We are a commune of inquiring, skeptical, politically centrist, capitalist, anglophile, traditionalist New England Yankee humans, humanoids, and animals with many interests beyond and above politics. Each of us has had a high-school education (or GED), but all had ADD so didn't pay attention very well, especially the dogs. Each one of us does "try my best to be just like I am," and none of us enjoys working for others, including for Maggie, from whom we receive neither a nickel nor a dime. Freedom from nags, cranks, government, do-gooders, control-freaks and idiots is all that we ask for.
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Wednesday, October 12. 2011
The real story is not complicated.
"Wall Street's Gullible Occupiers. The protesters have been sold a bill of goods. Reckless government policies, not private greed, brought about the housing bubble and resulting financial crisis." One quote:
Read the whole thing. The government essentially forced lenders into the subprime markets and to violate their own lending standards. Naturally, they didn't want these crappy loans on their books, so they packaged them as derivatives and sold them to eager buyers worldwide (unaccountably rated triple A when any fool could see that they were below investment-grade). With that, combined with low interest rates and people using their suddenly-valuable homes as ATMs, the housing and construction debt-bubble was created and inevitably burst.
Why the world's financial geniuses didn't see it coming is beyond me. Everybody on the internet saw it coming. All bubbles burst, but this was a biggie-sized one just like the internet bubble. Based on my reading, I had shorted housing-related equities, did not buy my living quarters which I could not have afforded anyway, and made out like a bandit. It was just too easy, even for an amateur. Call me greedy.
Of course, the rest of my quite modest portfolio did horribly. Equity baskets have been a bad bet for many years now. Munis stink too. Sorry I didn't buy gold, but I always thought gold was for end-of-the-world nutjobs.
I am no economist nor do I play one on the internet, but my take on things today is that fear of government is part of what is holding back investment in the US. That, plus people freaking out about their debt - and their lower-to-zero incomes.
It is not particularly mature to blame banks who were willing to lend you money, though, even when they perhaps doubted your ability to repay it. An adult who takes on debt is supposed to be an honorable citizen who will repay that debt, or have their credit and reputation ruined for ten years or more. Employers check your credit rating.
My only debts are my student loans which were such a good deal that I am in no hurry to pay them all off, as long as my career proceeds on course. However, periodically I borrow money from my local bank or my credit cards. Small amounts - $5000-10,000 - then pay it back after a couple of months. I use that trick to keep my credit rating up to date and in good shape (I rent). One of these days, I will really use my credit card to take a good girlfriend or future spouse on a bike tour around Sicily.
I can't wait.
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There's a competing viewpoint here:
That competing viewpoint is pretty weak.
The opening paragraph is nothing but a salvo of derisive lead-ins.
Barry Ritohlz (The Big Picture blog), who is mentioned in the article, makes the most reasoned case against blaming Freddie/Fannie and company at least as the primary cause of the debacle. I think his view lets them off the hook far too easily and the related problem of GSE's is the implicit government backing which serves to warp the market and the incentives/risk-reward scenario.
There are many guilty parties, including main street borrowers, the brokers, and wall street "lenders" - who really didn't lend as much as securitize and dump the risk elsewhere. Until someone remembered (egads, who knew) that the financial system is so intertwined that when things are levered up 30x when the bubble collapses, all's gonna fall. private greed (which is normal and what one would expect capitalists to exhibit) was enabled to put the system at risk with the bad policy, cheap money, permitted leverage. And why is the gov't in the mortgage business at all?
As I pointed out to a friend of mine who said "the market failed":
"the government basically laid out a promise to lenders who offered subprime loans that any failures would be covered. There was active encouragement on the part of the government to increase home ownership as a perceived good, and having the government support these loans would increase the overall 'good' supplied, thus offsetting the risks clearly apparent to the professionals in the business. As a result, the professionals, seeing their risk being backed by a government guarantee, gleefully made many of these outlandish loans, packaged them up, securitized them, and sent them packing (as any smart lender would), recognizing that at some point the bill would come due. The problem, of course, is the bill came due. And it's a bill the government promised to back up. The promises themselves may have not represented a large chunk of the market, but that's not the point. It's what the government institutionalized - the externality of moral hazard. The market, if left to its own devices, would not have approved or allowed most of these loans. With the institutionalization of moral hazard, banks backed up the truck and loaded up. Why not? Nobody would be put at risk, right?"
There's always more to the story, of course. But the fact remains that even back in the 1950's and 1960's, when my grandfather was in the real estate development business, he and his friend would toast "Fannie and Freddie". Guaranteed paybacks were a good thing. Except if you're a market.
Indeed, your last question is the most important - why was the government even in the business at all?
Jimbo, why set the discussion up for failure by using the term teabaggers? Not appropriate.
As to the U.S. government pushing loans that cannot be repaid, it's called politics. Our politicians make the banks offer easy loans and next election, those benefiting from such graces vote for said politician. The pols didn't allow for the unintended consequences of this particular action as they, as usual, only kick the can down the road, hoping all remains well until the next election.
I don't recall the Constitution giving Congress the right to invest in ANY business: real estate, education, utilities, transportation, insurance, pharma, etc. These grants and loans, bestowing of favored status, manipulation of the market should s-t-o-p now.
That was the point being made last night. Glad it got some prime time coverage, and general consensus among the candidates.
But, I'm not sure there will ever be broad understanding of that.
A few rules:
The bigger the problem, the more people responsible.
Many, but not all big problems are created by government.
All HUGE problems are created by governments.
It would be foolish to think the US Government would demand that banks lend to people who could not pay the monthly payments. Tea Baggers and Fox News viewers will use the lie to spit on their fellow Americans. Thoughtful people will understand that companies in business to make a profit - and have shareholders/Boards of Directors to answer to - cannot create loans dedicated to not performing. You know, you don't have to believe all the BS - you can use your own brain to decide what sounds most likely.
So you're suggesting that no one in the gov't has done something foolish.
Anyway, I heard what was coming out of the gov't at that time. The push for more loans was the popular mantra.
I guess you didn't hear about all the flap about "redlining" several years ago. I guess you also didn't see all the sub-prime and Alt-A loans that were written to people who were not asked if they had a job or a source of income. What would induce a company that, as you say are in business to make a profit, to make such a loan.
Hey Jimbo, the only "teabaggers are your poofter allies on the left. And you're a tool.
It's called moral hazard.
The government institutionalized it. Businesses are in it for the profit - why would they issue bad loans (my current complaint about Obama exhorting them to lend more!)? Well, there was a good reason to issue bad loans. Most of them were guaranteed to be covered in the event of default.
Businesses do what makes sense for them. In this case, it was issue bad loans because it was a no-lose proposition.
Hell, offer me the chance to make a buck off the back of the US taxpayer, and you can be damn well sure I will do it. Now, I'd much prefer to do it in an honest, beneficial way. But if the government said tomorrow "everyone buy stocks, we'll guarantee they only go up", I'd back up the truck and load up on stocks forever.
The logic, of course, is full of fallacies, but that is essentially the way people looked at it, and as far as politicians were concerned - why should they care? They can print money, for God's sake.
Wall Street made them rack up $100k in loans for the art history/beer pong double major.