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January 12, 2011

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This should be required reading—weekly—for every elected official in this country.

“Don't be led by silly "its for the children or environment or patriotism" arguments designed to evoke emotional responses.”
OK…I feel like something is wrong because I tend to agree with you here. On the other hand, there is a strong argument for regulating the capitalists controlling American finance. In our first 600 BILLION dollar bailout of financial institutions, the parties receiving the freshly printed dough had no duty to report anything…they could spend it however they wanted and the government could ask no questions. Pure deregulation. Unregulated capitalism equals monopoly and transfer of wealth from the bottom up. Just look what happened when big Phil Gramm’s wife exempted electricity futures from government scrutiny and then immediately went to work for Enron. We cannot trust these guys. We should not trust them. They need a rule book. This is the stuff that happens when the antennas go down.
What about BP. It is clear they were incompetent and grossly negligent in the cementing of the Macando well. What should we do? Should we shrug and say “oh well…shit happens” and let them go on unchecked? I don’t think so.

I'm sorry, but giving $600 million of taxpayer dollars to bankrupt companies is NOT unregulated capitalism. You seem to have the same definition of capitalism as Michael Moore. Bailing out banks and insurance companies is a form of regulation, in that it interferes with the normal operation of markets. CAPITALISM lets companies go under. And don't even get me started on how government regulation put pressure on financial institutions to make loans to unqualified recipients, through the Community Reinvestment Act and other regulatory measures. Yes, the credit default swaps were unregulated capitalism, but regulations almost always come into existence AFTER the first blow up, when the market has already learned its lesson.

What about BP? There were plenty of regulations on the books, but as happens in almost every regulatory regime, the regulators either don't know what they're doing or get co-opted by the companies they're regulating. The billions of dollars of tort losses that BP will be forced to pay are far more effective than regulations in incenting other companies in the future not to take shortcuts.

“I'm sorry, but giving $600 million of taxpayer dollars to bankrupt companies is NOT unregulated capitalism."

Good call Frank.

Who said it was capitalism? I said it is unregulated....and that is where a system ends up when you let the capitalists run the show….I hear choke moaning about interference with free markets and so on, but the boys took the money. They lobbied for the money and lobbied big. All the great capitalist institutions went down in flames and they took the $ from the government and then immediately started that some old worn out crap about “let the market sort it out” and “best system in the world”…balh blah. Frank, here is how it works….when a capitalist sees their competition fail it is due to a functioning market that weeds out the inferior, but when they fail…well..there must be something wrong with the system…so they do what it takes to survive regardless of any belief system…..the following quote is all you need to know “ITS ALL ABOUT THE MONEY”

“And don't even get me started on how government regulation put pressure on financial institutions to make loans to unqualified recipients” I would like you to get started on this, but somehow I hear an echo of Sean and Rush…educate me and I will listen, but blaming this mess on poor people that want a house just does not stand up. The debt created was not enough to bump the deficit. Almost all the debt revolves around multiple insurance policies written on the same mortgage back security. That does add up.

"but blaming this mess on poor people that want a house just does not stand up. The debt created was not enough to bump the deficit. Almost all the debt revolves around multiple insurance policies written on the same mortgage back security. That does add up."

On Oct 21, 2010 government estimates revealed that the bailout of Fredie Mac and Fannie Mae will likely cost taxpayers $154 billion. As Senator Dirkson said, "A billion here and a billion there adds up to real money." $154 billion is a significant part of the deficit and over 20% of the amount of the 1st bank bailout.

And I do blame poor people "that just want a house" for getting loans they could not repay. Poor people are responsible moral agents, just as accountable for their actions as anybody else. I've been lower middle class in income for much of my adult life, but I never bought a house without at least a 20% down payment and never got a loan for a house or car that didn't fit easily into my budget.

As to regulatory influence in the making of bad loans, as noted by UTD economics professor Stan Liebowitz, in a 2008 NY Post article, "No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: 'discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.'

Some of these 'outdated' criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.

Sound crazy? You bet. Those 'outdated' standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with '100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns.' Credit counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed 'the most flexible underwriting criteria permitted.' That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

Who was that virtuous lender? Why - Countrywide, the nation's largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy."


I agree with your number of 154 Billion…all in all about a 200 Billion dollar problem if we repo and auction off the houses….just a drop in the bucket…
Now consider the role the capitalists played. What about the credit default swaps (derivatives) written on the mortaged backed securities….how much debit was created by these unregulated instruments? Certainly well into the trillions. Pardon me for using the D word…I’ll just say “toxic assets” like Sean and Bill.

Lets see..200 billion…… 3 trillion or so….ummm…….where do you think the problem is here?

Many Americans, Including myself will not buy into projecting this crisis on poor people wanting houses. I know where the bad debit and reckless finance occurred. The plans for massive debit exposure did not occur over the dinner table of working Americans. The fraud came directly from the board rooms of Wall Street, and their motivation was not ”owning a home”, something that once was a part of a thing we called the American Dream.

Tell me this conversation never happened.

Young banker – Sir, I have been looking at our exposure in derivatives, and I think a downturn in the economy will bankrupt our firm and leave us a trillion dollars in the hole. Don’t you think we should stop writing contracts and lay off some of our exposure?

Old Banker- If we go down, the government will bail us out. Otherwise the system goes down with us. Those contracts bring in cash. Keep on writing them.

I'm sure that conversation happened. And because regulation always looks backwards, it was powerless to help, because massive failure of credit default swaps had never happened before. And it was the probablility of government intervention in the bailing out of failed institutions that created the moral hazard for that conversation to happen.

Interesting how you keep refusing to "blame poor people" when it was the failure of "poor people" to make their house payments that was the first event that finally resulting in the collapse. And it was pressure from regulatory agencies that caused many of those loans to be made in the first place, as discussed in my citation of Stan Liebowitz above.

For a working poor to person to want a house is a good thing. It is not greed. It is at the very center of the American Dream, which is a relict. These people were told they could afford housing and they bought into it. Blaming them for the failure of capitalism is like blaming Lynndie England for the Abu Gharib scandal.
Leveraging 1000 to one is a recipe for disaster. It defies common business practice and speaks to single minded nature of a capitalist. Wall Street hired the best minds our university system generated. They all knew they were leveraged beyond any reasonable business model, but more importantly they understood that the government could not allow them to fail. They just keep on writing derivative contracts, knowing an inevitable downturn would force government intervention. They won. Their winning bets were paid with printed money and the poor people lost their houses.

So now we have the very core of capitalism, the American financial system, brought down by one of the few unregulated sectors.
Here is the kicker. Poor people are cut off from finance. That correction came quick, but fiancial sector capitalists are still doing the same old thing, with little change. As a matter of fact they just paid out huge year end bonuses for dong such a good job in 2010. They have consolidated the power in to Goldman Sachs, which is indistinguishable from the government to me.
We can control the poor people with little effort, but only up to a point. Ben Ali (Tunisia) just got a quick lesson in karma, and it can happen here. It should happen here.

Maybe there is hope:

"As banker, I have the right to stand up if something is wrong," he said. "I am against the system. I know how the system works and I know the day-to-day business. I wanted to let society know how this system works because it's damaging society,"

This quote is from swiss banker (former) Rudolf Elmer as he hands over leaked Swiss Bank accounts with NAMES...to Wikileaks founder....

Royal, would you mind posting your income tax filings in this li'l blog? It would be noble. Actually, if you could lift your neighbor's form out of his outgoing mailbox and file it, that would be cool, too.

Now if I did that I would not be a whistle blower, would I? ……….and how ‘bout the way those good ole boys in Tunisia burned and looted the vacation homes of the Ben Ali clan…..Thanks in part to Wikileaks…it is nice to see Ben Ali and his clan run out of town in fear for their lives….perhaps America needs some outside oversight, like Wikileaks, to bring it back to the place it once was. One thing is for sure, this week has been tough on capitalists and their puppets…..
Our government was telling us what a good ally Tunisia was while our “shadow” government knew what a crook and tyrant Ben Ali was…chalk one up for the good guys!!!

Royale, sorry so late checking in. The conversation went like this:

Young Banker - My bonus on this is WHAT? Sweet!

Old Banker - Hell, yeah...and mine is 15x yours!

You need to know that nobody pimping derivatives understood derivatives! If you were in a meeting and someone tried to explain them, and you were the Chief investment officer for Goldman Sachs, you sure as hell wouldn't want anyone to know you didn't understand derivatives!

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