> -----Original Message----- > From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] On > Behalf Of John Williams > Sent: Sunday, October 26, 2008 10:56 PM > To: Killer Bs (David Brin et al) Discussion > Subject: Re: My contribution to the bail-out > > Dan M <[EMAIL PROTECTED]> > > > > First, it isn't that simple, > > Yes, you do tend to oversimplify. > > >the S&L mess (which also came > > after a spell of regulators looking the other way because government > > regulation was bad.....another of many coincidences, I suppose). > > Actually, a large contributor to the S&L failures was poor government > regulations. When inflation shot up, the S&L's were prohibited > by regulation Q from paying high enough interest on deposits to attract > enough money.
Hmm, I have a hunch you know, but choose to ignore the main problem with that argument. It is true that the regulatory environment that was reasonable for S&Ls to work in from the '30s through the mid-70s became problematic in the late 70s to 1980 for the reason you mentioned. As a result, in 1980, the limitation on the interest offered by S&Ls was lifted. In 1980, the prime rate was around 20%, so I could see that being problematic. It was recognized as such, and the law was changed. There were a few S&L failures in the early 80s, and I won't argue against the proposition that this law was a very significant cause of those early 80s failures. But, the fertilizer hit the fan in the late 80s, where regulators (who were following the boss's viewpoint that government regulations were evil and the free market would solve everything) loosened the regulations on S&Ls as much as possible, and looked the other way when they violated basic rules (like lower limits for equity on hand). In particular, their moving from the mortgage business to the high risk/high gain business loans, and then their failure to accurately account for the value of the business property heading south in the mid to late '80s was the reason that the government had to spend so much money. If you are allowed to cook the books, (like companies did when Reagan told them it was OK to raid the pension funds of their employees using funny math to justify the theft), then it is possible to hide all sorts of bad things until they get so bad that people can't help but notice. I was at ground zero when it happened and watched very closely. In particular, I remember the same arguments you've been giving as the reason why this would not result in either the employees or the government losing money by the acceptance of shady accounting practice as the new norm. Guess what, both did. So, at face value, your argument is that we should ignore this and focus on what happened ten years before. It appears to me that this is only logical if one assumes a priori that government regulation is bad (as happened in the 80s) and then immunize one's arguments from virtually any empirical falsification by appeal to complications. >Furthermore, S&L's were required to make mortgage loans mostly to customers >within a small radius > of the S&L. With little ability to attract new deposits, and almost no > geographical diversification, it is no surprise that they made a > lot of desperate, bad investments that ultimately led to many S&L >failures. The overwhelming number of failures came years after restrictions were _removed_, and the regulators looked the other way while the safeguards that were technically in place were ignored or worked around with imaginary numbers. But, I'm sure you know all that, so let me ask you a question. Why were restrictions that were removed in '80 cause very few failures before '85, but many failures from '86 to '92? Why dismiss a gigantic change in the value of Houston real estate'85-'86 time frame that was papered over, when simple arithmetic shows how it would affect the books? You dismiss the fact that the values of the properties that were used as collateral for the loans went way under water in that time frame, right? You do know that the S&L's hid this, and that the regulators looked the other way, right? Thinking carefully through the "market solution" at the website you referenced, I have distilled it to the following: "Allowing banks and other regulations to skate closer to the edge of insolvency, and when they skate too close, and the ice breaks under them (e.g. when the "assets" they count on to be solvent lose 40%-70% of their book value), allow them to hide this fact and tell people they are still solvent." I cannot imagine how this is a solution. I pointed out that I was around when and where it was tried, and have pointed out it was a disaster. So, to conclude this part of my response, let me ask you a question: do you think that lowering margin requirements, and then allowing banks to hide the fact that a significant fraction of the loans they have outstanding are under water (the value of the property is less than the value of the loan) is a market solution to the problems we have been facing for the last 4 months? I know your reference believes that (or at least argues that), but I wanted to know if you did. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
