Wall Street/Main Street
Wednesday September 24, 2008
In financial crisis blogging today: 1. If you read nothing else, see this Yves Smith rundown of the seriousness of the situation. The charts are very helpful, if extremely depressing. 2. Steven Malanga explains how it's convenient to blame Wall...
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About Crunchy Con
Rod Dreher is an editorial columnist for the Dallas Morning News, and author of "Crunchy Cons" (Crown Forum), a nonfiction book about conservatives, most of them religious, whose faith and political convictions sometimes put them at odds with mainstream conservatives. The views expressed in this blog are his own.
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I'm in agreement with Ehrenreich on this one.
We would be much better off if William Faulkner were our national bard instead of Walt Whitman.
As a New Englander, I find optimism to be highly annoying.
I read Ehrenreich's op-ed piece earlier today and it brought the following book to mind.
'The Wee Book of Calvin'
Bill Duncan
'The Wee Book of Calvin', a humorous self-help book that draws on the pragmatic philosophies of Protestant reformer John Calvin, urges people to embrace the darker, more realistic side of life. Author Bill Duncan says the book is a distinctly Scottish antidote to America's "personal improvement" industry.
An NPR interview can be found here: tinyurl.com/3lmbfy
I don't think anyone with a functional set of eyes and a functional brain can say they didn't see this one coming. This is like a forest where fires (recessions) are not allowed to happen, the better to save all the little woodland creatures and preserve the pretty trees. Brush accumulates over years, and when a forest fire finally does happen, the whole sodding forest goes up in smoke.
First we had things like the "Community Reinvestment Act", which mandated relaxed standards for mortgages and credit, the better to "encourage home ownership".
Then we added subprime mortgages and seriously relaxed leveraging standards for investment houses. The standard practice was to allow investment banks to lend out 12 times what they had in actual capital; Lehman was leveraged at 35 to 1 when they went under. Does anyone remember NINJA loans---No Income, No Assets, Just Approve ? (Gary North of LewRockwell.com spotted this particular grief coming back in '05, btw.) This led to "interest-only" loans and similar bits of rancid silliness.
Third, we have a central government that has, for 40 years (it was under LBJ that the current trend of deficit spending got started) been running up the national debt, mostly to pay for increased entitlement spending. Mass borrowing from a Red China looking for someplace "safe" to park all its' subjects savings exacerbated this.
Fourth, the Fed has gone three sides 'round the barn to keep the discount rates low, the better to avoid killing off the boom in housing and maintain the central government's ability to spend.
This makes for one hellacious bubble. And it's going to take a good 15 years to square enough of this debt to let growth resume. Then we've got Mr. Will's Boomer-retirement-induced problems to be concerned with, but I don't want to depress anyone.
Consequences:
1) Credit is going to be well-nigh impossible to get for anyone with less than perfect credit, even after a bailout. This will obtain for at least 10 years, if not longer. The housing market is going to stay in the tank for at least 5.
2) The dollar, as the world's reserve currency, is done. Foreign nations are going to be reluctant in the extreme to take our T-bills, and they're going to flatly refuse to take them at current interest rates.
3) Tax cuts ? Forget it. Even though cutting the cap-gains rate might be one of the few measures that might actually help matters.
4) New central-government spending ? Not if the Happy Monkeys have any vestige of sanity. This may be the one thing the serious observer can count on: the Happy Monkeys of both factions are capable of producing idiocy, depravity and stupidity in job lots.
5) Politically, it doesn't matter who wins; coping with the resolution of this debt bomb is going to be Job One for the political leadership cadre for the next three Administrations.
In short, a rockin' good time WILL be had by all.
"I'm Karth, Lord tai-Fulton and sutai-dVistrill, and I approved this message."
Your servant,
Lord Karth
One of my pet social theories is that the reason New England is still a pretty nice place and the people are still pretty well-behaved in spite of their secular liberal views is that there is a strong heritage of Calvinism. It has been softened and hidden under Transcendentalism, Universalism, and modern secular humanism, but it is still there. That is my explanation of why so many of my extremely liberal friends live such traditional, conservative lives in seeming contradiction of their crazy social theories and left-wing political ideas.
Their big mistake, it seems, is assuming that EVERYONE in the US also has a rock-ribbed Calvinist soul, and would therefore behave just like them, if only they had easier access to grad school, farmers' markets and Fair Trade coffee.
Karth-Pyrrho or Pyrrho-Karth in 2012.
The Pitchfork Party
The Know-Somethings
The Unhappy Gorillas
2. Steven Malanga explains how it's convenient to blame Wall Street for this mess, but a lot of the blame begins with mortgage fraud on Main Street.
Enh. When a lender makes a mortgage loan, they have a pretty strong incentive to make sure the borrower can repay the loan, since the lender makes their money off the interest (over the long haul). That was the function/point of Fannie and Freddie (both when it was a operation owned by the Feds and afterwards) - to guarantee that the lenders would get their money back in the event of default.
The new wrinkle was the "innovative financial instruments" - that is, the lenders chopped the mortgages up and resold them as derivatives. (And then other companies offered insurance on the payment of those derivatives!) What was innovative about it was that the lenders got their money back for the mortgage right then and there. So they got to issue a loan, make some money on that and resell the loan and get their money back which allowed them issue a new loan (or otherwise reinvest the loan profitably).
It is generally more profitable to have cash instead of lending it to someone else, unless the interest rate charges are high enough to make more money lending it out, since the lender could just buy some stock or something. So if the lender gets to issue an interest-bearing loan and resell it, it works as though they get the profits from making a loan without having to make a loan, and then they could get the profits from reinvesting the money again, which is nice work if you can get it.
So the lenders have a strong incentive to make lots and lots of loans, since each loan they repackage profits them up front, the cost of the loan disappears when they resell it, which allows them to make more loans. By giving loans to anyone and his dog, they made more money than if they were stingy, but there are only so many people with good credit, so to make more loans they have find warm bodies to borrow, or they have get people who already have mortgages to refinance.
In an atmosphere of free money and a market of rising prices, mortgage brokers and the like have a strong incentive to ignore the fact that people cannot repay their loans. After all, if the people a mortgage broker has lined up for a loan default, you can always foreclose on them and find a new warm body to lend to - at a higher price. So the business model of the lenders changed from conservative lending to people with good credit for a long time, to churning loans as fast as possible, so the loans can be resold.
Of course, when defaults rise, the mortgages underlying the sercurities go bad and the guarnators have to pay off and/or the lenders cannot pay off on the securities and or the insurer of the securities has to pay off. Which creates a bit of a chain reaction, since the lender stops lending, which was what was driving the profitably of house flipping and the issuance of the securities was from creating new loans.
Of course there was fraud by borrowers; there had to be fraud by the borrowers or by mortgage brokers or a lowering of standards by lenders because the lenders had run out of honest people with good credit to loan to, and the banks needed new loans and the mortgage brokers needed to create new loans to make their commissions. (That's why you can find plenty of instances of loan officers creating borrowers out of whole cloth so that the loan officers could (essentially) give themselves a bunch of loans which they would also collect commission on.)
Fraud by borrowers skyrocketed in the wake of lenders deciding it was profitable to issue loans to any warm body, but fraud didn't cause the lenders (babes in the woods that they are) to decide that issuing crappy loans was the way drive up quarterly returns.
max
['I do believe it was Poor Richard who said, 'Neither a borrower nor a lender be.'']
Rufus Thomas @ 10:35 writes:
"Karth-Pyrrho or Pyrrho-Karth in 2012.
The Pitchfork Party
The Know-Somethings
The Unhappy Gorillas"
An interesting idea, my friend. But before we go on, one question:
Do I get time off my sentence for good behavior?
Your servant,
Lord Karth
Rufus -
Thanks for your support. President Karth and I will make you majority whip and give you a flail with a big spiky morning star on the end to wield.
Salamander -
There's a lot of truth to what you say.
I was just thinking about why A.E. Housman's "Terrence, This is Stupid Stuff" has been one of my favorite poems for years now. In it, Housman defends his pessimistic poetry against detractors who find him too depressing.
In the final stanza, he tells the tale of Mithradates Eupator who would ingest small doses of poison each day so that he could build up enough resistance should one of his enemies successfully poison him.
They put arsenic in his meat
And stared aghast to watch him eat;
They poured strychnine in his cup
And shook to see him drink it up:
They shook, they stared as white’s their shirt:
Them it was their poison hurt.
—I tell the tale that I heard told.
Mithridates, he died old.
Yup, some of us think this way.
max
['I do believe it was Poor Richard who said, 'Neither a borrower nor a lender be.'']
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
That's Polonius's advice to Laertes, from Hamlet. Or am I missing a joke somehow?
Excellent remarks from Barbara Ehrenreich.
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