McCain’s version of “getting in their faces” *UPDATED*
Bookworm on Sep 18 2008 at 10:43 am | Filed under: Barack Obama, Economics, John McCain
At Iowa, McCain “gets in your face” mano a mano (that is, he doesn’t delegate his surrogates, but gives a speech to America, Obama included), and he focuses on the facts. This is a very concrete speech, which appropriately boasts his virtues and clearly exposes Obama’s failings:
U.S. Senator John McCain will deliver the following remarks as prepared for delivery in Cedar Rapids, IA, today:
I’m happy to be introduced by Governor Palin, but I can’t wait until I introduce her to Washington. Let me offer an advance warning to the big spending, greedy, do nothing, me first, country second crowd in Washington and on Wall Street: change is coming.
We need reform in Washington and on Wall Street. The financial markets are in crisis. Times are tough. Enormous strain is being put on working families and individuals in America. I know that the events unfolding can be difficult to understand for many Americans. The dominos that we have seen fall this week began with the corruption and manipulation of our home loan system. The reason this crisis started was the abuses that took place within our home loan agencies, Fannie Mae and Freddie Mac and within our home loan system.
Two years ago I warned this Administration and Congress that regulations for our home loan agencies, Fannie Mae and Freddie Mac, needed to be fixed.
But nothing was done.
Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Mae’s CEO who helped create this disaster in charge of finding his Vice President. Fannie’s former General Counsel is a senior advisor to his campaign. Whose side do you think he is on? When I pushed legislation to reform Fannie Mae and Freddie Mac, Senator Obama was silent. He didn’t lift a hand to avert this crisis. While the leaders of Fannie and Freddie were lining the pockets of his campaign, they were sowing the seeds of the financial crisis we see today and enriching themselves with millions of dollars in payments. That’s not change, that’s what’s broken in Washington.
There was no transparency into the books of Wall Street banks. Banks and brokers took on huge amounts of debt and they hid the riskiest investments. Mismanagement and greed became the operating standard while regulators were asleep at the switch.
The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling — which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground.
The Chairman of the SEC serves at the appointment of the President and has betrayed the public’s trust. If I were President today, I would fire him.
We cannot wait any longer for more failures in our financial system. Structures like the resolution trust corporation that dealt with the failed savings and loan industry were designed to clean up the system and worked. Today we need a plan that doesn’t wait until the system fails. I am calling for the creation of the mortgage and financial institutions trust — the MFI. The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions this will provide an orderly process through which to identify bad loans and eventually sell them.
This will get the treasury and other financial regulatory authorities in a proactive position instead of reacting in a crisis mode to one situation after the other. The MFI will enhance investor and market confidence, benefit sound financial institutions, assist troubled institutions and protect our financial system, while minimizing taxpayer exposure. Tomorrow I will be talking in greater detail about the crisis facing our markets and what I will do as President to fix this crisis and get our economy moving again.
Senator Obama has never made the kind tough reform we need today. His idea of reform is what his party leaders in Congress order him to do. We tried for bipartisan ethics reform and he walked away from it because his bosses didn’t want real change. I know how to make the change that Senator Obama and this Congress is afraid of. I’ve fought both parties to shake up up Washington and I’m going to do it as President.
Those same Congressional leaders who give Senator Obama his marching orders are now saying that this mess isn’t their fault and they aren’t going to take any action on this crisis until after the election. Senator Obama’s own advisers are saying that crisis will benefit him politically. My friends, that is the kind of me-first, country-second politics that are broken in Washington. My opponent sees an economic crisis as a political opportunity instead of a time to lead. Senator Obama isn’t change, he’s part of the problem with Washington.
When AIG was bailed out, I didn’t like it, but I understood it needed to be done to protect hard working Americans with insurance policies and annuities. Senator Obama didn’t take a position. On the biggest issue of the day, he didn’t know what to think. He may not realize it, but you don’t get to vote present as President of the United States.
While Senator Obama and Congressional leaders don’t know what to think about the current crisis, we know what their plans are for the economy. Today Senator Obama’s running mate said that raising taxes is patriotic. Raising taxes in a tough economy isn’t patriotic. It’s not a badge of honor. It’s just dumb policy. The billions in tax increases that Senator Obama is proposing would kill even more jobs during tough economic times. I’m not going to let that happen.
I have seen tough times before. I know how to shake-up Wall Street and Washington. I will get this economy moving. I will lead us through this crisis by fighting for you, and when I am President we will be stronger than ever before.
UPDATE: McCain’s there. Congress is not. For a good analysis of the Democrat Congress’ pusillanimous conduct with regard to the current economic situation, please go here. The only saving grace in their show of cowardice is that, given their political/economic views, it’s probably better for the economy if they run away.
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For those who have friends who don’t understand how this came about:
http://directorblue.blogspot.com/2008/09/root-cause.html
With pictures…
With due respect to Sen. McCain, in 2005 Bush tried to get a law passed that would have removed oversight of these firms from Congress and instead under an independent auditor. Oddly, congress didn’t go for it. Who knew?
Good, but does the message get out? Where is it reported? It´s a credit to the American people that McCain is about even in the polls. The media are doing everything they can to distort or suppress his message. Just go to google news and type “mccain”. It couldn´t be more obvious. I can´t even describe how angry I am.
When you follow the link to The Anchoress, please follow her link to a City Journal article from 2000. It’s unbelievable. We are talking community organizing groups (ACORN included) using tactics close to blackmail.
McLaren: I think the date for Bush’s attempt at reform was 2003. Of course, it’s all his fault. isn’t everything. I think it was Java Report that posted the NYT article on his attempt.
It’s fun to blame solely the democrats. Mark Levin is ranting in that direction even now. But I think the situation is a leeeetle more complex than just that.
I think McCain is right to call for the resignation of Chris Cox as head of the SEC.
(Well actually he called for his firing, but apparently you can’t do that…)
I know the whole mess started with Clinton, and suek’s link gives a great accounting of Democrat culpability.
But it’s my understanding that 95% of the risky subprime mortgages are being paid regularly and on-time. The vast majority of those “bad homeowners” that we want to blame, aren’t apparently the problem, and we shouldn’t pile on them unfairly. How is it possible that a failure of 5% of a market can lead to a financial meltdown among institutions supposedly known for financial acuity? (Or is my 95% statistic simply wrong???)
One part of the puzzle I haven’t seen explained very well, is how the financials companies can take their “mark-to-market”-ed assets and borrow against them to the tune of, say 35X. In that manner, a 5% stake in failure can expand to a 165% stake in failure, can’t it?
And then there’s a financial instrument called “credit default swap”. These pay off when mortgages blow up, so they are a form of “short sell”. Betting on failure, which is one way that the institutions are supposed to be able to manage risk. Apparently Lehman sold HUGE volumes of credit default swaps, and couldn’t pay them off as mortgages blew up.
So, given the rules allowing credit extension for assets of 35X, or even higher, and the mysterious “credit swap derivative” market, and God Knows what other obscure markets we have… this certainly does seem as though there’s a hell of a lot more going on than just a subprime mortgage mess with a bunch of corrupt Democrats and stupid borrowers.
Here’s a quote from a link you might enjoy reading:
http://www.businessweek.com/magazine/content/08_39/b4101034694184.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis
The massive credit-default-swap market became so complex that in some cases firms lost track of their stakes. AIG, for example, pleaded for capital from several private equity firms over the Sept. 13-14 weekend. After scouring the insurer’s financials, the firms balked at a deal, concluding that even AIG management didn’t know where all the skeletons were buried.
I’ve been hearing for months that the financial instruments that are causing all the risk are “opaque”, meaning no one knows what the hell is in any of them. And no one, anywhere, can even FIND OUT either. How in the hell is that possible??? How can it be allowed???
This sure looks more like the kind of rank profiteering associated with speculative bubbles than with any kind of sound management or sound financial marketing. Speculative bubbles happen, but this rank profiteering, and all the millions and billions that people have made – apparently not in good faith – have left all of us, the taxpayers, holding the bag.
If anything I’ve said is in error – which is quite possible, because wading through this is actually “beyond my pay grade”, and thanks to Obama for that phrase, Oh Intellectual One! – Please let me know, cause I’m trying to learn here. And any further information, beyond just correcting errors, on any of this would help, too!
DANG! I forgot to mention, I looooooooove this speech by McCain that Book posted above. Awesome!
A lot of people think of Iraq and various other things said of Bush that Bush failed at this or what not.
But you have to realize that Bush is no god. He is not responsible for every failure. He could have done more, but the only way to destroy saboteurs and internal insurgents is to arrest and/or execute them.
No matter what a person’s intentions are, he will always be handicapped by the process of putting it into reality. This is true of Bush on Iraq as it is true of Bush on Wall Street.
A general can fail, not because he didn’t give the right orders, but because his subordinates screwed it up, sometimes intentionally, when carrying those orders out.
This is what is meant by the devil is in the details. This is where things happen, as opposed to when things are said or claimed.
This is the Democrat’s weakest spot. Implementation: putting ideas and claims to reality.
The Democrats know that this is their weak spot, too. That is why they stayed silent and followed Bush after 9/11. They knew that if they tried doing their Leftist anti-American partisan political game, that they would get trashed and thrown out of office. It was better to stay cloaked so that you could use poison bites later.
If you allow the Democrats to stay silent and just follow the leader (McCain) on this issue, then you must be ready and able to handle the Democrat treason, which will occur after they get their wits together and plan a campaign of Blame EverybodyButThem.
It was true for Katrina. True for Iraq. True for Afghanistan. True for 9/11.
The Democrats will be in “Shock and Awed” mode for some months, following along. Acting like bipartisan folks and the loyal opposition or leaders. Then.. then comes the stab in the back. After they have secured their power base and solidified threats to their political prospects, watch out, they’ll be coming after you hardcore. You, McCain, everybody.
The weird thing is, this happened just months before the election. Which means the Democrats will try to get in on it. Their base will demand. They will demand that they pin the blame on Republicans.
But McCain is going to forward proposals. Proposals that the Democrats won’t have enough time to jury rigger in ways that will sabotage the bill or benefit their pork barrel special interests.
Politics is like war in this fashion. In order to do it well, you must be well prepared. You must know your targets, hit them, and ensure that your forces don’t run out of steam.
The Democrats hold off a vote just like any leader of inferior force would do against a superior force. Hold off a fight until later, until you’ve got better odds.
If anyone has answers that help to clear up the clarity and confusion, I’d appreciate it. If anything I say below is erroneous, by all means issue strong corrections!
(This is a reconstruction of an earlier comment post attempt that simply disappeared.)
I think it is a mistake to blame the financial meltdown of 2008 on “bad borrowers” and solely on the Democrat Congress’ incestuous relationship with Fannie Mae. I have listened to Mark Levin lambast Senator McCain for calling for SEC Chairman Chris Cox’ firing, and I see some conservative websites are criticizing Senator McCain as well. In my muddled attempts to figure this out, I support Senator McCain and I think Mark Levin is FULL OF IT. Let me explain (and hope I’m not out in left field).
Yes, the Democrats under Clinton instituted rules that forced banks and investment firms to have to offer sub-prime and ARM mortgages to people who could not afford them. As of 2008, the total worth of those loans is about 11 trillion dollars, with $500 billion in foreclosure (lost).
That means that about 5% of our worst borrowers, in the sub-prime mortgage market, have defaulted, at a cost of $500 billion.
However, the meltdown in the financials market is in the area of “credit default swaps” (CDS), especially as related to “naked short selling”. The CDS market was worth $144 billion ten years ago, and is worth $62 trillion today.
Take a look at those two numbers again. 144 billion in 1998, grown to 62 trillion today. Something HUGE happened.
Credit Default Swap is basically a BET, not a TRADE, that some form of credit will fail. A Naked Short Sell is a form of trade, based on absolutely no assets whatsoever, that such a failure will occur. Both are legal and are supposed to mitigate risk.
Credit Default Swaps became a large way after 1998 to mitigate the risk of the Clinton-initiated sub-prime mortgages. But the total worth of the sub-prime mortages is $11 trillion, with $500 billion in default, triggering CDS payments. Why are there $62 trillion in CDS value? Well, the banks branched out, very very aggressively, into all kinds of other markets, using CDS. International banks bought our CDS packages, only furthering the craze. (And that is why our collapses are rippling so devastatingly into other countries’ markets.)
The worst failure of the SEC is that the CDS packages, and other packages are opaque. In addition, “leveraging of assets” – kind of like getting a second mortgage on a home you already have a mortgage on – has allowed investment firms to pretend that their worth is 30X (Lehmen) or even 70X (AIG) what its real worth is. Much of the leveraging is in these opaque packages that have been resold and resold and resold around the world. No one, really, has any clue, what they’re holding. And for some bizarre reason they cannot seem to find out either!
The Democrats are to blame for triggering the whole mess, for sure. But the rampant Wall Street greed – I don’t think there’s any other word for what they’ve done – lies at the feet of the SEC. These opaque transactions that no one can follow has taken a $500 billion sub-prime problem and turned it into a financials mess whose size no one has a clue of, and no one CAN DETERMINE the sizeof. That is simply insane.
Tonight American taxpayers are responsible for a $29 billion bailout of Bear Stearns, followed by a $200 billion bailout/guarantee on Fannie Mae/Freddie Mac, and now an $85 billion bailout of AIG. There’s likely more to come.
Also tonight, plans are in the work to establish a $1 trillion fund that these banks and investment firms can simply place their bad debts into, to take them off of their balance sheets, and get the worldwide markets moving again. That’s an additional $1 trillion that you and I, fellow taxpayers, again, are responsible for. We are taking the risk OFF of the banks and firms and putting it on all of us.
That’s $1.3 trillion in new national debt that we taxpayers have taken on in just a few months. There is nothing like this in the history of our country, ever. (Well our unfunded mandates on Medicare and Social Security will in the end be far, far, far worse, but that’s thirty years from now.)
The Democrats certainly have their part in initiating this mess; and the oversight committees in Congress have been pigging at the trough and not paying any attention. Since 2004, the banks and investment firms and FannieMae/Freddie Mac have aggressively fed millions of dollars into the troughs where Democrat pig snouts are deeply embedded, including Barack, and one can only question why.
But Bush and the SEC and the Wall Street banks and firms themselves have a great deal of culpability here as well. Greed beyond any control has run rampant. This has been done by playing with the money of investors, not with products produced by a corporation, but with the investments, the pension funds, the mortgages of ordinary citizens. This is a moral failure of astonishing proportions.
Nearly everyone is to blame.
PS – It’s worth noting that two years ago McCain led a coalition to solve the looming Fannie Mae/Freddie Mac problem, but they failed. He warned then, presciently, what happened this year to Fannie Mae/Freddie Mac. But even John McCain has admitted that the CDS/Naked short sell problems and the opaque financial instruments issue that has destroyed our markets in the last month, was not a part of that bill nor did he warn against it.
Expat: I stand corrected. It was in 2003. It was McCain who later tried to re-introduce similar legislation only to have it knocked down.
>>Credit Default Swap is basically a BET, not a TRADE, that some form of credit will fail. A Naked Short Sell is a form of trade, based on absolutely no assets whatsoever, that such a failure will occur. Both are legal and are supposed to mitigate risk.>>
If you think you understand this, can you try explaining it? It makes no sense to me…
Which, I suspect, is part of why this stuff flourishes. It’s pretty hard to make laws that cover arcane methods intended to get around those same laws when you don’t fully understand the arcane methods. The only way to handle it is to take away the protection and let those who use risky methods fail. The problem is that if the risk takers have succeeded in building an infrastructure that will take down the world economy if they fail, then we all lose. That seems to be the situation here…so what can be done to prevent it in the future?
Part of the problem is that Wall Street is still governed by laws and regulations, many of them economically ignorant, put in place in 1933 and 1934. To make this worse, there have been more than 70 years of other laws and regulations and agencies piled on top of it.
One of the things I liked about McCain’s acceptance speech, although I think it’s a pipe dream, is his point that the American economy and American needs have changed, but we’re still muddling along under jerry-rigged rules and regulations and agencies going back 30, 40, 50, even 70 years. He couldn’t have predicted better what this muddle would do when it came to the economic market.
That’s why, while I’m usually opposed to Commissions, which I think are face-saving wheel-spinning, I think he’s got a point this time. Regulation has to be streamlined, so that there is much greater transparency in (not control over, just transparency) in America’s markets.
This is the same problem with the immigration system. It _does_ need total overhauling. When you hear the stories of people who are trying to follow all the rules and keep getting put off so that it costs them 5-7 thousand dollars because they have to get a lawyer to get through the system, plus 5-7 years because of delays in the system, there is definitely something wrong.
The problem is that there’s a crisis, and when you have a crisis, you just slap a quick solution on it … and that allows you to ignore the problem until the next crisis – which might not occur if you actually did the overhaul, but will continue to occur if you don’t.
We need the Fence. Then we need a system overhaul. I don’t know what equates to the Fence in the Wall street situation, but it looks like we need a stopgap solution for now, and then it appears that we also need a total overhaul there as well.
Why in the name of heaven are semi federal organizations like Fannie May and Freddy Mac _permitted_ to give _any_ money to _any_ congressman! That’s just plain stupid, imo, and just asking for graft and corruption.
Damn right.
Suek asked in #11:
If you think you understand this, can you try explaining it? It makes no sense to me…
Suek, I can’t. I posted because I wanted to get my newbie ideas out there, and perhaps drive a discussion to learn more. (I saw my #5 post show up eventually two days after I posted – its absence is why I posted AGAIN at #9 because I thought #5 got lost) which means I made two loooooong posts when I really only wanted one. Apologies to all for the extended blather!)
One comment I’d like to add on the difference between a short sell and a naked short sell. A short sell is an actual trade: You are moving your own assets from one position to another. A naked short sell is not a trade because you are not moving any assets; you’re making a statement that *IF* someone takes you up on your “offer”, then you’ll post some assets out there, later, to cover it.
The market purpose of naked short sells is, apparently, to “increase fluidity in the markets”. Why and when extra fluidity is determined to be good vs. bad, I can’t figure out.
It all hurts my head.
I guess the extraordinary measures the govt took were because the damage was spilling over into the most stable parts of our financial system, ie, money market funds, which are supposed to be utterly stable. You can never make nor lose significant money in those markets. Your money is essentially guaranteed to be there. And I guess for the first time (first time?), a dollar in those markets was suddenly worth less than a dollar… because some of that money had gotten tied up into, for example, Lehman. Which has got to make you wonder how THAT could be considered stable?
This ignorant newbie is starting to wonder if the whole thing is just a shell game, played to present illusory profits, illusory gains, illusory losses. That’s the conspiracy theorist in me exposing itself.
Or, this could all be an effect of the usual errors of short-term thinking vs long-term thinking. A family making all its decisions based on the short-term, and never the long-term, will find itself lurching from crisis to cornucopia to crisis to cornucopia to crisis to… That seems to reflect the wild gyrations in our financial markets as well, exacerbated by “excess fluidity” of instruments like the naked short sell. Everything is amplified and the focus on short-term (day to day) fluctuations creates chaos, because no one gives a damn about the long-term.
The Bush administration tried to resolve Fannie Mae instability in 2003, and the Democrats blocked it, complaining that we had to instead allow more bad housing loans instead. McCain tried again in late 2005, with a bill, that didn’t even make it out of committee because the Democrat in charge of the committee led the majority Democrats on the committee in voting it down, so it never even made it to the floor. But these dealt only with Fannie Mae.
The financial meltdown was in the debt instruments of credit default swaps, the $62 trillion market sector, in which $11 trillion is in sub-prime housing mortgages. What about the other $51 trillion? Can we really simply point to bad housing mortgages as the culprit? Especially when only $500 billion are in default? That means, as Neal Cavuto said, that only 1 out of 20 of the sub-prime mortgages had failed. We want to blame all those “bad loans” to “idiot poor people who bought houses they couldn’t afford”. But 19 out of 20 of those idiot poor people are still paying their mortgages on time. Why castigate them? And how could a failure of 1 out of 20 cause such a complete meltdown? I guess that’s my real question, because I don’t believe THAT.
It just looks like there’s a lot more going on here than meets the eye, and the excess leveraging of assets of these firms – how could AIG use leveraging to make itself appear to be worth 70X its actual worth? – that all seems to be a clue into the real problem.
But I don’t know. Further explanations by someone who really knows would help!
Mike Devx,
There is a big distinction between naked shorting and short selling. Naked shorting has always been illegal, and in 2007 the SEC tightened up the rule to make it harder to drive the price down by eliminating the uptick rule.
When you sell a stock short, you broker “loans” you the stock for a fee. So you’ve actually sold shares of a stock. If the stock price goes down, you can buy the stock back at a lower price to replace the “borrowed” stock, and the difference is your profit.
Naked short selling is illegal because there is never any stock to be sold. There is a three-day settlement period for all stock transactions, and at the end of the three days, since there is no stock to transfer, the sale is voided. But during the three day period, the short may influence the stock price.
If you own a stock (are long), you often don’t appreciate a short seller, but he’s looking at the fundamentals, or the sentiments and decides the stock really isn’t worth the price it’s trading for. The short seller provides the check to the market to control unwarranted enthusiasm for a stock. After all the price of a stock is supposed to represent the future value of a company.
You can also use put options to either hedge against a long position or as a controlled short.
Good read. Doesn’t clarify the particular questions we’re dealing with, but a good article.
http://astuteblogger.blogspot.com/2008/09/setting-record-straight-wall-street.html
This is partly a liquidity problem. And part of the problem won’t go away until the government quits competing for capital. And the nature of an economy that is driven by consumption instead of saving.
We need to let the market correct itself, as painful as that may be. And then go after the fraud.
Essentially we’re going to buy every bad mortgage in the country if I understand it. The question is at what discount?
I would suggest it’s merely an illegal attempt to drive the price of a stock down.
My brother the tax lawyer sent me a piece that says the genesis of the downward spiral is found in government attempts to “fix” the problems that led to the “S&L Crisis” in the ’80s.
The worst one required the lending institutions to state the “market value” of their assets, including mortgages. In a panic, of course, no one is buying mortgages, so the market value drops like a stone, approaching zero.
Before that, the regulators allowed the mortgage portfolio to largely be evaluated as assets with the value of mortgages being paid regularly, rather than at what they would bring if sold immediately into the falling market.
Today, when a crisis hits, it is increased immediately and immensely by this economically insane rule….
Anyhow, it shouldn’t surprise us that politicians have messed with the market in ways that actually make things worse — and that provide them another opportunity to “ride to the rescue”…..and so the wheel turns again!
This is interesting analysis:
http://online.wsj.com/article/SB122178603685354943.html
How could a relatively small amount of bad loans threaten the collapse of an entire industry?
This article deals directly with Earl’s post #19.
Very good article, Brian…though I think it’s going to take more than one read through to absorb it.
Do you understand this:
“First, the SEC must suspend Fair Value Accounting and require that assets be marked to their true economic value.”
That is to say…do you understand the difference between the two values, and how each is derived? It certainly seems as if they are the same: fair value and true value. Apparently they’re not – sort of like the “Fairness in Broadcasting” deal! But I don’t know the difference…do you?
Thx to everyone for your comments and links. That helps!
I agree that the clarity in BrianE’s link in #20 is extraordinarily helpful!
A question on naked short sells: Isn’t it true that if someone takes you up on your “naked short sell”, you *have* to provide the asset? If no one takes you up on it, you get to walk away from it. Isn’t that how it “works”? (I’m using the word “works” in the same way that I’d describe the way that a scam to rip of an elderly Alzheimer patient of his life savings would “work”. Or the way an Obama campaign commercial works.)
This a comment by Pat Patterson on Betsy’s Page. It seemed worth copying and pasting…
from the NYT 23 Oct 1999
The legislation repeals the Glass-Steagall Act, or, as it is formally known, the Banking Act of 1933, which broke up the powerful House of Morgan and divided Wall Street between investment banks and commercial banks. It also makes significant changes to the Bank Holding Company Act of 1956, which had restricted what banks could do in the insurance business.
The Glass-Steagall Act was enacted after the stock market crash of 1929 and the ensuing banking crisis and Great Depression. On the day it was signed, along with the National Industrial Recovery Act and other measures, President Franklin D. Roosevelt called the package “the most important and far-reaching legislation ever enacted by the American Congress.”
…
The breakthrough in Friday’s legislation came in a backroom meeting at the Capitol soon after midnight, when a group of moderate Senate Democrats — led by Christopher Dodd of Connecticut and Charles E. Schumer of New York — forced a compromise between Gramm and the White House over the legislation’s effect on the Community Reinvestment Act, a 1977 anti-discrimination law intended to encourage lending to minorities and others historically denied access to credit.
Dodd, whose state is home to the nation’s largest insurance companies, and Schumer, with strong ties to Wall Street, have long sought legislation to repeal the Glass-Steagall Act. Both men said in interviews Friday that they moved to strike a compromise after it became apparent that the legislation might be killed, as it was last year by Gramm, over the debate about the Community Reinvestment Act.
Gramm had maintained that he did not want anything in the bill that would expand the application of the Community Reinvestment Act because it was, he said, unnecessarily burdensome to banks. He had sought a provision that would exempt thousands of smaller banks from the law. He also wanted a provision that would expose what he has described as the “extortion” committed by community groups against banks by requiring the groups to disclose any special financial deals the groups extract from the banks.
But the White House found that provision unacceptable and had its own ideas about community lending. It wanted the legislation to prevent any bank with an unsatisfactory record of making loans to the disadvantaged from expanding into new areas, like insurance or securities.
The White House had insisted that the President would veto any legislation that would scale back minority-lending requirements. Four days of intense negotiations between Summers, Gene Sperling, the President’s top economic policy adviser, and Gramm, while moving the two sides closer, failed to resolve the differences.
..
After receiving calls from executives of some of the nation’s leading financial companies, Dodd and Schumer began trying to work out a compromise. An agreement was quickly reached on the issue of banks and expanded powers — no institution would be allowed to move into any new lines of business without a satisfactory lending record.
The lawmakers bogged down on Gramm’s insistence that all community organizations disclose to the regulators what benefits they get from banks. Some Democrats expressed the fear that Gramm’s proposal would require the Boy Scouts to file reports with the regulators.
Ultimately, the following provisions were drawn up and both the White House and Gramm said they could accept them:
¶Banks will not be able to move into new lines of business unless they have satisfactory lending records.
¶Community groups will have to make disclosures to regulators about certain kinds of financial deals with banks that they have pressed to make loans under the Community Reinvestment Act.
¶Wholesale financial institutions, a new kind of business that takes large, uninsured bank deposits, cannot be affiliated with commercial banks.
¶Small banks with satisfactory or excellent track records of lending to the underserved would be reviewed less frequently under the Community Reinvestment Act. As a practical matter smaller banks are reviewed about every three years. The deal struck today allows all rural banks and banks with less than $250 million in assets to undergo examination once every five years if their last exam resulted in an “outstanding” grade and every four years if they last scored “satisfactory.”
For more than 20 years, Congress has tried unsuccessfully to rewrite the nation’s financial services laws and repeal Glass-Steagall, particularly as many other industrial nations had no similar restrictions on their banks. But until recently, the three main industries affected by the legislation — banks, securities companies and insurers — had competing interests and were able to lobby any legislation to a standstill.
That all changed in recent years as the lines between the industries began to blur and it became more broadly acknowledged that a deregulation of financial services could be beneficial to insurers, bankers and securities firms alike. Once the three industries rallied around the legislation, they became a formidable political force, raising millions of dollars for lawmakers and pressing both Republican leaders in Congress and the White House for new legislation.
http://partners.nytimes.com/libr…s- congress.html
The reason this was instituted, I’m guessing, is to prevent a company from inflating the value of their assets. But when there is no market– the asset value may be significantly understated.
The true economic value, includes the time value of the investment and accounts for risk to determine the future value in present day dollars.
As to the naked short, there is never an intention of delivering the stock, since the seller doesn’t actually own any. Since the market is an auction, someone has already agreed to buy the stock. The naked shorter is using the three day settlement period to manipulate the stock down.
I think what got us in this mess is all of the above, including the Times article you cite. It’s never stated in that article, but the President was Clinton.
Ya know…it’s beginning to look like McCain’s statement that “he wasn’t strong on economics” was a statement of wisdom – especially given this current mess and trying to figure it out – and Obama’s assumption that _he_ knew economics was the ignorance of the naive.
It’s that old thing – when you know nothing, you don’t know that you know nothing. When you know _something_, at least you know there’s a lot you don’t know.
If anybody’s interested. I don’t have an ipod…
http://directorblue.blogspot.com/2008/09/podcast-mark-levin-explains-financial.html
suek said in #25:
“Ya know…it’s beginning to look like McCain’s statement that “he wasn’t strong on economics” was a statement of wisdom”
I agree. I happened to catch 45 minutes of Sunday talk show news this morning and made the mistake of tuning into ABC’s George Steph’ Round Table. It was absolutely horrifying and depressed me and angered me. The entire Round Table, George Will included, unloaded on John McCain with withering disdain. Minute after minute after minute it continued. It was stunning, it was horrifying… I’ve been away from the TV for months, avoiding all televised news, and the bias was simply… incredible.
In particular they took John McCain to task for saying “The fundamentals of the economy are strong.” They ridiculed him endlessly. They said he was ranting and raving while Obama was calm and in control. (Easy to be calm and in control when you say nothing and wait for all the real leaders to step up.) And Sam Donaldson was by far the worst. His outrage that John McCain is still allowed to even SPEAK to the rest of us was palpable. I don’t know that I’ve ever seen a regular-media news commentator be so completely biased.
The thing is, John McCain is correct but he probably was not careful enough in what he said. The fundamentals of our economy are in fact strong! The regular main street economy is moving along perfectly fine. It’s the financials markets with their bizarre, opaque instruments and years-recent mechanisms that induce wild gyrations in the market that are broken. And the financials markets that relate to the economy itself are perfectly fine; it’s the debt instruments where they’ve all been playing games where we’re in such trouble. (Well, Detroit’s auto industry is in trouble as well, but that’s nothing new. Same old same old since 1974 there.)
If John McCain had said, “My fellow Americans, main street America and our regular economy are doing very well. There are a few places where Democrats have been in charge for decades that are suffering, but the economy continues to grow and remains stable. The shenanigans and corruption on Wall Street and Congress have our financial markets in the worst crisis since the Great Depression, however, and if we don’t stop the hemorraghing, then even on main street we’re all going to suffer terribly. You and I, all of us, have a stake in creating calm on Wall Street and fixing this broken, terrible Washington mess.”
Or something like that. I’m no speech writer. But to simply say “The fundamentals of the American economy are strong,” when the underpinnings – the fundamentals – of Wall Street are so clearly shattered in the debt market – and when most Americans don’t know a damn thing about the debt market and won’t even try to figure any of it out… when all they hear is ‘The Great Depression’ and think, well, crap, our whole economy and country almost went into the tank last week… John McCain left himself wide open for this attack, I suppose.
I forgot to mention that the depressing part of the George Steph show was to hear George Will unload repeatedly on John McCain. Then I remembered the other side of this great Divide that Sarah Palin has exposed in American Politics: The complete disdain of the Washington Elite for “common America”. This is not merely a Democrat phenomenon; it is equally a Republican phenomenon as well.
George Will, Charles Krauthammer, several others do not understand that Sarah Palin represents the cherished American ideal that any of us, and you too, may become President. And that years spent in Washington do not automatically equate to years spent gaining wisdom. That sometimes, a natural wisdom born of time spent in real America can be far superior to the closed loop of Washington. That sometimes we trust a real American outsider to come riding into Washington DC and take a stab at cleaning up the rotten mess. Sarah Palin did not present herself to our Elite to gain their imprimatur of her acceptability, and John McCain has always been a maverick. The Elite has their knives out for McCain and Palin right now, and watching that happen even on the Right is terrible and depressing for me to see.
Sometimes I wonder if anyone really has any idea about economics. Paul Krugman would claim to be “strong,” but I consider him a truly dangerous man. (Although I owe him thanks because it was his manifest idiocies that drove me once and for all out of the Democratic party.)
When it comes to economics, strength always seems to be luck and 20/20 hindsight!
mike,
see that’s the problem. this stuff is really complicated and yes, that is the american dream that anyone can become president; but only if they do the work. folksy doesn’t cut it. knowing stuff does.
you wouldn’t want your next door neighbor to become president solely on some artificial perception that he/she didn’t earn would you. you would (hopefully) want him to be more knowledgeable, more worldly and dare i say it, smarter than you.
peace
Book,
Robert Heinlein often made the same point. There *is* insanity in some economics, meaning some things, like socialism, clearly always fail. But exactly what drives good times vs bad times even when you free up the marvelous capacity of freedom-loving individuals… and why bad times seemingly cannot be avoided… it perhaps may be a mystery. Or inevitable. Maybe the only purpose of regulation is to keep the lows from getting too low; but the inevitable effect of that is that the highs end up being not very high either.
Dagon,
Sarah Palin is smarter than me, and much more capable.
Barack Obama knows some interesting facts and knows how to destroy me with lawsuits.
Sarah Palin has wisdom. Barack Obama is lost in the leftist dream that inevitably harms us all.
I’m not at all sure what you mean by “worldly”, but I suspect you mean, Obama-like. Hell, no. I don’t want THAT. Of course not. I’ll take someone wise and wonderful offering me a mooseburger over some snivelling, blame-America, love-the-world intellectual asking me if I’d like some brie.
based on your comments mike, i think you’re probably right, sadly for you.
however, i do think that you at least know what the bush doctrine is.
but the rest of your stuff is just insipid drivel; the kind that has gotten us into the mess we are in. if you think intellectuals and people serious about science et al are less preferreable than people like sarah palin, then i suggest you say that to them the next time you need a heart-transplant or take advantage of the clean water you’re drinking due to the work of some leftist environment-loving engineer or take part in the well-thought of tenets of this nation that the framers came up with.
the founding fathers were brie-loving intellectuals dontcha know?
peace
Just because most people (including those on this site) do not understand economics doesn’t mean there isn’t good work being done. But you have to start by studying actual economists, rather than science fiction writers like the one Mike referenced above. The problem is that partisans and politicians like to distort the numbers and theory to their own ends–like that McCain ad (25 seconds of hard-hitting facts is really funny!!) which suggests that Obama showed bad judgment for taking a single call from Raines, while McCain has good judgment despite supporting all the economic policies that have caused a financial meltdown.
Dagon,
I’ll toss this one in at you. The clean water you’re drinking didn’t come as the result of some environment loving engineer. It came from an Army engineer trying to save the lives of soldiers in the field during conflict. Your heart transplant wasn’t made possible by ivory tower intellectuals – they said it couldn’t be done. It was done by research scientists at working hospitals that couldn’t get grants. Read up on Jarvic and his artificial heart. I work with intellectuals all the time; sometimes the theory is great and sometimes it sucks. Some are honest enough to take an evaluation. Obama strikes me as one that has been unable to hold a position or make a clear evaluation. His foreign policy statements are laughable; his actions in Iraq, if the Iraqi foreign minister is correct, are treasonous; and his plan for changing the economy is a daydream. Yes, the hands that do one thing can do another – the problem is cost, motivation, and what is supposed to happen between “bad” point A and “good” point C. It will take 10-15 years to convert the US private vehicle sector to a new type of energy; those mega and giga joules of energy have to come from somewhere. Obama and his party have denied access for nuclear, clean coal, and domestic oil exploration. Key, high value, wind farm areas are off-limits because of actions by congress – especially the California, Oregon, and Washington coastal regions and the off-shore proposals to harness the wind off Massachusetts and the Northeast. Restrictions passed by congress make new refineries cost-prohibitive or physically impossible, leaving the only refining capacity in the vulnerable gulf coast region.
And by the way, the Bush Doctrine is a misnomer. I’d call it the Marine doctrine and use Tripoli and the Barbary Coast pirates as an antecedent for our actions against Al-Qaida, in Afghanistan, and in Iraq. If someone attacks the U.S. as a nation, and a nation-state does not disown, destroy, or control those individuals, then it is and has been our national policy to hunt them down and kill them – often kicking other sovereign nations in the shins while doing so. Generally this encourages other nations not to harbor these types of anti-social individuals.
You have no sense of history, nor a sense of proportion.
And I’m a brie-loving individual, as was my Grandfather Renault – though he was a machinist. The difference between the intellectuals and myself is that I actually choose my own brie and camabert and can tell the difference without having to consult “Fine Living” or the Food Network. If I catch you brainy wannabees putting it on pizza or serving it sans rind on organic whole grain crackers with apricot jam I’ll have to take you out back and beat you. The only way to eat it is with one hand holding a warm baguette with sweet cream butter and the other a simple knife with a slice of brie; fancy means you add a slice of apple – preferably red delicious. I think I need a snack; maybe a bit of port and some dark chocolate.
SSG Dave – “You don’t need a degree to recognize good food or drink. You need a degree to believe you should pay someone $25 for a guide to good food and drink.”
holy strawman SGT Dave!
it sounds like the intellectuals that you know suck.
“You don’t need a degree to recognize good food or drink. You need a degree to believe you should pay someone $25 for a guide to good food and drink.”
seriously dude, who are you hanging out with? those don’t sound like people with degrees, dave. they sound like food snobs, who come from all walks of life sadly. i’m equally annoyed with them.
the rest of your screed is just more anti-intellectual bullshit; which i think you know. i do notice that you had no problem with my contention that the founders were intellectuals. because they were.
that’s the kind of brain-power we need now in these trying times and i’m gonna get cramps from the belly-laughs you’re going to elicit trying to tell me that mccain and palin are up to the task.
peace
Dagon said:
What mess are we in?
And lower the insult level.
brian,
we’re not in a mess? i was just told this week by the president the united states and his treasury secretary that we are in a crisis so dire that it will warrant the federal government essentially taking over the notes of our entire insurance and mortgage infrastructure. socialism essentially.
what would you call that?
and as far as insults, i’d say the fact that the question you just asked qualifies as “insipid drivel” are you playing devil’s advocate or did you seriously not know?
peace
dagon,
Read the thread.
I’m interested in your assessment of what precipitated this crisis.
Dagon,
I’m not anti-intellectual. I’m a published author on security issues. However, I don’t like a lot of the pseudo-intellectuals and ivory tower types. I’m not happy with the choices – none of them is a stellar, out-of-the-box thinker. McCain has his shortcomings, as does Palin. My counter, however, is that Biden is even less capable than either Palin or McCain and that Obama is too far in the pockets of the Chicago/Democrat machine to provide any change. Only one of these candidates did anything to combat corruption (Palin). Only one is abiding by the campaign reform finance he voted for (McCain). McCain may not be a gifted theoretician, but the presidency is not about theory and ideals. It’s about decisions, responsibility, and decisiveness. I’ve seen little to none from Obama, less from Biden, and no way for them to convince me of their ability with the press giving them cream puff interviews and covering up their mistakes.
And yes, a lot of the intellectuals I know suck. A lot. And most are backing Obama because of his race – which is the worst reason of any I can think to back a candidate. I’d not vote for Obama if he was a white man; he’s a party-line tax and spend candidate.
I’d suggest placing the blame for the mortgage crisis where it belongs – which is with the regulatory personnel that “built the bomb”. They did dumb things and tried to cover them up. Yes, I dislike the bailout; the problem is that two of the candidates voted against reforms that would have possibly prevented this issue. *Note- McCain is not one of them and Palin wasn’t in the Senate.
On a basic note, I find that the bottom line here is that we want someone who will take responsibility for both the good and the bad of the economy and do their best to fix it. I cannot see Obama as a “buck stops here” type of guy. I do see McCain being that type of guy.
Final note, then I’ll hang it up. No one person is capable of mentally or physically dealing with all the responsibilities of the presidency. The measure of the president is that person’s ability to find the best people to utilize in delegating and supporting. Obama failed to take the best VP candidate (I don’t care who you liked, be it Hillary!, or Sibelius, or Gore, or insert Democrat here – but it certainly wasn’t Joe “Open Mouth Insert Foot” Biden) and has a trail of questionable acquaintances behind him. McCain has some bad apples in his barrel, but Palin is one of the best choices he could have made, both for the label of reformer and outsider, along with conservative. He does not seem to fear the competence of others around him; that was Slick Willy Clinton’s downfall. Obama may be the single smartest man in the room, but I do not believe his ego will allow him to bring in the smartest people for the jobs around him (just like Clinton). I may be wrong, but I think McCain is a better bet for competent underlings.
SSG Dave – “Jimmy Carter was a nice guy – the enemy took hostages for over a year. Ronald Reagan was a loose cannon – the enemy fell apart. I’ll take the latter.”
thanks brian,
your question wasn’t worded that way. i’ve read much of it and a thorough reply will take some time. but again, thanks for your interest and i promise to post something substantive tomorrow.
i can leave you with some short answers.
–it wasn’t the dems.
–phill gramm had a lot to do with it.
–john mccaine was against regulation
–obama had this crap nailed as early as 2006.
i promise to be more expansive when i reply tomorrow. i’m watching the emmys now. so far, it kinda sucks!
peace
SGTDave, the Republicans are responsible for the housing crisis and the financial meltdown. Phil Graham had a direct hand in it by authoring poor deregulatory law, while McCain supported it. A Republican in the Fed kept interest rates too low, and the Bush administration supported this. Elections should be about accountability, but voters keep making excuses for the poor GOP policies that have generated this problem. So now that unbridled capitalism has failed, the Bush administration has been forced to undertake the largest socialist nationalization of US industry in the country’s history. This is a serious indictment of conservative, laissez-faire economic policies, and Republicans ought to admit it. And dagon is correct: Obama was pointing out these risks as early as 2006, since he had Warren Buffet–who predicted this in 2003–advising his campaign.
GD,
Check your sourcing – while Graham was involved, Obama was not one of the people trying to fix the situation. “Equal Opportunity” housing issues was the problem in the loan industry. It meant that people that should not have gotten loans were given loans to prevent the perception of discrimination. The Fed kept rates low, but that is irrelevant to the situation. Adjustable rate loans and the European “interest only” loans caused the crisis when rates came up. This is called “stupid”. I took a fixed rate at prime plus 3/4 instead of an ARM tied to the prime. Several people called me crazy at the time, but rates change. The bottom line is that we shouldn’t be in the bailout business. I hate to say that a recession and a crash are “right”; it will hurt a lot of people badly. It is, however, how the marketplace deals with the issues and why investing is a risk.
I have a problem with some of the officers in FNMA; to wit, one Jaime Gorelick. I’d really like to see the accounting issues reviewed and those responsible for the mis-reporting of the situation in jail/fined as in the ENRON situation. It won’t be likely, however, since these are “connected” people – and if Obama is elected there will be pardons all around for those who work on his campaign.
I should stop arguing with you; you really aren’t listening to me. Final one, GD, the Bush Administration did not authorize the bail out per se. It took action by a Democratic led Congress to spend the money. If it is the “wrong” thing, then the Congress needs to grow a set and tell the President “No”. If they don’t, then Pelosi, Reid, and the rest are just as responsible, if not moreso since they approved the money.
No person in this debate is innocent; Obama, McCain, and Biden are all Senators and should have been moving on this sooner. Obama’s voicing of concern, if true, should be a concern to you as his supporters – if his own people won’t listen to him now while they have control of congress, what does this portend for the future? Laissez-faire economic policy is a good thing; this is not a non-regulated market. You’re comparing apples to oranges, GD. The indictment is one of federal programs following instructions in contrast to market conditions – they shouldn’t have taken on the marginal loans from Countrywide and others. If not for regulators, then this issue results in Countrywide taking a bath and several other risk-takers (operative word here is “risk”) going under.
By the way, the bottom line in this is the same as the crash that started the Great Depression. There hasn’t been a change in “real” value of real estate and the market; the only difference is perception of value. The housing market in CA is bouncing back with high sales rates (albeit at lower cost – go economic law!) and elsewhere over-inflated prices are coming back down.
There is no “housing crisis”. There are a number of people who made bad choices, overextended, and are going to default on loans they should never have gotten. I hate to say “life sucks for them”, but that is the bottom line. Unbridled captitalism didn’t fail; it worked just fine. Individuals failed. Yes, it is a huge problem and a socialist answer. Unfortunately, this is an election year and telling people to suck it up and make better choices is not going to fly with the bread and circus crowd.
Nope, I’m not a blinders-on GOP type. By the way, the solution proposed by Obama was essentially what you are condemning Bush for right now. He wanted to nationalize the programs and take control. Stop saying that the “big” problem is the same as the solution your man proposed. Stop whining about whose fault it is and get off your ass and FIX IT. Man up; at least Bush is doing something – even if it is the wrong thing – instead of calling a recess (Pelosi, Reid) and leaving the problem to someone else.
SSG Dave – “In the end, a bad decision under fire is better than no decision at all.”
Sgt Dave says
“Unfortunately, this is an election year and telling people to suck it up and make better choices is not going to fly with the bread and circus crowd.”
Hear, hear! “You are responsible for your own choices” is a statement that used to be obvious to the majority of Americans… in an America that, sadly, is passing away. Americans that lived in a different, better time.
And I would apply that not only to the foolish sub-prime borrowers, but to the leaders of these financials firms that have walked away with millions upon millions of dollars while leading their institutions to ruin. And now we are to bail them out.
Did you see how New-York Lehmans transferred eight billion dollars from their British branch into the New York branch? And then gave, to their own thousands, massive bonuses while now the British office employees find that there is not enough money left on their side to guarantee even regular salaries being paid?
Apparently all legal. In the end, when systems are thoroughly corrupt, the people begin looking at Revolution to solve the problem. Congress, the Executive Branch appointees, lobbyists, and the financials markets are so thoroughly intertwined in their incestuous vile snakepit that people are going to become tired of being metaphysically raped. The response to this crisis will ensure that each of those groups will come out of this well; not so much you and I.
SGTDave, I am listening to you, but believe it is you who should check sourcing. The equal opportunity housing legislation did not cause the housing crisis, nor did Gorelick at FNM. I know John Lott argued the former point on Fox, but he is wrong. I emailed him for sources, which he supplied, but when I went through the analysis there were lots of holes in it–wrong time frame, geography, factual errors, lack of quantification, etc.–and he refuses to respond with corrected information or proper analysis. Meanwhile, many Republicans have blamed the GSE’s, including Fannie Mae, but that analysis is also flawed because the default rates of the GSE’s is running at half the private bank originated rate because FNM and FRE took onto their balance sheets the less risky/toxic stuff.
No, the crisis was caused by bad deregulation (e.g., Graham, Leach, Bliley Act), poor oversight (e.g., understaffed SEC), overly low interest rates (thanks, Greenspan), corporate greed (e.g., funds chasing yield) and poor personal decisionmaking (i.e., overextended borrowers), but it was most certainly not a result of too much regulation or government intervention–otherwise, the most regulated financial actors would have the most toxic balance sheets, which they do not. Hence, you are wrong to suggest that a free market would not have created this problem, since that is exactly what did create it. Private entities operating in an unregulated market caused a capitalist boom bust cycle of proportions that government intervention was required. There is not one credible economist or capital market expert who didn’t see a complete meltdown of even basic market functions (e.g., money market funds, consumer credit, etc.) occuring if the government didn’t intervene. And thank goodness they did. We’ve at least learned that lesson from the Hoover administration.
The financial crisis we witnessed last week is the other bookend closing the era of laissez-faire economics that Reagan ushered in during the early 80’s. You may not understand or appreciate that yet, but many will when we all see the full scope of regulations that will be placed upon financial institutions in the coming days. The era of unbridled capitalism is over for Wall Street. And not because it is an election year, but because the very core of our economy was threatened by the excesses of the pure form of that system. The multi-billion dollar bill that tax payers over the next 2-3 generations will pay (with interest), and the impact it will have on inflation, US Dollar strength, etc. is the price of a religious-like faith in economic dogma rather than empirical analysis, and it is a price we are going to pay for a long time. This is a serious indictment of economic ideology that conservatives will be coming to grips with for a long time…
Laissez-faire economics?! HA! We haven’t seen laissez-faire economics in this country since, well, ever. Jamestown had a system that had to meet contracts with European investors that were regulated by the Crown and were strictly watched by insurance firms who helped bankroll the endeavor.
If there is any “religious-like faith in economic dogma” that ignores empirical analysis, it is the Left that suffers from said affliction. Their blind allegiance to “reasonable oversight” has failed time and again. To wit: the laws and regulations in place today are based on all the combined wisdom of those who would rescue us from the Hoover Administration’s “laissez-faire” economic policies.
How’s that New Deal and Great Society working out? Unbridled capitalism at its finest!
Typical leftist claims as above:
- The equal opportunity housing legislation did not cause the housing crisis
- it was most certainly not a result of too much regulation or government intervention
- The financial crisis we witnessed last week is the other bookend closing the era of laissez-faire economics that Reagan ushered in during the early 80’s
Hmmm. Let me try.
- The housing legislation required all players in the game of mortgages to take on the subprime market or face hefty fees. They did so.
- They then covered their risk by moving heavily into the debt market via credit default swaps
- The credit default swaps were packaged into opaque instruments and sold
- The sold packages were repackaged, split up, etc, and resold and resold and resold, at ever higher values, until no one knew, and no one still knows, the value of their assets, because they are opaque.
- The housing market, a speculative bubble, inevitably collapsed. The ripple effect triggered Clinton’s mark-to-market rules, collapsing the financial value immediately of the cash/capital balances for these firms. Credit and capital FROZE as investors perceived each weakness. Bankruptcies and crises immediately began to follow. It kept rippling outward and outward and outward until Wednesday morning last week, when every single investment market was set up by pre-opening-bell orders to become frozen, triggering a complete meltdown.
Conclusion: Yes, the combination of mark-to-market and the housing legislation triggered the housing crisis AND the financials crisis.
As I’ve said elsewhere, mark-to-market and the housing legislation are certainly not the entire story, but as far as triggering effects go, it seems absolutely clear to me that they are the cause. Relying on debt instruments to present a profitable picture is insane, but nearly ALL of America is doing that, including your average citizen, not just the idiotic investment firm managers that presided over the financials collapse.
There are other idiocies: Naked short sells that induce wild swings in the market. Repealing the uptick rule on regular short sells, also inducing wild fluctuations. Etc. Also, any number of Republicans and Democrats were asleep at the switch, or protesting _too weakly_ what was going on, or especially in the case of Democrats, defeating those weak attempts from 2005-2007 to fix the looming problem. (Would those proposed solutions have actually fixed the problem? Who can say? Will this trillion-dollar bailout plan fix things now? Who can say?)
That’s the best I can contribute to this debate. If that doesn’t work, I can’t see anything further I can contribute. I’ve been posting too many large comments already as it is.
Mike, there are many problems with attributing the housing crisis and subsequent financial meltdown to equal housing legislation. First, it was designed to address minorities in the inner city, but the vast majority of non-conforming mortgages are concentrated in areas outside of inner cities (e.g., Henderson, NV, Riverside, CA, etc.) and do not disportionately impact minorities. Second, passage of that legislation, as John Lott most notably argued, occurred in the 80’s and ‘91, which is well ahead of the bubble in housing, so the timing (as well as the geography) do not appear to coincide with this explanation. Third, a variety of market players not subject to the equal housing rules also became involved without the government coercion that you and Lott point to, so you have to explain how private, unregulated actors (from mortgage brokers to investment banks) got burned because of this legislation. Fourth, the mark-to-market effects creating a vicious cycle were imputing mortgage foreclosure rates of 25% to 35% on Wednesday of last week, which is well above what the most bearing prognosticator (e.g., Schiller) was calling for, and the link between this perverse, purely private market effect and the government regulation/legislation you cite is non-existent. Finally, no one has shown data that banks took on bad debts because of that piece of legislation, and John Lott has failed to produce it for me. This explanation feels like a false meme unless someone can show me data supporting it.
Also, not to nitpick, but you have a couple of mistakes in your post. First, you are confusing CDSs with CDOs and CMOs. These are totally different instruments, with the repackaging of actual mortgages being CMOs not CDSs. Second, the mark-to-market is not a Clinton rule, but a GAAP rule. The government doesn’t set those rules; the accounting profession does.
Not only is your argument attributing the crisis to equal housing legislation is very, very weak, but you have basically proven that lack of government intervention was largely to blame for the meltdown. In essene, you have told a story involving CDSs, CMOs and CDOs, as well as mark-to-market effects, lack of proper trading rules, and an abdication of government oversight mostly by the regulation-averse GOP, that is almost purely a private market story, as these instruments were made possible by the deregulation occuring under the Graham, Leach, Bliley Act, and since most players involved were largely unregulated under Republican controlled executive and legislative branches. Because the crisis is the result of a market boom bust cycle and inadequate regulation, this is an indictment of the pure-market form of Reaganomics championed by Milton Friedman and Arthur Laffer, among others–unless, of course, you can show how government regulation explains how the most toxic effects occurred in the most unregulated areas of the market (a contradiction that would make my head hurt even more than the stockmarket does).
Show me one segment of the market that has zero regulation.
I never made that claim. Read carefully: “…most unregulated areas…”
also gd, you’re missing probably the most easily digestible point for the readers on this forum:
if the crises WERE indeed caused by too much regulation, then you wouldn’t see the mccain camp scrambling to re-brand their candidate as a regulator who is going to take it wall street.
peace
gd, or should I say dg, why are you so intent on defending fannie mae? I noticed that in your posts last week.
Do you have a vested interest in fannie and freddie or do you think they have been unfairly targeted?
As to mark to market rules, the SEC requires publicly traded companies to comply with GAAP, and they could just as easily institute new rules, so it’s not quite fair to say these are just accounting rules.
BrianE, I do not like people telling inaccurate stories for political purposes. If I thought that the GSEs were truly responsible for the crisis, then I would be a louder (and more formidable) critic than anyone on this site. As it happens, they are not, so I argue otherwise. It is important for people to understand what is going on rather than picking a side and inventing a story to support it. By the way, the SEC does enforce accounting rules but doesn’t write them, so the implication that the marks taking down banks are somehow tied to Clinton, which was the clear implication of Mike Devx’s comments, is simply not true. Perpetuating this false meme might delight conservatives, but it really hurts America since our democracy needs voters who are enlightened and informed.
“…this is an indictment of the pure-market form…”
The phrase “pure-market” would intimate a void of goverment regulation, would it not?
Not really. If you have go back and reread Milton Friedman or Arthur Laffer or Friedrich Hayek, then you would recall that these men are not advocating a system with no regulation when they speak of pure-market forms. But they do advocate a very, very limited government role. For example, Friedman was against having an SEC to guard against even blatant forms of insider trading. As Warren Buffett powerfully argued in 2002, this low level of oversight in the capital markets inevitably creates weapons of mass distruction because the market generates massive counterparty risk, opaque securities and insane amounts of leverage. Clearly, Friedman, Laffer and Hayek either did not forsee these system-threatening risks generated by an unregulated market or they thought that a Great Depression was preferable to even moderate levels of government intervention. Both are now being viewed as dubious positions. Hence, my earlier comment that conservatives likely will need to have a rethink…
Can we agree that this meltdown couldn’t have happened at a worse time, during an election cycle (as if there were something other than an election cycle), since the worst possible solution will be pushed for political expediency rather than sound fiscal policy.
Also, I don’t think anyone was suggesting that Fair Value Accounting caused the crisis, but it is certainly making it worse. Former FDIC chairman Issac’s proposal to use discounted cash flow might ease some of the pressure on financial institutions that are otherwise healthy.
I wonder to what extent we are seeing distortions caused by the Basel Accords–which resulted in too much leverage if I understand it correctly?
Read about the other 4 here:
http://mcauleysworld.wordpress.com/2008/09/21/the-fannie-mae-five-five-key-players-who-broke-the-system/
Read the rest here:
http://mcauleysworld.wordpress.com/2008/09/22/obama-deregulation-caused-this-crisis-an-ignorant-claim-or-political-spin/
Here’s a plan by Newt you can get behind. Sorry for the lengthy copy and pastes, but they deserve to be read.
I need to correct something I said about naked short selling. It is true that the person doesn’t own the shares he’s selling, but during the three day settlement period, assuming the share price does go down, shares are purchased at some lower price, delivered at the end of the settlement period and the difference is profit.
Please read post #58, an opinion piece by Newt. What the government is proposing needs to be pondered. The democrats played it close to the vest, letting the administration chart the course. This gives them, of course, cover to criticize it later.
As related to mark to market rules, I ran across this written last November on a financial website:
This is why beauracracies and dangerous to your health. They are unable to make adjustments as conditions change.
Here are 14 questions for Paulson and Bernanke. Read it here:
http://bigpicture.typepad.com/comments/2008/09/10-questions-fo.html