Business

"Once In A Century" Economic Crisis Afoot [Breaking News]

HidingFromGoro.

Posted to Business on Sun Sep 14, 2008 at 10:56:31 PM EST (promoted by port1080). RSS.

So says Alan Greenspan.

Merrill Lynch was just bought out by Bank of America for $43.5B, and AIG is seeking a $40B loan from the Fed to avoid collapse.

It looks like it's game over for Lehman Brothers, despite a $70B pledge by a group of 10 international banks intended to save the firm from crumbling.

So now, only 2 of the 5 big investment banks, Goldman Sachs and Morgan Stanley, still exist.

The U.S. credit squeeze has brought on a "once-in-a-century" financial crisis that is likely to claim more big firms before it eases, former Federal Reserve chief Alan Greenspan said Sunday.

Greenspan told ABC's "This Week" that the situation "is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go."

"Indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes," Greenspan said. He predicted that would not happen until early 2009, and said the odds of U.S. recession have gone up in recent months.

"I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring," he said.

While recent declines in the prices of oil and food may help avert a recession, he said, "I wouldn't put my money on it."

The financial crunch already has claimed investment bank Bear Stearns, spurred the federal seizure of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and left century-old Wall Street institution Lehman Brothers (LEH, Fortune 500) clinging by its fingernails after suffering nearly $7 billion in real estate-related losses.

Federal regulators and Wall Street executives were holding weekend crisis talks aimed at resolving the Lehman situation without further shock to the financial sector.

Greenspan, who left office in 2006, said he expected more failures before the crisis eases. While regulators "shouldn't try to protect every single institution," he said, companies should be kept from failing "in a sharply disruptive manner" to prevent further shocks.

Greenspan's critics say he helped inflate the housing bubble by keeping target short-term rates too low for too long, leading to reckless lending and borrowing in the housing market. But Greenspan has said the problem lay not in the loans themselves, but in their repackaging as securities and sale to investors.

So, how's your portfolio holding up?

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Tags: edited by Port1080, written by HidingFromGoro, United States, big business, banks, economy, Alan Greenspan, fail, 2008-financial-crisis (all tags)
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3

AIG should be turned down

wetkarma.

Mon Sep 15, 2008 at 07:41:23 AM EST

5.00 (astute, interesting, interesting)

Management refused a bailout offer from private investors because they would have lost control of the company. I'm no fan of government bailouts in the first place, but acknowledge that market stability is important in extremis. AIG is not in extremis, it can obtain credit from the market.

btw -- I think the past 5 months have illustrated that 'free-market capitalism' is a complete lie. State intervention regardless of political model is guaranteed to happen for the largest industries.

I say this with no exaggeration intended:
The USA is in the process of nationalizing the entire banking industry.

Memory is a strange bell, jubilee and knell.

6

^ 3

An incomplete lie

profwhat.

Mon Sep 15, 2008 at 09:58:42 AM EST

5.00 (interesting, astute, interesting)

btw -- I think the past 5 months have illustrated that 'free-market capitalism' is a complete lie.

The past 5 months are a hangover from extensive government meddling with the market.  Fannie Mae and Freddie Mac are not creations of the free market, but of politicians who had an economically irrational preference that families should have mortgages and home ownership.  To that, add the promise to regulate and a complete failure to do so, and you've got a case of the government royally screwing up the market.

8

^ 3

Re: banking

zyxwvutsr.

Mon Sep 15, 2008 at 10:50:19 AM EST

5.00 (interesting, interesting)

I read a funny bit of stuff in a tech blog about Microsoft Excel:

I used to work for a derivatives trading desk, writing spreadsheets. As anyone in investment banking knows, Excel is like the Outlook of the trading floor - traders use it to price absolutely everything; keep the departmental vacation calendar; plan their weddings and name their babies. At the same time, the more prudent parts of the organisation have enormous back-end systems to manage the organisation's risk and monitor their positions. These systems are almost always on a wide range of platforms - Windows Server, Solaris, Linux - and have been in place for very long periods of time. One thing you can say with a lot of confidence is that these machines don't have Excel installed.

The need for agility in trading means that almost all trades start life in Excel before migrating to whatever risk systems the bank has in place. There is a constant need to take numbers from spreadsheets and port them into back-end risk management systems, and this is done in various different ways today. One popular method is to have a "click here before you go home" macro on your spreadsheet, which connects to the database and uploads trades. This works fine until you end up with different versions of the macro smattered around the place in random trading sheets, or the trader goes on vacation and forgets to tell his stand-in about it, or anyone from audit finds out about it. Another option is to write some code on a centrally-managed machine which will load up all of the trading sheets, recalculate them all and write all the data. This works fine until a VBA bug appears in the middle of the night, or the market data permissions aren't right, or the IT guy who was supposed to run this is out sick.

So let's say we have a derivatives trader, Sally, who is experimenting with some new trades. In this case, Sally is experimenting merely with holding large quantities of her favourite stocks and keeping her fingers crossed, so she's probably due to be fired soon. The Office 2003 spreadsheet on which these positions live is an enormous beast - it's full of buggy VBA macros and littered with sheets and sheets of old data and notes from previous trades. Sally knows that somehow she has to get this into the back-end risk systems but she's terrified of messing with her pride and joy and doesn't want the responsibility of having to upload them every day.

In a darkened room on the other side of the road, we have our IT guy, Andy, who's tasked with running the Linux-based risk management and reporting functions...

...Andy now sets about writing a Perl script which will run every night on one of his Linux machines to suck the positions out of the spreadsheet and store them in the database. Andy isn't a very good Perl programmer, and as such some of his code may look suboptimal. He's about to be fired soon too.

10

^ 8

Re: banking

jwb.

Mon Sep 15, 2008 at 11:50:45 AM EST

4.66 (informative, informative, interesting)

That's nothing.  Practically the entire sub-prime crisis can be blamed on faulty risk modeling, using Excel.  Almost everybody who was trading this paper used a Monte Carlo simulation to assess risk, but because they are idiots who dropped out of real degree programs and into business school the had NFI what they were doing.  So the Monte Carlo sims were always run with the same random seed.  Because of that, the traders could tweak a couple of parameters -- median income, home price, loan-to-value, etc -- on the input side to make the derivative look risk-free.  We all know how that turned out.

12

^ 10

Re: banking

zyxwvutsr.

Mon Sep 15, 2008 at 11:56:52 AM EST

5.00 (informative, interesting)

Then there was the guy with experience in "Excel macro development for the exotics desk."

18

^ 10

Re: banking

JimmyHavok.

Tue Sep 16, 2008 at 12:46:54 AM EST

3.00 (informative)

Monte Carlo Method

Thanks for making me smarter!

33

^ 10

Re: banking

Shy Elf.

Wed Sep 17, 2008 at 05:38:21 AM EST

none

Yeah, I've heard this urban legend too.  Monte Carlo simulations work fine, except that you get a slight bit of extra uncertainty over an analytical method.  There was nothing wrong with the calculations, just with the assumptions.

They divided the mortgages into tranches, with the losses assigned to the junior trances first, making the senior tranches very safe unless you had a huge increase in default rates.  Then they convinced the rating agencies into accepting the senior tranches as AAA rated, and were able to sell them off easily.  Soon they needed more mortgages to make these securities, and they had to lower standards to get enough.  Nevertheless, they were still able to con the rating agencies into still giving out good ratings, despite the fact that their lowered standards guaranteed the very increase in default rates which made the senior tranches no longer safe.  Finally as the default began to mount, the market began to dry up, so they had to tighten lending standards.  With tightened standards, the housing market began to fall, which further increased defaults.

At this point, for many of these securities, nobody's buying at any price which means that the book values for these securities are rather arbitrary with future losses often not yet charged as losses.

27

AIG bailed out for $85B, gov't to take 80% stake

HidingFromGoro.

Tue Sep 16, 2008 at 08:33:56 PM EST

5.00 (informative, astute)

"In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan."

31

^ 27

Re: AIG bailed out for $85B

Shy Elf.

Tue Sep 16, 2008 at 10:52:12 PM EST

none

...

35

The GOP has jumped the shark. (or: flame war bait)

pO157.

Wed Sep 17, 2008 at 08:35:48 AM EST

5.00 (astute, astute)

I saw Romney on CNN this morning breathlessly going off about how great this bailout was. He explained how the $85B aid was small in the grand scheme of things, and how the government should prevent companies from going down if their impact would hurt too many people. The most ridiculous part? He explained that the American people were getting something out of the deal now that the US government had a $85B stake in one of the largest insurance companies. That is, of course, a good thing because when AIG grows we'll make a handsome profit, or something.

FTW, he then followed up by stating that whoever the next president is, they need to make sure we don't increase government spending.

WTF, since when did nationalizing insurance and banking firms not become a massive expansion of government and spending? Who the hell voted for this imbecile?

The GOP should just change its name to the "Free Cheese Party of Jesus" or something as it has obviously strayed so far from its origins that it is not funny.

44

^ 35

Re: The GOP has jumped the shark

profwhat.

Wed Sep 17, 2008 at 02:35:44 PM EST

none

In two years, if AIG pulls itself out of this mess, the U.S. government will have its $85 billion paid back, with interest, and it will no longer have any equity interest in AIG.  Although this is undeniably similar to the "spending" people criticize, it was a loan, not an expenditure.  It will look a lot more like an expenditure, though, if the loan isn't paid back on time and we seize AIG's insurance business as collateral.

45

^ 44

Re: The GOP has jumped the shark

pO157.

Wed Sep 17, 2008 at 02:56:30 PM EST

5.00 (astute)

It doesn't sound like the government has much faith in AIG. The interest rate is variable one, and currently floating at 11.31%.

Why is the government even in the position of doing this? I seem to recall general criticism of the Chinese for using bad loans to industries to prop them up. Aren't we doing the exact same thing?

48

^ 45

Re: The GOP has jumped the shark

port1080.

Wed Sep 17, 2008 at 05:37:13 PM EST

4.00 (interesting)

Why is the government even in the position of doing this? I seem to recall general criticism of the Chinese for using bad loans to industries to prop them up. Aren't we doing the exact same thing?

The type of industries being bailed out are somewhat different, though.  In the Chinese case (and Japan did this too in the 1990s) the loans are/were to manufacturers who can't or won't modernize their production, to keep factories going that never have a hope of making a profit, in industries where their is no demand for the product, or where it can be produced more efficiently elsewhere.  Banking & finance are a different beast - these companies aren't going under because their industry has become hopeless, but rather because they made some awful business decisions.  If they hadn't bet so badly on those mortgage packages, probably none of these companies would be going out of business.  So, the risk isn't the same - it's not sending money into a pit in quite the same way as what the Chinese are doing.  The Chinese government will never get its money back on those loans, and it knows it.  The US government, on the other hand, should get its money back and expects to get its money back.  If it doesn't, this whole thing will be regarded as at least a partial failure.  

Second, finance & banking are central to our economy (and to all modern economies, for that matter).  To allow the financial system to collapse would potentially put every single part of the economy in jeopardy.  To allow a manufacturing company, or even an entire manufacturing industry, to collapse could never have that amount of impact.  

That said, some Detroit execs are now calling for a bailout of the auto industry, and if that happened then it would be a much more apples to apples comparison with what the Chinese are doing.  It would also ruin US credibility when it comes to free trade talks (not that we have much left anyway), so hopefully Congress will be smart enough to resist the temptation (heh, like I can even say that with a straight face).

51

As heard on the radio

Lou.

Wed Sep 17, 2008 at 09:30:35 PM EST

5.00 (interesting, interesting)

Perhaps the econ/fin-nerds here can confirm or deny this.  According to an expert I heard on the radio tonight, there is an underlying reason why the fed is seriously considering (and in some cases doing) bailing out these financial institutions.  So many of the banks and such tied up with the mortgage crises have been using less than perfect and even risky models to conduct their activities. (I thought I heard something about derivatives)  Say bank A goes down the tubes and the fed doesn't bail it out.  It's only recourse is declare bankruptcy.  However, if it does that, all sorts of financial instruments that previously were unregulated are now going to fall under the scrutiny of the conservators.  In the course of this, they discover that the institution was severely overvaluing its assets.  What was thought to be worth 85 cents on the dollar at the meltdown is really worth 30 cents on the dollar.  One's first response might be 'meh...let 'em drop, etc, etc'.  However, say Bank B (or in the description from the commentator, a LOT of Bank Bs) uses the same or similar kind of financial instrument, but they're managing to hold their own.  Now that Bank A is discovered to hold all of these crappy investments, the fear is the same sort of judgment will be made of Bank B and their value will drop precipitously.  Lather, rinse, repeat...

Can someone shed some light on this?  Just writing the above gave me a headache.  Here's a link if it will help.

It's the end of the world as we know it, and I feel fine

52

^ 51

Re: As heard on the radio

jwb.

Wed Sep 17, 2008 at 10:24:10 PM EST

5.00 (informative, informative, informative)

You are basically on target.  The problem this week is counterparty risk on credit default swaps.  A credit default swap is effectively an insurance policy on a bond.  You can bring me some debt from XYZ Corporation, and for a fee based on the quality of that debt I will write you a contract that says if XYZ Corp defaults on their bond, I'll pay you what you were entitled to.  The details of these deals are all private, but you can think of it as bond insurance.

Now here comes the problem.  You are First Second Bank of Nowhere, and you hold one billion dollars worth of XYZ Corp bonds.  Recently the toaster business just hasn't been that hot, and the bonds that were rated AAA when you bought them are all rated A now.  That's OK because you bought credit default swaps from Lehman Brothers.  As long as Lehman stays in business, you're guaranteed to get paid on those bonds.  You put them on your balance sheet as a billion dollar asset.

Then one morning you wake up and you read in the Wall Street Journal that Lehman fucked itself.  Since the credit default swap business is wholly unregulated, you have no claim, or perhaps a very dubious claim, to Lehman's assets at bankruptcy court.  Your credit default swaps are worthless, and that means you now have to determine the real-world value of your XYZ Corp bonds.  You call around to a lot of trading desks and you find that they are worth about 60% of their face value.  You lose four hundred million dollars overnight.

What else?  Since you're a depository bank, you have capital reserve requirements.  You now have to go out on the market and raise money, because by the close of business today you have to get that $400m back on your books.  Or you could try to balance your books by unloading four billion dollars in liabilities.  Good luck with that.

That is what's happening right now in banks all over the country.  Many banks are holding mortgages as assets, and as we all know mortgages are severely distressed right now.  They are not worth anything like their face value.  But the banks thought they were clever and insured all their mortgage risk with default swaps.  Right now they are trying to figure out how much they have to write down those mortgage bonds.  The answer is going to be "a lot", perhaps as much as 50%.  Some of these institutions will fail because while their balance sheets deteriorate their creditors can force them to post up more and more collateral.  A lot of these guys -- Washington Mutual in particular -- will be fucked by the time you wake up tomorrow.

65

^ 52

Re: As heard on the radio

JimmyHavok.

Thu Sep 18, 2008 at 05:33:18 PM EST

5.00 (astute)

This is one of the flaws of an economy built on debt.  It's a house of cards that only needs a strong wind to make the whole thing fall.

There are all sorts of these positive feedback loops built into our economic/financial system because of its dependence on debt.  The most basic one is that when times are hard, people don't borrow, they pay off their debts, or they default on their debts.  That makes the money supply drop, and makes tough times worse.  The reverse applies to boom times, although it is easier to rein in boom times with interest rate increases than it is to boost the economy with cuts (how far below zero can you go?).

53

^ 52

Re: As heard on the radio

joshv.

Wed Sep 17, 2008 at 10:28:58 PM EST

none

So - what do we - the public - do?  Cash out everything and buy gold?

55

^ 53

Re: As heard on the radio

jwb.

Wed Sep 17, 2008 at 11:32:16 PM EST

none

I think inflation is the only appealing way out of this mess.  We're still the USA, and we can still stick it to everybody else by inflating our currency.  Of course, we can only do that once, ever.

57

^ 55

Re: As heard on the radio

joshv.

Wed Sep 17, 2008 at 11:41:18 PM EST

none

Yes, but inflation ruins the value of our dollar.  I was asking what "we the people" should do, not the government.  It seems you agree - invest in gold :)

59

^ 55

Re: As heard on the radio

Shy Elf.

Thu Sep 18, 2008 at 07:47:32 AM EST

none

We have to get rid of the trade deficit first.  So long as we're importing oil like we are, just cratering the dollar doesn't help enough.  Still, this may be a good policy in five or ten years.

58

^ 52

Re: As heard on the radio

Shy Elf.

Thu Sep 18, 2008 at 07:44:17 AM EST

none

This is an excellent explanation, except that so far the fuss has been about securitized mortgages and not regular corporate bonds, and that Lehman wasn't writing anywhere near the number of them that AIG did.  They didn't have the credit rating.  This is one reason that the Fed was much more anxious to save AIG than to save Lehman, along with Lehman turning out their buyout offer.  It's also one reason why AIG got no buyout offers.

The A rated securities selling for 60% of face value is pretty ridiculous, but also accurate.  It's a sad commentary about how far behind the curve the rating agencies are on this problem.

Regulators have essentially ignored the derivatives and options markets, other than to require that these instruments be held on the books at current value, which can be a highly flexible number when the market is illiquid, meaning that nobody is buying or selling.  The problem is that the current value alone gives very little information about the risk to which the company is still exposed.  The accounting firms work for corporate management, and bend the rules as much as possible to support management without being indicted, and sometimes even more than that.  The result is that there are no good numbers on what exactly AIGs default credit swap exposure is.  It would take only a few numbers to express the total notional value of mortgages and other classes of assets that they have issued swaps for, but nobody has these numbers.  With $62.2 trillion in notional value of default credit swaps and $382.3 trillion in interest rate swaps outstanding at the beginning of the year, how much of that is AIG liable for?  Nobody seems to know.  This is why they couldn't find a corporate buyer.  Of course, the amount actually changing hands is usually a small fraction of this, but what about when the whole mortgage market heads south unexpectedly?

They wrote the contracts on many of these swaps so that if the issuer's credit rating goes down, the buyer has the right to ask for additional collateral.  Guess what happens when the issuer has to find extra collateral?  Right, their credit rating goes down, and they have to find more collateral.  The issuers are subject to runs like a bank which takes demand deposits.

I think the kind of scenario Lou was taking about is more plausible when talking about commercial banks and hedge funds (including non-US ones) going down due to counterparty risk, and then their defaults and counterparty risk taking down more commercial banks and hedge funds, etc.  Often a given bond has many times its own value in credit default swaps speculatively taken out on it, so it's not unreasonable to assume that the dollar amounts might multiply with each step.

61

More major failings of US-style capitalism.

Shy Elf.

Thu Sep 18, 2008 at 01:15:43 PM EST

5.00 (interesting)

1. Tax incentives to borrow.
   Despite the fact that except for bankruptcy costs and taxes it does not matter whether a firm if financed with debt or equity, our tax laws tax corporate income but not corporate interest.  This provides a huge tax subsidy to borrowers.  The result is that otherwise healthy companies gradually become comfortable with their debt levels, increase them, and finally miscalculate and go bankrupt, doing tremendous damage to the economy for no purpose whatsoever.  My favored solution is a tax deduction of retained earnings.

2. Stock option compensation for boards and directors.
    (Executive pay is way too high, but that's a different matter).
   Executive stock options reward gains but fail to punish losses.  Hence boards and management have a strong personal financial incentive to increase the volatility of the stock prices of the companies they manage.  With modern options and futures, it is easy to arrange this.   Also, since they can sell when they want to, management has a strong personal financial incentive to hide losses for as long as possible, or take other actions aimed only at short-term stock price increases, like advertising their stock on television in a manner aimed at getting investors and not supporting the firm's products, even when no new stock sales are planned.  Having management stock-based compensation held for, say, 10-20 years after it is earned and be paid in stock and not stock options would improve these incorrect incentives.

3. Widespread incorrect application of the beta theory.
   Assuming that investments returns are reasonably independent of each other, the fair value of each investment is independent of the independent variability of its return and depends only on its average return and the degree "beta" to which its return varies in concert with the return of other investments.  Financial markets can place a very high penalty on the value of investments with a high beta.  Typically, a US firm will set a required capital return rate for new investments based on its beta or market interest rate, and will make exactly those investments which meet this criterion.  Frequently this rate will be as high as 20 percent per annum or more, and the firm will turn down even sure investments which don't meet this requirement.  Yet these safe investments would lower the beta of the firm as a whole, lowering its beta and its capital costs.  By incorrectly applying the beta of the firm and not of the particular investment, safe investments are irrationally discouraged and risky investments are irrationally favored.

13

Never Fear America.

MayorBob.

Mon Sep 15, 2008 at 02:35:33 PM EST

4.66 (astute, interesting, astute)

John McCain, in spite of the ongoing meltdown in financial markets, pronounced that "the fundamentals are still strong."  Then he went on to say that when he and Sarah rode into Washington, things would change radically.  He and Palin would "replace the outdated patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street, we will bring transparency and accountability and we will reform the regulatory bodies of government."

Okay, so I'm confused (I know it borrows on Sue's diary entry).  If the "fundamentals are still strong" then why do you need to replace everything with something else.  Will John McCain appoint "some plenty smart people" to explain this?

Illegitimi non carborundum.

14

^ 13

Re: Never Fear America.

profwhat.

Mon Sep 15, 2008 at 03:09:30 PM EST

5.00 (informative, astute)

When people speak of "fundamentals," they mean the factors that go to intrinsic worth: revenue, expenses, assets, liabilities, and so on.  When you talk about the fundamentals of an entire country, you're making a statement about big-picture economic issues.

Financial regulation is different.  The idea of replacing the patchwork of regulations is a good one.  It's not just McCain's idea, either; it enjoys bipartisan support.  Over the last 100 years, we went from an unregulated financial market to a regulated one, but we regulated it bit by bit, creating a new agency each time.  Commercial banks, S&Ls, and credit unions each have a different regulatory agency.  That's dumb.  Maybe there were good reasons for that, once, but now it's time to consolidate.  Part of the Freddie & Fannie debacle is that there was one regulatory agency for just those two companies, so they were easily able to defund and ignore it.

So, no, there's no contradiction in praising the economy's fundamentals while criticizing the job government is doing in regulating financial institutions.

19

^ 13

Re: Never Fear America.

tomc.

Tue Sep 16, 2008 at 03:41:11 PM EST

none

When McCain and Palin say "transparency and accountability" they mean "deregulation".

20

^ 19

Re: Never Fear America.

gerrymander.

Tue Sep 16, 2008 at 04:09:47 PM EST

none

I'll just note here that, save Fannie and Freddie, all the recent collapses/buyouts/what have you have come from companies which were meeting all their SEC regulation requirements. Regulation may well have prevented other panics and/or crises, but it didn't prevent this one.

Also, the least regulated arm of the financial sector is hedge funds, and they're not doing as poorly as banks.

Regulation only makes sense if it regulates. It should be pretty clear by this point that very few people -- if any -- understood the risks involved in the mortgage derivative market. The last thing we need is the government passing laws to implement a watchdog over housing credit that doesn't know what to watch for.

21

^ 20

Re: Never Fear America.

jwb.

Tue Sep 16, 2008 at 05:05:35 PM EST

5.00 (astute, astute, astute)

The entire current meltdown is due to credit default swaps, and those swaps are an end-run around the regulations that keep the insurance business sane.  People who write credit default swaps are engaging in insurance, but without meeting the capital reserve ratios and reinsurance requirements that legitimate insurers must maintain.

If regulators had kept up with the game, they would have recognized credit default swaps as insurance, and regulated it as such.  Since they did not, credit default swaps radically increased the amount of credit available in the streets, allowing the migrant worker to take out a no-documentation loan to buy that $350,000 house in Fresno.  And that's how we all got here.

22

^ 21

Re: Never Fear America.

PenitenziAgite.

Tue Sep 16, 2008 at 06:14:53 PM EST

5.00 (astute)

Considering the regulatory climate installed by the Republicans, I would not be surprised if the regulators were, in fact, keeping up with the game.  So much so that they may have been advising people on just how to accomplish these end-runs.

sierra tango foxtrot uniform

26

^ 22

Re: Never Fear America.

joshv.

Tue Sep 16, 2008 at 08:00:02 PM EST

5.00 (funny)

Could you point to specific examples of legislation that passed, with significant Democratic opposition, that you feel materially compromised the regulatory regime in the finance sector and contributed to this crisis?  Were there any attempts at regulatory reform that were sponsored by Democrats that were defeated by the Republicans?  Or has the current administration compromised financial regulation in some other way?

49

^ 26

Re: Never Fear America.

PenitenziAgite.

Wed Sep 17, 2008 at 07:13:45 PM EST

5.00 (astute)

When you appoint people who are opposed to the very regulations they are charged with enforcing...  It's not about legislation, it's about the focus of the regulatory agency.

All regulatory agencies have a liaison arm that is supposed to work with the regulated industries in order to help them comply with the regulations.  When that function gets turned into working with industries to help them circumvent regulations, for those seeking to do so, this kind of situation is what you get.

That is directly related to the executive branch, and the appointees who run these agencies.  This isn't a legislative issue.  This is like appointing a police chief who doesn't think that law enforcement is a legitimate function of a police department.

sierra tango foxtrot uniform

50

^ 49

Re: Never Fear America.

joshv.

Wed Sep 17, 2008 at 09:15:33 PM EST

2.00 (funny, illiterate)

Ah I see, it's a conspiracy.

60

^ 50

Re: Never Fear America.

Shy Elf.

Thu Sep 18, 2008 at 09:16:34 AM EST

5.00 (astute)

Yep.  There's a Cox guarding the chicken coop.

54

^ 50

Re: Never Fear America.

PenitenziAgite.

Wed Sep 17, 2008 at 10:42:29 PM EST

none

That's what I thought.  You got nothin'...

sierra tango foxtrot uniform

56

^ 54

Re: Never Fear America.

joshv.

Wed Sep 17, 2008 at 11:39:37 PM EST

none

You don't answer my question - and I "got nothing"?

You provided no legislative examples and some unsubstantiated claims of regulatory agencies helping industry "circumvent regulation".  Perhaps you have some examples of this practice?

If the democrats had passed newer, stricter regulations for Freddie and Fannie would Bush appointees have helped them ignore it?

62

^ 56

Re: Never Fear America.

thefadd.

Thu Sep 18, 2008 at 02:44:44 PM EST

none

Even your boy McCain says he would fire Cox. It's hardly a stretch to say that a Democratic administration would push tighter regulations (good or bad that's up for debate) on Wall Street but at least McCain appears as if he'd pay more attention to the situation than Bush. Your question about legislation is rightly ignored because it's a red herring.

It is easy to buy small plaster models of what you think life is like.

63

^ 62

Re: Never Fear America.

joshv.

Thu Sep 18, 2008 at 02:59:20 PM EST

none

"Your question about legislation is rightly ignored because it's a red herring."

Yes, I imagine if the Democrats has passed stricter regulatory laws, Cox would have just helped his golf buddies evade it in ever more creative ways.  The Congress is clearly helpless in the face of an executive so determined to flaunt the rule of law.

64

^ 49

Re: Never Fear America.

JimmyHavok.

Thu Sep 18, 2008 at 05:23:53 PM EST

none

people who are opposed to the very regulations they are charged with enforcing

Case in point, Michael Powell at the FCC.  Clinton really screwed the pooch with that bit of triangulation.

23

^ 22

Now that's funny right there...

T Slothrop.

Tue Sep 16, 2008 at 06:41:15 PM EST

none

You've never personally dealt with a federal regulator in the context of their job, have you?

{Insert amusing quotation here}

25

^ 23

Re: Now that's funny right there...

thefadd.

Tue Sep 16, 2008 at 07:52:24 PM EST

4.50 (funny, astute)

You probably just aren't giving them enough coke and blow jobs.

It is easy to buy small plaster models of what you think life is like.

24

^ 20

Re: Never Fear America.

tomc.

Tue Sep 16, 2008 at 06:45:46 PM EST

5.00 (astute)

It should be pretty clear by this point that very few people -- if any -- understood the risks involved in the mortgage derivative market.

Usually I find your posts very thoughtful, but you can't really believe that no one saw this coming.  

This latest house of cards was built on the same premise as the dotcom bubble/bust, except much much bigger.  I'm surprised politicians didn't start flogging the idea of privatized Social Security tied to real estate.

Financial strategies based upon extreme and unlimited growth should be regarded with suspicion.

37

^ 24

Re: Never Fear America.

gerrymander.

Wed Sep 17, 2008 at 10:29:28 AM EST

none

Well, that can't all be winners.

you can't really believe that no one saw this coming

I believe that quite a number of people saw that there was a bubble effect taking place in real estate investment. I also believe that many-to-most of that number didn't know the scope and direction of misery the eventual bubble pop would encompass. That assessment includes my past opinions; I guessed some banks would be in trouble, and tagged Fannie/Freddie feeling some heat, but AIG capsizing? Not even on my horizon.

1

Beliving Greenspan

Lou.

Sun Sep 14, 2008 at 11:07:29 PM EST

4.00 (astute, interesting)

I know I don't have the economic or political chops of many here on TnT so maybe this is the simplistic view...but I have to believe Greenspan in this...much the way that I'd believe Dr. Frankenstein when he said his creation might cause a little trouble.

It's the end of the world as we know it, and I feel fine

15

^ 1

Re: Beliving Greenspan

pO157.

Mon Sep 15, 2008 at 03:42:31 PM EST

4.00 (interesting)

Are you saying I should move my portfolio from securities to commodities along the lines of a switch from Land O'Lakes to a diversified mix of Smith & Wesson, Mossburg, Remington and Glock?

4

Some Good News To Be Had Here.

MayorBob.

Mon Sep 15, 2008 at 09:16:33 AM EST

4.00 (interesting)

Daniel Mudd and Richard Syron, former heads of Fanny Mae and Freddy Mac, might be queueing up at the unemployment office soon.  It seems that the federal government just severed their golden parachutes, worth $25 million between the two of them.

So what sort of job do you think these two former financial geniuses deserve?

Illegitimi non carborundum.

7

^ 4

Re: Some Good News To Be Had Here.

skeptic.

Mon Sep 15, 2008 at 10:44:01 AM EST

5.00 (astute)

They should be trained in Arabic and Parsi so that they can work as translators for the military.    Due to the (ridiculous) purge of gay translators, in addition to the high casualty rate in Iraq, the military is in need of new ones.

9

^ 4

Re: Some Good News To Be Had Here.

gerrymander.

Mon Sep 15, 2008 at 11:12:37 AM EST

5.00 (brilliant)

So what sort of job do you think these two former financial geniuses deserve?

I believe "license plate stamper" was the popular option back when Enron executives oversaw a fiasco about 1/100th the size of the Fannie/Freddie debacle.

11

^ 4

Re: Some Good News To Be Had Here.

jwb.

Mon Sep 15, 2008 at 11:52:24 AM EST

5.00 (brilliant)

How about Chief Falling on Sword Officer?

5

^ 4

Re: Some Good News To Be Had Here.

Lou.

Mon Sep 15, 2008 at 09:29:14 AM EST

none

Door greeter at WalMart.

It's the end of the world as we know it, and I feel fine

2

AIG

delete me.

Mon Sep 15, 2008 at 02:17:53 AM EST

none

Weren't AIG's problem of their own making from quite a few years ago? I recall that they engaged in accounting fraud and corruption.

- derumi (del-me)
"Bobby Fischer? Man, that guy is crazy!" - Mike Tyson

16

personal attack against the subject parser

DEMachina.

Mon Sep 15, 2008 at 03:58:57 PM EST

none

Greenspan's critics say he helped inflate the housing bubble by keeping target short-term rates too low for too long, leading to reckless lending and borrowing in the housing market.

This is totally idiotic.  It's not his fault people made poor investment decisions.  This is almost completely the banks' fault; their job is to see this type of thing coming.  The simple fact is that they got greedy and are now paying the price for it.

Still another reason I think completely laissez-faire capitalism is dangerous.  It assumes people always make the smartest choice, and that's demonstrably untrue.  This isn't going to be Malthusian in scope, and there will probably be benefits to some people (I'm graduating law school in a couple months, and hadn't planned on buying a house until I'd payed down my student loans some, but if prices are super-low it might make more sense).  Still, there's going to be a lot of economic damage worldwide, and as always the people with the least amount of give in their budgets will be the ones hurt the most.

Q: What do you think of western civilization? Gandhi: I think it would be a good idea.

17

^ 16

Re: personal attack against the subject parser

Steve Urkel.

Mon Sep 15, 2008 at 05:25:29 PM EST

5.00 (brilliant, astute)

"It's not his fault people made poor investment decisions"

Much of it is. His monetary policies created an environment of 'cheap' money and seemingly rising asset prices, which distorted the decision making of both borrowers and lenders.

Don't forget he had previously choked off the money supply because he was convinced there was a "tech bubble" that needed bursting. It was in the aftermath of that blunder that everyone began to flood into real estate.

"I think completely laissez-faire capitalism is dangerous"

I think government created entities like Fannie and Freddie are dangerous, as are government policies mandating risky loans.

28

^ 17

Re: personal attack against the subject parser

joshv.

Tue Sep 16, 2008 at 09:06:11 PM EST

none

"Don't forget he had previously choked off the money supply because he was convinced there was a "tech bubble" that needed bursting. "

But there was a tech bubble, or am I to understand that you think my Pets.com stock would still be worth something if it weren't for the meddling of Greenspan?

38

^ 28

Re: personal attack against the subject parser

Steve Urkel.

Wed Sep 17, 2008 at 12:59:48 PM EST

5.00 (astute)

There was a certain amount of "exuberance", but the amount of "irrational" has been exaggerated. You had a situation with lots of companies doing new things and things difficult to understand, combined with the fact that some of the winners could be huge winners. Yes, Pets.com was asinine. But then ebay still seems asinine to me too, and it was a sucess.

 

29

^ 17

Financial doesn't mean Economic

Shy Elf.

Tue Sep 16, 2008 at 09:56:34 PM EST

none

Had Greenspan meant to say "once-in-a-century type of economic crisis" as the writeup implies, he would have said that.  A financial crisis a crisis of finance, or of banks, and this certainly qualifies as a "once-in-a-century type of financial crisis".

Greenspan has never been especially good at communicating with non-economists, but that was a less important part of his job than keeping the economy ticking along at a constant rate, and he did warn about the stock market bubble and  gave at least some warning of the mortgage crisis.  I suppose he could have run around screaming about "certain death" when that wasn't what he meant at all, and perhaps erring in that direction would have helped.  On the other hand, maybe doing so would just result in more residents staying in Galveston during the next economic hurricane.

So how was what he did with the tech bubble wrong?  Was he supposed to create a depression in order to lower stock prices before the bubble burst, and afterwards create massive inflation to buoy them up again?  It wasn't his job to worry about stock prices.  It was his job to keep the economy ticking along at an even rate, which he, mostly, did.  The quicker you burst bubbles, the less damage they do.  The carping about him bursting the "tech bubble" comes from people who are pissed that they can no longer buy a house with their tulip bulb.

30

^ 29

Re: Financial doesn't mean Economic

jwb.

Tue Sep 16, 2008 at 10:51:37 PM EST

5.00 (astute)

The problem is that Greenspan invented the housing bubble to paper over the Internet bubble's problems.  That's gotten us into an even bigger mess.  We can't just keep going from bubble to bubble.

39

^ 29

Re: Financial doesn't mean Economic

Steve Urkel.

Wed Sep 17, 2008 at 01:06:53 PM EST

5.00 (astute)

I would prefer it if the Fed maintained sound money, which Greenspan didn't do, instead of taking it upon itself to determine whether or not asset prices are too high.

32

I guess...

laputanmachine.

Wed Sep 17, 2008 at 01:09:33 AM EST

none

I guess this means McCain wins the election?

34

^ 32

Re: I guess...

joshv.

Wed Sep 17, 2008 at 06:24:47 AM EST

none

Clearly what we need now is a lot of "Hope" and "Change".  That and some magic pixie dust.

40

^ 34

Re: I guess...

thefadd.

Wed Sep 17, 2008 at 01:43:33 PM EST

none

Eh, I'd settle for a free and fair election.

It is easy to buy small plaster models of what you think life is like.

41

^ 34

Re: I guess...

Lou.

Wed Sep 17, 2008 at 01:56:18 PM EST

none

Yeah...I guess that's why McCain is beating the change drum these days.

It's the end of the world as we know it, and I feel fine

36

But... but... I thought the bailout would save us

pO157.

Wed Sep 17, 2008 at 10:11:23 AM EST

none

Bloodbath 2.0 in progress down on the street. (Down 2.4% by 11am EST)

42

Huh...

Lou.

Wed Sep 17, 2008 at 01:56:54 PM EST

none

Is this what freefall looks like?

It's the end of the world as we know it, and I feel fine

43

^ 42

Re: Huh...

thefadd.

Wed Sep 17, 2008 at 02:05:11 PM EST

none

10,000 is where the Dow has belonged for a long time.

It is easy to buy small plaster models of what you think life is like.

46

^ 43

Re: Huh...

Lou.

Wed Sep 17, 2008 at 04:08:42 PM EST

none

So you're saying this is just one of those "correction" thingies?

It's the end of the world as we know it, and I feel fine

47

^ 46

Re: Huh...

thefadd.

Wed Sep 17, 2008 at 04:40:53 PM EST

5.00 (astute)

It's always just one of those correction thingies ;-)

It is easy to buy small plaster models of what you think life is like.

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