blamebrampton (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
blamebrampton) wrote2008-10-13 11:54 pm
blamebrampton) wrote2008-10-13 11:54 pm
Entry tags:
Politics alert, with a touch of ranting
I'm a bit crankypants today, which comes partly from having been dealing with students again (ARGH! Why so LAZY?) and partly from being so far behind in my life. So you may want to skip my political ranting.
It will come as no surprise to anyone who has listened to my previous cheer at living in countries with public health care that I am a pinko commie at heart. But many of my dearest friends and a few relatives are conservatives. While I don't agree with private health care, I do believe in a reasonable amount of deregulation and am annoyed at people who live on benefits for no reason (while, at the same time, wanting to protect those who are on benefits for a reason, and yes, I recognise the big grey area in the middle, but can we just boot the obvious freeloaders?)
Anyway, this is all preamble to two things that have really raised my narkometer today.
If you are a Republican in the US, and your Presidential candidate is gracious and gentlemanly, YOU DO NOT FUCKING BOO HIM! You say, "Gee, John, you sound like the guy who was by far the better candidate in the 2000 race before the extreme Rove-Cheneyfication of the GOP and bankruptcy of our nation's economy and political soul. Maybe we should go back to those times?"
Fuckers.
Also, in economic news I have now read the third editorial in a non-loony publication that suggests the reason for the current economic disaster was – essentially – lending money for homes to black folks and Latinos. Bzzzzt! I am sorry, that answer is INCORRECT!
Many commentators have rushed to lay the blame on loan defaulters and declared that the urge to lend money to poor Americans was the source of the problem. Not so.
Enter Moody's, Standard & Poor's and Fitch. These are bond-rating firms. If you've ever had anything recommended to you as a AAA-rated stock, that rating came from one of these firms. Ten years ago, a mortgage came from your bank, and was repaid by you over 10 to 30 years. But around that time, Moody's et al realised that this was an untapped sector of the market. They packaged up thousands of mortgages into securities and then gave them AAA ratings. The banks received their money quickly, which meant they had more money to lend, and which also meant that relaxed their standards for those they were lending to. House prices went up, because there was more money in the marketplace in the form of loans. Because there were loads of mortgages being signed, there was more product to be packaged into securities.
It wasn't just banks, non-bank lenders came in on the act, too, because there was enough money in the market to allow them to package mortgages DESPITE THE FACT THEY HAD NO DEPOSITS TO OFFSET THEIR MORTGAGE RISKS, which was the one thing that had always made bank mortgages a relatively safe prospect.
This is the important bit. Investors INVESTED in these securities because they were given triple-A ratings by Moody's, Standard & Poor's and Fitch. It wasn't a case of investors being stupid, they had every reason to believe that the product they were putting their money into was a good product.
The bond-rating agencies made money hand over fist through this period. The investment banks that sold the products rated by the agencies also made money hand over fist. But at the end of the day, the things that were being represented by those investments were not worth as much as the investors believed they were, and the banks had put a huge percentage of their available funds (remember that almost all of every bank's worth is in its assets rather than in the cash it has on hand, there ARE NO GOLD RESERVES HIDING) out into the market and had far less cash on hand than they needed.
In 2007 the ratings agencies began to downgrade these securities. Investors who had thought they had put their money into something safe and guaranteed found out that it was instead invested in something risky and unguaranteed. They then tried to sell out of these investments while they were still worth something.
Now, sometimes people sell things that have underlying value (like the Australian dollar, which is currently woefully undervalued. Buy up big! And I don't say this solely because I have to buy euros in under three weeks.) When this happens, savvy investors snap up bargains and the value of the thing sold soon returns to something akin to its intrinsic value. The problem with these securities is that their intrinsic value was much less than the investors were led to believe, so the price kept going down, down, down. In the money-happy environment of two years ago, bank and non-bank lenders had been lending sums that were greater than the worth of the properties that secured them.
In April of this year, The New York Times ran an extensive article discussing the problem. It has an excellent breakdown of the ratings agencies' mechanisms for providing a spread of ratings for subprime mortgage packages, which you should read, since I can't explain it very well (it's on page 3).
However, there are two important factors. The first is that the ratings agencies were paid for ratings by the investment banks, so the people who were constructing flawed investments were also paying for their ratings. It was in the agencies' best interests to have as many high-rated securities as possible, because the more money that came into the investment banks, the more money that came into the ratings agencies.
The second is that the volume of trade increased exponentially over the last 10 years. There simply wasn't time for the ratings agencies to stay abreast of the market as a whole. This was most notable in the Enron collapse, and two years ago the SEC identified it as a major problem. Investment banks were aware of the flaws in the system and basically constructed products that, on the surface, met the agencies' criteria for ratings, but which were not fundamentally sound.
It's like students who study enough to pass, but who don't really know their subject (little buggers!). It's bad enough if they are journalism students, but you wouldn't want one as your doctor, or investment banker.
In the end, entire nations such as Iceland were investing in securities that they believed to be high-quality and highly insured, and which turned out to be rubbish. And for that the blame falls squarely on the institutions that packaged those investments and the agencies that rated them.
If these packages had not existed, or if they had been rated as highly risky, the losses would have been restricted to individual banks, or to investors who were prepared to deal with high risk.
Now, you may ask what about the huge market gains of the last 10 years before the crisis hit? And I would make rude hand gestures at you. The market did boom, but it boomed stupidly and the costs were not worth it. We had plenty of substantive growth through the 80s, and 90s and the 'crashes' of those periods were simple market corrections, unlike the current gutting of the international economy.
So the next person you hear saying that it's the fault of the po' black folk – slap them like they were Richard Fuld.
I had something nice to say, I might make a separate post ...
It will come as no surprise to anyone who has listened to my previous cheer at living in countries with public health care that I am a pinko commie at heart. But many of my dearest friends and a few relatives are conservatives. While I don't agree with private health care, I do believe in a reasonable amount of deregulation and am annoyed at people who live on benefits for no reason (while, at the same time, wanting to protect those who are on benefits for a reason, and yes, I recognise the big grey area in the middle, but can we just boot the obvious freeloaders?)
Anyway, this is all preamble to two things that have really raised my narkometer today.
If you are a Republican in the US, and your Presidential candidate is gracious and gentlemanly, YOU DO NOT FUCKING BOO HIM! You say, "Gee, John, you sound like the guy who was by far the better candidate in the 2000 race before the extreme Rove-Cheneyfication of the GOP and bankruptcy of our nation's economy and political soul. Maybe we should go back to those times?"
Fuckers.
Also, in economic news I have now read the third editorial in a non-loony publication that suggests the reason for the current economic disaster was – essentially – lending money for homes to black folks and Latinos. Bzzzzt! I am sorry, that answer is INCORRECT!
Many commentators have rushed to lay the blame on loan defaulters and declared that the urge to lend money to poor Americans was the source of the problem. Not so.
Enter Moody's, Standard & Poor's and Fitch. These are bond-rating firms. If you've ever had anything recommended to you as a AAA-rated stock, that rating came from one of these firms. Ten years ago, a mortgage came from your bank, and was repaid by you over 10 to 30 years. But around that time, Moody's et al realised that this was an untapped sector of the market. They packaged up thousands of mortgages into securities and then gave them AAA ratings. The banks received their money quickly, which meant they had more money to lend, and which also meant that relaxed their standards for those they were lending to. House prices went up, because there was more money in the marketplace in the form of loans. Because there were loads of mortgages being signed, there was more product to be packaged into securities.
It wasn't just banks, non-bank lenders came in on the act, too, because there was enough money in the market to allow them to package mortgages DESPITE THE FACT THEY HAD NO DEPOSITS TO OFFSET THEIR MORTGAGE RISKS, which was the one thing that had always made bank mortgages a relatively safe prospect.
This is the important bit. Investors INVESTED in these securities because they were given triple-A ratings by Moody's, Standard & Poor's and Fitch. It wasn't a case of investors being stupid, they had every reason to believe that the product they were putting their money into was a good product.
The bond-rating agencies made money hand over fist through this period. The investment banks that sold the products rated by the agencies also made money hand over fist. But at the end of the day, the things that were being represented by those investments were not worth as much as the investors believed they were, and the banks had put a huge percentage of their available funds (remember that almost all of every bank's worth is in its assets rather than in the cash it has on hand, there ARE NO GOLD RESERVES HIDING) out into the market and had far less cash on hand than they needed.
In 2007 the ratings agencies began to downgrade these securities. Investors who had thought they had put their money into something safe and guaranteed found out that it was instead invested in something risky and unguaranteed. They then tried to sell out of these investments while they were still worth something.
Now, sometimes people sell things that have underlying value (like the Australian dollar, which is currently woefully undervalued. Buy up big! And I don't say this solely because I have to buy euros in under three weeks.) When this happens, savvy investors snap up bargains and the value of the thing sold soon returns to something akin to its intrinsic value. The problem with these securities is that their intrinsic value was much less than the investors were led to believe, so the price kept going down, down, down. In the money-happy environment of two years ago, bank and non-bank lenders had been lending sums that were greater than the worth of the properties that secured them.
In April of this year, The New York Times ran an extensive article discussing the problem. It has an excellent breakdown of the ratings agencies' mechanisms for providing a spread of ratings for subprime mortgage packages, which you should read, since I can't explain it very well (it's on page 3).
However, there are two important factors. The first is that the ratings agencies were paid for ratings by the investment banks, so the people who were constructing flawed investments were also paying for their ratings. It was in the agencies' best interests to have as many high-rated securities as possible, because the more money that came into the investment banks, the more money that came into the ratings agencies.
The second is that the volume of trade increased exponentially over the last 10 years. There simply wasn't time for the ratings agencies to stay abreast of the market as a whole. This was most notable in the Enron collapse, and two years ago the SEC identified it as a major problem. Investment banks were aware of the flaws in the system and basically constructed products that, on the surface, met the agencies' criteria for ratings, but which were not fundamentally sound.
It's like students who study enough to pass, but who don't really know their subject (little buggers!). It's bad enough if they are journalism students, but you wouldn't want one as your doctor, or investment banker.
In the end, entire nations such as Iceland were investing in securities that they believed to be high-quality and highly insured, and which turned out to be rubbish. And for that the blame falls squarely on the institutions that packaged those investments and the agencies that rated them.
If these packages had not existed, or if they had been rated as highly risky, the losses would have been restricted to individual banks, or to investors who were prepared to deal with high risk.
Now, you may ask what about the huge market gains of the last 10 years before the crisis hit? And I would make rude hand gestures at you. The market did boom, but it boomed stupidly and the costs were not worth it. We had plenty of substantive growth through the 80s, and 90s and the 'crashes' of those periods were simple market corrections, unlike the current gutting of the international economy.
So the next person you hear saying that it's the fault of the po' black folk – slap them like they were Richard Fuld.
I had something nice to say, I might make a separate post ...
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:)
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Any head-shaking?
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only you could make me spit out my coffee over predator lending. but in all seriousness, it's one of the reasons why i'm NOT a homeowner (yet). my credit is slightly tarnished due to my identity being stolen as a child, yet i've still been offerend home loans and whatnot. i just laughed in their faces.
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And yes, I thought you'd enjoy that. When it was the loony fringe I was prepared to ignore it, but I have seen sanitised versions of the same sentiment in the mainstream press now, and it's Just Not On!
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because lenders and banks are honest people who only care about their customers! /horrible attempt at sarcasm.
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Our banks have been fairly level-headed compared to many (and I point happily to our policy of some state control of banks), but I still think we're going to see a big reduction on the housing market here as well. Which would be good for me personally, since flats like the one I showed you the other day will no longer cost three fucking million NOK, but it'll suck hairy monkey balls for a lot of people. I'm wavering between sticking to my my ingrained social democratic conscience and tending towards the selfish on this one. :/
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A slide in house prices is the one upside for people like you and me. I have not been able to buy into Sydney since I first arrived and decided not to, three years later when I thought it was a good idea, the market had skyrocketed. I think I would like solid economies AND affordable housing, thanks:-)
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I do actually own my flat, but I was lucky enough to buy at a time when prices were saner, and also I didn't go crazy and upgrade to one I can't really afford when loans were so easy to get. So I can live with getting less for mine because it'll probably still be more than I owe on it, and the next step up will be smaller. But still, a solid economy would be preferable. :)
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Your way of managing things is the sane way, if only you were an American banker!
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I realise I have no idea at all how expensive housing in Sydney is - what would you pay for, say, 70 m2 and two bedrooms if you were to buy now?
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Better to have some extra cash to spend on gloves! And shoes! YAY!
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In Germany, the same argument is made for loans made to the "new Bundesländer" (the former GDR). Obviously, big business has a pretty tight grip on the media.
Refreshing, your rants!
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That said, there are an awful lot of journos who just aren't trying!
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My husband's no accountant, but he does do taxes for me (yay!).
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I continue liking boring cardigan-wearing politicians like Kevin Rudd with their moderate regulatory policies.
Sadly, I cannot wholly agree with your strictures (1)
As I have noted elsewhere, the coincidence of (firstly) the quango-isation of Fannie and Freddie (with the consequent investiture of the two quangos with the aura of governmental backing and authority) with (secondly) the governmental insistence upon the relaxation of mortgage requirements, was the first step on this road to Avernus on which we now find ourselves. The ratings given to SFCDOs and similar securitised obligations, like their valuation in money, were, it now appears, inflated, but that inflation is due in no small measure to the anomalous position of Fannie and Freddie, which appeared to be and were presumed to be acting as effective agents of the Treasury in making subprime loans (here used to include all non-A mortgages, including perfectly creditworthy Alt-A obligations). As one example amongst many of the way in this market deformation muddled the ratings, the size and quango-ification of Fannie and Freddie made ‘counterparty risk’ assessments go wildly astray: a direct and proximate caus of the rating errors of which you complain. You have begun your analysis, that is to say, with the second step.
The problem of subprime lending is that, in part as a response to a perceived problem of ‘red-lining’ – which remedy was persisted in even once it was found that there was no significant problem of red-lining – and in part for ideological-cum-’pork’ reasons, government pressure was exerted upon the market to encourage the purchase of homes by buyers who were not able to put down a significant equity stake from the starter’s gun forward. This is not a problem of racialism or of a response to racialism, this is not even a problem of creditworthiness per se, it is a classic problem of undercapitalisation.
Re: Sadly, I cannot wholly agree with your strictures (2)
Claims are not goods; they are means of obtaining disposal over goods. This determines their whole nature and economic significance. They themselves are not valued directly, but indirectly; their value is derived from that of the economic goods to which they refer. Two elements are involved in the valuation of a claim: first, the value of the goods to whose possession it gives a right; and, second, the greater or less probability that possession of the goods in question will actually be obtained. Furthermore, if the claim is to come into force only after a period of time, then consideration of this circumstance will constitute a third factor in its valuation. The value on January 1 of a right to receive ten sacks of coal on December 31 of the same year will be based not directly on the value of ten sacks of coal, but on the value of ten sacks of coal to be delivered in a year’s time. This sort of calculation is a matter of common experience, as also is the fact that in reckoning the value of claims their soundness or security is taken into account.
Claims to money are, of course, no exception. Those which are payable on demand, if there is no doubt about their soundness and no expense connected with their settlement, are valued just as highly as cash and tendered and accepted in the same way as money. Only claims of this sort—that is, claims that are payable on demand, absolutely safe as far as human foresight goes, and perfectly liquid in the legal sense—are for business purposes exact substitutes for the money to which they refer. Other claims, of course, such as notes issued by banks of doubtful credit or bills that are not yet mature, also enter into financial transactions and may just as well be employed as general media of exchange. This, according to our terminology, means that they are money. But then they are valued independently; they are reckoned equivalent neither to the sums of money to which they refer nor even to the worth of the rights that they embody.
Blame the bankers all you like; they’ve blame to accept. But the foregoing is why, when this mess is examined coolly, the fingerprints on the weapon will be found to be those of Acorn, Messrs Johnson and Raines, Senators Dodd and Obama, and Congressman Frank above all others. The Americans – the Congress in particular – ought really to have listened some years ago to Senator McCain.
Re: Sadly, I cannot wholly agree with your strictures (2)
Secondly, McCain is an idiot on economics. He said he'd like to see interest rates at 0%. Should Congress have listened? Should Congress listen now to his "bold plan" to nationalize the mortgage industry by buying up all of the bad loans? What Would Mises Do? Why should Congress have "listened to McCain" and on what? Listen to one central planner instead of the other central planner on the 0.01% on which they disagree?
You seem to being saying that Dodd, Obama, Frank, and ACORN are on one side while McCain is on the other. However, they're all pro-Fed. There is no difference between the Republicans and Democrats when it comes to the Federal Reserve.
I disagree to some extent with Blamebrampton's argument, because the START of the problem comes before the bond raters. It begins with the cycle of money creation and credit creation, and the fact that that is a bad thing is the crux of the Austrian theory of the business cycle. The Fed and it's management are to blame. S&P, Moody's, and Fitch exacerbated the problem, no doubt, but the ROOT cause is, as Brammers also mentioned, the fact that we have NOTHING backing our money - no gold, no silver, no nothing - and the Federal Reserve continues to print money without any care for inflation.
Ludwig would NOT approve.
Not, I think, hypocritical as such. Pragmatic.
But given that we have fiat money - in all economies - and central banks - also in all economies - the question is rather, Why this, why now? Why, that is to say, has this particular crisis come now in just this way?
And I think that there at least, Coase, Tullock, Hayek, Hutt, von Mises, and Friedman would agree (and Arnold Kling has been saying this as well, I understand) that we are dealing in the immediate term with undercapitalisation, rent-seeking, and regulatory capture in its extreme form (as I suggested here:
http://wemyss.livejournal.com/143562.html#cutid1).
And to that point only, I am suggesting that John McCain and other Republicans and a few Democrats were dead on two years ago when they sought to reign in Fannie and Freddie (and Countrywide and the Friends of Angelo and other actors), and were not only blocked in the effort, but derided by Mr Frank and others who explicitly stated that Fannie and Freddie were sound and the effective monetisation of SFCDOs was secure and a Good Thing.
I hold no brief for Mr McCain as an economist: he is neither an Austrian nor a Virginian nor a Chicagoan, in that sense. But I am still more doubtful of Mr Obama and his friends, who are not only complicit in the immediate causes of the current crisis, but whose instincts, up to and including a reflexive protectionism, seem poised, were Mr Obama to be elected, to recreate every error made in what Friedman aptly called, and cogently analysed as, the 'Great Contraction'.
ETA: What's so funny abt this is, I had just read yr 'Muffin' story on Skyehawke and thought, Now, here is a writer I must make note of. Snap!
Re: Sadly, I cannot wholly agree with your strictures (2)
Why do you never ask the difficult questions on gardening or textiles?
I am still trying to understand the whole picture. However, in the interim ...
Fannie Mae was converted to a stockholder-owned agency in 1968. For most of that 40 years things were fine. The relaxation of government standards for mortgage requirements that you speak of was hardly contemporary, Clinton first softened standards in 1999, 31 years later.
While the average American may have believed that Fannie Mae and Freddie Mac were government-backed, the same average American believes that Creationism is a science and cannot tell you where your spleen is. But to suggest that the average banker believed this is akin to suggesting that Creationism is taught at MIT and that the world-leading surgeons at the Johns Hopkins cannot tell you where your organs are located.
Now, that 1999 reduction in standards. On the one hand, I am all for home ownership and many stockholders were also in support of the decision due to the fact that it represented higher profits. It did increase the amount money and assets in the community and was a deregulatory move that, of itself, wasn't disastrous, especially when the anti-predatory lending rules of 2000 were put in place.
The private lending sector (NOT backed by either of the FMs) aggressively marketed to people who were not able to meet the reduced standards of Fannie Mae, mortgages aggressively sold (I feel that predatorily sold is not too strong a description) in this market were STILL swept up into securities and the risk onsold as soon as was humanly possible from the original lender.
So, as far as I can tell, and I freely admit that I am still working this all out step by laborious step, the sequence of events went something along the lines of the following:
1. Fannie Mae and Freddie Mac allowed lending to mortgagees with lower standards of credentials than had been allowed in the past.
2. They made, overall, a large profit and were seen as very attractive to shareholders.
3. Other participants in the market took advantage of the removal of regulation in 1999 and, more radically, in 2004 to sell mortgages to customers that were even less equipped to pay.
4. This increased activity in the market drove up house prices, requiring borrowers take larger mortgages, whether they be at the 'good' end of the subprime market, or the 'bad' end.
5. The other participants in the mortgage market sold their risk on and the investment banks who bought that risk packaged it in ways that concealed the genuine levels of risk.
6. The new participants mentioned in point 3 were driven by the investment firms mentioned in 5.
7. While the collapse of the subprime market alone would have (and did) see Fannie Mae and Freddie Mac (as well as a number of other mortgage lending institutions) take substantial hits, these hits were due to the fact that lending and depositing banks have tiny sums of actual capital and massive amounts of assets. At the end of the day, these banks still *owned* things, which meant that government bailouts of them were buying *things*, in this case mortgages and property.
8. The investment banks trading in complex products constructed from the mortgage-backed securities on the other hand, were playing with *not-things*. When they suddenly had no money, they had nothing else to take its place.
I readily accept that my understanding could still be flawed, I am not an economist. But, to my mind, saying that they were all misled by the fact that Fannie Mae and Freddie Mac weren't really government-backed is to say that the people who were running those investment banks were all stupid.
I don't think that can be true. I think they were fully aware of the risks they were running and just expected to keep getting away with them.
And I do fully agree that undercapitalisation is at the root of the problem, I just see the point at which things spiralled from acceptable risk to ludicrous greed as being a separate point.
I'll keep going with this, but it will take me some time, as I REALLY need to learn Italian now!
Re: Sadly, I cannot wholly agree with your strictures (1)
Americans, God bless them.
I do maintain however that by the time, at the latest, of the Clinton-era emendations to the CRA, the encouragement by regulatory fiat of subprime lending was by then a solution to a largely vanished problem, undertaken for its perceived political and profitable (rent-seeking) benefits rather than as a utile instrument of policy.
Re: Americans, God bless them.
I'd probably have to see a whole lot of mapping before I'd take "largely vanished problem", though we might be talking about effects of that 40 year policy vs. the policy still being in effect.
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And doubters out there need only talk to bank tellers. Anyone who is a bank teller (or is related to one) can tell you that a few years ago, the job changed dramatically. It was no longer about providing friendly service to depositors, encouraging people to open savings accounts, checking accounts. Instead it became a stressful, pressured-filled trial of a job that was suddenly about selling loans to anyone and everyone that walked in the door. Qualified or not.
In fact, at one particular bank (possibly others that I am unfamiliar with) they created a new sort of product. One in which the lendee was able to decide how much they paid a month. Sounds great right? Except that the lendees, largely, chose the lower payment, as expected by the lender, only to find as time went on, that their payments were only barely touching the interest, not only leaving the principal untouched but accumulating more interest. Nice, huh?
This is how default happens, bank executives, when people owe more than the thing they're funding is worth.
My sister works at such a place, and about 2 months ago, in a big head-scratching 'Uh-oh!' moment of realization, the powers that be ordered them to stop making loans altogether.
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No matter which side people are on when it comes to the recent "bailout," they should realize that the $700 billion is being pulled out of thin air. The only argument is where to put this phantom money. If it hadn't have gone to the stock market, it would have gone somewhere else. There is no caution exercised when it comes to printing money. And people wonder why the economy is in crisis???
*sigh*
But yeah, "Blame it on the Blacks" is a popular argument for assholes everywhere. THAT needs to change.
I do love the issues you bring up. You should get some kind of medal for making-people-think-ism. :p
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*hugs*
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Btw, this line:
WIN!
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You can steal my economics research if I can look at your son's photos when I need a dose of cute and listen to you talk when I need a dose of practical psychology, that seems a fair trade!
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