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.
I love that you mentioned Financial Security. Who benefits the most from financial security? Obviously those who have a lot to secure. Many people near the bottom wouldn’t mind a shake-up. Which is what were seeing in the broad opposition to this from everyone outside Wall Street.
150 · Roger23 said
u can start an ibank
A lot of people talk as if government intervention in the markets is a “proven” and accepted practice. We just assume certain things, like the need for a currency monopoly or a federal reserve. This is not like the evolution vs creationism debate. There are numerous nobel prize winning economists who would argue that these policies are plain wrong. Idealism is important, especially in times like these. Especially when that idealism is based on real Math and Science.
Unless you are a person with a pension (see: blue collar workers in unionized or government jobs), or a person who is employed by a person who has assets that need security (in general, all of us who are employed in the “above ground” economy).
There’s a high propensity (which I believe is myopic) to think a banking problem only impacts banks and people with investments in them. Those with a bunch of assets are going to be ok; even if 60% of their investment wealth is wiped out, they’re not going to starve. The same is not true for workers at the bottom and middle of the wealth spectrum. If your job disappears because credit has tightened, consumer spending has decreased, and manufacturing has declined, the proportional impact is going to be pretty profound.
Economies are like ecosystems; a threat to the health of one sector impacts the capability for other sectors to thrive, also.
can’t make loans though. Thats what the little people understand.. who needs a loan in their area. who’s going to pay it back. There’s so much knowledge wasted by regulations such as these.
But you are attributing some intrinsic ‘wealth’ to money. If credit tightens due to market activity, it should tighten. People should shift their assets. Some people should lose their jobs. Thats how we can redistribute far more important resources such as human energy. Some of those fired people will start their own companies, and create new jobs. Others will go to school, learn a new trade, and adjust themselves to face a different market. No one has the ‘right’ to a particular job.
Supporting unprofitable enterprise is essentially like digging a hole and filling it back up. A waste of energy, and nothing is accomplished.
26 · Manju said
uh oh. there goes that theory.
Yes, exit situation looks grim. Investments were robust at least in the first half of 2008, but it’s just a matter of time before that falls off as well because VC confidence is at 7-year low. [link]
Depends on how deep the discounts are, doesn’t it? Brad Setser thinks banks can not afford to sell at 33 cents which leaves financial institutions with an exposure of 3.7-3.8T and triggers an aggregate loss of 1.4 trillion in write-offs which is much higher than what has been recognized so far (~400B ??). A higher purchase price implies a smaller write-off on remaining assets, but an even bigger remnant exposure which does not help confidence. [link]
It’s not clear to me if reverse auction will be used to discover the right price and whether that price will be used for mark-to-market pricing of leftover assets.
157 · oops i did it again said
you linked to a story regarding exit strategies for VCs, the most popular of course being ipos. naturally, when the market tanks, not a great time to go public. i was referring to investmens by VCs, which are OK, though i suppose in time we’ll see that hit too.
either way, i don’t see how vinod becomes a welfare queen when he’s not benefitting directly, only indirectly like the rest of us who are doing the bailing. you’d think someone like you would use this trend to debate the actual subject, after all its gods goft to leftists, yet you spend your time making inane insults that don’t even add up.
I haven’t seen anyone drop a gimmie like this since hillary tried to get the democratic nom.
was that the sound of a hair splitting i hear?
you are the one who made some “argument” about silicon valley and vcs. i just refuted that figleaf. although you seem to be doing an excellent job of going back on your “argument” yourself.
dont worry, keep responding to strawmen. latch on to glass steagall repeal allowing bofa to buy merrill, not that glass steagall was already archaic by the time it was replaced, but not with a better regulatory structure, rather with a free for all. the fact that private ratings firms did not do a good job evaluating the risk of firms to which they give a aaa credit rating. the fact that these firms could shortcircuit legal provisions that required them not to be overleveraged by wilfully underestimating risk. the fact that the commodity futures act which phil gramm sponsored that exempted many derivative classes from regulation. it first bit us in the ass in terms of enron, which phil gramm mightily profited from personally, and now it has contributed big time because it specifically banned regulation of credit default swaps.
but no, keep harping about non-arguments so you can keep winning.
they don’t need to. i hear the govt will come riding to my rescue if i screw enough of them up.
there is a bigger problem, i think. reverse auction is going to be tremendously complicated by the equity stake that the govt will get in return. how do you compare the mbs that different firms are selling?
Primarily tranche ratings and time of origination, I suppose. But you are right in that it’s hugely complex, and not sure how credible the ratings are, which is a big part of the problem.
161 · oops i did it again said
strawman? i was responding specifically to dilletante, and later camile, who made the very very common argument that the repeal, specifically allowing ibanks and cbanks to exist under one roof, had something to do with this crises. far from a strawman, its being made all the time.
why would i respond to an argument that wasn’t made until now?
right. why would try to debunk soomething i agree with?
so the credit agencies broke the law? this is fact noe opinion? were the ibanks and hedge funds involved, since they were the ones over leveraged? and why would they hold securites that they knew were not safe? can you subastantiate this? its interesting. and why are you beratting me for not responding to to this accusation when it wasn’t made till now?
i don’t get it. you’re upset with me because i bought this up myself?
no, but there should have been laws preventing them from doing what they did. that is the case for regulation – the govt should have done more instead of being hands off and trusting the market would do the right thing. the aaa credit ratings despite out of control leverage were the fundamental enablers of bad behavior because they could keep borrowing more and more money inspite of not being good for it in actuality.
i fully expect that we will see evidence of law-breaking, or at least systemic bad practice, in terms of undervaluing risk, when this is looked into. this is a confidence game, after all. it is just that the market blinked.
163 · dipanjan said
there is another question, right? treasury needs to value the rest of their assets to come up with potential appreciation in equity, if it is going to get equity in return for its purchase of the mbs. and so even mbs in a similar risk class, but from different companies, can’t really be considered equal.
cuz it was. but enough about me. let’s talk about how fannie and freddie were the problem.
Tyler Cowen! Now even deeper in the tank!
167 · oops i did it again said
so, let me get this straight. you’re upset with me for not taking issue with your assertions?
your first link, i guess to yourself though you use a different handle, is a one line assertion “it is ridiculous to try and believe that they had any role at all to play in downplaying the risks and hiding the extent of their leverage.” i don’t know that was addressed to me since i never called such accusations ridiculous, in fact, i bought up the role of leverage myself, and the commodities act. even then that quote has nothing to do with the credit agencies and its not an argument, just an assertion. so there’s no real meat there.
the second is a link to a nytimes piece. i generally respond to commentators not to those who punt to links, b/c it hard to decipher what the actual argument is. be that as it may the piece talks about financial modeling, something i’ve bought up (how the models are “right” but the firms too overleveraged like in ltcm) so i’m not quite sure where you’re taking issue with me. perhaps you can explain?
yeah i saw that link. i didn’t understand it and its not a known or reliable source so i didn’t respond, and as i said i respond to comments. links should just back up arguments, or else i could just google “fannie mae responsible”, link it , and demand you answer.
i guess you missed the highlighted segment. but i don’t blame you. it is hard for you to swallow because it is inconvenient.
170 · oops i did it again said
well, you’re not really making a cohesive argument. you highlighted someone elses conclusions instead of persuading. i would think this issue would be easier for you. marshal the facts and make an argument. i’ll listen.
lack of regulation was the problem case made and agreed by manju. cra “argument” debunked and supported by tyler cowen fannie’s giant role debunked and affirmed by brad delong gimme taken. good night.
172 · oops i did it again said
y’know, you’d really think on an issue where practically the whole country thinks dereglation led us here, you’d be able to make an extended arguement backed by some facts. this should’ve been a slam dunk for a partisan like you.
yeah, that tyler cowen and brad delong… real ideological dummies.
oh i’m not a partisan. i think clinton too screwed up big time by letting congress get away so easily with the newt deal in the glorious 90s.
the reson i didn’t understand “oops i did it again” link to brad delong, which allefgedly debunks fannies and freddie role, is that the graph appears to do the opposite.
while fannie and freddie are losing market share, they are so huge, that they are still bigger than all other players. so, the graph appears to back up vinods claims. i don’t know if they “led the market down”, but they’re certainly the big fish in the mortgage-buy-side world, whith the largest demand.
127 · MoorNam said
Glad you liked them 😉 Where’s yours? Did you read the Wallerstein? Try Modern World-System I and III (comments on India). Who are you going to blame the Yen Carry Trade on? Enron? That national debt is now going to be 86% of GDP? That basic government functions like making sure that bridges don’t collapse, cranes don’t collapse, hurricanes don’t flood major cities and kill a lot of people have fallen apart. Poor Black people to blame there as well (however implicitly ;)?
Try also Roubini – he has a COMMPREHENSIVE plan to deal with this problem – which hasn’t even been considered as far as I can tell because of a combination of happenstance and the general idiocy of the American elite (Bush and his cronies are a$$holes, the Senate Democrats and House leadership are idiots for going along with them).
Hard? Bernie Sanders had an amendment that came up for a vote on this bill yesterday – a five year 10% income surtax on single people making more than $500,000 and $1,000,000 for couples. They didn’t allow a vote where members names would be recorded and instead made it anonymous. Which guaranteed failure.
Obama has stated he wants tax hikes for people in the 95% percentile or above. This is in a U.S. context. If we had a global government, then you could apply the same standard there, but since you don’t, it’s impossible (without warfare which has its own costs).
You see, it’s not that hard – it’s just that many people don’t want ot do it, from crazy ass ideological republicans to cowardly Democratic Senators. Some are more responsible than others…
Yes, goddamn those people about to lose their houses. I would be impressed, actually, if they’re the ones doing this – I would be too afraid. It’s probably houseflippers. Actually, I would be impressed if anyone is doing this – sounds like an internet rumor with slightly less credibility than “Biden is dropping out for Hillary Clinton.” Yeah, it might be happening, but your substantiation is weak (I read on some website?), particularly given the length of your text and the radical approach of blaming a crisis involving bank-to-bank lending that rests of securitized debts not being sufficiently risk assessed on poor people who can’t pay their mortages.
More to the point THIS IS IRRELEVANT for the economy – as opposed to the credit crisis or the overall financial sector. The reason working and poor people can’t pay their mortgages is because the housing bubble collapsed, there was not enough regulation on lending practices (many of which were in my opinion predatory), they had poor understanding of credit or no other options, their real wages haven’t gone up in a generation (or two at this point), and the rich have been taking profits (e.g. bush tax cuts) or just wasting money (missile defence shield, iraq war, who knows what else) instead of reinvesting for a generation or two.
So go ahead, ignore the big picture – what you’re not realizing and what Vinod hasn’t realized is that the ideology of deregulation, privatization, and voodoo economics is dead- it’s hit its final stumbling block – it simply doesn’t deliver FOR THE MARKET anymore – this is why lots of Big Money supports the Democrats like Obama while some fractions of Big Big Big Big Big money supports the Republicans. And now they want us all to stick together after 25 years of unilateral class warfare on the poor by the rich, without acknowledging that if you don’t have demand, supply has nowhere to go, and the economy doesn’t function. And try to reassure us that they KNOW that giving $700 billion to banks for bad assets is not going to cost anything despite that no one knows! Absurd and angering, and blatantly ideological (and factuallly challenged) descriptions of it are almost as bad.
It’s most irritating to me because I get put in the position of having to defend the market from people who allegedly support capitalism because I believe, rightly or wrongly, that the people who are most marginal will bear the costs of an economic collapse.
So go ahead, free market ideologues, keep on whistling dixie while the circus is burning 😉
Dr,
Roubini is awesome. He was the one who warned publicly about this in 2006.
As for Sanders/$500k – why not $400K? Or $250K as Obama proposes?
AMT was supposed to snare only very rich when it started. Now it snares even the middle-middle class. If the US catches the hyperinflation flu, then a garbage collector will be making $500K, and being taxed higher.
M. Nam
A 10% surtax on such a tiny number of people, regardless of whether they were involved in creating the crisis, is almost downright thievery. To hear someone defend it so strongly, calling people who would be against such a measure cowardly or ‘crazy,’ is quite frightening.
Dr thank #176 you for clearly stating what had been troubling me for a while.
Maybe 700 billion could have been given DIRECTLY TO working poor and middle class families :):). But then that might actually change the balance of power and no one wants that. Seems like we’re propping up the heroin addict with more junk.
178 · Roger23 said
Thievery? You mean like passing a trillion dollar tax cut, half of which goes to the top 1%? This income surtax would make up less than total amount. Sorry you’re scared, but bs time is over. Learn some political economy and stop ignoring recent recent history or get out the way.
mnam 176 – are you seriously asking these questions? It seems like bull$hit to me – the problem with passing a tax cut on the top tier is not technical definitions of who constitutes “rich” – the problem is that no one in power wants to do it. But wait…you’ll see it happen. That Sanders proposal even came up for a vote would be nothing short of a miracle if I didn’t know how hard I worked to get my friends to sign a petition that he had on his website. Simlarly, the Alternative Minimum Tax situation is the same old tactic the republicans have always used to defend absurdly irresponsible tax cuts in the past 10 years – you find a place where someone gets caught in a loophole and then you ask for the moon rather than just closing the loophole. Here’s a simple answer – close the loophole – just raise the standard for the AMT (Which I think the senate bill did, so congrats – further reductions in government revenue at a time without much to make up for it at a time when debt is skyrocketing).
I’ll be off to go learn Mandarin now – thanks! Next week we will cover why it is that I have to learn Mandarin and not a South Asian language 😉
179 · glass houses said
Sure 🙂 Thanks for appreciating it 🙂 You should check out OpenLeft if you get a chance – lots of good discussion there on similar topics. on an aside, please don’t diss addicts – they’re ill, not morally depraved like the people who are ostensibly (and poorly) running finance capital these days.
125 · Manju said
Of course there is a clear cut culprit – it’s you, and everyone else who is obscuring attempts to arrive at as clean a possible an understanding of events that are already having dramatic repercussions on billions. Honestly, do us all a favor and just get out of the way, just this once. At least vinod is sincere.
159 · dipanjan said
Yeah, thats the issue, dipanjan. I’ve been trying to understand what metrics Buffet is using to claim fairly confidently that we’ll turn a profit. But he was unclear on Charlie Rose, but maybe I missed it.
I know his position is we need to do something even if its imperfect, so maybe he’s just talking up the bailout, but thats never been his style.
Buffets Plan:
He said his proposal would kickstart demand for mortgage-backed securities, help find a market price for these troubled assets and make it more likely that taxpayers would be made whole or even come out ahead in the bailout.
Under Buffett’s plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.
“Now you have someone with 20% skin in the game,” explained Buffett. “Believe me, I won’t be overpaying if I’m buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed.”
Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them.
he is just getting in ahead of the bailout and is counting on the govt pumping money in to rescue the system.
160 · Manju said
New York Times. In the tank!
Gimme taken again. And again. And again.
I would say the market has, time and again, proven that it has the foresight of a hamster, but I think John McCain’s campaign strategy gets that distinction after his stunts in the last couple of months. (And still true believers claim that the market knows best, and even has the foresight to deal with the negative effects of climate change which we will see in decades!)
186 · oops i did it again said
Hey, you proved me correct!
“though i suppose in time we’ll see that hit too.”
no wonder you are a fan of wall street.
187 · oops i did it again said
Well, thats what i mean. Anyone can just link to people who agree with them. You’d think on an issue like this, you could write a cohesive arguemt on your own, and link to back it up.
Relying so much on links makes converation impossibe, since your not addressing specific points, just punting to others.
190 · Manju said
are you saying those are not cohesive arguments?
191 · oops i did it again said
No those are cohesive arguments, but they’re not yours, nor are they part of this conversation.
Take the CRA and GSE piece. Since the author hasn’t read Vinod, his specific argument in 120 go unrebutted. I’m sure its related but instead of parsing out what you think is relevant and summarizing where Vinod (or I) are wrong, you just link. So there’s no real conversation.
Don’t understand? Reverse it: Deregulaion not to blame! You’re wrong. I win. Gimme taken!
Quite unsatisfying, huh?
Unfortunately, this statement in your link is wrong.
In fact, the supbrime assets owned by the GSEs were far less risky than those in the broad market. The only argument that is based in fact is that the GSEs were enablers by injecting cash into the system and acting as enablers for the rest of the system’s bad behavior. Well, then the real problem is that the rest of the system was allowed to engage in bad behavior.
I sympathize with your stance, though. I realize you would rather bicker about debate rules and “gotchas” rather than the actual facts, since they are disadvantageous to you.
oops: i gotta run, but i’ll return later to address your 2nd to last parargraph, which is what i was asking from you. but just quickly, i wasn’t endorsing the piece i linked to, just demonstrating the logic of my “debate rules.”
Well, I actually read the pieces I link to, and agree with them, so you can take issue with the facts presented in those arguments and that would be reasonable. That’s the difference. I link to these pieces because they are coherent, often relatively complete arguments by people with a reputation, rather than the piecemeal whack-a-mole style of discussion that typifies blog comments.
So Bear Sterns offered Mortgage funding to “undeserved communities”under Glass Stegall, and GLBA didn’t change that? First Union Capital Markets Corp., Bear, Stearns & Co. Price Securities Offering Backed By Affordable Mortgages ” Unique Transaction To Benefit Underserved Housing Market “
So they acted as if Glass stegall was still in place by doing what was illegal under glass stegall? Why is it happening now? , is it because I banks have decided its way cool to be commercial banks and under tighter regulation,supervisoin along with IB being so 2005? Or is it because they wanted access to deposits to fund themselves as well as the Fed’s lending facilities. Could it be they were afraid of going ‘bye bye’ like Lehman, Merrill and Bear?
Well nobodies told the Maverick’s;
Gov. Palin in Last night’s debate
ok,…I can agree that Govt Regulation via CRA “incentivized” IB’s,Hedge Funds etc to enter/exploit this asset class. However that does not mean that regulation or the opposite; deregulation is neutral. We can’t have it both ways. “If” CRA was bad regulation- was it “good” regulation to allow everybody and their brother to get in on the game? Did not the culture/mission of an IB, Hedge fund, mean that their interest in retail banking products- like mortgages were fundamentally different from “tradtional” mortgage suppliers? And as you point out- their way to shift risk via default swaps were under Greenspan’s decision not regulated or supervised
Stiglitz Vanity fair.
196 · dallying dilletante said
Very nice article, thank you, Dallying Dilletante! Not only analytical, but also prescriptive.
Stiglitz and Shiller will make solid Chairmen of the new Financial Products Safety Commission and Financial Markets Stability Commission respectively. Krugman has been suggested for Treasury Secretary, but may be more useful as a strong outside critic with deep specialist insider knowledge. Don’t know if Bernanke can get a second term as Fed Chief. This mess will take a while to get sorted out, and will need deep cleansing and deep reforms.
196 · dallying dilletante said
Correct. The tranacton you described, would’ve been legal under glass-steagel (at least as far as Bear Sterns goes). in fact, similar transactions (a public offering of MBSs) were done all the time. This type of transaction was invented at salomon bros, sometime in the late 70’s and exploded in the 80’s, almost single-handedly making salomon the most profitable company in the world.
No, Merrill, MorganStan, Bear, and Lehman operated as independent inv-banks, devoid of any significant com-banking activities…until now, after the crises hit. Now they are forced to take advantage of the deregulaion afforded under GLBA i order to save themselves and the capital markets.
Correct. They want access to the Feds lending facilities and are arguably pivoting their biz toward the more stable commercial banking.
I’m not sure your statement proves the first statement wrong. If I bought 10 apples and 3 were bad, and you bought 1 apple that was bad. My portfolio of apples is less riskier than yours but I still contributed to the bad apple market more than you.
maybe if you take those bad apples, smash them up, add some sugar you could repackage it as apple sauce – repackage and sell. Don’t forget to lie about the expiration date.