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The New Normal
December 5, 2009 | 2 comments
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The Conservatives’ Big Mistake
October 3, 2009 | 4 comments
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Obama’s Rock Is Not Capitalism
June 6, 2009 | 1 comment
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Demand and Supply
April 21, 2009 | 25 comments
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Unemployment and Stimulus
February 6, 2009 | 90 comments
Economics
Who Do You Really Believe?
The real story of the financial panic of 2008 is worlds apart from the conventional wisdon.
What a weird world we live in. The leading business pundits (in print, television, and the blogosphere) have convinced themselves, along with many investors, that professional doomsayers, Meredith Whitney and Nouriel Roubini, know more about banking than the CEOs of Goldman Sachs, Bank of America, Citigroup, and JP Morgan — Lloyd Blankfein, Brian Moynihan, Vikram Pandit, and Jamie Dimon — combined.
Ever since the financial panic of 2008, when analysts like Whitney and Roubini earned kudos for predicting economic mayhem, they have been treated like all-knowing royalty. Many investors have lost faith in common sense and have begun to believe anything these analysts tell them. For example, when Whitney told 60 Minutes that municipal bonds would default in record numbers, the market crashed almost overnight. She has been wrong and the muni-market has recovered. Roubini’s pessimistic pronouncements regularly make major headlines, scaring retail investors out of stocks at exactly the wrong time.
This is not personal. There is nothing wrong with Whitney and Roubini. Whitney is a stock analyst. She just started her own company. Roubini has had a career in academics and government. They seem to be intelligent and diligent. They certainly are telegenic and articulate, and have a great sense of marketing. But to argue that they know more about banking than Blankfein, Moynihan, Pandit, and Dimon — a group with more than a century of combined banking experience — seems awfully far-fetched.
So, why do so many people believe it? The answer is that the conventional wisdom has built a narrative of the 2007–2009 financial crisis that deifies shortsellers, puts halos on the analysts who apparently predicted it, gives government a free pass, and belittles Wall Street and capitalism. This narrative has sent roots so deep that many free-market types, even some conservatives, believe it despite the fact that it gives comfort and aid to interventionists and statists.
They believe that greedy, evil, shortsighted bankers jammed unpayable mortgages down unsuspecting homebuyers’ throats, packaged up this toxic waste and then sold it to other stupid and greedy bankers. Wall Street created such a mess that the economy was almost incinerated. And it would have been if government had not stepped in just in time, with TARP, Quantitative Easing, stimulus, and dozens of other government programs.
Whitney and Roubini, along with a few others, are credited with sniffing this crisis out before it happened. The fact that Roubini had been predicting recession for years (after Katrina, for example) does not seem to matter. Because things got so bad and so scary, anyone who got it right is credited with wisdom and knowledge beyond actual human abilities. And, of course, because the bankers caused it all, they cannot be believed. The narrative says the analysts, economists, and short-sellers who profited from or predicted the crisis know more about banking than the bankers themselves.
But this belies common sense. The leaders listed above, their boards, and their key employees are not in business to rip people off, nor do they play dice with their businesses. They obviously take risks (in the sense that business and life are risky), and they are clearly competitive people who want to beat the opposition. They may make some people mad, they have made some bad decisions, and they are not above using their government connections to cut a good deal. In fact, they went along for the ride in the mortgage fiasco, hoping to jump before it all crashed, when they probably should have known better. But analysts who act like they know more than these bankers, and the journalists who put them on thrones, are not being honest with themselves. Analysts are smart and can sometimes see things that managers cannot. But, when MeredithWhitney says “zombie banks” and Jamie Dimon says “that’s not true,” who are you going to believe? The answer depends on what narrative you listen to. The conventional wisdom says to listen to Whitney because she got it right once. History and common sense say listen to Dimon.
THE REAL STORY about the financial panic of 2008, the one that explains what really happened, is totally different from the conventional wisdom. This better narrative blames government and regulation for the crisis, not capitalism.
Politicians on both sides of the aisle created Fannie Mae and Freddie Mac, and then pushed the Community Reinvestment Act — a regulation that forced banks to make low-income loans. Combined, these institutions and regulations caused lenders to absorb the risk of smaller down payments and lower credit scores. Subprime loans, and therefore risks, proliferated. Peter Wallison has argued these points effectively in these pages and in the Wall Street Journal.
In addition, Alan Greenspan held interest rates at absurdly low levels in the early 2000s (1 percent in 2003-2004). This encouraged people to take more risk and borrow more money than they would have if interest rates had been held at normal levels. Once this low rate regime ended, the spigot of new loans was turned off, the bubble began to burst, and losses began to proliferate. In other words, the bubble was not caused by greedy bankers, but by politicians and Fed officials who intentionally over-stimulated the housing market. This could not last, and it didn’t.
The bursting of this bubble did not have to threaten the entire economy. Total losses, when the dust finally settles, will probably be near $400 billion. In a $15 trillion economy, this is too small to cause a Depression. Yet, losses ballooned into the trillions because of a little understood accounting rule that was put in place in November 2007 — “mark-to-market accounting.” According to Milton Friedman, mark-to-market accounting was a key reason so many banks failed in the Great Depression. In 1938, after studying its negative impact, even FDR stopped its use. But it came back from the dead.
In 2008, as markets froze and became illiquid, the value of mortgage-backed securities tumbled to pennies on the dollar. Mark-to-market accounting forced banks to mark down the value of this debt to prices well below its true worth. Even though there were no actual trades at these rock-bottom prices, the accounting rule, enforced by the Financial Accounting Standards Board (FASB), caused markdowns, capital impairment, and bankruptcy.
It is widely understood that mark-to-market accounting is pro-cyclical — it makes the good times look better than they really are and the bad times worse. And as long as this accounting rule was in place, and as long as a vicious downward spiral of markdowns, capital impairment, bankruptcies, frozen credit, and economic pain were occurring, banks could not secure financing and bank runs became a real threat.
Lehman Brothers, Bear Stearns, AIG, Wachovia, and Washington Mutual all succumbed to this downward spiral. But, without mark-to-market accounting, they probably would have all survived. AIG was berated for its Credit Default Swap business, but looking back, the portfolio that it held has actually made money, not lost hundreds of billions of dollars as many analysts said it would.
In other words, Whitney and Roubini (and a few others) were right about the economy, but only because mark-to-market accounting created a downward spiral that could not be stopped. The proof is in the pudding, as they say. The market bottom in the stock market coincides perfectly with the announcement of a hearing by Barney Frank’s committee in the House of Representatives. The hearing took place on March 12, 2009, but was announced in the days preceding this date. Even though FASB did not officially change mark-to-market accounting rules until April 2, 2009, the panic and recession ended when markets knew that this mayhem-causing rule would be changed.
Bill Hussein O'Stalin| 10.18.11 @ 6:27AM
A lot of what you write is accurate.
But there are other systemic problems which hold the economy back.
The federal government is becoming the pinwheel of central economic planning and it's not all about finances.
Gender and racial preferences, the refusal to enforce immigration laws and the abstinence of belief in the free markets by both parties has taken us to where we are today.
It is highly unlikely the fools inside the beltway will come up with any cognizant plans to propel the economy onward and upward.
The fact that everything hinges on the Supercomittee shows that Washington, D.C. INC. has not learned their lesson yet.
The U.S. Congress sits deadlocked and I think that by Spring of 2012 you will see real fear as unemployment continues to rise. Nothing will be done and a new phrase will be coined.
"The only thing we have to fear is government itself." Yeah, I know. Reagan already said it.
Apparently, no one listened.
Jim Mulcahy| 10.18.11 @ 6:31AM
I agree with Mr. Westbury for the most part. He leaves out, though, the impact of SarBox on management in dealing with the effects of mark-to-market accounting (something I railed against in 2008 in these very pages). Also, the conventional wisdom is that Greenspan held rates low because they were low. however, the long end of the rate curve didn't rise which it would have if people thought there were excessive stimulus by the Fed that would be translated into inflation. What the "right" rate was I don't know but I'm sceptical of the view that they just had to be too low.
Donna| 10.18.11 @ 6:53AM
"The proof is in the pudding, as they say."
You need an editor. What "they" say is that "the proof of the pudding is in the eating.."
Trinacria| 10.18.11 @ 10:35AM
You need a life.
Dave| 10.19.11 @ 3:03PM
I'm sure Donna has a life to go with her awareness of the correctness of the all too often mangled truism. It's possible but uncommon to have both, alas.
Appleby| 10.18.11 @ 11:32AM
Oh, and it's "Whom" do you believe.
DTOM| 10.18.11 @ 1:01PM
Sheesh. I can't find where somebody wrote "who you believe." But if that was the phrase, it was correct. "Who" is the nominative case, the case appropriate for the subject of a sentence or clause.
"Whom" is the objective case which makes it appropriate as the direct or indirect object of a verb, or as the object of a preposition.
So "who you believe" is correct. So is "whodunit." Except for maybe the spelling part.
Many fail to use the objective case of who, which is "whom." Frinstance: "He did it to who?" which causes others to insert, mentally or out loud, the missing "m" to make it "whom." This happens so often that some just get in the habit of sticking in the superfluous "m" reflexively.
The exact same thing has happened to the word "I." It sounds far classier to say, "between you and I" but it is also incorrect. The objective case of "I" is "me." So it is supposed to be "between you and ME!"
Ted| 10.18.11 @ 3:25PM
The economy is in the hole... The country is broke... The President is spending our tax dollars on his PR/re-election campaign... And here at TAS, we quibble about grammar. At least we will sound educated in the soup and bread lines.
MikeBee| 10.18.11 @ 5:33PM
DTOM,
Almost there. Three questions need to be asked, to determine correct usage:
1) Change the tense of the sentence to past tense. When you do, which word changed? That is the verb. "Who you believed." Believe is the verb, as it changed when you changed the tense.
2) Ask who or what "believe?" The answer is "You believe." "You" is the Subject of the sentence, needing the nominative case, "You." This one's correct.
3) Ask, "You believe" what or whom? The answer is the remaining word, "Who." This is the Object of the sentence, and should be in objective case. Therefore, what is correct is: Whom you believe.
Occam's Tool| 10.18.11 @ 9:09PM
No, ma'am, it's "who" do you believe. The way I always check is to see if I can replace the phrase with "to whom."
Tony in Central PA| 10.18.11 @ 8:38PM
Looks like this comment has initiated a " viscous downward spiral ". Whatever that is.
Occam's Tool| 10.18.11 @ 9:10PM
Kind of a syrupy mess flowing downward?
POST American| 10.18.11 @ 7:02AM
---Just as the REAL history of the
20th century is miles away from
CON-ventional reporting.
Time to shed the bennies, and drop
the wreck-dom worship.
The very inception of the FED was criminal.
Admit it.
The US dollar has lost 96% of its value since
1913. The income tax was its ground zero
compliment. The Great Depression was,
ON RECORD, orchestrated by it. It's involvement
with installing, funding and enabing VAST
Bolshevik, Soviet and Stalinist genocide is
now a matter of record.
"The Federal Reserve has pumped
so many BILLIONS of dollars into
(Nazi) Germany that they dare not name the total."
-REP. Chares McFadden
1935
(ie -DURING our depression)
Need we say more---?
AND NOW
The FED's role in underwriting and enabling
the 'RED China Miracle' is common knowledge.
The American takedown is the wrap up.
There we have it--
Debt serf plantation, wrapped in scuzzy,
God hating, Masonic pontifications, feuled
by psychopathic Darwinist USURY and
TREASONOUSLY pursuing agendas of
world CON--solidation along with cultural,
moral and actual GENOCIDE --er, we meant
EUGENICS --uh, that was 'BIO-ETHICS'
--ump, we meant 'SMART Living'.
Time to cast aside the programming and intimidation and prosecute these monsters.
-------------HUAC meets NUREMBERG--------------
"Daddy, where were you during
the Globalist RED China sellout and TREASON
OP? ---WHY didn't you do anything?
-----WHY do we have to eat this icky plastic
food? ---with chopsticks? ----in this camp?"
Find your nerve America-------------------------------
----------------IN THE NAME OF GOD----------------
-----------------FIND YOUR NERVE-------------------
Tim the Enchanter| 10.18.11 @ 11:14AM
Huh?
Bill| 10.18.11 @ 12:04PM
HUAC meets NUREMBURG.
Cool. Who won?
Dan Mathewson| 10.18.11 @ 11:27PM
HUAC won. It was a two out of three pinfalls/submission match. The first round went to NUREMBURG. The next round went to HUAC for a submission. In the final round the ref. was distracted by HUAC's manager, the FED. HUAC hit NUREMBERG with a steel chair and won by pinfall.
Choey| 10.18.11 @ 12:37PM
Ooh look! A chemtrail!!!
Solo| 10.18.11 @ 7:05AM
Bill Hussein O'Stalin wrote:
"The federal government is becoming the pinwheel of central economic planning and it's not all about finances.".
Exactly! The 'invisible hand' within the free market is a fickle beast under the best of circumstances. The things which influence its direction are most often subtle with long time frames between stimuli and reaction. Therefore, "cause and effect" are not always immediately obvious.
With government taking on an ever increasing level of influence within the economy, picking winners and losers, directing research and development in one direction or another, mandating one light bulb over another, or water saving toilets, or energy efficient appliances, or gas mileage mandates etc....etc...etc..--its influence and distortion of the economy increases in step.
Between the low treasury yields, Mark
To Market write-down requirements and the Community Re-investment Act--the housing bubble, bad loans and bad banking regulation combined to make a ticking time-bomb that eventually went off.
It was a "Perfect Storm" of folly by government intervention within the market place--not the so-called "greedy bankers".
And...every attempt to fix the problem by repeating the same mistake (government intervention within the economy) has only delayed our recovery.
Wayne| 10.18.11 @ 7:11AM
What is obvious to me is that Bush was asleep at the switch, clueless to the machinations of Hank Paulsen, who Bush should have fired. We have Bush going against Capitalism to save Capitalism, a nonsensical statement that could have come from Wonderland or Oz. It insured Obama's win and gave the Democrats a free pass to use the US treasury as a means to reward the cronies, and put a few billion in their own pockets. The GOP needs to separate itself from Bush, Tarp, Cronyism and the Democrats, less we again march further down the path of Marxism.
Solo| 10.18.11 @ 2:39PM
I'm not going to defend the Bush administration for their domestic policy but.....
It is important to remember that the Bush Administration attempted to audit Fannie Mae and Freddie Mac no less than 11 times in 8 years.
All efforts blocked in committee by democrats.
Just sayin'.
This is the democrats baby (quisling) from day one. Make no mistake!
WM| 10.18.11 @ 6:28PM
Actually, mark-to-market was the baby responsible for the financial crisis, and it was birthed in notional form by Richard Breeden, who served in the very conservative Republican administration of Ronald Reagan and who was Republican George H.W. Bush's SEC chairman.
Greenspan and a couple of other big names dropped warning letters about mark-to-market in the early '90s, and Clinton wouldn't touch it with a 10-foot pole. It took a clown like Bush II to boldly debut an idea this bad.
The Democrats' hands are clean of this. This is another instance of Republicans shooting themselves and the free market in the foot, which is why quality control in our candidates is so important. It's why politicians like Paul Ryan scare the hell out of me. We don't need people in office who are too clever by half with new ideas on how to tweak the market to improve performance.
Dave| 10.19.11 @ 3:06PM
Congress in '07 passed this, did it not? Who was the majority party in Congress (and the Senate) in '07?
A majority who pretty much steamrolled a war-weakened Bush in '07, it must be stated.
Vern Crisler | 10.18.11 @ 8:13AM
Anyone remember that the Democrats took over Congress about a year before the recession? When they took charge it was supposed to be the return of paradise after 8 years of hellish Republican rule. Cause, effect? I'd say the recession was the economy's revenge against stupid voters for giving Democrats control of the economy.
JimH| 10.18.11 @ 8:34AM
'The fact that Roubini had been predicting recession for years ..' - Well if you keep saying it long enough you will be right eventually.
Sam Vaughn| 10.18.11 @ 8:49AM
A neighbor way back in 2005, told me one day that they were leveraged to the hilt, "everybody" does it. There were more million dollar neighborhoods being built than there could possibly be people making that kind of money. Common sense observation? US GDP growth was dramatically separated from the mean trend line, fueled by debt, which was directly obervable by the untrained eye (mine). I sold my house downsized and waited for the bubble to burst, it did. We can argue about the why, but common sense, which unfortunately is uncommon, told many of us exactly what would happen.
ncatty| 10.18.11 @ 9:59AM
Correct.
Maddox| 10.18.11 @ 12:59PM
Yes. I'm no financial genius, but being in the home building business, I saw the problem as it developed. Add government meddling by overspending in ways that hurt rather than help, and common sense tell you it won't come out well in the end.
Municipal bonds may have made a short recovery but that is because many municipalities received TARP fund to keep them afloat.
Occam's Tool| 10.18.11 @ 9:11PM
My house has actually APPRECIATED (ever so slightly) in value.
JA| 10.18.11 @ 9:23AM
Yes, it was the govt - AGAIN ! - thru its criminally negligent policies that caused the economic mess. But let's be very clear, the Wall Street banks KNEW that that the CMOs and other mortage derivatives they were selling were garbage, a fraud, junk.
Wall Street is full of Harvard, Yale, Wharton, MIT, Columbia finance / math / science grads (what the F^^K do they teach them at these schools ??) and they had a CHOICE; they could have chosen not to create, market and sell this garbage. But they chose othewise.
Frankly, a bunch of govt. and congressional folks should be imprisoned - for life - for what they did. But Wall Street CHOSE to participate in this massive fraud, and a bunch of them should also be in jail.
Thomas| 10.18.11 @ 10:08AM
Of course the Wall Street banks knew that the mortgage derivatives were junk. But, they were stuck with potentially toxic loans, many of which were made under requirements of the Community Re-Investment Act. And, they had to deal with Mark-To-Market rules. What were they supposed to do? The reality is, that under the Clinton Administration, these lending institutions had NO real choice. It was either toe the government line or close their doors. They did what they had to do to survive.
DRed| 10.18.11 @ 10:47AM
Bullshit. First of all, wall street doesn't make housing loans. So I have no idea how you think they were stuck with them. In any event, the CRA was passed over 3 decades ago. CRA loans were a small percentage of the total subprime market (roughly 5% of subprime loans had any connection to the CRA) and those loans and defaulted at a significantly lower rate. Claiming the CRA had any real role in the mortgage crisis is completely unsupported by facts. I know it's fun to blame things on the poors, but unless you've got some evidence that I haven't seen it looks like you're just engaging in some faith based analysis here.
skip| 10.18.11 @ 11:35AM
The same emotional prattle devoid of any reason and experience over, and over, and over, and over, and over, and over.
Either you are employed by an organization such as moveon.org, you are willfully ignorant, or both.
"Claiming the CRA had any real role in the mortgage crisis is completely unsupported by facts."
This has been your mantra almost as pathetically and despicably as your claim we've all read here, over, and over, and over, and over, and over, and over that the top 1% don't pay their fair share of taxes, when they pay more than the bottom 95% combined.
Idiot.
DRed| 10.18.11 @ 12:03PM
Hey skip! Been a long time. I notice you haven't managed to marshal a single piece of evidence to back up any of your arguments. Take your time, buddy.
skip| 10.18.11 @ 4:57PM
"Claiming the CRA had any real role in the mortgage crisis is completely unsupported by facts."
Way to marshal up these facts.
Idiot.
DRed| 10.18.11 @ 5:35PM
So you disagree that CRA related mortgages made up around 5% of the subprime loan market at the time of the mortgage crisis? You have evidence showing that I'm wrong when I say borrowers with CRA related mortgages defaulted on their loans at a much lower rate than non-CRA related subprime borrowers did? Oh, no, you don't. You're such a bore, skip.
skip| 10.18.11 @ 7:38PM
I couldn't help but notice, even more emotional prattle, entirely devoid of any and all reason and experience, from you, yet again, as readers here have witnessed over, and over, and over, and over, and over, and over, and now, yet again.
I couldn't help but notice, in all this emotional prattle, devoid of any and all reason and experience, yet again, that you have not indicated whether you are employed by an organization such as moveon.org, or not.
I couldn't help but notice, in all this emotional prattle, devoid of any and all reason and experience, yet again, you have not marshalled a single source to back up your 'facts', though it is likely you are just, yet again, citing the politically appointed Financial Crisis Inquiry Commission, which was politically established and passed by Congress, led at the time by Reid in the democratically controlled Senate, and Pelosi in the democratically controlled House, and signed into law by the notorious socialist democrat Obama, that concluded, politically, that the mortgage crisis was caused by financial deregulation and Wall Street greed, these political realities, in addition to the economic realities, serving to thoroughly discredit this commission and its conclusions.
I couldn't help but notice, and neither can any other reader with a modicum of intelligence and honesty, that your statement:
"Claiming the CRA had any real role in the mortgage crisis is completely unsupported by facts"
is not only ridiculous and ludicrous, it is pathetic and despicable.
As are you.
Idiot.
Jack London| 10.18.11 @ 3:27PM
Hi Shirley Temple – been a time since I've seen your ignorance here and you never disappoint on that score.
Let's run this one by you - the article writer saysL 'The leaders listed above, their boards, and their key employees are not in business to rip people off...'
Oh yeah?
skip| 10.18.11 @ 5:03PM
"Hmmm. Let's see. 98% of climate scientists think man-made global warming is real. 2% don't."
"Fact: Every dollar spent on unemployment benefits creates $1.61 in economic growth."
Who, let's hazard to guess, was the genius who posted these nuggets I've just run by you?
You aren't even in DRreadful's league.
Idiot.
Kill the Occupiers| 10.18.11 @ 12:45PM
It is not the poor but their self-appointed over credentialed liberal jerk representatives like yourself that we blame. You should read a book every once in a while. Your ignorance is self inflicted.
Brian B| 10.18.11 @ 1:23PM
The CRA was passed in the seventies but was barely enforced. It was strengthened during Clinton's term and NGOs latched onto it to begin utilizing it in earnest subsequently.
You are either falling for or are complicit in the fiction created by Fan/Fred regarding subprime loan classification and default rates.
CRA was not the prime mover in the crisis but it was a contributory factor.
Occam's Tool| 10.18.11 @ 9:12PM
DRed: what constituted the bundled securities?
gearjammewr| 10.18.11 @ 12:13PM
Right. You know i am cooking 5 pounds of good sausage and you say blend in a pound of diseased and feed it up and nobody will know the difference. That is the story and yes all the culprits are fat and sassy. If it really was just a republican scandal bankers and pols would be jailed by the bushel. The wall sreet DEMOCATS are not going to the joint and take the fall-nope they get indicted the Washington DEMOCRATS are going down with them. Thus is their leverage. Plus they are all pals and chums.
Solo| 10.18.11 @ 2:46PM
It was not Wall Street's fault. Not in the least.
IN fact, it wasn't the investment banker's fault either.
These lending institutions were effectively forced to make these loans or face audit by orders of the Clinton administration. Later by protests and bad press coverage orchestrated by ACORN, et al.
Fannie and Freddie were there as a "clearing house" for these bad investments. Once laundered through Fannie and Freddie, these investment "instruments" were given the backing of the U.S. government--which resulted in an "A" rating--when the reality was that they were total junk.
Investors gobbled them up like free hot-cakes and...PRESTO!, screwed! And it took the economy with it because it froze bank assets due to the "Mark-To-Mark" write down requirements.
The only common denominator between all of these actors are the democrats..and their quest for
"social justice".
Plain and simple!
David T| 10.18.11 @ 10:12AM
In Oct 2008 when all the smart people were screaming that the economy was on the verge of collapse and only extreme Government action would save it, Newt Gingrich said the best way to recover was to drop the mark-to-market rule and let the market seek its own level.
WM| 10.18.11 @ 5:12PM
I remember that column he wrote. At the end of it, he advocated that we keep the mark-to-market rule anyway, just use a rolling three-year-average. Apparently so we could crash in slo-mo instead of all at once.
Political courage at its finest. That's our Newt.
Mark Dapier| 10.18.11 @ 10:23AM
I provide legal counsel for non-mortgage, sub prime consumer lenders. Many of my clients are family owned businesses that have been providing credit to consumers with credit issues or low credit need for 80 years. Their customers buy cars, appliances, furniture, or pay for school supplies or other family needs with short term, often unsecured installment credit (not payday lonas). My clients would NEVER lend a dime unless they were reasonably assured they would collect it back and had control of the collection process.
Contrast that business model with the mortgage lenders who based every credit decision on the faulty assumption that the collateral (your house) would always be appreciating thereby mitigating any potential loss if you don't pay. A faulty assumption since it is built on the principles of every economic bubble in history- the gains were UNEARNED, UNBELIEVABLE AND UNSUPPORTABLE. (Go back to tulip bulbs, south seas real estate or the dot coms you'll see the same underpinnings of those bubbles). Couple that with consumers who also assumed that when their adjustible, interest only loans converted to fully amortizing market rate loans (and don't think the consumers didn't know about this- I also do a substantial amount of real estate closings- the consumers have many many government documents given to them at closing telling them just that and at least in Illinois where I am, a lawyer next to them explaining it to them) they would simply refinance because of course their house would have substantially appreciated and would support a new loan. WRONG!!
My subprime lenders did not lose money during this recession and and certainly didn't need or want a government bailout. In fact all of them report record collections and originations. Their client base did not over extend itself and they did not change basic lending practices namely don't make loans that can't be collected and base your credit decision on ability to pay not collateral appreciation.
Who Knows?| 10.18.11 @ 10:33AM
It’s always a good day to be lucky to read what Brian Westbury has to say, and he doesn’t disappoint today.
Economic illiteracy abounds, even deeper and more widespread than plain old illiteracy. But, then, what’s new under the sun?
What was the name of that at-the-time famous book, about learning all you need to know in kindergarten?
Two Keep-It-Simple-Stupid = KISS quotes are about all you must keep in mind, and everything makes sense based on their witty insights----
There’s a sucker born every minute.
Never give a sucker an even break.
Yes---there are ALWAYS way more suckers than suckees!
Chalkdust| 10.18.11 @ 10:41AM
There were many villains in our little Kabuki dance to serfdom:
Besides the soul-sucking democrats gaining control of 2/3 of our government in 2006.
Candy-ass George W. Bush standing on the side lines for two ****ing years (06-07), pretending to be a by-stander. One could grow to hate him for that.
Barney Frank/Chris Dodds should go to jail for their part in the collapse.
Greedy bankers for dreaming up the scheme of derivatives to cover up the practice of writing bad mortgages.
...and finally one of the biggest villains of all. the ones who declared a $200,000 house was suddly worth $400,000. The American Society of Appraisers. These people have so-far gotten away with financial murder.
Dave| 10.19.11 @ 3:10PM
Gets it. Thank you.
Peppermint Tea| 10.18.11 @ 11:29AM
The collapse, the recession, whatever you call it was a reordering of our economy. The Housing Bubble had to burst eventually. Doing away with Mark to Market was not going to avert it--only building less houses was going to work.
But the real crime is not allowing the market to sort things out. TARP, Stimulus 1 and 2, Unemployment benefits forever, and the government take-over of 40% of the economy is the road to nowhere--where we are right now.
IN A MARket system, bailing out a financial sector is the Worst decision, because that is the sector that is suppose to decide where the limited resources are to be allocated. Now nobody knows! And the President can give a half million to Solyndra or another political crony company.
Let freedom ring and the market decide!
DTOM| 10.18.11 @ 1:10PM
Pep' T
The market was working, those houses were being built because people were buying them - buying them with mortgages that they could not afford. Building fewer houses would have driven prices up faster and possibly farther as the demand was there. The crash may have come sooner and not been so wide spread.
But I agree with you that ANY bailout is a bad idea. Nothing is too big to fail, nothing. Just remember this, every time you bail something out without writing down the bad assets, something bigger will fail later on. This will continue until those bad assets are recognized and written off. Continued bailouts just incent bad economic decisions which generate more non-economic activity and more bad assets.
big bob| 10.18.11 @ 12:20PM
Whitney was still the banking analyst for my company when she made the call on the banks in 2008. I was on the road when the #$%^ hit the fan and I remember downloading her 30+pages to try to figure out what was going on. Her take at that point was spot on. She did a marvelous job of valuations and telling the truth about the housing markets in the face of all the lies from those defending the FNMA and Freddie Mac fiasco taking place concurrently. I still have that report and will keep it on file as part of the record. From responses in this forum and others who dare broach this subject, the truth has a way of angering those who have attempted to rewrite history. I chuckle at the responses above from those who don't have a clue how Wall street was even involved in this process!! It was complicated, and displayed the crony capitalism perfectly that would become the hallmark of the Obama administration. Mr. Wesbury is an optimist and a good analyst. Sometimes his optimism and analysis get confused, but I follow his work even though I work for a competitor. I was very happy to see this posted today. Thank you.
WM| 10.18.11 @ 5:15PM
Meredith Whitney predicted a flat-out default crisis. She was wrong. It was a markdown crisis due to mark-to-market. Defaults were fairly ordinary.
If there had been no mark-to-market, Meredith Whitney would be fetching coffee and typing dictation today.
big bob| 10.21.11 @ 2:03PM
Not necessarily true. The government took over the banks. This was not in her analysis, as one might expect. In her evaluation, she cited the regional weaknesses in bank mortgages as they related to Case-Schiller. It was an excellent analysis, and helped me get a handle on just what was really at risk. Later on, she ran beyond her expertise, and then ultimately got in trouble with her muni predictions. But originally, her banking report was excellent.
Ken (Old Texican)| 10.18.11 @ 12:31PM
Brian,
we have already chewed this fat.... endlessly.
Please try to be current.
Petronius| 10.18.11 @ 12:50PM
The government and Wall St may hate each others guts behind their backs but no whore will kick her best client out of bed. Problem is, we're all stuck in for the duration.
John Law| 10.18.11 @ 12:53PM
"Mark-to-market accounting forced banks to mark down the value of this debt to prices well below its true worth."
"True worth," huh? And what exactly determines this Platonic notion if the market doesn't? Without mark-to-market, we get the banks making up their own figures, and the stock prices of BAC, Citigroup and the like suggests that the "real" market doesn't believe that the book value of the big banks (based on their own fantasy evaluations of their assets) is accurate.
Experto crede.
DTOM| 10.18.11 @ 1:40PM
John;
Markets are dynamic creatures - they run hither and thither, subject to the whims and vagaries of the market. But market prices are set at the margin, i.e. at the last trade that clears the market of buyers and sellers.
So if some bad news comes out about some large company's new project and the stock falls 5% in a few days, does that mean that the collected assets, operations and capital are suddenly worth 5% less than they were a few days ago?
That is the lie in mark-to-market. Consider mark-to-market in applied to a home mortgage. Say your house is worth $300K. And you are making payments your payments per the contract. Now suddenly something happens and your neighborhood is featured in a newspaper piece saying that there have been a lot of crimes in your neighborhood. Your neighbor is trying to sell his house and the appraiser reads the paper, finds that the neighbor's house is worth a lot less than it was a year ago.
Mark-to-market requires that your mortgage holder re-evaluate your mortgage because of this new information. Suddenly, your mortgage banker figures out that at the new, lower market valuation (which is in fact based on some guy's OPINION) the value of your house is less than you owe on it.
You have been paying on time, you are going to be paying on time, and your banker says,
"Too bad. It's only worth $200K and you owe us $250K. So could you please send us $70K so that your mortgage is no longer underwater? Today, please!"
Suddenly, you are a non-performing asset because of some fact-free article in the newspaper; you are in foreclosure even though you were letter perfect a week ago and nothing really had changed.
Remember if the mortgagor doesn't demand the $70K, your mortgage would have continued performing flawlessly.
That is mark to market!
You may want to re-think this. Should not the actual performance of an asset outweigh the vagary of a market price which ebbs and flows on a daily basis? I say performance means more than "experts' valuations."
After all, it was those "experts" who drove us like sheep into this economic slaughterhouse.
WM| 10.18.11 @ 5:34PM
It's not a Platonic notion, fool. A bond's value is a function of its cash flow:
Present value = C[(1/r)-(1/r*(1+r)^t)]
The market price is supposed to reflect its value, not the other way around. Mark-to-market put the cart before the horse, making banks say that the cash flow was less than it was because the market said so. And the only reason the market began to offer less for these assets was because a mark-to-market rule with a ceiling at par collapses balance sheet equity, which collapses lending capacity, which collapses the creation of credit, which collapses prices. It's already been looked at. Mark-to-market with a ceiling at par inherently collapses prices.
What's Platonic is the notion that even though the market bought these securities at a certain price, their true self disagrees with them, as expressed by market prices which are driven by bureaucrats who insist that the market knows better than the market (and financial mathematics) what an asset is worth. Capiche?
cicero| 10.18.11 @ 1:51PM
When the banks stopped loaning one another funds collateralized by the mortgage derivatives, "markl to market" required those assets to be marked down to their sales (or borrowing) price on that day. Thus, zero. When all the banks bet the wrong way at the samee time, all of thier assets were worth nothing. The government then jumped in and bailed out the bankers - not the banks.
In March of '09, Congress quietly changed the accounting rules back, to "standard". At that point, the value of the mortgages were marked up to their face value - allowing the banks to borrow against them at the Fed window on a ratio of 9 to one. This allowed the bankers to pay back TARP 1, and pay themselves the bonuses they had promised themselves. ....and no one went to jail.
Thank you Mr. Westbury, for beginning to report this sordid storey.
Purpleguy| 10.18.11 @ 5:10PM
Not a bad article, has some mistakes, but the overall premise that free markets are the savior is completely untrue. We have never had a free market in any country, unless Somalia is it. There has always been haves and have-nots, those with influence and special privileges and there always will be. For 200 yrs America had an Industrial Policy until the 1980's and since then we've allowed others to eat our lunch. We need to reinstitute that policy that Alexander Hamilton and the Founders promoted that allowed Public-Private partnerships to promote business, the economy and allowed our people to grow.
WM| 10.18.11 @ 5:59PM
Great column, Ben. Allow me to fiddle with the timeline just a little, however. Mark-to-market actually went into effect in January 2007 (okay, technically, all reporting periods beginning after September 2006), but it was still optional at that point in time. However, according to a Deloitte report, about half of all banks, including almost all of the top commercial and investment banks, adopted it at that time, probably out of reputational concerns. That's actually when the problems started. The ABX and the year-over-year Case-Shiller began falling starting January 2007. Remember that credit crunch in August? I do! Whew! Lots of turmoil in Europe that year as well.
The rule became mandatory for everyone after November, and that's when things went downhill fast - BS, MS, WaMU, AIG...dominos.
Europe was on mark-to-market around the same time we were, but they had some variation around dates and implementation.
Regarding the easing of the rule in the U.S., the seminal event was Fed Chairman comments on March 10. Rumors had swirled about Congressional hearings and intervention against the rule, but it made the news that day that Bernanke reversed his position and now supported substantial "improvements" to the rule. That was code for "let's stop doing things this way." I remember that day. I wasn't sure whether to believe the good news or not, but Wall Street was and did. Instant reversal and rocket. What a dog whistle that was.
Interesting times, as the Chinese would say.
WM| 10.18.11 @ 6:07PM
I would also like to say that this is an invaluable service conservatives are getting. Poor Peter Wallison is getting destroyed trying to prove that the CRA and the GSE's and the Fed were the primary cause of the crisis. As plausible as that conventional wisdom sounds on the surface, the numbers just aren't there, and you cannot win the minds of non-partisans when the actual numbers go against what you are saying.
axbucxdu| 10.22.11 @ 11:17PM
Mark to market may have spilled the punch bowl, but who the hell was it that filled the damned thing in the first place? I beg your pardon, but financial ruin on this scale is simply not possible without a centrally (mis)managed money supply. It was only a matter of time before the massive financial flows originating with the Fed (e.g., "The U.S. government has a technology, called a printing press ...that allows it to produce as many U.S. dollars as it wishes at essentially no cost...") and recirculated by the GSEs had themselves an accident.
Monetary history, and that of centrally controlled money in particular, is riddled with these episodes. If it wasn't mark to market, it would have been some other financial gimrack that collapsed the system. You see, centrally controlled systems are notoriously unstable. Invaluable service? From whom?
RDMcDevitt| 10.18.11 @ 6:09PM
Did this writer not see the recent poll that showed Americans in a 2 to 1 margin hold the government responsible for the 2008 economic crisis. I think the author writes this article from a false premise. The majority of Americans know who the culprits are but they are opposed to big banks being given a pass for their wrong doing. Somebody needs to be prosecuted for the crimes committed against the American people.
WM| 10.18.11 @ 6:31PM
Incidentally, Romney is for mark-to-market. He hedges his wording, but then so did Bush.
Auger Well| 10.18.11 @ 6:33PM
This is the most disingenuous POS I've read in a while. Do derivatives, and second and third derivatives of derivatives, escape your dubious ken?
Made some $| 10.18.11 @ 8:37PM
Read awhile then just skimmed this silliness. Whos to blame? Everyone. I bought and sold property during the bubble. the last one I bought for 220k, it was "appraised" and marketed at 500k by a "real estate professional" lingered for awhile and I told the agent to dump it. Got 400k for it. I did nothing to this property, I sold it as a "tear down" to avoid any home warranty problems, the buyers bank still appraised this turkey at 440k.
The problems arose when a slowing economy meant banks actually had to produce money from thier portfolios.
The so called products of finance of course were (and still are) worthless. But, everyone rode the wave. Some got off in time. The greedy and stupid did not.
There are no innocent parties.
RDMcDevitt| 10.19.11 @ 4:42PM
There are plenty of innocent citizens that were just living their lives in their homes they could afford saving their money in 401ks etc. that did nothing wrong that were hurt by those gaming the system.
TrickleUpPolitics| 10.18.11 @ 9:15PM
Banks aren't in business to rip people off? Ok, but I think they are in business to take advantage of the uneducated. As for the housing collapse, the banks' complicity was shown during the foreclosure process when it turned out they were fabricating documents because their greed dictated that they bypass hundreds of years of settled property law through MERS, which exists in violation of the UCC. The banks get no sympathy from me.
POST American| 10.18.11 @ 10:44PM
--------------------FINAL WORD------------------------
Time for ALLLL eyes
to REAL-eyes --
------------------------it's the-------------------------
--------------------psychopathic--------------------
----------------------Globalist------------------------
--------------USURY and EUGENICS-------------
----------------------ROT-child----------------------
--------------------------et al--------------------------
--------------------------FED---------------------------
Dan Mathewson| 10.18.11 @ 11:32PM
No it isn't. You're making it up out of whole cloth.
POST American| 10.19.11 @ 12:51AM
---------------ESSENTIAL READING-----------------
'Tragedy and Hope'
&
'The Anglo-American Establishment'
by CFR 'innie', and ,mentor
to Rockefeller blood-linked
Bill Clinton
THEN go through ALAN WATT's archive
for a couple of weeks. CHECK OUT the
documents for yourself.
----------------------------THEN, as the EUGENICS
and CON-troll OPS of the PRIVATE banking
front UN rev up --
DOWNLOAD
------------------------'IKIRU'----------------------------
--------------------------THEN SEE!
emo| 10.19.11 @ 7:49AM
Brian Wesbury is right about a lot of what caused the financial meltdown in 2008, but his forecasts have been 100% wrong.
He predicted in 2009 that the economy was in a V-shaped recovery and that unemployment would be 7% by the end of 2011.
Amos Horton| 10.20.11 @ 11:54PM
Excellent article, Thank You, I am going to attempt to attach this to an e-mail to Rush Limbaugh.
POST American| 10.22.11 @ 12:35AM
-----------HUAC meets NUREMBERG 2012---------
AS the Globalist police state, RED China
'enforced' world TREASON OP. reaches
for FINAL consolidation--------------------
AS 'former' 'CALM--YOU---nist'
Mikhail Gorbachev, prime 'innie'
of the world TREASON OP, yesterday,
tells America it needs 'WORLD govern--ANTS'
As ---'AWE---STARE---'IT'-----HE' ------
and YOU-genics 'X--speed--iency' is
quietly unfolded.
AS 'bennie violence', from FUKISHIMA
to the Middle East, is on the move.
AS David yet 'counts' the tribes---------
-----------HUAC meets NUREMBERG 2012--------
----------------IN THE NAME OF GOD---------------
-------------------you know it's time!------------------