How Washington failed America
Friday October 3, 2008
Read it and punch the wall. It's the story of the 2004 Securities & Exchange Commission rule change -- a regulatory move that wasn't even covered by the media -- that let the big five investment banks throw caution to...
Filed Under: rule change, SEC
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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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In 2003, Fannie and Freddie weren't in trouble -- certainly not the way that led to their recent federal seizure.
If I'm not mistaken, the 2003 kerfuffle involved "managing earnings" -- which is a bad corporate practice but a common one in an era when missing your quarter by 2 cents can cost billion in shareholder value overnight.
The Wall St. Journal editorial page has had a beef with Freddie and Fannie for years, fundamentally because it's thought the companies were unfairly competing with their implied federal guarantee, which let them borrow cheaper than other companies. (And because of its involvement with D.C. crony politics.)
Maybe so, but let's not kid ourselves. Washington Mutual, Wachovia, Lehman, Bear Stearns and AIG -- some of the bright lights of the private financial sector until a month ago -- were brought down by the same real estate boom-and-bust.
The GSEs didn't cause the problem.
Well, I don't mean to grab any moral high ground, just to offer confidence that my opinions are based in fact: in my first career, 1974-90, I was deeply embroiled in legislation, regulation and government bureaucracy at the battle line between those entities and the taxpayers -- in my case, the corporate taxpayers. At the same time, I was on the front line with my clients concerning investments. Together, those two entities defined my working life: pension actuary.
The following constitutes observations and personal opinions. Anyone seeing it as advice is covered under my dropping the "gladly" from "I do not suffer fools."
This is particularly relevant today because a loud voice amongst the complainers is the institutional and individual investors of retirement funds.
For the plan sponsor, pension plans provide two benefits (besides the biggest benefits going to those with the highest salaries, of course): a government "subsidy" to the tune of their corporate tax rate, since qualified pension contributions are fully deductible; besides health care, the highest-profile employee benefit, helping attract employees and keep them.
For the individual plan member, they provide a differing two benefits: a source of retirement income in addition to Social Security; and income on which they get to pay federal taxes at a time when their total income is likely to put them in a lower tax bracket. More buck for the bang, as it were.
Now, stop and think for a moment. To avoid making this post over-long, I'll not address the corporate side, and skip right to the core principle of individual retirement planning: the longer one has until retirement, the greater risk one can tolerate because there is more time to recover from it.
Think about that again. Risk is the deciding factor in retirment fund investment. The younger the investor, the greater the risk tolerance.
Anyone over 55 who still has significant investments in stocks deserves to lose them. Between 50 and 55 is the time to get the heck out of Dodge and stop thinking you have the time to survive the downturns that are going to happen.
I get the attraction the markets had to all investors, the prospect of capital gains well in excess of the fixed-income rates. What I don't get is the notion that big gains are enough to mitigate the risk of big losses, and I decidedly don't get the complaints. Risk means you get what you get. It has nothing to do with what you feel you are entitled to get.
The bottome line: if you have 15 or more years to go until retirement, stand pat. Certainly avoid putting current and near-future contributions in stocks, but give your stock investments time. In five or ten or 15 years, the chances are excellent that you will be able to liquidate them without injury.
For those with 15 or fewer years to go... you just learned the once burned, twice shy lesson, in spades. What you don't have is sufficient time to confidently heal from it and apply it from now on. Suck it up, deal with it, and move on. Spilt milk, and all that.
That SEC story, though, that's a doozy.
The GSEs underwrote the whole industry. They are the gorillas of the industry, and had they been barred from participating, the problem wouldn't be as large and fewer banks would be in trouble.
People need to see problems ahead of time. It's like a lifetime pack-a-day smoker getting cancer at 65 and saying, two years ago I was fine!
OK, Russell Roberts' explanation of public policies that helped inflate the bubble (on OpinionJournal.com) details how Fannie and Freddie helped create the market, as Other Jim says.
It also notes how Congress was pushing them to do just that. It's complicated.
Franklin, your advice seems prudent, wise and sound -- for people five or fewer years out from retirement. I'm just afraid that, if experts like you start talking like that en masse, they're going to cause a run on moderate-risk retirement-investment accounts not only by Boomers but also Gen-Xers and even 401k newbies, etc. As if the buckling of the stock market isn't /already/ exacerbated by early cut-and-runners ...
Zaccheus, your expectation is reasonable, and not just for the present investment climate. The difference for now is in the investor climate, and not for what the experts (which, to be ethically accurate, I am one no longer) are saying. Visit any financial website that offers retirement planning advice, and you will see the same basic structure: How old are you? What mix of investment risk are you personally willing to tolerate? The "advice" results will generally be broken down by age ranges, with the advised mix moving from stock-heavy to fixed-income-heavy as age increases.
What I'm describing is as old as the hills. Employee money in pension plans goes back much further than the advent of 401(k) en.wikipedia.org/wiki/401(k)#History, which is a label for the type of plan but is also the section of the code that governs it.
The bail out isn't about America, its in favor of our debtors,
commentary from here
www.youtube.com/watch?v=5ZQs3anwN0I (add http://)
to whom we have been obliged by administration monetarist (not monarchist, but darn night could be, the way they're debasing the currency at will like King Carlos of Spain whom Jesuit Mariana outspokenly opposed for moral and economic grounds. "His moral objection was that just as monarchs had "no right to tax his subjects without their consent," kings also "had no right to lower the weight or quality of the coinage without their acquiescence." cied from an article last year "Saving Europe's money" at www.acton.org/commentary/commentary398.php" shame that the folks didn't use the same deductive logic about the Fed, eh?)
more on debasing the dollar (and peak oil) here from Jim Rogers (Telegraph TV)
www.youtube.com/watch?v=5ZQs3anwN0I (add http://)
"I don't like saying it, I'm an American "Its a sucker's rally?"
Conservatives and liberals used to think differently. Today both sides pass off wishful thinking as if it were fact-based analysis, and both are willing to test favorite untested theories on the broadest possible canvass.
We get the government we elect, and the government we elect is a reflection of us. We no longer disagree on how to think about the world, we tinker around the edges of what to think. But process has always determined the range of possible results, and so now that we're all wishful thinkers we're doomed to judge "style" as being equal to "substance," and to ignore the lessons of history as we rediscover our errors over-and-over again.
The Fed is not independant, it is merely an association representing one segment of our economy: the financial segment, which is in deep doggie-do, of their own making "Blackhawk Bernanke down on M3"
http://blog.mises.org/archives/004356.asp
Washington failed America alright, but it started a long time before 2004 - leverages in fractional reserve are not "cushion against losses" they're the depositor's property - money which ought never be gambled (zero leverage, 100% reserve) if you want real "stabilility"
And has nothing been said of the fact that Obama is the second highest recipient of Fannie Mae/Freddie Mac contributions? Pelosi, Frank, Reid, Rahm: all in the top 25.
Oh... my... gosh... EVW has uncovered the secret truth of American Politics. Dare I write it out in the open?
Every campaign contribution ever made to a candidate or office holder is, in fact, and without exception, payment for voting according to the desires of the contributor.
Start carrying umbrellas every day, my friends. The sky will start falling any minute now...
... EVW, I hope you are not scared off by my mockery, because there is a thing that can be learned here and on other such forums where a diverse group of people meet to discuss issues: no matter how pithy or clever the soundbite is, its connection to reality is further off the fewer number of words it has. So, in your case, the missing part is: all candidates and all office holders receive contributions. Make assumptions, and you must make those assumptions about all of them.
yes, the rule change did pass, but do not forget that many who voted for the waiver did so assuming that the SEC would exercise its statutory authority to monitor the effects of the waiver, which it utterly failed to do (believing in the fair market ideological argument in favor of the 'silent hand' -- that the investment banks would regulate their own behavior and not make risky moves). Also, Greenspan at the Fed (which understand is primarily central banks whose clients are largely outside the US), was warned repeatedly that he needed to exercise his authority to crack down on predatory lending. He refused to do so.
Lenders who sliced and diced the notes and sold individual portions to multiple investor banks created a scenario where workout of the individual loans could not be accomplished, even though the borrowers involved could have paid the workout successfully (as businesses caught in similar situations do.).
The subprime default rate is about 5%. The prime default rate is running about 3%. Sure seems a shame to me that large investment banks could not have facilitated voluntary workout of these mortgages, particularly when they worked so hard to unload them as quickly as they could.
Had there been either Fed or SEC intervention anywhere along the way, had states beefed up their statutes and enforcement regarding predatory lending, etc. etc.
This is a very complicated matter and while certainly individual actions can be pointed to, the more you dig into it, you find just what a web of correlated actions or non-actions were involved.
The crisis came to a head when China notified us it would no longer lend us money. The IMF also had harsh comments when it reviewed the US banking system. Smaller third world countries were extremely upset that the IMF had cracked down on them for similar behavior and had been turning a blind eye to what was happening in US .....
Correction: re China and IMF. This activity was directed to Paulson re: US government money policies and activities, not private US banking industry.
Corrections:
re China and IMF. This was directed to Paulson re: US government money policies and activities, not private US banking industry.
"invisible hand" not "silent hand"
(heading for another cup of coffee .. apparently the first one didn't take :)
Additional comment: Blaming CSE lending does not fly with anyone who knows anything about what happened. It is being sold by the political right as a convenient Willy Horton type distraction, but it is just that. A distraction. (Surely you are better than that ... surely you don't want to participate in that.)
CSE lending did not have the zero down, teaser rates, adjustable rates etc. The loans did not go thru fly by night mortgage loan companies, and the repayment of loans thru CSE is not at the heart of the problem. And the Community Reinvestment Act DID NOT require banks to lend to borrowers who were unable to pay their loans or credit unworthy.
Corrections:
re China and IMF. This was directed to Paulson re: US government money policies and activities, not private US banking industry.
"invisible hand" not "silent hand"
(heading for another cup of coffee .. apparently the first one didn't take :)
Yes, I want to smack a wall but it wouldn't be very productive.
Washington let people like me down -- no doubt about it.
But there are deep linkages between the mortgage meltdown, the end of cheap oil, sprawl, and the overbuilt McMansion subdivisions that drove the mortgage fraud that fueled -- along with the Bush crowd's ideological blindness, a collassal mess.
It was all about me, me, me.
This was true of builders.
It was true of realtors.
It was true of mortgage brokers, bankers, title insurance agents, and others in what was - for a few years - an incredibly lucrative network of Ponzi scheming fraud.
And every one of them that I met the past ten years was bragging about their tax-deductible PAC contributions to the GOP.
So howdy, look at how the chickens eventually come home to roost...
Ask yourself: why would a GOP administration have the guts or brains to stop the spigot on all the obscenely fat, happy jerks who helped feed that beast?
And why is it not at all surprising that McCain's 'strategists' (i.e., lobbyists on leave long enough to get him into office so they can scarf up any leftover gleanings at the public trough) have so many associations with homebuilders and loan industries? I don't find it one bit surprising; if anything, it only underscores my point.
Basically, by pretending that markets can achieve Perfect Equilibrium, and that de-humanized 'actors' make a series of 'perfect decisions' because they have 'complete information' about The Market, we end up forgetting that economics, like politics, is a profoundly human enterprise.
This article also explains a new view of what is called 'post-autistic economics'. It's no surprise that this topic is currrently receiving new attention:
http://www.harpers.org/archive/2005/05/0080538
I'm thinking the problems with the economy has more to do with people having less spendable income to purchase real goods and services. Perhaps more money would flow through the system if average people could afford a little more than the very basics in life. Many people can't even afford that. Many people don't even own a home. I seriously doubt that a few people who couldn't pay their mortgages caused this problem. If anyone in the mortgage industry is responsible it would be those who sell and resell paper that has very little real value. Back to regular people. When and American who works a full time job making minimum wage can't actually live on that wage, we have a problem. Perhaps those folks whose homes are in foreclosure thought their wages would go up enough over the years to pay for the jump in their ARMs. There is no way that a few people defaulting on loans created any of this. Lack of living wage jobs, affordable housing, and affordable healthcare create a sense of drowning with no way out. Life liberty and the pursuit of happiness is something all who work should be able to achieve. People who can earn a living wage will spend money on the very things that keep our economy strong. The great sucking sound is coming from the top, not the bottom. 850 Billion is proof of that.
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