71 Comments

1. NahnCee:

I wonder why B. Hussein, Pelosi and Reid haven’t made the claim that if we hadn’t gone into Iraq and wasted trillions of dollars trying to bring a Stone Age people into the 21st Century, the current Wall Street / Main Street internal financial meltdown wouldn’t have happened, because all those trillions of dollars would still be here on this side of the ocean, helping our economy.

I have no idea if that’s really the case, but it sounds good.

Sep 27, 2008 - 2:18 pm 2. heather:

I suggest that there is one more aspect to this financial meltdown (William Kristol has a note on “a genuine and immediate crisis” at http://www.weeklystandard.com/Content/Public/Articles/000/000/015/636zbhel.asp), one that will not so easily be solved by buyouts: that is, Demography. A lot of the increase in price for houses through the western world has been a sellers’ market, fueled by huge numbers of Boomer buyers. Well, the people born in 1945 are 63 years old now, and are in the process of selling those expensive houses for condos.. creating a new kind of market, one with more sellers than buyers because the post boomer generation is smaller than its older cohort.

In other words, the oncoming avalanche of Social Security, Medical Expenses, etc, is being compounded by something unexpected: all those boomers selling their large homes. Also, did you know that the 1970s home is HALF the size of the contemporary home?

Throughout the Boomer generations’ time on this planet, things have just gotten better and better. Maybe until now???

Just another cheery thought from someone whose life savings are in mutual funds…

Sep 27, 2008 - 2:21 pm 3. Cris:

Here’s a FoxNews video showing who was saying what, when. Some people saw it coming a long time ago. http://www.youtube.com/watch?v=cMnSp4qEXNM

Sep 27, 2008 - 2:27 pm 4. RiverRat:

Although the voices were muted (silenced?) let’s not forget George Bush, staring in 2001, Greenspan and others in 2003-04, and McCain in 2005-06 calling for tighter regulation of Fannie and Freddie.

It’s true politicians, including Bush, also pandered to the “growing home ownership wave” for votes. If Bush had gotten more strident in his objection in ‘03-04″ Kerry would be President…I don’t even want to think about how deep the core would melted if Kerry had been elected.

It’s the old 3P standard. Pandering Populist Politicians.

Sep 27, 2008 - 2:31 pm 5. S:

The current mortgasge crisis is merely a sympton not the cause. The US has been losing compeitiveness for a decade plus. This crisis is a first derivative of Bretton Woods II. Much of the current rot is a function of cold war evconomic ideology run amok. The recent bubbles, stocks then houses, were a convenient way of papering over the stagnating wages and global wage arbitrage. It was also a stalling strategy in a concerted choice to become a knowledge economy. The imbalance of those policy failed policy decisions is evident in the current fiasco. We are experiencing not the beginning of the end but the end of the beginning. As more Americans begin to examine the current economic regime they will arrive at the same conculsion that the rest of the world knew long ago but was afraid to say: the US is literally a paper pusher in the form of Treasuries. The bond market is the biggest bubble on earth. We are heading straight into amassive asset deflation and there is but one way out of this: devlaution. There is simply too much debt in the United States. Thedays of multiple flat screens is coming to a close. Like mortgages the US governemtnoperated on a orignate (T bonds) and distrubute (Central Banks). This model is ending. Furthermore the leveraged bet that the US would be the financial services leader globally has shown itself to be a complete joke. The segment has grown well beyond what is prudent as a percentage of profits. In short the US is in for a massive adjustment. Without fdollar hegemony, the aircraft carriers will not mattert. The US is in the process of being downgraded. The CDS market, evil as it is, is telling you that the soveregin risk of the UNited States is at levels never seen before. Nothing is risk free, not ven the United States.

Sep 27, 2008 - 2:32 pm 6. Fat Man:

I have a friend who was the president of the Savings and Loan trade association back in the early 80s. He continually complained about Fannie/Freddie as a source of instability in the system. This one has been coming for a long time.

Sep 27, 2008 - 2:37 pm 7. whitehall:

Buying off voters has long been recognized as a systemic weakness of democratic political systems. That’s why the Constitution gives us a republic with insulation against mass democratic movements.

The rise of mass media has made things worst, not better. Likewise the unwise expansion of the franchise. The Motor Voter laws were fought to the death but are too widespread.

The next battleground needs to be rigorous voter identification requirements. The trend to voting by mail is also harmful and is subject to abuse.

Sep 27, 2008 - 2:50 pm 8. Pascal:

This one is almost too easy. Why didn’t it make headlines before?

The answer lies in both human nature and the nature of what one BCer called the Washington party and I’ve been calling the RepublicRat party for over a decade.

1. The Left demanded housing be made more affordable for those who had been left out — the old “social justice” aim of results prove justice rather than equal status under the law.

2. The Right so believes in free market that they see no downside to unbridled greed nor any danger to undeterred salaries for corporate officers.

The two parties compromised so that they acted as one. Easier loan rules make for riskier loans, sure. But they also create an enormous surge business growth.

Before the ink was dry on the risky (and now bad) loans, their prospect was used to calculate the phantom increase in revenue.

On such increased business was (and I’ve every reason to suspect still is) justification for higher corporate salaries — and exit bonuses.

RepublicRats™ have long nibbled on the rules that limit federal power. Those nibbling rats made it possible for our pigs to gorge.

What with our Ministry of Information having pigs as its primary clients while its licenses are granted by rats, is there any wonder why it is so hard for the American public to find new leaders?

Sep 27, 2008 - 2:57 pm 9. Tony:

Dear Prof. Wretchard,

Thanks for closing comments on the last thread. I long for boring BC threads full of ideas instead of useless threads full of FEELINGS. (Can’t you throw up a filter and just forget about posts that are more than 50% CAPS?)

This “astro-turfing” that the Obama-fanatics do is creepy and anti-liberal in the deepest sense of the word. The Obama campaign itself, like the Kerry campaign last time, overtly threatens anyone who dares speak against them. Kerry threatened financial damage to Sinclair Broadcasting and shut down distribution of “Stolen Honor” which was a documentary of former Nam POW’s speaking about their own experiences of the Kerry slanders against them while they were prisoners. The Obama campaign has taken it one Bolshevik step further and engaged law enforcement officers against those who would speak up against them. It’s gone beyond creepy, it’s the opposite of “liberal.”

Arguing with liberals is like playing [gridiron] football against girls. Just don’t do it.

Sep 27, 2008 - 3:01 pm 10. Cannoneer No. 4:

Shocking Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis

If you can spare 8 minutes and 37 seconds, you ought to watch this.

H/T: Wolf Howling

Sep 27, 2008 - 3:08 pm 11. Alexis:

About the last thread, it looks as though a bunch of O supporters were looking for a fight. Reading through the comments, you’d get the idea that some of them were planning to murder every last resident of West Virginia.

Sep 27, 2008 - 3:10 pm 12. hdgreene:

For decades our tax laws have massively favored real estate over other productive investments. Our government says, “Build Villas, not factories.”

The progressive income tax made the mortgage deduction the best investment for high income individuals (with the mortgage payments front loaded to maximize the write off). The deduction was always sold as helping Joe Six pack but in reality it helps the real estate industry — which in turn helps politicians. Government policy favors building large houses in the far suburbs and devalues more modest, older homes in urban areas — to the point where fifty year old homes in cities are abandoned.

After we work out this housing bubble, we will start on the next.

If home ownership is a social good that government should promote, then the use of a modest tax credit that basically gives all tax payers the same boost toward a “starter home” would be the way to go.

But the real estate industry gives a lot of money to politicians, so I won’t expect things to change.

Some sort of flat tax would be a better way forward. But the Democrats like the progressive income tax because they can convince most people that “the evil rich” pay it, not the noble middle class (where does your doctor get his money from?). At the same time they can sell loopholes and tax subsidies to interested parties.

I don’t mean to say it is hopeless, only just about.

Sep 27, 2008 - 3:32 pm 13. Neanderpundit » A great video:

[...] Hat tip, Pascal via the Belmont Club. [...]

Sep 27, 2008 - 3:34 pm 14. Ron Hardin:

Women’s suffrage is to blame: a huge bloc of soap opera voters, even though it’s only 40% of women.

Sep 27, 2008 - 3:48 pm 15. Stephen:

Bill Whittle says the economy is passing a kidney stone:

http://article.nationalreview.com/?q=YWE1YTg0N2I5OTQ1ZWNkYjFmYTNjZjQ2ZmMzYmM5ZjA=

One of his better efforts. I wonder how many of the Obama kids have felt the special feelings that come with a kidney stone. Bill and I have.

Sep 27, 2008 - 4:09 pm 16. slade:

Revolting Economists:

Economists are not famous for agreeing with each other. (“The First Law of Economists: For every economist, there exists an equal and opposite economist. Second Law: They’re both wrong.”)

So it is striking that publicly expressed opinions among non-Wall-Street economists on the Paulson/Frank plan range basically from that of former-Wall-Streeter Henry Blodget (“it stinks”) to Luigi Zingales’s “it will destroy the capitalist system for the next 50 years.” (Zingales is worried about the moral hazard problem). The only other common and prominent public point of view is Greg Mankiw’s “Ben Bernanke is a very smart guy who knows more than I do, and if he says we have to do it then maybe we have to do it.” But even Mankiw seems to have grave doubts, and a lot of economists suspect that Bernanke actually thinks it’s a bad deal too; he has looked awfully pale and has taken a conspicuously deferential and back-seat role to Paulson in his public comments (see Robert Shimer’s reply to Mankiw on Mankiw’s web page). My own best guess is that Bernanke’s deep regard for the constitutional structure of the government has led him to conclude that it is not his role as Fed chief to undercut the Treasury secretary even if he thinks the Paulson plan is a bad one.

……

The KEY point that I think is not penetrating from the economists to the Congress is that what sticks in our craw is ONE SPECIFIC ASPECT of the Paulson/Frank plan: Its focus on having the government buy up the toxic subprime securities. This is close to a pure bailout for Wall Street, and there is NO REASON that any of us sees that this has to be the core of the rescue plan. I think you could get near-unanimity from economists, from across the political spectrum, in FAVOR of a simple, easy-to-do alternative that would be both more economically sound and more politically palatable: The Federal government should do, with respect to the banking sector as a whole, what Warren Buffett did last week in his investment in Goldman Sachs.

Buffett did not become the richest man in the world by making bad investments. The money he provided to Goldman was emphatically NOT a bailout. It was a prudent investment – he thinks he will make his money back, and much more. The taxpayer should follow his lead and take a similar stake in the financial industry.

…….

What is mystifying to me and many other economists is why there seems to be such resistance to the Zingales/deLong/Buffett plan by people who do not seem to be able to offer a coherent rational argument for why it would not work, and an insistence instead that the taxpayer should buy the toxic assets directly. I can think of only one potential explanation: A rigid ideological opposition on the part of Henry Paulson to taxpayer ownership of even one dime of the financial sector.

That Treasury Secretary Paulson rejects a plan allowing taxpayer ownership of financial institutions, but is willing to allow the taxpayer to own the bad debt, is a presumption that cannot be proven. Readers can exercise their own judgment. The political, social, and regulatory forensics are reasonably clear at this point, but the antipathy to alternative approaches – a single one actually – is murky.

It’s an Ownership Society all right.

Sep 27, 2008 - 4:17 pm 17. Patriot Front:

(What Tony Said.)

Sep 27, 2008 - 4:26 pm 18. Brock:

I think who the President is does matter, and that McCain will actively participate in preventing problems like this from happening again (he’s one of the few who tried to stop it). Despite Obama’s advantages in intelligence and charisma, McCain is a genuine change agent. He always pushes for reforms. He doesn’t always get them right (see McCain-Feingold), but he’s willing to experiment and try things. Obama seems much more likely to try to just “get along.”

is the political system doomed, like some automaton, to keep trying to buy off voters with one entitlement after the other no matter who wins thereby ensuring that overspending will always be with us?

Doomed? No. Strongly predisposed? Yes. There are a few simple (if Constitutional) changes which might address this though.

1. You must pay at least 1% of gross income in order to vote. Your receipt from the IRS is your “ticket” to the ballot box. Tax Day and Vote Day are within a week of each other.

1.a. No hidden taxes, such as payroll.

2. No Congress can impose a financial obligation on a future Congress (other than debt interest payments). For instance, if a Congress wants to provide a taxpayer with a lifetime pension then such Congress must fully fund that pension. Otherwise the most such Congress can promise is 2 years of income, and the next Congress must pass a law to pay another 2 years.

3. To the greatest extent able, the Government must abide by the same rules as it imposes on the private sector. Particularly accounting principles and financial reporting.

4. Play no favorites in the tax code. Broad & color-blind is the name of the game. If government wants to support something, it must cut a check.

Sep 27, 2008 - 4:32 pm 19. twolaneflash:

Where are we going and why are we in this handbasket?

Both parties in Congress hope to cover up their deals with/for Marxists with more funding of the same. America is up the $#!+ creek. No canoe. No paddle. We have been betrayed, but none are punished. Benedict Arnold lived to a ripe old age despite his calumny. Betraying America has historically been the safest and most lucrative occupation to have. Look at Congress.

Sep 27, 2008 - 4:42 pm 20. Charles:

Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis
Republicans arguing for a new regulatory structure during the last 8 years.

Sep 27, 2008 - 4:53 pm 21. NahnCee:

I think it’s a bad idea to have to pay to vote. I understand where you’re coming from, in that it should just be payers of taxes who decide on who’s going to access those funds, but doesn’t it necessarily follow that those with the most money who are paying the most taxes — like Russian, Persian and Arab immigrants — should have the right to vote, whether they are citizens or not?

Plus you know what ethnicity a lot of people on welfare are, so it wouldn’t work because then they couldn’t go out and massively vote for their Messiah along race lines.

Sep 27, 2008 - 5:09 pm 22. NahnCee:

Can any of the really smart people here give me a fast explanation why America’s credit crunch is affecting a Yurp bank? Have the Europeans been giving too much credit to their poor white trash who couldn’t pay it back, too?

Or is America so powerful that when we go bankrupt, everyone else suddenly runs out of money, too?

Or, possibly, are we looking at another example of Economic Terrorism?

Sep 27, 2008 - 5:12 pm 23. trangbang68:

Cannoneer, That is damning evidence, but will it penetrate the thick skulls of a bunch of damn fools?

Sep 27, 2008 - 5:18 pm 24. slade:

why America’s credit crunch is affecting a Yurp bank – NahnCee

Since Buddy is AWOL and “Franklin Delano Dave” is out hunting rhinoceros’ with programmer, Part of the Answer is Here.

The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the news recently, has a leverage ratio of “only” 33, but its liabilities are several times larger than the GDP of its home country (Belgium).

But that is still the question – dissecting “economic terrorism” from the general downturn at home and abroad. Metrics, market indicators, indices, and graphs all pointing every which way, but in the same general direction – slowing growth as the overall economic context acting as backdrop for various localized disruptions, such as the current domestic “crisis.” The trend is established but the degree and localization of the pain among various players still being debated.

What got my interest was the even more distressed state of the European Central Banks – over leveraged up to 60:1 (see article) which is well beyond the capacity of foreign governments to “restructure” with their own “Paulson Plans.” (The intersection with various SEC rules since 1999 is interesting. The USA financial houses lobbied SEC for regulatory control in order to avoid coming under the EU rules as Europe wanted to equalize the playing field. As part of a compromise agreement, SEC loosened up leverage ratios for the five big investment houses.)

What I do know is this. The floor traders want some action. Out of all the players, I trust their collective opinion the most. Some action is required to recapitalize the market and free the credit pipelines. How that is done, they don’t really care. That’s where the fairness and ownership issues come in. Based on that, I believe the credit crunch has legs that can cross the ocean.

To what degree the US Plan impacts the European banks – or more to the point, what entity will bailout the European banks is unknown to me. I wouldn’t bet against the floor traders, but I still don’t trust this “Plan.”

I think we’re in for a bad decade with or without a plan. I tend to favor the Chris Whalen approach of orchestrating an orderly shutdown of the bad houses and selling their assets. Banks know how to do this.

Sep 27, 2008 - 6:00 pm 25. Cannoneer No. 4:

tb68, maybe it will if it is dripped on their heads like Chinese water torture relentlessy until Election Day. Our debaters would do well to memorize the contents of that video, or better yet cache a transcript for cut & pasting in forums everywhere.

Sep 27, 2008 - 6:06 pm 26. Patriot Front:

What is remarkable is that there is little or no marketing of these truths. Does the RNC feel it’s too complicated for people, or do they not want to point fingers? What am I missing here? C’mon John, drop your external fuel tanks and get in the fight!

Sep 27, 2008 - 6:14 pm 27. Konyok:

@Heather

I agree with you about demography being the ultimate cause of our financial crisis.

It seems to my primitive reptilian economic mind that we are perpetually balancing between two perils: inflation and deflation.

We baby boomers are like a goat passing through a python. When we demanded homes, prices increased. Now that we have pretty much achieved our economic goals we have what we need and demand for homes is falling. (Look at the run on mcmansions the last few years …)

This trend towards deflation is structural because of the demographics. The Bush administration has been trying to square the circle – increasing spending and encouraging consumer spending (go out and shop!) as it attempts to control inflation. Spiraling energy prices complicated the juggling act.

The entire western world is caught in this unprecedented position of maintaining prosperity with declining populations. Japan has been in recession for a decade now …

Sep 27, 2008 - 6:15 pm 28. slade:

The other thing to come from this mess is a greater appreciation of numbers, the recent agreement between Venezuela and Russia for $1B of military support for example.

I almost laughed but I haven’t done that for awhile so I have to practice.

As a matter of perspective, I think the sober gray beards are correct in their assessment that this country is still economically strong, but (1) it is getting smaller (shrinking from 50% of world GDP to 25% since opening of globalization), (2) it is getting weaker with loss of manufacturing base replaced by a services industry dominated by insurance and regulation (law), and (3) we were told repeatedly during all of 2008 that “fundamentals remain strong”, whatever that means.

Hopeless but not critical.

Sep 27, 2008 - 6:16 pm 29. elijah:

let’s have someone step up and help us understand that video linked by Cannoneer
perhaps it was taken out of context

Sep 27, 2008 - 6:23 pm 30. Eggplant:

NahnCee said:

“Can any of the really smart people here give me a fast explanation why America’s credit crunch is affecting a Yurp bank?”

I don’t claim to be a really smart person and know little about economics.

It is my understanding that the Europeans and Chinese were essentially suckered. Due to imbalanced foreign trade, the Europeans and Chinese were holding too many US dollars that were depreciating against foreign curriencies. They needed to buy American assets that were tangible rather than in fiat currency. The American banks recognized this market and created derivative investments based upon American real estate mortgages. The derivatives were made up of many mortgages and packaged in such a way as to appear to be safe investments, i.e. the derivatives had phoney credit ratings and the more visible mortgages in the derivative packages were of high quality. The derivatives initially offered a high yield rate while the real estate market was still an expanding bubble (classic hook for a Ponzi scheme).

The American banks initially made off like bandits because they were exchanging garbage mortgages for stable foreign currency. However with a Ponzi scheme, the secret is knowing when to “cut and run”. Many failed crooks running Ponzi schemes end up holding too much of their own garbage when the bubble pops or fail to flee before being seized by their victims. Also, sometimes the scam is so sweet that the con artist himself gets suckered. I believe in the end that is what happened with this mortgage bubble.

Sep 27, 2008 - 6:32 pm 31. Cannoneer No. 4:

elijah, email contactus@nakedemperornews.com and ask the guy that posted it to explain it to you.

The context is C-SPAN footage of Congressional hearings.

Seems pretty self-explanatory to me.

Sep 27, 2008 - 6:45 pm 32. Cannoneer No. 4:

Explosive Video, Fannie Mae CEO calling Obama and the Dems the “Family” and “Conscience” of Fannie Mae

Sep 27, 2008 - 6:50 pm 33. Cannoneer No. 4:

The Democrats and Obama caused the financial crisis of 08 by supporting Fannie Mae and Freddie Mac and covering up their bad books.

Sep 27, 2008 - 6:57 pm 34. Paul:

I tend to think that our economic problems are reversible. And I think they are easier to overcome and are caused by our political problems.

Our economic problems are caused by poor judgement on the part of our electorate. Too many people have been brainwashed by our educational system and our media to value a fashionable marxist fascism that wants to control the smallest details of everyday life. In too many places, regulation has become purposely punitive to drive away that entrpreneurial Capitalist spirit present in many Americans and replace it with a cowering dependence on big government.

How else can one explain this craven love of the Messiah? I know way too many people supporting Obama who act like cultists. I am old enough to remember discussing politics with people of the left during the Vietnam War. My classmates at college during that time generally did not support that War, and they could have sent to fight it. But hardly any were unhinged as the common leftist is today.

I do not believe demographics is a cause of the current crisis. As far as demographics go, the housing market has not kept up with demand here in California since the early 80’s. That was not because of greater demand or the emergence of the Boomer housing market. LA County to that point had doubled its population every ten years for ten decades. Then with growth actually slowing, LA County could not keep up with demand because of the beginning of burdensome socialist and environmental regulations. Since that time, housing and other ordinary living expenses have become more and more expensive , going from affordable to most to affordable to the very few.

I am involved in an industrial concern in a small midwest town. Most of our costs are one fifth or less than LA County. The reason: hardly any regulation. Manufacturing can still be done in America. America can still do almost anything it sets it’s mind to do. The people just have to generate the will to force government to get out of the way and stay away.

Sep 27, 2008 - 7:01 pm 35. Ex-fetus:

Economics is easy.
There is one law, supply and demand and one principal; buy low sell high.
Everything else is theory.

In this case there were more homes built and sold then the market could handle. Eventually, those homes stopped selling because demand dropped, which forced down the price. Those that bought high were forced to sell low. They used OPM ( Other Peoples Money, a more accurate term for credit) to buy high, so the Other People are now being forced to eat the loss.
Thsy don’t like the taste and want somone else to eat it for them. They are threatening to piss in EVERYBODY’s soup if we don’t help them with their meal.
See how simple that was.
Economists cannot charge 500$ US per hour for something this simple, so they dress it up in Jargon and trot it out to see who is buying. I saw one Congress critter today say that polls show 75% of American aren’t buying this 700 Billion con.

Sep 27, 2008 - 7:03 pm 36. Dave:

Slade: Programmer and I are not hunting the rhinoceros. We are hunting RINOS. Just in the scouting stage now, but we do anticipate many scalps on our lodgepoles shortly.

Sep 27, 2008 - 7:24 pm 37. Habu:

NahnCee,

Let me see if any of my fifteeen years working for Wall Street firms can help.

First how did it happen, the mortgage problem? Well I think everybody understands the sub prime aspect. Allowing people to have mortgages that have no business getting one. That’s what apartments are for or renting.

OK, here come the greedy Wall Street types (WS). Some of those people do nothing but think up ways to produce new products to sell to the public. So let’s take mortgages.

Mortgages have all kinds of seen and unseen parts to them. Most of us “see” the term of the mortgage, the amount, and the interest rate and monthly payment. The brokerages and banks see much deeper. They see the tranches which are fairly well known. It’s a “slice of the mortgage be it a slice of the monthly payment, the interest rate, the term etc.
(this is the simplified version) Now the WS and bankers “strip” these into different tranches, they calculate the rate of return on various tranches, bundle them together and sell them. Not only is this one operation performed but computers have allowed WS and bankers to formulate all kinds of different “products” that are calculated through internal rate of returns, strips of the strips and every kind of thing you can think of and they get sold.

Now Europe , China, the world watched this go on and started buying all these products. The products, CMO’s CDO’s etc continued to get rebundled and all were given AAA status as “good” investments. I mean who doesn’t want to own a home? Anyway after a period of time no one could put an actual value on these things that now banks all over the world owned in huge dollar amounts. Suddenly no one can sell them because the new buyer doesn’t know the value or even an approximation of the value. The guy on the street has taken all the equity out of his home for a new car etc and finds the mortgage he bough he can no longer afford because it was am ARM or his wife got sick and the second income went away of you name it.

The banks semi panic, along with WS because they all own stuff that’s worth ….what? No one knows…so they start to horde their money so they can pay operating costs. Some fail because they’re too highly leveraged…..they derived synthetic “products” from a computer model and the model didn’t account for human behavior.

So no one is giving out gobs of credit and the cascade of no credit for business; ceases and the business’ cease to function.

Needless to say the story has many chapters but this is basically what is happening. I hope this helped.

Sep 27, 2008 - 7:31 pm 38. slade:

Tough job Dave but somebody’s gotta step up ::))

(It wasn’t the Brad DeLong reference was it? I used to follow his blog – or so I thought.)

Sep 27, 2008 - 7:35 pm 39. programmer:

Since I have nothing of value to add to these conversations, I have refrained from commenting, however I do want to extend my gratitude to those who have freely given of their time, knowledge, and well thought out ponderings.

Oh, by the way, does anyone have a recipe for anything that starts out, “Take one large dead male rhinoceros….”

Sep 27, 2008 - 7:37 pm 40. Eggplant:

Paul said:

“I tend to think that our economic problems are reversible. And I think they are easier to overcome and are caused by our political problems.”

Politics no doubt plays a role. However I believe our basic economic problems are deep seated. I believe the root of our economic problems is that we are living beyond our means. It is my opinion that sometime in the early 1970s, we as a nation started consuming more than we were producing. Since the 1950s, it has been a basic American assumption that our standard of living must always improve. However after the early 1970s, that assumption became impossible based upon conventional economics. Unfortunately, the requirement of an ever increasing standard of living has forced us to unconventional economics, e.g. deficit spending, living off of credit, spending down equity, Ponzi schemes, etc. That sort of operating mode can only go on for a limited time. I believe the clock has almost run out.

Sep 27, 2008 - 7:39 pm 41. slade:

Oh, by the way, does anyone have a recipe for anything that starts out, “Take one large dead male rhinoceros….” – Programmer

Tranche lightly with a heavily leveraged dose of salt.

Simmer for years then bring to a boil.

Invite the neighbors over to taste it first.

Then retire to Plan B.

As rapidly as possible.

Sep 27, 2008 - 7:48 pm 42. Dave:

High, Nahn-cee: The whole house is on fire?
Not exactly what I had in mind for a fireside chat, but I guess it will just have to do.

Remember that when you have money in the bank,
that is a liability. And when you owe the bank money, that is an asset.

That ain’t exactly how you see things, but it is how the banks sees it and they operate on the basis of their viewpoints. You deposits
can be withdrawn, hence they consider it a liability. The incoming interest on money owed to them is their profit, hence they consider debt assets.

They are supposed to keep enough cash on hand to be able to meet any and all withdrawals of
liabilities that may occur.

Over in “yurp” they have not done so. They were counting on income from the American Debt instruments they have bought. They thought this income would always be there in sufficient quantities and on time to make up
their shortfalls.

It has suddenly dawned on them that their assumptions might not come true and that they have failed to make allowances for untoward events. Therefore, they are very busy soiling their undergarments.

Can they pull through, even in the event of a total American default? Yes they can. They just have to sell their assets at a huge loss
in order to meet their obligations. Not a desireable event, but a surviveable one.

If anybody over there is in real trouble, I would estimate it to be the Russians. What they have in the way of “assets” are probably so phony that they would have to pay somebody else to take them off Putin’s hands. I am trying not to gloat, but it is hard.

Sep 27, 2008 - 7:51 pm 43. steveaz:

I want to echo Amy’s post in the prior thread.

These are not “debates!” For them to be debates, the two contestants would face each other on stage, rather than be positioned side-by-side. And they would be forced into exchanging and justifying opposing ideas before an audience.

Instead (and true to their social engineering tendency), the media stewards of these political shows make the candidates face the audience, and lob questions designed to exhibit some difference between the candidates.

That is NOT a debate. When we get a real debate wake me up.

Lehrer should know better. I think something has broken in our country, and our professional wordsmiths are to blame.

Sep 27, 2008 - 7:57 pm 44. programmer:

Slade,
Thanks for the recipe. I salute you, sir.

Sep 27, 2008 - 8:07 pm 45. slade:

A serious debate would be structured to reflect the policy complexities of the modern world – divided by subject and including the specific policy teams, say two to three people each team. It is borderline ludicrous to think that one person now or in November or during his term will make decisions without consultation and research. The upper tier of each policy team should be identified and participate in the debate.

Under those circumstances, I would listen.

Sep 27, 2008 - 8:16 pm 46. slade:

No problem programmer. I expect I’ll be needing a second career before the fat lady hits the low notes of this opera.

Sep 27, 2008 - 8:24 pm 47. Konyok:

So, are the Yurps and the Chicoms breathing down Dubya’s neck? Does that explain some of the urgency?

Sep 27, 2008 - 8:51 pm 48. Charles:

Washington Times
Sunday, September 28, 2008
Illegal immigrant factor
http://www.washingtontimes.com/news/2008/sep/28/illegal-immigrant-factor/
It’s no coincidence that most of the areas hit hardest by the foreclosure wave – Loudoun County, Va., California’s Inland Empire, Stockton and San Joaquin Valley, and Las Vegas and Phoenix, for starters – also happen to be some of the nation’s largest illegal alien sanctuaries. Half of the mortgages to Hispanics are subprime (the accursed species of loan to borrowers with the shadiest credit histories). A quarter of all those subprime loans are in default and foreclosure.

Regional reports across the country have decried the subprime meltdown’s impact on illegal immigrant “victims.” A July report showed that in 7 of the 10 metro areas with the highest foreclosure rates, Hispanics represented at least one-third of the population; in two of those areas – Merced and Salinas-Monterey, Calif. – Hispanics comprised half the population.

Sep 27, 2008 - 9:08 pm 49. OldSalt:

“Personally I think there’s enough political blame to go around both sides of the aisle, though I generally agree with the video’s assertion that one the causes of the the flood of toxic paper was these poorly secured loans which turned around and bit their supposed beneficiaries. – Wretchard”

We had a case like this next door. Without belaboring the point (and writing one of my four page posts), these folks clearly weren’t in the economic salary bracket to afford a house in our neighborhood. Most of the neighbors were a bit worried about property values (i.e. roosters in the front yard, tenants in the garage, a dozen kids from three families running around the neighborhood, etc.), but they all in all turned out to be a nice family. Unfortunately, this guys is now months in arrears on his adjustable mortgage, does not have equity to refi, and has his house up for sale at 2/3’s of the purchase price (with no takers). Everyone in the neighborhood feels for the guy and this family. However, it’s also true that he’d be in much better shape if he’d bought a smaller, less expensive house. He’d have built up equity and own an asset. Now he likely owes more than he’ll ever be able to repay, he’ll lose the house, destroy his credit, and may not outlive the damage. It’s tragic.

In fact, taking one step back, the reason this guy had to pay $700K for what is today a $400K (or less) home is due to the number of people buying up homes for fun and investment with nearly free money, with no documentation of their ability to repay their loans. The market went wild. How in the world can the average price of a home in California be $500K or $650K (whatever it was back then), unless the average income was $250K or $300K. These houses HAD to be overpriced, yet I had people such as my brother-in-law (late 30’s, never saw a housing or economic recession in his life) telling me that “..you’ll think a $700K house is cheap in another year.. the market is just taking off”.

I can still recall back in 1986, a few years after I (first) left active duty, when I was first married and trying to make rent on a low, “starting” income. We went house hunting, saw a $90K house in Pennsylvania, where we lived at the time, which was about 6x the value of my annual income at the time. I feared I’d never be able to buy a house. 12 months later, I’d switch jobs twice, moved back “home” to California, my income had tripled (ex military officer, right place at the right time, Lord answered prayer), and I was chasing my first house with a VA loan . We purchased a $135K house. It had been 115K 3 weeks before, and the entire track sold out in 3 weeks. I drove around the area where a dozen new home tracks were breaking ground. These houses average price for the same sized house was averaging $165, and THOSE tracks were selling out. We couldn’t afford $135K on my salary, and the cost of houses were running away. So, I went home to our little apartment, I explained to my wife “Honey, trust me, it may be now or never for us”, and I sold of assets, paid down our debt, borrowed $6K from my parents to improved our balance sheet, and put an immediate down payment on the last house available in that track for $135K. (I also made a “contingent” offer on a house probably on the best lot in that division, in event it fell through. The Lord again answered prayer, that was the ONLY house that fell through, and I got to take pictures of my wife sitting in the unfinished steps of the interior, 6 months pregnant). We were property owners, we owned our own house, and we were 54% mortgaged.

That latter personal story is only relevant in that I understood in 2005-2006 how panicked people felt, and how tragic this situation is for so many. But the solution to personal tragedy isn’t to socialize the property market. Bottom line: I think the Government has to get out of the business altogether, including phasing out the tax deduction, and government assisted loans (i.e. short of those which are earned under the GI bill, but requrements for those should be tightened as well to protect the borrowers).

Opps….ended up writing another windbag post anyway. Oh well.

Sep 27, 2008 - 9:18 pm 50. Paul:

Eggplant;

People are living beyond their means because their basic household expenses including Housing, Transportation, Energy, Health Care, Insurance, food, Schooling for their kids, and Taxes are rising at a rate much faster than their income. This situation has been developing for many years. The basic cause is that our government is out of control.

Many today blame flashy conspicuous consumption of today’s families. Yes, there are better gadgets today and many high income families live pretty large. But generally speaking, my parents generation had and are still enjoying a much better lifestyle than most working families today. And in the years of the 50’s and 60’s the wife generally did not work to facilitate that lifestyle as they do today.

Sep 27, 2008 - 9:34 pm 51. slade:

So, are the Yurps and the Chicoms breathing down Dubya’s neck? Does that explain some of the urgency? – Konyok

I don’t believe their voices have been heard yet, at least not in the high-pitched range – just through some reportage.

But I don’t understand how they intend to deal with their problems, which are worse, in the absence of some form of external assistance – “too big to fail and too big to save”.

The idea, as best I understand it, is to restore the credit markets to functionality so confidence returns and the sovereign wealth funds step in in some capacity, which they aren’t doing right now until this country “does something.”

Trickle-down and dominoes being the confidence drivers without form – the theory behind the realities.

As pointed out earlier (can’t recall who), the older econometric models simulate “normal” market processes, but the statistical assumptions fall apart with outlier performance, such as down markets, which are outside of the bell curve distribution. (Newer models are better but the extent to which they have been calibrated and implemented I don’t know.) The technical verbiage is not there but that’s the gist behind the assumption. “System” performance becomes less predictable except in general trend lines.

I have a very poor understanding of the impact on/of the European Central Banks, but it concerns me in the context of the American taxpayer assuming ownership of this debt – a debt which has not been clearly delineated. As I wrote above, owning the debt seems a dubious proposition to me.

Sep 27, 2008 - 9:43 pm 52. Alexis:

I think much of the real estate bubble is based upon ideology. I see subprime mortgages as a symptom and not the root cause of the problem. The problem is the entire ideology dictating that full citizenship in America must necessarily mean “owning one’s own house”.

What exactly is wrong with renting? Renting often has advantages over owning a house and there is nothing immoral about renting an apartment or a house. Besides, how is it really an “ownership society” where one’s home is mortgaged up to one’s neck?

I think what we have here is a Jeffersonian ideology gone mad, with the Jeffersonian dream of the “yeoman farmer” transformed into a miniature Southern mansion with a tiny lawn in a surburb, perhaps stocked with enough modern appliances to replace the household servants. And if one is rich enough, one can hire an “undocumented worker” to cook, clean, and take care of one’s children.

Those who want a lawn can have a lawn. Those who want a miniature mansion can have a miniature mansion. But when our media and our politicians go about acting as though there’s something wrong with those who don’t own a home, this extends the entitlement mentality into the housing market. Why should politicians act as though there’s something wrong whenever fewer black people own homes than white people? One should not necessarily assume that home ownership is a state of being that all Americans must aspire to.

When I warn against “The American Dream”, I am warning against an assumption that there must be something wrong with people who don’t share the lifestyle of Albert Gore Jr. It’s not merely a question of whether opportunities are available to become like him, but also a question of whether Americans have the liberty to not desire what he has. Even if one builds a mansion, why can’t it be different? Why can’t it deviate from the big house for the big man with the big ego, a house that looks like a warmed over version of Monticello?

In some respects, Senator Obama and his friends exemplify an embrace of a crass materialism that the counterculture once claimed to oppose. He may rail about all the homes owned by his opponent’s wife, but he has big mansion for himself with a lawn paid for in a corrupt deal by a political patron. He talks of “Reclaiming the American Dream”, and yet our nation was never founded upon the ideology of “The American Dream”. America was founded upon liberty, not upon the hedonism of James Truslow Adams. It is not “The American Dream” Americans ought to reclaim, but instead the liberty to dream our own dreams, the liberty to be who we would like to become, the freedom to create a culture of our own choosing, and freedom from government, media, and academe using our tax dollars to force feed an artificial ideal of America upon the American people.

Sep 27, 2008 - 10:05 pm 53. Therapist:

OLD SALT,

It’s ok to get it off your chest and socialize your problems with friends. Soon we will all have district and block therapits’ aiding each of us by having us point out those who show too much individualism.

Who do you know that might be against that system? We’ll help you and them.

Sep 27, 2008 - 10:19 pm 54. Therapist:

We’ve actually been quite successful for decades. We have 100% of parents telling their children to share. If the child hesitates the child is scolded and told they must “share”

Comrade, “sharing is caring”.

This weeks schedule calls for you to share your car with a homeless person who lives under the 103rd street overpass. Let me have your car keys and $50 dollars for gas money.

As the block therapists this will look good on my weekly report about you. Your keys now.

Sep 27, 2008 - 10:34 pm 55. NahnCee:

“So, are the Yurps and the Chicoms breathing down Dubya’s neck? Does that explain some of the urgency?”

What about the Russkies and the Japanese? They weren’t involved in these money-making “bundling” activities over the past two decades? Nor India, or Dubai which seems to have oil-money tentacles in pretty much everything these days. Please, someone tell me the American taxpayer will not be asked to bail out some Emirati bank that’s become over-extended.

Sep 27, 2008 - 11:29 pm 56. onesimus:

Question:

Is there a reliable site that gives figures on how the mail to congress is running on the bailout?

In other words are we, the public being ignored by our “betters”?

Thanks in advance.

Sep 28, 2008 - 3:27 am 57. Melissus:

Alright. Let’s fix our governmental system, specifically, the Congress. Why not? It’s flunking out, I can’t flunk out any worse than what the pros are doing.

Let’s start by reproposing legislation for term limits in Congress: no congressman or senator may be reelected to consecutive terms of any government office. They must have an interlude of no less than 2 years separating terms in office. The Presidency and other executive offices are excluded from the effects of this legislation.

Now I know the Supreme Court ruled unconstitutional this or a similar law that was passed by Gingrich’s Congress in their Contract-with-America. I am not a legal expert and would like to know if there is some constitutional scholar that could tell me how hopeless this approach would be, if indeed it is hopeless.

In favor of this law, just look at how shamelessly our representatives, with a view of attaining or maintaining political power, are prostituting the authority we voters give them. I name two obvious examples. One is the immigration issue: a legislator profits (or so he thinks) by allowing illegal aliens into the country either on account of future votes he or his party may receive, or perhaps on account of contributions from unscrupulous businesses that want cheap labor. Thus, the sovereignty of our country is compromised, sold out for the miserable supposed gains of one politician. I submit that this is contrary to the constitution, the lawfulness of which presupposes that it is the constitution of one sovereign nation. Territorial integrity is a necessary condition for the validity of laws and a constitution in that territory.

Another example is this financial meltdown: politicians again judged it advantageous to their possession of political power to swap our national economic stability for their political gains. Of course, the examples can be multiplied.

My point: constitutionally, it should be possible (I hope) to argue that it is unconstitutional to disallow term limits as these encourage unscrupulous politicians to twist the power of government (and the constitution) to serve themselves rather than the interests of the nation as a whole.

Logical? Well, of course it is. But would that be able to stand as a legal argument, especially in the context of previous Supreme Court rulings?

Sep 28, 2008 - 4:07 am 58. onesimus:

My scheduled Bible reading for today:

Read it and weep.

Isaiah 1
21 How the faithful city
has become a whore,
she who was full of justice!
Righteousness lodged in her,
but now murderers.
22 Your silver has become dross,
your best wine mixed with water.
23 Your princes are rebels
and companions of thieves.
Everyone loves a bribe
and runs after gifts.
They do not bring justice to the fatherless,
and the widow’s cause does not come to them.

Sep 28, 2008 - 4:26 am 59. mark_b:

Therapist:

We’ve actually been quite successful for decades. We have 100% of parents telling their children to share. If the child hesitates the child is scolded and told they must “share”

Comrade, “sharing is caring”.

This weeks schedule calls for you to share your car with a homeless person who lives under the 103rd street overpass. Let me have your car keys and $50 dollars for gas money.

As the block therapists this will look good on my weekly report about you. Your keys now.
Sep 27, 2008 – 10:34 pm
————————————
Now we know why they are called the rapists.

Sep 28, 2008 - 5:30 am 60. 3Case:

Simply put, Pascal, the RepublicRats(tm) branding sucks. The concept is sound. The rendering, in pursuit of glibness, deflects identification of the true locus of the uber-statists, the Democrats; similar to the “Red State/Blue State” shibboleth (a rather convenient metaphoric inversion) forced upon us after the 2000 election.

Sep 28, 2008 - 5:47 am 61. 3Case:

“let’s have someone step up and help us understand that video linked by Cannoneer perhaps it was taken out of context”

If you doubt it, then YOU prove it wrong or misleading rather than engaging in the ninny deceit of making the substantiation of your doubt the responsibility of the group; a tactic that is near pure guano…. That video not only uses the players’ own words, it shows them speaking the words.

If you were being facetious, then you did a good job.

Sep 28, 2008 - 7:04 am 62. slade:

Please, someone tell me the American taxpayer will not be asked to bail out some Emirati bank that’s become over-extended. _ NahnCee

Well that’s the point. I can’t do that. But the other point – that I’ve been trying to illustrate with my “Musings from an Amateur” posts is that the public deserves & is more than capable of absorbing an explanation – one that is not forthcoming outside of the condescending “Main St doesn’t understand this, that, or what not” or the “it’s all over folks – the Dubya way or the Dubai way”, etc, etc, all variations on a theme, which is what’s not said. The 900-lb hole in the middle of the room.

Now The Boys are blaming Paulson for failing to “sell” the program. Reach your own conclusions.

Sep 28, 2008 - 8:38 am 63. slade:

And The Boys should do themselves and everybody else a favor and stop winking at each other long enough to notice that very few of the American public are inclined to blink on this one – minds fully focused by loss of productive work invested in soon-to-be-worthless accounts, while The Boys drive away in Leo’s BMW (no accounting for taste BTW.)

Those accounts are going down – one way or another – I want the plan with maximum punishment focused on bad financial houses. That’s the first order of business. Second order is Congress. Vote against your local incumbent. Soon and often.

Repeat as long as necessary.

Make responsibility cool again.

Sep 28, 2008 - 8:46 am 64. whitehall:

Recent history seems to show that the housing market has a pretty narrow range of conditions where it works to restore equilibrium efficiently and smoothly.

Congress gave it a bit of forcing function to increased supply with CRA and the GSEs. The Fed helped with interest rates a bit too low for conditions, for reasons to do with managing the overall economy.

The result was a unrestrained (for a time) run up in overall housing prices which saw many jumping on-board the bubble, either for hopes of unbegotten gain (speculators) or just to buy a home of one’s own.

Congress set in motion forces that overcame the regular “PID” self-regulatory mechanisms. But not all of them. When the oil price run ups hit plus a slight rise in LIBOR rates (triggering ARM payment increases) a number of mortgagees on the margin walked away.

When there is no self-regulation, there are step changes, ie crashes.

Prices will return to their normal ranges, either by lower real prices or by inflation (lowering the value of the dollar.)

Why is the Administration so hell-bent on government assuming the bad debt? There are other solutions. I suspect that there are real international pressures at work that we aren’t being told of. We know China told their banks to suspend inter-bank loans to American banks.

At heart this is a failure of Congress to act responsibly. Having Barney Franks as the front man is scary. I don’t care too much about the corporate bosses – Franks needs to be in jail!

Sep 28, 2008 - 12:27 pm 65. Pascal:

3case — I am painfully aware that the RepublicRat branding sucks. It suggests that the Republicans are in the lead rather than the Dems. Since most conservatives vote GOP because the alternative is so very bad they feel insulted and thus reject the label. More than one person suggested I call it RinoCrats, but it doesn’t work.

However, without the fifth column within the GOP the power of the left to make extremist demands are immediately blunted. For instance, the Dems can float a rider in the bailout bill that would fund ACORN that some think was just a ploy, but the GOP doesn’t counter that ploy with a similar demand to reduce whatever funds ACORN now gets.

At any rate, I only reintroduced that amalgam party for the sake of the argument that crisis driven “bipartisan” agreements are meant to shut down discussion right quick; and it isn’t for the sake of protecting the interests of the middle class.

Aside question: I have NOT been able to find any assorted news from March 1992 regarding how the Freon ban was signed. It was a crisis that smells astonishing similar to this one, only on a much smaller scale. NASA leaked, what eventually was revealed as fraudulent, about an ozone hole spotted over Massachusetts. Minority leader Gingrich rushed a bill to the floor that GHWB would sign. History repeats itself and George Santayana is haunting us.

Sep 28, 2008 - 2:37 pm 66. Pascal:

About that Freon crisis: what a marvel is with this memory hole? Anyone?

Sep 28, 2008 - 2:40 pm 67. Pascal:

3case: “similar to the “Red State/Blue State” shibboleth (a rather convenient metaphoric inversion) forced upon us after the 2000 election.”

Yes, a form of Newspeak that has a good number of us old timers double-thinking in conversations so that younger folk must think we are slow. That is truly a nasty ploy that should prove to you that reports of the death of Old Media is vastly premature.

Sep 28, 2008 - 2:44 pm 68. Bob Murphy:

Great stuff y’all. Very thought provoking. Thanks for going to the trouble.

Sep 28, 2008 - 3:51 pm 69. 3Case:

“Soon we will all have district and block therapits’ aiding each of us by having us point out those who show too much individualism.

Oh crap!…time to return to the mountains, I suppose. Good thing I am built for and like the cold. Therapeutic types tend not to like it below 40F and I could care if it ever goes above. Neighbors tend not to talk to government types, too.

Sep 28, 2008 - 4:36 pm 70. Fred:

Here’s a working link for “Burning Down the House”

http://www.youtube.com/watch?v=NU6fuFrdCJY

Sep 30, 2008 - 6:47 am 71. Bob Murphy:

Built for the cold, 3Case?
Short, stocky and hairy???

Sep 30, 2008 - 1:52 pm

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