Dont be too quick to judge the 1%

[TimG]

The pundits out there mostly downplay the severity of any crisis. Just like many are saying there is no financial crisis.

You are evading the point. One note pundits that preach doom or boom all of the time are not interesting. They will be mostly wrong no matter what happens. Show me a pundit that predicted both the run up from 2001 and 2008 and the subsequent collapse and I would pay attention.

Well you are now backtracking on your statement that there was too much regulation. Now you say it's both? How do you explain that?

The market for CDOs was created by banking regulation imposed by Dems seeking to pander to their base. Once the market was created it made it possible for unregulated entities to jump into the mortgage market.

If the Dems had not gone on their social engineering spree there would have been no CDO market and no meltdown. Once the market was created more regulation of non-bank entities would have prevented the meltdown.

In other words, it was a combination of too much regulation and too little. I feel the Dems deserve much of the blame for creating the market in the first place. The fact that more regulation after the fact might of prevented the damage caused by their policies does not absolve them of blame.

Edited November 22, 2011 by TimG

[blueblood]

A broken clock is right twice a day. There are ALWAYS people predicting the collapse of the system. When a major incident occurs random chance ensures that a few pundits will end up looking like they were geniuses.

Schiff was dead wrong after the 2002 tech melt down. It should come as no surprise that he lacked credibility when he continued to claim that 'doom is just around the corner': http://en.wikipedia.org/wiki/Peter_Schiff

If you looking for people who stuck their head in the sand then look at the Democrats in 2003 who refused to support Bush's reforms to Fannie Mae and Freddie Mac which might have reduced the impact of the crisis even if it was not enough to stop it.

He was wrong because he didn't anticipate the fed dropping the interest rate to 1% to inflate their way out of the recession. It wasn't just schiff, there were others sounding warning bells. Dropping the interest rate like that, just kicked the can down the road to now and just made things worse. He has a point about the problems with too much of the economy based on consumption funded by debt.

However, that was one pillar of the problem, there were others including the regulation scheme the democrats brought in. The other being ordinary people and their sense of entitlement, and bankers stupid enough to lend to them. Like all other things, it was human error caused by trying to be mr. nice guy.

[SF/PF]

He has a point about the problems with too much of the economy based on consumption funded by debt.

Suppose we substantially reduced consumption funded by debt. What would the effect be on the money supply and the financial system as a whole?

[blueblood]

Suppose we substantially reduced consumption funded by debt. What would the effect be on the money supply and the financial system as a whole?

It would be like a heroin addict going through rehab and dealing with withdrawal. Painful at first, but gets the person healthy in the long term.

[SF/PF]

It would be like a heroin addict going through rehab and dealing with withdrawal. Painful at first, but gets the person healthy in the long term.

Would it? Suppose that debt funded consumption remained low after "rehab." Would this long term health ever actually materialize?

Also, what effect would this dramatic reduction in consumption have on the other side of the equation: production?

[TimG]

Would it? Suppose that debt funded consumption remained low after "rehab." Would this long term health ever actually materialize?

You cannot really compare a body to a society because a body does not have its different components betraying each other to eke out an advantage. For example, for the 'rehab' to work everyone - including public sector unions - would have to accept a large decrease in absolute wages/benefit. The unions would fight bitterly to protect their advatage even though it screws the rest of society. The same story plays out with any number of entitements that need to be cut back.

[SF/PF]

You cannot really compare a body to a society because a body does not have its different components betraying each other to eke out an advantage. For example, for the 'rehab' to work everyone - including public sector unions - would have to accept a large decrease in absolute wages/benefit. The unions would fight bitterly to protect their advatage even though it screws the rest of society. The same story plays out with any number of entitements that need to be cut back.

Do you see any problem with a solution that requires both reductions in debt and reductions in real wages?

Moreover, if debt funded consumption was dramatically reduced to the point that deposits exceeded credit requests, what would happen?

[dre]

It has not been debunked. All you are doing is covering your ears and screaming 'it ain't true'. What you seem to keep missing is banks got into this business because of government mandated loan targets under the CRA. They had to use CDOs because that was only way to run a profitable business under the new rules. If Clinton had not changed the rules the CDO market would not have existed. Without a CDO market there would be no profit making opportunity for third party companies.

IOW: you argument that non-CRA entities made most of the bad loans is irrelevant because these entities would not have been able to do that with out a CDO market created by the banks.

They say people who do not understand the past are doomed to repeat it. The collective refusal of many to even acknowledge the role the Democratics played by screwing with the system is a big problem.

The CDO market wasnt created by banks and your "blame the democrats" refrain is just boring partisan hackery. Nothing more.

And banks were not even big issuers of CDO's.

These companies created most of them.

• Cohen & Co.

• Trust Company of the West

• Goldman Sachs Group, Inc.

• Duke Funding Management LLC

• Aladdin Capital Management LLC.

Edited November 22, 2011 by dre

[TimG]

Do you see any problem with a solution that requires both reductions in debt and reductions in real wages?

It really depends on what debt are you talking about. Personal debt will be harmed by reductions in wages but run away debt fueled government spending will harm people more in the long run. There is a battle between citizens trying to hold onto their priviledges. It will not be pretty.

[Michael Hardner]

The CDO market was created by banks and your "blame the democrats" refrain is just boring parisan hackery. Nothing more.

I think that banks were encouraged to lend to people who had problems getting credit, but I could never find anything that mandated such a thing. It's hard to see such a thing being enforceable. How could the government mandate that they take excessive risk ?

What did seem to happen is that they found a way to make money from such loans and deregulation helped make it succeed... and fail... in the way that it did.

[dre]

I think that banks were encouraged to lend to people who had problems getting credit, but I could never find anything that mandated such a thing.

Yeah thats because it simply does not exist.

What did seem to happen is that they found a way to make money from such loans and deregulation helped make it succeed... and fail... in the way that it did.

Well it was easy to make money off of those loans. You just have investment bankers bundle them up with a bunch of other loans, then pay the credit ratings agency to stamp AAA on them, and flog them to global investors. The point is it wasnt commercial banks that were doing this.

Edited November 22, 2011 by dre

[TimG]

The CDO market was created by banks and your "blame the democrats" refrain is just boring parisan hackery. Nothing more.

Sorry. Banks don't operate in isolation. They respond to government regulation. They got into CDOs because of government regulations.

You should do some research instead of responding with a knee jerk partisan defense of the dems:

http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Armageddon/dp/0805091203/ref=sr_1_1?s=books&ie=UTF8&qid=1307451201&sr=1-1

Here is the most helpful critical review of the book.

http://www.amazon.com/review/R2DELFWKJVJXQS/ref=cm_cr_pr_viewpnt#R2DELFWKJVJXQS

I couldn't decide if I should give this 3 or 4 stars. It is very well done and exhaustively researched and documented. I found it a bit too well researched at times and a bit tedious - and I have a financial services background. I think for the "average" person this could be a tough slog in parts.

Still - what actually happened and the audacity or stupidity of many of the players is almost hard to believe. The authors make it believable though with the strength of their research.

One thing I found odd was the ending of the book - was that just me? I was reading along and all of a sudden I was in the "where are they now"/epilogue section.....seemed like someone yelled out "pencils down" and they just stopped the book where it was.

Overall - a very solid book.

Edited November 22, 2011 by TimG

[TimG]

I think that banks were encouraged to lend to people who had problems getting credit, but I could never find anything that mandated such a thing. It's hard to see such a thing being enforceable.

The CRA passed by clinton impossed hard quotas on banks. If their loan portfolio did not reflect ethnic make up of the community the banks faced penalties.

How could the government mandate that they take excessive risk?

Well the banks found a way to do the bidding of the political masters: CDOs.

Note I am agreeing that the direct cause of collapse were a bunch of investment banks and shady mortgage brokers who turned the CDO market into a huge bubble. But I also am saying if you go back further in time and look way why the market for CDOs existed in the first place you will see that government regulations were the spark that started the fire.

The lesson we should take from this is that is it not enough to simply say 'we need more regulation'. We need to have the right type of regulation that does not create perverse incentives.

Edited November 22, 2011 by TimG

[dre]

Sorry. Banks don't operate in isolation. They respond to government regulation. They got into CDOs because of government regulations.

You should do some research instead of responding with a knee jerk partisan defense of the dems:

http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Armageddon/dp/0805091203/ref=sr_1_1?s=books&ie=UTF8&qid=1307451201&sr=1-1

Here is the most helpful critical review of the book.

http://www.amazon.com/review/R2DELFWKJVJXQS/ref=cm_cr_pr_viewpnt#R2DELFWKJVJXQS

Yup this is pretty much the standard response from people that parrot all this debunked crap. Hows your campaign to ban securitization going? You set your tent up in the park yet?

[TimG]

Yup this is pretty much the standard response from people that parrot all this debunked crap.

You have debunked nothing.

All you have done is repeat talking points that don't address the points being made.

Edited November 22, 2011 by TimG

[dre]

You have debunked nothing. All you have done is repeat talking points that don't address the points being made.

What points? You did absolutely nothing to substantiate your claim that "banks" were forced by the government to relax lending standards, and as I demostrated banks were not even the ones making the bad loans. All of those loans came from tertiary lenders, that lent to people that banks WONT lend to.

THen you claim that "regulations" forced "banks" to create the "CDO" mess (again a completely unsourced claim). But CDO's dont come from banks they come from investment banks (I showed you the 5 biggest issuers), and those investment banks were not subject to any regulation at all.

But go ahead! Show me the government regulations that forced Country Wide or New Century financial to make sub prime loans. And show me the government regulations that forced wallstreet to create CDO's.

No government regulations were required to force the financial industry to do these things. They did them because they were profitable.... and they made a mountain of cash.

Edited November 22, 2011 by dre

[TimG]

What points? You did absolutely nothing to substantiate your claim that "banks" were forced by the government to relax lending standards

I gave a link to the rules that were put in place. Here is another:

http://www.youtube.com/watch?v=ivmL-lXNy64

The video gives direct evidence of democrats forcing banks to take on risk they did not want to take on.

The consequence is the banks needed to get these risky loans off their books.

Hence they created a market for CDOs.

Every action creates a reaction.

Denying the consequences does not make it any less true.

[dre]

The CRA passed by clinton impossed hard quotas on banks. If their loan portfolio did not reflect ethnic make up of the community the banks faced penalties.

First of all thats not true. Second of all even if it was true its a complete and total red herring because only a tiny percentage (6%) of subprime loans were loans made to low income borrowers by CRA lenders.

Heres the report issued by the Board of Govenors at the Federal Reserve that was charged with studying all the data.

http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136

In order to gauge more precisely the possible effects of the CRA, we use the LP data again and focus attention on the subset of ZIP Codes that are similar, in principle, except for their relationship to the CRA. Specifically, we focus only on ZIP Codes right above and right below the CRA eligibility threshold. (A neighborhood meets the CRA threshold if it has a median family income equivalent to 80 percent or less of the median family income of the broader area.) As such, the only major difference between these two sets of neighborhoods should be that the CRA focuses on one group and not the other. This analysis indicates that subprime loans in ZIP Codes that are the focus of the CRA (those just below the threshold) have performed virtually the same as loans in the areas right above the threshold.7/ (See Table 5.)

To gain further insight into the risks of lending to lower-income borrowers or areas, we also compared the performance of first mortgages originated and held in portfolio under the nationwide affordable lending programs operated by the NeighborWorks® America (NWA) partners to the performance of loans of various types as reported by the Mortgage Bankers Association of America. Many loans originated through NWA programs are done in conjunction with banking institutions subject to the CRA, so the performance of these loans provides another basis to address the relationship between the CRA and the subprime crisis. Along any measure of the severity of loan delinquency or the incidence of foreclosure, the loans originated under the NWA program have performed better than subprime loans.8/ (See Table 6.) Although the performance of loans in the NWA portfolio provides one benchmark to compare the performance of CRA-related loans with other loans, it is only one portfolio of such loans; further research of this type could provide a stronger base from which to draw conclusions.

Another way to measure the relationship between the CRA and the subprime crisis is to examine foreclosure activity across neighborhoods that are classified by income. Data made available by RealtyTrac on foreclosure filings from January 2006 through August 2008 indicate that most foreclosure filings (e.g., about 70 percent in 2006) have taken place in middle- or higher-income neighborhoods. More important, foreclosure filings have increased at a faster pace in middle- or higher-income areas than in lower-income areas that are the focus of the CRA.9/ (See Table 7.)

Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.

Edited November 22, 2011 by dre

[msj]

Ah yes, the Big Lie about the Community Reinvestment Act.

Don't forget to read the Big Lie Part deux and take a look at some charts.

This is not to say that governments are not to blame for much of the existing mess.

They are because they were such poor regulators of the financial sector in the first place - they let the banks do things that should never have been allowed to happen in the first place (or should have been regulated properly).

Then, in the US, they socialized the losses and crony capitalized the gains with the Bush/Obama bailouts.

No wonder the "99%" are protesting.

[TimG]

Ah yes, the Big Lie about the Community Reinvestment Act.

More mindless talking points from people who don't even bother to read the arguments presented.

The facts still are:

Banks intially used CDOs to get risky loans off their books.

The government through the CRA forced banks to take on loans that they thought were too risky.

Hence government regulations created the market for CDOs.

It is possible that the market for CDOs would have evolved even if the Dems had keep their fingers out of the banking system.

But is irresponsible to claim that the bad regulation (as opposed to under regulation) is not the problem.

[TimG]

First of all thats not true.

Sure the the CRA paid lip service to the idea that banks should not make risky loans but I gave to a link to a Clinton official who was bragging about how he bullied banks into making risky loans. Community activist groups like ACORN regularily used their powert under the act into making loans that the banks did not want to make. The reality is banks WERE force to give loans they did not want to give.

Second of all even if it was true its a complete and total red herring because only a tiny percentage (6%) of subprime loans were loans made to low income borrowers by CRA lenders.

I frankly don't care what percentage of CDOs were due to CRA in 2008 because it is not relevant to my point. I am talking about how the Dems created the CDO market in the 90s.

You are like someone when faced with evidence that the driver was drinking insists the cause of a crash was excessive speed. There is a causal relationship which you are ignoring.

Edited November 22, 2011 by TimG

[msj]

More mindless talking points from people who don't even bother to read the arguments presented.

The facts still are:

Banks intially used CDOs to get risky loans off their books.

The government through the CRA forced banks to take on loans that they thought were too risky.

Your link between CDO's and CRA is specious at best. Hence Dre's and my links to actual statistics showing the correlation you are trying to draw as being BS.

Hence government regulations created the market for CDOs.

No, the market was created by Drexel Burnham Lambert in 1987 but didn't really get going until the 1990's and then peaked nicely around Q1 2007.

The market was created by Wall Street.

The government failed to regulate this properly I will agree.

It is possible that the market for CDOs would have evolved even if the Dems had keep their fingers out of the banking system.

NSS. CDO's peaked out during the Bush W years. Coulda, shoulda, woulda, nothing changed during those years.

But is irresponsible to claim that the bad regulation (as opposed to under regulation) is not the problem.

Under regulation is bad regulation although bad regulation is not always under regulation.

The CRA has little to do with CDO's and their development - the banks found their shiny new toy in 1987 and fine tuned it during the 90's until it could be released with a vengeance in the 2000's.

The government should have regulated that better; but then, the private sector should have also known what kind of monster they were creating and using in the first place.

Edited November 22, 2011 by msj

[TimG]

No, the market was created by Drexel Burnham Lambert in 1987 but didn't really get going until the 1990's and then peaked nicely around Q1 2007.

This is my point. CDOs were used for one reason and one reason only: to get bad loans off the balance sheets of banks so they could meet Basil accounting rules. You are being deliberately obtuse if you think there is no connection between the CRA rules and the emergence of CDOs in the 90s. Obviously, the banks ran away with them after they found a 'new toy' but the biggest mistake we can make now is to ignore the culpability of politicians who thought the could force banks to make risky loans and face no consequences.

To refine my analogy above: if a car crashes due to high speed and we find out the driver was drinking we blame alcohol - not the speed for the crash even though the excessive speed is the immediate physical cause. Similarly, if we find out that the drunk driver was pressured in to buying more drinks by a bartender looking for tips we hold the bartender responsible as well.

Democratic politicians are like the bartender pushing drinks and should be held responsible.

[msj]

This is my point. CDOs were used for one reason and one reason only: to get bad loans off the balance sheets of banks so they could meet Basil accounting rules. You are being deliberately obtuse if you think there is no connection between the CRA rules and the emergence of CDOs in the 90s. Obviously, the banks ran away with them after they found a 'new toy' but the biggest mistake we can make now is to ignore the culpability of politicians who thought the could force banks to make risky loans and face no consequences.

The CRA is nowhere near being any kind of first cause for CDO's.

The banks fell in love with these and abused them for their own purposes.

To link the two, particularly given the fact sheets/stats I have already linked to above, is absurd and/or intellectually disingenuous.

To refine my analogy above: if a car crashes due to high speed and we find out the driver was drinking we blame alcohol - not the speed for the crash even though the excessive speed is the immediate physical cause. Similarly, if we find out that the drunk driver was pressured in to buying more drinks by a bartender looking for tips we hold the bartender responsible as well.

Democratic politicians are like the bartender pushing drinks and should be held responsible.

Sure, and all those Republicans pushing for the relaxation of financial regulation going back to at least the Reagan era aren't culpable at all.

How convenient.

[dre]

The CRA is nowhere near being any kind of first cause for CDO's.

The banks fell in love with these and abused them for their own purposes.

To link the two, particularly given the fact sheets/stats I have already linked to above, is absurd and/or intellectually disingenuous.

Sure, and all those Republicans pushing for the relaxation of financial regulation going back to at least the Reagan era aren't culpable at all.

How convenient.

The banks fell in love with these and abused them for their own purposes.

The thing is it wasnt banks. Its was investment banks that are not even subject to the CRA, and FDIC regulations.

And the point being missed here is that this was profitable activity. Wall street made a lot of money on these securities. Nobody had to force them to do any of this stuff, they did it to make money, and people made a FORTUNE while the bubble was building.

The banks fell in love with these and abused them for their own purposes.

To link the two, particularly given the fact sheets/stats I have already linked to above, is absurd and/or intellectually disingenuous.