How did we get into this situation in the first place?

[corplinx]

I wonder what Ayn Rand had to say about depressions? Probably that they were caused by government interference and that if the capitalist system were just allowed to operate without interference they wouldn't happen. And free enterprise would somehow fund the soup kitchens.

Aren't most soup kitchens run by charities?

 

[BenBurch]

Aren't most soup kitchens run by charities?

You know who is often credited with having invented the whole concept, right?

Alphonse Capone.

Seriously.

 

[GreyICE]

I believe the Randites (and I used to be one) think that recovery would have actually been FASTER from the Great Depression without government intervention. They see it as a failure of intervention as opposed to a failure of capitalism.

Well yes. The Randroids, however, are deeply insane. This point really cannot be overstated when attempting to wade through their nonsense.

All copies of Atlas Shrugged should come bundled with Beggars in Spain.

 

[corplinx]

To be fair, not every New Deal regulation sped up recovery. I think a reasonable person should be able to analyze what worked and what did not and come up without either being called a socialist for pointing out what did or a crazy Randroid for pointing out which did not.

 

[BenBurch]

Well yes. The Randroids, however, are deeply insane. This point really cannot be overstated when attempting to wade through their nonsense.

All copies of Atlas Shrugged should come bundled with Beggars in Spain.

Problem is that SOME things she was correct about, and that sucks people in. But they insist on taking her whole catechism as a "seamless garment."

 

[BeAChooser]

As gdnp has just pointed out, the market is presently evaluating those mortgages as essentially worthless.

The only reason the market is saying that is because it is waiting to see what the government does. The market has built in mechanisms for assessing value, if you let it operate as it can if left alone. Competition between potential buyers will be factor and help in properly doing that. The government actually has no such mechanisms for assessing value and eliminates competition in that process. The market would value each item individually ... but I read that the government bailout may entail lumping assets together at so many cents on the dollar and it being done arbitrarily by Paulson depending on how he feels at a given moment. Politics wouldn't figure much into a market solution but you can be sure it will play a major role in the government's bailout. As a result favoritism will enter the picture. We've already seen hints of that with some of Paulson's shenanigans. And the government bailout will also do nothing about the poor policies that created the problem in the first place. It won't change the underlying defect. A market solution would because it would put new people in charge and they would enact different policies.

 

[Dymanic]

The only reason the market is saying that is because it is waiting to see what the government does.

Partly, but not the only reason. It depends on what a lot of things do. The unemployment rate. The price of oil. Some of the people who took those loans will be able to keep up with the payments; some of them won't. For those who are just barely keeping up now, the next spike in the price of food or gas or heating oil might be the straw that breaks the camel's back. The worse things get, the worse they'll get -- and if they get bad enough, it won't be just the marginal borrowers having trouble keeping up.

For now, the market has to assume that a lot of those loans will fail, and because it isn't easy to tell which ones they'll be, securities based on them must be regarded as highly suspect at best and essentially worthless at worst. As has been noted, it is partly a "crisis of confidence". The market is waiting to see what the market will do. Once a certain tipping point is reached, the whole thing becomes viciously self-perpetuating. The bailout is an attempt to break that cycle before it gets so much momentum that nothing could stop it. I hope it works, but I have to say that the phrase "Hail Mary pass" comes to mind.

 

[not_so_new]

The only reason the market is saying that is because it is waiting to see what the government does. The market has built in mechanisms for assessing value, if you let it operate as it can if left alone. Competition between potential buyers will be factor and help in properly doing that. The government actually has no such mechanisms for assessing value and eliminates competition in that process. The market would value each item individually ... but I read that the government bailout may entail lumping assets together at so many cents on the dollar and it being done arbitrarily by Paulson depending on how he feels at a given moment. Politics wouldn't figure much into a market solution but you can be sure it will play a major role in the government's bailout. As a result favoritism will enter the picture. We've already seen hints of that with some of Paulson's shenanigans. And the government bailout will also do nothing about the poor policies that created the problem in the first place. It won't change the underlying defect. A market solution would because it would put new people in charge and they would enact different policies.

Look.. here is the deal.

This is beyond politics, this is beyond finger pointing. This is SERIOUS.

There are people in the world of economics who say we have no idea what to expect because we are heading into uncharted waters. They don't know what the best course of action is and that leads me to believe that YOU don't know what is the best course of action either.

Is the bailout the solution? I don't know, no one does but I am willing to risk a little long term hurt in exchange for a GREAT BIG SMOKING hole in the head hurt that awaits us right around the corner if the credit markets don't start to loosen up and soon.

As Paulson said something like (not a direct quote) taxpayers will be paying for this mess regardless. The only question is whether we want to pay for it with fiscal spending (the Paulson plan) or lost revenue (a second Great Depression).

I for one don't want to risk just letting a little "market correction" take place. I am a tax payer and I am PO'ed about this mess but I want my tax dollars to go toward fixing it for the betterment of MY wallet and the nation.

As Warren Buffett said, "Well, I don’t think it’s perfect, but I don’t know that I could draw one that’s perfect. I’d rather be approximately right than precisely wrong, and it would be precisely wrong to turn it down."

 

[BeAChooser]

Bear Stearns failed in March. Why? subprime mortgage securities. How much time do you think the markets need to value these assets? That was 7 months ago.

What's your point? Bear Stearns failed because it engaged in foolish practices. Why's that my problem? In fact, Bear Stearns just proves my point. They were so stupid that they refused to sell out to larger firms when they got into trouble early on. Because the bad management wanted to stay in power, pulling in those great salaries. And when they failed, what happened? The government immediately stepped in, interferring with the process of determining asset values. IN MARCH the Fed agreed to fund $30 billion in Bear Stearn assets, rather than let the market deal with the problem itself. What changes took place in Bear Stearn's management and policies? Can you tell us? And apparently, that effort didn't really do much to stabilize the situation ... did it. Here we are being asked to hand over $700 billion more now. How much will they ask for next year, when again the basic problem isn't solved and the same people are still in control?

Because when the banks all fail the FDIC will have to bail out the depositors anyway.

And what makes you think banks are ALL going to fail if we let firms that made bad investments go bankrupt? Your fear? And who is promoting that fear? Or are you using that fear to try and promote an agenda ... making government bigger? Even if all the banks in the US collapsed and we decided to bail out depositors for everything they had in them (including the uninsured deposits), it still wouldn't cost us much more than the 700 billion dollars you folks want to steal from us now. Compare that to the total assets of US households in 2005 of 62.5 trillion dollars (according to wikipedia). And of course that isn't going to happen. It's just baseless fear.

Yours is the system that the Japanese tried after their real estate bubble burst.

WRONG.

http://www.cnbc.com/id/26441422

Bailout Plan Will Be Drag On Fragile US Economy

... snip ...

Hanke and other economists see some similarities with Japan’s decade-long economic malaise – combination of real estate asset bubble, banking crisis and misguided and expensive government intervention.

... snip ...

Most economists say the Japanese government made the mistake of extending the country’s financial problems by one form of intervention or the other – corporate aid packages, repeated stimulus packages with one-off tax rebates that consumers didn’t spend and ever lower interest rates. The stock market sank and then languished for years.

http://www.realclearpolitics.com/articles/2008/10/financial_bailout_would_impose.html

Why the Bailout is Bad for America

By Daniel Mitchell

The proposed bailout of the financial system is a misguided scheme that will hurt the U.S. economy in the short run and long run. The economy currently is stumbling as a consequence of a government-created housing bubble, but a bailout of companies, executives, and shareholders that made unwise decisions would, at best, extend the economy's adjustment process. More likely, the bailout would impose considerable additional economic damage because political factors would at least partially supplant market forces in determining the allocation of resources.

... snip ...

Japanese politicians made many of the same mistakes in the 1990s that American politicians today are considering, and the Nikkei suffered a lengthy period of decline - and remains today far below its peak level.

... snip ...

The bailout repeats the mistakes Japan made in the 1990s. There are several historical episodes that indicate the dangers of government intervention to prop up a bubble. Japan faced a similar situation at the end of the 1980s, with real estate prices rising to absurd levels. The bubble then burst, but rather than let market forces operate, Japanese politicians sought to prop up both insolvent institution and asset prices. This interfered with the orderly reallocation of labor and capital, created considerable uncertainty, and contributed to a "lost decade" of economic stagnation.

Here's what your approach may do, gdnp:

http://finance.yahoo.com/tech-ticker/article/83221/Bailout-a-Done-Deal-So-What-Happens-Now?tickers=jpm,wfc,c,bac,gs,ms,^gspc

So What Happens After the Bailout?

... snip ...

October 1, 2008

... snip ...

- Hank Paulson & Co. survey the banking industry and decide who will stay and who will go. ... snip ...

- Within a month or two, Paulson buys $250 billion of worthless assets. ... snip ...

- Confidence improves modestly, but banks continue to hoard capital and credit markets stay tight. ... snip ...

- The credit crunch filters through to consumers ... snip ...

- The economic news continues to get worse ... snip ...

- The global economy continues to weaken: Europe, Asia, and, eventually, emerging markets ... snip ...

- The stock market continues to fall, as corporate earnings come under increasing pressure and hope for an early 2009 recovery fades ... snip ...

- The government enacts further measures to try to stop the fall in asset prices (stocks, houses)–including an expansion of the bailout plan–but these don’t work ... snip ...

- A new round of white-collar prosecutions send a new posse of corporate villains to jail. Some will be guilty ... snip ...

- The government announces a new New Deal ... snip ...

- Eventually, asset prices will bottom: Housing down 40% in real terms, the stock market down at least 50% ... snip ...

- Unlike Japan, we finally force our banks to write down assets as far as they need to be written down…and then recapitalize them ... snip ...

- We gradually begin a long-term economic recovery ... snip ...

- The stock market finally begins a new, long-term bull market ... snip ...

BAC, what part of "worst financial crisis since the great depression" don't you understand?

gdnp, what part of Roosevelt's government intervention prolonged recovery in the Great Depression don't you understand?

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

FDR's Policies Prolonged Depression by 7 Years, UCLA Economists Calculate

http://www.usnews.com/articles/business/economy/2008/04/11/did-the-new-deal-work.html

In 1995, economist Robert Whaples of Wake Forest University published a survey of academic economists that asked them if they agreed with the statement, "Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression." Fifty-one percent disagreed, and 49 percent agreed. Whaples today says that the New Deal remains a thorny issue for economists because it's so difficult to measure the effects it had on the country. "You need a credible model of the economy, and not everyone is going to agree on what that model should be," he says.

Yet most economists, including defenders of the New Deal, do agree that Roosevelt's policies were far from perfect. The National Industrial Recovery Act of 1933, in particular, gets a lot of blame. It created the National Recovery Administration, a federal bureaucracy that limited competition in various industries by setting prices and wages above market levels. The ensuing upward pressure on the price of goods and unemployment may have turned a bad situation worse.

... snip ...

One explanation is that in addition to the harm done by the restrictions imposed by the NRA, the "soak the rich" rhetoric coming from the Roosevelt administration had a chilling effect on economic growth by making people fear for their property rights. Who knows, maybe Uncle Sam would just start wholesale confiscation of the fortunes of America's wealthy or the nationalization of industries—Americans were already observing that going on across the pond with the rise of communism in Russia and fascism in Europe. This uncertainty, along with a jump in the top federal income tax rate from 25 percent in 1931 to 79 percent in 1936, may have deterred investment.

Does that last sound familiar, gdnp? It should, if you've been paying attention to the rhetoric coming from the Obama camp. Maybe the worst thing we could do is add Obama's agenda to this already dire situation.

 

[BeAChooser]

Here's the real crisis in confidence, gdnp:

http://www.youtube.com/watch?v=NU6fuFrdCJY "Burning Down The House: What Caused Our Economic Crisis? V2"

 

[BeAChooser]

My only problem is, accountability.

Speaking of which, I notice not one of you had a thing to say on this thread:

http://www.internationalskeptics.com/forums/showthread.php?t=125511

Why am I skeptical that you folks really have a problem with lack of "accountability"?

 

[Matteo Martini]

Obama asked in the debate, "how did we get into this situation in the first place?" Good question. Who really is responsible for getting us in this mortgage mess? Republicans or Democrats? McCain or Obama? [..]

Both.
America spends too much money in their military, this is why their economy is not going well.
China is not spending much on the military, so their economy is growing 10% a year

 

[BeAChooser]

As has been noted, it is partly a "crisis of confidence".

See post #110.

The market is waiting to see what the market will do.

No, the market is waiting to see what the government will do. If the government had stated from the beginning there'd be no bailouts, we'd already be a long way down the road to eventual recovery. Commercial entities would be stepping in to buy those assets with any value. The way it is now, it sounds like even you ... the advocates of this government bailout ... have your fingers crossed over a hail mary pass ... that in all likelihood won't work. We KNOW the market can deal with bankruptcies and risk and asset evaluation in an efficient manner. I see few examples where government has accomplished what it said it would do in an efficient manner and without all sorts of unintended consequences. Do you?

 

[BeAChooser]

This is beyond politics, this is beyond finger pointing.

Of course you'd say that since democrats and their constituents are the people who mostly caused this problem.

There are people in the world of economics who say we have no idea what to expect because we are heading into uncharted waters.

But the market dealing with bankruptcies is not uncharted water. It has happened every day for hundreds of years. What is uncharted is the government bailout. You are right. The government does NOT know how to handle a problem like this since it has no time tested mechanisms for doing it. And most examples in the past of government interference have only made matters worse. The government (mostly democrats) assured us 45 years ago that they were going to solve the problem of poverty in the US. More than 10 trillion dollars later, the problem is still with us and just as many people are called poor now as were called poor then. The government assured us it would solve the problem of drugs decades ago. They didn't did they and it could even be argued that they've only made matters worse. And in the 1990's the government assured us they were going to solve the problem of home ownership for the poor and minorities. And look where we are now. Why do ANY of you have ANY confidence that government is now the answer ... especially since government interference in the market caused this problem in the first place? Are you just stuck on stupid? Watch that video clip on burning down the house that I linked above and then try to convince me government and democrat interference in the housing market is not what created this mess. And you are ok with giving a trillion dollars to the very people who did it, hoping they will now fix the mess. I have a bridge to sell you.

Is the bailout the solution? I don't know

Wow! And yet you want us to hand a trillion dollars to the people who created this problem in the first place. You must think us idiots.

I am willing to risk a little long term hurt

As long as it's not the people who caused this problem (mostly democrats) doing the hurting? How generous of you.

if the credit markets don't start to loosen up and soon.

And why hasn't the credit market loosened up? Because of government interference. Because of fear promoted by democrats in an election year.

As Paulson said something like (not a direct quote) taxpayers will be paying for this mess regardless.

That does not give Paulson the right to put his hand in my pocket. *I* am willing to take my chances and pay later IF NEED BE. What Paulson is doing is EXTORTING money from us ... at gunpoint (called the IRS). Paulson is part of the problem and his own corruption is evident in some of things he's been doing.

or lost revenue (a second Great Depression)

You are just playing on our fears. I thought you democrats objected to Bush and the Republicans playing on the publics fears? The Great Depression and this event are not similar. There wasn't 65 trillion dollars in household assets in America back then. There is now.

I for one don't want to risk just letting a little "market correction" take place.

See? It's like I've said all along. You folks don't believe in the free market or private property or capitalism. You just give those things lip service. That's now obvious. You believe in socialism. Or communism. You believe you can TAKE money from me to keep someone else from paying for their mistakes and bad judgement. Tell me, are you going to ensure that NO bankruptcies occur in the US? Because the majority of small businesses, which form the backbone of America, go bankrupt. Oh the pain that causes. Seems to me you should be equally compassionate to those people as you are to the people who got us into this mess.

I am a tax payer and I am PO'ed about this mess but I want my tax dollars to go toward fixing it for the betterment of MY wallet and the nation.

Obviously you aren't that PO'ed because I think you know as well as I do that in all likelihood government will NOT fix this problem. They'll only delay its actual resolution and probably make it worse. Let me ask you this. Are you willing to eliminate the activities that caused this to occur in the first place? Social engineering to promote home ownership amongst people who did not have the financial basis to own a home? Are you willing to punish those people who abused the system ... like Raines? Are you willing to throw the people who ignored this problem until it was critical (like Barney Frank and Maxine Waters) out of office? Let's test how PO'ed you really are.

 

[BeAChooser]

China is not spending much on the military

http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

The United States spends 3.7% of its GDP on its military, less than China's 11%, more than France's 2.6% and less than Saudi Arabia's 10%.[8] This is historically low for the United States since it peaked in 1944 at 37.8% of GDP (it reached the lowest point of 3.0% in 1999-2001). Even during the peak of the Vietnam War the percentage reached a high of 9.4% in 1968.[9]

 

[Meadmaker]

Google is such an amazing thing. I got to wondering about the role of FHA loans in this mess. I was always suspicious of a program that made it easier for people to buy houses when they couldn’t afford a downpayment. I was a 20% down sort of guy myself.

Anyway, I stumbled upon this particular liberal initiative:

http://www.whitehouse.gov/news/releases/2003/12/20031216-9.html

So, here was this big liberal at the White House, surrounded by other liberals like Jim Leach and Katharine Harris, all touting their plans to increase minority home ownership. This was 2003, just as the loans were about to be issued that would cause us so much grief today.

I really know very little about this legislation. Was it bipartisan? There were no Democrats whose names I recognized at the signing ceremony.

Here’s an analysis with one paragraph that really caught my eye:


http://iarnuocon.newsvine.com/_news/2008/10/01/1940028-the-republican-roots-of-the-subprime-crisis

President Bush's "America's Home Ownership Challenge" pushed the private lending sector (as well as Fannie Mae and Freddie Mac) to make more than 5.5 million new minority and low income mortgage loans. To meet his challenge to the private lending industry, twenty four of our largest banking and lending companies pledged to make 1.1 trillion dollars in low income and minority loans. Bush's "America's Home Ownership Challenge" pushed private lenders to "create more creative" loan products, and encouraged them to "loosen underwriting standards."

What caught my eye was were the quoted sections about “more creative” loan products, which I had seen referenced elsewhere, and also “loosen underwriting standards”.

Creative load products with loose underwriting standards were indeed the cause of this problem. Did the Republican sponsored and signed bill create, encourage, or expand these practices. Did Democrats support or oppose this legislation? I don’t know. Is the opinion piece quoted above even accurate? Again, I don’t know.

Google On! I will report back results.

 

[Meadmaker]

duplicate post removed.

 

[Dymanic]

The way it is now, it sounds like even you ... the advocates of this government bailout ... have your fingers crossed over a hail mary pass ... that in all likelihood won't work.

That seems like a fairly reasonable assessment. As I've said, I don't see anyone really being in love with this thing. I'm not sure I'm ready to be counted as an "advocate" of the bailout -- I'm an opponent of doing nothing. The most I'm hoping for is that it may buy some time.

We KNOW the market can deal with bankruptcies and risk and asset evaluation in an efficient manner.

When a hurricane makes landfall somewhere on the US coast, we can deal with that in an efficient manner (for some values of "efficient"). If every major city in the country were hit by a hurricane on the same day, that would be an entirely different matter. If our credit system fails, WE KNOW the market can't deal with that. Help won't be coming from anywhere, because everybody will be dealing with their own problems.

 

[boloboffin]

Well. Barney Frank in 2003 said that Fannie Mae and Freddie Mac weren't in a crisis. He did this when the Republican Treasury Secretary John Snow was proposing new regulation of the two GSEs.

As in, switching regulation from HUD to Treasury.

And the thing is, John Snow agreed with Frank.

Mr. Frank. I agree, Mr. Secretary, but here is my point. I think Treasury is going to be the big brother here, and if one set of goals is in Treasury and the other set is in HUD, I worry about an institutional disadvantage for the set of goals that are important to me.

Let me, with that, turn to the Secretary of the Treasury, because what I am struck by here is what is not in here; and I am glad it is not in here. We have heard descriptions of the situation regarding GSEs as a great crisis and an imminent threat to financial stability. This does not change the essential relationship of the GSEs legally. I am not for changing that, but I think we ought to note that this is not a document put forth by people who think that the sky is about to fall or that we are going to have serious damage; and I am struck by that moderate quality.

Let me ask you, Mr. Secretary -- and again I appreciate that there is not a lot of rhetoric in here about how terrible these are. I appreciate that you think we should enhance the regulation, but I get the impression that you were talking more about guarding against potential future problems developing, rather than feeling that there is an urgent need to stave off some crisis.

Are we in a crisis now with these entities?

Secretary Snow. No, that is a fair characterization, Congressman Frank, of our position. We are not putting this proposal before you because of some concern over some imminent danger to the financial system for housing; far from it. Rather what we are saying is, since 1992, or whenever it was that OFHEO was established by statute, over a decade ago, these housing markets have developed.

Mr. Frank. Getting bigger.

Secretary Snow. Huge. Hugely. And those entities have grown and become now very large players on the whole financial landscape of the United States. We just feel it is time to----

Mr. Frank. Good. I think it is important to have that, to make it clear that that is the context.

 

[Meadmaker]

I really know very little about this legislation. Was it bipartisan?

Answer: It passed by unanimous vote in both houses.

One problem with google is that it is great for search for obscure information, or for not so obscure, but non controversial, information, where there is likely to be a wikipedia article.

In this case, it was hard to get past the opinion pieces.

What I was looking for was exactly where the President, as part of his "America's Home Ownership Challenge", actually changed regulations, initiated legislation, or really did anything at all beyond give lip service to the issue. I found a few things, like the above legislation, that were aimed at making homes more affordable among low income, especially low income minorities.

I found something called the single family home ownership tax credit, but to be honest, the articles all talked about the "proposed" tax credit. I couldn't tell if it ever passed. It gave tax credits to home builders building 1 to four unit buildings in distressed neighborhoods. Targeted tax credits are, apparently, part of the "free market".

One specific modification, made in 2004, was to eliminate the debt to asset ratio required for investment banks. That seems like a collossally bad idea, and it doesn't seem to have worked out so well.

What I was really looking for was something to substantiate the charge that deregulation caused the subprime mess. I found lots to confirm what everyone already knew. The subprime mess was caused when lots of people borrowed lots of money they couldn't afford to pay back. This happened at all levels of income and housing prices. Suddenly, people started making loans without the traditional requirements of down payments and income verification. The President supported at least the initiatives to lower down payment requirements, eliminating the 3% downpayment minimum for an FHA insured loan. That strikes me as another awful idea, but I doubt the Democrats complained about it

I found one reference, but no specifics, about Bush loosening the oversight of the credit default swap market. That's what brought AIG down.

Meanwhile, issuance of mortgage backed securities started buying these toxic loans, while previously they had avoided them.

So, why did it happen during this decade, when previously, it hadn't? Did the Bush administration repeal existing regulations? Did it fail to enforce existing regulations? Did it fail to react when new institutions sprang up, that skirted existing regulations? Or was it just sudden changes in market psychology?

At any rate, the train wreck was easy to see coming, and the engineers were asleep at the switch.