US Banks: Nationalization? Pre-privatization?

[msj]

August, I see little point in repeating my argument, and my links, with you yet again.

I have never blamed Greenspan for all bubbles. But he certainly has played a role in the stock market bubble of the '90's (his "irrational exuberance" speech being rather ineffectual) and the real estate bubble of the '00's.

Nevertheless, a role was played with improper and poor regulation.

The difference between a CRA loan and the junk sold by Countrywide is that under a CRA loan the bank knew the client and the county.

With the sub prime/Alt A junk the bank didn't care and even the "rational" buyer of that junk didn't care.

As for the rest of your nonsense - I have already dealt with it in the past and so no more need to repeat arguments for which I have provided more than enough facts and evidence to support them.

If only you were to attempt to do the same....

[GostHacked]

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

So if they are not high risk, why have they been given a sub-prime mortgage? Because if they were not high risk, then they would have qualified for a prime mortgage.

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.

Giving to those people who have no hope in paying back the outrageous loan they were given in the first place is an example of not following sound operational banking policies.

They were never forced to lend money. Investors wanted to make more money, and everyone who qualified for a loan already had one ... what do you do then? Risky business with sub-primes and other high risk investments.

[msj]

So if they are not high risk, why have they been given a sub-prime mortgage? Because if they were not high risk, then they would have qualified for a prime mortgage.

What I mean is that just because East Vancouver (to use a Canadian city that is well known) is full of poor riff raff does not mean that everyone who lives in East Van has a low FICO score.

Many people who live in East Van would qualify for a regular bank loan and would not need any kind of sub prime type of loan (if East Van was a US city).

This blanket stereotype that certain cities/counties/municipalities are poor and, therefore, all people contained within are sub prime or need a CRA type loan is BS.

[GostHacked]

What I mean is that just because East Vancouver (to use a Canadian city that is well known) is full of poor riff raff does not mean that everyone who lives in East Van has a low FICO score.

True, but we are not talking about those people who are qualified for a prime mortgage.

Many people who live in East Van would qualify for a regular bank loan and would not need any kind of sub prime type of loan (if East Van was a US city).

If they qualified for a prime mortgage bank loan and got a prime mortgage, then there is no real issue then is there? IF they were qualified for a prime mortgage and not given one by the banks .. then that is another issue we can look at.

This blanket stereotype that certain cities/counties/municipalities are poor and, therefore, all people contained within are sub prime or need a CRA type loan is BS.

It is a blanket for the type of loan given to those people not about the people or geographical area you think I am stereotyping. The banks decide if a person qualifies for a prime or sub-prime mortgage.

[msj]

True, but we are not talking about those people who are qualified for a prime mortgage.

Speak for yourself.

If they qualified for a prime mortgage bank loan and got a prime mortgage, then there is no real issue then is there? IF they were qualified for a prime mortgage and not given one by the banks .. then that is another issue we can look at.

To the extent that they received an Alt A or other type of loan and to the extent that the banks' documentation on it was a single piece of paper then I think there is an issue.

Whether it is sub prime or Alt A, banks had terrible policies about documenting these loans. If that is the point you are driving at then we are in full agreement.

It is a blanket for the type of loan given to those people not about the people or geographical area you think I am stereotyping. The banks decide if a person qualifies for a prime or sub-prime mortgage.

No, I believe the people doing the stereotyping here are Republicans who don't like the CRA and who want to muddy the issue with chatter about how the CRA "forced" banks to make sub prime loans to low income people.

Sub prime loans were not forced on anyone - the banks gleefully issued those loans because a terrible system with terrible incentives allowed them to.

[GostHacked]

Speak for yourself.

Let me make this clear one more time. The problem is not with prime mortgages or the people who have them. The problem is with the sub-prime mortgages because of the higher risk of these people in conjunction with the banks allowing them to borrow too much, defaulting on the home loan. I know you agree with this. You are making an argument with me for nothing, because we are agreeing on the same thing of what the cause of the crisis is.

To the extent that they received an Alt A or other type of loan and to the extent that the banks' documentation on it was a single piece of paper then I think there is an issue. Whether it is sub prime or Alt A, banks had terrible policies about documenting these loans. If that is the point you are driving at then we are in full agreement.

I am not disputing that at all.

No, I believe the people doing the stereotyping here are Republicans who don't like the CRA and who want to muddy the issue with chatter about how the CRA "forced" banks to make sub prime loans to low income people.

Well, screw the idiots who do the stereotyping, or just flat out ignore it .. it is irrelevant anyways.

Sub prime loans were not forced on anyone - the banks gleefully issued those loans because a terrible system with terrible incentives allowed them to.

And people gleefully took the loan they know they can never pay back. The banks and the people are to blame. Blame the banks for being able to lend too much money to a high risk group, and blame the people for living beyond their mean income and taking that high risk loan.

[msj]

Gosthacked, we largely agree.

Where we disagree, however, is that prime loans, Alt A for example, are not so great either.

A lot of people simply blame this mess on sub prime and the stupid people (whether lendees, lenders, investors etc).

In fact, the system is also rotten for Alt A loans. It's just not in the news as much as the subs.

[August1991]

Where we disagree, however, is that prime loans, Alt A for example, are not so great either.

A lot of people simply blame this mess on sub prime and the stupid people (whether lendees, lenders, investors etc).

In fact, the system is also rotten for Alt A loans. It's just not in the news as much as the subs.

Or what about Jumbo loans? That would bolster your argument msj since Jumbo mortgages were likely not to be subject to CRA influence.

Reading through this thread and in particular the argument between msj and gosthacked, I have the impression that you both believe that if the banks didn't lend this money and if people hadn't borrowed, we wouldn't be in this situation.

I disagree.

For starters, CRA had an effect. So did Bush's desire to see more home ownership. Low interest rates encouraged this. Interest rate tax deductibility, non-recourse provisions, property tax deductibility alll encouraged a housing bubble. Securitized mortgage instruments and so on.

IOW, there is no shortage of culprits. Underneath all of this is the fact that house prices rose and rose and many people believed that they would continue to rise. People will look back at this episode and call it the Collapse of the 2000s Housing Bubble, because that's what it was.

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 ...

That would be perfect in an ideal world but we don't live in an ideal world.

Can we prevent bubbles? I don't think so, not with the existing state of the art. For the moment, speculative bubbles are inevitable. I'm not certain that regulators can stop them. I suspect too that moral hazard (government regulation) only encourages them and makes their collpase more catastrophic.

The problem is far graver and this crisis is in part so intractable because of this problem.

It is naive (and even wrong) to believe that with less Fed intervention and better regulation, we could avoid bubbles:

You're both right - a combination of ineffective regulation and an attitude of Greenspan being there to bail out the market every time there was a problem created an atmosphere where risk need not be considered.

The regulators weren't looking on the one hand, and whenever the s&it hit the fan, on the other hand, then Greenie was there to hold the markets hand.

But Greenspan and the regulators amount to the same thing.

IOW, you can't have it both ways and blame Greenspan on one hand and then blame the lack of oversight on the other. The Fed is both an insurer and a regulator and it is ultimately impossible to separate these tasks. The very existence of a government regulator induces moral hazard. In some ways, the seeds of this bubble were planted with the S&L bailout 20 years ago.

----

This crisis has thrown up a serious problem in how the State and markets operate side-by-side. Krugman has posted two good columns on this very issue.

It’s one of Ben Bernanke’s most memorable quotes: at a conference honoring Milton Friedman on his 90th birthday, he said: Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

...

But can we say that recent events appear to disprove that claim?

Krugman

The 1970 Phelps volume, which suggested that imperfect information could explain a lot of what we see, had a huge impact on the profession. And when Lucas married this insight to rational expectations, it seemed to shake the foundations of Keynesian ideas about monetary and fiscal policy. Business cycles, Lucas suggested, last only as long as price- and wage-setters can’t disentangle nominal from real shocks — and monetary or fiscal policy can’t stabilize the economy, at most they add noise.

Krugman Edited March 2, 2009 by August1991

[msj]

August, the reason Greenspan deserves much blame is because he did not do his job. Hence - improper regulation.

That is not having it both ways.

It is simply stating the fact that Greenspan's ideology was that the market would be okay, Jack (except for all those times that Greenspan helped out the market by bailing out LTC and reducing interest rates, of course - how convenient for Greenie to forget about those interventions).

Greenspan should have taken the punch bowl away and he should have ensured the Fed properly regulated mortgages so that "thin file" mortgage documentation did not occur.

That is the Fed's job and it simply didn't do it. Hence, improper regulation.

As for being in this situation - if the banks didn't lend this money then the post 2001/2002 recession recovery would have been worse than it reportedly already was.

As such the US would still be stuck in a static economy from 2002 through who knows when rather than a tepid rise in growth for a few years (2003 - 2007) as people borrowed against their "home equity" only to see a rapid decline in the economy in 2008/2009.

The advantage of events unfolding the way they are, however, is that everyone gets to see just how big a failure Greenie was, they get to see how big a failure the banking system was and is when left to their own devices (because Greenie didn't implement proper regulation to curb gross excesses) and everyone gets to be reacquainted with Keynesian economics as the dark age of economic ignorance surrounding the new Keynesians is examined by people interested in solutions to this mess (yes this comes from an earlier Krugman article and yes I had already read your links earlier today).

[Oleg Bach]

Greenspan did what he was instructed to do...make magic...and he did his part and duty - but you can not continue to make something out of nothing forever - we live in the phyical world. - Don't blame the magician - blame the king and his court (congress) who insisted on one more trick.

[punked]

Greenspan did what he was instructed to do...make magic...and he did his part and duty - but you can not continue to make something out of nothing forever - we live in the phyical world. - Don't blame the magician - blame the king and his court (congress) who insisted on one more trick.

He was not "fallowing orders" as you claim. Greenspan believed and tired to prove the problem with the mortgage market was regulation. He was wrong but it was certainly his belief.

[Oleg Bach]

He was not "fallowing orders" as you claim. Greenspan believed and tired to prove the problem with the mortgage market was regulation. He was wrong but it was certainly his belief.

So are you saying he suggested better and more stringent regulatory measures and congress did not listen?

[August1991]

Greenspan should have taken the punch bowl away and he should have ensured the Fed properly regulated mortgages so that "thin file" mortgage documentation did not occur.

On the contrary, Greenspan took the punch bowl away, and put it back as required.

Bernanke, with much less aplomb, is doing the same.

====

According to Friedman, the lesson of 1929 is that the Fed was too tight-fisted. Msj, your argument is no different. You argue that Greenspan should have taken the punch bowl away.

In 1987, Greenspan opened the spiggots. After 2000, he let the air out of the bubble. In 2008, Bernanke opened the spiggots again. The general consensus among macroeconomists is that Greenspan/Bernanke did the right thing.

Maybe central banks shouldn't play with punch bowls, ever. Maybe the State cannot regulate markets, except as another special player.

When it comes to a direct dispute between market organization and State organization, a game of chicken between market players and politicians, the market players will win.

[Oleg Bach]

Our version of the fed is also tight fisted - our tight fist is called frugality - the american fed fist is called greed.

[msj]

On the contrary, Greenspan took the punch bowl away, and put it back as required.

Bernanke, with much less aplomb, is doing the same.

====

According to Friedman, the lesson of 1929 is that the Fed was too tight-fisted. Msj, your argument is no different. You argue that Greenspan should have taken the punch bowl away.

In 1987, Greenspan opened the spiggots. After 2000, he let the air out of the bubble. In 2008, Bernanke opened the spiggots again. The general consensus among macroeconomists is that Greenspan/Bernanke did the right thing.

Maybe central banks shouldn't play with punch bowls, ever. Maybe the State cannot regulate markets, except as another special player.

When it comes to a direct dispute between market organization and State organization, a game of chicken between market players and politicians, the market players will win.

If you have been reading Krugman then you know Friedman is full of it.

As for Greenspan - he should have been regulating the mortgage industry like the Fed is supposed to do.

He chose to ignore it instead and we have systemic private banking meltdown.

Brilliant moves by Greenie. And, once again, hence "improper regulation."

As for whether or not we should have central banks - that's a question for another time....

[punked]

So are you saying he suggested better and more stringent regulatory measures and congress did not listen?

No he thought and has preached less regulation and oversight by the fed would make the system stronger. Go bake and read anything he wrote. He has always thought the best ideas was to let business police themselves.

"In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control. Governments supplement private surveillance when they judge that market imperfections could lead to sub-optimal economic performance. "

http://www.federalreserve.gov/BoardDocs/Sp...252/default.htm

Seriously go back and read anything per 2007

[blueblood]

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.

Nope

CRA = Bad

No regulations regarding results of CRA = Bad

[punked]

Nope

CRA = Bad

No regulations regarding results of CRA = Bad

Why Proof.

[August1991]

As for Greenspan - he should have been regulating the mortgage industry like the Fed is supposed to do.

Greenspan did regulate, as a central bank only can. He opened and closed the spigots. That is the regulation.

No he thought and has preached less regulation and oversight by the fed would make the system stronger. Go bake and read anything he wrote. He has always thought the best ideas was to let business police themselves.

"In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control. Governments supplement private surveillance when they judge that market imperfections could lead to sub-optimal economic performance. "

http://www.federalreserve.gov/BoardDocs/Sp...252/default.htm

Seriously go back and read anything per 2007

Please, tell me, how to police people who want to be rich. We can barely police people who want to smoke marijuana. The idea of the State policing greed is absurd.

Maybe in the future, somehow, we can prevent bubbles. (The State learned how to prevent panics.)

----

Banks depend on our trust. The State depends on coercion. Imagine the possibilities.

Edited March 3, 2009 by August1991

[msj]

Greenspan did regulate, as a central bank only can. He opened and closed the spigots. That is the regulation.

There are other ways that the Fed can regulate. And Greenie choose to look the other way rather than stop "thin file" loans.

Just because you are unaware of the Feds powers to regulate doesn't mean I will be bothered to take the time to educate you about them.

Frankly, your ignorance is boring.

[punked]

Greenspan did regulate, as a central bank only can. He opened and closed the spigots. That is the regulation.

Please, tell me, how to police people who want to be rich. We can barely police who want to smoke marijuana. The idea of the State policing greed is absurd.

Maybe in the future, somehow, we can prevent bubbles. (The State learned how to prevent panics.)

----

Banks depend on our trust. The State depends on coercion. Imagine the possibilities.

Regulation is about oversight. You can not tell business sure you can watch yourselves. We've had this arguement before I say it leads to poison peanut butter and you say after people die that peanut butter wont sell. I say that isn't the world I want to live in and you say it is the world we live in. It goes around in a circle.

[August1991]

There are other ways that the Fed can regulate. And Greenie choose to look the other way rather than stop "thin file" loans.

Ultimately, it can only open and close the spigot.

msj, you believe in a deus ex machina who can protect us from bubbles, panics and all that is bad. You are a Catholic, or a Muslim. God decides. Perhaps you are a Socialist, the State will protect us.

Unfortunately, the Universe ain't so simple. The State (the Fed) is not God.

Edited March 3, 2009 by August1991

[msj]

Ultimately, it can only open and close the spigot.

Ultimately, you don't have a clue as to what the Fed's powers are.

[punked]

Ultimately, you don't have a clue as to what the Fed's powers are.

It is clearly lawn watering and maintenance.

[bush_cheney2004]

It is clearly lawn watering and maintenance.

May as well have been.....either way we got a haircut.