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).
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The Solution to the Credit Crunch? More Desis. |
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.
this is the mirror image of michelle malkins illegal immigrants got mortgages scenario. it certainly happenned but its bought ot the forefront b/c it fits an ideological narrative. most people shop a mortgage around, even aledgedly stupisd poor people. somewhere along the line a broker is going ot say i can give you a better deal and watch out for your ARM b/c that broker/loan officer wants your biz. i doubt this fraud had much to do with the crises, though i don’t doubt it exists.
I linked to this NYT article in my comment (#61). It details efforts of H&R block to sale its Mortgage business, to private equity firm Cerberus Capital Management. The same article covers the Blackstone groups’ failed attempt to buy the mortgage business of PHH. I’ve also linked in #40 to a Bloomberg News story of Merrill Lynch (you know the former Investment bank)purchase of a mortgage company. You and Vinod- from my reading, seemed to conflate CRA to a ” positive right to a mortgage” as the primary suspect in this debacle.
My contention is private equity firms, tax preparers (H&R Block), and investment banks were not imposed on in any way via CRA legislation, to ‘bend the rules’ for poor minorities to own houses.
I’m basing my not so tenuous argument on this:
Not always the best source- but I think this is legit- Wikipedia
102 · dillettante said
i don’t think cra was a primary suspect, i was only countering harbeer’s (i think) claim that it had nothing to do with it b/c community banks are still in biz
amaun, that’s helpful to know — maybe we’ve had two different client communites. My clients are largely working-class, lower-middle income. My friends who are middle-middle class (making $35K+, have college degrees), however, tried to do tricky things and draw money out of their (inflated) home values and are now crushed under their ARMs. I am less sympathetic towards my friends; they knew better, were advised better, and were caught up in the fervor of trying to turn a quick buck.
Manju, I agree that Fr and Fa are a cog in the machine; I don’t subscribe to the belief that they are the only cog in the machine, or that they dragged everyone down with them. The housing bubble and subprime mortgages were a concern YEARS ago, and eventually this was going to catch up with everyone. I don’t even think the regulations on the books had to be much stricter if the SEC and DOJ were doing their jobs re: enforcement and compliance.
With respect to mortgage availability, I think part of the reason this has had such a huge fallout is precisely because the market for those who took out mortgages extends beyond the low-income tax brackets. A bunch of folks “on the line” or “in the middle” (i.e., making an income, supporting their families but not a lot of cash for emergencies or unforeseen expenses) were taking out loans way above their capacity. I am all for extending credit to unbanked communities, but I think some lenders fully expected people would default after 2-3 years, the bank could recollect and resell the house (which ideally by then would have appreciated), and the only “loss” would have been transaction costs.
Dilletante #102,
From the wikipedia article “Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a “less than satisfactory [sic] rating at its most recent CRA exam”, essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the CRA.[3]. This was an issue of hot contention, and the Clinton Administration stressed that it “would veto any legislation that would scale back minority-lending requirements.” [4]”
Aside, Greenspan was the one who objected to regulating Credit default swaps. That in my mind is the next major piece and will be interesting to see how it unfolds.
Even though financial crisis can hit the entire economy and may indirectly affect people across various classes, I wonder what kind of clientele do Lehman brothers, Morgan Stanley, Merrill Lynch, AIG and other failing investment banks have ? I doubt these banks cater to the majority of the working class (who are anyway taxed more by Republic admin) whose taxes will have to pay for fiancial bailout. Only way you could argue is the subprime mortgage mess has been created mostly by defaulters amongst the working/middle class (though don’t have data on that) and hence they are liable indirectly. Btw wonder who was getting Fredidie’s check – McCain’s campaign manager
102 · dillettante said
i still lost. blackstone, etc had nothing to do with cra. ok
As I’ve mentioned before this situation has multiple root causes. It isn’t an issue of just free market principles, government oversight (or the wrong type of government incentives), public frenzy over the market, etc.
I guess the best way to describe it is as how Umair Haque mentions it – the DNA of the system is flawed. Government, corporate industry, and ultimately the American public’s itself.
CRA being amended in the mid 90s, the dot-com bubble burst, corporate creative accounting, government (Congressional/Executive management), the public buying into the housing hype,etc. all are driven with short term goals in mind. To a certain extent (and this is my opinion, not passing it off as fact), it seems that people want to benefit from the good times and in times of a downturn, government is expected to abosorb the risk. But government absorbing the risk is only transferring it to another instutition – we’re all still responsible for the costs.
The idea that a market should always grow or expand, every day, is wrong. Over a 10 year span or decades, sure, the market should grow (and the reason why index funds like the Vanguard 500) have been so successful. The concept that one MUST purchase a house for investment purposes isn’t valid either.
Bottom line – the current market conditions favor short term goals (political and economic) over any thing long term. Instead of driving for improvement in value for the customer, or in case for the government, the public, all insitutions are geared towards producing results NOW, which is myopic. All the corporate/government smoke and mirrors only serve as barriers that provide benefits in the short term but lead to long term rot and demise.
This is an opportunity to have a more transparent system, that can function on free market principles with the correct government oversight (not less or more, but the right type of involvement), but I don’t think it’s going to happen. Larger banks are swallowing their competitors, the government wants to spend 700 billion without much transparency, and the media’s hysterics aren’t helping. Transparency is not in the interest of maintaining the bureucracies of large business or large government. Time will tell, but at least in some businesses, we’re seeing how being open is puttng the old guard on notice (Google vs. Microsoft). Don’t know if the system as a whole will shift in that direction.
The market may need the 700 billion to keep the wheels turning, but driving a deal without benefiting the public at large is a mistake, too. Warren Buffet is a smart guy and found a good deal. That’s what the government needs to do – get a good bargain and improve value for the taxpayer. In situations such as these, the government SHOULD profit when forking over money (warrants, shares, whatever).
103 · Manju said
And I was only responding to the phantom YouTube video which was linked to in the original post but had been removed from YouTube within two hours of the original post going up. And it was BUSINESS WEEK’s claim, not mine. I don’t make claims, I make vague statements and irreverent ballyhoo.
Cluck cluck. The sky is falling.
P.S. I should mention that I was assuming (from context) that the phantom video was that one viral video that’s been blaming the current crisis on the Community Reinvestment Act. I’m not certain that was the case, but Vinod has not stated otherwise, so I assume my assumption was correct.
102 · dillettante said
dill: pinnig this on the repeal of glass-steagel, ie removal of the seperation of investment banking and commercial banking, is not only wrong (and i suspect an attempt by many to attach the crises to the vague concept of deregualtion) but it is the precise opposite of what is actually happenning out there.
look at the firms most involved in the crises. First on the buy side (investors in the mortgage securities): Freddie, Fannie, and AIG. – the first two are govt-sponsored mortgage investors, the latter an insurance and money management company. All did nothing that they couldn’t’t do under glass-steagall. Insurance companies traditionally take your premiums and invest them. Fannie and Freddie mandate is to purchase mortgages in the secondary market thus providing the liquidity for affordable housing. The Glass Steagall repeal changed none of that.
The ibanks in question–Bear, Lehman, Goldman, Merrill, and Morgan,–all operated as if glass steagall were still in place…independent investment banks and brokerages, with virtualy no commercial banking activities and even less retail commercial banking. If you haven’t noticed, the precise opposite of what your saying is happening now, with Goldman and Morgan becoming bank holding companies in order to solve the problem (something outlawed under glass-steagel) and Merrill selling itself to BoA, a commercial bank…also illegal under glass steagall.
In fact the firms that took the most advantage of the repeal–BoA, JPMorganChase, and Citi–are still standing and, especially the first two, have had the least amount to do with this scandal, having genrally avoided the mistakes (with the exception of Citi) of the firms that operated as if Glass Steagel were still in place. in fact, every single commercial bank that went under–wamu, countrywide, etc, existed in glass-steagel form.
since the new hybrid banks created by the repeal are propping up the market, the current crises has demonstrated the exact opposit of wht you’re saying…ie this particular deregualion is saving us.
Manju, your analysis of the ibank/commercial bank divide is not entirely on point. Lehman, Bear, etc., are organized in ways that make it appear that their work is divided, and internally it mostly is. However, grouping both practices under one house was made largely possible by GLBA. The premise was that we could trust companies to make decisions that would help balance their risk. For a lot of the reasons GujuDude mentions, that didn’t happen.
The American economy has been in a Britney Spears-like “Gimme More” culture for the past 15-20 years. A lot of knowledge can be a good thing, but a little bit of knowledge can be incredibly dangerous.
112 · Camille said
Camille: Bear, lehman, Goldman, Merill, and Morgan did not have any significant commercial banking practice. They decided to operate under the old model, independent ibanks. Ditto (but the other way around) for WaMu, Countrywide, indyMAc, etc…they had no ibanking practice.
Only BoA, JPMorgan, and Citi attempted to merge both practices, something that appeared to be failing a few years ago b/c ibanking and cbanking proved to have very little synergies; but now appears to have proven to be a safer way to do business.
From what I understand, commercial banks are subject to far stricter oversight and if you look for their bank call reports their commercial banking arms were not the problem.
And cheaper funding under the reinstated commercial bank/ibank model. Again from what I understand most Ibanks borrowed overnight to fund and that is what dried up and caused problems.
To see what banks are still doing not so bad we just have to look at custodian banks like Northern Trust/State Street/Bony Mellon etc.
114 · umber desi said
yes, that’s one of the reasons goldman, merrill, morgan etc decided not to go the hybrid route
115 · umber desi said
yes, cheaper funding adn access to the discount window is the main reason goldman and morgan have now decided to become bank holding companies. end of an era (the glas-steagel era).
“Let’s say, there exists a group of people who are pissed at the direction the country has taken in the last century from an economic and social point of view.”
What direction do you think the elites want to take Moornam? Or rather what were they unable to accomplish over the last 50 years given their wealth and power. What are they pissed off by exactly? Too much social welfare? Too many public schools?
97 · Camille said
I slice / dice it so –
Loans in general –> only a small % are defaulting… so it’s true that 90% (or whatever) of CRA loans are doing well. it’s the 10% that are the problem. This is a classic marginal pricing problem (e.g. behavior at the margin sets the rules for the mid market)
CRA by itself –> it probably contributed a bit ; it certainly led to “innovations” like no downpayment, interest-only, lower credit limts, etc. –> thus creating the Subprime market. You could think of it as the guys who created the formula for Crack. CRA by itself achieved it’s goals with a stick –> e.g. banks could get sued if statistical discrepencies popped up in their rate of loans to minorities.
CRA being driven by Freddie / Fannie -> this was the real catalyst for the scale of the problem. As Manju noted, Freddie / Fannie justified their existence on a CRA basis (e.g. “without us, all these poor people would go without loans!”). They took the CRA “innovations” and dramatically scaled ’em up. It enabled your uncle fred to get in the mortgage biz, offer CRA-term (e.g. subprime) loans and sell them back to F&F and make the processing fee. They were the nationwide crack wholesalers responsible for 30-40% of all subprime loans sold. CRA + Fannie achieved their shared goals with Carrots –> e.g. F&F had an open, govt-backed balance sheet to buy up all the subprime loans folks could source & figure out how to sell to ’em. And the “crack retailers” got mighty creative in figuring out how to source & sell.
Without CRA, F&F wouldn’t have had the “license” to do what they were doing –> When Bush et. al. wanted to strongly regulate F&F, CRA was their defense (as well as increased lobbying). (too many folks here are ignoring / forgetting that the strongest attempts to add more regulation to this particular market came from the supposedly FreeMarketFundamentalist “rethuglicans”)
Without F&F, CRA / subprimes wouldn’t have achieved the scale it did –> We’d still have been faced with something more like the dotcom bubble w.r.t. scale (credit default swaps, etc. would have still weaved a mighty mess). Perhaps CRA loans might have largely remained at small, regional banks which are generally doing just fine… If you could magically subtract F&F from the mess, there are literally TRILLIONS in contracts you / we can ignore. There is NO OTHER entity on anywhere near the scale – they’re by far the biggest cog in this machine.
With F&F as a GSE, this becomes a govt bailout problem –> like it or not, as a GSE, they played by diff rules (far lower reserve requirements, for ex) and had the implicit govt backstop and hence folks in the market behave differently (more recklessly) w/ the stuff that F&F were buying/selling.
There’s a classic banking adage that “if the loan recipient defaults on a million dollar loan, he is in trouble… if he defaults on a billion dollar loan, I’m in trouble”. That Fear is necessary to keep the Greed in check and when F&F w/ their special status were on the other side of the table, the Fear disappeared.
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 way 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.
Moornam, you have no idea what I believe and I have no patience for bull$hit right now, which leaves us at something of an impasse. Let me simply say, it is my very good honour to meet you, and I don’t call myself a “liberal”, I think the state is oppressive, and I don’t believe that nation-states are the appropriate unit of analysis for captialism (see Wallerstein).
amaun, see here.
Manju, spare me the advice about how to respond to people. I can assess fairly quickly whether or not I think it’s worth my time to engage in a detailed response to something or whether the discourse itself is so skewed that it’s not worth it. your new “all your arguments are ideological” canard is cute, but just as intolerable as your other bs. spare me.
My first thoughts on the credit crisis were written up over 14 months ago and as you know have continued to evolve. I have supplemented by reading the views of people like Thomas Friedman, Soros, Paul Krugman, Roubini, Paulsen, Dodd, Isaac, and many others, in addition to my usual staple of progressive reading, and my comments were not from an ideological vein, but frustration at the overtly ideological positioning that has emerged in conservative circles in the last 2 weeks. Yes, clearly, government policy regime is responsible for this crisis – as are many other parts of the system that has developed over the past 25 years. But we don’t get to any of that. Instead we get this:
This doesn’t even pass the laugh test. Sorry, but bank to bank lending rates are much more important for what is the CRISIS (credit) in the short term whereas the bad assets caused that crisis are a medium term problem at this point because resolving that tomorrow won’t really do much for the liquidity problem (except insofar as it will give confidence to banks to lend to each other). An easy way to solve this medium term problem would be for the government to raise taxes on the very rich and write down these mortgages (along with other debt) which would magically fix the assets of the companies that hold securitized debt as well but there are other ways to do it depending on what your class positioning and ideas are; in the longer term, it would have to loosen its social organizing for higher wages so that consumer demand can keep up with production without massive debt and unfair bankruptcy provisions – there are other ways to do this too (e.g. India or China becoming consumers of last resort) but I doubt that that would happen.
So you see, it IS a real problem. It is also part of a MUCH bigger problem, which is that the real economy is probably unsustainable as it has functioned recently, and not handling it properly now will cause a long and painful recession or depression in the U.S. and potentially abroad; and the politicians in washington don’t seem to care and don’t know enough to fix it or simply aren’t capable. Much like they didn’t about: civilian costs of Iraq War; food crisis effects around the world; U.S. debt that would with passage of bailout bill reportedly reach 86% of GDP; handing massive amounts of power to the Bush Administration; making torture acceptable; undermining the right to habeas corpus; destroying the social safety net in the U.S.; destroying the capacity of governments of poor countries to make their own decisions – for better or for worse – about their industrial policies; etc.
You see, serious topics deserve serious discussion 😉 Not ideological bs like this:
And if I see it, I’m not going to engage with it, I’m going to call it out. I’ll let someone else waste their time with the details. There’s more important things to be done.
122 · Dr Amonymous said
there’s nothing wrong with ideology if the general theory emerges from specifics, like in vinod’s argument. if he just threw those lines out there w/o backing it up i’d agree, it wouldn’t be helpful, it would be just sloganeering, assertions w/o argument, like you did 91.
figleaf.
122 · Dr Amonymous said
yes, bank to bank lending is the problem now. what i think has bought us to this precipice is that firms holding undervalued MBSs are now forced to value them at the market (mark to market accounting stndards) which is essentially zero, for the reasons i explained in 121. This rocks their balance sheets, forcing them to recapitalize by raising new money. this drives down their market price as investors assume they’re in trouble and the short sellers come in and as panic spreads banks fear that any other bank thats looking to borrow must be on the verge of bankruptcy and thus they refuse to lend to them.
and thus credit comes to a halt and we stand on the verge of a severe recession. Very serious problem, and much harder to untangle than some recent wall street crises (like enron, internet bust, etc) b/c there is no clear cut culprit…and with credit, the repercussions are even more serious.
Those wanting a non-ideological libertarian take on the crisis, see Tyler Cowen at Marginal Revolution.
Doctor Doctor Doctor…
Thanks for the link. Read all your masterpieces in there. Now I know what your narrative is, and where you want the world to go with your ideas.
Apart from the teeny-weeny issue of defining what constitutes being “very rich”, this is an excellent idea.
There’s a website going around – I don’t recall the name – where they elaborate how to not pay your mortgage, yet avoid losing the home. Works something like this: Don’t pay your mortgage for 90 days. The bank forecloses on you and calls you. Refuse to pay unless they reduce your principal. Continue to not pay in the months ahead. We all know that bank staff is overwhelmed with such cases and it could take upto a year to resolve. Keep accumalating cash. After a year, during which the bank takes the hit (and hopefully goes under), offer the bank (or what’s left of it) to pay back all your arrears if they reduce your principal by X%. By then they will probably be on their knees. Pay up. And continue paying up diligently for a couple of months. Then withhold payment again demanding principal reduction.
Rinse and repeat.
If even a million americans do this (and there’s almost two million americans doing this already), the system will be so underwater that it won’t come back up for a generation.
If Obama is elected, there’s a strong possibility that I’ll do this.
M. Nam
126 · factual aversion said
that’s factual adversion, you’ll nmoticce i alluded to excess leverage (and its deregualtion) in 16,44,55, and especially 96.
i was practically beggiing one of you anti-trickle downers to bring it up, but y’all got bogged down in vague genralities and false speificis, like glass steagel. c’mon, this should be a slam dunk for you. the politically winning narrative is deregualuion led to this. fill in the details, make your argument.
to manju, with love.
129 · debunk’d said
no where did i say cra contributed significantly. you’re failing to grasp the brilliant nuance of my comments.
129 · debunk’d said
Who knew? First, vinod is a welfare queen. Then, Manju is a bipartisan. Now, Tyler Cowen is in the tank!
Vinod, point taken. What I’m trying to argue is that there is a spectrum of subprime loans, that subprime != inherently bad, and that this spectrum means that there are tensions and failures at multiple levels. Fr & Fa certainly contribute to a large share of subprime lending, and they’ve also covered their shady practices by invoking the CRA. With respect to foreclosures and loan defaults, this is connected to several factors, including a “reset” value for homes, rising costs of living with respect to fuel and food, and the slow impact of years of economic slowdown at lower-income levels catching up. In short, many American workers make less today (in real dollars) and have to pay for much more. It’s no wonder that as food, fuel, and health care ate up greater shares of their income that credit began to default. We have been undersaving and overspending on credit for a long time now.
However, it is not the CRA per se that promotes poor lending tools or practices. Banks could meet their CRA requirements through MANY instruments and channels (e.g., equity, homeownership, tax credit investments, small business loans, etc. — you don’t have to pick subprime lending as your only option). At its core, the CRA, which was passed with the civil rights legislation of the 1960s-70s, was designed to address redlining and the lack of credit available to credit-worthy minority enterprises. The 1990s reforms sought to add more “teeth” to the requirements (which were often not being met by mainstream banks). I understand the use of the CRA as a block for following the regulatory practices required for commercial banks, but this doesn’t square with all the other private lenders who were not GSEs. Further, for those who are losing assets because they bought securitized subprime loans, there’s a big part of me that asks where the buck stops. There was a responsibility across the ibanks to their investors, and they came up short by playing recklessly with other peoples’ money. That’s part of the risk of investing, but the risk was misrepresented or understated.
It may come as a surprise to most, but the United States has well over 100 million banks. Well over 100 million full fledged financial entities that take deposits and issue loans are active in this country on a daily basis. If you don’t get it, I’m talking about you, and me and just about everybody you will see today. For all intents and purposes, in dealing with a so-called ‘real’ bank, an individual acts as one himself. By depositing cash into a checking or savings account, you are essentially issuing a loan. Taking out a loan is really the same as the ‘real’ bank “depositing” money into your pocket. Don’t let any high-flung executive or bureaucrat with fancy degrees convince you otherwise. The only real difference between JP Morgan Chase and you is its relationship with government.
The value of a bank to the economy is its theoretically superior ability to decide who should have the money, or liquidity, now and who should have it later. If a bank doesn’t have that ability, its not a good bank. It should die. The real currency is, and has ALWAYS been, an arbitrary unit of intelligently directed energy. The total value of our economy is the total sum of such energy. A collapse of the banking industry does not mean that the value of our economy decreases. It will allow other people to start new ‘banks’ and financial entities which will better serve the people.
I’m not trying to be rude, but the use of jargon!=intelligent conversation. It just serves to limit the potential contributers to any argument. Sure some people may know what CRA is, but everyone doesn’t.
Camille, I think the basic idea is that ‘CRA’ constitutes inefficient government interference. You’re right subprime != always bad. But that is only true when the decision is made by independent entities. When the government forces decisions, by saying you HAVE to lend to a certain amount of minorities etc, those loans are inherently ‘bad’ because they arent made using the full intelligence of the bank in question. There’s a difference between saying its unlawful for a bank to discriminate on the bases of Race, and saying the banks must treat all people as members of equal Races. The CRA basically says the second. It is similar to caste quotas in India in that it forces a bank to say that a minority with a 90% chance of repaying a loan is > than a regular person with the same 90% chance. That is always wrong.
132 · Camille said
This is very important. virtually all of these securites were sold thru the institutional sales desk of the ibanks, where fiduciary responsibility is very very low, in great contrast to retail distribution networks, like at merril lynch’s private client group. off the top of my head, i can recall only one time an institutional player sued an ibank for misrepresentation: ronald perelman (i think) won a suit against morgan stanley.
so if, unlike the Internet/research scandals, ibanks did not try to pass these securities off to unsuspecting individual investors; if unlike wcom and enron CEOs did not sell their shares in their companies knowing they were about to become worthless (Cayne and Fuld went down with of Bear and lehman for example) What does this mean? This tells me the most sophisticated investors actually believed in these securities, but their over leveraging coupled with brutal accounting rules (mark to market) meant they simply didn’t have time to hold onto these securities until they recovered.
now will they recover? dipanjan in 68 argues no. but we’re buying the assets at a discount to par. couldn’t they at least go back up to say 50cents on the dollar so we get back most of our money soon. Buffett came out said he’d pick them up if he had 7000bill. could be a huge opportunity for taxpayers to make money, and thus shore up social security, the pyramid scheme representing the next financial crises. but time is the key.
if we do this we have to simutaneously insure the banks have enough liquidity but also do it at a price where we’re fairly certain we can recover.
Roger, I hear you, but I think we disagree on whether or not it is appropriate for the government to set benchmarks to show that a bank is compliant with civil rights goals. Banks have said, for a long-time, that they do not lend to minorities because they are inherently riskier or unbankable. Even in communities that have seen increased wealth and asset-security, this is, in my opinion, a cop-out. The CRA does not require banks to reserve a portion of loans only for minorities, it just wants results-driven, measurable goals showing that banks are compliant with efforts to ensure credit reaches a diverse population (and it does tie this to a % of total funds available). This is why I point to the wide variety of ways in which banks can meet CRA standards. I think it’s convenient to hide behind the CRA instead of accepting responsibility for poor practices, poor oversight, and poor enforcement and compliance.
Manju, I think you’re right that we can recover liquidity, but I agree with dipanjan re: lost assets. Some people may make back their investments, but for those who are less willing to stick it out in the market (e.g., those with retirement funds), this is a crap situation to be in, and realistically many investors may never recover.
Look, I think government intervention is required. However, intervention without an understanding of what happened and how to address at least some of the underlying policy concerns is unacceptable. Both as a taxpayer and as a private citizen who banks, I believe I have financial rights (even if these are just feelings, not codified rights) to know that my money is going to go into some kind of productive enterprise. I feel much more strongly about this with respect to the opportunity cost of the war and Defense budgets (which are a huge drain, imo) than I do about bailing out banks, but I do want some kind of reassurance that securitized mortgages, and other securitized assets, will be governed more closely to commercial bank practices than ibank practices.
Camille, if it were true that banks are discriminated, or “copping out,” wouldn’t they naturally lose ground to banks who didn’t? If I were a bank, I would just take advantage of the opportunity created by the short-sightedness of the discriminating banks. I would profit from it.
Also, I too feel I should know my money’s not being used for ‘gambling,’ etc. But rather than demand the government ‘regulate,’ why shouln’t I just choose to bank with an institution that inspires my confidence? Its always hard for me to believe that people so much against the defense budget and war, and who see the opportunity costs of those are willing to allow government to interfere as long as its for ‘good.’ Well the reason the government can have such huge defense budgets and wage expensive wars is because these very ideas have led to an explosion of the size of government. If you want a government that provides education, it will wage war. Thats what concentrated power does.
Roger, in theory that would make sense, but in reality the market for credit in low-income communities is dominated by payday lenders, credit card companies, loan sharks, etc. As dilettante mentioned, there are really successful credit unions that are doing fine, and among “bankable” (i.e., lower risk) minority communities, there are definitely successful local banks.
The limit of banking locally, however, is that you’re also constrained by the money that bank has available to you. If I take a loan out from New Alliance Bank for a community development real estate project, for example, I could absolutely qualify, but my terms wouldn’t be great, and I probably couldn’t take out more than $25,000 (even though I could qualify for up to $50,000). Banking with a larger national bank, e.g. Bank of America, often also implies greater assurance that your funds will come through, as well as access to more funds.
Isn’t that what people did when they picked Lehman, Bear Stearns, Goldman, etc.? All of those are white-shoe firms; if I were an investor in securitized mortgage markets (which, at first glance seems REALLY low-risk), I would be horrified and shocked at what’s happening.
Anyway, I hope I am not pulling the discussion down a dark alley. I’m happy to continue to discuss via email if I’m dominating the conversation or making the conversation inaccessible by invoking financial jargon. For those who are interested but feel this conversation is getting wonky, the NYT has an excellent series of articles explaining what happened in the financial markets and why the fall out is so far-reaching.
But providing luxuries such as ‘better terms’ is not the function of government. What about the opportunity costs of preventing small new credit providing companies from growing. Many, not all, so called loan-sharks are just entrepreneurs. By regulating, guaranteeing, or anything else, you limit the ability of those minority entrepreneurs to make it big and spread prosperity amongst those groups. Clearly, from the events we have seen, the SIZE of a banking institution has little if anything to do with its stability. The government shouldn’t create institutions that promote some lenders BECAUSE they are large.
sure, i’d be horrified. I’d have lost my money. And next time i’d make a better decision. Thats how the market works.
Camille, you make the sisterhood proud. (ya been missed.)
Accounting regulations are an easy scapegoat. The fair value accounting has always been there in some for or the other. The new rules require assets to be valued at an exit price the asset will command in an orderly market (doesn’t take into account prices in firesales) and requires more disclosures on the methodology.
127 · MoorNam said
right after you travel back in time, shoot Gandhi and cut a merry jig on his corpse.
Thanks, bess 🙂
I don’t know that I consider fair terms to be a luxury; I think they’re required for a well functioning market, particularly a market where you want to diversify choice and the ease of entry/exit. Perhaps you see loan sharks as entrepreneurs; I see them as usurers with outrageous terms. There’s a lack of market choice, information, and financial education in addition to a (slightly higher by % of income) need for quick liquidity in low-income communities that facilitates quasi-monopolies.
Look, the free market cuts both ways — for every restraint that is lifted off the “top,” a security net is revoked from the “bottom.” It works well and good when the economy is all boom and growth, but it hurts like hell in a recession. Part of the reason the Great Depression was Great because without regulation or caution, there are big losses to be had for each speculative big gain. Gujudude’s comment re: the short time horizons was totally on point. If you chafe against government regulation, consumer protection, or fairness/accuracy in lending, then why not be alarmed at the massive nationalization effort happening today? Free market ideology implies that you have to be willing to accept big losses when the market goes bust. I think, if people really thought it through, they would prefer a degree of intervention to ensure greater (financial) security in exchange for moderate gains.
Does this mean I’ll finally stop getting all those stupid credit card offers in the mail now? I got one from WaMu like two days ago…
Does this mean that, in the absence of stupid credit card offers that make up so much of the mail that’s delivered, the post office will soon be going belly-up? Or do corporate welfare checks come in the mail, too, thus ensuring life-prolonging subsidies for the ol’ P.O.?
146 · Nayagan said
MoorNam, with all due respect I think what you SHOULD DO if Obama gets elected – is to go find a Walden in Polynesia for four years kick back for four years and then come back to the spend the rest of your life in the Libertarian wet dream that America will become as a reaction to the four years.
“why not be alarmed at the massive nationalization effort happening today?”
Are you kidding me? I am so absolutely against it. More so than any of the other policies I mentioned. In fact I think the very idea they WOULD be bailed out is the problem in its entirety. You’re absolutely correct, we should accept the loses. Not only that, I believe the losses are a net positive. It will allow the growth of new ideas, which is one opportunity cost that is NEVER discussed. Preserving these old financial dodos prevents many potential competitors.
If I wanted to start a ‘bank’ today with my 300k saved up, I cannot. I can only do it if I have 5 million dollars, and am willing to go through the proper regulation hurdles. Do you not think that prevents so many minority entrepreneurs from participating in the free market? Thats why I have a certain admiration for ‘black money,’ ‘loan-sharking’ and the like. Although they have their negative side, at the basic level they are 2 entities agreeing to a contract mutually. The negative side is completely due to its illegality. The loan sharks use ‘thugs’ because their contracts would not hold up in court. Just like the drug trade leads to so much useless loss of life, because they cannot enforce contracts through the court system. I believe the free market has far more to offer those at the bottom then it does to those at the top. Government give-aways will most often help those who are best able to take advantage of them. This most often, are the people who need the least help