Mainstream Media Finally Gets Economic Crisis

[Shady]

Is Capitalism Dead?

IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

Thus, the Clinton administration, supported by then-Federal Reserve Chairman Alan Greenspan, refused to tighten regulations on financial derivatives, memorably dubbed "financial weapons of mass destruction" by Warren Buffett. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton,

Government support for housing was well-intentioned: Homeownership is a worthy goal. But when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance. Congress did not apply this sound principle to Fannie Mae and Freddie Mac; they were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee.

Washington Post

Better late than never.

[peter_puck]

We can bring the internet to its knees with a bandwidth sucking debate about what laws and practices led to this mess. The bottom line is, however, that nobody who wrote any of the laws being mentioned knew what their actions would lead too.

During the Bush administration, however, it became very clear that things were getting ((#$# ed up. Bush and the congress should have done something about it, but they didn't. The most likely reason was that this debt boom made the economy appear to be doing much better than it actually was (which made it look like the Bush tax cuts were actually working). An analogy would be eating cheeseburgers and drinking coke. There is perhaps it is not a super smart diet, but many people can eat that diet without consequences (its all in the genes). Now, lets say I start to get numbness and pain in my toes. I have episodes of chest pain. While I may not have been an idiot to start eating those foods, I sure would be if I continued? In this case, Bush went from slight chest pain, to a full blown massive heart attack

I would agree, however, that this current mess does not mean "the end of capitalism". Capitalism only functions where basic laws are enforced and the process is transparent. That did not happen here. People were allowed to commit fraud to gamble with other people's money, and the financial products were so convoluted that the people who owned them did not realise it.

Edited October 22, 2008 by Charles Anthony
deleted re-copied Opening Post

[WIP]

Notice that Shady's propaganda site doesn't mention about the deregulation that began under Reagan -- everything is Clinton's fault! This superficial Republican propaganda also carefully avoids mentioning who authored the bill in Congress that repealed Glass-Steagal -- likely because it was none other than PHIL GRAMM, John McCain's financial adviser -- Gramm-Leach-Bliley Act

[M.Dancer]

Washington Post is a propaganda site?

Had the Watergate commission only knew....

[Liam]

Personally, I think there were three big culprits to the current crisis:

1. mortgage lenders who extended credit to everyone and anyone and the financial markets who overvalued a lot of worthless paper;

2. government regulators who did nothing to monitor the extension of this credit or the market trading of these repackaged and rebundled mortgage-backed "assets";

and, the most guilty of all:

3. the average consumer who thought of his (rather illiquid) investment in his house as a liquid asset which reflected his actual wealth, making him think he was entitled to taking out a $500,000 mortgage when he only had $100,000 in income, making him think he could take out home equity lines forever, making him think he didn't need to do anything to save and making him think he could run up enormous credit card bills because his house (i.e., his net worth) was on a continuously upward trajectory. Cripes, just watch HGTV for an hour and you'll see nothing but granite countertops, wine fridges, enormous home expansions, spa-like pool installations -- our society has gone mad with trying to live a luxury life on the credit card.

[stevoh]

3. the average consumer who thought of his (rather illiquid) investment in his house as a liquid asset which reflected his actual wealth, making him think he was entitled to taking out a $500,000 mortgage when he only had $100,000 in income, making him think he could take out home equity lines forever, making him think he didn't need to do anything to save and making him think he could run up enormous credit card bills because his house (i.e., his net worth) was on a continuously upward trajectory. Cripes, just watch HGTV for an hour and you'll see nothing but granite countertops, wine fridges, enormous home expansions, spa-like pool installations -- our society has gone mad with trying to live a luxury life on the credit card.

While I am definitely a huge supporter of the idea of consumer responsibility, only borrow what you can reasonably pay back, I think that the lenders themselves should be held equally accountable. The lenders are making an investment in the person, and taking on some risk, in the hopes that they will be paid back with profit. If the lender did not require proof of income, did not ensure that the numbers made sense, and went ahead and gave the loan anyway, then they deserve to loose that investement capital as much as any investor in the stock market does when they make a bad choice.

Sure, its up to the individual to ensure that they can afford to borrow any money they do. But its also up to the lender to minimize risk and do the research on their potential investment into this person. Its just good business.

[Liam]

While I am definitely a huge supporter of the idea of consumer responsibility, only borrow what you can reasonably pay back, I think that the lenders themselves should be held equally accountable. The lenders are making an investment in the person, and taking on some risk, in the hopes that they will be paid back with profit. If the lender did not require proof of income, did not ensure that the numbers made sense, and went ahead and gave the loan anyway, then they deserve to loose that investement capital as much as any investor in the stock market does when they make a bad choice.

Sure, its up to the individual to ensure that they can afford to borrow any money they do. But its also up to the lender to minimize risk and do the research on their potential investment into this person. Its just good business.

No, the lender is not making any investment in the borrower. The lender is making the sale and doesn't care if the borrower can pay it back, because the initial lender only holds the loan for a few weeks until it is bundled with a bunch of other mortgages and sold to banks or other institutions. Now, if there are shady lending tactics (showing someone a certain rate but burying a different rate among the loan papers, or showing payback schedules that do not account for adjustments to monthly installments), ONLY THEN is the lender at fault.

Ultimately, the borrower has to take responsibility for living beyond his means. Someone looking to borrow in the hundreds of thousands of dollars ought to be held accountable for doing even the most rudimentary homework on the terms of a loan and determining whether or not he can afford to pay it off.

[stevoh]

No, the lender is not making any investment in the borrower. The lender is making the sale and doesn't care if the borrower can pay it back, because the initial lender only holds the loan for a few weeks until it is bundled with a bunch of other mortgages and sold to banks or other institutions. Now, if there are shady lending tactics (showing someone a certain rate but burying a different rate among the loan papers, or showing payback schedules that do not account for adjustments to monthly installments), ONLY THEN is the lender at fault.

Ultimately, the borrower has to take responsibility for living beyond his means. Someone looking to borrow in the hundreds of thousands of dollars ought to be held accountable for doing even the most rudimentary homework on the terms of a loan and determining whether or not he can afford to pay it off.

Any investment, including a money loan, whether to an individual or a business carries risk. By making the loan, you accept that risk. If you sell that loan to someone else, they instead accept that risk. If the original loan has a high risk of default, the money should have not been loaned in the first place, or you have no-one to blame but yourself when it fails.

[bush_cheney2004]

Any investment, including a money loan, whether to an individual or a business carries risk. By making the loan, you accept that risk. If you sell that loan to someone else, they instead accept that risk. If the original loan has a high risk of default, the money should have not been loaned in the first place, or you have no-one to blame but yourself when it fails.

That's not quite how it works for original home mortgages, which are loans secured by the appraised value of the asset. Liam is correct in that mortgage banks do not invest in a person, but rather in the expected rate of return on the mortgage over many years. As described, mortgages are bundled and sold every day like potatoes. The lenders were no more wrong than auto finance corps now holding liens or title on light trucks that have plummeted in value as well. NINJA loans are only a small portion of well managed portfolios to mitigate such risks.

Derivatives and mortgage back securities were largely unsecured debt being sold to buy yet more debt. Housing bubbles in and of themself are not new...we had one in the 1980's as well....Japanese banks lost their asses on commercial real estate at home and in Norte America.

Edited October 22, 2008 by bush_cheney2004