The federal government is a lot like the mafia. It lends out a few bucks to a businessman in trouble, and the next thing the businessman knows, his business is his ostensible benefactor's. This is the direction, full nationalization of troubled banks, that Democrats and a few Republicans advocate. The lesson? Maxine Waters, or Phil Leotardo, hanging about your establishment has the tendency to scare away customers. If you want to stay in business, keep the government, and the mafia, out of your business.
It’s amazing that up until the time when the Democrats took over Congress, we had 55 months of growth and the Dow was hovering at around 14,000 points.
Fast forward a bit and enter the start of toxic paper hitting the financial markets and presto chango, an economic disaster tailor made for the agent of ‘Change’ and ‘Hope’ to ride in and save us. But Mr. Hope n’ Change quickly turned into Mr. Doom n’ Gloom and the cries came out that ‘WE HAVE TO DO SOMETHING’!!!! ‘ANYTHING’!!!! Forget the fact that we’re spending and borrowing more money than we have and putting our country into a deeper hole.
The upside for Barack and the Boys is now they get to nationalize and socialize and they won’t have to wait at all to do it.
This is another example why one party rule is dangerous. Especially when that party has no scruples, honor or morality about them and don’t particularly like the country they’ve been elected to manage.
"The upside for Barack and the Boys is now they get to nationalize and socialize and they won’t have to wait at all to do it."
How quickly you conveniently forget the massive nationalization under Bush. As well, if republicans wanted to stop the 'Democratic Congress' from their actions it was easy with a veto.
"Fast forward a bit and enter the start of toxic paper hitting the financial markets and presto chango"
Toxic paper began long before the 'democratic congress', it was actually the result of no regulation on a $13 trillion market that started with Reagan. Clinton looked like a republican on this aspect of his presidency. Is that what you are talking about when mentioning a one party system?
"fdsa" is exactly right. The artificial bubble has burst, and we are now in the aftermath. That bubble was caused by Bush, the Fed, and their willing Republican and Democratic accomplices in Congress.
As said here -- "Screwing the Country" -- the problem is bipartisan. The current programs foisted by the Obama Administration are at their core just more of the same that got us in this mess in the first place -- a LOT more of the same.
Blindly partisan comments like the first one above are ignorant of economic history and offer nothing in way of solution, just partisan fangs.
The solution is to rebuild the credibility of those who profess to be fiscal conservatives. Voting "no" almost unanimously against the "stimulus" bill is a commendable start, but it looks to the public like unprincipled sour grapes. The countercharge of the Democrats, "look what you did the past 8 years", sticks, and rightly so. Therefore, the only way to rebuild the conservative brand, and actually stop our rapid slide into Euro-socialism, is for so-called conservatives on the Hill and on the airwaves to repudiate Dubya's presidency -- pretty much everything about it, save the tax cuts -- and then for them to repudiate themselves for going right along with him the whole way to this hell we are now in.
I missed fdsa's last paragraph. The problem was hardly one of de-regulation. Rather, it was a case of rampant government intevention (read: regulation of) the economy over the course of decades, and especially recently, the manipulation of the money supply and artifically-low interest rates (read: forms of indirect regulation), etc. See
I wrote the following at my blog back when Bush (and McCain and Obama) was pushing his own bailout and nationalization of AIG, etc.. It applies equally to Obama"s "stimulus" bill and all the other bailouts to come:
[T]he crisis we are in is NOT due to de-regulation, as the media and much of Capital Hill has been trying to paint it. Rather, it is due primarily to 1) a Clinton-era law/regulation that mandated lenders offer below-market rate to high credit-risk people, including minorities, in the name of “helping the poor” and “affirmative action,” and 2) artificially low interest rates imposed by the Federal Reserve and Dept. of Treasury over two Administrations, through liberal manipulation of the money supply.
The whole thing is obviously extremely complicated. But the principles are simple: “do not implement unequal weights and measures”; “live within your means”; “thou shall not steal”, etc. Human nature being what it is, the monetary policies of the past decade or so have made the consequences of the bad, immoral actions of some investors and corporate-types much more deleterious to the larger economy than they would have been under a true free market. And, even more pervasive, have led to honest but imprudent investment decisions and mortgaging where demand wasn’t really there, due to artificial rates making them seem more profitable than they really were. In other words, the very people who do-gooders in government tried to help were actually harmed, and the rest of us have been taken for a ride through an artificial credit bubble that would inevitably pop. Price fixing - in this case through artificially low interest rates, made possible by printing money out of thin air - never works.
What the Administration is now trying to cram down our throats is nothing more than financial socialism, and will only push the problem slightly down the road, making it much worse in the long-term. Their bailouts only encourage moral hazard and more of the same bad practices that got Bear Sterns, AIG, Lehman brothers, etc. in such trouble. The better tact is to free up capital from burdensome regulations and taxes and allow the market correction to take place. The pain will be real, but short-term (probably just over a year or so). Otherwise it will be long-term and could last a whole generation. They say they are trying to avoid another major depression. In fact, their cure is exactly the sort of thing that caused the Great Depression in the first place, and perpetuated it for ~16 long years.
Our prosperity and freedoms hang in the balance. You cannot socialize losses without eventually socializing profits. And socialism has always and everywhere failed. Why destroy America by implementing it now?
So, we're in agreement that the overall issue with regard to our current so-called crisis was the meddling in the housing market by the usual suspects (predominantly Democrats) culminating in causing toxic paper to flow into financial markets thus corrupting the system.
And, yes, I am being partisan. Although I do understand Bush’s penchant for spending, over the years largely under his watch the economy was going relatively well. But the mortg@ge mess that has gotten us to this point is primarily a Democrat induced issue. It would not have happened without Clinton de-regulating the lending industry and his administration and the Democrats pushing the CRA (a Jimmah Cawta initiative) and forcing Fannie and Freddie to guarantee bad loans or loans that were inflated to reflect false market prices.
The dominance of the Democratic leadership who kept telling us that all was well made it impossible for partisan whistle blowers to halt the bad lending practices.
Btw - Excellent synopsis Eric.
The notion that the lending industry was de-regulated is a farce. And, btw, lots of Republicans (and Bush) went very happily along with CRA (twice over the Clinton and Bush Administrations) b/c of the "conservative" notion that widespread homeonwership ("people take care of what they own") should be encouraged, even at artificially low rates and even at expense of normal credit thresholds. This was a truly bipartisan mess, regardless of the origins under Carter. They all went along with it.
And of course the economy was humming under Bush. Your personal economy would hum too if you lived on credit cards and only occasionally paid the minimal fees -- with other credit cards! But it would inevitably crash, just as ours has.
A correction needs to occur, but Obama wants to take out even more credit card debt then Dubya did! The result will be to maybe forestall the pain; but ultimately the rooster will only crow louder.
Reagan's 'small government' philosophy contributed to the great HUD scandal directing federal money to political partners and the savings and loan scandal of which the Feds subsidized 83% of the lost money. Seem familiar???
ASDF, you don't listen real well... if republicans wanted to stop the 'Democratic Congress' [under Bush] from their actions it was easy with a veto. Both parties failed.
http://thechive.com/wp-content/uploads/2008/11/pet-dog-fail-funny-animal-13.jpg
p.s. Eric, I agree with the majority of your reference article, but it says that "Citibank stock price fell by 79% between October 2008 and October 2009." WTF? It has to be a typo...
If we divided the 800 Billion by the 300 million citizens, each person would get $2,666.66. That looks better to me than rewarding stupid companies like GM or BOA.
So are you saying that Clinton’s repeal of the Glass-Steagall Act had nothing to do with de-regulating an industry and who could issue or trade bad paper? And if that is true, wasn’t it a stepping stone that led to mortg@ge based economic problems?
Before that repeal, a commercial lender like the largest U.S. bank (in assets) Citigroup could not underwrite and trade financial instruments such as mortg@ge-backed securities and collateralized debt. After the fact, debt obligations were freely bought and sold and the market was now open to allow the virus of toxic paper to spread easier and more quickly.
No? Do tell.
From "Regulatory Sneak Attack" (9/16/1999):
Perhaps the most egregious example of all of regulatory blackmail is enforcement of the so-called Community Reinvestment Act (CRA) in the U.S. The CRA was enacted in 1978 under a patently false pretense -- that banks made fewer loans to residents of low-income neighborhoods not because there were fewer creditworthy borrowers there, but because of allegedly pervasive "discrimination" against the residents of those neighborhoods, primarily black residents.
Banks do -- and should -- "discriminate" against less creditworthy borrowers, but in doing so they run the risk of regulatory extortion. An entire industry of sometimes federally-funded "community groups" has sprung up, with names like "Center for Community Change" and Association of Community Groups for Reform Now (ACORN), which essentially extort money from banks with the following ruse: Whenever a bank proposes a merger, expansion, or building of a new branch, it is subject to regulation by the Fed, the Comptroller of the Currency, and the FDIC. If anyone files a complaint to any of these agencies accusing the bank of making too few CRA loans, the merger or expansion is halted. So-called community groups frequently lodge such complaints and do not withdraw them until the banks give them or other groups which they designate large sums of money, sometimes in the tens of millions of dollars.
For example, the "Neighborhood Assistance Corporation of America (NACA)," led by self-described "urban terrorist" Bruce Marks, has "won" loan commitments totaling $3.8 billion from Bank of America Corp., First Union Corp., Fleet Financial Group, and others. These monies are lent to borrowers favored by Mr. Marks, and his organization usually gets a lump-sum fee or a percentage of each loan. NACA plans to operate in all 50 states by 2001 when it expects its annual budget to be in the $80 million range.
Regulatory extortion via the CRA was on display on national television during Bill Clinton's summer 1999 "poverty tour." One of the corporate executives who accompanied Clinton on his tour of economically depressed areas was the CEO of NationsBank, which was at the time in the process of merging. Before granting NationsBank permission to merge, Clinton required the bank to commit to $150 million in low-interest loans to individuals and businesses in areas chosen not by the bank, but by the Clinton administration. One can be sure that the areas chosen for such favorable treatment will be ones in which Al Gore is in need of votes for his presidential bid.
A staff member of the U.S. Senate Banking Committee recently told me that approximately $100 billion in CRA "loans" have been extended in the past twenty years, and that there is currently a concerted lobbying effort afoot to extend the CRA to credit unions and the insurance industry.
The CRA is a welfare program financed by (legal) regulatory extortion. It is bound to have a negative effect on the capital values and stock prices of banks in particular and and on the entire economy in general, because it socializes a portion of the capital markets. The major negative effect on the economy is the diversion of capital from economically sound to politically popular but economically dubious uses. A moral hazard problem is also created, in that a signal is sent to lower-income people that one does not necessarily need to become creditworthy (by working regularly, paying one's bills, and saving part of one's earnings, for example) to have access to credit, but to become politically connected instead.
The Clinton administration has been budgeting over $100 million per year in federal subsidies for "community development banks," which are another (similar) way of politicizing lending. This, along with the expansion of the CRA, possibly into credit unions and the insurance industry, is a recipe for another savings-and-loan-type financial disaster in the future.
Incidentally, re: Glass-Steagel, the issue with the morthage bubble and ensuing houseing crisis is not at root an issue of who could lend. the issue was why anyone would lend so recklessly. Or, put another way, "how could mort-gage lenders fool investors into not demanding high-risk premiums to cover the likely loan losses"? The root cause answer of this is 1) moral hazard casued by previous bailouts (i.e. "why worry, the gov't's got my back?!") and 2) the fact that incopetant firms were around at all, again attributable to previous bailouts. The root of all of this was an artifically low interest reate policy peursued by the Federal Reserve, and the numerous bailouts (under Greenspan) of failed financial institutions, thus ecnouraging very risky behavior.
IOw, you are placing blame wehre it doesn't belong. Water flows downhill; the fact that it was allowed to flow down more than one route doesn't isn't the reason the water was there in the first place.
RE: S&L crisis; once again de-regulation is a leftist boogeyman.
From the "Financial Post" (September 20, 1999):
This year marks the 10th anniversary of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), Washington's answer to the great financial disaster known as the savings and loan crisis. At the time, Congress blamed lax regulation. We now know the blame lies with over-regulation.
Originally, the S&L crisis was seen as a uniquely American mishap. In fact, it was but one of a slew of banking crises around the globe. Since 1980 when the crisis began, fully two-thirds of the 182 nations that belong to the International Monetary Fund have suffered similar problems.
In August of 1989, after 10 years of crisis, Congress belatedly authorized outlays of more than $150-billion (all figures in U.S. dollars) to close failed S&Ls that should have been liquidated years earlier. Rather than admit to its own mismanagement, Congress used FIRREA to deflect blame to directors, officers, lawyers, accountants and others who had been caught at the tiller when the system sank into insolvency.
Subsequent research reveals why this kind of scapegoating was silly. Fraud, which some have mistakenly identified as the major factor in the S&L crisis, accounted for less than 10% of the clean-up costs. The more important factor was an ill-advised government rule: Since the 1930s, S&Ls had been required by law to make long-term, fixed-rate home mort-gages funded by short- term deposits. In the early 1980s, short-term interest rates rose above long-term interest rates. By 1981, almost all S&Ls were reporting losses, and their liabilities exceeded the value of their assets -- largely home mort-gages.
Congress played legislative catch-up for the rest of the decade. In 1980 and 1982, S&Ls were set free to become more like commercial banks, which had remained largely immune to risks inherent in borrowing at short-term interest rates while lending at long-term rates. The S&Ls mostly rushed into commercial real estate. Congress also bought time by lowering the capital requirements for S&Ls, encouraging yet greater leverage in real estate investments.
The commercial real estate market stumbled badly in the mid-1980s with the precipitous decline of energy prices and federal tax reform. The former produced a regional recession in the Southwest, while the latter drove down commercial real estate prices by eliminating some juicy tax breaks.
Then things got ugly. In 1989, Congress shuffled regulatory bureaucracies, raised capital requirements and, ironically, required S&Ls to retreat to home lending, where they had first gotten into trouble. Compounding the damage, they forced institutions into a fire sale of their relatively modest portfolios of high-yield bonds, which had performed well throughout the decade. Last, but hardly least, Congress eliminated "goodwill" as an asset in S&L portfolios, pulling the rug out from under many institutions and adding a potential $50-billion of taxpayer liability, when the Supreme Court agreed that the government could be sued for reneging on what amounted to contracts.
To dispose of nearly $1-trillion worth of assets seized from failed S&Ls, Congress established the Resolution Trust Corp. FIRREA was part of a broader wave of financial re-regulation that hamstrung the government in recovering the full value of assets in liquidations. These regulatory shifts helped precipitate the 1990 recession, during which banks and S&Ls reduced loans by about eight times the amount of their decline in capital.
Since small-business borrowers have fewer substitute sources of credit available to them than large ones, the decline in bank lending disproportionately affected their ability to spur innovation and long-term economic growth. The outcome was thus the worst of all possible worlds: a national recession triggered by an excess supply of real estate, the needless destruction of asset values and greater liabilities for taxpayers. The S&L crisis has echoes in the recent East Asian crisis and other banking crises around the world. Excessive government intervention has limited allowable activities, hobbling financial institutions' attempts to reinvent themselves by diversifying both their assets and liabilities.
The absence of efficient capital markets, and dependence on ossified banking systems, has left these countries with daunting resolution costs. It will cost Mexico about 19% of its annual GDP, compared with just 2% to 3% of America's GDP in the S&L crisis.
In addition, following in the footsteps of the U.S., Japan is proving that excessive forbearance--not resolving insolvent banks in a timely fashion--is excessively costly. Though gam-bling on a favourable turn in interest rates or a sharp rise in asset prices may sometimes work out, generally it creates the costly debacles that the U.S. and many countries elsewhere have failed to dodge.
We live in a time of extremely successful government spin. As in the case of the S&L crisis, Congress has fingered lax regulation as a major culprit in the East Asian and other international banking crises.
But the far bigger problem lies with the destabilization by-product of regulation--government determining who lends how much to whom for what. That role should be left to individuals with capital at risk.
---------------
JAMES R. BARTH, a senior fellow at the Milken Institute, served as chief economist at the Federal Home Loan Bank Board and its successor, the Office of Thrift Supervision, from 1987 to 1989. He delivered a version of this paper Friday in Toronto at the Ludwig von Mises Institute's conference on Austrian Economics and the Financial Markets. c) copyright The National Post, 1999
For entertainment purposes only, excerpts from the New York Times in 1999 (before Bush 43 took office), headlined, "Fannie Mae Eases Credit To Aid Mortg@ge Lending.":
...Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortg@ges to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortg@ges, has been under increasing pressure from the Clinton Administration to expand mortg@ge loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. ...
... at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market. ...
Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
Read all about it:
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=2
