Abhi asks how “Does the credit crisis affect ‘us’” and what Desi’s could do so I thought I’d chime in. Personally, although I’m a pretty strident free trader, the more I learn, the more I believe some sort of bailout is ultimately necessary (and so I’m probably disappointed by the House’s failure to pass legislation – don’t know enough of the deets to say for sure).
Of course, it’s awful on almost all counts that taxpayers get stuck holding the bill. But as I often say here, most of life’s choices aren’t between good and bad (and a bailout is clearly bad) but rather, between bad and worse (an economy-wide credit crunch). It’s cheap & easy moral pontificating to iterate the umpteenth reason why the situation is Bad (or why some sort of Wall Street comeuppance is Good). What real adults have to do is accept the bad to avoid the worse.
This interview from Greenspan, circa August 2008 is quite plain & direct about the necessary outcome –
The collapse in home prices, of course, is a major threat to the stability of Fannie and Freddie. At the Fed, Mr. Greenspan warned for years that the two mortgage giants’ business model threatened the nation’s financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt “inevitable,” he said. “There’s no credible argument for bailing out Bear Stearns and not the GSEs.”
If there’s a silver lining here, perhaps it’s that taxpayers & voters will have been taught a bitter lesson about what danger lurks the next time a politician tries to promise some new class of positive, economic rights…
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p>There’s no such thing as a free lunch and when a politician promises economic benefits to one group what it usually means is that costs will be displaced either in time or to a different, less politically favored group. Most often, that “group” is the public at large who have better things to do with their time than scrutinize the cost of individual earmarks. We’re now seeing the price of govt attemps to create a “right to home ownership“; similar days of reckoning await with “right to retirement” and “right to healthcare”. (Imagine the massive unused daytime TV commercial airtime and unemployment in the Scooter industry when/if the Medicare gravy train grinds down )
So what is perhaps uniquely Desi about the whole thing? Well, in that same interview, Greenspan offers one, relatively straightforward (albeit partial) remedy. Simply put, the current crisis is caused by a price collapse as too many homes chase too few folks who reliably make their mortgage payments. So, why not *import* folks who are more predisposed than average to being both credit worthy and buying new homes?
“The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants,” he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. “Perhaps 150,000 of those are loosely classified as skilled,” he said. “A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale — and hence help stabilize prices.”
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p>And, of course, any wholesale increase in “skilled immigration” to the US has a pretty disproportionately positive impact on Desi’s. So Desi’s – do your part, go forth, multiply, and continue to maintain your credit scores assiduously.
UPDATE: Another Desi angle –
Corporate America has just lost a chunk of its value the size of the Indian economy.
200 · bess said
Sure Bess; but if i did that I’d make sure to distribute the sauce thru retail supermarkets. I wouldn’t serrve it to my own family.
though i suppose if i did serve it to my own family, i’d hope medicaid will take care of us. so, i guess bess’ analogy sums up where we are.
manju mac apple sauce – good for the fannie.
thanks bess, these are lean times
204 · Manju said
Goodbye Wall Street: An Indian Story
All too real for some people. Nikhila Natarajan writes in the Hindustan Times of the Great Crash of ’08 and its impact on a DBD family.
chachaji@205:
Yes karma. Very Indian.
120 · vinod said
VINOD WROTE: 121 · Manju on October 1, 2008 02:43 PM · Direct link · “Quoteâ€(?)
120 · vinod said
this is true, only a small % have defauted but something more has happenned to the MBSs. here what i gather happenned:
In the good ol days the MBSs, complex securitues packedged individual mortgges togheter, were very liquid, mostly AAA rated. If a Hedge Fund or whoever owned them needed cash, they could quickly sell them at a fair market price. When housing prices started to decline and defaults increased, funds wanted to sell the risky MBSs so buyers started to worry that the seller may simply be trying to unload their worst assets, but had no efficient ay of really knowing, given the complexity of these instruments. this asymmetric information, ie the buyer not knowing the exact composition of the MBSs, made the entire market for all MBSs illiquid. You couldn’t sell these thing in a panic b/c the mere fact hat you’re selling tells the buyer you hold crap. The derivatives, irrationally, started to be valued at close to zero while the underlying mortgages were worth much more.
i think.
Boston_Mahesh wrote: The derivatives should have been worth a lot, but the underlying assets could have been valued close to zero. The derivatives, i.e. calls and puts, increase in value when the underlying asset has more volatility, among other things. A derivative is worth 0 if it’s a call, and the underlying is much less than the strike price. however, the puts are worth a lot of money for this case.
I think that what you meant to say is that the derivatives were worth something – maybe more or less depending on the type of derivative – but the underlying asset wasn’t worth much.
Just for the record, here’s a thorough refutation of everything you believe in:
Some humor, an SNL skit that apparently got cut(I’m not sure here, but if someone has information otherwise, please correct me).
Wow! I didn’t know their holdings went as high as 48%. I always read around 20-30%. And an implied govt backing for this. And this doesn’t include their over-leveraged insurance biz that goes into the trillions. Vinod’s right, “they vastly increased the size/scope of the bubble”
well, in the presence of voodoo economics like that embodied in this post, what a great day it is for krugman, the voice of sensible leftist economics for the past 20 years or so, to have been awarded the nobel. once again, he has been proved right with his persistent calls for nationalization, where all his detractors have landed up with egg on their face. once again.
a children’s treasury of exploding heads in response to krugman’s nobel.
the comments on volokh are especially hilarious. warning: they pose a major spit take hazard
Oops, what in the world does Krugman’s analysis of trade patterns and location of economic activity have to do with Vinod’s post? I mean, even the Volokh post you cite makes clear: “I believe Krugman’s Nobel is well-deserved. He is clearly among the most important economists of his generation.”
214 · Manju said
I know! It’s like people think there’s some kind of politics to economic analysis, which we all know is absurd 😉
it’s ok, manju. don’t take nationalization by komissar paulson so hard that you respond to a comment about volokh i never made 🙂
216 · oops i did it again said
well, as an unprincipled opportunist, I can’t say I’m taking the nationalization hard at all, especially with todays rally… though as an Obama supporter I am concerned a short-term stablization could give mccain an opening, though he probably needs one more event beyond that.
But I pulled that Volokh quote from the very post you cited, from the poster himself in fact, not just a commentator, so it has more weight vis a vis the zeitgeist in libertarian world regarding Krugman’s nobel (of which i have no opinion).