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apogee
climber
Technically expert, safe belayer, can lead if easy
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Dec 16, 2014 - 12:48pm PT
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F*#ked up as Cheney might have been, his influence as VP was historic. Just sayin'...Veeps can make sh#t happen, too.
Edit for TC:
OK, then, TC....who would you like to see throw their hat in the ring?
What do you think about Warren?
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Splater
climber
Grey Matter
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Dec 16, 2014 - 12:55pm PT
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the ticket should be
Warren-Clinton, not the other way around.
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John M
climber
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Dec 16, 2014 - 12:55pm PT
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Both the presidential branch and the legislative branch "on both sides of the aisle" had a hand in this. Clinton pushed the idea that more people should participate in the American dream of owning a home. Fannie Mae and Freddie Mac helped make this happen by buying mortgages from brokers, knowing full well that lending practices had become so lax that many of those mortgages were bad, and at the same time were backed financially by the fed. Had Fannie and Freddie not had this unique relationship with the U.S. government, then they never would have purchased all of the toxic mortgages that they did (and sold them off to investors in bundles), which in turn would have had the effect that the brokers would not have engaged in the dubious practices they did such as lying on mortgage applications. Had the federal government not taken the view that everyone should own a house, and implemented policy to that end they never would have needed to bail out the huge investment banks.
this doesn't ring true. Especially since Freddie and Fannie were not the only ones purchasing toxic mortgages. Lots of places were. Including Citigroup.
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JEleazarian
Trad climber
Fresno CA
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Dec 16, 2014 - 01:16pm PT
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And now for something completely different . . .
To the surprise of no one who follows the political discussions on ST, I disagree (although not completely) with Norton's analysis. First a bit of history:
To answer Apogee's question, the repeal of the portion of Glass-Steagall that took place in 1998 was a bipartisan effort, passed by Congress when the Republicans had the majority of both House and Senate, and signed into law by Bill Clinton. I have yet to see any convincing agrument that the 1998 repeal had any significant impact on the housing bubble or its bursting, except for post hoc ergo propter hoc fallacies.
The housing bubble came about as a result of at least the following government policies designed to increase the value of home ownership:
1. The mortgage interest tax deduction;
2. The exclusion from taxable income of up to $500,000.00 of gain on sale of a principal residence;
3. Federal subsidies and de facto taxpayer guarantees of residential mortgage lending through FHA, Fannie Mae and Freddie Mac;
4. Manipulation of interest rates to keep mortgage rates low;
5. Pressure to lend to groups who were identified as underrepresnted in housing ownership.
In addition, the availablity of credit to non-traditional borrowers through "liar loans" and securitization of subprime loans allowed for people to finance housing acquisition when their only hope of repayment was to continue refinancing. The populist narrative says that these two activities caused the housing bubble and its damage. I respectfully disagree.
Interestingly, for years, populists whose views mirrored Warren's rhetoric blamed liar loans, but had no rigorous research to back up their claims. One of thie first, and still one of the best, studies came from Johns Hopkins: http://pages.jh.edu/jrer/papers/pdf/past/vol35n04/05.507_554.pdf
That paper is rather technical, but it points out certian truths about liar loans that the populists overlook:
1. Liar loans were available for middle class borrowers, but not for those who were less creditworthy. The truly low income borrower had to provide more verification of income and equity than the middle class borrower.
2. The Liar loans were about 10% more likely to default than other loans.
The availablity of liar loans simply does not explain the extent of the bubble or the severity of the downturn.
Neither does securitization of subprime loans. Here, though, I do blame regulatory failure that took place under the Bush administration - and predecessors and successors, however, for the "groupthink" nature of the evaluation of mortgage-backed security risks. The feds required that certain credit rating agencies (e.g. Standard & Poors, Moody's) be used to evaluate the risks. Risk limitation theory says that diversification of a loan portfolio lessens risk. Unfortunately, the diversification made was of borrowers, but it ignored the systemic risk of inflated housing prices, and all of the government-required credit reporting agencies ignored that risk.
Given that all the government-approved ratings agencies made the same mistake, one would think that the Obama administration would insist on ending, rather than continuing, the exclusive use of those same agencies that ignored the real risk of a market correction. Instead, it has perpetuated the exclusivity of reliance on those same agencies that failed before.
Moreover, that risk was well-known. The Wall Street Journal editorialized about the risk from Fannie and Freddie for years before the housing correction. Mssrs. Dodd and Frank were consipcuous in their arguments justifying lending in the face of that risk, and in their insistance on making loans to buyers who did not qualify under conventional lending criteria. The risk was very well known to insolvency counsel. I put my money where my mouth was and sold our house in 2004, and rented until 2010. If I could see it coming, you can bet that others could, too.
Despite all of these risks, the government did all it could to prop up the inflated housing market. Worse yet, when the correction finally came, it attempting to undo the needed correction, in much the same way that the New Deal tried to "re-flate" the economy under the NIRA in the 1930's. The housing correciton came because the price of a house became unaffordable for most people. That would not have occurred to nearly that extent without the governmental interference in the market.
To summarize, without government intervention in the housing market, banks would only make loans that meet conventional underwriting criteria, and in particular, loans to borrowers with a demonstrated ability to pay. Ironically, much of the money extorted from banks in the last few years are in the nature of proving that "no good deed goes unpunished." As just one example, Bank of America was "encouraged" by the government to acquire Countrywide - a non-bank mortgage lender. The money the Bank paid in its settlements with DOJ arise from actions of Countrywide.
The populists will continue blaming the lenders, because it's easier than blaming ourselves, but facts tell a different story.
John
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John Duffield
Mountain climber
New York
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Dec 16, 2014 - 01:20pm PT
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Indeed. A Biden/Warren ticket, is not only one that could win, but has the firepower to actually be good for America.
Imagine that.
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apogee
climber
Technically expert, safe belayer, can lead if easy
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Dec 16, 2014 - 01:24pm PT
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crankster
Trad climber
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Dec 16, 2014 - 01:27pm PT
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Just Google "Brooksley Born" and/or watch "Inside Job" and you'll change your mind about Norton's analysis.
It's Bush or Romney, righties, take your pick:
McClatchy-Marist poll shows Mitt Romney, Jeb Bush leading GOP pack
By JENNIFER SHUTT 12/15/14 8:18 PM EST
A new poll shows former presidential candidate Mitt Romney leading the field of likely 2016 Republican candidates.
The McClatchy-Marist poll, released Monday, shows Romney has the support from about 19 percent of Republican voters, with Jeb Bush receiving 14 percent.
The former governors were followed by New Jersey Gov. Chris Christie and Gov. Mike Huckabee, both with 9 percent. Ben Carson received 8 percent.
If Romney doesn’t enter the 2016 Republican primary, the poll showed Bush with 16 percent, Huckabee with 12 percent, Christie with 10 percent and Carson with 8 percent.
On the Democratic side, 58 percent of those polled said they hope the party will nominate a candidate who will break from President Barack Obama’s policies. That’s a 10 percentage point increase over last year.
As expected, Hillary Clinton leads over any other potential Democratic challenger by large margins, the poll finds.
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Splater
climber
Grey Matter
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Dec 16, 2014 - 01:29pm PT
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JE,
you seem to be forgetting the warnings from people like Brooksley Born
http://www.pbs.org/wgbh/pages/frontline/warning/view/#morelink
who told clearly how hedge funds and derivatives trading on those risky mortgages were a massive risky scheme and who were dismissed by all the powers in both Congress and the Executive.
In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.
"I didn't know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton's powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group -- former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin -- convinced him that Born's attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."
Born's battle behind closed doors was epic, Kirk finds. The members of the President's Working Group vehemently opposed regulation -- especially when proposed by a Washington outsider like Born.
"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"
Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."
Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.
"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."
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apogee
climber
Technically expert, safe belayer, can lead if easy
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Dec 16, 2014 - 01:30pm PT
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"The McClatchy-Marist poll, released Monday, shows Romney has the support from about 19 percent of Republican voters, with Jeb Bush receiving 14 percent."
Is that why I saw two Romney '12 stickers yesterday?
Hope springs eternal. But hope for what?
Romney as POTUS?
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John M
climber
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Dec 16, 2014 - 01:31pm PT
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Just Google "Brooksley Born" and/or watch "Inside Job" and you'll change your mind about Norton's analysis.
did you mean Norton, or JohnE? Because Brooksley seems to support what Norton said.
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John M
climber
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Dec 16, 2014 - 01:40pm PT
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Do away with government back mortgages and you keep a lot of people locked into rent with little chance of ever getting ahead. but you have to have sound oversight if you are going to back them. And not allow them to be traded as derivatives.
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JEleazarian
Trad climber
Fresno CA
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Dec 16, 2014 - 01:49pm PT
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JE,
you seem to be forgetting the warnings from people like Brooksley Born
I am aware of her warnings - made during the Clinton administration, and opposed by Clinton's economic advisors - about regulating the derivatives market. I find the argument something of a free lunch in this sense: who said the regulations would have helped?
I ask that question based on what the regulators are doing under the current administration. I see the main risk of the trading in subprime mortgages to be a failure to recognize the key risk - namely a market downturn. There is no evidence that regulators would have recognized that risk any better than the traders - and the rating agencies - did.
More than likely, the regulation would have been similar to securities regulations. The bonds would need to be rated by one of three federally-recognized ratings agencies, and would need certain disclosures that no one would read because they're too long. I say this because the current regulators - as I noted above - added regulations requiring the blessing of the very ratings agencies that missed the risk last time.
Sorry, but I don't put nearly the credence in the efficacy of that sort of regulation that you do, because I've seen too little demonstrated ability of regulators to predict the future with better accuracy than market participants.
John
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apogee
climber
Technically expert, safe belayer, can lead if easy
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Dec 16, 2014 - 01:52pm PT
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So in your view, John, the invisible hand of the market is always the best option?
Regulation has no role, whatsoever?
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JEleazarian
Trad climber
Fresno CA
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Dec 16, 2014 - 01:56pm PT
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Do away with government back mortgages and you keep a lot of people locked into rent with little chance of ever getting ahead. but you have to have sound oversight if you are going to back them. And not allow them to be traded as derivatives.
John, I don't have a problem with the packaging and trading of mortgage-backed securities. My problem - which happens to be where I agree with Warren - is in making the government the guarantor of those securities. I'm not sure the provision that was repealed (that would require a small percentage of those assets to be held by the bank holding company rather than the banking corporation) really does much to solve the problem. I just don't like to see situations where people can invest in a way where they get all the upside and the taxpayers get most of the downside.
John
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apogee
climber
Technically expert, safe belayer, can lead if easy
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Dec 16, 2014 - 01:59pm PT
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" I just don't like to see situations where people can invest in a way where they get all the upside and the taxpayers get most of the downside."
Hear, hear, HEAR.
And those who benefitted from these 'Socialized Risks' should be IN JAIL right now.
But in Congress...it's crickets both sides of the Aisle...except for Warren. Kudos to her.
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JEleazarian
Trad climber
Fresno CA
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Dec 16, 2014 - 02:10pm PT
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So in your view, John, the invisible hand of the market is always the best option?
Regulation has no role, whatsoever?
No, it's not, Apogee. See my argument above concerning government guaranties and the need for regulation.
It's rather a methodology that acknowledges that information costs something, and there is no a priori reason to believe that regulators make better decisions than market participants. Rather, we need to analyze any proposed regulation to see what it costs, and what it provides that the invisible hand does not or cannot.
For example, a completely unregulated banking industry might provide slightly higher interest rates to savers, but a greater risk of losing their deposits. Most savers would prefer a lower interest rate with the certainty of maintaining the value of their deposits. In such a situation, deposit insurance, coupled with regulation to make sure that the insurance doesn't lead to perverse incentives, would produce a result that the market cannot produce, in part because the collusion required to maintain that deposit insurance would be illegal.
The derivatives market, in contrast, generally involves sophisticated participants who know how to use derivatives either to hedge risks or to leverage them. Clinton's economic team rejected Born's call to regulate the derivative market because they saw the cost dependent on a large number of certainties, and the benefit dependent on a large number of unknowns.
Also, keep in mind that those of us on the right know that the invisible hand is impotent without the government needed to enforce property and contract rights, for example. More fundamentally, we want competition that lowers prices and/or improves quality. We don't want competition where the competitors bump off the competition's R&D department, for example. To a certain extent, what some would call law enforcement others would call regulation.
So no. I most certainly do not believe that we'd be better off with no regulation. I just ask that we try to measure the marginal cost and benefit of the proposed regulation realistically.
John
Edit:
And those who benefitted from these 'Socialized Risks' should be IN JAIL right now. Really? What law did they break? I'd love to see it be illegal to benefit at taxpayer expense, but lots of government contractors, protected and/or subsidized industries, home builders, buyers and brokers and/or public employee unions would be terribly upset.
What I'd like to see instead is that politicians who routinely approve such schemes be shown the door by their constituents.
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Jorroh
climber
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Dec 16, 2014 - 02:32pm PT
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"The derivatives market, in contrast, generally involves sophisticated participants who know how to use derivatives either to hedge risks or to leverage them "
Actually, that was proven not to be the case in the most emphatic manner possible.
Thanks for the Clinton reference...raised a chuckle... no JE posting is complete without a "Look Ma! they're doing it too"
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crankster
Trad climber
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Dec 16, 2014 - 02:42pm PT
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Still hard to see a path to the White House for a progressive.
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crankster
Trad climber
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Dec 16, 2014 - 02:53pm PT
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Look, Warren's speech was terrific...but I need a bigger sample size.
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Jorroh
climber
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Dec 16, 2014 - 02:58pm PT
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I'd be curious to see others jiggle with the numbers a little bit and come up with a better/different approximation, correct mistakes etc....but
mortgage defaults are a scapegoat for what really happened.
112 million households in the US (based on census data for 2008).
Home ownership rate in this country is 75% (the historical average over the last decade is much lower), then there should be about 84,000,000 people who own their home.
According to a 2001 study by the Census Bureau and the Department of Housing and Urban Development (HUD), "nearly 40 percent of all residential properties in the United States, owner-occupied and rental units, are not mortgaged but are owned free and clear." This has most likely gone up over the last few years, but if this is anywhere close it leaves approximately 50,400,000 homes with some form of a mortgage on their home.
Lets assume that banks typically recover around 75% of a defaulted mortgage (remember that mortgages still have an asset backing them up, even if its value is declining).
Now lets also assume that the average mortgage is $200,000 (also an aggressive number).
That would mean that the $700 billion bailout would allow for $50,000 per home on 14 MILLION homes.
That is 28% of all homes in America that have a mortgage associated with it. ( actual figures were around 10- 12% at most I believe)
How many people do you know that have foreclosed and handed over their homes to the bank?
Is it 28% of your friends and family?
Now ask yourself why the worlds banking system would be on the verge of collapse due to losses on mortgages that at the absolute max (realistically much less) were in the region of $700 Billion spread over a multi year time period.
Look no further than the 71 trillion dollar market for derivatives.
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