So, right after I tell Cass I won't engage her seriously outside of sci-fi/fiction, I see her reply and have to eat my words. But I think there are too many misconceptions about where the lion's share of the blame should fall, so I'm posting the reply instead to stand on its own. My summary version of crash of 2009. Really and truly. I guesstimated the details, but it's about right give or take a few percent either way. Freddie/Fannie were directly behind the leveraging of the mortgage portfolio to many multiples times their face values. Fueled by the rapacious element of capitalism, the investment bankers. E.g. there's still over three trillion dollars in jeopardy, don't believe any of the conforting words (needed to soothe markets) that we're near the end of writedown and losses, there could be much more to come. Meanwhile, Freddie/Fannie's role and the culpability of Congress is well documented. As was the easy money [one per cent interest] by Greenspan's Fed post-9/11, which although needed at the time proved disasterous when combined with policies (Congress, again) that effectively forced banks to lend money for houses to people who couldn't afford them. Less well documented was the SEC's decision in 2004 (which had been rejected by SEC a few years earlier) to permit 5 banks to compete with europe and increase permitted leverage from max 12:1 to a max 40:1, through some obscure changes to net capital requirements (essentially, looking upstream to the IBs holding company parent to assess capital). Post mortem: of the 5 investment banks that won approval from the myopic SEC: Two of those 5 banks are gone (Lehman and Bear). Two merged/combined (Morgan and Merrill). And the US government just bought shares in Goldman Sachs at gunpoint. Sweet schadenfreude is probabaly most appropropriate around this point of the collection of incompetences, although in fairness an overhaul of the SEC would seem appropriate. So the Fed thinks their grasp extends to all financials assets held by "banks," but they know all about Investment Banks, which are regulated by the SEC, and not part of the "banking" system. So the SEC regulates the IBs, and via stealth massively increases the potential size of IB capital, and the bets can be placed based on the capital. But the SEC doesn't call the Fed to organize oversight of huge new capital base. The Fed doesn't ask about what it knows to be huge, and opaque pile of assets in the system that isn't really being monitored for compliance with net capital requirements. Money market funds have never "broken the buck" (fallen below $1 for $1 put in the account) until this crisis. The funds are regulated by SEC, which allows Moodys and S&P (and two smaller rating agencies) to retain a oligopoloy of authority to rate the investments held by money market funds, paid by the very companies they were rating. The SEC and the industry have repeatedly raised the issue of fixing the known problems with the credit rating agencies but never get around to it. Now it's blown up, as a single downgrade by S&P on Lehman Bros one week prompted a run on Lehman and a few days later its bankruptcy filing. An entire new class of instrument has sprung into existance during the past decade - again, the rapacious element of wall street greed, which deserves the full 5% blame I've allocated - called the CDS. Basically its an insurance policy. Just a piece of paper, in this case it pays off if Novartis (or any company) defaults on some bonds it issued. So if Novartis defaults, somebody's going to have to make the payments on the bond - in this case, the banker who wrote the Credit Default Swap. Whoops! The banker - and his bank - Lehman - are gone. Bonuses were paid each year the products were being sold, and everything would've turned out just fine for all if markets never went down. And the Congress, SEC and Fed escape unscathed as populist bullshit from MSM, McCain and Obama blames the easiest target to sell from the list: george bush halliburton wall street greed. So, sure, it's an outrage that bonuses were paid each year and that money's not recoverable. But the point isn't that foxes ate the hens, which is what the foxes will do, it's that the henkeeper didn't believe in a leash and collar when he let the foxes in. Or if you prefer you can stick to the Scorpion analogy from my original reply, you knew the fuckin creature was a scorpion and now your crying because you got stung.
Shorter version: somebody borrowed money to people who couldn't pay back. They bundled those foul loans and sold them, no doubt feeling extremely clever and worthy of at least 500 fantastillion in boni. The buyers sold them on. And those buyers too. Then the debitors, completely unpredictably, couldn't pay back, causing a shockwave, a domino effect. Banks in Germany started falling because some guy in Kansas can't pay his mortgage any more. Bank can't pay its own debt, next one falls. And so on. I share your assessment that the ratings agencies played their part: they rated those bundles much too highly, for whatever reason. The real problem isn't teh government , it's greed, pure and simple. Somebody felt clever and sold a 'product' that exploded in the face of somebody else. That this stuff is so abstruse that nobody can see thru didn't help. All this together -> chain reaction, kaboom. Personally, the good I see coming from this is that we'll quite likely stop seeing money as a 'product' and once again as a currency. An economy shoveling around something that's nothing but meaningless numbers in a computer CAN NOT work forever. I hope this is the point - in that case, we dived thru relatively unharmed. What you wrote certainly had an effect, no question. But you can't blame your ideological 'enemy' for banks that found a new and totally shrewd way to squeeze a few more pennies. This, in fact, has nothing to do with ideology. It's a complete and utter failure of the system - and many of us will suffer from it.
Funny that a few years ago during an argument, the only common ground we could find was that capitalism needed to be fettered. And now you just can't concede the simple point that the fettering was wholely inadequate.
Btw, I think once this mess becomes untangled some time in 2020 or so, we'll get a whole slew on interesting books on Economics
Tuttle, would you know offhand what Fannie/Freddie's contribution to the debacle was percentage-wise, as opposed to other lenders?
I have no non-extreme recipe for how to prevent such things from happening. Problem is, I do believe in a market that's 'as free as possible' if that makes any sense. But checking every financial 'product' (remember, once we are two steps away from the original lender, we're talking about insubstantial numbers in a database here) thru and thru would require a bloody army of state sponsored financial experts. That is, of course, out of the question. The least extreme idea I do have is some kind of provision where money brokers of various kinds can be personally prosecuted for deals that create huge amounts of damage. How? Don't know. But the threat of losing your livelyhood and fortune until the damage is repaired oughta be a motivator. Personally I hope the whole globalized money market dries out and the deal gets a little more regional again. I can't pay my mortgage? Why should a Japanese pensioner lose his money over that.
If I hadto hazard a guess I'd say over 50% of all US mortgages had fannie or freddie's hand in a material way, possibly much higher if it's a measure of pieces of paper (derivatives of some variety) flowing through the entities' hands. I'll try and reply on it if I come across data, but a former Fed president (wayne angell) has expressed with confidence that there's no way we'll extricate ourselves from the mess without using Freddie/Fannie in a major way - he feels the key is new capital exclusively from private sources but conceded thta the government would have to back-stop for anyone to invest. But he says it was a blunder to allow Freddie/Fannie stop to drop to $1 (speculation value only), and that private investors may be hard to coax . . .
Hank Paulson was head of one of the 5 banks that went to the SEC in 2000, when it said NO to the request to increase leverage. That's why I brought Treasury Dept. into it. Capitalism requires, it demands, that the supervisors have at least the intelligence of the people they supervise. We could just agree to blame the lawyers and end it there. It's the same in the tax industry, Congress writes the Code, lawyers navigate, loopholes are closed, new schemes devised. If we're going to leave the supervision to brilliant people like Hank Paulson or Trichet, they have to see the bigger picture. Paulson clearly understood the significance of muliplying by more than 3 the amount of leverage. When the SEC changed the Rule in 2004, and Paulson became head of Treasury in 2006. How could something of this magnitude not consitute a failure of leaders to (1) understand something or (2) if they don't understand something, ask about it? Sorry, back to your point more directly, I'm not sure we can un-globalize. But I agree that the era is past of "securitizing" everything. The problem is that tomorrow's problem will come in a very different form (just like this one had very little to do with the internet bubble bursting). I think we'll get a slightly better approach to regulation, globally (that MiFid was a nice start), and the US will get a crapload of stupid new laws and regulation because of the knee-jerk reaction, just like with Sarbanes-Oxley.
Oh, I do agree that there were multiple reasons. It's certainly a cascade effect. But the chain of actions I described in my first post was when made the hatchet fall. The point is - had one of those superclever brokers realized that the whole shebang is probably a bad idea and stopped the whole thing, the financial world could look differently today. But common sense is trumped by greed. That's the crux. After me the deluge. I hope we can find provisions to somehow neutralize it. As you say, people will always try to find ways around rules. It's no use to try and follow like a rabbit follows a carrot. As much as it pains me to say, the solution is probably a global kind of SEC. Like the original was a result of the 1929 crash, the new one could be one of the 2008 crash. And no, I'm not very fond of another superagency. Yet, these days, national borders have no meaning and the next crisis is already ripening in the shadows. Personally, I nominate the IMF for the job.
Or, better yet, the World Bank. Anyway. You said "But common sense is trumped by greed." So I ask, which was a more realistic expectation if you made the judgment five years ago? That common sense by regulators would overcome greed by wall street, or that greed by regulators would overcome common sense by wall street? btw, I started my legal career with four plus years as a staff attorney at SEC.
Hm. Let me tell you about my day. I worked. I'm a journalist, local news, nothing fancy. Typical Saturday fare - drunk drivers, accidents, stuff like that. Had enough to do to not be able to check the news all day. Some time in the evening, you posted this thread and you seemed to be serious. We talked a little. Then I watched a bad movie (ZOHAN, 4/10 because I had a good day). Then I came back and saw the above smiley posted, guessing that all the 'serious' was a ruse. You'd also try to get in a 'finishing move' by posting this: Congrats. Then I went and checked the int'l news. And what must I see? Obviously, world leaders including a certain Mr. Bush agree with me and not you! Break out your tinfoil hats. And never forget they stole the idea from me
You misread me completely. I was only ridiculing the idea that the IMF was up to the job. (hence the smiley, and crack about the even less effective World Bank). After the "finger" I was back to serious (well, semi, anyway) again. Your point - well, the news is around a week old that major financial centers would have to coordinate the regulatory banking supervision in the future as a consequence of financial and trade system "globalization." US UK Europe Japan, at the least. And I agree completely that coordination is needed- it's a no-brainer imo, given the global nature of capital flows. As for my first job out of school, I mentioned it only for perspective, given my consistent criticism of SEC in this argument. There was a time 15 years or so ago I would've defended the good work it did. But I still don't think even now that it was any kind of 'attempt to score a point.' Heck, I even gave you an agreement rep when I saw the thread you started last week, which I'd missed, had already mentioned the overhanging CDS threat.
