Getting our terminology right

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Getting our terminology right

Bookworm on Oct 04 2008 at 5:15 pm | Filed under: Economics

This will be a quick post because, this weekend, soccer is my life. Fortunately, I only want to make a quick point, and it’s one that I think needs to be made over and over and over again.

As you may recall from Thursday’s debate, Biden kept saying that our current financial woes arose because of deregulation and that even John McCain now wants more regulation. In other words, bad Republicans let Wall Street go wild, and now they’re cowed and are following the Democratic line.

Palin, who generally did fantastically well, failed a bit when dealing with Biden’s direct and indirect accusations, because didn’t correct the terminology. Let me state, therefore, what should be obvious, and what should be an embarrassment for the Democrats and a source of pride for the Republicans. That the opposite is true is only because the Democrats are controlling the message and the Republicans are hiding:

The problem did not start because of deregulation. It started because of hyper-regulation: Because Democrats did not think it was “fair” that only people who have saved a lot of money and have reliable income sources should get loans, the Democrats forced through policies mandating that banks must give loans to those who normally would be poor risks (those famous subprime loans). What kept banks from squawking about being forced by the government to engage in practices that no sound business would ever engage in was the fact that Fannie and Freddie (staffed at the upper level by Democrats) promised to buy those loans, insure them, and sell them. Well, with an offer like that, the Banks couldn’t refuse, and they went hog wild. It was a no loss for them, and a huge incentive (because of these government regulations, not deregulations) to give out as many bad loans as possible.

What Bush and McCain and other Republicans started calling for a few years ago wasn’t deregulation (although that would have been a good idea considering the disaster that was looming with Democratic interference in the market) but, instead, some oversight. That is, given that the government was bossing the market around, at least it should investigate to see what the result was and make sure everyone was playing honestly (including Fannie and Freddie).

Sensible Republicans are still calling for more policing. They understand that the smart money is on letting the market function normally, which will prevent handing out insane loans that are doomed to failure, and which will ensure that housing prices curve with inflation, rather than soaring above inflation. The government’s involvement should be limited to ensuring that the lenders are acting honestly (no cheating, no discrimination).

So, let’s get things clear here: The problem was too much regulation (not deregulation), with the Democrats forcing the banks to give bad loans. The Republicans certainly wanted less regulation, but what they were calling for in the past (and what the intelligent ones seek now) is government policing or oversight, which is an appropriate role for the government in a national money market.

Cross-posted at Right Wing News

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12 Responses to “Getting our terminology right”

on 04 Oct 2008 at 6:33 pm 1Old War Dogs

2008.10.04-05 Politics and National Defense Roundup…

This post will grow as the weekend goes on. Please don’t forget to check back later. How can you tell when Joe Biden’s confused? His lips are moving. We have out of town company this weekend. It probably will affect…
on 04 Oct 2008 at 7:56 pm 2Helen Losse

Oh, I get it. It’s the Democrats fault. LOL Please!!
on 04 Oct 2008 at 8:01 pm 3Oldflyer

Book, I also posted on AT about this. I sent the McCain campaign an email right after the VP debate and urged them to have someone educate the Senator and the Governor about the difference between regulation and oversight. Quickly.

I know, I know; about like writing to my Senators (my Congressman is different). But, as I tell my wife, it is all I know to do and it makes me feel a little better.
on 04 Oct 2008 at 8:11 pm 4Ronald Hayden

Oh, I get it. It’s the Democrats fault. LOL Please!!

Unfortunately this seems to be the standard response…you can show the votes of the Democrats, you can quote their repeated calls for no further oversight of these institutions, you can show the video of them practically pounding the table demanding that Republicans stop calling for oversight, you can point out they’ve been in charge of Congress for the last two years and didn’t address this problem, you can remind people of how much money they got from those institutions in return for making sure no oversight occurred, and the typical response is exactly this.

It’s this kind of refusal to acknowledge facts that is causing McCain to move away from talking about economics (since no one believes the facts) and to negative campaigning about Obama’s past.

He has no choice, if he wants to win.
on 05 Oct 2008 at 7:28 am 5Zhombre

No, Helen, it’s not all the Democrats’ fault, but they their fingerprints on this mess. And I think Democrats like Barney Frank and Chris Dodd are directly responsible.
on 05 Oct 2008 at 8:41 am 6JackMayo

OK, so it is the democrats calling for too much regulation, and “sensible” republicans calling for “more policing”. So policing and regulating are different?

Come on! Policing is just enforcing the “regulations” or “laws”, of which, you say, too much already exists….so if too much exists, why would you want to enforce hyper-regulation which you say is the problem?

Bottom line: Your hero President and candidate supported the nationalization of toxic debt and interfered with the free-market economy time and again in the bail out of banks, airlines, auto-companies, and more, going against everything many Republicans claim to stand for….sounds like socialism to me……what does your party even represent anymore? Oh yeah, it’s the libertarians, not Republicans who represent the principles of free-markets, keeping taxes at an absolute minimum, keeping government small, and maintaining “non-interventionist” foreign policy.

True free-market economy lovers, will most likely vote for Ron Paul or Bob Barr….and as someone who attended the Libertarian National Convention, I would warn you that many many libertarians consider Obama to be the lesser of 2 evils for one main reason:

Obama is honest about his socialist intentions, and as a true fiscal conservative, I’ll take that any day over a party which claims to be all things to all people.

We’re already a socialist country, and at least with Obama we know where he stands.

You can’t have your cake and eat it too Republican socialists! You have been exposed!
on 05 Oct 2008 at 9:20 am 7BrianE

So JackMayo, as a true fiscal conservative, are you a fan of the Community Reinvestment Act and its requirement that banks provide loans to unqualified borrowers, and should we continue that program?
This is the regulation Bookworm was referring to.
on 05 Oct 2008 at 9:23 am 8Deana

Jack -

Your post makes me think of a discussion I heard on the radio the other day. They were talking about how furious they were that some Republicans had voted for the bailout because it violated all sorts of principles that conservatives hold dear. Discussion ensued on how, at least with the Democrats, you knew you were going to get screwed. Inevitably, the conservation turned to: Do you prefer to get screwed and know in advance it’s coming or do you prefer the element of surprise. I couldn’t help but laugh – one has to keep a sense of humor through all of this or one would lose their mind.

However, on a more serious note: what you describe in your above post is exactly why I refer to myself as a conservative and not a Republican. And I would be amazed if most people on this blog don’t also think of themselves more as conservatives than Republicans. So you aren’t telling anyone anything of which they are not already aware.

No one, except for liberals, has ever mistaken President Bush for a conservative. He is not. And while I admire him for many reasons and will always be grateful that he was the President during the past 8 years instead of the alternatives, there have been many times when I wished he had done something different.

But, as I’ve mentioned before on this blog, there will be a couple of very good things that happen if Obama wins, as I suspect he will, and one of them will be that the Democrats and liberals will own it all. Their ideas will be front and center and, unfortunately for them, so will the results of their ideas. Perhaps Americans need to get a good, hard look at what those are instead of allowing themselves to be dazzled by all the dreamy talk of hope and change.

Deana
on 05 Oct 2008 at 10:43 am 9Mike Devx

It’s rare for Helen to pop in and offer a quick and mindless comment. But this time she did. Sigh.

Well, she’s welcome to say “Oh Please”, and give us her LOL, and check out.
But for perhaps the first time, my estimation of her has dropped.

We’ve been offering a *huge* number of reasons why Democrats are culpable in this mess. It’s difficult – highly difficult in my estimation – to offer anything concerning Republicans that comes close.

Is anyone aware of a list of reasons produced by Democrats of why Republicans are to blame for this crisis? It would be *really* interesting to see that list, wouldn’t it.

I’m waiting for even ONE liberal to offer the item list that describes Republican culpability, or refutes how culpable the Democrats are in triggering this mess.

On the news a conservative legislator said: “In ’05 and ’07 we tried to rein in Fannie and Freddie” -
Charlie Rangel (D-NY) interrupts: “I don’t think we should talk about that.”

Well, Charley, if *that* were an acceptable defense, we’d see it being used in courtrooms across the country.
Prosecutor: “The fingerprints on this knife clearly illustrate that-”
Suspect interrupts, hollers: “I DON’T THINK WE SHOULD TALK ABOUT THAT!”

Not exactly a shining response by Rangel, is it? But at least it’s better than an “Oh Please,” followed by an LOL, and a checkout.
on 05 Oct 2008 at 11:00 am 10Deana

Mike – I love your courtroom example! That is hilarious!

If the Democrats could pin this financial problem on a Republican, they would have been calling for congressional investigations from day one. Has anyone anywhere heard of a single Democrat asking for an investigation?

Anyone?

Hello?

Instead, we are treated to accusations that this is all Republicans’ fault, or, as Pelosi said, “we were dealt a bad hand.”

Who did the dealing??????

Deana
on 05 Oct 2008 at 11:27 am 11BrianE

I know many don’t like it when I copy long pieces, but this article reinforces what Bookworm is saying. And from the international version of the NYT. (emphasis is mine)

International Herald Tribune
How an embrace of risk tripped up Fannie Mae
by Charles Duhigg
October 5, 2008
“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.” – Daniel Mudd, former chief executive of Fannie Mae.
When the mortgage giant Fannie Mae recruited Daniel Mudd, he told a friend he wanted to work for an altruistic business. Already a decorated U.S. Marine and a successful executive, he wanted to be a role model to his four children – just as his father, the television journalist Roger Mudd, had been to him.
Fannie, a government-sponsored company, had long helped Americans get more affordable home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans – expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.
But by the time Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.
So Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the U.S. housing market and the economy.
Dozens of interviews, most with people who requested anonymity to avoid legal repercussions, offered an inside account of the critical juncture when Fannie Mae’s new chief executive took additional risks that pushed his company, and, in turn, a large part of the country’s financial health, to the brink.
From 2005 to 2008, Fannie purchased or guaranteed at least $230 billion in loans to risky borrowers – more than three times as much as in all its earlier years combined, according to company filings and industry data.
“We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Last month, the White House had to orchestrate a $200 billion rescue of Fannie and its corporate cousin, Freddie Mac. On Sept. 26, the companies disclosed that U.S. government prosecutors and the Securities and Exchange Commission were investigating potential accounting and governance problems.
Mudd said during an interview that he responded as best he could given the company’s challenges, and worked to balance risks prudently.
“Fannie Mae faced the danger that the market would pass us by,” he said. “We were afraid that lenders would be selling products we weren’t buying, and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”
When Mudd arrived at Fannie eight years ago, it was the beginning a rapid expansion that, at its peak, had it buying 40 percent of all U.S. mortgages.
Just two decades earlier, Fannie had been on the brink of bankruptcy. But chief executives like Franklin Raines and the chief financial officer J.Timothy Howard built it into a financial juggernaut by aiming to tap new markets.
Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.
So Fannie constructed a vast network of computer programs and mathematical formulas that analyzed its millions of daily transactions and ranked borrowers according to their risk.
Those computer programs seemingly turned Fannie into a divining rod, capable of separating pools of similar-seeming borrowers into safe and risky bets. The riskier the loan, the more Fannie charged to handle it. In theory, those high fees would offset any losses.
With that self-assurance, the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.
All this helped supercharge Fannie’s stock price and rewarded top executives with tens of millions of dollars. Raines received about $90 million from 1998 to 2004, while Howard was paid about $30.8 million, according to regulators. Mudd collected more than $10 million in his first four years at Fannie.
Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”
The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.
From 2001 to 2004, the overall subprime mortgage market – loans to the riskiest borrowers – grew to $540 billion from $160 billion, according to Inside Mortgage Finance, a trade publication. Communities were inundated with billboards and fliers from subprime-loan providers offering to help almost anyone buy a home.Within a few years of Mudd’s arrival, Fannie was the most powerful mortgage company on earth.
Then it began to crumble.
Regulators, incited by the revelation of a wide-ranging accounting fraud at Freddie Mac, began scrutinizing Fannie Mae’s books. In 2004 they accused Fannie of fraudulently concealing expenses to make its profits look bigger.
Howard and Raines resigned. Mudd was quickly promoted to the top spot.
But the company he inherited was becoming a shadow of its former self.
Washington bore down on Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority home buyers.
“When homes are doubling in price in every six years and incomes are increasing by a mere 1 percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, Democrat of Rhode Island, lectured Mudd at a congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”But Fannie Mae’s computer systems were not able to fully analyze many of the risky loans that customers, investors and lawmakers wanted Mudd to buy. Many of them – like balloon-rate mortgages or mortgages that did not require paperwork – were so new that dangerous bets could not be identified, according to company executives.
Even so, Fannie began buying huge numbers of riskier loans.
In one meeting, according to two people present, Mudd told employees to “get aggressive on risk-taking, or get out of the company.”
During the interview, Mudd said he did not recall that conversation and that he always emphasized taking only prudent risks.
Employees, however, say they got a different message.
“Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little,” said a former senior executive at Fannie. “But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”
From 2005 to 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.
For two years, Mudd operated without a permanent chief risk officer to guard against unhealthy hazards. When Enrico Dallavecchia was hired for that position in 2006, he told Mudd that the company should be charging more to handle risky loans.
In the following months, Dallavecchia warned that some markets were becoming overheated and argued that a housing bubble had formed, according to a person with knowledge of the conversations. But many of the warnings were rebuffed.
Mudd told Dallavecchia that the market, shareholders and Congress all thought the companies should be taking more risks, not fewer, according to a person who observed the conversation. “Who am I supposed to fight with first?” Mudd asked.
During the interview, Mudd said he never made those comments.
Dallavecchia was among those whom Mudd pushed out of the company during a reorganization in August.
Mudd added that it was almost impossible during most of his tenure to see trouble on the horizon, because Fannie interacted with lenders rather than borrowers, which created a delay in recognizing market conditions.
He said Fannie sought to balance market demands prudently against internal standards, that executives always sought to avoid unwise risks and that Fannie bought far fewer troublesome loans than many other financial institutions. Mudd said he heeded many warnings from his executives and that Fannie refused to buy many risky loans, regardless of outside pressures.
“You’re dealing with massive amounts of information that flow in over months,” he said. “You almost never have an ‘Oh my God’ moment. Even now, most of the loans we bought are doing fine.”
But, of course, that moment of truth did arrive. In the middle of last year it became clear that millions of borrowers would stop paying their mortgages. For Fannie, this raised the terrifying prospect of paying billions of dollars to honor its guarantees.
on 05 Oct 2008 at 12:38 pm 12Ronald Hayden

JackMayo says:
OK, so it is the democrats calling for too much regulation, and “sensible” republicans calling for “more policing”. So policing and regulating are different?

I understand the potential for confusion, but yes, actually. Think of your corner store…it is regulation to say you can’t go in an rob the store, or is it policing? And if you do rob the store or take actions that make it clear you are about to rob the store, is it regulation or policing for investigators to take you in for questioning?

In the store scenario, the store isn’t told what to sell, whom to sell to, or at what price, and you are not required to shop at that store. Neither you nor the store is being regulated, but you are being policed.

When it comes to Fannie and Freddie, preferably they would be fully private companies and only need the standard policing to make sure no stores are being robbed in the process of doing business, but government would have no say in who they are giving mortgages to at what risk and what price.

But, given that they are quasi-governmental entities, then they should be given appropriate oversight, because they are not private companies in a fully free market — they are shielded from risk and given government mandates. As such, responsible oversight should be applied, given the situation. In this situation, Democrats insisted on mandates (give out more high-risk mortgages) and refused further oversight. The recipe for disaster.

Bottom line: Your hero President and candidate supported the nationalization of toxic debt and interfered with the free-market economy time and again in the bail out of banks, airlines, auto-companies, and more, going against everything many Republicans claim to stand for….sounds like socialism to me……what does your party even represent anymore?

It’s not my party or my President in that sense (though I did vote for him in 2004, on the basis of Iraq). I agree with you that he has been very disappointingly liberal in nature when it comes to financial issues.

Oh yeah, it’s the libertarians, not Republicans who represent the principles of free-markets, keeping taxes at an absolute minimum, keeping government small, and maintaining “non-interventionist” foreign policy.

Good, since I consider myself a libertarian (more accurately, a “libertarian hawk”, if I may say so without getting thrown out).

True free-market economy lovers, will most likely vote for Ron Paul or Bob Barr….

I am a free-market economy lover, and I wouldn’t touch Ron Paul with a 10 foot pole. Don’t know much about Barr, but I decided to expend my time and energy looking into the candidates who have a chance to win this time around.

I’m not sure whether I really want a serious libertarian candidate anyway…our system is not set up to work for a third party, even if they win office. I think (and I’m certainly not set on this), I’m more in the Cato Institute camp of choosing to try and influence the major parties in the libertarian direction rather than create a true third Libertarian party.

Obama is honest about his socialist intentions

No he’s not honest — he constantly talks a moderate pro-market game. He never ever actually votes that way, but much of his appeal to liberals and moderates is that he pretends to be something other than he is on this.

You can’t have your cake and eat it too Republican socialists! You have been exposed!

Okay…I do hope you’ll be willing to engage in non-hyperbolic discussion with people here who do have a nuanced view of things. As other commenters mentioned, it’s possible to be conservative (or libertarian in my case) and support a candidate while being fully aware of their flaws and not, for Zeus’s sake, taking them as some kind of “hero”. Bush is a “hero” to no one in an all-around sense, except for his willingness to stick with Iraq until we could win, in defiance of all around him. McCain is a definite hero in one sense, but no one treats him as an all-around hero — almost everyone supporting him does so with a deep sense of his flaws (unlike most Obama supporters).

It’s the ultimate straw-man to portray conservatives or people supporting Bush or McCain in this manner — it shows a deep misunderstanding of those people.