US Economy

[muskrat89]

The lunacy continues.....

http://www.foxnews.com/story/0,2933,447749,00.html

Automakers Ask Congress for 'Immediate' Funding

Thursday, November 06, 2008



DETROIT  —  Detroit's automakers appealed to congressional leaders Thursday for $25 billion more in federal loans, low-interest emergency borrowing and a share of the Wall Street bailout to help rescue an ailing industry battered by the economic crisis.

The talks with House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., came as General Motors Corp. and Ford Motor Co. were poised to announce billions more in losses and further job cuts Friday, and as GM's president for North America said the next 100 days would be critical for his company and the industry.

GM, Ford and Chrysler LLC pledged to work with the leaders "to ensure immediate and necessary funding to keep the auto industry viable and its transformation on track during this critical time," according to a GM statement.

Pelosi told reporters at the start of the meeting that the discussions would focus on "how we can work together to go forward to ensure the viability of that important industry, looking out for the taxpayer and looking out for the worker."

Later in the day she said: "It is essential that we preserve our manufacturing and technology base in this country. Today, the Democratic leadership discussed how to protect hundreds of thousands of workers and retirees, safeguard the interests of American taxpayers, and use cutting-edge technology to transform blue-collar jobs to green collar jobs for generations to come."

GM said the additional federal support would allow "a competitive" auto industry "to contribute to our nation's economic revival." The executives, who were joined by the president of the United Auto Workers, declined comment to reporters between the private meetings.

They sought an additional $25 billion in federal loans for future health care payments for retirees. They also want lawmakers' help in winning access to the $700 billion financial bailout being run by the Treasury Department and to low-rate emergency borrowing from the Federal Reserve's discount window, used in normal times by banks.

The loans would help the companies make required payments to health care trust funds that were created as part of a 2007 labor deal.

The remainder of the article can be found at the link posted.....

 

[a_majoor]

Who says you can't demand it both ways?

http://www.slate.com/blogs/blogs/kausfiles/archive/2008/11/05/whirl-of-change.aspx

How About At Least Making Them Choose? So
the UAW wants a $25 billion bailout and an end to the secret ballot ... Because Wagner Act unionism clearly worked out so well for Detroit. ... 9:31 P.M.

Expect more of this and a frenzied push by the Congress to "bail out" everyone in trouble and "stimulate" the economy while showering expensive favors on their Union supporters. At this rate the US dollar will resemble monopoly money by 2012.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is an interesting report on the impact of the financial/credit crisis on Europe:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081107.wrcover1108/BNStory/Business/home

European (dis)union
It's been 10 years since the birth of the euro zone, and the dream of global economic clout. But now the blanket is tearing, threatening a disastrous derailment of the monetary union

BRIAN MILNER AND SUSAN SACHS

From Saturday's Globe and Mail
November 7, 2008 at 9:53 PM EST

TORONTO AND PARIS — Two or three times a week, Laurence Humeau trudges to the jobs centre near her home in southeast Paris and waits her turn to scroll through the offerings at one of the countertop computers. She has been coming for eight months and never has the wait been longer.

“Welcome to the economic crisis,” said Ms. Humeau, a 29-year-old former barmaid, cashier and telemarketer who had to move back in with her parents after her last temporary job ended. “Every day it's more crowded here because every day more of us are being put out on the street.”

The busy Tolbiac neighbourhood jobs centre, a cheerless place of harsh fluorescent lights and bare walls, is a bellwether of the recession settling over France and the rest of the Europe.

Financial and economic misery stretches across the length and breadth of the region. While much of the global concern has focused on Wall Street and the U.S. economy, the situation in Europe is even worse. No country has been spared, as the credit crisis has burst bubbles created by cheap debt, flattened business and consumer spending, and compounded existing structural problems. The depth of the European crisis hit home this week as the International Monetary Fund reported that euro zone economies will contract by a combined 0.5 per cent next year and said the damage could be worse than it estimates.

Both inside and outside the shelter of the euro zone umbrella, some countries have fared far worse than others. But the rain is pelting down on everyone, even as panicky governments and the oft-criticized European Central Bank scramble to recapitalize battered banks, free up credit and restore a measure of market confidence.

And the umbrella has begun springing serious leaks under the worst strains it has faced since its inception a decade ago. The severity of the slump in the hardest-hit countries is spurring resentment in their better-off neighbours, such as Germany, France and the Netherlands. Taxpayers in those countries have no desire to bail out their weaker currency partners.

The economic pain in the 15-country euro zone is not being spread equally, which is a major source of tension. Countries that grew rapidly thanks to easy credit, such as Spain and Ireland, have been run off the prosperity highway by the collapse of the housing bubble. Some face years of painful restructuring that might have been easier if they had control over their own monetary policy. Others, such as Germany and the Netherlands, have fared notably better, which makes it all the more difficult to apply the euro zone's one-size-fits-all monetary policy.

The stresses could end up breaking apart the world's most ambitious currency union. “The euro zone is about to go through the most traumatic time since it came into being,” said Howard Archer, chief European economist with IHS Global Insight in London.

Bond investors are showing their concerns about the zone's future, as spreads between euro bonds issued by the weaker sisters such as Italy and Greece and those of healthier countries such as Germany widen. Speculators aren't wagering that the euro zone will collapse, bond analysts said. But they are making bets that the cracks will widen.

But for its member countries, the failure of the monetary union would have such disastrous consequences that it's almost unthinkable.

The costs would be astronomical. It would also mean a return to the days when even minor crises could trigger volatile currency swings, undermining economies and putting government balance sheets at risk. “You would have the mother of all financial crises,” said Richard Portes, a professor of economics at the London Business School.

So far, no one is talking of abandoning the euro, and most of the newer members of the European Union from the old Soviet bloc are clamouring to join. Even the Western European members of the EU that chose to retain independent currencies – Denmark, Britain and Sweden – may be having second thoughts about embracing the relative stability of the euro after the beating they have absorbed.

Tiny Iceland, which is not part of the EU, certainly wishes it had adopted the euro after its savaged currency become almost worthless. Even the eccentric pop star Bjork has joined a growing Icelandic chorus calling for membership.

THE EURO MISERY SCALE

Some might wonder why the euro zone is still so attractive to those on the outside looking in.

The economies under the umbrella face a world of pain. Spain, for example, is in such bad shape that it faces a prolonged depression, analysts say, with collapsing domestic consumption, a massive current account deficit and unemployment rising above 20 per cent.

At the other end of the euro misery scale sit countries like Germany, the Netherlands and France, which managed to avoid a Spanish-style housing explosion but still face tougher economic times ahead.

Germany's once-booming, export-driven economy, the largest in the euro zone, has come to a standstill this year. Industrial output fell 3.6 per cent in September, the biggest decline in 14 years. And the economy is expected to contract by as much as 0.8 per cent next year.

On Thursday, French Finance Minister Christine Lagarde gave her most pessimistic prediction yet for France's economy, saying it is now likely to grow by at most 0.5 per cent in 2009. Just last month, she had forecast 1-per-cent expansion. The world financial crisis, she said, “is starting to be felt and is going to last several trimesters.”

French unemployment, which only this summer had dropped to its lowest rate since the 1980s, is now expected to rise to 7.4 per cent by the end of the year. At the same time, consumer confidence has dropped to an all-time low.

Ms. Lagarde also told the parliament that the country's fiscal deficit would likely reach 3.1 per cent of gross domestic product this year, exceeding the EU's threshold of 3 per cent for euro zone members.

Yet for all that, France is still better off than it was before the euro was introduced, said Jérôme Boué, an economist with Global Equities in Paris. “It's a plus.” Both the financial crisis, and the economic weakness that has flowed from it, would have been considerably worse without the currency and interest rate stability provided by the European Central Bank, Mr. Boué and other analysts said.

The situation in the U.S., Britain and Japan is evidence that “it's false to say that you can do better with having an independent national monetary policy,” said Anton Brender, director of economic studies with Dexia Asset Management in Paris. “The question to be asked,” he said, “is how to improve and evolve the European institutions.”

HOW THE EURO BUBBLE GREW

It has been 10 years since the euro zone was launched with great fanfare, no little trepidation and considerable disapproval from a gaggle of vocal critics, including the likes of famed U.S. monetarist Milton Friedman. But the criticism became more muted with the passing years, as the Europeans proved better disciplined than they had been given credit for, and the euro gained entrance into the exclusive club of the world's most trusted currencies.

Indeed, the euro became one of the flavours of the decade, soaring nearly 80 per cent against the U.S. dollar between early 2002 and March, 2008, and prompting dreams in Brussels of becoming the leading engine of global growth and wielding the power and influence that would come with such economic clout.

Now, those dreams have been washed away by a tidal wave of gloom, and the question becomes whether the flaws baked into the very structure of the euro zone will sink it as well – or if the Europeans will take advantage of this crisis to make the system more efficient and effective.

The policies of the ECB have tended to fall into line with the preferences of the strongest and most influential members, namely Germany and France. In the early years, the ECB ran a loose monetary ship, keeping interest rates low for the sake of the then-stumbling German economy. The excessively low rates, combined with a global credit boom, triggered bubbles in some of the fastest-growing, but weaker, economies.

Inflation was not a problem in Germany and France, but in less wealthy and less structurally sound economies, such as Spain, Ireland and Greece, prices rose dramatically. The ECB couldn't intervene, and the credit bubble ballooned in some countries, but the currency remained strong, masking the problem.

CRACKS EMERGE

Derek Scott, a former economics adviser to then-British prime minister Tony Blair, argues that the very nature of the euro zone played a key role in the creation of the credit bubbles and debt mountains that have blown up so traumatically. “Whatever may have been the mistakes in the United States, it seems to me that the euro zone itself is a structure that, almost by definition, creates asset bubbles, on top of anything that might have been exported by the United States or China.”

Spain, Portugal, Ireland, Greece and a couple of other European countries expanded rapidly thanks to a housing and construction boom, high domestic demand and debt-fuelled consumption. Although they suffered from inflation, a drop in competitiveness and widening current account deficits – all weaknesses a central bank would normally try to address – everything seemed manageable.

But then the global credit freeze hit with a vengeance. Lenders worried about being repaid and domestic consumption quickly fell off a cliff. The same thing happened in Britain and the U.S. Central banks in those countries could – and did – intervene dramatically.

The U.S. Federal Reserve has led the world in rate slashing since the crisis worsened this fall. On Thursday, the Bank of England finally responded with a surprisingly deep cut of 1.5 percentage points. On the same day, the ECB reduced rates by only a third of that, bold by its standards. Anything more aggressive risks triggering a dangerous bout of inflation in better-off economies such as Germany's.

The ECB won high marks in some circles for its prompt action, at least on the capital front, since the credit squeeze first hit home in August, 2007. But on other fronts, cracks were emerging. On the interest rate side, it remained tightly focused on inflation. And it lacked the capacity to make such central bank moves as adjusting the amount of currency in circulation.

And the most serious flaw in the euro zone design quickly became apparent as conditions deteriorated: There is no institution capable of co-ordinating fiscal policies or taking other emergency measures in the event of a once-in-a-century financial catastrophe.

As long as many of the policy options available to governments and central banks in Canada, the U.S. and elsewhere are not in the euro zone playbook, Europe faces “a much longer, harder, more complicated slog to pull out of this,” said Peter Zeihan, vice-president of analysis with Stratfor, a global intelligence firm based in Austin, Tex.

‘MORE EUROPE?'

Every European crisis prompts soul-searching about whether it's better to be part of a large entity than going it alone.

This time, despite the strains, the union could end up stronger. Worried national governments, shaken by the unexpected near-collapse of financial institutions once viewed as pillars of their economies, could finally yield some of their jealously guarded fiscal and banking authority and promote a euro-zone-wide regulatory regime.

Historically, every European crisis “has been used as an opportunity to bring about ‘more Europe,'” said Mr. Scott, the former Blair adviser, referring to the EU's widening of powers. “That is a potential result of this.”

It's understandable that troubled Denmark and a handful of Eastern European countries such as Hungary, which have been pushed to the brink of bankruptcy, might be looking for safety in the euro.

“But the notion that a Denmark would be safer inside the euro zone I don't really buy. You gain some security perhaps. But against that, you're locked into a system, where if you get into difficulties, you can't get out,” Mr. Scott said.

There's a price to be paid for gaining the stability of a stronger currency, Mr. Scott and others critics say. Joining a monetary union could weaken an already troubled economy. “Far from being a mechanism for convergence of economic performance, it's a mechanism for divergence,” he said. Within the euro zone, “that's what we're seeing. And it's now exaggerated because of the wider international problems.”

The future of the currency zone may have already been determined by the design flaws in its creation.

Amy Verdun, a political science professor at the University of Victoria who has written extensively about European monetary policy, argues the EU's big mistake was setting up an “asymmetrical” economic and monetary union.

The monetary side, in the hands of the ECB, is responding to the current crisis. But it has no political counterpart – just the finance ministers of the member countries who gather from time to time to co-ordinate policies.

Unlike national governments, the euro zone has no mechanism for directing attention to a problem sector or struggling country. And that is unlikely to happen, because it would mean transferring more authority to the European Union. As it is, “people don't trust the existing EU institutions,” Prof. Verdun said.

A CASE FOR UNITY

Euro zone members can and frequently do act unilaterally, without regard to the consequences for their fellow euro zone partners. Early in the banking crisis, for example, Ireland hastily guaranteed all deposits, causing a furor and setting off a race among governments seeking to out-do each other in national assistance. Only belatedly did they realize it would be considerably more effective to enact common policies.

Whether the euro zone can continue with its flawed model of a powerful central bank and a weak, informal arrangement on the economic side remains to be seen, Prof. Verdun said.

“They are heavily dependent on ad-hoc co-ordination. There's no authority to say: ‘You have to.'”

And there will always be a conflict between the interests of the heavyweights and the peripheral members. Even EU officials recognize that a single monetary policy is bound to be inappropriate for certain countries at least some of the time.

Are there sufficient strains to call into question the euro zone's survival?

Prof. Portes, of the University of London, dismisses such a question out of hand.

“I think it's nonsense,” he said. “The stakes are much too high. Even Germany recognizes that you couldn't allow the euro zone to break up in any way. The consequences for any country to drop out would be horrendous. Its financial system would be destroyed.”

Susan Sachs is a freelance reporter based in Paris.

As this report makes clear, the US sub-prime mortgage mess is only the catalyst that provoked the crisis. Europe is in worse shape than North America because it had made more bad policy choices over the past 20 years.

 

[GAP]

As this mess accelerates in the EU watch the companies in Canada that were bringing in Guatemalans, Mexicans, Ethiopians, suddenly start hiring Europeans hit hard by the recession. Canadians who think it is beneath them to move and work in the west and north, are suddenly going to find the well very dry. Learning to ask "do you want fries with that?" may well become their mantra.....

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is more news from the subsidize everything and everyone crowd, led by George W Bush:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081111.wcitimortgages1111/BNStory/Business/home

U.S. moves to prop up those at risk of foreclosure

BARRIE MCKENNA

From Wednesday's Globe and Mail
November 11, 2008 at 8:33 PM EST

WASHINGTON — In a sign that the U.S. housing crisis is getting worse, not better, the Bush administration and the mortgage industry are moving to stop a fresh wave of Americans from losing their homes to foreclosure.

The government Tuesday directed Fannie Mae and Freddie Mac to ease terms on hundreds of thousands of delinquent home loans. The announcement follows similar foreclosure prevention plans by major commercial banks, including Bank of America Corp., Citigroup Inc., and JPMorgan & Chase Co. The bank said that Citigroup's efforts, for example, would save as many as 130,000 homeowners from foreclosure.

“We need to stop the downward spiral,” said James Lockhart, director of the U.S. Federal Housing Finance Agency.

This week's actions mark a renewed effort by the government and banks to tackle the heart of the mortgage crisis – the millions of American households losing their homes or threatened with foreclosure as the United States slides into recession. The various loan workout plans would touch roughly 1.6 million homeowners.

The move by Fannie Mae and Freddie Mac, which own or guarantee nearly 60 per cent of all U.S. home mortgages, should set a standard for the rest of the industry, Mr. Lockhart said.

Anything that keeps homeowners out of foreclosure is a good thing, agreed Celia Chen of Moody's Economy.com. But she said these programs “only nibble at the problem.”

Some U.S. authorities also criticized the plan as inadequate. Federal Deposit Insurance Corp. head Sheila Bair said the plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages, particularly those held in private securitization trusts.”

Those mortgages could prove much trickier to modify.

As many as 12 million homeowners are now “underwater” on their mortgages, meaning they owe more than their homes are worth, she said.

By the end of June, more than four million homeowners were behind on payments or in foreclosure, data from the Mortgage Bankers Association show. That represents 9 per cent of borrowers with a mortgage.

And Moody's Economy.com estimates that 8.5 million U.S. homeowners will default on their mortgages between 2008 and 2010. Roughly 5.2 million of them will lose their homes.

Troy Courtney, for example, left his Mill Valley, Calif., home after many attempts at a loan modification. Mr. Courtney had two loans on the house and could not persuade the loan manager to modify terms.

“I feel like I missed the boat,” said the San Francisco police officer, 44.

Economist Nouriel Roubini of New York University said the underlying problem is that Americans have too much debt.

“You cannot grow yourself out of a debt problem,” he said. “When debt to disposable income is too high, increasing the denominator with rebates is ineffective and only temporary. You need to reduce the debt.”

The Fannie Mae and Freddie Mac plan targets homeowners most at risk – those who've missed at least three loan payments, live in their homes and haven't declared bankruptcy. Under the arrangement, Fannie Mae and Freddie Mac will pay loan service companies $800 for every homeowner for which they arrange more affordable monthly payments (defined as 38 per cent of gross household income), either by cutting interest rates, extending loan terms or deferring payment of principal.

The program is set to begin Dec. 15.

Citigroup said it would target borrowers at risk of foreclosure by cutting interest rates to as low as 3 per cent and stretching payment periods to as long as 40 years.

“With the unemployment rate rising and rising, more and more borrowers are getting into financial distress because of loss of income,” said Sanjiv Das, chief executive of CitiMortgage. “It is a problem the country will face for some time to come, so it is very important to reach out to borrowers before they become delinquent.”

Even U.S. authorities acknowledge the plan has limitations. The government is not stepping in to forgive all or part of any mortgages.

“There is no silver bullet to address the housing downturn,” said Neel Kashkari, the Treasury's interim assistant secretary for financial stability. “We are experiencing a necessary correction and the sooner we work through it, the sooner housing can again contribute to our economic growth.”

The scope of the problem is much larger than the relatively small part of the problem that is in the hands of Freddie Mac or Fannie Mae.

The dismal shape of the housing market is making loan modifications increasingly tricky. As U.S. home prices continue falling, a growing number of homeowners are underwater on their mortgages.

These homeowners have little incentive to honour their debts, and many of them will choose to simply walk away from their homes.

And U.S. officials said most troubled mortgages are held by entities other than Fannie and Freddie.

Mr. Lockhart urged those lenders to follow Fannie Mae and Freddie Mac's lead. Beyond moral suasion, the government can't make that happen.

Economist Ed Yardeni said Fannie and Freddie remain “hobbled” by inadequate capital and so they are unable to vastly grow their mortgage portfolios. He urged the government to nationalize the two agencies, and let them lend as much as $2-trillion at a heavily discounted rate of 4 per cent.

“That would be a much more effective way to bail out the financial system, the housing market, and the economy,” Mr. Yardeni said.

The Treasury Department seized the two government-created entities in early September because of their ailing finances.

With a report from Associated Press

Politically, at the new style retail politics level, it is hard impossible to resist bailing out hundreds of thousands, even millions of home owners. In many respects there’s no point in punishing middle class homeowners who, with a combination of naivety and greed, bought into the idea that their home could be a safe ATM. But, if too much personal debt is the real, core problem then maybe the surest way out is to write down/write off all those bad debts – foreclose and put the debtors out on the street, en masse, and resell the properties.

There is an old adage that if one wants to get out of a hole the first thing one must do is to stop digging.

 

[Old Sweat]

To whom does the foreclosers sell the properties? There are very, very many attracitve properties, but others are in the double wide category.

 

[Edward Campbell]

To whom does the foreclosers sell the properties? There are very, very many attracitve properties, but others are in the double wide category.

Texas is not one of the most severely hurt states and the Dallas area appears to be doing fairly well. I'm told that in some of the newer suburbs there is a very brisk resale market and foreclosed homes are moving quickly, at relatively low prices. Several people are asking themselves if now is the time to buy another house, as a mid to long term investment (mortgages rates being in the 5.5% range).

The rental market also appears to be good because many of the people who lost their houses are not poor - they have jobs, they have cash on hand. They simply bought too much house three or four years ago and when their variable rate mortgages went sky-high they stopped paying, lived 'free' for a few weeks, even months and are now looking to rent a house - often in the same suburb! - and they are able to pay the rents being asked.

 

[a_majoor]

Fixing the mess. I "hope" the new Administration and Congress will "change" their approach of social engineering, bailouts and regulatory excess, but I doubt it:

http://newenergyandfuel.com/http:/newenergyandfuel/com/2008/11/07/four-economic-mistakes/

Four Economic Mistakes
November 7, 2008 | 6 Comments

While America is filled with joy and consternation over the election and the results I’ve been thinking about what should be done about the economy. The more obvious thing is to list the “For God’s Sake, Don’t Do This List.” It’s a rather short. Founded in hard experience by America’s economy, visible to any student of economics, these few principles need be engaged in your thoughts to estimate the future.

In the meantime let’s be careful to recognize that the media and politician’s efforts to stimulate the economy with “stimulus packages” for consumers, “industry rescues” for financiers and automakers, and the other ideas are much more like snake oil salesmen’s tonic than real antibiotics that attack a disease. Or, better get the stitches or cauterize the wound than endlessly pour more blood in.

You may well realize that if the blood loss can be stopped the body may well recover from the shock and begin healing with little treatment at all. Markets, be they financial or houses are creatures of human organization after all.

To avoid a depression forming out of a recession there are just four big mistakes to avoid.

The first mistake to avoid would be not engaging in protectionism, or setting up trade barriers, taxes and other devices that serve to limit trade, keep jobs at home, or other lofty goals. It didn’t work 75 years ago when there were no instant worldwide communications networks, airfreight systems, integrated capital and commodity markets, and vast numbers of businesses and their jobs based in a worldwide economy. Seventy-five years ago the world engaged in protectionism and the results were catastrophic throwing millions of Americans out of work for years only to finally get work when war broke out.

Today such a mistake would reach tens of millions, if not reach well past the hundred million American citizen mark. So when you hear politicians or media heads talking about renegotiating or other economic treaty meddling, be very concerned. If you own, are invested in, work for such a business or use products and services that come even in part over national boundaries the risks are very dangerous as the economic contractions would be earthquakes of never imagined consequences. Talk like revisiting the North American Free Trade Agreement has more to do with the stock market this week than any other single issue. Way down deep, where few people are willing to visit, this fear is real already and needs addressed with confidence building and soon.

The second mistake to avoid is more regulation. Its interesting to note that since 1945 the U.S. and the free world economies recovered from the disaster of the Second World War and built in short order what we know as the “developed world” leaving everyone else way behind. Much of the worst over regulation from the Great Depression was left behind by the 1950’s, setting many people and lots of capital free. Over regulation is a temptation to set things right, control the bad behaviors, compel certain behaviors, and do other good things. All well and good in a theoretical way, but taken too far, regulation chills people and their hopes and dreams. The bad actors are going to be bad in any case, so regulation needs to be about minimum standards, not something to solve all ills or compel certain courses of conduct.

What brought on the end of the housing boom is complex, but a major effort by government regulation sought to compel lenders to loan 100% and other devices to increase home ownership. A lofty goal, but for many borrowers it was more of a switch from paying a landlord to paying a mortgage. But when something went wrong there wasn’t someone to call. With no equity money saved and invested in the home there is nothing to lose. Would you have made the loan in such a set of conditions? These loans were securitized with all of the good ones making them the bad apple that spoiled the whole bunch. With housing being such a huge credit market making up the majority of personal wealth in the U.S. its no wonder that the crises is as serious as it is. We know that some regulation revamping is needed in the kind of loans that are guaranteed by taxpayers and bundled as securities. Getting the regulations turned back was tried by the Republicans, and blocked by the Democrats in Congress a couple years ago. We surely have learned now that more regulation compelling a behavior is a bad thing here, as turning the regulatory clock back to before the new loan product offerings is a simple and effective solution.

The securitization of credit isn’t a matter of being a bad idea so much as making the regulations couldn’t keep up. This is a case where new regulations limiting the bad behaviors could be applied. But will the mood of the Congress be updating regulatory matters or instead, seek to compel another form of conduct? That’s the risk, instead of regulations that expose and require truthful disclosure of risk in bundled securities, debt swaps and derivatives, we may get something that kills one market and/or seeks to create a new one in its place. That means an economic contraction followed by a mandated form of market that suits regulation rather than the needs of an economy.

It took from the over regulation attack on the economy during the Great Depression until the beginning of the Clinton administration to finally get the economy moving in cruise mode. Then the ensuing 16 years have seen more of the compelling of behaviors than regulations that simply protect us from and limit the bad behaving players. The pendulum certainly swung quickly back to another economic calamity, but this time the error isn’t a lack of regulation, but too much of the wrong sort.

It’s a lot to expect, and truthfully, I don’t expect that Congress will establish law that gets regulation back on a useful course for security, safety and growth. Instead we may get another swing of the pendulum too far the other way. Remember, it took more than 50 years to fix most of the over regulation of the Great Depression that in today’s dollars may have cost tens of trillions of dollars in lost economic activity. Over regulation is slower, less visible, but cuts very deep for a very, very long time.

The third mistake to avoid is attacking capital. By this I mean striking fear such as engaging in protectionism, over regulating, taxing, and even scolding those who worked hard enough and were lucky enough to get some. That’s a big chunk of Americans and justifiably they will act to save, protect and defend that capital. It’s in homes, pension funds, 401Ks, small businesses, IRAs and a wealth of other things. The “Rich” is most of us. Assertions that what we’ve won with hard work, risk taking and deep stress is a source of pride, the family who can burn their mortgage is just as much a success as the millionaire, different only by degree. The artifice of taxing “only those” is a well-known lie understood by all who have any maturity and experience.

The whole of any successful economy is founded in the willingness to risk, work and endure. The profits, payrolls, sales, and property to tax is utterly dependent on those people’s results. Spooked, profits will “disappear,” along with jobs, capital will get moved to a safer place so making what is the end of a business cycle triggered by regulatory policy errors in housing and home financing, a long term problem. Actually, much to the horror of the unionized community, capital can in its disorganized way “go on strike,” too. When I hear the term “Cash Is King” I shudder, as it means fear, uncertainty and doubt or “FUD” has won.

FUD is a creature thought up to describe the attacks by Microsoft to belittle and dissuade people from competitive operating systems. And it worked to some degree in a competitive business environment. Over the years the strategy has worn thin, and Microsoft has had to get better products out. They have yet to learn that they have way over priced the commodity personal operating system. Which is a good thing as the alternatives thrive while Microsoft just bleeds it customers. But government is much more than a near monopoly like Microsoft.

Attacking capital is an insult to work, risk and surviving stress. People can choose to go on strike not just in investing, but in simple spending, too. Its in progress now, housing is nearly frozen unless it’s a foreclosure buyer after a distressed priced property. Demand destruction in energy and fuel use is well underway. Reduced consumer spending in retail stores is getting going now, and surely pointing to a sorry commercial Christmas season. Soon health care will come under pressure and nothing will be left untouched save government itself. Government will still seek to go on without an economic contraction adding more stress to those most short of cash flow.

America is both blessed and cursed by multilevels of government with power dispersed close to people and in the black hole of Washington D.C. With governments increasing their focus on solving their own operating problems in an economic contraction rather than assisting the economy to stabilize and resume course, taxation, fees and other means to gather cash is further attacking the economic cash flow.

FUD, taxes either staying the same or increasing, fees, licenses and other costs simply kill capital activity. When capital activity is reduced the consequences are profound, eventually government will have to literally “make” money by the artifice of creating more cash for itself, a kind of self reinforcing, looping phenomena that appears to the average person as inflation. As many readers old enough will remember, inflation makes people poorer with repeatedly lowering the value of money and a little more remembering will recall that the fix for inflation is yet another dreadful recession experience. Attacking capital is a sure way to keep a recession and drive an economy into a depression.

The fourth mistake is engaging in creating simple uncertainty. This is surely the most difficult thing to avoid as media, press, opinion makers, we bloggers and a wealth of new venues on the Internet are all going off in whatever way suits the individual producer. Every culture or society or nation will form a kind of pyramid of power from the least intelligent and poorest of luck at the bottom and increasing education, work, risk taking and perseverance as one looks at the upper levels of the pyramid. Everyone to some extent is watching those at the top where money and influence impact the popular wishes of democracy’s functions into the hands of a few in the Presidency and the leaders in Congress.

There, the attitude, the willingness to engage in government for the greatest good ahead of social engineering will decide if creating uncertainty comes before the need to set a certain national security and an economic growth confidence path. While wrangling will go on it’s the context that matters. Is national security the order of business or some idealistic goals substituting in its place? Is economic confidence the order of the day or is social engineering leading the debates? People, in spite of the media, press and pundits catch on pretty quickly. Sound bites are very telling and hardly need parsed by the average person to be clear. Idealism and social goals while under national stress are breeders of uncertainty as the leaders are clearly seen putting private agendas ahead of the nation as a whole. In truth, idealism and social engineering have always failed to get the promised results.

Uncertainty is sand in the gears, infection in the wound, depression in the mind kind of thing. What we see and hear in the coming weeks will tell us much of what we have bought in the latest election. Have these newly elected people learned anything from history or are we all doomed to repeat it?

Can they keep the doors open and let world prosperity be a foundation for national and world economic security?

Will they control their impulses in making laws and regulations, suppress their human wish to wield power over others and correct the mistakes of the past or trigger a new disaster with decades of recovery required?

Can they deal with the responsibility so avoiding the tyrant’s and dictator’s trick of blaming something that cannot speak in defense? Capital has no single voice, blaming “greed” and avarice is a not very clever trick that won’t last long. Winning back the trust from the lie may take much longer than one term in office allows.

Will the national interest be first ahead of ideals and social dreams? Do the leaders and the influence of special interests find a context of public discourse that tells observers that certainty of purpose for national security and economic performance comes ahead of all other wishes?

This is a long blog. Not on topic, but relevant to the day. There won’t be much in new energy and fuels if the national security and economic activity are lost to weak minds and dreamers of utopia. I would surely not like to lose my soapbox on my favorite field to political failures of responsibilities.

There you go. What to watch for. May God bless us; we’re really going to need it.

 

[Drag]

If there is a bailout of the Big Three it should include clauses for union contract renegotiation, not that I am hopeful that the Democrats will demand it.  I saw somewhere that the average autoworker costs GM about $150K per year when you add up the wages and benefits.  The same article said that the average university professor made about $100K.  With all due respect, assembly line work is not worth $150K / year.  Japanese automakers operating in North America pay out, on average, only about $95K per worker per year and are in good shape.  Sorry UAW, if you want to keep working, you have to be ready to come back down to earth.

 

[a_majoor]

This will really help the economy:

http://www.usnews.com/blogs/capital-commerce/2008/11/10/is-obama-planning-a-surprise-tax-hike.html

Is Obama Planning a Surprise Tax Hike?
November 10, 2008 02:46 PM ET | James Pethokoukis

I have been arguing that Barack Obama's tax hike plan represents a floor, not a ceiling. (And even that floor seems to fluctuate.) I recall that some House Democrats, like Charlie Rangel, were pushing a for a "millionaire" surtax during the last Congress.

Now this: My guy Dan Clifton, superanalyst at Strategas Research, has noticed that Speaker Pelosi is pushing for a permanent refundable tax credit on payroll taxes paid. Clifton thinks that tax credit could be paid for by a five percent surtax on higher income taxpayers.  "While this achieves the same goal of raising the top tax rate, to achieve the permanent middle class tax cut, the 5 pct. surtax will fall on top of the higher income tax rates after the Bush tax cuts expire (39.6% + 5%)."

So we could end up with a top rate of 45 percent, higher than the top rate during the Clinton years. And up it goes.

 

[Kirkhill]

Here's one for those that are a lot brighter than me, it is in keeping with the move to "ease terms":

What would be the impact of renegotiating "failing" mortgages, via Fanny and Freddy, at 99 year terms?  Make the principal payment vanishingly small and effectively just carry the interest on the loan.

As to the tax hike.....as I said before, keep our rates reasonable and we may end up being the beneficiary .... Canada as the Switzerland of North America, but with oil.

 

[a_majoor]

Japan's huge property bubble burst at the end of the 1980's (just about the same time various talking heads were predicting Japan would overtake America as the world's biggest economy), but their government failed to force Japanese banks to take non performing assets off the books.

The Japanese economy essentially deflated for the next decade (economic stimulus packages and reducing the prime rate to effectively 0% did nothing to help [say, that sounds pretty familier]) due to the drag of the non performing assets. Using Freddie and Fannie to carry non performing debt would have similar impact on the US economy, although since the failed mortgages are a smaller percentage of the overall US economy, the effect "should" not be so severe.

Most of the various bailout packages proposed or implemented are having no or negative effects on the economy (witness the Asian stock markets dropping after the Chinese package was announced) since they are totally counterproductive. The crisis is caused by an excess of debt in the system, systematically increasing debt through deficit spending (or preventing the debt:wealth ratio from coming into balance by attacking wealth in the form of higher taxes or malformed regulation) IS being factored into the global stock market, which is reacting to policies which reduce future growth, future profits and future savings.

I think we are reaching a real crisis point. Either the debt is wrung out of the system (and quickly; allowing GM to fail would probably kick off the process and get it over with through a cascade of bankruptcies in a year or so), or attempt to "stimulate" or "rescue"  the economy, and wring the debt out by devaluing money through rapid increases in inflation. I lived through the inflationary 70's, and saw what it did to my parents; I would never wish that on anyone.

 

[a_majoor]

A long article which explains some of the financial aspects of the problem and how it became so amplified: remember, if the CRA hadn't been enforced and banks "encouraged" at gunpoint to start making these sub prime loans, the foundation of all these derivatives would not have existed in the first place. Incentives and lack of understanding or transparency inside Wall Street took care of the rest.

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

Long article, but well worth it.

 

[a_majoor]

I'd vote for this guy. If he represents the "new wave" of Republicans, maybe people will be able to be "proud of America for the first time (since 2008) in 2012". Where is the rest of the team?

http://online.wsj.com/article/SB122670755063129989.html?mod=rss_opinion_main

Don't Bail Out My State
South Carolina's governor says more debt isn't the answer.
By MARK SANFORD

I find myself in a lonely position. While many states and local governments are lining up for a bailout from Congress, I went to Washington recently to oppose such bailouts. I may be the only governor to do so.

But I suspect I'm not entirely alone, as there are a lot of taxpayers who aren't pleased with Christmas coming early for politicians. And I hope these taxpayers make their voices heard before Democrats load up the next bailout train for states with budget deficits.

Several questions led me to oppose bailing out the states. They are worth asking, even if you supported bailing out Wall Street.

Who bails out the "bail-outor"?

Washington is short on cash these days and will borrow every dime of the $150 billion to $300 billion for the "stimulus" bill now being worked on. Federal appetites may know no bounds. But the federal government's ability to borrow is not limitless. Already, our nation's unfunded liabilities total $52 trillion -- about $450,000 per household. There's something very strange about issuing debt to solve a problem caused by too much debt.

Do you now have to be a financial "bad boy" to win?

Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.

Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?

Medicaid grew 9.5% annually over the past 10 years. That's unsustainable. But if Congress opens the checkbook now, there will be no reform.

Isn't government intervention supposed to be the last resort and come only when it can make a difference?

In 2008 bailouts became the first resort. Over the past year the federal government has committed itself to $2.3 trillion (including the tax rebate "stimulus" checks of last February) to "improve" the economy. I don't see how another $150 billion now will make a difference in a global slowdown. We've already unloaded truckloads of sugar in a vain attempt to sweeten a lake. Tossing in a Twinkie will not make the difference.

However, there is something Congress can do: free states from federal mandates. South Carolina will spend about $425 million next year meeting federal unfunded mandates. The increase in the minimum wage alone will cost the state $2.6 million and meeting Homeland Security's REAL ID requirements will cost $8.9 million.

Based on what I saw in Washington, the bailout train is being loaded up. Taxpayers will have to speak up now to change its freight, tab or departure.

Mr. Sanford, a Republican, is the governor of South Carolina.

 

[a_majoor]

Well, there will be a chance to try this in 2012:

http://pajamasmedia.com/blog/want-change-lets-try-truly-free-markets/

Want Change? Let’s Try Truly Free Markets

Posted By Rand Simberg On November 17, 2008 @ 12:00 am In . Column2 03, . Positioning, Money, Politics, US News | 10 Comments

For all of the talk about “change!” in this election, the incoming president’s political party, and perhaps the president-elect himself, seems stubbornly resistant to it.

Joseph Schumpeter famously — and admiringly — wrote about the “[1] creative destruction” inherent in the actions of the free market. I refuse to use the word “capitalism” in this context, because it’s really a Marxist term and doesn’t capture the essence of a system in which individuals and corporations freely exchange goods and services without government interference, if indeed it ever did. When so-called “capitalists” who run the finance, real estate, insurance, and now automotive industries come to Washington, hat in hand, for taxpayer dollars, it’s [2] laughably ludicrous to call them supporters of the free market. Moreover, the term “capitalism” doesn’t capture or connote the importance of property rights and the ability to exchange them freely that are [3] at the base of human liberty in the way that the phrase “free market” does.

In Schumpeter’s view — which is supported abundantly by history — as new technological or financial or cultural innovations arise, or as the societal desires and composition change, so change the markets and business models for existing companies. They have a choice of adapting to that change or, if incapable of doing so for either corporate cultural or other reasons, they can die. They can die, that is, if they don’t have courtiers at the royal court. Then, their options are more varied and they don’t require the necessary and painful change to their ways of doing business that might be required to survive in the new circumstances.

In her seminal book, [4] The Future and Its Enemies, Virginia Postrel writes about the real political divide — not left versus right, but what she calls stasists versus dynamists. The former fear change and want to use government power to minimize it, if not eliminate it. The latter accept that improvements in the human condition require change by definition, and understand that the best way to ensure it is to allow individuals the freedom to make choices, with consequences, both good and ill, to be borne by them.

By these definitions, both presidential candidates in this election were largely stasists. Barack Obama wanted, and wants, to avoid the “change” of having people lose their jobs. John McCain wanted homeowners — even homeowners who didn’t really “own” their home by any sensible definition of that word, in that they had no equity in it — to “stay in their homes” and avoid the change of having to move out and rent. Never mind that in many cases they made no down payment. Never mind that in many cases they could probably rent for less than the mortgage they cannot afford. Never mind that in not selling or foreclosing, the day at which the market prices of the homes are determined, and the point at which we can discover the value of the paper that is based on them, is put off further into the future, delaying the bottom of the market and the resolution of the financial crisis. No, they must stay in “their” homes and not have to undergo “change.”

Similarly, the leaders of Congress share this aversion to change, demanding that General Motors — and perhaps the rest of the American auto industry — be bailed out by the taxpayer, in order to avoid the restructuring of the companies and their union contracts vital to any hope for future financial success. They want to preserve a wage, pension, and work-rule structure for unskilled labor that can no longer be justified or afforded in a twenty-first-century world, and have the rest of us pick up the tab.

What they don’t seem to understand is the hidden cost of such conservative policies. In a famous essay, the French economist Frédéric Bastiat wrote about [5] that which is seen and not seen:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

When jobs are preserved at too high a cost, it results in a costly product for which there is no market. If the product is a necessity, with no competition, then people are spending money on it that they could have been spending on other products and services, thus creating additional jobs. If there is competition or people can do without, then the company will continue to bleed red ink. If the taxpayer has to make up the difference, then again, it is money being spent that is not being used to generate wealth, but rather to provide the difference between the wage paid and the market wage as public welfare, though none call it that. Similarly, when we keep people in “their” homes, we are preventing the market from determining the value of those homes, and preventing others from buying them who might now find them affordable at the new market price. All of the new jobs, all of the new wealth, that might be created if those resources were to be freed up, is what Bastiat called “the unseen.” When a worker loses his job, or has his pay or pension reduced, or someone’s house is foreclosed, it is covered in the news. What is not reported on are the jobs that aren’t created and homes that aren’t purchased, because no one can see things that haven’t happened, and hence, there’s no political pressure to allow them to occur.

It pretty much goes without saying that neither Harry Reid nor Nancy Pelosi nor Barack Obama nor John McCain are economists. And if they are, they clearly aren’t the ones that Bastiat calls “good” economists. What they are is stasists, which is really another word for true conservatism — an intrinsic aversion to change (one of the reasons that “conservative” is not necessarily a useful descriptor for those on the so-called right, including libertarians). Who is the conservative — the person who wants the taxpayer to maintain the status quo at the cost of future wealth generation, or the person who favors letting the market work its course and redeploy the economic resources in a more fruitful direction?

There was another politician who abhorred “change,” implementing policies to [6] preserve wages and prices, even [7] jailing people for charging five cents too little for cleaning shirts. In reaching back decades to the failed philosophy of Franklin Roosevelt, which was what made the Great Depression great, [8] extended its duration by seven years, and prevented the creation of an unknowable amount of wealth that might have stood us in good stead in World War II, Barack Obama isn’t offering us “change we can believe in.” He isn’t offering us change at all. He’s simply come up with an economically destructive conservatism and stasism, as old as FDR and Mussolini — or even Karl Marx, if not older.

Government allocation of resources is an idea as old as government itself, back to the dawn of civilization or before. What is new and different and represents real “change” is free and dynamic markets in which individuals make their own decisions how to spend their money, and how much to spend and save. It was the model that the Founders of this nation had in mind when they drafted the Constitution. Unfortunately, for the past eighty years, we’ve slipped far from it while — ironically and sadly and mistakenly — blaming it for our current travails.

Perhaps, instead of what has passed for “capitalism” since the New Deal and the [9] Wagner Act, it’s time to shed the conservatism and give free markets a real try.
--------------------------------------------------------------------------------

Article printed from Pajamas Media: http://pajamasmedia.com

URL to article: http://pajamasmedia.com/blog/want-change-lets-try-truly-free-markets/

URLs in this post:
[1] creative destruction: http://en.wikipedia.org/wiki/Creative_destruction
[2] laughably ludicrous to call them supporters of the free market: http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflati
on-now/

[3] at the base of human liberty: http://corner.nationalreview.com/post/?q=NTRhOTVhZmJlM2Q1OTk3MzM0YWQ2OWMxMmFkY2ExZDM=
[4] The Future and Its Enemies: http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FFuture-Its
-Enemies-Creativity-Enterprise%2Fdp%2F0684862697&tag=pajamasmedia-20&linkCode=ur2&camp=1
789&creative=9325

[5] that which is seen and not seen: http://www.econlib.org/library/Bastiat/basEss1.html
[6] preserve wages and prices: http://corner.nationalreview.com/post/?q=OGYxMzJlZDVhM2ZhNDE2YzlmYzIzZDlhNDUxOGE2Y2Q=
[7] jailing people for charging five cents too little for cleaning shirts: http://www.amazon.co.uk/review/REK7X4PGXRXP7/ref=cm_cr_rdp_perm/
[8] extended its duration by seven years: http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409
[9] Wagner Act: http://www.transterrestrial.com/archives/2008/11/capitalism_corp.html

 

[a_majoor]

Some sectors of the US economy are doing just fine (and I'll bet we can see the same if we look carefully around us in Canada as well):

http://drhelen.blogspot.com/2008/11/underground-economy.html

The underground economy
I read with interest an article entitled, In Ethnic Enclaves, The U.S. Economy Thrives (Hat tip: Newsalert):


Dr. Alethea Hsu has a strange-seeming prescription for terrible times: She is opening a new shopping center on Saturday. In addition, more amazingly, the 114,000 square foot Irvine, Calif., retail complex, the third for the Taiwan native's Diamond Development Group, is just about fully leased.

How can this be in the midst of a consumer crack-up, with credit card defaults and big players like General Growth struggling for their existence? The answer is simple: Hsu's mostly Asian customers – Korean, Chinese, Taiwanese, Japanese – still have cash. "These are people who have savings and money to spend," she explains. "Asians in Orange County are mostly professionals and don't have the subprime business...."

The center, reconstructed from a failing old mainstream mall purchased in 2005, is now roughly 90% occupied. "We are doing so well that we are expanding the mercado," Legaspi says, referring to the thriving centers dominated by very small businesses run from attached stalls that are a popular feature of many Latino-themed centers. "It's all cash economy. They pay their bills with cash. The banks and credit card companies are not involved. It's true capitalism, and it works."

Latino shoppers, he suggests, also have been less impacted by the stock market collapse than other consumers. After all, relatively few, particularly immigrants, have large investments on Wall Street. In addition, even if they have lost their jobs, particularly in construction, Legaspi adds, they tend to pick up other employment, even at lower wages, often in the underground economy. "They get paid in cash, and they pay in cash" [my emphasis].


My initial thought about the article was that I like that the "ethnic enclaves" are said to be "true capitalism" that works but when I got to the part about Latino immigrants going into an all cash economy as a result of the "underground economy," I must say, I was a bit puzzled. Afterall, this would imply that they are paying no taxes--not even payroll taxes--and not filling out income tax forms like the rest of us. Isn't this illegal, hence the name "underground economy?" They play by one set of rules, the rest of us another?

Mike Huckabee, in our interview with him for PJTV discussed how the fair tax would be more fair since those in the underground economy would pay taxes on what they bought. This seems like a good idea to me. I wonder how big the underground economy is? I thought about this the other day after overhearing a conversation at the hair salon.

One of the customers having her hair done was talking about how flush in cash she was because of her new job. "I'm making a lot," she stated to the hair sylist, "it's all under the table, of course." "That's the best way," replied the sylist. Is this really fair to the other Americans who pay their fair share of taxes? I don't think so, do you?

 

[HunterADA]

banks "encouraged" at gunpoint to start making these sub prime loans

I wasn't aware anyone was forcing banks to sell low initial rate, "exploding" adjustable-rate mortgages. Here I've been under the impression this whole time that mortgages with three year teaser rates followed by a reset to a rate that gives the homeowner a much higher payment were something the banks came up with all by themselves, and eagerly snapped up by both stupid home buyers and real estate speculators looking to flip the house long before the payment changed.

When I see states like California, Florida, Arizona and Nevada topping foreclosure lists ( http://www.realtytrac.com/states/index.html ), with the first two far in the lead, it doesn't scream 'welfare mom with ten kids and no income that the bank was forced to give money to'. It does point me towards bubble-like housing markets that have been rising at a rate far above inflation or typical investment returns. It does point me towards some of the most lucrative places in the nation for real estate speculation in the last decade. And it does point me towards banks that, having made the loans, knew they were bad and did their best to securitize and dump them on somebody else, then figured the securities they were buying from everyone else to sustain their own profits were somehow better than the trash they were unloading on the market.

Nobody forced the banks to develop these investment vehicles, least of all Clinton and the (mostly Republican-controlled anyway) Congress of his administration that you seem to be implying. Alan Greenspan said in April, 2005, "today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s." Are you saying the Republican-controlled Congress, with the Republican president, was to blame for that statistic? Or that they were so weak a majority that they couldn't influence a situation like that?

That same self-proclaimed lifelong Republican supported the 2001 tax cuts that the Democratic congressional minority criticized as unsustainable and unfair. (Hey, I've never had a problem with them, I pay half the tax on investment income that I do on the income I get from my job. Schleps who actually make all their money from working for a living might disagree.) They even went so far as to lable the man a political lapdog and hack who would do anything to appease the party in power. And in his testimony before Congress last month, Greenspan said ""Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief."

He expected banks to act responsibly, look out for their long-term interests, and prudently safeguard their capital while making skilled decisions to generate revenue for depositors. Basically, the kinds of things the traditional vision of a banker encompasses.

Oops. His bad.

 

[DBA]

I wasn't aware anyone was forcing banks to sell low initial rate, "exploding" adjustable-rate mortgages. Here I've been under the impression this whole time that mortgages with three year teaser rates followed by a reset to a rate that gives the homeowner a much higher payment were something the banks came up with all by themselves, and eagerly snapped up by both stupid home buyers and real estate speculators looking to flip the house long before the payment changed.

Banks were forced to lend to some groups of people that should never have been given loans. Bundling them into securities was a way for banks to protect themselves and shed the risk. The government assisted them in doing this with expanding the operations of Freddie Mac/Fannie May along with other programs and legislation/regulations. Write loan (get fees), bundle and securitize (get more fees) then sell shares in the bundle (more fees). Once the cycle completes the risk is gone. Banks got greedy and pushed the cycle to be big and fast without any regard to caring about the risk of the various loans. Helping them was the rest of the financial industry who made these bundles look like something other than what they were: bundles of very risky loans with a significant chance of default.

The teaser rates and lack of checking for any ability to repay was because they didn't care about the risk of the loan as it would not be their problem once it was bundled and sold to some suckers. Keep in mind a lot of the bank's loses are just the loans they had in hand when the scheme collapsed and they could no longer bundle and sell them as some form of investment instrument. The inflated money supply for the housing market made it into one huge bubble that has burst causing grief for a lot of people. Lots of greed, stupidity, deceit  and blame to go around.

 

[a_majoor]

The Community Reinvestment Act (a Carter Administration program) didn't really become an issue until the Clinton Administration began to threaten banks with regulatory enforcement of the act (it had been ignored for the most part through the '80's and bankers were still able to use sound mortgage practices when lending). Once the Clinton administration started the process, radical groups like ACORN would start shakedown lawsuits against banks that still persisted in looking for steady income and low debt/equity ratios from potential buyers. I will have to refind the link, but a certain lawyer named Barrak Obama apparently filed at least one lawsuit against a Chicago bank along with or in conjunction with ACORN, claiming that looking for debt/equity and income was "redlining" and racially motivated.

Since the power of the State was behind these lawsuits (in the form of the CRA), bankers really had no choice but to comply. As DBA points out, positive incentives were found in the form of securitization. Consider, however, that without the enforcement of the CRA, the entire process could never have begun.

Now we have the same gang of idiots who decided the CRA was a good idea and fought against regulating "Freddie and Fannie" in 2003 AND 2006 also want to seize control of people's savings (401 and IRA accounts), introduce national healthcare and pick winers and losers in the general economy (starting with the Detroit "Big Three"). If they do as good of a job as they did with the banking and mortgage industry (and there is no evidence they will do anything differently [i.e. spreading gravy to their friends at your and my expense]) then the next four years will be very rough sledding indeed.

 

[HunterADA]

Banks were forced to lend to some groups of people that should never have been given loans.

Agreed.

The inflated money supply for the housing market made it into one huge bubble that has burst causing grief for a lot of people. Lots of greed, stupidity, deceit  and blame to go around.

Also agreed. But the above is still not anywhere close to the proximate cause of this issue. It makes just as much sense to invoke the S&L scandal in relation to the current crisis as it does to lay the blame on an ill-advised attempt to mingle EO and finance. And I'm still curious about where this seizure of my retirement account is coming from, aside from certain fear-mongers.