily in the business of making a profit to somehow be responsible for nonfinancial things.
I think one of Bush's many problems as a president is that he really, really couldn't separate the country's best interests from the best interests of the oil companies. He was an oil guy and he sees things through that filter.
I think the responsiblity extends beyond institutions to families that pretended risk had vanished from housing prices, buying stocks and going into debt to support spending above their income.
But we are also learning that the financial sector and real economy are connected--that bad decisions can affect innocent victims--and that there are reasons for the government to act to fight an immpending deep recession even if we cannot yet sort out all of who is to blame. Right now is the time for action.
We have the tools to minimize the spread of the financial crash on the real economy (jobs and income) and while we should try and minimize the amount of money that goes to "people who acted irresponsibly", the important focus of action is to puch money out and make temporary arrangments like loan and depsoit guarantees that show we have learned from the Great Depression that we don't have to let original stupidity spiral downward into a Depression.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 15, 2008 at 6:57 am
OP, follow your thought back to the moral hazard portion of your post..who and what caused the moral hazard?
The two beliefs you have, that DEregulation and moral hazard were the culprits, are mutually exclusive. The REGULATION which regulated banks into absurd subprime loan practices to extremely high risk people who had no requirements to put money down and thus no "walk away" risk is the root of the problem.
If the market had not been regulated, rational decision makers would not have made too many extremely high risk loans which were decoupled from risk for the lending institution and the borrower.
Unfortunately, the result now is that we are heading ever more into decoupling consequences from actions, so that those of us who were responsible are now ALSO responsible for bailing out those who weren't. Socialism on the march. Lovely.
Whatever the result of this mess, the take away for Fannie Mae and Freddie Mac and future generations of lenders and borrowers is..doesn't matter what I do, I won't have to pay the price, someone else will.
That attitude is not good to give kids, and it is not good to give the country.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 15, 2008 at 6:59 am
The most irritating part is that the people MOST responsible for irresponsible lending is Congress...and the Republicans are too spineless to tell the American people who did this and how, and the Dems ( except for a few..I saw a letter from one, I will find the name) too spineless to admit they screwed up.
So, it will keep happening because the ignorance of the American people will keep re-electing the people who believe in the ideas that did this.
Posted by R Wray, a resident of the Palo Verde neighborhood, on Oct 15, 2008 at 9:20 am
Economists and the media should be leading the way and explaining to the voters what caused the problems by naming and examining the specific regulations that were at fault. Following opinion polls is what we Objectivists call second handiness.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 15, 2008 at 2:45 pm
Since you posted this link (an editorial from the NYT), it is reasonable to assume that you support its content.
The crtical phrase, that you apparntly missed is:
"the subprime mortgage debacle"
If you could simply admit that this is the issue, rather than a housing bubble per se, we could begin a rational discussion about causes and effects. Until you get to this point, you are left flaying around in the 'there is much blame to go around' pablum.
One needs to identify causal factors, and not confuse them with effects or mere correlations.
Posted by R Wray, a resident of the Palo Verde neighborhood, on Oct 15, 2008 at 3:36 pm
OP states that she is not anti-capitalist.
At first glance, one might think the two negatives cancel and that she is a capitalist. This is clearly not the case since this would mean a belief in principles.
I just read an interesting essay by Tara Smith, "The Menace of Pragmatism". Smith takes "pragmatism" to refer to a style of thinking marked by 4 key features:
1. A short-range perspective. (The here and now is paramount.)
2. The inability (or refusal) to think in principle.
3. The denial of definite identity. (Each thing is regarded as sort of this and sort of that.)
4. The refusal to rule out possibilities. (Nothing is ever off the table.)
I find it interesting to read posts keeping these features in mind.
Smith concludes that pragmatism destroys objective knowledge and values. "The pragmatists' 'quick fixes' fix nothing. On the contrary, they exacerbate existing problems, create more problems that will need fixing, and destroy previously achieved values."
(Dr. Smith's essay can be found in "The Objective Standard", Vol. 3, No. 3, Fall 2008.)
Posted by OhlonePar, a resident of the Duveneck/St. Francis neighborhood, on Oct 16, 2008 at 2:06 am
I'm far too much of a pragmatist to believe or not believe in capitalism. Sometimes it works very well, other times less so. It has its flaws and works best when reulated--i.e. so the tendency toward monopolies is controlled.
We've been over this before--again, Occam's razor. Your hypothesis relies on the Bush administration being weirdly passive for eight years and the notion that events further back in time have more effect on current events than more immediate occurences--such as the deregulation in 2004 that allowed the Wall St. banks to become dangerously over-leveraged.
I also put a certain amount of blame on Greenspan who *knew* he should have slowed down the economy, but instead dropped interest rates to keep the Bush administration out of a recession but helped cause massive real-estate speculation as a result.
Sorry Perspective, this is one of these weird things about which I'm reasonably informed.
Posted by R Wray, a resident of the Palo Verde neighborhood, on Oct 16, 2008 at 2:30 pm
In this context, we generally mean a "coercive monopoly". Alan Greenspan once defined such a monopoly as "a business concern that can set its prices and production polices independent of the market, with immunity from competition, from the law of supply and demand."
When defined this way (by essentials) it easy to see that no company in a free market can do this. They must compete everyday in the marketplace.
It takes the government (by force) to make a monopoly--not part of capitalism.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 16, 2008 at 5:26 pm
I think you are confusing the word "regulate", Regulate. Preventing monopolies by law does not mean regulating the actual business. Yes, you could say "regulations" prevent monopolies and therefore the businesses are "regulated", but I believe most people mean directly influencing how business is done when they refer to "regulation" of businesses.
Posted by R Wray, a resident of the Palo Verde neighborhood, on Oct 16, 2008 at 5:51 pm
A market is either free (free from physical force) or not. There's no "purely" about it. A business can only be protected from or can only gain immunity from competition by the force of government (through regulations). If there are regulations, the market is not free, and it's not capitalism--it's a mixed economy like we have.
Unfortunately, we are accelerating toward a fully controlled economy--like Cuba , Venezuela, North Korea,...
Posted by Regulate, a resident of the Barron Park neighborhood, on Oct 16, 2008 at 8:41 pm
"A market is either free (free from physical force) or not" Technically, sure. Technically, then, there is no free market in the world. We, like the Europeans, have a mixed economy. The question is what the mix is.
No, we are not even moving in the direction of a North Korean economy. Do you know what you are talking about?
Posted by R Wray, a resident of the Palo Verde neighborhood, on Oct 16, 2008 at 10:55 pm
I agree that there is no free market in the world, but that doesn't mean that there shouldn't be. In any mix between the poison and the good, it is the poison that over comes. The question is in what direction is the mix going in the US?
We just had a fascist partial takeover of our 9 largest banks--and more is coming. Have you read an account of the meeting with the economic czar, Paulson, where he makes an offer to the CEO's of the banks that they can't refuse?
Posted by Regulate, baby, regulate!, a resident of the Barron Park neighborhood, on Oct 17, 2008 at 7:57 am
"I agree that there is no free market in the world, but that doesn't mean that there shouldn't be."
Pure capitalism would bring us things like slavery, child labor, injured workers, extreme poverty, etc. For you, those are good. For me, they are poison. For me, that reason alone means there shouldn't be a free market.
Fascism? Do you know what it means? I don't understand why you would use that word.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 17, 2008 at 8:18 am
Dave Altman wrote: " Regardless of how much we hate "Wall ST" and would like them to suffer the consequences"...
I think that is the fundamental problem with the left. I don't "hate" Wall Street. Do people who say these things even know what Wall Street means? Wall Street means OUR JOBS. I LOVE Wall Street. Like any number of institutions comprised of multiple smaller institutions, like our government, it needs to have "adjustmetns" from time to time, but in general I LOVE Wall Street.
Wall Street grows my wealth. Without Wall Street, we would all be farmers or die.
So, those of you who hate Wall Street? Please give me all your stock and retirement plans to prove you hate Wall Street.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 17, 2008 at 8:23 am
you guys are silly to be talking about "free market" in completely different ways. AS usual, definitions count.
I doubt sincerely anyone is suggesting that a free market means slavery, for God's sake.
Again, free market means letting businesses do what they need to do without government interfering in their ability to function.
Does that mean there are no civil laws for human protection? Of course not! It means that my government does not tell me that I can't build and sell a certain widget because it isn't "in the plan", free market lets individuals decide if they want to take the risk to build widgets or not, and lets individuals decide if they want to buy the widgets. It means that my government doesn't fix my prices, we let individuals decide if something is worth the price or not. It means that if there is any hope for a certain alternative energy, it lets individuals who are much more capable of determining the best bets invest their own money..but then reap their rewards for their risk.
It means equal opportunity, not equal outcome.
It doesn't mean ignoring basic human rights in civil consequences.
Posted by Perspective, a resident of the Midtown neighborhood, on Oct 17, 2008 at 8:31 am
Regulate, do you understand the concept of slippery slope? If you are on the left, you have employed it many times, which such statements as calling Bush Hitler.
If Bush was Hitler to the left, then I think we can grant the right the much more nuanced assertion that we are moving toward the same economy as Cuba or N.Korea, given we just did the biggest nationalization of banks, cars, and insurance companies ever in our history.
The difference is that at least our govt is, so far, mouthing the right words about the businesses paying the taxpayers back and taking back their own stock. We'll see if it happens. It will depend on if socialists are in charge or not.
Posted by Gary, a resident of the Downtown North neighborhood, on Oct 17, 2008 at 1:17 pm
I would like to take you up on your notion that the meldown is, essentially, a leverage issue. The difference between 20:1 and 40:1 is two-fold. Such two-fold differences do not explain the meltdown.
If the underlying toxic subprimes are the cause, as I think, it really doesn't matter that much (although it matters some, obviously) whether the leverage is 20 or 40. It's a bit like being on the Titanic, without a lifeboat available to you...once you go into the water, you are going to die in five minutes or ten minutes, according to the layers of clothing you are wearing, but the end result is the same. The subprimes were the iceberg.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 18, 2008 at 10:36 am
I think there is a difference between addressing the impact of the crises and preventing something similar from happening again. Our foucs now should be on "stopping the bleeding"; there will be time later to assess why the financial sector crises (more than one) happened and whether/what fundamental reforms are needed.
We need to work on three fronts--all connected in many ways but also separate in terms of policy responses.
I favor a second stimulus package along the lines that Speaker Pelosi is proposing (details can be negotiated). So at least $150 billion focusing on aid to state and local governments, expansion of safety net spending like extending unemployment insurance benefits and infrastructure spending. The infrastructure spending proposal is tricky, although enticing, because we would need to focus spending on worthwhile projects that could be underway/expanded quickly without waiving environmental and permitting rules.
I favor more steps to reduce the number of foreclosures and keep people in homes where a renogiated loan would make that possible. The details are complicated but the general principle is that 1) there is mutual interest between borrowers, lenders and the broader economy to minimize foreclosures, 2) the homes are now worth much less than the purchase price, 3) losses will need to be shared and 4) taxpayers should get a part of any appreciation in home prices for folks who are helped.
There are a lot of specific proposals to prevent foreclosures around the idea of voluntary or forced renegotiation of loans But the main point to begin is to send lenders a clear signal that the government will not overpay for these loans. I would also require families who get help to give up a large portion of any future price gains in return for the help. Once lenders know they will not get bailed out on bad loans, there should be a rapid movement toward voluntary renegotiation. In this process there will be continuing losses to many parties, some loans that are beyond saving and more capital losses by lenders and investors related to these imprudent loans.
But minimizing the overhang of homes on the market is an important step in minimizing the capital problems in banks going forward from now.
There have been a number of steps to provide capital to banks and to guarantee deposits and loans toward the goal of releasing the paralysis in lending that threatens to turn a difficult situation into an even more severe downward spiral in the economy.
I would let the existing moves here work out before adding more measures to restore capital and promote lending. I think we will see some positive moves in the markets over the next weeks.
Posted by stephen levy, a resident of the University South neighborhood, on Oct 19, 2008 at 11:00 am
All individuals are liable for federal income taxes if their income is high enough whether they work or only have investment income.
Individuals who work are also liable for the employee share of payroll taxes, which in 2008 were 6.2% of pay (up to $102,000) for Social Security and an additional 1.45% for Medicare.
So there are some individuals who do not owe federal income taxes but do pay federal payroll taxes. The Obama Make Work Pay tax proposal would provide a refundable credit of %500 for a one-worker family and $1,000 for a two-worker family whether even if the workers did not owe that much (or any) federal income taxes.
Obama's rationale is that many workers pay more in payroll taxes than they do in income taxes and this credit is a way to give a tax cut to working families to offset some of their payroll taxes.
The emphasis on working families is why it is true that Obama's plan gives tax cuts to 95% of "working families" while it does not give tax cuts to 95% of all families. There are some families whose taxes stay about the same--neither up or down under the Obama proposals.
There is now a tax calculator on the Obama website that readers can use to see the impact on their family.
The U.S. already has a refundable tax credit for low-income families called the Earned Income Tax Credit, which has been in place since about 1975 I think.
As to the claim that this proposal is welfare or socialist, readers can decide that for themselves.
Posted by Jeff, a resident of the South of Midtown neighborhood, on Nov 1, 2008 at 5:15 pm
When I asked Mr. Levy to comment on Peter Wallison's article, which blamed the GSEs, he said, "As I read the article it is an attempt to tell the history toward making a statement about candidates in the Presidential election."
Now we see that Mr. Levy is all about the Obamaa political campaign. This is not surprising, but we can at least conclude that he is not an objective economist.
Posted by Anna, a resident of the Southgate neighborhood, on Nov 1, 2008 at 5:34 pm
Payroll taxes (i.e., Social Security Taxes) have, since the inception of Social Security, supposed to bear some relationship to the benefits received - partially under the fear that doing otherwise would make Social Security look like welfare and ulitmately erode support for it.
By taking income tax revenue from the top 5% and using it to offset (or 'refund') the payroll taxes of the other 95%, Obama is turning SS into the welfare program that it never was meant to be. For those of us who see Social Security as a Ponzi scheme that we'll never see benefits from, this is a good thing if it indeed reduces support for it as the Roosevelt Democrats who came up with it feared.
Yes Levy is campaigning for Obama and the Democrats throughout this thread - and the others to which he posts. It's misleading to call this "Ask the Economist". He's anything but unbiased. But what else is new?
Posted by Perspective, a resident of the Midtown neighborhood, on Nov 2, 2008 at 8:48 am
Anna: Most of us age 50 or less figured out long ago that Social Security was REALLY a tax, and stopped supporting it in its current form long ago. Let me put my Social Security into the STOCK MARKET for the 40 years I work, and it would be a hell of a lot more money in my pocket, for me to pass on to my heirs, than in the Ponzi Social Security scheme.
Yes, Social Security as it is now will die out as the under 50 crowd gets more and more burdened, and the 50-60 year olds now get "indexed" out of the benefits they thought they were promised...in other words, get punished for actually saving for their retirement outside of Social Security.
Sort of like all of us who saved for our kids' college..only to find that our neighbors who DIDN'T save get financial breaks from the colleges, but we dont' because we saved.
There is no incentive any more to take care of yourself and your family except pride in independence. Most people are well on their way to having lost all pride.