Did deregulation cause the economic crisis?

[Francesca R]

This is a good article--their usual standard

Liberalisation happened for many reasons. Often, regulators were simply trying to catch up with the real world—for instance, the rapid development of offshore markets. In addition, deregulation provided things that voters wanted, such as cheap loans. Each financial innovation that came along became the object of speculation that was fuelled by cheap money. Bankers and traders were always one step ahead of the regulators. That is a lesson the latter will have to learn next time.

Amid the crisis of 2008, it is easy to forget that liberalisation had good consequences as well: by making it easier for households and businesses to get credit, deregulation contributed to economic growth. Deregulation may not have been the main cause of the rise in living standards over the last 30 years, but it helped more than it harmed. Will the new, regulated world be as benign?

 

[Tippit]

Housing doesn't have a cost except what people will pay. And that is related to what they can borrow.

Only because money is debt, and each dollar represents a debt that must be paid back to the Federal Reserve System at some time.

Upon asking Fed Governor Marriner Eccles how the Fed obtained the money to purchase $2 billion of US Government Bonds in 1933, Congressman Wright Patman received this response:

Eccles: We created it.
Patman: Out of what?
Eccles: Out of the right to issue credit money.
Patman: And there is nothing behind it, is there, except our government's credit?
Eccles: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.

If borrowing is regulated so that it is related to income, then the prices will not rise so much:because demand is not defined as how many people want a commodity: it is defined by how many people can afford to buy the thing they want. An economist can say with a straight face that there is no demand for food in a country where people are starving, because demand is a term of art in this connection. The links I provided show that the availability of credit is the biggest factor driving up house prices and that is what deregulation achieved: planning regulations are insignificant in comparison

Indeed, the availability of credit, or in this case, debt-based money, was the driver of all of the asset bubbles that are now collapsing, including the real-estate market. The error of you and other statists who cry for regulation, is the absurdity of the desire to regulate a behavior that is inherently fraudulent in the first place, and should be outlawed. That is, the endless monetization of debt by fiat money in an inherently unstable fractional reserve banking system.

Perhaps Jefferson said it best:

"The eyes of our citizens are not sufficiently open to the true cause of our distress. They ascribe them to everything but their true cause, the banking system; a system which if it could do good in any form is yet so certain of leading to abuse as to be utterly incompatible with the public safety and prosperity." - Thomas Jefferson

Crying for more regulation of the current plutocratic banking and monetary system we have is like crying for the regulation of rape and murder.

 

[Tippit]

Somewhat off topic. I don't think there is an inherent problem with a fiscal deficit. Some would say that a government that does not need to borrow is taxing its citizens too highly. Of course, big fiscal deficits can spook investors.

That's asinine, when one comes to the simple realization that the monetization of debt is in essence a flat tax on currency holders, and that interest paid on government debt is either paid for by more of the same, or by the government coercion of taxpayers.

With your last comments, could you please address the issue I raised? Traditional banks have had to be rescued too, and deposit insurance has been apparently gauranteed without limit. If Glass-Steagall was not unwound, there would simply have been more Lehman Brothers and Morgan Stanleys. And the idea that they can fail appears to have been quickly proved wrong. (I think that if the US government could wind back the clock a month, they would have saved Lehmans)

Where is the money going to come from, with FDIC sitting at approximately $45B, and responsible for guaranteeing trillions in bank deposits?

 

[Meadmaker]

MIKILLINI: Yeah, they voted to repeal ONE act, while passing hundreds more, and constantly urging banks to give more mortgages in order to promote more home ownership.

They repealed ONE law, and, according to that graph I posted, added another 20,000 pages to the Federal Register. That doesn't sound like they really believed in free markets.

There is one thing that must be borne in mind. The system really did fail. Whatever happened, it failed. When Congress has to meet in a crisis session and pass massive rescue packages to prevent economic collapse, something went wrong.

So, the question that I asked to start this thread had to do with what regulations might have been "de" regulated, in order to bring about this catastrophic failure. A few candidate examples have been proposed, and repeal of those regulations and/or laws may have contributed, but there doesn't seem to be a real smoking gun anywhere. It seems more that the banking system changed and modernized, and new variations of old instruments (e.g. credit default swaps) were created, and allowed to run unregulated.

Meanwhile, there is a counterargument that has been put forward. That argument is that excess regulation actually caused the problem. The focus of that has been the Community Reinvestment Act, and other government initiatives aimed at increasing low income home ownership.

To me, that argument seems very weak, for a few reasons. First, I don't hear executives from loan companies, banks, etc. complaining about it. As best I can tell, they were making money hand over fist doing this business until the bubble burst.

Second, most of the people making this claim seem to cite actions by the Clinton administration, or event the Carter administration. The very fact that ancient history would be brought into this makes me suspicious. It would seem that more recent actions might be more relevant. Did George W. Bush spend his time warning us of impending doom due to his predecessor's action? I think not. In fact, he launched "America's Home Ownership Challenge", lauded the arrival of "the ownership society", and bragged about how much money was being loaned to poor people. Despite that, no one seems to be saying, "George Bush forced banks to make bad loans!" The culprit is always Clinton and the Democrats. It makes me suspect some partisan bias.

Indeed, it seems to me that these excess regulations that allegedly forced banks to make bad loans may actually have been examples of deregulation, or nonregulation. I suspect that what was going on was a bit of a deal between politicians and industry. From the Democrats, it was sort of a promise not to look too closely at questionable risky lending as long as their constituents were the apparent beneficiaries of the looser credit. From the Republicans, it was a deal to let lenders in on the risky, but lucrative, lending practices, as long as they promised that some of that lending would go to low income families. In other words, I don't think banks were forced to lend to low income families, I think they were allowed to do so, and jumped at the opportunity.

 

[Francesca R]

That's asinine, when one comes to the simple realization that the monetization of debt is in essence a flat tax on currency holders, and that interest paid on government debt is either paid for by more of the same, or by the government coercion of taxpayers.

Except that none of those statements satisfy the facts, as I have pointed out a number of times. However, the difference between yourself and SaulOhio, for example, is that you admit that what you believe in is a conspiracy. Other than that, you are both equally in denial of reality.

Where is the money going to come from, with FDIC sitting at approximately $45B, and responsible for guaranteeing trillions in bank deposits?

If trillions in bank deposits need to be redeemed by governments, massive defaulting private sector liabilities will transfer to the state, as will the ownership of a huge portion of currently privately held capital assets (businesses). Inflation will be much higher under that scenario than it would be in the absence of the government honouring this guarantee, but it is probable that in its absence inflation would be of the order of -25% per annum for several years, so it would be a preferable outcome.

 

[Francesca R]

So, the question that I asked to start this thread had to do with what regulations might have been "de" regulated, in order to bring about this catastrophic failure. [ . . . ] It seems more that the banking system changed and modernized, and new variations of old instruments (e.g. credit default swaps) were created, and allowed to run unregulated.

I believe this is more or less the correct conclusion.

Furthermore, financial liberalisation and regulation is a live (social) experiment. Governments and societies are learning that certain mistakes happen, and that certain mistakes are apt to happen, and we are learning what level of importance should be applied to the potential consequences of various incentive structures, and to what extent, and with what degree of difficulty, behaviour can be altered in society's interest by re-rigging incentives. The live experiments in financial capitalism teach us plenty about what can and what cannot be achieved.

There is potentially huge social value that can result from this learning process, more so if knee-jerk policy responses can be avoided.

 

[WildCat]

Meanwhile, there is a counterargument that has been put forward. That argument is that excess regulation actually caused the problem. The focus of that has been the Community Reinvestment Act, and other government initiatives aimed at increasing low income home ownership.

To me, that argument seems very weak, for a few reasons. First, I don't hear executives from loan companies, banks, etc. complaining about it. As best I can tell, they were making money hand over fist doing this business until the bubble burst.

Second, most of the people making this claim seem to cite actions by the Clinton administration, or event the Carter administration. The very fact that ancient history would be brought into this makes me suspicious. It would seem that more recent actions might be more relevant. Did George W. Bush spend his time warning us of impending doom due to his predecessor's action? I think not. In fact, he launched "America's Home Ownership Challenge", lauded the arrival of "the ownership society", and bragged about how much money was being loaned to poor people. Despite that, no one seems to be saying, "George Bush forced banks to make bad loans!" The culprit is always Clinton and the Democrats. It makes me suspect some partisan bias.

It's funny, because a year and a half ago Ben Bernanke gave a speech in which he credited the CRA along with other laws/regulations for creating the secondary mortgage market as well as the subprime loan market: http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm

I wonder if he's since backtracked now that the whole thing has blown up in his face?

In other words, I don't think banks were forced to lend to low income families, I think they were allowed to do so, and jumped at the opportunity.

There was nothing preventing them from making those loans prior to the 1995 CRA revision. Nothing at all! Yet, they weren't "jumping at the opportunity" then. Why was that? Did greed get invented as soon as Bush was elected? Or, as Bernanke thought in March 2007, did such loans only become viable once 2 things happened? The first being improvements in information technology allowing a secondary mortgage market to exist, the second being the proliferation of subprime loans suddenly mandated by the CRA as well as Freddie and Fannie the banks were eager to get off their books as soon as possible. When banks made loans only to people with acceptable credit risks they tended to keep the paper, there was no need for a secondary market.

After the 1995 CRA revision community groups (and ACORN was a big player in this) were allowed to have a say in bank mergers - and their #1 criteria was how many loans they made in low-income communities. So banks started working with these community groups so as not to incur their wrath when the next merger opportunity came around. One thing they did was take a loan candidate who couldn't qualkify for a loan, send him to a community organization credit counseling session, and all of a sudden, as if by magic, that person became "bankable" and got a loan!

And until the whole thing blew up this year everyone was eager to credit the CRA with making this all possible! Now, not so much. Isn't politics amazing?

 

[Tippit]

Except that none of those statements satisfy the facts, as I have pointed out a number of times. However, the difference between yourself and SaulOhio, for example, is that you admit that what you believe in is a conspiracy. Other than that, you are both equally in denial of reality.

That's funny, coming from perhaps the number one denier of reality on this sub-forum. I give you credit though, at least you make some semblance of a substantive argument, even though I find it hard to believe that you believe your own tripe. First, here is what the wiki says with respect to debt monetization being a flat tax:

Debt monetization

Debt monetization occurs when a nation's central bank (e.g. the Federal Reserve in the United States) buys government bonds. [1] If a government's expenses exceed its tax revenue, debt monetization prevents the government from taking capital out of the private market. Since there is a limited amount of capital available in the market, there will be less available to fund business growth if the government takes a substantial portion.

Debt monetization can be seen as a flat tax because the government acquires additional funds while the currency decreases in value.[citation needed] However, monetization helps the government temporarily to meet its short term commitments at the beginning.[citation needed] Debt monetization also has the drawback of increasing the twin deficit. That is, when government financing is increased, along with interest rates and foreign capital, the trade deficit also goes up.[citation needed]

Please do point out in your infinite wisdom where the wiki is wrong, and you are right.

Second, if price is defined as the exchange-ratio of a currency to a good or service, supply is defined as the amount of a commodity that producers are willing and able to offer for sale at a specified price, and demand is defined as the desire to possess a commodity or make use of a service, combined with the ability to purchase it, then why doesn't the law of supply and demand hold for currency as it does for goods and services? The answer is, of course it does.

Economists use supply and demand curves to determine equilibrium price, so obviously supply is relevant. The reciprocal of a price is merely the number of a good that is willing to be exchanged for one unit of currency. If you increase the supply of currency, the equilibrium price of currency will decline in terms of what producers of goods and services are willing to exchange for it. This should be obvious to you, but it apparently isn't.

Furthermore, when issuers of currency debase existing currency in this manner by increasing supply, they profit from the difference of the nominal value and the cost of producing the currency, which, given electronic and paper currency, is next to nothing. This profit is called seigniorage, and it doesn't accrue in a vacuum. It comes at the direct expense of anyone who holds currency, not just those who hold interest-bearing debt on the currency, or savings accounts. Besides enriching those who get to spend the new currency first, it also arbitrarily rewards anyone who holds assets, or interest-bearing debt at the direct expense of those who do not. This should really be obvious to a five-year old, but apparently we're living in the economic dark ages, where "speculation", "regulation", or "deregulation" are to blame for the current economic crisis.

If trillions in bank deposits need to be redeemed by governments, massive defaulting private sector liabilities will transfer to the state, as will the ownership of a huge portion of currently privately held capital assets (businesses). Inflation will be much higher under that scenario than it would be in the absence of the government honouring this guarantee, but it is probable that in its absence inflation would be of the order of -25% per annum for several years, so it would be a preferable outcome.

So in other words, you're a shill for a system that privatizes profit for the super-rich banking class, and socializes risk and puts the burden of these bankrupt and immoral practices on the poor. A system that leaves us either with rampant hyperinflation, or deflation and depression. To a student of sound money like myself who knows that all of this is entirely avoidable, that sounds like a false dilemma.

 

[Toke]

What would happen if goverment bought the bad mortgage at 30-50% of face value?

The banks would get cash, and the homeowners could get their debts reduced to something reasonable.

 

[Francesca R]

Please do point out in your infinite wisdom where the wiki is wrong, and you are right.

My wisdom isn't infinite, and wikipedia does not say "debt monetisation is a flat tax". And it isn't, unless you take your money out of circulation.

Debt monetization can be seen as a flat tax because the government acquires additional funds while the currency decreases in value.[citation needed]

(Oh look, "citation needed")

Decreases in value relative to what? Goods and services? Only if real interest rates average out negative, which they don't. Relative to foreign currencies? Only to the extent of inflation differentials with foreign economies over the long term, and which has nothing to do with domestic real purchasing power which I just dealt with.

Debt monetization also has the drawback of increasing the twin deficit. That is, when government financing is increased, along with interest rates and foreign capital, the trade deficit also goes up.[citation needed]

(Oh look, "citation needed")

Illogical. Debt monetisation does not result in increased bond issuance, rather it reduces bonds outstanding. Ceteribus paribus that would cause interest rates to fall. Show me evidence that treasury bond buybacks in the US at any time over the last 20 years caused interest rates to rise. Come to think of it, show me evidence that treasury bond issuance over the last 20 years caused interest rates to rise.

Second, if price is defined as the exchange-ratio of a currency to a good or service, supply is defined as the amount of a commodity that producers are willing and able to offer for sale at a specified price, and demand is defined as the desire to possess a commodity or make use of a service, combined with the ability to purchase it, then why doesn't the law of supply and demand hold for currency as it does for goods and services? The answer is, of course it does.

What about money demand? Are you one of those who does not think money demand exists? If so kindly refrain from applying an economic axiom that would not apply in such a magic world.

Economists use supply and demand curves to determine equilibrium price, so obviously supply is relevant. The reciprocal of a price is merely the number of a good that is willing to be exchanged for one unit of currency. If you increase the supply of currency, the equilibrium price of currency will decline in terms of what producers of goods and services are willing to exchange for it. This should be obvious to you, but it apparently isn't.

See above. You seem to think you can prove that a square is actually an equilateral triangle by concealing one of its sides. Get real, be honest and stop thinking you can pull wool over people's eyes.

Furthermore, when issuers of currency debase existing currency in this manner by increasing supply, they profit from the difference of the nominal value and the cost of producing the currency, which, given electronic and paper currency, is next to nothing. This profit is called seigniorage, and it doesn't accrue in a vacuum.

Really? They profit if they spend it on society's behalf? They profit if they retire debt with it, relieving a future taxpayer of an obligation? You probably think that Ben Bernanke goes and buys a yacht with it. (Moreover, if it causes unexpected inflation--your implicit assertion running through this--then the Fed's account loses real purchasing power at the same rate as yours and mine)

It comes at the direct expense of anyone who holds currency, not just those who hold interest-bearing debt on the currency, or savings accounts.

You are correct if you say that someone who takes their money out of circulation (EG--stuffs it under their mattress) is not compensated for inflation. That is a voluntary action. As is burning it. Neither of them are great for your wealth unless you expect bank defaults and deflation, which stands a much stronger chance of happening sustainably under what I gather to be your policy proposals

Besides enriching those who get to spend the new currency first, it also arbitrarily rewards anyone who holds assets, or interest-bearing debt at the direct expense of those who do not. This should really be obvious to a five-year old, but apparently we're living in the economic dark ages, where "speculation", "regulation", or "deregulation" are to blame for the current economic crisis.

And those who hold cash at the bank. The federal funds rate is positive in real terms over medium and long term horizons, even though it is negative today. Current (checking) accounts usually do not get compensated for inflation. They aren't a sensible destination for large fractions of personal wealth.

ETA--Oh and belatedly I note your volte-face between those last two quotations, from the false claim that holders of debt or assets are penalised by inflation to the correct one that they are compensated for it. Nice. Maybe there is hope for you yet.

 

[Francesca R]

What would happen if goverment bought the bad mortgage at 30-50% of face value?

That's more or less what the TARP planned to do (and probably will)

The banks would get cash, and the homeowners could get their debts reduced to something reasonable.

Er, the reason why mortgage-backed securities are trading far below par value is that more than a few homeowners have already relieved themselves of their debts.

 

[SaulOhio]

Meanwhile, there is a counterargument that has been put forward. That argument is that excess regulation actually caused the problem. The focus of that has been the Community Reinvestment Act, and other government initiatives aimed at increasing low income home ownership.

The CRA was only one factor, and maybe the least important one. The GSE's, Fannie Mae and Freddie Mac, were most directly responsible, and the urgings of politicians for them to expand home ownership. It is the GSE's the were backing about half of the mortgages in the country. Then there was the Fed, with its historically low interest rates. This is mainly what fueled the speculative bubble. Lots of easy money at low interest rates. Then they raised the interest rates, making it harder for people who got all this easy money to pay it back:

That explains the timing of the crisis. The speculative boom happened during the dip in the chart, when interest rates were as low as 2%. When was the last time the interest rate was that low? Then Bernanke took the Fed Funds rate to over 5%.

Then there was FDIC insurance, which allows banks to lose money and get it back. Heads they win, tails they don't lose.

To me, that argument seems very weak, for a few reasons. First, I don't hear executives from loan companies, banks, etc. complaining about it. As best I can tell, they were making money hand over fist doing this business until the bubble burst.

They weren't complaining about the low interest rates. But ACORN found it necessary to sue a number of lending institutions to get them to comply with the CRA.

Second, most of the people making this claim seem to cite actions by the Clinton administration, or event the Carter administration. The very fact that ancient history would be brought into this makes me suspicious. It would seem that more recent actions might be more relevant. Did George W. Bush spend his time warning us of impending doom due to his predecessor's action? I think not. In fact, he launched "America's Home Ownership Challenge", lauded the arrival of "the ownership society", and bragged about how much money was being loaned to poor people. Despite that, no one seems to be saying, "George Bush forced banks to make bad loans!" The culprit is always Clinton and the Democrats. It makes me suspect some partisan bias.

I agree that the causes of the crisis were a bipartizan effort. But I do credit some republicans, including McCain, for trying to do something about it in 2005, with the FEDERAL HOUSING ENTERPRISE REGULATORY REFORM ACT OF 2005

Indeed, it seems to me that these excess regulations that allegedly forced banks to make bad loans may actually have been examples of deregulation, or nonregulation. I suspect that what was going on was a bit of a deal between politicians and industry. From the Democrats, it was sort of a promise not to look too closely at questionable risky lending as long as their constituents were the apparent beneficiaries of the looser credit. From the Republicans, it was a deal to let lenders in on the risky, but lucrative, lending practices, as long as they promised that some of that lending would go to low income families. In other words, I don't think banks were forced to lend to low income families, I think they were allowed to do so, and jumped at the opportunity.

Thats close, but not quite it. Things like the low interest rates and FDIC made it seem profitable to make these loans. Without them, why would someone lend money to someone who would be unlikely to repay it?

 

[Toke]

I got the impression that your goverment brought mortgage-backed securities at full face value, instead of what they might be worth now or in a year.

Bying at a fraction of value would finance/allow some debt reduction scheme for the most vulnerable homeowners.
Without cost to taxpayers, as a reduced debt would let most pay whats left of their loans.

Financial houses must be easier to negotiate with when short of cash, particulary when you controll the only supply of cheap loans. (national bank)

Instead of disaster capitalism you could get disaster nationalisation.

 

[Francesca R]

The GSE's, Fannie Mae and Freddie Mac, were most directly responsible, and the urgings of politicians for them to expand home ownership. It is the GSE's the were backing about half of the mortgages in the country.

And the big majority of those are conforming loans to prime borrowers which were not and are not in any trouble. FNMA and FHLMC were actually rather "late to the party" with guaranteeing sub-prime debt.

Then there was the Fed, with its historically low interest rates. [ . . . ] The speculative boom happened during the dip in the chart, when interest rates were as low as 2%. When was the last time the interest rate was that low?

In real terms, which is what matters to borrowers, they were that low a number of times in the last 30 years. (The Fed is, arguably at fault for not leaning against asset-price bubbles. I suspect Fed thinking and policy will change on that score.)

Then Bernanke took the Fed Funds rate to over 5%.

And nobody should have expected that? I realise you want an imagined (for you) utopia where interest rates don't matter because there's no credit, but in the real one, make up your mind about whether they should not have been low. or should not have been increased.

Then there was FDIC insurance, which allows banks to lose money and get it back. Heads they win, tails they don't lose.

Do you think deposit insurance is *bad*? Would you prefer "caveat emptor" for banking, whereby Jane public needs to assess the credit risk of her savings bank? Again, please deal with the real world where people use banks, not your fantasy where that's rendered too expensive and everyone hoards gold ingots.

Things like the low interest rates and FDIC made it seem profitable to make these loans. Without them, why would someone lend money to someone who would be unlikely to repay it?

Why would someone borrow if they might not be able to repay? Why would someone believe house prices could only go up and interest rates wouldn't?

 

[Francesca R]

I got the impression that your goverment brought mortgage-backed securities at full face value, instead of what they might be worth now or in a year.

"My" government? My location is listed on the left. And if the government bought at face (issue) value, taxpayers would take an instant certain loss, which is not what the government wants.

Bying at a fraction of value would finance/allow some debt reduction scheme for the most vulnerable homeowners.

Buying the bonds off banks doesn't do anything for homeowners directly. It is, however, thought rather necessary to prevent deep economic collapse.

Without cost to taxpayers, as a reduced debt would let most pay whats left of their loans.

Again, the asset purchase is not by itself something that results in debt forgiveness. That would need to be handled separately by other fiscal initiatives (and has been to some extent already).

Financial houses must be easier to negotiate with when short of cash, particulary when you controll the only supply of cheap loans. (national bank)

Most certainly. The TARP programme is "take it or leave it". But there is a balance to strike between allowing banks to be punished by their prior mistakes and saving them from ruin, because of the extreme negative cost that would inflict on business and society beyond the banks.

Instead of disaster capitalism you could get disaster nationalisation.

I don't know wht this means. Sounds like some idea of a hidden agenda for "planned" extensive state control of banks. Nothing is further from the truth IMO.

 

[SaulOhio]

And the big majority of those are conforming loans to prime borrowers which were not and are not in any trouble. FNMA and FHLMC were actually rather "late to the party" with guaranteeing sub-prime debt.

I think they were late to the party admitting they were having financial difficulty and asking for a nbailout, but isn't providing sub-prime loans they founding principle? Isn't that what they were created for, to give mortgage loans to poor people other banks wouldn't lend to?

In real terms, which is what matters to borrowers, they were that low a number of times in the last 30 years. (The Fed is, arguably at fault for not leaning against asset-price bubbles. I suspect Fed thinking and policy will change on that score.)

It is easy to find fault for the Fed's policies in hindsight. But how do you figure out what they should do ahead of time? This is a small number of people, the chairman and the board of directors of the Fed, deciding how to regulate the economy of an entire country of 300 million people. How do you figure out what is going to serve all their needs, motivate all of them to do the right thing? What principles can serve to guide the Fed in its actions?

And nobody should have expected that? I realise you want an imagined (for you) utopia where interest rates don't matter because there's no credit, but in the real one, make up your mind about whether they should not have been low. or should not have been increased.

I don;t know where they should be. But there would be credit, and there would be interest rates. Its just that banks would not be pretending they have money in their vaults that isn't there.

I really do recommend reading Rothbard's America's great Depressiojn:

Let us suppose an economy with a given supply of money. Some of the money is spent in consumption; the rest is saved and invested in a mighty structure of capital, in various orders of production. The proportion of consumption to saving or investment is determined by people’s time preferences—the degree to which they prefer present to future satisfactions. The less they prefer them in the present, the lower will their time preferencerate be, and the lower therefore will be the pure interest rate, which is determined by the time preferences of the individuals in society. A lower time-preference rate will be reflected in greater proportions of investment to consumption, a lengthening of the structure of production, and a building-up of capital. Higher time preferences, on the other hand, will be reflected in higher pure interest rates and a lower proportion of investment to consumption. The final market rates of interest reflect the pure interest rate plus or minus entrepreneurial risk and purchasing power components. Varying degrees of entrepreneurial risk bring about a structure of interest rates instead of a single uniform one, and purchasingpower components reflect changes in the purchasing power of the dollar, as well as in the specific position of an entrepreneur in relation to price changes. The crucial factor, however, is the pure interest rate. This interest rate first manifests itself in the “natural rate” or what is generally called the going “rate of profit.” This
going rate is reflected in the interest rate on the loan market, a rate which is determined by the going profit rate.

Do you think deposit insurance is *bad*? Would you prefer "caveat emptor" for banking, whereby Jane public needs to assess the credit risk of her savings bank? [/quote]
Yes. That is exactly the problem with our economy as it is. It encourages people to be lax in managing their risk. They expect the government to do it all for them, to save them from the folly of their own actions. Have I posted the link to Welcome to 'Moral Hazard' here, yet?

Again, please deal with the real world where people use banks, not your fantasy where that's rendered too expensive and everyone hoards gold ingots.

Why would people hoard their gold? Why wouldn't they spend or invest it? Aren't people "greedy" in your world? Don't they want to make a profit?

Why would someone borrow if they might not be able to repay?

Because its nice to get something for nothing, which is possible only in our modern, fractional reserve, FDIC insurance, easy bankruptcy economy.

Why would someone believe house prices could only go up and interest rates wouldn't?

Because they believe the government will pump easy money into the economy indefinitely. This is all stupid behavior that people could only believe they could get away with if they believe the governemnt is always going to be there to save them.

 

[Tippit]

My wisdom isn't infinite, and wikipedia does not say "debt monetisation is a flat tax". And it isn't, unless you take your money out of circulation.

Of course it is a flat tax. Apparently using cash equates to "taking money out of circulation" to you. Are you pretending hard currency doesn't exist and circulate, or is magically exempt from this tax? Wikipedia and most economists are correct, you are wrong.

Decreases in value relative to what? Goods and services? Only if real interest rates average out negative, which they don't. Relative to foreign currencies? Only to the extent of inflation differentials with foreign economies over the long term, and which has nothing to do with domestic real purchasing power which I just dealt with.

The unit of currency depreciates in spite of the fact that you may make a pittance on your savings account, and you continue to ignore the fact that this punishes those who do not have assets or access to capital markets in favor of those who do.

Illogical. Debt monetisation does not result in increased bond issuance, rather it reduces bonds outstanding. Ceteribus paribus that would cause interest rates to fall. Show me evidence that treasury bond buybacks in the US at any time over the last 20 years caused interest rates to rise. Come to think of it, show me evidence that treasury bond issuance over the last 20 years caused interest rates to rise.

That's ridiculous. If the Federal Reserve System didn't stand ready to print more monopoly money, the surplus government bond offerings would have no real demand. Treasury issues new IOUs knowing full well the market (consisting mostly of foreign central banks who debase their own national currencies) will not absorb them all, and in fact depends on the Federal Reserve to finance its deficit spending. As far as the effects of monetary debasement on prevailing interest rates - they vary. When discussing interest rates it pays to be specific. For instance the so-called TED spread, the spread between t-bills and the LIBOR is near all-time highs, reflecting the illiquid credit markets. When inflation causes asset bubbles such as that in real-estate, it often pays more to simply acquire assets. The Fed can only manipulate the rates it has direct control over.

What about money demand? Are you one of those who does not think money demand exists? If so kindly refrain from applying an economic axiom that would not apply in such a magic world.

I never suggested monetary demand doesn't exist. Of course it exists, and in the case of national governments and banksters, it's insatiable. I merely pointed out that in the real world the supply of goods bears directly on the price of goods, and this is true for the supply of currency as well. The important distinction being, of course, that increases in the supply of goods can only come from productive economic activity - the supply of currency is entirely arbitrary, and can be created by keystroke or printing press.

See above. You seem to think you can prove that a square is actually an equilateral triangle by concealing one of its sides. Get real, be honest and stop thinking you can pull wool over people's eyes.

It is you who is doing the figurative "wool-pulling", because you would have us believe that the price of goods is dependent on the supply of goods, yet, if we take the reciprocal of price, the price of currency is somehow magically independent of the supply of currency. In the real world, the lowest-cost producers of goods realize the highest profits, so too do the lowest-cost producers of (and in fact, the monopolists of) currency realize the highest profits from seigniorage.

Really? They profit if they spend it on society's behalf? They profit if they retire debt with it, relieving a future taxpayer of an obligation? You probably think that Ben Bernanke goes and buys a yacht with it. (Moreover, if it causes unexpected inflation--your implicit assertion running through this--then the Fed's account loses real purchasing power at the same rate as yours and mine)

Close, but not quite. More accurately Bernanke chooses which of his bankster friends he's going to bail out with his funny money, and they go and buy yachts (and mansions, and sports cars) with it. You're free to believe the "it's done on society's behalf" lie if you wish. If I had access to unlimited bailouts, I could increase my share of money faster than my existing money could be debased. There is no counterfeiter's paradox.

And those who hold cash at the bank. The federal funds rate is positive in real terms over medium and long term horizons, even though it is negative today. Current (checking) accounts usually do not get compensated for inflation. They aren't a sensible destination for large fractions of personal wealth.

Translation - the purchasing power of money in your wallet and your checking accounts is subject to perpetual confiscation, and you fully support this. In fact, even the "real" rate of return is dependent on the phony CPI and GDP calculations designed to minimalize cost-of-living adjustment expenses of government entitlement programs. And CPI doesn't account for asset bubbles at all, does it? It only accounts for hedonically adjusted consumer prices. The fact that the average home-buyer has to mortgage half her life away to become a "homeowner" is just an afterthought, I suppose.

ETA--Oh and belatedly I note your volte-face between those last two quotations, from the false claim that holders of debt or assets are penalised by inflation to the correct one that they are compensated for it. Nice. Maybe there is hope for you yet.

That sentence corrected should read "It comes at the direct expense of anyone who holds currency, not just those who issue interest-bearing debt" Inflation hurts creditors, and helps debtors. Are you really claiming otherwise?

 

[Meadmaker]

It's funny, because a year and a half ago Ben Bernanke gave a speech in which he credited the CRA along with other laws/regulations for creating the secondary mortgage market as well as the subprime loan market:

That's quite a speech. Slow to digest. I haven't yet, fully, so I won't comment extensively, but a couple of things jumped out at me. First of all, in the early paragraphs Bernanke noted that there were three major revisions of CRA regulations, in 1989, 1995, and 2005. You focused on the 1995 revisions, but in reading about those regulations, I didn't see anything about them that forced banks to do any more than they had done before 1995. In fact, they appeared to be directed at lowering the cost of compliance for banks. So, what was it about those 1995 regulations that made banks issue more of the bad loans?

Or is it possible that other factors Bernanke identified, regulatory and market based, had a greater role?

Another thing that jumped out at me is that Bernanke discussed how the CRA may have been becoming increasingly ineffective, as fewer loans were orignated by banks, and more by mortgage brokers, who are not subject to CRA compliance.

 

[Meadmaker]

The CRA was only one factor, and maybe the least important one. The GSE's, Fannie Mae and Freddie Mac, were most directly responsible, and the urgings of politicians for them to expand home ownership.

The more I read about Fannie and Freddie, the less I like them. I must agree that these pseudo-private, government backed institutions are accidents waiting to happen.

 

[Francesca R]

I think they were late to the party admitting they were having financial difficulty and asking for a nbailout, but isn't providing sub-prime loans they founding principle?

No, not at all. They don't even "provide loans". And the securitisation of lower credits happened quite recently, in the last decade.

Isn't that what they were created for, to give mortgage loans to poor people other banks wouldn't lend to?

That is not the same thing, is it? (In the aftermath of the 1930s depression, that is)

I don;t know where they should be. But there would be credit, and there would be interest rates. Its just that banks would not be pretending they have money in their vaults that isn't there.

See, every time you say something dumb like "pretend", which banks are not doing in respect of "money in their vaults", you confirm that you believe in a conspiracy. Which on your own terms apparently means you are finished here. Unless that was a lie. Looks like it.

Yes. That is exactly the problem with our economy as it is. It encourages people to be lax in managing their risk. They expect the government to do it all for them, to save them from the folly of their own actions. Have I posted the link to Welcome to 'Moral Hazard' here, yet?

So to confirm, you think that Jane public not bothering to check out the creditworthiness (default probability) of her savings bank is "lax risk management"? So you want her to inspect the financial statements and gain the necessary training first to be able to understand them. Suppose she did all that and concluded that WaMu was indeed a sound bank, and suppose then there was a bank run and she didn't get paid. That means her actions were "folly" does it? What rot.

Why would people hoard their gold? Why wouldn't they spend or invest it? Aren't people "greedy" in your world? Don't they want to make a profit?

Because apparently according to you, they would have to acquire a financial degree before even using a bank.

Because its nice to get something for nothing, which is possible only in our modern, fractional reserve, FDIC insurance, easy bankruptcy economy.

Nonsense, it is possible in any economy.

Because they believe the government will pump easy money into the economy indefinitely. This is all stupid behavior that people could only believe they could get away with if they believe the governemnt is always going to be there to save them.

Nonsense again. The government never said it would constantly push up house prices, nor can it.

Let's get this straight--the government was responsible for everything bad that has happened, and all private actors were unwitting faultless pawns in this vast conspiracy? Yeah, right.