As a bit of a follow up to the recent posts here on the crisis in the financial markets, and in particular dk.au’s piece on the way “facts” work in collective economic behaviour, I wanted to draw attention, firstly, to a comment from John Quiggin:
Having reached this point, it’s hard to see how the US can turn back from a massive extension of financial regulation, starting with the derivative markets where AIG got into so much trouble, notably those for credit default swaps (CDS). Along with winding up the affairs of AIG, Lehman and others, the authorities will need to oversee an orderly unwinding of the transactions in these markets which they are now effectively guaranteeing. More generally, it’s time for a partial or complete reversal of the financialisation of the economy that took place after the breakdown of the Bretton Woods system back in the 1970s.
That needs to be read in conjunction with a column in The Guardian by Robert Skidelsky, the distinguished biographer of Keynes. Skidelsky argues that we’re at a conjuncture – a tipping point where one “cycle of economic fashion” gives way to another.
The bankruptcy of Lehman Brothers and the forced sale of Merrill Lynch, two of the greatest names in finance, mark the end of an era. But what will come next?Cycles of economic fashion are as old as business cycles, and are usually caused by deep business disturbances. “Liberal” cycles are followed by “conservative” cycles, which give way to new “liberal” cycles, and so on.
Liberal cycles are characterised by government intervention and conservative cycles by government retreat. A long liberal cycle stretched from the 1930s to the 1970s, followed by a conservative cycle of economic deregulation, which now seems to have run its course.
With the nationalisation of America’s two giant mortgage banks, Fannie Mae and Freddie Mac, following the nationalisation earlier this year of Britain’s Northern Rock, governments have started stepping in again to prevent market meltdowns. The heady days of conservative economics are over – for now.
Skidelsky also has some quite scathing words about the economics profession and its mystifications and orthodoxies:
The cycles in economic fashion show how far economics is from being a science. One cannot think of any natural science in which orthodoxy swings between two poles. What gives economics the appearance of a science is that its propositions can be expressed mathematically by abstracting from many decisive characteristics of the real world.
The classical economics of the 1920s abstracted from the problem of unemployment by assuming that it did not exist. Keynesian economics, in turn, abstracted from the problem of official incompetence and corruption by assuming that governments were run by omniscient, benevolent experts. Today’s “new classical economics” abstracted from the problem of uncertainty by assuming that it could be reduced to measurable (or hedgeable) risk.
A few geniuses aside, economists frame their assumptions to suit existing states of affairs, and then invest them with an aura of permanent truth. They are intellectual butlers, serving the interests of those in power, not vigilant observers of shifting reality. Their systems trap them in orthodoxy.
When events, for whatever reason, coincide with their theorems, the orthodoxy that they espouse enjoys its moment of glory. When events shift, it becomes obsolete. As Charles Morris wrote: “Intellectuals are reliable lagging indicators, near-infallible guides to what used to be true.”
Update: Another interesting perspective from Ann Pettifor at Open Democracy.
Another post here by Mark.
Update: Another interesting perspective from Ann Pettifor at Open Democracy.
Kim,
We can only hope that we have reached a tipping point. The current fashion for ever bigger and more intrusive government has been running for a very long time.
I will live in hope, if not expectation, of some real changes.
I suspect that’s not the tipping point Skidelsky has in mind, though, Andrew! However, I suspect that “more intrusive government” is seeing things the wrong way around. All modern governments are intrusive, or rather seek to govern more and more intensely (whether or not they regard what they’re doing as oriented to “free markets” or not). See Mark’s post:
http://larvatusprodeo.net/2008/08/29/on-the-futility-of-arguing-about-hayek-or-whats-in-a-name/
Note also that both Quiggin and Skidelsky suggest that regulation will most probably be directed towards financial rather than other sectors of the economy. Which I think is appropriate. How it’s done, though, is crucial.
There are lots of private-sector, public-sector, and academic economists in this world, doing lots of different things, with lots of different attitudes and assumptions, and you can’t generalise about them any more than you can lump together all historians, all scientists — or all sociologists.
When I read that piece by Sidelsky, it reminded me of nothing so much as John Greenfield ranting about post-modernists.
I was hoping you’d turn up here, Andrew! I actually thought you’d changed your tune on regulation with this latest round of collapses. Can you expand a little more on how you think less regulation could have prevented this? (Assuming that is your position … I know that would be speculative, and after the fact)
Well, try the other article, which is quite specific about the misattribution of blame for the current events by economists (macro-economists are who we’re talking about here, obvs).
Sorry, crossed with dk. My comment was addressed to Paulus @ 4.
Paulus, the difference is that, when provoked, more economists than any other social scientists will claim their discipline to be ’scientific’, in a kind of ham fisted positivist way. There are concrete, historical links between Popper and the Austrian school I could point out here, but don’t want to get in trouble with Kim!
Yikes! Thanks, dk.au! I hate discussions about “the Austrians”… although if it’s relevant…
Economics is scientific in so far as it makes theoretical predictions, gathers data, and then attempts to test the data via statistical methodology. There’s also a new and interesting field of experimental economics, where you get a bunch of volunteers into a lab, and run experiments on economic behaviour.
I just dusted off my first-year econ textbook which has a lengthy discussion of what economics is. It classifies economics as a social science, “along with political science, psychology, and sociology”. The textbook does not claim any sort of superior position to the other social sciences.
Maybe, dk.au, you just had the misfortune of running into some arrogant members of the profession. Such people exist in all fields.
Now if you want to be some sort of purist, maybe only physics qualifies as a ‘real science’. (One physicist I knew disdainfully referred to biology as not real science, just “stamp collecting”.) But fundamentally this is a pointless debate.
No, it’s not a pointless debate at all. First, because orthodox neoclassical economics is not the only economics. Nor indeed the only economic science.
Even if most Australian Economics departments spent the 80s and 90s purging any other form from their curricula. So it’s not absolutely amazing that an Economics 101 textbook would talk in naive Popperian terms.
And secondly because the degree of abstraction and quantification that Skidelsky talks about is part of the reason why the “masters of the universe” in NYC create such a mess.
Ahhh!!.. not Australia’s answer to Mizes and Hayek, at post 2.
I would have thought this lot would have been trembling deep back in their funkholes, finally shamed into silence after the last weeks events.
But shame has never been their strong suit, any more than their ”
blame the victim” insensitivity.
The ‘pointless debate’ I was referring to is the argy-bargy over what is ’science’ or not. It can’t be resolved in any way, and is in practice just a means for people to parade their prejudices about other disciplines, so I call it pointless.
But anyway I think this is a distraction from the point of the thread.
The regulation of financial markets is an issue of political economics, rather than economics per se. All economists support some level of regulation: I challenge anyone to show me one economist who thinks that deliberate fraud should go unpunished, for example.
If you conducted a CSI of the pre-1990s US banking laws, I’ll bet you’d find more fingerprints of corporate lobbyists and law firms on the knife than economists.
In Australia, with a very heavy presence of economists in policy-making institutions, we have a system of financial regulation that has avoided, and probably will avoid, the problems the US is having.
“Orthodox economics is not the only economics.” True. As you noted earlier, there is the famous Austrian school.
Yes, Paulus, but the famous Austrian school rests on the same epistemological foundations as neo-classical economics. It’s quite right to say there’s been a deliberate narrowing of the discipline (and incidentally its personnel) in Australia over the last two or so decades (Sydney was lucky in a way to have a formal split). When I was an undergrad, you could still get taught by people who were post-Keynesians, institutionalist economists, Neo-Ricardians (and even a very odd Straussian). And we didn’t have any rational choice Marxists at UQ, though such a beast exists. And all of the above do quantification (except the crazy Straussian).
It does matter whether claims are made about “science” because they suggest that there’s only one way of looking at things. Orthodox Marxist theorists employed the vocabulary of “science” to precisely the same effect.
And I don’t know about your distinction between politics and economics – because what is precisely at issue is the thrust of “solutions” – see the linked article by Pettifor.
And as for Greenfield, Skidelsky is himself an economist:
http://en.wikipedia.org/wiki/Robert_Skidelsky
I don’t know that Greenfield is a postmodernist, and I don’t think he could argue his way out of a brown paper philosopheme.
And perhaps dk.au will come back and talk about Popperians!
The issue isn’t whether there are testable hypotheses, etc, but what the predicates and assumptions which generate those hypotheses are. Among others.
Maybe you should look up a Philosophy of Social Science 101 textbook to go along with the Economics 101 text!
Oh, and I forgot to mention my favourite economists – the French Regulation School! (No doubt JG would not approve…)
Mark, Kim, I disagree that there’s been a narrowing of the discipline of economics. In fact, I’d characterise it as the very opposite. Here at Adders U, the curricula has broadened to include subjects in areas like development econ, environmental, natural resources, financial markets, game theory, experimental, and so on. Many of which wouldn’t have been there a couple of decades ago.
Most of these, obviously, use micro-economic theory, plus models developed specifically for each niche.
At Adders, 3rd year macro doesn’t even explicitly enter into the debate between Keynesians, post-Keynesians, monetarists, etc. In fact, at the moment, it’s only one-half of a one-semester unit called ‘Economic Theory III’. When I took it, in the half-a-dozen weeks available, it barely had time to cover some mathematical extensions to the (Keynesian) IS-LM theory we were taught in second year. They were certainly not bombarding us with free-market rhetoric, in case you were wondering.
What I’m saying, basically, is that most (not all, but most) of the discipline seems to have decamped from the monetarist vs Keynesian trenchlines, and is off exploring different stuff that doesn’t fit neatly into a left vs right paradigm.
These days, frankly, I wonder if you’d actually find a ‘rational choice Marxist’ if you advertised for one. Not because of the ‘purges’ that Kim seems to think have happened, but because people just don’t seem interested in those old paradigms and intellectual positions.
You knew Rutherford?
That quote is normally attributed to him, though sometimes to Kelvin, and might be apocraphal.
Though your friend has seriously misinterpreted what is meant by that statement. Stamp collecting (the classification and placing in hierarchy of what is already known) is sometimes more important then physics (the mathematical modeling of the movement and behaviour of matter).
The field of economics sometimes appears to be neither of these things, though there are some areas (game theory for example) that touch on them.
This is Skidelsky’s money quote:
Skidelsky recognises the possibility of the existence of “geniuses”, presumably folks who elevate the study of economics to the status of a “science”. Thus, Skidelsky implies that economics is a “science” in some sense of that word.
As for the rest — the “butlers” — Skidelsky doubly condemns them, not because they are incapable of scientific economics but because they choose servitude to “those in power”.
Fascinated as I am by economics, my study has of necessity been restricted to the economic histories of various periods I study.
As for economists and their pontificating what we should all do, isn’t it about time we all stopped bowing down before them?
They clearly have less credibility than bad science ficxtion writers.
I’ve often thought that we should add to the list of inevitables, alongside death and taxes, the demand for more regulation after bear markets. It’s as predictable as clockwork, this bleating demand for the government to do something, anything, to
please, God, do something for the childrenprevent markets from delivering the more painful side of creative destruction, and almost always AFTER the horse has bolted.While the amassed genii observing from the sidelines are thoroughly disinterested in (and frankly mystified by) the workings of financial markets during boom times, the moment things go pear-shaped the chorus of critique arises and the finger-pointing begins. Of course, the leftwardly inclined, who tend to go quiet when markets deliver wealth, prosperity etc. are emboldened to push their particular ideological barrow, working under the presumption that socialism looks somewhat less bankrupt when markets aren’t behaving.
Also, Skidelsky is not an economist; he’s an historian. NTTAWWT.
And Bush isn’t a socialist, he’s a “compassionate conservative”. NTTAWWT.
Except that Bush has presided over the biggest corporatisation since Lenin.
Those hypocritical socialists (of whom I am definitely not one) may be bleating but the free market ideologues are doing the nationalisations.
BWAHAHAHAAHA!
When I did some basic economics a few years ago, the Lecturer on the first night welcomed us to the course, did the housekeeping and then stated that if you put 100 economists in a room, gave them a problem and the time to work it out – they would give you a answer. When the answer subsequently was proven to be wrong there would be 150 reasons why that is the case.
Maybe he was right
Yes, Ludo, no doubt in boom times we “leftwardly inclined” are suffused with envy and ressentiment at the superior God like skills of those who make up the “financial markets”
Paulus, yes, economists have been looking at different problems (or colonising the entire domain of social science and often reinventing the wheel, from another perspective) but on the basis of the same theoretical paradigm. People who did economics when I was at Uni were able to do no doubt fascinating subjects like “Transport Economics”, but the key difference is that there were a range of competing theoretical perspectives – and not just locked up in a little ghetto called “comparative economic thought” or something.
Btw, interesting that you should single out “rational choice Marxists”! They’re mainly English – a strange blend of British empiricism and rigid politics.
You should check out the Neo-Ricardians and Post-Keynesians – you might find them interesting.
Interesting points: as a left social democrat, I’m always stunned at the surprise surrounding market failure once too much socially important infrastructural service provision is handed over to the private sector (and I include not only health and education, but superannuation, pensions etc).
Regulation is good! The market is not Lord, and neither for that matter, is the nation-state – look at the international repercussions. Thus, as the market is global, and this is good, so must regulation be global.
Global warming is merely an extreme case study in its inevitability.
“Btw, interesting that you should single out “rational choice Marxists”! They’re mainly English – a strange blend of British empiricism and rigid politics.”
Would there be some links between these guys and 70s/80s analytical marxist philosophy ie. rejection of the dialectical aspects of marxist thought?
Spot on, klaus!
While the amassed genii observing from the sidelines are thoroughly disinterested in (and frankly mystified by) the workings of financial markets during boom times, the moment things go pear-shaped the chorus of critique arises and the finger-pointing begins. Of course, the leftwardly inclined, who tend to go quiet when markets deliver wealth…
That is a complete steaming pile, Fyodor. People from AGE opinion writers to Paul Krugman to various other commentators both here and in the US have been writing and talking for years and years about the burgeoning national (private) debt of our countries, mortgage equity abuse and other credit abuse, and other workings of financial markets which have come on the back of deregulation and neoliberal policies, and which have managed to create the illusion of more wealth than we actually have – to the benefit of people like the former Liberal government. They’ve been warning about it for years. Look through the back copies of any newspaper. Honestly, I don’t know why you think you can say such a thing and get away with it. They (and I include myself in that group, although I haven’t blogged about it)wanted more regulation years ago, not just when the bear market kicked in years ago, and we have been proved right. Again.
Jeez, hyperbole much? Bush snr. spent more on the S&L bailout in the early 1990s. Lenin nationalised an entire economy. Let’s get some perspective here.
Glad to hear you’re not a hypocritical socialist, but you’d be hard pressed to identify Bush jnr., or his cabinet, as “free market ideologues”. As for nationalisations, we’ve been through that already.
Who said you were, Mark? “Envy and ressentiment”, eh? Never seen those associated with Teh Left before.
It’s a big bigger than a “bear market” too. Again, see the article from Pettifor. As The Economist – among other rabidly leftie rags – has recognised – a financial crisis can’t be dismissed as a correction or whatevs. That commie pinko Greenspan seems to think it’s something rather important as well.
Maybe the particular economists at the bottom of this particular stuff up are of that peculiar subspecies – “Market Economist”. I’ve never been sure why they are classified as such but they are at plague proportions in the media … or at least they were. The current environment could lead to something akin to an algal bloom, a great blossoming of opinion followed by starvation and mass death (I studied stamp collecting).
So what else is new? Privatise the profits, socialise the losses, and let the hypocrites speak for themselves.
Get your terms right.
What has the level of nationalisation got to do with the nett amount of money actually spent? Infrequently, nationalised enterprises run at a surplus. Thus one can have a 100% nationalisation that not only costs nothing but can produce a surplus.
Fannie and Freddie now underwrite more than 90% of the home mortgages in the US. That represents an enormous potential charge on the accounts of the US government. Conversely, this state of affairs may even turn a surplus for the US Government — highly unlikely, but possible. But what cannot be denied is that this represents a 90% nationalisation of home loans, one of the larger sectors in the US economy.
But if you want to talk actual sums, by the time this is over, and it has hardly started yet, the money actually spent by Bush Sr on the S&L bail-out will probably look like petty cash compared with what his son has committed the US government to splashing around.
The one problem with the tired ‘privatise the profits, socialise the losses’ mantra is, of course, that all these ‘bailouts’ are occurring on terms which leave the relevant shareholders, quite rightly, with pretty much nothing and confer rights on the government to sack the managers at will.
So a more accurate cliche would be ‘privatise the profits (except 40% of them, which are paid as company tax each year), socialise the losses (except 90% of them, which the masters of the universe have already borne). That isn’t a sympathetic statement, by the way. They underpriced risk on their own books; they can’t blame anyone else for that.
There are many reasons why even this helping hand is unwarranted. And these Wall Street types don’t do themselves any favours when they bleat about ’systemic risk’ in a transparent ploy to have the taxpayer underwrite their continued employment…
BBB
Helen, you should take it as a given that I would not include in the ranks of the “disinterested” those people who have been demonstrating interest by writing about the issues. I can walk you through the logic on that point if you insist.
As for “burgeoning national (private) debt of our countries, mortgage equity abuse and other credit abuse, and other workings of financial markets etc.”, you don’t leave much out, do you? Moreover, simply asserting that mentioning these things somehow gave you or your preferred oracles foresight about the pickle we’re in now doesn’t actually prove it. Much as you’d like to believe otherwise, it’s very far from clear that “more regulation” (on what? by whom? implemented how?) would have prevented the crisis we’re in now.
So, no, “you” haven’t been proved right. You’ve actually failed to prove anything just now, other than that you haven’t actually manifested any interest in this subject up until now, and that your recommendation – “more regulation!” – is precisely the kind of simplistic, ex post knee-jerk reaction I identified earlier.
If you don’t like regulation then you shouldn’t mind losing your super’.And doesn’t that pile look tempting now.
Fyodor – you seem unseemly concerned with the reactions of people you think know nothing about financial markets and are “disinterested” (I’m going to assume you mean uninterested) in them.
Why would you expect a well-wrought critique from such people?
Perhaps your time would be better spent explaining what you think is going on, and what you think is an appropriate response (beyond letting the “more painful side of creative destruction” run its course).
Fyodor, perhaps Helen means this kind of regulation:
Proposed by the Bush administration in 2003, opposed by Congressional Democrats: “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
The world is all topsy turvy, isn’t it?
BBB
Topsy turvy indeed, BBB, and as they say, all that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses. Ahem.
And Katz, you call that nationalisation? This is a nationalisation done the way Lenin would have liked—no buyouts, no compensation, in with the troops.
Patrick B hits the nail on the head – the economists you see pontificating on the news are not a random sample of economists. They’re often paid shills for their employer, even trying to push markets in a direction that puts their employers’ investments in the money. They are about as credible on things like where the dollar is going as real estate agents talking about where house prices are going.
The number of times I’ve been asked at parties “so, should I take my overseas holiday now or next year to get the best rate on the dollar?”, when good neoclassical theory (not to mention experience) tells you that no-one can possibly know ….
On whether economics is a “science” or not, it suffers the same inherent problem of most social sciences – the rarity of true controlled experiments to properly test hypotheses. That’s because we can’t rewind history. However economics does have a culture of using theory to generate testable hypotheses and then trying, at least, to test them. It’s the abundance of good theory and that natural paucity of good empirics that creates the “ask four economists a question and you’ll get five different answers” effect.
Please don’t think I’m dismissing it, Mark, by calling it a “bear market”. “Bear” markets are painful and destructive periods, and this one’s likely to be one of the worst in decades, IMO. I agree that it is a crisis, but it’s not the first crisis faced by financial markets, and nor will it be the last.
WTF are you on about, Katz? You’re the one stating that “Bush has presided over the biggest corporatisation since Lenin.” Not that I’m defending Bush, but they’re simply not in the same league – you’re reaching for hyperbole.
As I’ve explained to you previously, the US government is proposing to recapitalise the two companies. This means injecting sufficient equity to ensure that assets exceed liabilities and that they don’t default on their debts. Despite the fact that you’ve done some research on the two beasts, you STILL fail to understand that they currently (i.e. on last reported numbers) have more assets than liabilities. Moreover, the vast bulk of that 90% you mention is not funded by FRE and FNM, it’s funded by the securitisation market, i.e. bond holders. The third point is that the US government is proposing to shrink both FRE and FNM, so, again, you’re reaching for hyperbole when you describe it as “a 90% nationalisation of home loans”.
You may well be right, but that still doesn’t put the process anywhere near Leninist territory. Also, let me suggest you’re showing yourself to be a wee bit obsessed with Bush here. I think it’s pretty clear he has little real influence [probably a good thing] on what’s going on right now and, arguably more importantly, won’t be the guy picking up the tab next year. That is, whoever’s in the seat early next year will still have to address these issues – they’re not going away in a hurry.
Okay, you can obviously disregard my #37.
Except the linguistic nitpicking. That’s always worth a read.
Please stay on topic.
I didn’t say “funded”, I said “underwrote”. Under the present arrangement, the US Government is responsible for any shortfall of interest payment to those bondholders and other creditors. These liabilities have been nationalised, not the houses themselves.
Fydodor, just because some of us don’t blog on economics doesn’t mean that ipso facto we were all either pig ignorant or complacent. the number of subjects the people who frequent this blog have not blogged about is huge – does it logically follow that therefore we are all pig ignorant / complacent about those topics? “You failed to loudly condemn this before” is really the weakest argument on the internetz.
As for what I’d like done, just for a start, how about regulating the way the banks give out (or should I say gave out) credit willy nilly, the HELOCs and NINJAs in the US and the low-doc loans for no-deposit mortgatges in Australia, on houses least likely to appreciate; then the advertising, direct mail and pressure to encourage ordinary people to increase the limit on their credit cards and mine the equity of their houses as if the party would never end? That would have been a good start if someone had thought of it earlier.
While the amassed genii observing from the sidelines are thoroughly disinterested in (and frankly mystified by) the workings of financial markets during boom times, the moment things go pear-shaped the chorus of critique arises and the finger-pointing begins.
And I am saying that I have read literally hundreds of pieces, both from the left and the right, in the last ten years pointing out that the artificially credit-fuelled “boom” couldn’t last and that the landing could be harsh. Many of us were deeply worried about it Fyodor.
Uh, “if someone had thought of it earlier”, of course as I said the shortcomings of these practices were pointed out earlier, I meant something like “if the people in a position to do something about it had thought of it earlier.” And hadn’t been so blinded by greed.
“And I am saying that I have read literally hundreds of pieces, both from the left and the right, in the last ten years pointing out that the artificially credit-fuelled “boom” couldn’t last and that the landing could be harsh. Many of us were deeply worried about it Fyodor.”
So why isn’t this line taken to its logical conclusion and blame laid at the source of all the credit?
BBB
I’m not meaning to criticise Helen, but I do think the mortgage comparison between AU no-deposit, etc. and the sub-prime US is a pretty big leap.
There’s some pretty big diffs there, not least in the numbers, that would say that Australia is in a very different situation. Not that I’m championing those loans mind you, but there’s a difference between rising defaults, and a tidal wave of defaults.
What I’m interested to see is how this plays out more broadly in the deriviative markets.
I don’t blame the Trotskycons for causing this Enron like implosion but they sure look to profit by it. Already resurgent from their lies about the surge, they’re like that creature in ‘ The Thing’. They just keep coming back. Who else but a sweet Neocon would not only want permanent revolution or endless war overseas and mass collectivization’s at home ( Ukraine 1930’s anyone )
The cycle involved here is very clearly between Austrian economic ideologues on one side and Neo-Marxist ideologues on the other. We are the meat in their sandwich unless and until we manage to re-create the libertarian-socialism of 1936 Spain and sustain it against all enemies foreign and domestic.
Patrickg, that’s why I cautiously separated the different elements in Australia and the US!
But you can’t seriously tell me that there isn’t a crippling level of personal debt in Australia and that people haven’t been using their home equity and /or plastic to live beyond their means. This and the blowout in the (private) foreign debt (sorry if I’ve used the wrong jargon) is the dirty little secret behind the apparent “success” of the Howard-Costello years. The Potemkin village is falling down.
You have to hand it to Osama he really helped to fuck them up big time. The US’ Admin’s response to 9/11 was not only a debilitating war in Iraq, but free money for years. And free money usually sends most people very silly, and with absolutely nothing holding anyone back….
“Pork on the pig” was one description of CDO’s, I recall straight from the mouth of a Martin Place banker a few years ago.
And this is a classic quote from that the v. interesting Martha Poon piece on dk’s thread the other day:
“it came to me as a thunderous revelation: my debts were some other people’s assets”. I bet it did.
All I can say is that Geoff Dixon and last year’s board of Qantas are freaking lucky they are not being strung up in the town square just about now. A country totally reliant on aviation, with one national carrier was a hair breath’s away from it being sold off in an almost entirely leveraged deal. Some of the APA partners like Allco are now busted. The Smirker btw. approved the sale, just FTR.
All debts are assets on the books of the lender, jo. How on earth could it be otherwise? The only people for whom this is a thunderous revelation are those who are hopelessly ignorant of basic economics and accounting.
BBB
Umm, BBB, exactly.
Masters of the Universe, not.
Word, Helen.
And I don’t buy the claim that there’s no room for comment on any of this because it’s the province of experts – you know, those whiz kids of quantitative finance who invented these charming “products” that… well, you know the rest.
I suspect that people have been to some degree intimidated into refraining from dipping their toes into these waters just because there’s been so much invested (pun intentional) in making them appear muddy to those who aren’t in on the arcane secrets.
LOL. If you insist on quibbling over “underwrote”, please state what FRE and FNM currently “underwrite”. I think you’ll find that: 1) “underwrite” doesn’t mean what you think it means; and 2) “90%” does not mean what you think it means.
Also, if you’re going to quibble – and, let’s face it, you can’t help yourself, can you? – then no, the US government is not “responsible for any shortfall of interest payment to those bondholders and other creditors”, and, “These liabilities have been nationalised” is likewise false – they have NOT been nationalised, and nor does the US government guarantee them explicitly. As I keep stating to you, the US government has agreed to keep the two GSEs solvent by injecting equity. That is NOT the same as “90% nationalisation of home loans”.
And the other thing that’s going on here is that there was a basic level of public trust that people in the goddam “markets” wouldn’t act in spectacularly irresponsible ways (no matter how ostensibly rational on their own terms) and that regulators would well, regulate. That trust is now shattered, and if you read the Fin Review today, it might bring down Gordon Brown, who tried the *smart trick* of letting the City of London get away with even less regulation than Wall Street after the Sarbanes Act.
It’s not just “lefties” grumbling.
People who’ve had plastic shoved at them, been incited to go for ever higher credit limits, redraws on their houses, no doc loans etc. knew it was too good to last, and that it wasn’t some function of Peter Costello’s ECONOMIC MANAGEMENT.
It’s time for a reckoning now.
… oh and I don’t imagine that anyone will be rushing to “socialise the losses” of people on the receiving end of all this.
We’ll just get more pronunciatos that “the fundamentals are sound” while the GOP try to purge people who’ve been subjected to mortgage foreclosure from the voting rolls…
Helen, Lehmann Brothers got caught out mis-pricing the risk from mortgage-backed securities, etc. and then got pummeled by the market’s panic over their potential insolvency. That ain’t basic economics or accounting. That’s being caught with bad debt in a property-market-led credit crunch. Of course, it’s still their fault. Jo’s quote seems to be from someone who hasn’t got past the bit: my debt = counterparty asset. I have seen similar ‘how can debt be an asset’ comments from people who think such an outcome is absurd and goes the heart of what is wrong with financial markets. It isn’t and it doesn’t.
BBB
One things seems pretty certain, we are seeing the death of the Wall Street investment bank as a type of market participant. The instruments will be stick around, the buying and selling of risk will stick around, but all of these guys are going to sink. In the longer run the commercial/retail banks may be the only winners.
BBB
Agree absolutely, Helen – it’s a good thing I didn’t use it.
At this point I’d also like to note that you’re flailing against a nifty strawman with your approach here. “Pig ignorant”, “complacent”, “condemn” are all your words, not mine.
As it happens, all these things ARE regulated. You might want to argue that they should have been regulated morer and betterer, but as you insist on waffling vaguely and jargonautically about “regulation” without demonstrating any knowledge of existing practice, I think I’m safe in assuming you’re going to struggle to come up with a suggestion more constructive than “MORE!”.
That’s great, Helen. I’m glad you found that reading of benefit. I should point out, however, that booms are inherently finite, i.e. they always end, and that these endings are often “harsh”. Please forgive me if this deflates your bubble somewhat, but these aren’t blinding insights. Furthermore, they aren’t proof that the “harshness” of the current situation was anticipated or, more importantly, that More Regulation would have prevented it.
In the late 1990s, at the futures broker I worked at, I remember such breathless pronouncements as “DOW AT 32000″!!! Christ it was an asset bubble then, no one would listen even though I -cough- called the top of the S&P500 in 2000, months before it went south (my only regret was not being sufficiently capitalised to be allowed to trade the S&P500 index on the CME). Not that that prediction saved my job! And this crisis now is made of such worse stuff … but while the Wall St crowd are getting their just deserts, what will the collateral damage be? I can see a considerable rise in unemployment in this country; how much tied to the financial services sector are most of our capital-city CBDs? I am thinking about a return to full-time studenting to ride out the storm for the next year or two …
But you can’t seriously tell me that there isn’t a crippling level of personal debt in Australia and that people haven’t been using their home equity and /or plastic to live beyond their means.
I’m not trying to say that, Helen. You would be bold indeed to argue that!
However, I think there is a bit of a, hmmm, tendency to conflate a lot of things that are happening in the finance sector – a lot of things that are connected – as being the same thing, when they’re not, necessarily.
Household debt in Australia doesn’t equal sub-prime loan defaulters in America, doesn’t equal the collapse of Lehman doesn’t equal private equity companies buying crazy futures options or buying out huge corporeal organisations with fairy money etc. Don’t get me wrong – I think these things are connected, very connected in some cases – but they’re not the same thing.
And whilst they may have some of the same causes, or symptoms, I still don’t think they are the same.
I know this sounds horribly equivocal, and I hope I’m not coming across know-it-ally, or rude or anything, but I’m just very leery about ascribing broad-based causes or solutions to these things, I think they cover multiple areas sectors, etc. And I’m certainly a fan of regulation, where appropriate, but I don’t think legislation in one finance area will have a topple on effect to other areas.
I think we probably agree more than disagree, lol.
Ludo, didn’t the capital injection come at the price of the FHFA taking 80% ownership of Freddie and Fannie? Doesn’t that mean there’s now an explicit government guarantee?
d
Yes* and, strangely, no – they’ve left that issue – whether the government should explicitly guarantee the GSEs’ liabilities – for the next administration. However, if the US government is prepared to keep putting more equity into the two GSEs, then they won’t go under, which represents an effective implied guarantee.
*Technically, Treasury’s doing the investing.
BBB – that my was point. It was a ‘thunderous revelation’ to this person. Whatr Kim says @
As the old saying says – if you owe the bank $50,000 it’s your problem, if you owe $50 million, it’s theirs.
Fair enough jo.
BBB
What I think is more interesting is how this will play out against the commodities markets. A lot of new wealth has been created in Oz on the back of that boom and I think we may see a downturn but won’t China and India’s expanding middle class take up some of the consumption slack given out by the US. Or is it the case that tighened credit will strangle growth in that sector as well. Ludo?
sorry, I’m running in and out – just gotta walk the dog before dark, but I meant to say kim @ 54.
And in respect of what the averagely informed person knew-s – jeez, a lot these CDO’s and over junk were “off balance sheet” in VIE’s.
I mean WTF. “off balance sheet”. How unfriggingbelievably dodgy.
Then, who is responsible to pay any debts and obligations owed by Fannie and Freddie? Whom do they sue?
What does taking 80% ownership of these GSEs (as mentioned by DR above) mean if not nationalisation? Aren’t you quibbling about this increasingly vanishingly fine distinction between “implicit” and “explicit”?
Fyodor, you have an annoying tendency to think that everyone else came down in the last shower. I’m not just yelling “MORE!”, I’m talking about a return to a less deregulated regime now that deregulation has failed, just as Keynesian policy and Bretton Woods gained traction after the Great Depression and WWII. And before you take that to mean I want them reinstated in their previous form, uh-uh. We need something appropriate to the 2000s. But for Australia, requiring banks to tighten their requirements for extending credit card limits, and making home loan applications dependent on a realistic ability to pay, would be a start. Not unreasonable?
You’re fired!!!!
Just to add my 2 cents. I don’t think that regulation alone is the answer. How is it that land values can double or tripple in some places and it doesn’t show up in inflation? If CPI had been a true measure of inflation then the housing boom and the speculation that accompanied it would have never have got so out of hand.
The heart of the problem is that governments manipulate the CPI to make themselves look good and the long term result is an absolute effing mess.
Helen – isn’t it the non-bank lenders which have been the real problem? They’re the ones that have been doing most of the low-doc/high interest rate loans. Though I’d gently suggest the real problem is people being too greedy – just because someone is willing to lend you the money doesn’t mean you should take it! Watching programs like Insight, I’m just flabbergasted at the levels of debt people are willing to put themselves into.
Some of this, reportedly, has to do with exemptions from regulation:
http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html
Look, all I know is deregulation qua ideology is in roughly as much as trouble – right now – as certain species of socialism in 1991. I think its a watershed, and certain gravy days are over.
Anyway you slice it, some idiot called Reagan put the kids in charge of the lolly shop, and Mummy Keynes just bailed them out of detention, after they set fire to the joint.
That’s about the strength of it, Lefty E. Kim @ 54 also put her finger on it. As has Quiggin:
http://johnquiggin.com/index.php/archives/2008/09/18/what-next/
Yep – that’s markets! What floating money won’t want to see “state guaranteed” written all their landing pad now?
Personally, Ive been investing my humble savings dollars in humble old term deposits in banks for years. Oh, how they laughed at me in those heady days of 2001! Who’s larfin now, chacho?
Plus I told em where to ram it when they came with their silly bells, whistles and flags-of-all-nations clown show about “super choice”. I’m old school, pension style. Ta. No, Ill stick with it, thanks, now bugger off.
Upshot: The vandals can f’n sack Rome and Im still eyeball high in lattes, cheers culero.
Few vinos in , so ..erm… excuse my French etc
But the trouble with this wish list of new rules to keep the money market kids from buring down the house will run into one simple problem – capital moves .
It will just head off to the least regulated environment it can find.
The expansion of credit has to be wound back and will shrink that sector of the economy which relies on it to do business – the brokers , salespeople and the backroom support staff.
That credit which has been used to inflate asset values will now destroy or at least diminish asset values until real value emerges.
The banking crisis in Japan was very much a forerunner to the the situation we are now experiencing.
I have to agree with Fyodor though , these calls aren’t new , they probably won’t change much and the complicated nature of the problem works against a wide spread public revolt which could enact meaningful changes in the financial markets.
Two points, murph:
(1) If Quiggin is right and there’s no strong financial centre, where does capital move? The Cayman Islands or China aren’t nodes for financial architecture.
(2) It’ll shrink a lot more than the financial sector. On Lateline Business just now, they were discussing the knock on effects on the economy of NYC. And before that the former VP of Goldman Sachs Asia was pointing out that manufacturers and retailers will suffer greatly in the States as well – again, as Quiggin said, they’re headed for a really severe recession.
Fixing it might be complicated. Stopping it happening again isn’t so much. And you’d be wrong, I think, to underestimate how responsive politicians can be to real public fear.
Catallaxy has the solution!!!
http://catallaxyfiles.com/?p=3717
I agree with those points Mark, when I say broker and salepersons I mean in all areas of the economy – Lehman alone sacked 5000 people in London last week- imagine the knock on effect on London’s service businesses and real estate.
The problem with more stringent regulatory supervision isn’t it’s existence – on the ratings thread I linked to a piece by Michael West wherein he details how the regulators had the rules and ability to act to protect investors but didn’t.
The rules are there – perhaps the politicians will use this crisis to expand their power and demand action but that is having a lot more faith in politicians than I do.
As soon as things stabilise people will make a little profit and they will imagine the good times are back. It is inherent in our nature to invest emotionally and this leads to the hubris and the pride.
I don’t condone any of this – for months I’ve been blathering on on various threads about what a rip off Macquarie’s models and subsidiaries are but people are easily deluded that the miniscule returns they are getting are due to their own amazing wisdom .
I hope you are right – that a conviction politician will come along and really work hard to spend the years educating and consulting so the public aren’t prey for the unscruplous – any suggestions from among our current crop?
You’ve got me there, murph! Maybe we need to resurrect FDR?
Oh yeah, great idea Mark. Take a recession and stretch it out for a few more years FDR-style. We need another FDR like a hole in the head. Pre-war, he is second only to Hoover in extreme economic incompetence.
I wonder if the more far-sighted Londoners are getting excited by all this. They’re caught up in it of course, but in the longer term the City might be a real winner. I certainly hope so; I’ve decided to clear out for the West End. Thank Christ I didn’t go for Manhattan.
BBB
I thought I might start a blue with one of the many FDR revisionists around, BBB. However, I don’t want to play. What I was referring to, of course, was the decision to regulate the equity markets.
As to the Londoners, from what I read in the Fin today, they’re anticipating even worse than Wall Street because Brown deliberately deregulated even further to attract dosh and traders after Sarbanes-Oxley.
Mark, really? Did I say the West End? I meant the West Indies.
BBB
Enjoy the cricket, BBB!
Mark, a part of some amusing commentary at Quiggin’s site:
BBB
dk.au and others (notably Helen @ 69),
Firstly, apologies for not responding earlier – I have been very busy over the last few days.
The current system is not, repeat not, even close to deregulated. Statements such as “…a return to a less deregulated regime now that deregulation has failed…” just leave me aghast. My comment @ 2 was in perfect seriousness. I would strongly suggest that anyone who believes that this system is in any way “deregulated” take a look at the amount of legislation, regulation and controls are in place.
Sure, the State directed credit system of the 1950s has largely (but not completely) gone – it lives on in the special regulations surrounding home lending. It would, however, be hard to argue that the financial system is still the most regulated section of the economy – both here and (possibly more so) in the USA. The extent of regulation remains vast. To just look at the elements that a bank has to go through just to launch a new product (say a new mortgage product) is enormous. A short list (there are many more):
1. Corporations Act and associated regulations (many aspects, including Financial Services Licensing and client advisory)
2. Income Tax Assessment Act (many aspects, both from the banks’ and their clients point of view)
3. Uniform Consumer Credit Code
4. Determine treatment under Basel II standards – keep this under perpetual monitoring
5. Determine treatment under all applicable accounting standards, including AASB 139, 132, 7 and possibly 117 (if leasing may be an issue).
There are more – but I think you get the picture.
All of these change at least once a year, every year, which typically means the products all need to be reviewed at least once a year – you may have noticed this process witht he Product Disclosure Statement or revised terms and conditions that comes with your bank statement on a regular basis – and almost everyone (including me) immediately throws away.
Please, don’t even think we live in some sort of deregulated system – we do not. The amount of time and effort taken to comply with all this is, at least in part, what is destroying the smaller institutions (the co-ops, Friendly Societies and Credit Unions) and reducing competition in the industry.
Banking is (IMHO) one of the, if not the most regulated business in the world.
Steadily increasing the regulation does not seem to have helped. Maybe we should try deregulation for a change.
BBB, I can’t get through to Quiggin’s at the moment – who’s the author?
Btw, a new post on the politics of all this from me:
http://larvatusprodeo.net/2008/09/19/the-end-of-financialisation-ii/
Mark, someone by the name observa. It’s got ‘Austrian’ written all over it, so I expect it will be politely but firmly…ignored.
BBB
Ah, good old obs. He used to come around here and give us the benefit of what the blokes having a smoko in the shed thought.
Andrew, you might like to have a read of comment 73.
Um, FNM and FRE on both questions. Both survive as legal entities. As I keep pointing out to you, and you keep ignoring, the US government is NOT the legal guarantor of either GSE’s liabilities. The guarantee is implicit, not explicit.
Am I kwibbling, Katz? You’re the expert, so I suppose I should defer to your authority on the matter. However, you can’t fault me for following your example in pedantry, particularly when I’m right and you’re wrong.
I’m sorry you got that impression, Helen, as I don’t think everyone else came down in the last shower. Just you*.
OK, so it’s not that you want more regulation, but you DO want less deregulation? And you can’t see the tautology there? As for the “failure of deregulation”, that’s for you to prove.
No, I don’t disagree that that would not be not unreasonable. I don’t see why we need to regulate those products more, Helen. We haven’t seen problems emerge with either credit cards or home loans in Australia, so I fail to see the rationale for the government interfering further than it does already.
*I probably shouldn’t be antagonising you further at this point, but you really did walk into that one. Opportunistic snark is another annoying tendency of mine. It might be a good idea to put it down on the (no doubt extensive) list of my failings so you can remember for next time.
Poor little Ludo
Hasn’t a cludo,
About what to do next
In a world so vexed.
So he spends all his time
Poncing online,
Telling all who will hear
There’s nothing to fear.
But of himself he’s so full,
That his own brand of bull
Makes most of us yawn
At points so forlorn.
Along comes Adrian,
Always an also-ran,
Hopes to compete
But always get beat.
Here’s one more field,
For him to yield.
He hasn’t a clue -
A fault he will rue.
But let’s not dissuade,
When baiting the Ade.
Show us your mettle
while I call your pot kettle.
We haven’t seen problems emerge with either credit cards or home loans in Australia
…!!!…
I’ll just leave that there, steaming, without comment.
so you can remember for next time.
Is that a threat, Fyodor? that I should shut up when you’re around? Mate, I’ve been snarked at by madder and frothier wingnuts than you, boyo.
*Exits, whistling “Sin City” by Gram Parsons…
An alternative might be to back up your assertion with, you know, evidence and suchlike.
“Madder and frothier” than moi? How disappointment, but as for threats I think you’re being melodramatic here, as I was not, and am not, threatening you, with anything. You’ll notice that I haven’t been cataloguing your failings as you have mine, and I gave you some pointers to lift your game. You just can’t help some people.
Helen, Fyodor is talking about rampant bad debts along the lines of US-style subprime loans for housing.
As the RBA has consistently said, the Australian household sector is managing its personal debt well, with aggregate credit card debt growth virtually nil and average credit balances declining marginally. Mortgages are obviously a separate, but connected, issue. My understanding is that default rates remain very low, even for the low-doc cases which comprise (relative to places like the US) a very small proportion of the mortgage market. And with an apparent undersupply of housing in this country, a US-style housing market implosion is pretty unlikely. The upshot of all that seems to be precisely what Fyodor is saying: no arrears problems emerging.
What systemic problems are you alluding to?
BBB
Mark,
You are right – I did miss #73. Correct me if I am wrong, but they “exempted” broker-dealers are not the only ones to have gone, nor were they the first or biggest. I see no proof in that pudding.
In any case (and correct me if I am wrong) the very regulators that granted the exemption seem to be the ones you are calling for to have more power, not less. Am I the oly one to see a logical disconnect here?
In the end, the regulators have (IMHO) little or no chance of running the businesses any more successfully than the management appointed by the owners of the businesses. If you can suggest how the regulators are likely to improve on the current system I am all ears, but all I see is evidence of over-regulation and regulatory failure.
Who are the biggest and first to go Andrew?
I thought Merrill were the biggest writers of sub-prime by factors?
What Andrew said.
The regulation in question applied only to broker-dealers, not the holding companies that owned them. The investment banks routinely ran higher consolidated asset/equity ratios than their broker-dealer operating subsidiaries, so the “deregulation” in question arguably had no impact on the propensity of Bear Stearns et al to collapse. For example, Lehman Bros. had an assets/equity ratio close to 29x as far back as 2000, and was often over 30x in the 1990s, well before that change went through. Furthermore, it’s drawing an extremely long bow to suggest that it caused the surge in subprime mortgage defaults in the first place.
In short, it’s not the smoking gun. This bloke Pickard is kidding himself.
jo,
The biggest one to go is unquestionably AIG. The first (apart from the usual US micros) was Northern Rock – of the UK.
Fannie and Freddie were required by statute to fund “affordable housing”. I’m wondering if and how this requirement was translated into provision of loans to persons who could not afford to service them, aka the “subprime crisis”.
Would this crisis have occurred or would it have been as serious if the Fannie and Freddie didn’t exist?
Helen, have you had a chance to think about what systemic default problems have emerged in the Australian home loan and credit card markets? You must have thought about it pretty carefully to meet Fyodor’s reasonable comment with stunned silence and an implication that it was, in fact, a steaming pile of sh*t. Vague allusions to household indebtedness don’t really cut it in view of recent RBA credit card data and the the fact that subprime home loans are less than 1% of the Australian market (from what I’ve read).
BBB
Katz,
Fannie and Freddie were excluded from working with subprime loans at all. Given their funding rates it meant that if you wanted to securitise home loans, you needed to head down market if you wanted to get out of the markets they were funding. In other words, the amount of money funding the poorer risks was the result of Fannie and Freddie undercutting on the better ones. The whole thing was a risk management failure – no doubt – but without Fannie and Freddie I would contend it would have been a whole lot smaller as the drive to chase the higher yield assets would not have been nearly as strong.
Why would anyone *want* to get out of the markets Fannie and Freddie were funding?
AR, according to this story you are incorrect:
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_pf.html
Wow Katz, if that is true then it changes the picture remarkably.
On this basis, the true progression of events seems to be: (1) FDR creates secondary mortgage monopoly, (2) government privatises secondary mortgage monopoly and charters new private corporation to provide ‘competition’, (3) government allows these two government-backed secondary mortgage market participants to (a) exploit their lower borrowing costs to push out wholly-private interests and (b) grow to grotesque proportions, (4) government forces the now-giant government-backed secondary mortgage market participants to take on hundreds of billions of dollars in high-risk home loans in the name of affordable housing, thereby massively expanding the market for such lending downstream.
This is all a massive market failure of course…
BBB
Of course, Teh Left can take some heart: it was the Bush administration who was responsible for the latest round of disastrous ‘affordable housing’ policy. The Republican administration’s misguided attempts to help the poor have had an unfortunate and devastating collision with reality. So you see that no matter who’s in charge of government, government tends to screw things up. It’s almost as if government intervention itself is a problem…
BBB
Exactly BBB – and not one person in a hundred will ever truly ‘get’ it.
This has been a massive failure of government intervention, not the market. I hope you all enjoy the ride as the golden goose is finally killed off.
On the bright side – no need for Kyoto/Carbon trading etc. as the world economy tanks.
Then again, it might all just blow over.
Perhaps the seriousness of this fiasco can be ascribed to “faith-based finance” based on a fundamentalist reading of Bush’s sacred text: “the American way of life is non-negotiable.”
Well, it turns out that the American way of life is non-negotiable until, like Wile E. Coyote, enough holders of dodgy CDOs etc., look down and recognise to their horror that they are running on thin air.
Kerplunk!
Katz,
The problem is that Bush, like most Presidents before him, has over-estimated the ability of the government to regulate to prevent or fix problems. Maybe one day they, and we, will learn that this is the case. I will not hold my breath, though.
Which is precisely what I have been saying in relation to Bush’s Iraq fiasco since 2003!
Except that Bush’s administration, across a wide range of activities, appears to be measurably more incompetent than most.
Don’t forget that these Fannie and Freddie arrangements have remained unchanged in significant ways since the early 1970s.
Before you can justify your general statement about the incompetence of governments you have to explain why this crisis never happened under the administrations of Nixon, Ford, Carter, Reagan, Bush I, or Clinton.
Don’t you just love those who attempt to turn this debace into “a failure of government, not the market”. Oh no, the market is infallible, God-like, perfect. Since it can’t possibly fail, the fault must lie elsewhere.
I understand your desperate delusion people. When the Soviet Union collapsed, I couldn’t accept it either – they were just “not communist enough, Communism is the greatest system in history” I kept telling myself. But it was crap. Just like the theory of unfettered, self-balancing markets is crap.
So government has little ability to regulate or fix problems? Gosh, lucky that our government realizes that fact and has never regulated our finance sector. I guess that’s why we have gotten through this largely unscathed so far.
Boy From Flynn – the financial markets are some of the most heavily regulated markets in the world with many tens of thousands of pages of regulations. And yet this is happening. Various people point to one aspect or another and claim the failure was here or there but in truth there is almost no consensus as to the root cause. There is, or will be, no consensus on how to fix it or even if it is possible to fix the worst of it. Even the ban on short selling has largely divided various experts with some saying that the crisis is over and others saying it is the final straw that will cause collapse.
So we have a situation where there is no consensus as to the cause or the cure. Same goes for the last (great) depression. Some claim the new deal worked and plenty of others say it extended the depression for many years longer than necessary.
So the question is, how on earth can you really regulate such a thing. I don’t reckon you can and it is arrogant to think that it is even possible. Sensible people protect themselves from this sort of collective madness.
BTW – plenty of people predicted the collapse of the Soviet Union. I in fact made a bet with a knowledgeable friend in 1983 that the Berlin wall (and hence the USSR) would cease to exist by 2000. He readily agreed to take the bet and immediately after I said ‘no make that 10 years’. I still won.
BFF, obviously we are somewhere in between. Poorly targeted and counter-productive government intervention + appalling greed and imprudently risky behaviour on the part of lenders and Wall Street investment banks = clusterf*ck.
But don’t you just love those who attempt to turn this debacle into a failure wholly of the market, not the government in any way: “It’s teh end of teh neoliberalism and teh capitalism and teh fascism!” Oh no, the government is infallible, God-like, perfect. Since it can’t possibly fail, the fault must lie elsewhere.
See what I did there?
“”…Communism is the greatest system in history” I kept telling myself. But it was crap…”
You only came to the conclusion that communism was crap in 1991. Good grief.
BBB
Katz,
Which means that Fannie and Freddie were the same through the S&L problems and every other stuff up in the US system since then. I would think that your second paragraph has another possible explanation in it.
.
BFF,
If a partipant in a market makes a mistake, they make a loss. If many participants in a market make many mistakes they all make a loss. The ones who get it right make a profit (as many short hedge funds have done). If a government makes a mistake we all lose – even if we did not choose to participate.
As a rhetorical question: which is fairer?
What role did Fannie and Freddie play in the S&L fiasco?
I also like how some people think lefties can’t spell, my teh bruvva.
Perhaps you thought I was implying that this is the end of capitalism. Of course it isn’t the end of capitalism. It could turn out to be the beginning of the end of teh neoliberalism though. We really don’t know how far this has to run yet, how much damage will ultimately be done.
Just watched Kochie’s report. Turns out we were already acting in accordance with his five tips for getting through this (depending on how bad it gets). Just common sense really.
Oh, and I was 18 in 1991 (teh wink).
The whole ‘teh’ thing crosses the political divide, BFF. It is also used by lefties to denounce the ramblings of RWDBs, with some justification.
BBB
Just browsing over the web commentary five years ago and came accross this passage, from a visitor hailing from the “Strocchiverse”. which contains the first recorded blog use of the term “financialisation”.
The analysis remains valid, especially the bit about “purging the financial class” ie economic cleansing through what we might call the “sterilisation of the speculator” eg Tobin Tax. With few exceptions financialists are predators, parasites or ponces who either have no idea what they are doing or know only too well and shouldnt be allowed to do such things in the first place.
The proximate cause of this financial crisis was the conjunction of “debtquity and diversity” in the home loan sector. A perfect convergence of the New Right “masters of the universe” and New Left sub-prime “dregs of society”.
It is the perfect example of post-modern liberalism. The financial Scrooges and cultural Wets dancing in unison, on their own graves it seems.
So what mistakes did government (rather than individuals in the market) make that have caused this mess? That does sound like what you’re implying. If (I say “if”) this fucks up badly, I didn’t choose to participate but I’ll still get shafted all because a bunch of sleazy dirtbags were allowed to get away with stuffing their pockets with the proceeds of dodgy loans. The failure of (a neoliberal) government here was the failure to appropriately regulate this sector. Not too much “interference” but rather not enough in the right places.
FFS, stop being so negative about government – when government gets it right, we all benefit. Or was it a mistake to socialize say, the immunization program? Should it be run for private profit etc etc? Jeez.
Thankfully, the sort behaviour that so obviously came naturally to particular individuals when they were not properly policed was already banned here by our regulators. I really can’t see how anyone can argue that government caused this mess by not giving market players ENOUGH freedom. History will judge that the opposite was the case.
BFF,
Firstly, I have never called for anarchy as you seem to be implying.
If you are not prepared to even look at an argument that regulation may have at the very least helped this along then there is not much point engaging with you, is there?
Andrew, I am about to head off on holiday for a week, where I probably won’t have internet access. But do indulge me, I’ll read it when I get back.
While it is blindingly obvious what caused this crisis, tell me how you think government made it worse. And what in your opinion should be done about it?
Though at the end of the day, it is an inescapable fact that the root of all of this is moneylenders profiteering by giving out loans that they KNEW many people would not be able to pay back (yes, many averege joe’s were stupid and greedy too but they would never have been able to default on such loans if regulation had prevented them from accessing them in the first place). From what I can gather, this sector was left pretty much unregulated in order to encourage those who would not ordinarlily qualify for mortgages to take out home ownership.
Would it not have made more sense to simply funnel money into public housing? But of course, that’s not the neoliberal way is it?
But do tell me what you think Andrew, I’m listening.
The Boy From Flynn needs to read up on the Community Reinvestment Act (though there are arguments that this was not a cause). Wiki is not a bad starting point.
I don’t think it is at all ‘blindingly obvious’ what the root cause is and we’ll probably end up blaming the wrong people, setting ourselves up for the next one.
“I don’t think it is at all ‘blindingly obvious’ what the root cause is and we’ll probably end up blaming the wrong people, setting ourselves up for the next one.”
Regardless of the root cause, pumping public money in to fix it hardly discourages its reoccurance.
Rafe Champion knows the root cause – too much regulation!
http://clubtroppo.com.au/2008/09/22/the-death-of-the-free-market/
BFF,
I will indulge you – although I doubt you are truly willing to set aside what seem to be your prejudices. My views are informed through 18 years working for regulators, banks and, for 7 years, prosecution of (alleged) bankers – so I have at least a little knowledge of the area.
Firstly – apart from a few loans given out by fraudsters most of the loans were made in the expectation of returns. Banks are not charities and so they were expecting to get prinicipal and interest back. Where the loans were made to people with NINJA conditions (no income, no job or assets) it would have been through capital increase – i.e. appreciation in the value of the home.
A second problem here was those banks using brokers to sell the loans and then giving them incentives for getting the loans in through the door, rather than (as happens here – and not by regulation) for continuing performace through trail commissions. This mean that some brokers were just handing them out and using high-pressure techniques and breaking both the law and their contracts with the banks.
At a regulatory level, however, the problem gets more interesting. Firstly, Fannie and Freddie, as GSEs (government sponsored enterprises) were using their implicit government support to lower the lending rates to the prime loans they were (largely) restricted to. This also heavily skewed the markets – home lending through Fannie and Freddie became the same as lending to governments, so there was no risk sensitivity. They were also able to (and increasingly did) use these borrowing rates to issue many complex derivatives based on home loans. They were also, as GSEs, not subject to the same regulations as everyone else. Nobody really cared about this because there was an understanding that Uncle Sam would ride to the rescue if needed – as they did.
A further, major, regulatory problem is the way that housing loans were (and in the US still are) treated under Basel II. For capital purposes all home loans were treated exactly the same – whether a ninja loan to someone in the projects or a 10% LVR loan on a $10,000,000 stately home on Long Island. Not incidentally, none of the GSEs could touch either of these loans.
Everyone knew this was silly, so there grew up a large market in derivatives based on home loans that was designed to arbitrage the difference between the loans the GSEs could touch and those they could not.
The net result of this interplay between the GSEs, the capital regulations and lax lending standards due to high monetary growth was that the banks were stuffed with cash they had to get out the door. They were unable to use the cash to make loans to the good risks that Fannie and Freddie had cornered and the capital regulations said that all home loans were as safe as each other. The brokers were often being paid to make loans (not necessarily good ones) and the banks did not care as much as they should have as, for the last 10 or more years, home prices had risen as much as, if not more, than their prime lending rates. Many of the banks were also, by their charters, prohibited from lending outside the US or for other than homes.
If Fannie and Freddie had not been there and the capital regulations (if they existed) had actually been risk sensitive then lending would have been (IMHO) better – but, as always, not perfect. This would have reduced (but perhaps not eliminated) the ninja loans, meaning the house prices would not have gone up as much, meaning returns from other than capital would have been examined.
I am not trying to assign sole blame for this to the regulators. All I am saying is that they did not help – so expecting more regulation to fix the problem would be the triumph of hope over experience. In the US at least, the problem was in large part caused by the multiple overlapping systems of regulation, the effects of the GSEs and the frankly stupid incentives it gave many of the market participants.
AR is mostly correct, except that he continues to neglect to acknowledge that Fannie and Freddie also took on more tha $400b of subprime mortgages.
It’s time to address the conceptual dissonance that drives much of this discussion. It is assumed that because we are talking about the US, that, ipso facto, we are talking about a regulatory environment for real estate that is much lighter and more market-driven than our own. This simply isn’t the case. The Autralian model is a paragon of market virtue by comparison.
And let us look at the latest evolution of the American mania for regulation. Paulson’s bail-out has established the US taxpayer as the biggest mug in the game of buying over-priced assets. The proposed legislation ensures that assets will be sold to the Treasury if and only if the Treasury is the highest bidder and if and only if the financial institutions think it is better to offload their trash rather than to hang on to their treasure.
By legislation, the US taxpayer (great-grandchild of current taxpayers) has become the buyer of last resort.
Regulations don’t get much more absurd than that.
But it’s not Paulson’s money, so what does he care?
Katz,
I always thought that the GSEs were barred from those by their legislation. Do you have a link to some further info on that?
See my 107 above.
Thanks Katz – I had missed that. It can be another addition to the long piece I am writing for ozrisk.
AR, you should ask Mark whether LP will also host it as a guest post.
BBB
BBB,
I think the LPers would probably get enough of my opinion anyway.
No disrespect to Andrew, but we do restrict blogging here to left wing perspectives – coz we’re a left wing blog. I don’t think Andrew would characterise himself that way. Everyone’s obviously most welcome to participate in comments, and we value Andrew’s input, but if he’s got a desire to do a post, the best thing to do would be to write one on his own blog and link.
Really? Damn. I’ve got a cracking post about the life of Malcolm Turnbull from a Randian Objectivist perspective. I was going to email you about that. Nevermind.
BBB
You could try Troppo, BBB, now that “radical centrism” includes Rafe Champion’s posts…
Mark,
No disrepect taken. I think we would broadly agree that I am not a left winger.
Actually, I will be over in Brisvegas is a month or so. Perhaps if you have time for a beer (I think I owe you one or two) we could catch up.
Sounds good, Andrew, and that’s good timing, as I’m submitting my thesis on 3 October and defending it at a seminar on 30 October, so I’m going to have more time for beer soon!