David,
One has to wonder if the packaging of Mortgage based securities at Freddie and Fannie would have been caught had they had the same regulations that the banks have? Freddie and Fannie were the "enablers" of the wide open mortgage system, and we may never know the answers to that. They covered the banks collective behinds (not very well) and Congress covered the ample behinds of Freddie and Fannie, and then Congress has the nerve blame the banks and "deregulation." I agree completely, but that doesn't mean the banks are not worthy of some blame. Maybe your organization identified subprime customers in 2007, but there were plenty of banks loaning their hearts out with very risky loans. Up here in Montana, the local banks didn't do that... they stuck to sane principles. They are doing fine now and making loans. Government intervention is deserves a lot of blame in Japan, especially before their '80 meltdown. The banks were in bed with the largest corporations and the goverment. A goal was to facilitate the "lifetime employee" status that was so highly touted in books like The Art of Japanise Management. It didn't work. It created a collusion that was destined to fail in a competitive world market. Our situation here is different, but there are similarities. The US government - congress and regulators - looked the other way while Freddie and Fannie (quasi governmental organizations) were doing their irresponsible thing. The Fed also promoted irresponsibly low interest rates. Government collusion with business, however, was different than in Japan. Our government played less of a partner role with business than they did in Japan... until now. I find the government intervention in our great recession disturbing, but I think it is a better alternative than not intervening. I believe that a full blown depression would create more problems than the current pro-active government intervention. It is the best of two evils. Both are distasteful. Chris _____ From: [email protected] [mailto:[email protected]] On Behalf Of David R. Block Sent: Thursday, May 21, 2009 8:55 PM To: Radical Centrist discussion list Subject: Re: [RC] A Failure of Capitalism (II)--Whom to Blame? - Richard A. Posner Chris, No, there were regulations in place on the banks, but no regulations of Freddie and Fannie were in place. They still aren't regulated. Banks have regulations, but the mortgages are created and are almost immediately shuffled off of the balance sheets to Freddie and Fannie, with the banks trying to keep the "better" mortgages so as to not run afoul of the FDIC. They guessed wrong on a sizable chunk of the mortgages that they kept, it appears. However, guessing who will be laid off is not an exact science. (Full disclosure: I work for First American Real Estate Tax Service, part of First American Financial and First American Title. Our customers include: Bank of America, Wells Fargo, Citi, J P Morgan Chase, GMAC Mortgage, and numerous others. We are the intermediaries who pay the property taxes. We were identifying "subprime" customers back in early 2007 already.) One has to wonder if the packaging of Mortgage based securities at Freddie and Fannie would have been caught had they had the same regulations that the banks have? Freddie and Fannie were the "enablers" of the wide open mortgage system, and we may never know the answers to that. They covered the banks collective behinds (not very well) and Congress covered the ample behinds of Freddie and Fannie, and then Congress has the nerve blame the banks and "deregulation." This is specifically odious in regards to Barney Frank and Chris Dodd who kept F & F UNregulated and then proceed to rail against DEregulation, while taking thousands in contributions from the officers of F & F. That being unregulated is NOT the same thing as being regulated and then deregulated. Both Franks and Dodd pushed against regulation proposed by the Bush Administration and Senator McCain and others, and are just trying to misdirect the ire of the voters from their own dirty hands, with the able assistance of their lapdogs in the media. I have no confidence in the Democratic party to fix this mess. Absolutely none. I expect them to obstruct real regulatory reform and butter things up for their contributors. The most depressing thing of all is that Obama is following the formula that Japan followed in the late 1980s that has resulted in over 15 years of stagnation: Namely public works spending, massive government debt, and keeping "zombie" corporations alive that should be allowed to go bankrupt. Their debt is at 176.2 % of GDP (2006). Ours is 77 % of GDP as of February of this year. (Numbers from Wikipedia.) Bottom line: I blame government intervention. David "There is no difference between communism and socialism, except in the means of achieving the same ultimate end: communism proposes to enslave men by force, socialism - by vote. It is merely the difference between murder and suicide."--Ayn Rand Chris Hahn wrote: David, "I would have better faith in government regulating appropriately if they would, you know, actually regulate appropriately." This, indeed, is the crux of the problem. How, does the government regulate appropriately? I don't think either party knows the answer. Powerful Fed chairmen like Greenspan span parties. There is plenty of blame to go around with both parties. I am not optimistic about Obama's administration getting it right, but I hope they do. I want a workable solution, I don't care which party puts it into place. As you pointed out, there were essentially "no" regulations in place. The house of cards was outrageously fragile, and it fell because "Banks who thought that this was spiffy, did not adequately insure (but the insurers went belly up anyhow)..." What a mess. The reason I am not optimistic is that even with a truly bi-partisan team of the most brilliant experts in the field drafting regulatory controls, someone will eventually find a way to find a chink in the armor of the regulations. That chink will be so obscure that almost no one will be able to detect it, and even if a prodigy regulator detects a perilous situation and sounds an alarm, virtually no standard-faire legislators or government bureaucrats will be able to understand the problem. And the cycle begins anew. Chris _____ From: [email protected] [mailto:[email protected]] On Behalf Of David R. Block Sent: Tuesday, May 19, 2009 11:14 PM To: Radical Centrist discussion list Subject: Re: [RC] A Failure of Capitalism (II)--Whom to Blame? - Richard A. Posner The failure in capitalism here is a regulation induced failure. I will probably slip into and out of sarcasm without warning. With the CRA starting in the Carter Administration and the expansions to it under the Clinton Administration, co-opted by the "Ownership society" of the Bush Administration, we have the Freddie and Fannie messes. Freddie and Fannie were way stations on the path to selling mortgage backed securities. They would package up mortgages and sell them to banks and investment firms. As a quasi-private and quasi-government agency/corporation/what have you, they bundled these mortgages up and sold them. They also, together with private insurance (think AIG), insured them. So when the Adjustable rate mortgages adjusted and people could no longer afford their payments, the buyers of Freddie and Fannie mortgage packages were left holding the bag. This starts bringing down investment bankers and regular bankers who had bought those packages because suddenly they have two related problems: Decrease in revenue due to the defaults, and decrease in the worth of the mortgages themselves. So they really have double losses on their books. Some of these losses are insured, so the losses transfer to the balance sheets (now, the out-of-balance sheets) of Freddie, Fannie, and AIG, for a few. Banks who thought that this was spiffy, did not adequately insure (but the insurers went belly up anyhow), and they found themselves part of other banks (WAMU, Wachovia, BearSterns, Countrywide, etc). Instead of "deregulation" being the problem, the problem is instead NO regulation. Barney Frank and Chris Dodd fought regulation every step of the way, including regulations proposed by the cause of all of this deregulation, George Bush. Yes, Bush proposed regulation of Freddie and Fannie, as did John McCain. But this is now a newspeak world, up is down, black is white, and regulation is suddenly deregulation when proposed by Bush and McCain. Obama, Geitner, Franks and Dodd and the Lamestream Media tell me so. We must not forget the narrative: EVERYTHING is the responsibility of George W. Bush, even regulations that he couldn't get through Congress due to the obstruction by Franks and Dodd, two of the largest recipients of campaign cash from Freddie and Fannie executives. The other member of that unholy trinity is no less than.......Barack Obama. And they wonder why they have a credibility problem when they are the architects of the "fix" to this mess? Is there a working brain among them? I would have better faith in government regulating appropriately if they would, you know, actually regulate appropriately. But these guys are bought and paid for by the people they are regulating, and are so far an EPIC FAIL on regulation. Blaming it on Bush is a habit that the left as acquired for the last eight years. No surprise that they are still beating the dead horse. Oh, and that Bush deficit? Obama exceeded Bush's 8 year deficit in one year. Yeah, that's CHANGE all right. Right direction, not so much. David "There is no difference between communism and socialism, except in the means of achieving the same ultimate end: communism proposes to enslave men by force, socialism - by vote. It is merely the difference between murder and suicide."--Ayn Rand Dr. Ernie Prabhakar wrote: A useful analysis. While this could be read as blaming the government for everything, the implication is that the industry *needs* the government to regulate it appropriately, as otherwise the market incentive always ends up leading to taking on excessive risk... -- Ernie P. http://correspondents.theatlantic.com/richard_posner/2009/05/a_failure_of_ca pitalism_ii--whom_to_blame--richard_a_posner.php In fact the bankers took too many risks from an overall economic standpoint, and that is the immediate cause of the economic hole we're in. They made too many risky loans, especially in real estate, and when the risks materialized the banks' assets, which included many real estate mortgages and securities backed by such mortgages, plunged in value. The banks found themselves undercapitalized and reduced their lending, which slowed economic activity, which began the downward spiral that we're in. They were permitted and indeed encouraged to take risks that were too great from the standpoint of economic stability by the government itself, in two major respects. First, the regulatory controls that had once limited the amount of risk that banks could take, in recognition of the potentially catastrophic effects on economic stability of a collapse or near collapse of the banking industry, were gradually dismantled, beginning in the 1970s. Not completely dismantled, but enough dismantled to allow competition almost free rein to push the bankers toward taking more risks than were good for the nation's economic welfare. And second, the Federal Reserve pushed interest rates too far down at the end of 2000 and kept them there longer than made economic sense. The results included a housing bubble, a credit bubble, the bursting of the bubbles, and the ensuing swoon of the banking industry--all of which I'll explain in the next blog in this series. _____ _______________________________________________ Centroids mailing list: [email protected] http://radicalcentrism.com/mailman/listinfo/centroids_radicalcentrism.com Archives at http://radicalcentrism.org/pipermail/centroids_radicalcentrism.com/ _____ _______________________________________________ Centroids mailing list: [email protected] http://radicalcentrism.com/mailman/listinfo/centroids_radicalcentrism.com Archives at http://radicalcentrism.org/pipermail/centroids_radicalcentrism.com/
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