Economic non-solutions from McCain and Bush
This segment on the Newshour does as good a job as any at outlining Bush's Treasury Department's lame plan to reorganize the regulation of the country's financial markets, with Paul Krugman pointing out that it doesn't address the biggest problem right now: that institutions are getting federal guarantees with no regulation to address the moral hazard.
When we hear about moral hazard from the deregulate-everything crowd, it's usually to oppose assistance for families facing foreclosure. In the Newshour segment, the Treasury Department representative hinted at this when referencing individuals who made bad decisions; John McCain was more explicit in his speech last week, decrying individuals who made bad decisions and promising to scrutinize proposals to stop foreclosures to make sure that "undeserving" homeowners wouldn't get any assistance.
I expect to hear more of this kind of thing. It's a clever way to frame the argument, diverting from the campaign-contributing culprits in this mess (as well as financial market deregulation apologists, like McCain advisor Phil Gramm). It leaves one nagging question unanswered, though.
Surely, flaws in individuals existed a long time before the current crisis, no? If you emphasize individuals who made bad decisions, do you mean to imply that these human frailties were somehow less widespread before 2002 or so?
What's changed since 2002 or so, of course, is not the sum total of human failings in America, but rather the aggressiveness with which subprime loans were marketed, especially to people who would have otherwise qualified for mortgages with lower interest rates, irresponsible cheerleading (and fed-funds-rate-setting) by Alan Greenspan, and dizzying levels of complexity of mortgage "securitization" (repackaging mortgages so that they were traded by Wall Street investment banks). I wonder if the deregulatory crowd will get away with denying such obvious realities. Here's where a good presidential campaign can be handy.
UPDATE - some interesting stuff here about how tax breaks for mortgage interest contributed to the crisis.
When we hear about moral hazard from the deregulate-everything crowd, it's usually to oppose assistance for families facing foreclosure. In the Newshour segment, the Treasury Department representative hinted at this when referencing individuals who made bad decisions; John McCain was more explicit in his speech last week, decrying individuals who made bad decisions and promising to scrutinize proposals to stop foreclosures to make sure that "undeserving" homeowners wouldn't get any assistance.
I expect to hear more of this kind of thing. It's a clever way to frame the argument, diverting from the campaign-contributing culprits in this mess (as well as financial market deregulation apologists, like McCain advisor Phil Gramm). It leaves one nagging question unanswered, though.
Surely, flaws in individuals existed a long time before the current crisis, no? If you emphasize individuals who made bad decisions, do you mean to imply that these human frailties were somehow less widespread before 2002 or so?
What's changed since 2002 or so, of course, is not the sum total of human failings in America, but rather the aggressiveness with which subprime loans were marketed, especially to people who would have otherwise qualified for mortgages with lower interest rates, irresponsible cheerleading (and fed-funds-rate-setting) by Alan Greenspan, and dizzying levels of complexity of mortgage "securitization" (repackaging mortgages so that they were traded by Wall Street investment banks). I wonder if the deregulatory crowd will get away with denying such obvious realities. Here's where a good presidential campaign can be handy.
UPDATE - some interesting stuff here about how tax breaks for mortgage interest contributed to the crisis.
Labels: Bush, economics, housing, John McCain, Obama, racism
posted by honestpartisan | 10:08 PM
7 Comments:
I don't like backing JP Morgan any more than you do, however I don't like any kind of bail out- be it giant firms like Bear Sterns or homeowners. Its not "mortgauge relieff" its holding my taxes for ransom.
Its simple, don't buy stuff you can't afford individuals and don't make shitty loans giant hedge funds. Simple. I guess if we're going to bail out banks they should be regulated like the old style institutions... I have no problem with that in the future. If a bank will be ensured by the FED then it should follow tight regulations. Those companies can be regulated like any other bank.
But as to backing JP Morgan or companies deregulated you can't have your cake and eat it too. You can't have total freedom from regulation and a giant nanny state to bail you're ass out when consequences come. Any future attempts at spending tax dollars- I'm firmly against it. These companies made bad investments- thats not my problem. Does a homeowner end up upside-down on thier house? Also not my problem. I'll be hugely upset if 1 tax dollar is spent on this insanity. I think this recession might be good for Americans and investors- it will teach them to be responsible with thier money. I've been predicting this would happen for a long time. Americans and American companies and even our government are credit crazy. We need a good slap in the face to wake us up. That sounds puritanical and I don't care. So be it.
Sure the realestate market will effect me with the ressession that will cause. I've got real property and stocks. Every person in the country will get hit by it and that sucks. We will take a hit because of bad moves made on wallstreet. These people screwed us. However, I think the tax payers have suffered enough. I'm not interested in spending billions of tax dollars on the bad decisions of reckless companies or yes, homeowners who bit off more than they could chew on sub prime loans. Its not just a moral hazard, its a bad business decision for the taxpayers. You can't regulate away stupid. We are in dier need of some financial natural selection and the sooner the better. There are some very disturbing trends in all areas of business, a lot of that fostered by a notion that in the end, people can fall back on Uncle Shugar.
Time for the whole to suffer for the mistakes of the few. Thats a lesson we need to learn before this trend leads to many more failed banks and a 2nd depression.
Every person in the country will get hit by it and that sucks. We will take a hit because of bad moves made on wallstreet. These people screwed us. However, I think the tax payers have suffered enough.
To some extent, taxpayer money will be involved if the government underwrites refinancing of subprime mortgages (as the Frank-Dodd bill proposes). But for me the question of whether taxpayers have suffered enough comes down to an empirical one of whether the burden of this proposal outweighs the drag on the economy if something like that isn't done.
You can't regulate away stupid.
Well, you can regulate against fraud. When people who could have qualified for lower-interest loans get subprime loans instead in significant numbers, we're not talking about people being financially reckless, we're talking about people being peddled predatory loans.
I don't know if you got a mortgage when you bought your real property, but I did when I got mine, and the whole process seems to thrive on complexity and opacity. I was lucky enough to know enough people in the business to get referrals for both a reputable mortgage broker and a good lawyer, but not everyone is so situated. I don't think they should have to be not to get scammed.
I am still confused about what regulations you desire. Previously on this subject we were talking about some sort of regulation on the investment banking sector (although what the regulation was and what it would accomplish was never clear). Now you seem to be talking about regulating the commercial banks instead to prevent this sort of loan from being made at all, although how you would accomplish this is somewhat vague to me.
What sort of regulation are you asking for? 'Regulation' isn't a magic wand, we cant just say, lets have a regulation that makes all the good stuff happen and none of the bad stuff, we have to be a bit more specific then that.
To some extent, taxpayer money will be involved if the government underwrites refinancing of subprime mortgages (as the Frank-Dodd bill proposes).
Maybe I wasn't clear in that I find it outrageous that the taxpayer is underwriting anything. This JP Morgan aquisition of Bear Sterns being backed by tax dollars exceeds my ability to keep my head expolding.
I don't think we should spend one thin dime on this housing bubble bursting crisis.
But for me the question of whether taxpayers have suffered enough comes down to an empirical one of whether the burden of this proposal outweighs the drag on the economy if something like that isn't done.
We can pay now with a recession or pay later with worse. We can't keep this credit craze up. Nothing will put a screetching halt to it like some financial suffering. I'm not looking forward to it, I didn't help cause it- but its GOT to happen to avert disaster. Debt is a sickness in this country at all levels.
Well, you can regulate against fraud.
I don't equate a confusing contract with fraud. You and I both had the presense of mind to investigate our investements. If others don't, they deserve the consequences.
Life isn't fair, bad things happen.
Lets look at some history to give this some context as well. In 1979 (the year I was born) we were in a recession with double didget inflation. We pulled out of it in 1981. But wait, by 1987 we were back in recession, only to pull back out. But wait! By 1992- you guessed it- recession. We pulled out by 2004 only to see the dotcom bubble burst in 1999 and be in a recession by 2000. The triple whammey of Sep 11 and ENRON/Tyco/World Com complicated matters so it lasted into 2001. By 2006 we were at reccord market prices but were begining to see the housing market crash. Now in 2008 we're again in recession. Notice a pattern here? Every 4-7 years we get a recession. Thats a natural market correction that in the long run is good for the economy because it weeds out the weak. Its economic natural selection. This recesion promises to be worse than most because of the credit mania whose chickens are coming home to roost. However, we aren't going to reinvent the wheel with regulation. It isn't going to stop this cycle. I could go back way past 30 years and you'd see the pattern is very old.
I don't suggest we panic. I'm not an alarmist. In reality- the economy does't care whose president, what party is in majority or what buzz words are popular in Washington. This resession is hyped up right now because that makes fodder for pundits. Fact is it was coming and will be gone by next year and we'll turn arround only to see another one in 4-6 years. Thats just how it is. Bank Regulation won't fix that.
I'll agree about the business cycle, but let's take an even broader historical cycle. In the 1800s, there were Great Depression-scale economic downturns on a regular basis (1837, 1857, 1873, 1893, 1907, then finally 1929). While I don't think that the business cycle can be repealed, economic downturns since the '30s have been much shallower and shorter with lower unemployment rates, because of government intervention. Keynesian macroeconomics took hold, and the federal government was able to mitigate the business cycle with low interest rates and loose fiscal policy. Perhaps more importantly, institutions established in the New Deal -- the FDIC, the SEC -- made people feel secure about entrusting their money with third parties, which has facilitated investment and promoted prosperity generally.
DJ: The regulation I'm thinking of is twofold. If investment banks are going to have access to the Fed's discount window, and be the beneficiary of bailouts, then they should have limitations in what they are able to invest in and have more stringent capital requirements. As far as mortgages go, there should be better protections against predatory lending and licensing of mortgage brokers.
HP
We're almost on the same page. I agree that if a bank is to be federally insured they should live by regulations set. Otherwise they are not insured. If that is what you're saying- I'm fine with that.
However, Bear Sterns was a hedge fund and NOT INSURED! so I'm wondering why our tax dollars are bailing them out of thier bad investments.
However, where we disagree is on the concept of "predetory lending".
People should learn to read a contract, not depend on government. Like I said, you can't regulate away bad decisions.
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