US Banks: Nationalization? Pre-privatization?

[GostHacked]

The Obama Administration's problem now is cleaning up after the collapse of a bubble. IMV, it is not bubbles that are the problem; it is the response to them.

Errr?? How about not getting into the bubble in the first place? So the problem is not the problem, but the response to the problem is a problem ... k

msj

Too many people wrongly assume that wealth is a consequence of debt.

The ratio of people in debt to the people who have wealth kind of proves you wrong.

[msj]

msj

The ratio of people in debt to the people who have wealth kind of proves you wrong.

That is my point - too many people think that they can become wealthy by going into debt.

For awhile there it looked like that was the case but the bubble popped and what's happened?

Well, one's "wealth" has gone down (stock markets -50%, real estate -30% - in the US) while one's debt is still holding steady (or increasing).

Wealthy people are careful with debt - they know it is just a tool to be used judiciously to enhance their equity.

[bush_cheney2004]

....Well, one's "wealth" has gone down (stock markets -50%, real estate -30% - in the US)...

Neither of those constitute true wealth.....just unrealized gains (losses).

From the NYT (in 1904), if wealth be the antithesis of poverty, most Americans are wealthy indeed.

[GostHacked]

Wealthy people are careful with debt - they know it is just a tool to be used judiciously to enhance their equity.

Wealthy and smart people try as best they can to avoid debt. That is my point. While everyone else lives on credit, these people live off of their own money. I would so think anyways.

The only real debt a person should accumulate is debt towards an investment like a house. At least the house does not disappear as fast as the stock market investments.

[August1991]

That is my point - too many people think that they can become wealthy by going into debt.

How else can poor people achieve anything in life? They must mortgage their talents, and in a civilized world, they can.

In the 1950s, people borrowed about 10x their annual income to buy a house. At first, their net wealth was close to zero but they could live decently and as they paid down their mortgage, their net wealth rose. Rent Capra's "It's a Wonderful Life", if you don't believe this. (Prior to the 1940s, mortgages were difficult.)

More generally, capitalism means trading in claims on property, physical capital. (I may own the tractor but someone else uses it and pays me for this.) There are myriad ways in which to organize this principle and their complexity will only increase in the future. As Pierre Trudeau noted, the only prediction we can make about the future is that people will be more rational. So, I believe that capitalism is a force of great good for humanity. In the future, people will trade in ever more complex contingent claims on real property.

Wealthy and smart people try as best they can to avoid debt. That is my point. While everyone else lives on credit, these people live off of their own money. I would so think anyways.

Smart people pay down their debt. But at any given moment, society will have debt and a civilized society will have more debt than an uncivilized society.

In a civilized society, young, poor, talented people can borrow to achieve their goals. Financial intermediaries make these kinds of transactions possible. The level of debt reflects the sophistication of a society's banking system and the confidence of its people.

----

Several counties in the US got involved in a housing market bubble. Speculative bubbles happen in capital markets, and their demise is often cataclysmic. Banks collapse. If you look back at historical examples, the bubble is "euphoric" and the collapse is "the end of the world".

IMV, it is the response to the collapse of a bubble that warrants attention. In teh case of Citibank today, Geithner seems to have concocted a curious arrangement whereby the US government's position depends on private participation (PPP, as we say in Quebec) with the intention of keeping the US government a minority shareholder, reducing the preferred shareholder obligations of Citibank and allowing Citibank to pass a stress test.

I'm reminded of Paul Martin using Gomery to deal with the sponsorship scandal. We're watching smart people attempting to put the toothpaste back in the tube.

Edited February 28, 2009 by August1991

[msj]

And people still don't get it: you do not become wealthy by getting yourself into consumer debt.

And you don't get wealthy by going into debt and holding on when a bubble rises and then pops.

To the extent that there were some people smart enough to get in and out of a bubble (and these people most likely timed the market early and got out early) then debt is fine.

Many of the great masses are stuck with debt that exceeds the fair market values on their houses, and, to the extent that their monthly cash flow is negative thanks to the debt payments - well, clearly those people were fixated on the fair market value of their assets (as they went up), ignored the grand total of their debt and gave no consideration about the cash flow implications should the economy sour.

These are people who wrongly believe that by simply going into debt to buy an asset "that always goes up" will make them wealthy. A rather foolish faith.

A wealthy person realizes that leverage is important in making one wealthy, however, if one is going to borrow it must be on terms that will prove profitable.

For GM to borrow at 8% and then turn around and lend to consumers at 0%, they better be making up the difference between their cost of capital and their rate of return via the mark up on their vehicles. Obviously they haven't been.

I have clients who own rental properties and they generally come in two types - the wealthy ones and the pretenders.

The pretenders are the ones who think it is better to lever up so that they generate losses so they can save $0.30 for every dollar they lose - they are losing $0.70 on the dollar, willingly!

But hey, they "will make it up on the capital gain" (which looks quite foolish in this real estate environment now).

The wealthy are the ones who carefully lever their properties but still ensure they are cash flow positive (an important point to remember - the pretenders not only generate losses for tax purposes but they are also losing big time on cash flow since mortgage principal payments are not included as an expense on their tax returns).

So a wealthy owner not only knows it is better for him to make $1 and pay $0.44 in taxes on it (since he still has $0.56 left over) but he also knows that he "will make even more money on the capital gain" when it arises.

And that capital gain is more likely to arise for the wealthy person because he is cash flow positive - it is unlikely that he will be forced to sell his rental properties in a poor real estate environment since he has a cushion.

The pretender has no cushion since he is losing money from the outset.

So, it is about "smart" debt and "smart" investing - something few people do well at.

[ReeferMadness]

msj/august:

Your responses are typical of people who think that market capitalism controlled by fiscal stimuli is the pinnacle of human evolution. It must be painful when you come to realize it's all downhill from here.

And debt is bad?

Given a choice between being in debt and not being in debt, most people would choose to not be in debt. So debt is at best, a necessary evil. But it's necessary only if you wear the type of blinders the two of you obviously have.

Is debt necessary? I don't think so. Debt is a dual manifestation of consumerist greed and societal inequality. Neither one of those is necessary so debt is unnecessary.

Can debt be positive? Standing inside your capitalist paradigm, it is the only realistic way in today's world for most people to own a home. It can be used if you are clever (and lucky) enough to time the wild and bizarre market swings so as to make money "investing" (or, more accurately, speculating).

If you stand outside that paradigm, it could be argued that debt is a useful motivator to get people to work harder (more on this later). As a motivator, it is coercive and we should all aspire to better motivators.

Well then, what about the downsides of debt? There's a line of argument that says that debt is the premier means of controlling the unkempt masses. If you can keep people focused on paying off expensive items all their lives, they need to focus all their efforts on income-producing work. That means that they will not have the time or effort to understand that they're being exploited, much less do anything about it. That may sound like a conspiracy theory but it works equally well as an unintended consequence of our economic system.

Then there are the societal implications of msj's "smart investors", the ones who buy up real estate and rent it back to people who can't afford to. These people are a large part of the reason that a lot of people out there can't afford to own a home. When they buy up properties, they increase the demand and help to drive up the price. Not only are these people "smart" enough to get in before the bubble - they helped cause the bubble. Their debt (along with that of a bunch of other "not-so-smart" speculators) is making the world a worse place for the rest of us. But who cares? It's a fee world, isnt it.

Now let's get back to the point that I made originally, the point that august carelessly generalized to "Is debt bad?". As I said earlier, at best debt is a necessary evil. A system that [relies/i] on debt for its continued operation is asinine. Too much debt and..... well, we can all see the results. Not enough debt and the money supply collapses. How ridiculous is that? Let's build a system that just assumes that people will never want to get out of debt.

I watch the pundits wring their hands in agony over what must be done to get the American consumer spending? I haven't heard anyone ask "Does the American consumer need anything more?" Or even "Would the American consumer be any happier if s/he had more?" No, it's accepted that the American consumer must get back to the consumerist trough and perform the duty of spending.

[blueblood]

msj/august:

Your responses are typical of people who think that market capitalism controlled by fiscal stimuli is the pinnacle of human evolution. It must be painful when you come to realize it's all downhill from here.

The stock market has crashed before and will crash again. It is by far the best and most fair system out there.

This mess was caused by government, the gov't stepped in when it shouldn't have and didn't step in when it should have.

Had the banks not been forced to lend to skid rows in the first place, the world would be much better off. However the gov't forced banks to lend to skids, and had the utter stupidity not to put in regulations when dealing with very risky loans/mortgages.

Blame gov't, not capitalism.

[punked]

The stock market has crashed before and will crash again. It is by far the best and most fair system out there.

This mess was caused by government, the gov't stepped in when it shouldn't have and didn't step in when it should have.

Had the banks not been forced to lend to skid rows in the first place, the world would be much better off. However the gov't forced banks to lend to skids, and had the utter stupidity not to put in regulations when dealing with very risky loans/mortgages.

Blame gov't, not capitalism.

This is just a lie. The banks is Iceland crashed, the banks in Europe crashed, are you telling me the US government went over there and said "You have to lend to poor people"? No this is a right wing lie.

The banks paid people to go out and find the poor people to make these high interest loans too, the government forced the banks to hire those people too eh? No the banks saw a short term large profit. They then bundled these loans and sold them to other banks paying hott potato with them. This was caused by the deregulation of the industry. Well the music stopped and almost all the banks were caught with someone else hott potato and that is that. It has very little to do with the government forcing anyone to do anything.

[msj]

Punked, you're preaching to someone who is heavily into the Republican kool-aid.

I have already posted numerous articles in at least two threads on this topic.

It is pointless. But Warren Buffet had some interesting words to say on this topic in his latest letter to shareholders which you may find interesting.

A summary is seen here.

[blueblood]

Punked, you're preaching to someone who is heavily into the Republican kool-aid.

I have already posted numerous articles in at least two threads on this topic.

It is pointless. But Warren Buffet had some interesting words to say on this topic in his latest letter to shareholders which you may find interesting.

A summary is seen here.

I call it like I see it.

Banks were legislated to loan to poor people.

In spite of this legislation, there were no regulations whatsoever. That constitutes to me a disaster in the making. I'm not saying your wrong. If your going to lend to high riskies, regulations should be in place.

[punked]

I call it like I see it.

Banks were legislated to loan to poor people.

In spite of this legislation, there were no regulations whatsoever. That constitutes to me a disaster in the making. I'm not saying your wrong. If your going to lend to high riskies, regulations should be in place.

So they went out of their way to hire people to go out and seek these "at risk" people to loan too? Doesn't add up even if the government makes you loan to these people like you claim why do you hire people to go out and find them?

No they went out and found them because then they could bundle these loans and sell them to other banks. Once it was off their hands it wasn't their problem. Funny thing was all the banks were doing this to each other in a zero sum game.

[blueblood]

So they went out of their way to hire people to go out and seek these "at risk" people to loan too? Doesn't add up even if the government makes you loan to these people like you claim why do you hire people to go out and find them?

No they went out and found them because then they could bundle these loans and sell them to other banks. Once it was off their hands it wasn't their problem. Funny thing was all the banks were doing this to each other in a zero sum game.

What your refering to is the latter part of the problem. The gov't was forced to lend to skid rows, and over time the regulations were made more and more lax. It adds up in the fact of "well if we're forced to lend to these people, lets make the best out of it". With such a ridiculous socialist policy put in place, there should most definetely have been regulations. It ended up cascading and was a disaster. If anyone can get a loan, it would make sense to get as much people to loan to as possible.

Had their been regulations, regarding lending to trash, this wouldn't have happened. While being forced to lend to them, I would think the banks initially wouldn't have been so eager to seek it out. However over time, it didn't appear to be such a risk, and with such lax regulations the banks being as competitive with each other as they are, were trying to outdo each other, but finally it blew up in all of their faces.

I'll pose you this question, why is it so hard in Canada to get a loan if you are trash? The Canadian gov't knows not to let banks lend to trash and has regulations and safeguards to help deal with that.

Blame both sides of the spectrum of the US gov't, not the banks.

[punked]

What your refering to is the latter part of the problem. The gov't was forced to lend to skid rows, and over time the regulations were made more and more lax. It adds up in the fact of "well if we're forced to lend to these people, lets make the best out of it". With such a ridiculous socialist policy put in place, there should most definetely have been regulations. It ended up cascading and was a disaster. If anyone can get a loan, it would make sense to get as much people to loan to as possible.

Had their been regulations, regarding lending to trash, this wouldn't have happened. While being forced to lend to them, I would think the banks initially wouldn't have been so eager to seek it out. However over time, it didn't appear to be such a risk, and with such lax regulations the banks being as competitive with each other as they are, were trying to outdo each other, but finally it blew up in all of their faces.

I'll pose you this question, why is it so hard in Canada to get a loan if you are trash? The Canadian gov't knows not to let banks lend to trash and has regulations and safeguards to help deal with that.

Blame both sides of the spectrum of the US gov't, not the banks.

So you actually believe they said "well we are force to lend to these people we don't want to lend too, lets make the best of it by finding as many of them as we can?" "Let's hire people to actively seek these people out, and make sure they don't accept a smaller loan but the largest one we can give them". No what you are saying doesn't make any sense at all. Again I ask you did they force the Icelandic banks to do the same thing? The European ones too?

Yep right wing logic always makes so much sense to me.

[msj]

So you actually believe they said "well we are force to lend to these people we don't want to lend too, lets make the best of it by finding as many of them as we can?" "Let's hire people to actively seek these people out, and make sure they don't accept a smaller loan but the largest one we can give them". No what you are saying doesn't make any sense at all. Again I ask you did they force the Icelandic banks to do the same thing? The European ones too?

Yep right wing logic always makes so much sense to me.

Yep, even when you look at the CRA (Community Reinvestment Act) website they clearly states:

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.

I have reads some of the legislation to help fight insomnia and I haven't found anything in it which forces banks to lend to poor credit risks using unsound banking methods.

Perhaps Blueblood could link us to specific sections of the Act that demonstrate that the act is contrary to the purpose quoted above?

[blueblood]

Yep, even when you look at the CRA (Community Reinvestment Act) website they clearly states:

I have reads some of the legislation to help fight insomnia and I haven't found anything in it which forces banks to lend to poor credit risks using unsound banking methods.

Perhaps Blueblood could link us to specific sections of the Act that demonstrate that the act is contrary to the purpose quoted above?

Visit My Website

It requires banks to lend to trash.

The unsound banking practices stems from what I think is competition to get the most customers, which I'm not a fan of. If you have to lend to everyone, the more people you can get the better.

Punked:

So you actually believe they said "well we are force to lend to these people we don't want to lend too, lets make the best of it by finding as many of them as we can?" "Let's hire people to actively seek these people out, and make sure they don't accept a smaller loan but the largest one we can give them". No what you are saying doesn't make any sense at all. Again I ask you did they force the Icelandic banks to do the same thing? The European ones too?

Yep right wing logic always makes so much sense to me.

You keep stating the consequences of what happens when banks have to lend to poor people without regulations of any kind, it turns into unscrupulous cutthroat competition where in the end everyone loses.

Citibank was one of the largest banks in the world, the Europeans had to compete. If it was appearing to work for the Americans, why not in Europe. However in Canada, that wasn't the case. Canada is smart enough to put regulations on loaning to trash.

Try expanding your mind sometimes. Go to CBC.ca and watch Dragon's den clips, it will show you how loans are dished out properly.

Have you ever taken a large substansial loan out of the bank before?

[msj]

Visit My Website

It requires banks to lend to trash.

The unsound banking practices stems from what I think is competition to get the most customers, which I'm not a fan of. If you have to lend to everyone, the more people you can get the better.

Are you sure that is your website?

Do you mean this part:

CRA lending has been profitable for financial institutions. The ten-year California commitments made by Bank of America, Wells Fargo Bank and First Interstate Bank in 1992 were completed within four to five years. In half the time expected, a total of $21 billion had been invested in low-income communities and communities of color. This was a lesson for all the major banks: expanding products and marketing to previously ignored communities and people increased profits. These California commitments were the largest and most comprehensive in the country and helped set the terms of engagement nationally.

Or is it this part:

In addition, studies by diverse groups such as Bank of America and the WoodsWhat does it mean?tock Institute, a community research institute based in Chicago , have shown that mortgage loans to low-income single families are less risky than those to wealthy borrowers.

Or do you mean this part:

Evolution of the Industry

Recent conservative federal provisions have increased the consolidation of financial institutions , which has allowed insurance companies and securities institutions to acquire banks without the restrictions of CRA. These provisions have also encouraged the formation of mega-banks, which simply have less local connection and allegiance. The size, distance, and company diversity inherent in these larger institutions may require more investment by CRA advocates in local communities in putting together a coalition with sufficient strength to capture the institution's attention. It may force a coalition to target local banks instead.

This last part is directly linked to why "[o]nly one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics." Link

Once again, just because the CRA intends to encourage banks to lend to "riff raff" does not mean they are being forced to lose money or give it away. Your assumption is just not supported by the facts.

CRA accredited banks have to carefully assess loans in those low-income areas which is probably why these loans have been so profitable - they are probably more conservative than the "thin file" loans used for regular folks at WaMu, for example.

[punked]

Visit My Website

It requires banks to lend to trash.

The unsound banking practices stems from what I think is competition to get the most customers, which I'm not a fan of. If you have to lend to everyone, the more people you can get the better.

Punked:

You keep stating the consequences of what happens when banks have to lend to poor people without regulations of any kind, it turns into unscrupulous cutthroat competition where in the end everyone loses.

Citibank was one of the largest banks in the world, the Europeans had to compete. If it was appearing to work for the Americans, why not in Europe. However in Canada, that wasn't the case. Canada is smart enough to put regulations on loaning to trash.

Try expanding your mind sometimes. Go to CBC.ca and watch Dragon's den clips, it will show you how loans are dished out properly.

Have you ever taken a large substansial loan out of the bank before?

Wow do you ever hate the poor.

I agree some what in your change in arguement here. The problem wasn't the lending to the poor it was the deregulation which made it possible to target the poor and uneducated and sell them on taking huge loan for a short profit. The people that made the money were able to take their huge bonuses and run. Unchecked capitalism was the problem glade we can agree on that.

[blueblood]

Wow do you ever hate the poor.

I agree some what in your change in arguement here. The problem wasn't the lending to the poor it was the deregulation which made it possible to target the poor and uneducated and sell them on taking huge loan for a short profit. The people that made the money were able to take their huge bonuses and run. Unchecked capitalism was the problem glade we can agree on that.

I'm not a fan of people who think they're something they're not. It causes problems for everyone. I would like to drive a Ferrari as much as the next person, but I can't afford it. I'd like to live in an extremely large house, but I can't afford it.

If you are going to lend to poor people, there best be some regulations. That is what we have in Canada. Before CRA, the regulations were "if your a deadbeat, get out of my bank"

MSJ, you are skirting around the root of the problem. It says it right off the bat in black and white, that deposit taking banks are required to offer equal access to lending investment and services. When that happens without regulation, we get ourselves into trouble.I take that as a green light to being forced to lend to everyone when the bank should be discriminating based on the ability to pay. As was the case before.

[punked]

I'm not a fan of people who think they're something they're not. It causes problems for everyone. I would like to drive a Ferrari as much as the next person, but I can't afford it. I'd like to live in an extremely large house, but I can't afford it.

If you are going to lend to poor people, there best be some regulations. That is what we have in Canada. Before CRA, the regulations were "if your a deadbeat, get out of my bank"

MSJ, you are skirting around the root of the problem. It says it right off the bat in black and white, that deposit taking banks are required to offer equal access to lending investment and services. When that happens without regulation, we get ourselves into trouble.I take that as a green light to being forced to lend to everyone when the bank should be discriminating based on the ability to pay. As was the case before.

So you agree deregulation and less government over sight was the wrong idea.

The idea Bush had that everyone in America can own a home was wrong? Here is lending to poor people Bush's success. I think we know where this problem came from. http://www.foxnews.com/story/0,2933,115279,00.html

Lending to the poor is not wrong giving them huge loans which they wont be able to pay for 100 years was what was wrong here. Charging them 7% interest when everyone else is getting 4 or less is wrong. Acting as lended money is real money to inflate your profits is wrong. The problem here is unchecked capitalism. I am glade we have been able to reach a middle ground for agreement. Sometimes we need government to step in and say "This right here isn't real money and you don't get to pretend it is so you can cut and run." Problem is one party thinks the government has the right and need to do that and the other party thinks the government should die.

[msj]

MSJ, you are skirting around the root of the problem. It says it right off the bat in black and white, that deposit taking banks are required to offer equal access to lending investment and services. When that happens without regulation, we get ourselves into trouble.I take that as a green light to being forced to lend to everyone when the bank should be discriminating based on the ability to pay. As was the case before.

I'm not skirting around any issue - you are missing reality: not everyone who lives in poor neighborhoods is a high risk borrower.

CRA accredited banks are not required to lend to "everyone" in those neighborhoods.

Mortgage lenders (private lenders as pointed out in that article linked above) have been going broke faster than CRA accredited banks and they were never forced to lend under the CRA.

CRA accredited banks are not going broke because they were forced to lend money to people (whether "riff raff" of high FICO). No, these banks are going broke because they did not follow sound operational banking policies - which is a failure of the private banking system.

That "thin file" approach encouraged by WaMu is a demonstration of the type of practice that banks practiced during the last 6 years or so and it has nothing to do with the CRA and everything to do with the banks' own operating procedures.

When you put those facts together your assumptions are asinine (to be alliterative).

[blueblood]

I'm not skirting around any issue - you are missing reality: not everyone who lives in poor neighborhoods is a high risk borrower.

yet there was enough to cause problems in the financial sector

Mortgage lenders (private lenders as pointed out in that article linked above) have been going broke faster than CRA accredited banks and they were never forced to lend under the CRA.

CRA accredited banks are not going broke because they were forced to lend money to people (whether "riff raff" of high FICO). No, these banks are going broke because they did not follow sound operational banking policies - which is a failure of the private banking system.

True, however this was a problem 30 years in the making and it had to start somewhere.

That "thin file" approach encouraged by WaMu is a demonstration of the type of practice that banks practiced during the last 6 years or so and it has nothing to do with the CRA and everything to do with the banks' own operating procedures.

When you put those facts together your assumptions are asinine (to be alliterative).

WaMu is competing against CRA banks, they're going to be pulling out all the stops, it just happeed to blow up in their face.

Competition to get undesirables didn't work out how the banks wanted to. Oh well back to the drawing board. One thing for sure, trash will have a harder time getting bank loans.

[punked]

Blueblood that last post looks like a back peddle on your previous claims. Besides showing destine for the poor you have not offered any evidence they are what caused the crises.

[msj]

WaMu is competing against CRA banks, they're going to be pulling out all the stops, it just happeed to blow up in their face.

WaMu was a CRA accredited bank.

They were recklessly loaning money to people and not bothering to check to see if those people had the income to back up such loans (just like many other lenders).

WaMu was not forced to do this. Nor were these loans to "riff raff." In fact, many "Alt A" loans (loans to people with higher FICO scores) have been performing very poorly too, it's just that certain people, like you and the Republicans, want to focus only on the subprime and then try to link it to the CRA.

And that's the funny part - the CRA is not the problem. Lending prudently is not the problem.

It is lending to anyone with out due care and diligence that is the problem.

The system encouraged moral hazard thanks to low interest rates and packaging of loans to resell as investments.

People buying such "investments" had to trust the rating agencies to properly rate these investments - which was not being done.

As such, these investors would normally be the "suckers" here as they see their "investments" plummet.

To some extent that is true although the taxpayer looks to be the bigger sucker.

And that is where it is even funnier: CRA loans are loaned out on the basis of knowing the client and the neighborhood/county.

Sub prime and Alt A loans did not require knowing much about the client (one piece of paper was good enough for WaMu) since the bank was packaging them up and off-loading them (and the risk) to someone else anyway. Why care about the risk when you are holding the loan for a matter of days or weeks?

To the extent that "riff raff" could get sub prime loans in lieu of CRA loans, well, once again, that is the banks decision to make such loans, the rating agencies to rate such loans and do a poor job of it, and the investors decision to buy a package of these garbage loans.

The CRA never forced these people to make these type of loans (sub and Alt A), give decent ratings to them, or buy the "investments" - these decisions were all made by "rational" profit seeking individuals with free will.

[August1991]

And people still don't get it: you do not become wealthy by getting yourself into consumer debt.

And you don't get wealthy by going into debt and holding on when a bubble rises and then pops.

...

So, it is about "smart" debt and "smart" investing - something few people do well at.

You make an imperious divide between "wealthy" and "pretenders". Leverage is not bad and almost everyone leverages when they buy a house. As a result, about 60% of North Americans are not renters - a statistic that is considerably different elsewhere in the world.

But msj, almost any market is prone to a speculative bubble. They happen and it would be absurd to blame them all on Alan Greenspan.

Debt is a dual manifestation of consumerist greed and societal inequality.

I completely disagree with that statement but more pertinently Reefer, greed is a fact of human nature. Live with it.

And that's the funny part - the CRA is not the problem. Lending prudently is not the problem.

It is lending to anyone with out due care and diligence that is the problem.

The system encouraged moral hazard thanks to low interest rates and packaging of loans to resell as investments.

People buying such "investments" had to trust the rating agencies to properly rate these investments - which was not being done.

But CRA was part of the problem, as was the Bush Administration's preference for home ownership. Heck msj, you blame Greenspan for keeping interest rates "low". I could just as easily blame AIG for using its AAA rating to cover the mortgages with Credit Default Swaps (insurance). Or what about Fannie and Freddie? Did the FDIC not see what was going on?

After the collapse of a bubble, the post mortem often turns into an ad-hoc discussion of blame. Sometimes there is criminality involved but usually there is just sheer blindness. House prices were rising and some people blindly thought they would continue to rise. I suppose the Dutchman in the 17th century who sold his house to buy a tulip bulb probably later tried to find a culrprit too.

It would be nice to find a convenient culprit because then we could presumably avoid the next bubble. I don't think it will work. When people want to believe and play the game, they'll get around even smart regulators.

One of the few housing markets in North America that has avoided a bubble is Montreal. Why? I dunno. Nevertheless, the Caisse lost several billion buying ABCP (toxic mortgages) and the Minister of Finance had the temerity to explain last week that the paper was rated AAA.

-----

The US government is about to dump another 30 billion into AIG tomorrow. This is a horrible step in this game of chicken. Talk about moral hazard.

We are setting ourselves up for something truly catastrophic down the line when the next bubble takes off.

Edited March 2, 2009 by August1991