One of the great myths of Palestinian politics is that “national unity” is a prerequisite for forging peace with Israel. Indeed, history has shown quite the opposite: that the very pursuit of Palestinian “national unity”—which implicitly requires empowering parties that are sworn to Israel’s destruction—retards the peace process entirely. For example, consider the consequences of including Hamas in the 2006 parliamentary elections: rather than joining forces with Palestinian Authority President Mahmoud Abbas in a unified pursuit of peace, the victorious Hamas leadership opted to escalate its confrontation with Israel—doing so with greater political legitimacy among Palestinians, no less.
Democratic presidential hopeful Barack Obama claims to have learned from this history. Even while declining to denounce former President Jimmy Carter for his upcoming meet-and-greet with Hamas leader Khalid Meshal in Damascus, Obama declared, “Until Hamas clearly recognizes Israel, renounces terrorism and abides by, or believes that the Palestinians should abide by previous agreements … I don’t think conversations with them would be fruitful.” Yet there is a new reason to doubt Obama’s sincerity in his stance against engaging Hamas: in the most recent issue of The New York Review of Books, Obama foreign policy adviser Robert Malley argues that Abbas should employ the same “logic behind his acceptance that Hamas participate in the 2006 elections,” such that Hamas is coaxed enter the political system and given “a stake in governance and a foot in the peace process.”
Yes, you’ve read that correctly: Malley—whom I’ve previously criticized for enthusiastically supporting the inclusion of Hamas in the 2006 parliamentary elections—believes that learning from Palestinian political history means repeating it! In this vein, Malley further calls for yet another Hamas-Fatah national unity deal—one that roughly resembles the agreement that the two parties signed last year in Mecca (with Malley’s blessings), which ultimately gave Hamas ample cover for planning its coup in Gaza only four months later. But perhaps Malley’s total failure to learn from history is best illustrated in his typical homily to Yasser Arafat, whom Malley believes should be a model for future Palestinian leaders trying to sell peace with Israel to their people; he writes, “Full of bluster and bravado, Yasser Arafat could make Palestinian setbacks such as the Oslo compromises taste like victory.” Of course, this is a stunning distortion: Arafat never actually promoted Oslo as a Palestinian victory, but promised that it represented a first step towards reclaiming all of historic Palestine.
Ultimately, one is left to wonder: if Obama is so dead-set against engaging Hamas, why is Malley—a constant proponent of engaging Hamas, among other wrongheaded ideas—advising him?
Shhhss…let’s bring this even farther down. Wall Street is waiting for a bailout. It works the first time.
The U.S. will need to use the Swedish model, which included nationalization. As Obama does it, he should follow Reagan’s example of sparing no opportunity to lash out at his predecessor’s administration.
“when bankers suspect that more help is on the way, they don’t have the incentive to change imprudent practices. So the next bailout should be the last one.” This sounds convincing, but I’m not sure it is empirically correct. For one thing, each and every bank that was subject to a “bailout” has seen its equity crushed. In some cases, equity holders may have been better off with a bankruptcy filing. Even mere federal cash infusions have been resisted by most institutions because of the punitive effect on equity. The expectation that someone from the government will be coming to help does not likely promote laxity. If anything, the opposite. The argument seems more plausible when talking about institututions taking credit exposure to banks, the notion being that parties are more willing to transact with large institututions that are perceived to be too big to fail. Again, sounds reasonable but I don’t think that in fact that is the case. Credit spreads for troubled institutions are very high, the LIBOR spreads to Treasuries, at least in the fall, reflected a great reluctance to lend to banks, and I do not believe there is a credit officer in the land who is saying “no big deal, it’s a failproof institution.” For one thing, allowing some institutions to fail achieves the requisite market discipline (see under Lehman) even if others are saved. And there are plenty of people to transact with, so most institutions steer clear of problematic ones (or charge accordingly) or limit their credit lines. All in all, I hear the moral hazard arguments, but I just don’t see the moral hazard supposedly engendered by federal intervention playing out in the market.
All of this could be pretty interesting, in the Chinese sense of the word, because among other things it could wind up illuminating a critical aspect of the Federal Reserve that’s rarely discussed, i.e., that it is a privately-owned system to whick Congress in 1913 ceded control of the national money supply. If the system really does collapse as Roubini predicts, we’re in for a debate that the U.S. hasn’t had since Andrew Jackson mixed it up with the Bank of the United States.
Ariel Kronman, yes, equity holders have been wiped out, but management has not done as badly. When we talk about the effect of bailouts on behavior, we are looking at management’s outlook. As far as I know, the Feds are not talking management change with regard to future bailouts.
Here’s a simple solution (which, of course, is likely to be wrong):
Allow banks to account for their assets at par minus a loan loss reserve based on predicted defaults rather than market value. What a concept: banks accounting like banks. Assets that produce large reserves can be sold to “Bad Bank” to effect the bail-out and clean the balance sheets. Bad Bank would not be an “investment”; it would be a sewer, but it allows us to quantify the cost to taxpayers and treat the losses as the cost they are.
Isn’t time to move to Sweden? Sweden with an Ikea box stuffed with the wing of a fighter jet Sweden has one big weapon industry as depicted by Cerny….just saying.
We are the citizens of the world as the Messiah said. If you want nationalization move to Venezuela. Government is not the answer unless you want free-handout and ration.
Gordon, I’m going to out Neocon the Neocons. There is one way out of this crisis;a huge injection of assets into our system. The only practical way for that to happen would be a large scale military operation into the ME,and gaining control over the oil properties there. This would solve our debt,currency,and balance of trade imbalance in one stroke. Empires always have to resort to “takeover” assets to cover their debts;we’re no different. I know that the Neos hate to go to war unless there’s a principle involved,and there is one here. The world would be a better place with the US in control of the ME oil. I’ve held this view since we went into Iraq. Had we gone into Iraq for economic gain,I would have supported that effort from day 1.;Democracy building using American lives is pure idiocy. Anyway, unless there’s another strategy that could work, Conquering weak,rich countries is the way. If we go to 25% unemployment or higher,we will lose everything,anyway to social breakdown. Let’s be proactive in a crisis. We may have nothing to lose in saving our nation.
John Hartland, thanks for raising the issue about the Fed’s relationship with Congress. You’re right: that would really be interesting. I had not thought about it, but I guess when the system completely fails every issue gets discussed.
Gordon, whether or not the issue gets discussed in any broad sense is impossible to say. But the financial people will be talking about it, anyway. Here’s another one to chew on: Before George W. decided to squander the surplus on tax cuts and war, the U.S. government was on its way toward extinguishing the federal debt.
Without Treasury securities to play with, the privately-owned Federal Reserve (specifically, the New York Fed’s Open Market Desk) would’ve been deprived of its most useful tool. I tend to think that this explains Junior’s tax cuts. The war is a different matter. To me, that was a Bund adventure from the get-go, i.e., a device by which Israel came to use the U.S. military in a failed attempt to construct a security perimeter by which it could extend and defend its dreams of Lebensraum and ethnic cleansing in its neighborhood.
Those dreams lie in tatters, along with the American financial system.
Lawrence Kramer — your specific solution may or may not be “right,” but you get at a fundamental point. Federal intervention to date has essentially, if not explicitly, been wielded as a means of trying to prop up non-credible asset valuations, by avoiding exactly the cost accounting for bad loans that you speak of. Until we come clean with ourselves about that cost, and quantify it, the cancer will still be there in the system.
Right now we’re just throwing good money after bad. There IS a fundamental valuation of assets that derive their value from the wealth and productivity of the United States, and it is probably greater than the loudest pessmists think it is. We’re bending our future out of shape to avoid facing our balance sheet. But if we don’t face it, it won’t have any financial meaning.
John Hartland’s point about a federal government/central bank showdown IS an interesting one, and the consequences are much further-reaching today than during Andrew Jackson’s term, when we were still a pipsqueak on the world financial scene. Today we’re the 800-pound gorilla. Financial integrity and soundness are the only viable measuring sticks of government policy in this regard.
I’m not sure what the Dow Jones Average tells us about bank problems. Since October, the DJIA has fallen below 8000 three times and each time it has rcovered to above 8000 the next day.
This country’s central bank is privately owned. That’s the kicker. It’s an issue that’s never discussed. Anyone who mentions it is immediately branded a kook. But now we’ve got a bank collapse, and it shows every sign of turning into a run on the Treasury, which means a direct claim on every American’s wallet. If that happens, it’ll be interesting to see what machinations are performed to avoid a discussion of this central issue.
Nationalize the banks? Well, look, the banks are bankrupt. The same banks that nearly 100 years ago were granted control over the U.S. money supply, an authority specifically granted to Congress by the Constitution. Turns out that none other than the “conservative” George W. Bush, the lying, floor crawling and desperately incompetent fake of a Republican president, put all of this stuff on the table.
Irony, folks, it’s what’s for dinner.
Lawrence Kramer, what price would the loans be sold to “Bad Bank?”
RCAR, no, I don’t think we can do that.
John Hartland, I liked the idea of no Federal debt. Burdening future generations is one of W’s many legacies you don’t hear much about when analysts say his reputation will improve over time.
ichthyophagous, I don’t think 8,000 is the bottom by any means. So, there’s a support level there at this moment. We have yet to fully comprehend what’s happening. When we do, the Dow will be breaching much lower levels.
the banks are done. let them fail and let new ones run by people who know what they are doing take their place. that’s the only way to “restore confidence” I’m an investor and you couldn’t give me shares of any TARP companies
15
Gordon Chang Says:
January 21st, 2009 at 4:17 PM
RCAR, no, I don’t think we can do that
It’s still early in the game,I realize, but remember how we beat Great Depression1,and don’t tell me that if Roosevelt had had to,he wasn’t capable a generating a war to save our nation. He was a ruthless b—–d. And,if you’ll remember,we pushed Japan very hard in the years preceding Pearl Harbor.
John Hartland, I liked the idea of no Federal debt. Burdening future generations is one of W’s many legacies you don’t hear much about when analysts say his reputation will improve over time.
I thought retiring the federal debt was a good idea. I never figured it’d stay retired, given the coming need to pay for the baby boomers in their old age. But, generally speaking, the lower the debt the better, because leverage reduces flexibility. I think Junior slept though his finance class that day at Harvard Business School, where he was admitted solely as a family legacy.
I like the idea of no federal debt too, but I’m afraid I can’t agree with John Hartland that the banks are the problem in our current case. Government policy is the problem.
Government policy has, for some 70 or more years now, demanded that borrowing not cost people what it naturally costs. The impact of this policy was accelerated by federal demands on banks to make bad/risky loans as a price of doing business, for which the justification in the US Code was laid during the Carter administration. The Clinton administration put the match to the tinder with its threat of lawsuits against banks that supposedly were discriminating against minority customers. Congress, both Republicans and Democrats, enabled the cancer to metastasize by boosting the overleverage of Fannie and Freddie, and hailing mortgage-backed securities as a brilliant way for everyone to profit from bad debt.
What the private commercial banks “should” have done — refuse to make the riskly loans demanded by federal agencies — would have embroiled them in years’ — decades’ — worth of costly lawsuits. That is no excuse for the EMBRACE of bad loans extended by some (not all) lending institutions; but on the other hand, government, in the form of Congress and the agencies, was there the whole time, egging the banks on, and fully aware of what they were doing.
Congress has shown zero ability to act in the interest of financial soundness. There is no one who would run the banks worse than the US federal government. Nationalizing our central banking system, the Federal Reserve, would be a dreadful idea. There is no entity on the earth with the power to hold our government financially accountable, and keep it from turning our “central bank” into an ATM for favored political constituencies. Congress and the federal agencies have spent the last 30 years doing exactly that, with legislation and the threat of lawsuits. I can never agree to handing the Federal Reserve over to them for management.
What needs to be done away with is law that seeks to make credit equally available to everyone, regardless of creditworthiness. People of 25 with no credit histories should NOT have access to the kind of credit you can get if you are 49 and have household assets, and a long-established, stellar credit record. The 49-year-old in this condition started out as the 25-year-old who had to get his first tiny loan with his hat in his hand — and 20 pages of paperwork, a letter from his employer, and a personal session with a loan counselor — and there is absolutely nothing unjust about having to build your credit that way.
Government has tried to make credit a right, rather than a privilege for which you establish eligibility. This is a political, not a sound financial, posture. A BANK would never assume it; it takes government to try to ignore and fool the natural laws of finance and credit. I would not trust the government with my bank account for exactly this reason, and we cannot rely on it to hold the Federal Reserve in trust for us.
By the way, if Junior hadn’t blown it all up, there was the makings of a grand compromise on the Social Security, Medicare and health care fronts, in the form of combined health savings/retirement accounts that the federal government would’ve had the resources the subsidize for lower-income workers. That possibility is gone now, one of the many casualties of George W. Bush’s stunning, historic idiocy and gross incompetence, and the connivance in it by the Republicans and their Bund string pullers.
#21,”I would not trust the government with my bank account.
And yet, you would entrust the government with the unlimited power to create money(debt). If that’s wrong, what limits would you put on our Central Bank in terms of money(debt) creation(Fiat money is debt)
The impact of this policy was accelerated by federal demands on banks to make bad/risky loans as a price of doing business
The Community Reinvestment Act is what you’re talking about, and it was a fly on a cow’s back. It amounted to nothing. The subprime issue has virtually nothing to do with the CRA, and the debt crisis is only tangentially related to the subprime issue. In fact, the entire loan classification framework is bogus. Everything is subprime, and that’s a matter of rampant banking greed facilitated by Republican corruption at the regulatory level.
Nationalizing our central banking system, the Federal Reserve, would be a dreadful idea.
The banks are bankrupt. If you want them to collapse, you’d better ponder the following scenario, because it WILL happen: A truck leaves Minneapolis, bound for a city you approve of. It carries food bound for grocery stores, which run on about a four-day restocking schedule. The driver pulls into a gas station on an Interstate highway that you approve of. He puts his credit card into the gas pump, and it’s rejected because the banking system has failed.
Now multiply that by 10,000 and that’s what a banking collapse means in the real world. So, wingnut, is that what you are looking for? Try advocating that one, and welcome to 100 years or more in the political wilderness. When Obama talked about “responsibility,” he was trying to tell you to clear the b.s. from between your ears and look around, you fool.
#24
Still not a peep from the Contentionsistas on Madeoff,LOL.
Gordon -
Bad Bank should pay par for bad assets, with no discount for collectability. Any bank being saved could sell as many assets as it took to bring its capital, after the sale, up to the level necessary for it to resume lending.
Bad Bank could take common stock as part of the deal, not so much to lessen the subsidy (which it might do), but to reduce the incentive for a bank to dump any more assets than it absolutely has to dump, and to dilute the common holders as an antidote to moral hazard. The only winners should be the employees who keep their jobs and the customers who keep their source of credit.
But Bad Bank is not the essence of my proposal. The heart of it is permission to account on the basis of discounted cash flow, with the government guaranteeing the bank’s stated capital so that depositors won’t flee. Any mechanism that achieves that purpose works for me. (I don’t know how man banks would be insolvent if they could account at par or by how much.)
Meanwhile, I think retiring the Federal debt is a bad idea. Our national creditworthiness is what distinguishes us from Biafra. Credit is a good thing. If you can get it, you should use it. That’s not to say that we should borrow more than our children can repay (by rolling it forward among other things), or that we should not be mindful of demographic imperatives. But there are a lot of people looking for prudent investments, and the private economy can provide only so much AAA-worthy paper. The government should borrow, whether or not it runs a current deficit, but since money sitting around unspent is the devil’s plaything, a current account deficit seems a good thing to have.
The key, I think, is to distinguish deficit spending from national investment. Yes, they can look surprisingly alike, but roads, bridges, airports, power grids, broadband lines, green energy subsidies, and the like are qualitatively different from entitlements and bullets. I’m not dumping on the latter, just suggesting that they should be paid for currently, whereas things that benefit future generations car reasonably paid for by our progeny.
We also need the government to borrow so that our trading partners have a place to put their surplus dollars. We really don’t want them buying up our realty and corporate wealth, so Treasury securities are a necessary part of our trade machinery. Indeed, creditworthiness is one thing in which we have (had?) a comparative advantage: they sent us stuff and we sent them paper of an apparent quality that would have been difficult for them to have found anywhere else. Protecting this advantage – the US AAA-rated brand – was the job of the ratings agencies, and their failure to do so has done irreparable and unforgivable damage to the nation.
Still not a peep from the Contentionsistas on Madeoff,LOL.
Podhoretz says their lead article in February is going to be about Madoff. I’ll hold off until I read it. You never know, Commentary might rise to the occasion and produce something of value. Or (more likely) they’ll produce some evasive, self-justifying political screed. Proof’ll be in the pudding.
#16, Gordon Chang: “Burdening future generations is one of W’s many legacies you don’t hear much about when analysts say his reputation will improve over time”
/1/ Two presidents who presided under a massive increase in federal debt
were FDR and Ronald Reagan. It did not ruin their historical reputation.
/2/ The federal debt is going to increase so rapidly under President Obama
that Bush’s increase may not look so steep in retrospect.
/3/ If our economic future is to be as bright as you predicted last
month, then there will be historical praise, not blame,
to apportion between presidents Bush and Obama:
“we will emerge from this global crisis stronger [...] Welcome, my friends, to the Second American Century.” (Gordon Chang)
#28: “presided over” (not “under”)
Hartland,
You make some interesting points, but I’d be much more willing to listen to you if you weren’t such a self-righteous blowhard.
The federal debt is going to increase so rapidly under President Obama
that Bush’s increase may not look so steep in retrospect.
That debt will be incurred because of Junior’s failure and the critical need to address it.
Bush has already nationalized bank in order to save the economy. Remember? Where that money went? Nobody knows.
Nationalize by Obama. Good. Nationalized by Bush. Bad.
Warning. BDS is a disease. Permanently damage brain.
gold standard. it wasn’t broke but they went and tried to fix it
gold standard. it wasn’t broke but they went and tried to fix it
Just do what Uncle Miltie suggested: Set monetary growth at 3% and go play golf.
Problem with the gold standard, aside from the superstition involved, is that supply grows only 2% a year. That’s not fast enough. The gold standard holds people back. There’s no reason to hold growth at 2%. In the U.S., a better long-term rate is 3%. Elsewhere in the world, i.e., China, it’s faster.
lester, I agree with your comment #18. Maybe this is a first.
RCAR, given trends, I don’t think we will have to look for a war. I suspect one will find us instead.
John Hartland, you wrote: “I think Junior slept though his finance class.” That’s as good an explanation as we will hear about this. Thanks.
john- at any rate, a system where the governent can’t borrow or inflate rampantly would be good.
people still talk about tax cuts and tax stuff. we don’t have a tax problem we have a spending problem. I’m not against tax cuts but they have gotten so good at the other stuff that it isn’t the issue it once was. “I’ll cut your taxes” yeah and give the bill to the next generation.
why are people so afraid of spending cuts? wow, the whole world is going to stop if we have a 2 trillion instead of 3 trillion a year budget. gimmee a break, not only won’t thr world stop it will likely run much better. these politicians and the pundits and everyone esle know we don’t really need them that’s why they never propose any sort of across the board cuts. they’d be out of work!
gordon- did you hear that peter schiff may be running for chris dodd’s seat in 2010? I’d be curious as to how you guys here would feel about that. here hold on I’ll get the article
http://www.norwichbulletin.com/lifestyles/columnists/x743979580/Dodd-could-face-serious-challenge-in-re-election-bid
it’s a few years off of course. If people aren’t familiar with him, schiff has been on glenn becks show and is one of the vaunted “people who called the crash” and thus is one of the economist du jours if you will.
I don’t know his foreign policy but i would guess he is anti war. so that could be a problem with…warriors
8
RCAR Says:
January 21st, 2009 at 3:25 PM
Lebensraum?
Our national creditworthiness is what distinguishes us from Biafra. Credit is a good thing. If you can get it, you should use it.
This is good advice to, say, a 21-year-old college graduate, or at least it was good advice in the days before some fool started handing out credit cards to college kids. Back in the goodle days, my father advised his debt-free son new on the job to get himself a Sears card and buy a few things, then pay them off. That way you’ll establish credit. So that’s what I did, and it worked just like he said it would.
The United States isn’t a newly minted college grad in need of a Sears card. If the country were debt-free, it could borrow any time it chose to, at stupendously attractive rates. Its currency would likely be in high demand, and it would have an embarrassment of choices. That’s the direction we were headed before George W. Bush, that feckless, lying, floor-crawling drunk of a historically incompetent Republican fake president, ran this country off the road at 100 miles an hour.
John Hartland, you wrote: “I think Junior slept though his finance class.” That’s as good an explanation as we will hear about this. Thanks.
I don’t think finance was the only class that joker slept through. How else do you explain someone who used daddy’s strings to set up an oil company to operate in Kuwait, a place where you can find oil by mistake in the garden, and go bankrupt doing it?
Gordon, if yesterday’s drop indicates this major problem, doesn’t today’s recoup of the loss mean the problems went away?
Or is it not more likely that this isn’t the measure on which to be basing the argument?
why are people so afraid of spending cuts? wow, the whole world is going to stop if we have a 2 trillion instead of 3 trillion a year budget. gimmee a break, not only won’t thr world stop it will likely run much better
Government spending has always been countercyclical. That’s not Keynesianism, it’s common sense. You want to cut spending? What you do is manage it the way Bill Clinton did. You reduce deficits as the private economy strengthens. That makes the government sector smaller as a share of the total. You don’t cut government spending during a recession or a depression, unless you absolutely have to.
Of course there’s a systemic crisis in the banking system. The problem is how do you solve it at minimum cost to the taxpayer but without the entire system imploding. Hence the somewhat halting steps to fix the problem. Neither the Bush administration or the Obama want to nationalize most of the major banks for several reasons. Firstly they don’t wan to run banks any more than they want to run car companies. Secondly if they do they will be required by law to put all the banks liabilities on the national balance sheet. Thirdly taking over the banks will involve the certain wipeout of all the common and preferred stockholders although I assume the bond holders would be covered. The impact of wiping out all the common/preferred stockholders would be cataclysmic. These holders are not all fat millionaires living in Greenwich CT. They are pension funds, IRA accounts, mutual funds, 401k’s, insurance companies. An assuming the wipe out all these folks who the hell from the private sector is going to invest more capital in these institutions. No they have to keep them solvent and get private capital back in off the sidelines and that is going to mean some measure of protection for investors. This is an enormously complex and sensitive situation and not really amenable to bumper sticker sloganizing.
If the country were debt-free, it could borrow any time it chose to, at stupendously attractive rates.
Christ, if that had ever happened, the Ronco salesmen in snazzy suits on Wall Street would have been coming up with every phony reason for the Treasury to issue bonds. There will be one happy fallout from the current disaster, which is that at least for a while, the financial crowd will be seen for the pack of empty-brained, trend-sucking, grasping, greed-addled shysters that they are, always have been, and always will be.
46
John Hartland Says:
January 21st, 2009 at 7:26 PM
Government spending has always been countercyclical.
I presume you mean “big increases” in public spending are countercyclical. Alas it’s not always true. One of the seldom identified villains in the current crisis is the huge increase in public spending that has occurred over the last seven years. Even before the big bailouts started it was on song to be up by about 70% which is an astronomic increase that wasn’t covered by increases in taxes as it should have been. It’s certainly true that there has to be increased govt spending now to fill the gap left by the fall in consumer spending. Even most Republican economists agree with this although there is some debate about the mix. Personally I’m a large believer in concrete rather than tax cut which will either be saved or used to pay down debt and hence produce only modest economic growth. Basically I trust Summers, Bernanke, Orzag and Geithner to get as near right as anyone is capable of getting it. They are probably less likely than Paulson and the Bush admin to be tied down by doctrinal shibboleths as was I believe the case with the refusal to bail out Lehman which was in retrospect a major error. I also think on the whole they would be well advised to overshoot than undershoot.
I presume you mean “big increases” in public spending are countercyclical. Alas it’s not always true. One of the seldom identified villains in the current crisis is the huge increase in public spending that has occurred over the last seven years.
They are called “automatic stabilizers,” i.e., things like unemployment compensation. Even constant government spending is countercyclical, because it keeps employment in one sector stable while everything else is dropping. There are all kinds of ways to skin the cat, but I am somewhat sympathetic to the idea that infrastructure projects take too long to rev up, and that other methods might be preferable.
As for the big increase in public spending during Junior’s term, I think a close examination would show that the real economy (i.e., the private economy apart from the excess investment in residential and commercial construction) was weak throughout Bush’s tenure in office, and that without the bubble and the trillion dollar war, we’d have been in a real pickle.
The roots of the current depression go back a long ways. The defining moment was when Greenspan bailed out LTCM, and in doing so set off the blowoff of the Internet bubble in 1998 and 1999. If they’d slowly let the air out of the tires back then, thing would’ve been different. That error was drastically compounded after 9/11, when the Fed pumped it up and the Bush administration did nothing about the excesses that followed.
The policies after 1998 were poor, and after 2001 they were an utter disaster. People who think all of this is going to be over with in two years are stark, raving lunatics.
RCAR, you wrote: “Still not a peep from the Contentionsistas on Madeoff,LOL.” What do you want to hear about him?
Lawrence Kramer, many thanks for the interesting explanation of your proposal. It sounds workable to me.
Have you written anything about it?
contra, it depends what you do with the money, of course. Reagan ended the Cold War with it. FDR won the Second World War.
Well, John Hartland, I congratulate you on recognizing the Community Reinvestment Act, but don’t think much of your “fly on a cow’s back” analogy.
The CRA, as administered under Clinton, had produced almost $1 trillion in lawsuit-leveraged mortgage credit commitments by major lenders to “underserved” markets in the period 1993 to 2000:
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
A trillion dollars, in context, is about one-sixth of the total outstanding mortgage commitments ($6.1 trillion) of the major mortgage lenders outlined by the US Comptroller of the Currency’s Office of Thrift Supervision in the third quarter of FY2008.
http://www.occ.treas.gov/ftp/release/2008-150a.pdf
The comparative size of the CRA-leveraged loan commitments, versus total mortgage loans administered by major lenders, renders their significance obvious.
However, we can also note that a majority of the mortgage loans made with CRA-leveraged money, and brokered by community reinvestment groups like NCRC and NACA, are subprime or Alt-A loans. Coincident with Clinton’s administration of the CRA, subprime mortgage loan originations, as a percentage of total mortgage originations, increased from 5% in 1994 to 13.4% in 2000. This is, notably, the same period in which the loan commitments from the major lenders that were made under CRA pressure increased from zero to nearly $1 trillion.
http://www.frbsf.org/publications/economics/letter/2001/el2001-38.html
As you are no doubt aware, the default rate on prime-rate mortgages is about 1.5%, whereas the default rate on subprime mortgages has hovered around 10%.
Now, pay close attention so you can follow the argument. I do not assert that there is a one-for-one relationship here; i.e., that the loans made in response to CRA pressure from activists and federal agencies “equal,” one for one, all the subprime loan defaults that have collapsed the bad-debt house of cards since 2006. It’s not that simple.
Some of the CRA-pressured loans ARE in the mortgage-default mix. But the larger and more insidious effect of the CRA was to give lawsuit-scared lenders an incentive to spread the risk of bad debt around, instead of trying to take a stand against this financially unsound practice (being forced to lend to uncreditworthy borrowers). From the lenders’ point of view, it might be easier and cheaper to just package bad debt and resell it, than to defend lawsuits in court.
Government measures from the 1990s made that calculation exactly correct: the dramatic expansion of Fannie’s and Freddie’s willingness to buy up mortgages; regulatory changes in the finance industry that increased the number of players in the mortgage market; and a Congressional blessing on mortgage-backed securities, particularly the famous “credit default swap” instrument, that greased the wheels for lenders to repackage bad debt with good, and let speculators have at it. All of these measures were enabling factors for what lenders needed most, if they were to agree to lend to high-risk borrowers: diffusion of the risk.
All of these factors were required to bring us to where we are now. If Clinton and Congress had not arranged for multiple risk-spreading options for mortgage lenders in the 1990s, the lenders would have been less likely to agree to be extorted by community activists under the CRA. It would have been more cost-effective for at least some lenders to defend lawsuits, instead of taking on bad debt. The result of that for the average, creditworthy borrower would have been less availability of credit, and higher interest rates.
It turns out there’s a limit to how much risk you can spread. Meanwhile, however, it is absurd to say that the CRA pressure brought to bear on lenders in the 1990s, which pumped high-risk lending to $1 trillion in the first 7 years of its use by activists and lawyers, was insignificant. A trillion dollars is significant in any context, and is certainly so in the context of an industry of which, today, that figure represents one-sixth of the assets.
lester, thanks for the link in #41. I will have to take a look.
Charlie (Colorado), you’re right that the argument is not based on stock-market reaction. I wanted to highlight the fact that investors had not discounted the news about the banking system, and I thought it was a good way to start the posting.
Thanks for pointing this out.
John, okay, but this will not be a pain-free exercise. I understand the notion that we need to attract fresh capital. But if someone gets wiped, it should be the holders of equity.
In any event, thanks for the thoughtful comment.
#54, the article you linked to is one that I’ve read before. It’s a right-wing screed whose main purpose is to rant ‘n rave about Acorn, et al. It asserts that CRA loans totaled $1 trillion, but never backed up the assertion with data. The practices that led to the collapse were not caused by the CRA, nor were they somehow unique to it. No down-payment, no income-verification lending was everywhere during your feckless fake president’s terms in office.
When a bank makes a “loan” without a downpayment and without income verification, the counterparty is best described as a “tenant,” not a borrower. That individual has no natural stake in the place; the minute the market turns down, the result is “jingle mail,” the term coming from the sound of the keys in the envelope mailed to the loan servicer.
What happened during your lying, floor-crawling drunk’s terms in office was just another version of the 1920′s-era margin buying of stocks. It happened throughout the loan classification system. The idea that “subprime” was much different than “Alt-A” or “prime” loans has been shattered by events.
There are two differences between now and the 1920s. One is that the underlying credit system is FAR bigger than the equity markets ever were, then or now. The other is that now, the shysters of Wall Street compounded the tragedy with derivatives that neither they, nor the regulators de-fanged by your Republican co-conspirators, ever understood.
Yeah, I know. You want to blame all of this on the usual suspects: poor black people. Look, let’s accept your implicit hypothesis that the black population of America is a pack of shiftless, irresponsible thieves. Face it, some of ‘em are. But even if they all are, there aren’t enough of ‘em to have done this. There aren’t enough liberal activist terrorists, either.
This one goes much higher. If you want to drink your kool-aid and blame it on the blacks and the liberals, I can’t stop you. But you’re lying to yourself, and no one should ever lie to themselves. That sin always ends badly.
Gordi,
Is it not ironic that you predicted the collapse of China and yet here it is your own country collapsing? Be careful of what you wish for.
I think that while there are structural problems, the short term problem is confidence and that’s where Obama will help a lot.
I think that we will muddle through.
BTW have you study through that article on the IDF using civilians as human shields.
Gordon -
No, I have not written anything more about my proposal than is here. I’m making this stuff up as I go along. And there is no false humility here. People who know more about this stuff than I do are in a position to implement reserve-based accounting and they have chosen not to. Maybe they have a good reason, although from what I can make out, they seem to be fighting the last war. Anyway, the subject is too complicated for a non-pro to offer anything very detailed.
And I think there is a more important fix that needs to be made outside the banking arena. We have to restore the credibility of the US AAA Paper brand. The ratings agencies are corporate corpses, and it’s time for them to lie down. What is needed is something like Underwriters Laboratories, an entity owned by major lenders – sovereign wealth funds, pension funds, money center banks – and charged with rating all instruments whose issuers wish them to be rated. Issuers would be charged a less-than-compensatory fee intended to defray the cost of rating unworthy paper and to deter frivolous requests for ratings. But there would be no incentive on the ratings organization to produce favorable ratings.
Until the brand of private US paper is restored, I don’t see how the gap between corporate and government paper shrinks to its proper level, how capital becomes cheap enough for growth, or how new homes and borrowers get financed. Once the brand is restored, the undercapitalization of banks will become the bottleneck and a proposal to shore up that capital along the lines I proposed earlier may be worth trying. Without restoring confidence in the paper the banks create, however, I’m not sure what point there is in giving them permission to lend.
Big Picture, as bad as things are here, they will not shake the political system. And I’m not hoping for anything. I’m just reporting and analyzing.
We’ll do better than just muddle through.
Thanks again for the link. I took a quick look, but, because I don’t write about those issues, I didn’t study it with great care. Again, I appreciate the education you provided.
Lawrence Kramer, I really like your ratings-agency proposal. Thanks for airing it here.
Quote: “Thanks again for the link. I took a quick look, but, because I don’t write about those issues, I didn’t study it with great care.”
Gordi,
The wrong conception that you had (Israel good, Arab bad) is a corner stone of Am thinking especially conservative thinking. Thus, to pass over the truth about the Middle East is also to pass over a whole way of thinking. Please take more care with this.
More specifically, I say that the above wrong conception is also tied with another one (China bad, US good). The basic idea is that foreigners (different color, difference religion) are bad.
Quote: “as bad as things are here, they will not shake the political system.”
How do you know ??? If things get to the point of no bread, you can bet that there will be political unrest.
On the other hand, China is more stable in that sense that they are more used to living on the edge. Second, they know that the media is fixed by the government so that they tolerate the situation. However, in America people live in a coma. Witness that most of the world know all too well that the IDF is careless with civilian casualties, yet, an investigative journalist like you and many others don’t have a clue !!! So when you and the rest find out that you were duded you will be angry. Depending on circumstances the US can become more unstable than China.
Your views strike me as superficial and nationalistic. Any opinion?
Big Picture, nobody knows the future, but to say the United States is less stable than China does not comport with known facts. My views are not founded on a sense of nationalism, they’re consistent with reality.
On human shields, let me say that when I see Hamas rockets fired from apartment buildings, I am not inclined to believe that Israel is more guilty than that group. If I wrote about this, I would study it carefully. Until then, thanks again for the link.
Gordi,
Do you know that if you fire a rocket from an apartment that it would either explode or burn up the apartment! Think it over.
What usually happens is that Hamas fires from NEAR civilian buildings. They cannot just fire from open fields which mean instant death. Then this scenario is used by Israel and its suporters to generate the big legend that the Palestinians use civilians in their operations. On the other hand, the IDF will at times takes hostages and push them ahead in their operations.
Most times though, the IDF just bomb a place indiscriminately and civilian casualties are blamed on Hamas (and the PLO previously) because they say Hams fired from among civilians. Occasionally that is true but if the IDF is a moral army, it would not fire. This is a part of their terrorizing of the civilians . Of course many civilians who do not help Hamas are hurt.
Thus, 60 years of facts have been trampled for a legend that is only partly true.
Quote “to say the United States is less stable than China does not comport with known facts. My views are not founded on a sense of nationalism, they’re consistent with reality.”
Known facts are not good enough anymore, We are in living UNIQUE times. Perhaps you want to read my analysis over.
If you work with reality how come your prediction about China failed?
I’ll just say this, and this is directed at John Hartland, who wishes to exempt liberals from the problem that they have created (and I know that I said I wouldn’t respond to him anymore, but this is important): if liberals don’t recognize that they had a hand in creating this problem, then we will never be able to solve this problem. Think of all of the problems that we are now facing or will be facing: healthcare, public education, Social Security, finance, etc. Whose policies do you think are really having an adverse effect on everything? There are no such thing as free lunches in life as at some point, the bill must be paid. I don’t blame poor blacks, but I certainly do blame white liberals for using poor blacks to exploit them for a lot of their social spending.
And by the by, Bill Clinton did not have a surplus. If any company practiced accounting the way the federal government does, the board would be sacked, the chairman, CEO and CFO convicted and serving time, and the company would go bankrupt. Oh wait, that did happen (see Enron).
Gordon -
To finish off the catalog of contributors to systemic risk, I’d note that naked shorting and naked CDS issuance are an important source of trouble. Both activities, I submit, are tortious (in the legal sense), naked shorting because it works a fraud on the market and naked CDS issuance because it puts subject companies at risk.
To be specific, naked shorting intentionally deceives market participants about the state of the market. Consider the Madoff case. Those analysts who knew Madoff was up to something based their view in part on the knowledge that the market in options was too thin to support the volume of trading Madoff claimed to be doing. There simply were not enough options to go around. Likewise, when I buy a stock, I know that the actual number of shares available to short limits the number of shares that can be sold short, so the possibility of a short attack is limited by the difficulty in borrowing shares to sell. Thus, when someone makes a short sale, and that sale crosses the ticker, I am able, like a card-counter in Vegas, to keep track of the short interest as a function of the float and to act accordingly. When a short sale is made without stock being borrowed, the seller is implicitly “lying” to me about having borrowed real shares to deliver. That sure seems like good ol’ common law fraud to me, and it seems to me unfair that the seller should be able to profit on the sale from a decline in the market value of my stock attributable to his fraudulent act.
Naked credit default swaps pose a different problem, but they in effect potentiate naked shorting by giving someone a reason to mount a short attack of the sort that only naked shorting can accomplish. My problem is not with the credit default swaps per se. They are insurance contracts covering credit risk, and, as such, they server a valid purpose. Like insurance contracts, however, a CDS issued to someone who does not have an insurable interest in the risk is a bad thing.
To understand the downside of this practice, just imagine learning that your worst enemy has bought a $1,00,000 insurance policy on your life. The same fear would apply, say, to a company that learns that a well-known short-seller has bought a CDS on its paper. What happens next is that the short-seller does some heavy naked shorting, which causes the stock to fall, which makes the stock poor collateral, which raises questions about the company’s creditworthiness, which increases the value of the CDS, etc. The naked CDS gives the buyer a reason to engage in naked shorting. More important, the vulnerability of companies to this sort of attack makes them poor credit risks, which contributes to lenders’ reluctance to lend. Taken together, the ability of predatory players to buy naked CDSs and then short the insured’s stock without actually borrowing it make the US market an inhospitable place for a lender to do business, and the practice must be stopped.
In the insurance world, state courts have developed several theories for thwarting the practice of buying insurance without an insurable interest. The two principle theories are (i) that such contracts are a form of gambling, because the bet does not have a valuable risk management purpose, and (ii) that such contracts promote the possibility of murder and must, therefore, not be enforced in favor of the beneficiary. The second camp breaks down into two schools. In some states, the policies are held unenforceable as “against public policy.” In the others, the insurance policy is enforced against the issuer, but the proceeds are taken from the beneficiary and given to the deceased’s heirs. In the absence of direct statutory authority, courts have the power to “do equity” in such situations to prevent injustice. Either way, there is no profit in buying true insurance against a risk the buyer does not have, and the same consequence should attach to naked credit default swaps.
The creators of naked CDSs were aware of the similarity of their product to insurance, so much so that they contrived in 2000 to get a Federal law passed (the Commodities Futures Modernization Act) that purports to render such contracts enforceable despite stated legal flaws such as non-compliance with state gambling or bucket-shop laws. But I do not see how the general equity jurisdiction of the courts is preempted. To date, I am not aware of an equitable attack on naked CDS holders, but I imagine one will arise as the bankruptcy lawyers get more deeply into discovering the assets of the companies they are carving up. One of those assets may well be the proceeds of naked CDS contracts on the company’s “life.”
Just as willing lenders are put off by the lack of reliable ratings, a reliable ratings agency would have a tough time giving a solid rating to any company in a market where naked CDSs are available and shorting is tolerated. That applies not only to underlying borrowers but to middlemen, who are also publicly traded companies. So, whatever we do to stabilize the banks and whatever else we do to make the ratings process credible, we also have to clean up Dodge City so that its corporate citizens are not always in mortal danger.
John Hartland at #58 — Actually, you’re the one who’s dragging “poor black people” into this. My beef is with the destructive policies of the politicians and activists who have claimed to represent the interests of poor black people.
Do you understand WHY there has been a frenzy of mortgage and borrowing solicitation, across economic strata, over the past 10 years or so? Why middle-class homeowners were, throughout that time, deluged with offers of home equity lines of credit, refinancing with “cash out,” and even just new, additional credit cards? Why absurdly unsound ARMs were so ridiculously available?
Why did banks and other lenders work so hard to generate new loans? Because generating new loans was the way to generate new performing assets, to offset the increase in non-performing assets. The more packageable, tradeable mortgage-backed securities you could generate, the more you could spread around the risk of your non-performing assets, by offering a profit opportunity to investors. Most of the solicitation blitz came from just a few lenders, whose balance sheets had been skirting perilous territory since at least 2004. (This is where we pause to take securities rating agencies out behind the barn.)
The dynamic of lenders seeking to surround their bad loans with a lot more loans, most of which would go ahead and perform, was not, of course, confined to the amount of loan traffic represented by CRA-pressured loans. I never said it was, although you persist in misreading me in that regard.
But it is fundamentally unnatural for mortgage lenders to frenziedly seek more loans than they can vet properly — or that they take on expecting to fail — and take on the very iffy paper represented by a lot of ARMs. Mortgage lenders don’t normally do that. To be induced to, they have to see a model for doing it with minimal risk. And that is where government intervention comes in, in the form of the CRA, which required lenders to make bad loans, and the combination of Fannie and Freddie, and mortgage-backed securities, which made it possible to spread the risk around. This was the model that made unsound practices seem like a manageable risk.
And not all financial institutions got into this set of unsound practices. We’re talking about a relatively few names in all this. But those who did, like Citibank and Wells Fargo, had more often than not been either threatened or actually sued by activist groups under the CRA.
Most of the commentators today are focused on eliminating the government-backed or approved methods of spreading the bad-loan risk around — that is:
- regulating MBSs more closely, or even doing away with them;
- reintroducing the restrictions on who may engage in mortgage lending (eliminated under Clinton, which I point out only so that you might be deterred from blaming that on GWB or Republicans in general, not because I think only a Democrat would have done it);
- and reconstituting Fannie and Freddie, to back fewer loans, and cut the implicit link to a guarantee of bad loans by the US government.
The problem with addressing only this side of the equation is that it will make credit more expensive and less available to everyone, including the solvent and creditworthy. The side of the equation that needs to be addressed is the government policy that says lenders MUST, by law, make high-risk loans, and then eat the costs themselves. The risk-spreading mechanisms of the 1990s postponed any reckoning with the cost of high-risk loans, and introduced a lending model that basically demanded making more of them, to keep postponing the reckoning. But the reckoning will always, inherently, be waiting for us, if we continue to demand that lenders make high-risk loans as a matter of government policy.
Until we repeal the CRA, eliminating the risk-spreading mechanisms will only make creditworthy customers pay the bill for high-risk loans. Without government intervention, paying customers would do that anyway — BUT, lenders would be far less likely to take on the high-risk loans that make them recover excessive costs from paying customers. When lenders have true discretion over the risk they are willing to accept — and when government is not stepping in to “even out” outcomes for everyone — the lenders simply don’t make all those high-risk loans.
I appreciate the thought Lawrence Kramer has put into his cost-retiring concept, and suspect that something like his proposal would be quite workable as a short-term measure. But it won’t fix our problem for the long term. For the long term, we will not be healthy again until government does not require lenders to take on high-risk loans for political purposes. The costs of doing that must be paid somehow.
Big Picture, whether from apartments or near them, the issue is the same: Hamas is putting civilians at risk. You cannot expect Israel to forgo strikes on rocket sites, especially when those rockets kill Israeli civilians.
I predicted that the Communist Party would fall from power by the end of this decade. My prediction has not yet failed.
J.E. -
It would have been interesting to see what would have happened if the ratings agencies and financial guaranty insurers had imposed pricing discipline on the process. I suspect that the cost of mandated bad loans could have been distributed through adequately priced credit enhancement insurance on the CRA-tainted MBSs.
As you say, good credits would subsidize bad ones, but that’s just a tax, and not all taxes are fatal to the economy. I don’t say it’s a good idea, just that it seems to me a doable thing and not necessarily something the system cannot overcome.
Lawrence Kramer, many thanks for comment #67. Perhaps we should deputize you to clean up Dodge.
Gordi,
Quote:”Big Picture, whether from apartments or near them, the issue is the same: Hamas is putting civilians at risk. You cannot expect Israel to forgo strikes on rocket sites, especially when those rockets kill Israeli civilians.”
PLEASE ! I hope that you know that this is fascist thinking. I am not saying you are but fascist thinking has been drilled into you. One does not just drop a 2000 pound bomb at an apartment complex because some one fired a rocket outside that complex! Nor does one come and bulldoze a person house because a gunman fired from behind that person’s house. But the IDF will do all these and has convinced Americans that this is ok behavior.
There are easy choices and solutions but I will let you think it over yourself so that perhaps you can reclaim a little bit of humanity.
BTW, a gunman, enclosed in an urban area has few places to fire from, and often takes covers at civilian buildings. Fighting from an open field means instant death. So it is not surprising that they do often fire from behind or near civilian buildings. This has been built up into an urban legend that “Palestinians fight behind their women”. The real truth is that Israel is the real terrorist.
Big Picture, I know the conflict between Jews and Arabs goes back centuries, but let me say that civilians in Gaza were killed because Israel invaded. Isreal invaded because Hamas was firing rockets from Gaza at Israeli civilians. So who’s responsible?
Gordi,
Quote,”Big Picture, I know the conflict between Jews and Arabs goes back centuries, but let me say that civilians in Gaza were killed because Israel invaded. Isreal invaded because Hamas was firing rockets from Gaza at Israeli civilians. So who’s responsible?”
A rather simple way of looking at the situation.
Israel declared war when they imposed a blockade on food, fuel and medicine. The rocket fire was a way to negotiate a relief of the blockade. Six months went by and Israel refuse to give an inch. Then Israel provoked Hamas by killing 6 fighters in a guise of rooting out tunnels. For these 2 reasons Hamas started firing rockets again after the ceasefire. If they were smart they should have been more careful, but if they are like you, reasoning from the surface, then they actually have a consistent logic.
In any case, the general feature is as it has always been, a war of resistance against a terrorist state who has brainwashed Americans into believing the opposite. Fortunately, the rest of the world knows the real situation.
I am not saying that Hamas does not practice terrorism, but they practice it at a much lower level in terms of intensity and cunning than Israel.
Big Picture, so why did the Israelis impose a blockade?
Gordi,
They imposed a blockade because they don’t like the newly elected government: Hamas. The blockade totally undermines the Bush and Israeli program of spreading democracy. The program has been changed to become spreading democratically elected people that we want in. Not much of a democracy program.
So the idea was to weaken Hamas, get the people to turn against Hamas, and thirdly, get Abbas into power in Gaza. Again, not much democracy.
Big Picture, any other reasons for the blockade?
What do you have in mind?
Big Picture, I think Israel imposed measures to stop smuggling of arms and to prevent attacks, no?
Quote, “I think Israel imposed measures to stop smuggling of arms and to prevent attacks, no?”
NO, Israel does not control the Gaza border crossings where the smuggling takes place. As to preventing attacks, Hamas gave 6 months ceasefire and Israel gave NOTHING in return. In reality Israel was planning for a big invasion and was baiting Hamas.
This is all too clear from events. You cannot believe what you hear but must see what deeds took place to evaluate any event.
Recent events demonstrate Israel’s lack of sincerity for peace, yet again!
Big Picture, there’s no evidence of baiting that I saw. What evidence did you see?
In a kids show called the suit life of zach and cody, a pampered hotel eiress london tipton finally gets a job to pull her own weight, and she gets 1000 dollars from her dad for every dollar she makes- after screwing up and getting fired, her dad buys the place and she keeps her job. this is what is happeneing- and the government cant waste the common mans tax money to support the PRIVATE company owned by the rich. If anything, there should be a bailout for the poor, to keep their cars, houses, and to afford food, not a bailout for the rich that pocket the extra money.
Ariel Kronman, you are insane!