U.S. Economy ~ Ponnuru & Krugman Call-In Event Date: 02/15/2009
video: http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=284070-3 Ramesh Ponnuru talked about approaches to stabilizing the economy, including the stimulus plan, its impact of Wall Street, and the White House plan to steady the financial markets. He responded to telephone calls and electronic mail. ----- video: http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=284070-6 Participating from Princeton, New Jersey, Paul Krugman talked about the U.S. economy and responded to telephone calls and electronic mail. Professor Krugman won the 2008 Nobel Prize in Economics and is the author of The Return of Depression Economics. ==== The road to financial hell: we're only at the beginning.(WALL STREET CRISIS) Publication: National Review | Publication Date: 20-OCT-08 Author: Ponnuru, Ramesh http://www.accessmylibrary.com/coms2/summary_0286-35867581_ITM http://www.thefreelibrary.com/Ponnuru,+Ramesh-a1202 --- UNTIL very recently, an economist who wrote an op-ed about Fannie Mae and Freddie Mac would get only yawns for his trouble--typically from editors saying, No thanks. But in mid-September, economist Kevin Hassett (an NR contributor) got 1,500 e-mails, most of them nasty, in response to his Bloomberg News column on the subject. Hassett wrote that these "government-sponsored enterprises," to use the term of art, are at the heart of the financial crisis. "The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally." He added that these enterprises were able to explode only because Democrats had, in 2005, blocked reformers such as John McCain from defusing them. It's safe to say that nobody is yawning anymore. But the origins of the financial crisis remain mysterious, especially to the general public. Everyone knows that the housing market is at the root of the problem. But 90 percent of mortgages are still being paid on time, including 70 percent of all subprime mortgages. How did this small default rate lead to catastrophe? The Democratic answer is that deregulation turned the financial industry into a house of cards. But the real answer lies elsewhere, in trends and policies that almost nobody would have regarded as major threats to our economic future in, say, 2004. The Federal Reserve had by then responded to the recession at the start of the decade by loosening monetary policy and keeping it loose. Long-term interest rates dropped, stimulating homebuying and refinancing. Very few people expressed any worry: Loose money, at that time, was not increasing the general price level, which would have generated complaints. It was merely inflating housing markets, to the delight of homeowners. It was also encouraging both homeowners and the financial industry to become overleveraged. The historical tables suggested that homebuying was a low-risk investment. But once most people started to think that way, housing was bound to become overvalued. Land-use regulation made the inevitable boom-to-bust cycle worse in some parts of the country. Randal O'Toole, who studies these issues at the libertarian Cato Institute, points out that the market usually moderates housing booms: When prices rise, more houses are built. Areas where homebuilding was severely restricted had no such brake on prices. O'Toole writes, "The housing bubble was not universal. It almost exclusively struck states and regions that were heavily regulating land and housing. In fast-growing places with no such regulation, such as Dallas, Houston, and Raleigh, housing prices did not bubble and they are not declining today." Two more things were necessary to start the financial fire. The first was the development of new financial technologies. The ability to pool mortgages, slice the pools into tranches, and sell and re-sell them to multiple buyers increased efficiency and thus made it cheaper to buy homes. But these securitization techniques proliferated faster than risk-management techniques could keep up with them. The second was the push by the government to promote homeownership among people with high credit risk. The Community Reinvestment Act, liberal legislation that forced banks to meet lending quotas, was one of the government's methods. But it took Fannie and Freddie to turn what would have been a serious financial problem into a disaster. Elsewhere in this issue, Stan Liebowitz provides the grim details of how they led a systematic assault on underwriting standards. Fannie and Freddie enjoyed an "implicit subsidy": Investors and lenders expected the government to bail them out if necessary, as indeed it did. Privatizing profits while socializing risks is a formula for imprudent behavior. That's not a bug in the firms' design. It's a feature. They were set up as government-backed companies precisely to do what no private firm in its right mind would do. In this respect they certainly succeeded. Many Wall Street firms have fingered "mark to market" accounting rules, also known as "fair-value accounting," as an additional culprit. Under these rules, tightened late last year, many financial institutions must report the value of their assets based on their current market prices. Most of the time, that makes sense. The critics of the rules say, however, that they do not work well for assets in illiquid markets during big booms or busts. In recent months, they say, the rules have created a fire-sale atmosphere. Banks with assets that have been marked down--such as mortgage-based securities--have suddenly found themselves below their capital requirements. They have had to unload those securities, in the process driving their prices farther down and thus endangering the balance sheets of other institutions with problematic assets. This chain reaction has been good for buyers and short sellers, but bad for the system as a whole. Brian Wesbury and Robert Stein of First Trust Advisors write, "Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances, had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this 'new market' and give the bank $80,000 in cash immediately (so that you would have 20 percent down), or lose your home. Would this reflect reality? Not at all. Would this create chaos? Absolutely. And it is happening all over Wall Street." There is a heated debate on this subject, with proponents of the strict rules arguing that the opponents want to cook the books to create "fake capital." The opponents retort that it is the current rules that cook the books, and do so at the moment in the firms' disfavor. One of the reasons that investment banks such as Goldman Sachs have in recent days become commercial banks is to avoid the accounting rules that apply to I-banks. (Most of the opponents do not want to scrap the rules altogether; they want to suspend them for those assets where they seem to be causing trouble, pending a rethink.) It took the combination of all of these factors to bring about the present debacle. Most of them, you'll note, involved misguided government policies. While Senator Obama and many others blame deregulation and government inattention for the financial crisis, government intervention actually played a role in every step of this process. The deregulation of banks, by allowing them to diversify, has probably made it easier for them to ride out the crisis. In some cases, additional regulation would have made sense: Stopping mortgage originators from making "no-doc loans," for example, would merely have been an application of the traditional libertarian stricture against fraud. But for the most part this fiasco has resulted not from "market failure" but from a failure to have markets. Libertarians have also always warned that intervention tends to beget more intervention, and so it is likely to be in this case. Whether or not some version of Treasury secretary Henry Paulson's financial-rescue legislation is enacted, many big players in the financial industry are going to get government assistance. In the public mind, that assistance will count as a "bailout" even if both management and stockholders have to eat big losses. The Democratic/media narrative about the folly of deregulation may not have lasting consequences. When Enron and WorldCom went under during the accounting scandals earlier this decade, it led to a major piece of regulation, Sarbanes-Oxley, but did not pull our political system to the left in general. Bailouts, on the other hand, may have bigger consequences. For one thing, people will reasonably argue that if taxpayers are at risk of having to bail out firms they should insist that firms behave in less risky ways. If companies can be "too big to fail" or "too entangled to fail," perhaps we should keep them from getting too big or entangled in the first place. For another, it will become harder to resist bailouts of other sectors of the economy, even if failures there pose no systemic risk. The auto industry already has its hand out. Finally, it will be harder to resist welfarist legislation in general. Liberals will be able to campaign for anything--larger student loans, national health care, jobtraining programs--by saying that if we give billions to Wall Street, we should be willing to help the luckless too. We are going to be paying for the mistakes that led us to this pass for a long, long time. ==== Subject: Video - Democrats Covering up the Fannie Mae, Freddie Mac Scam? Shocking Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis http://www.youtube.com/watch?v=_MGT_cSi7Rs --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "ShadowGovernment" group. 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