For decades the government has done things to help Americans to realize the dream, e.g., graciously allowing citizens to keep some of their own money to help pay for the interest on a mortgage (the official term for this is a “tax deduction,” but I prefer my locution since it emphasizes the fact that it is YOUR MONEY we are talking about).
But what about people who do not work hard (if they work at all)? What about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to live the American dream?
That was the question that led to (drum roll, please)
“The Community Reinvestment Act” (see here for more).
* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.
The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.
* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”
Bottom line? It forced banks to issue something on the order of $1.5 trillion in sub-prime mortgages.
$1.5 trillion, i.e., one and a half thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.
But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties. As Howard Husock, writing in City Journal way back in 2000 observed: “Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A’s for effort. Only results—specific loans, specific levels of service—would count.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a client who charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”
* In 1997, Bear Stearns –- O firm of blessed memory –- was the first to get onto the sub-prime gravy train.
* Fannie Mae & Freddy Mac — were there near the beginning, too.
Anatomy of a bubble
Step 1. The intoxication: “My house is worth millions!” From 1995 – 2005, the number of sub-prime mortgages skyrocket. So did the house prices.
Step 2. The hangover: “Oh my God, my house isn’t selling. What went wrong?”
Why didn’t someone try to stop it?
Someone did: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” The New York Times, September 11, 2003.
But someone intervened to stymie the Bush administration. Who? The New York Times reports:
Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “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.”
Why didn’t someone else ring the alarm?
Someone else did. In 2005, John McCain co-sponsored the “Federal Housing Enterprise Regulatory Reform Act,” which among other things provided for more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked it?
The bill was reintroduced in 2007. But again, no luck. Fannie Mae and Freddie Mac had friends in the Senate:
* Chris Dodd, a recipient of “sweetheart” loans from a Freddie and Fannie backed company.
* The junior senator from Illinois, i.e., Barack Obama, who turned to Jim Johnson, former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?
* You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac: see here , for example, or here, or here. (And thanks again to this great video for the outline I précis above.)
The dog that didn’t bark.
Perhaps the most amazing thing about the Times’s little drama that casts George Bush as the protagonist of our economic tragedy is not what’s in it but what isn’t. You will search in vain for the name “Barney Frank” or the phrase “Community Reinvestment Act.” But telling the story of our economic crisis with out those elements is like staging Macbeth without Macbeth or the witches.
There is a great refusal in operation here, a refusal to face up to facts. Thomas Sowell touched on this in a typically percipient column a few months ago when he wondered, not without exasperation, whether facts still mattered in our political life. The current economic crisis seems to have benefitted Democrats. But how could that be? Sowell reminds us of some forgotten facts:
Fact Number One: It was liberal Democrats, led by Senator Christopher Dodd and Congressman Barney Frank, who for years –- including the present year -– denied that Fannie Mae and Freddie Mac were taking big risks that could lead to a financial crisis.
It was Senator Dodd, Congressman Frank and other liberal Democrats who for years refused requests from the Bush administration to set up an agency to regulate Fannie Mae and Freddie Mac.
It was liberal Democrats, again led by Dodd and Frank, who for years pushed for Fannie Mae and Freddie Mac to go even further in promoting subprime mortgage loans, which are at the heart of today’s financial crisis.
Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers to the President. So did Bush’s Secretary of the Treasury, five years ago.
Yet, today, what are we hearing? That it was the Bush administration “right-wing ideology” of “de-regulation” that set the stage for the financial crisis. Do facts matter?
None of this is new. But Gide was right: although everything has already been said, no one was listening, so it is always necessary to start over again. Go into your local bank. Look around. Somewhere you’ll see posted on the wall a notice advising customers that the bank’s lending practices follow the dictates of the Community Reinvestment Act and that federal bureaucrats regularly stop by to make sure the bank is abiding by its ruinous stipulations. When will it stop?
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1. Fausta’s Blog » Blog Archive » Reason eleventy-hundred and one for NO MORE BAILOUTS, EVER:[...] meanwhile, is wondering if The New York Times is secretly in league with the country’s [...]
Dec 22, 2008 - 8:09 am 2. David Thomson:“The Times allows that “there are plenty of culprits”
This is actually half true. There were a lot of people with their hand in the cookie jar. This disaster nonetheless began because left-wing politicians forced lending institutions to provide mortgages to minorities possessing poor credit histories. Soon thereafter, white people demanded that they get a piece of the action. Why shouldn’t they also have some fun?
There is something I simply don’t get: why aren’t the graduates of Harvard, Yale, and our other “elite” universities not being humiliated for their gross stupidity? Should we not be questioning their obviously lousy education? How could someone who obtained an MBA degree from Harvard, for instance, not realize that loaning money to those deemed high credit risks would inevitably prove disastrous? Are these individuals brain dead? And no, I am not trying to be facetious. I am serious as a heart attack. How can such idiots graduate from Harvard? This is indeed a very rational question—and it deserves an answer!
Dec 22, 2008 - 12:18 pm 3. David M. Bethune:All that needs to be said is that Roger’s essay is superb, superb, superb. No more need really be said.
Dec 22, 2008 - 12:33 pm 4. Andy McCarthy Nails It:[...] just had an election in which the decisive financial melt-down was, as Roger Kimball details
Dec 22, 2008 - 12:34 pm 5. Harry Taft:The only satisfaction available to those of us who are outraged at the Times and others, is that while they spend their days blaming Bush for everything except Original Sin, they are, in fact, spending what will be their last days. The law of unintended consequences work so that their propaganda activity has alienated half of the market at a point in history where, without that half, they are no longer a viable presence economically. R.I.P., NYT (and good riddance).
Dec 22, 2008 - 12:51 pm 6. Pajamas Media » Who Caused the Global Economic Crisis?:[...] Read more here. [...]
Dec 22, 2008 - 12:59 pm 7. Maggie:Bush demanded a regulatory overhaul in 2003 and nothing happened. Same thing with our energy policy. Same thing with social security. Why did conservatives just shrug and move on? Where are the leaders who will fight the war even when they lose a battle?
Dec 22, 2008 - 1:25 pm 8. CHRIS:One can only hope that the current economic crisis will put NYT under for good. Six Feet Under.
Dec 22, 2008 - 1:27 pm 9. Mr Blackwell:Pinch doesn’t care if the Times goes under: he has plenty. Like any liberal interested in the green economy, he’s someone that already has “his” and won’t be effected.
What is a shame is the loss of what Pinch doesn’t understand: the Times could have made a difference.
Its a bloody shame that US voters don’t get what the Times could provide if it wanted to–news.
If it were a newspaper people could rely upon as truly unbiased. One that reported instead of telling you what to think.
Once that didn’t paper over unpleasant facts like it did with the Duke case. Ot make a fool of itself with the rash of golf course stories (the economy was going down the tube, and the Times was obsessed with a golf event).
Its short-sighted vesting of its power with a rich man’s son with no judgment and no appreciation of the damage he’s done is appalling. The damage is not just to the Times: but to the country. we lost a voice that might have helped. Instead, we got just another liberal newspaper.
That will be “Pinch’s” legacy. The Times made itself a narrow-minded paper and forfeited its role as an objective reporter. It failed not just economically, but failed the country.
What might be possible even today if voters trusted the media to report not slant. If right and left alike had a source they could trust.
Dec 22, 2008 - 1:29 pm 10. Retep:It is absolutely preposterous that the very people who got us into this mess are now in charge of leading us out of it. Christopher Dodd and Barney Frank have largely escaped blame for this. Amazing. Really.
Dec 22, 2008 - 1:38 pm 11. 888:That’s why I and millions like me quit our subscription to the NYT. Its articles are not fact-based, and the NYT is as corrupt as the people it covers up for.
Bush will come out on top in future history books because Iraq will succeed; the NYT, on the other hand, is a has-been.
Dec 22, 2008 - 1:48 pm 12. Johnny Dollar:I have spent 17 years in the mortgage business and Roger is exactly right. My income actually dropped during the boom years because I refused to put clients into the nutty delusional mortgage products that were all the rage at the time. I could not have slept at night otherwise. Home ownership went from being a priveledge to an entitlement via Freddie and Fannie (at the taxpayers expense, no doubt). Lots of blame to go around but Congress is the genesis of this crisis because they removed the moral hazard to lenders and borrowers for political reasons. We are now seeing the same with the TARP, etc. And it will be disastrous.
Dec 22, 2008 - 2:10 pm 13. Broadsword:Roger, back when the Doonesbury cartoon strip was funny, there was a long series of strips wherein Zonker Harris completely fooled “tough, cynical reporter Roland Burton Hedley Jr., just back from Vietnam” into believing there were still hippies living at Walden Farm. His article was called, “The New Hedonism.” In the strip a dismayed Zonker is saying, “I didn’t think he would believe this stuff!” His editors asked Roland Burton Hedley Jr., if he had bothered to check out their stories. “I didn’t need to”, he said, “The assured me it was all true.” When asked what he covered in Vietnam Hedley said, “Sports”. The NY Times doesn’t have to check; and their readers can be assured it’s all true.
Dec 22, 2008 - 2:25 pm 14. I Love New York:The New York Times in 1999 did a very good job discussing the potential liability from the fallout of a crashing Fannie Mae
http://query.nytimes.com/gst/fullpage.html?res=9c0de7db153ef933a0575ac0a96f958260&sec=&spon=&pagewanted=all
Dec 22, 2008 - 2:39 pm 15. MikeD:The one good thing to come out of all this mess–in both the private and public sectors –may be the realization that an Ivy League education can not improve mediocrity. Simply being numbered among the offspring of our wealthy inbred elites and the white-guilt affirmative action admissions who attend these institutions doesn’t in any way, shape, or form improve much of anything. We are governed by a clique of wealthy and self-important egomaniacs who are supported by a star-struck media staffed, in turn, by truly inferior intellects (Keith Olberman comes immediately to mind). The country is being led by a segment of the population that is truly mediocre but who, nonetheless, have come to think of themselves as superior. They have done nothing to justify their arrogance or the continued collective support of the balance of the population. It is time we all became aware of this. Going to Harvard, Yale, Princeton or Columbia costs a lot but only offers “connections”. Perhaps that is enough, but it is time to acknowledge that the quality of the education really isn’t necessarily very special. And, I would bet (to the surprise and dismay of the privileged), that beyond rubbing shoulders with other members of the “bettors” class that 9 out of 10 graduates might as well have attended their local community college. Finding out that someone graduated from Harvard simply does not impress me. If these folks want respect they better have something else to offer. Most of them, unfortunately, do not.
Dec 22, 2008 - 2:43 pm 16. thegre8_1:DEMOCRATS
Dec 22, 2008 - 3:01 pm 17. thegre8_1:Did you all watch Erik Cantor tear out a new cavity out of Barfy Frank with Wolf Blintze yesterday on Communist News Network? Do you also know the UAW pried 4 billion dollars from Canada? Guess we don’t have the only idiot politicians.
Dec 22, 2008 - 3:06 pm 18. thegre8_1:NYT=RIP.
Dec 22, 2008 - 3:07 pm 19. Barrett:David Thomason,
To answer your questions, I think it is the result of hubris that comes with intellect detached from experience.
First, there was money to be made.
Second, the financial elite frm Wall Street and in higher education are almost all liberals. Wall Street gave much more to Obama than McCain. The notion that somehow they were doing good by creating affordable housing fit with their political sensibilities and financial motives.
The financial models used on Wall Street were quite sophisticated and written by PhDs in math and economics. The devlopers took all available statistical information into consideration. However, no one ever took a walk into a low income neighborhood. No one ever asked what would happen if defaults increased 10% more than the historical record. I can tell you that the models broke.
A major assumption was that the median price of homes would not decline. The extreme dislocation in the credit markets and technical insolvency of the much of the banking system was never even contemplated.
We all know that you can build a syllogism that follows the rules of logic and yet is devoid from reality. Financial and econmetric models are no different.
VAR (value at risk) models led to under reserving for credit losses as well because of the assumption that future volatility will esstentially mirror historical volatility.
As a result of government interference in markets, intellectual hubris and lack of real world experience with subprime borrowers, credit was extended to borrowers by people who would have loaned them $5 of their own money of asked.
There is no substitute for knowing your customer.
Now the same folks who set the stage for this debacle are going to lead us out of it? Right!
The government is acting like a plutocracy. The real hope is with small business and entrepreneurs who employ roughly 70% of the workforce. But the government is strangling them. Here is a timely article on the subject.
http://online.wsj.com/article/SB122990472028925207.html
Dec 22, 2008 - 3:27 pm 20. Photo9710:Roger, Beautiful Articles. I learn a lot and Thank you. A lot people been blame Bush therefore, I knew it is not his fault. Good thing I never subscription NYT.
Dec 22, 2008 - 3:30 pm 21. quasar:I found that the NYT made an excellent bird cage liner…until it started making my bird really, really stupid…and my bird has an MBA from Harvard!
Dec 22, 2008 - 3:44 pm 22. The Historian:DISASTER ON THEIR WATCH MERITS A RAISE?
We need to get rid of our reprehensible representatives and the earliest opportunity:
http://greensrealworld.blogspot.com/2008/12/economy-in-crisis-congress-gets-raise.html
Dec 22, 2008 - 4:18 pm 23. David Thomson:“The country is being led by a segment of the population that is truly mediocre but who, nonetheless, have come to think of themselves as superior.”
Thank you. I was getting worried that nobody else wished to state the obvious. One must, however, make a proper distinction. Those who earned a hard science degree from one of our “elite” universities are truly brilliant. The idiots are usually the graduates who obtained a liberal arts degree of some sort. They are often dumber than a doornail. Think about it. How stupid do you have to be to force lending institutions to provide mortgages to individuals deemed high credit risks? How could such an absurd idea not be ridiculed almost immediately?
“Elite” university liberal arts graduates should initially be perceived as fools until proven otherwise. It’s time we make sure these people earn everything they get in life. They have been looking out for each other for far too long—at the expense of the rest of America.
Dec 22, 2008 - 4:26 pm 24. Marc Boyd:One thing all of you folks are forgetting.
To my knowledge, not one of our “Prominent” Senators or Rep.s has a degree in Business, Science, Economics, or other relevant education. They are all frigging Lawyers.
They chase MONEY for a living (Ambulances?).
Million? Trillion? Billion? Say what? No clue since it ain’t their money.
Dec 22, 2008 - 4:37 pm 25. harry:A better question is: Why does anyone bother reading the New York Times? By reading it you validate it. By not reading it it becomes invalid. The Times has proven over and again it is not a trustworthy source of information. Let the old hag die already.
Dec 22, 2008 - 6:37 pm 26. Tom Royce:This reminds me of the great line, “Nobody gets fired for buying IBM.”
The new version for the Times is “Nobody gets fired for blaming GW Bush.”
Dec 22, 2008 - 7:08 pm 27. zazulu:What a pleasure for me not to have to read the NYTimes anymore….but Mr. Kimball must
Dec 22, 2008 - 7:09 pm 28. Scott (in Colorado):continue as the vigilant watchdog and assail them on their lies at every opportunity. He does it effectively
and persuasively, with facts…and with a clean, sharp bite….Just like a really good schnauzer! Shame on the New York Times!
Allowing politicians to manage our finances is a bad idea. Jefferson said so when arguing against the federal reserve system (yes – the idea is an old one). Finger-pointing serves no other other purpose than political. Sounds circular, doesn’t it?
We’re all to blame. Get over it – else watch the republic fail. We need solutions, not excuses. This forum is bankrupt otherwise. Just another bunch of wieners looking for cover.
Dec 22, 2008 - 7:13 pm 29. Benson:Wonderful article, Roger. Simply superb. Many thanks!
Dec 22, 2008 - 7:52 pm 30. bkaplovitz:Great piece by R. Kimball. And here are the videos to go with it:
Burning Down The House: What Caused Our Economic Crisis? Bombshell
http://www.youtube.com/watch?v=1RZVw3no2A4
Taxman In The Casino: The Truth About Taxes And Our Economy
http://www.youtube.com/watch?v=66z5TDrwPxM
Dec 22, 2008 - 7:55 pm 31. Origins of the financial crisis « Internet Scofflaw:[...] of the financial crisis Yet another review of the origins of the financial crisis.
Dec 22, 2008 - 8:40 pm 32. coggieguy:For an interesting contrast go visit a “buy here, pay here” used car lot. They sell cars to the sub prime, no bank loan possible segment. Ask about down payment requirements (I’ll bet 25% minimum, ask about monthly payments (usually in the range of $200-$250 per month)-a do-able payment but not onerous. Also likely to get car paid off in less than 3 years. Interest rate – in the range of 20-25%. Lots of risk – that is why there is also another key component – a copy of the keys taped to the loan papers and the services of a good repo man – and yeah they do wear long black leather coats. Often the owner must tutor the customers about the responsibilites of car ownership – budget your money and make your payments on time. So the essentials are – good sized down payment, regular monthly payments, repo the car if you screw up. Tha is how the sub prime market is handled successfully. Barny and Dodd could have saved us a lot of money with a few tips from lenders who know their market.NO rose colored glasses when it is your own money at risk.
Dec 22, 2008 - 8:45 pm 33. frege:I am with you on it being our money to begin with, but let’s not gloss over the fact that by having the mortgage deduction we favor the idea of home ownership over alternatives. We should just let you keep more of your money, not condition it on your making a large interest-bearing purchase. We will have enough real estate bubbles in the future because people will always eventually start thinking real estate prices have nowhere to go but up. We don’t need to blow more air into those bubbles by making it more attractive to own than to rent. Sometimes it is, sometimes it isn’t. The government shouldn’t push the balance one way or the other.
Dec 22, 2008 - 9:18 pm 34. Jamie Irons:David,
You wrote:
Those who earned a hard science degree from one of our “elite” universities are truly brilliant.
You, sir, show your own brilliance by this perceptive and truthful remark.
Jamie Irons
Yale, Molecular Biology and Biophysics, 1969
Dec 22, 2008 - 9:31 pm 35. And now for a little history. « CCOFFER:[...] now for a little history. Roger Kimball does an excellent job in explaining the origins of the mortgage [...]
Dec 22, 2008 - 9:49 pm 36. Roger’s Rules » Who caused the global economic crisis? (Hint: it wasn’t George W. Bush) « CCOFFER:[...] Rules » Who caused the global economic crisis? (Hint: it wasn’t George W. Bush) Roger’s Rules » Who caused the global economic crisis? (Hint: it wasn’t George W. Bush). Possibly related posts: (automatically generated)Orson Scott Card on the Economic CrisisBush [...]
Dec 22, 2008 - 9:54 pm 37. Bob:Mediocrity in and of itself isn’t the real problem. Mediocrity that’s accompanied by a fair amount of humility can still accomplish a lot of good. This requires such things as admitting to mistakes and learning from them. A humble person can do this.
It’s the mediocrity that “can do no wrong” that’s deadly. It can never learn from its mistakes because it is too proud to admit to a mistake. So disaster follows mistake follows error.
Have Frank or Dodd admitted to the mistake of backing Fan and Fred? Is anyone talking about repealing the CRA? Only pride and personal dishonesty stand in the way.
Dec 22, 2008 - 10:03 pm 38. Saying Goodbye To A Decent Man « Nice Deb:[...] It’s a shameful tragedy that The New York Slimes is still trying to pin the blame of the current economic crisis on Bush. [...]
Dec 22, 2008 - 10:07 pm 39. James:LIAR!!! You are all duped again! Bush and his croonies made millions off the backs of working people who are now losing their homes! Why shouldn’t the government back mortgages to the working class?
Dec 22, 2008 - 10:30 pm 40. The Historian:AMERICANS DON’T KNOW BASIC CIVICS
It is so bad that college graduates cannot pass a simple civics exam:
http://greensrealworld.blogspot.com/2008/12/elected-officials-flunk-easy-civics.html
Dec 22, 2008 - 10:31 pm 41. Robbins Mitchell:The NYT should change its masthead motto to read “All the news that’s $h!t,we print.”
Dec 22, 2008 - 10:35 pm 42. Mike LosAngeles:The sub-prime loans are a big component, but not the whole story. Many with excellent credit bought too much house too – and that’s a whole bunch of money too. The commercial property mortgage mess will hit the fan mid 2009.
The daily articles about laws being passed to force companies to not be stupid – and not self-destruct – are something out of bizzaro world. You’d think there would be enough incentive for companies to want to stay in business already.
Dec 22, 2008 - 10:44 pm 43. Andrew Garland:See We Guarantee It
for my review of the news and events leading to our crisis.
Excerpt:
The government ran an off-budget loan-department (Fannie and Freddie) that borrowed $5.4 trillion ($5,400 billion), as much as the total debt of the US before that. Fannie and Freddie were regulated and directed by the House Financial Affairs committee, chaired by Barney Frank (D. MA) and controlled by the Democratic majority for the last two years. The bad loans were made mostly in the last two years, under their direction and encouragement.
The crisis was powered by the unlimited guarantee of the U.S. Government through Fannie Mae and Freddie Mac, along with Government influenced ratings agencies that put AAA ratings on pools of sub-prime loans (Motto: They haven’t defaulted yet)
Dec 22, 2008 - 11:47 pm 44. mark l.:if AIG doesn’t insure the the subprime loans, no one buys them.
this fiasco was supported at so many levels, but it is sweet to see the smartest guys in the room confuse draino for a glass of milk.
Dec 23, 2008 - 1:09 am 45. G Alston:#2 David Thomson — “How can such idiots graduate from Harvard?”
Economics is a philosophical construct, not science. These people are not idiots. Economic realities stump the best minds periodically because human behaviours don’t always conform to their models. There are no perfect models.
Dec 23, 2008 - 2:41 am 46. Bill Dalasio:Mr. Kimball,
Excellent article. I might draw a little bit of a quibble here and there (Personally, I’d put a lot more blame on Fannie/Freddie than you seem to.). But you get to the essence of the issue. The problems with the current “blame Bush” mentality going around with the public are not only political. Ultimately, identifying the wrong cause of the problem will leave the fundamental causes of the crisis unaddressed. The subprime market was ultimately unworkable, not because of securitization, but rather the reverse was true securitization failed because the subprime market was unworkable. Firms found themselves relying on greater and greater complexity to preserve some qualities of a viable security. Add to that the GSEs both operating as de facto government subsidized hedge funds and acting as a one-way purchaser of this credit, and you have a recipe for a financial crisis. Sadly, I don’t see the realization of this on the part of the public. As a result, I’m inclined to believe that we’ll only see more of the very influences that caused the current crisis.
Dec 23, 2008 - 4:13 am 47. David Thomson:“Economics is a philosophical construct, not science. These people are not idiots. Economic realities stump the best minds periodically because human behaviours don’t always conform to their models. There are no perfect models.”
Baloney. These people are idiots. If somebody lacks the common sense not to loan money to people possessing poor credit histories—then they deserve to be ridiculed. Their credentials obviously leave much to be desired. Harvard, Yale, and the other so-called elite universities have failed miserably to teach many of their graduates how to think and follow a logical argument. One has the moral and intellectual right to make fun of their “models.” By the way, could these be the same fools who brag about their global warming models? The dummies who have acquired these dubious degrees must not be allowed to get away with their nonsense any longer. It’s time these fools start earning their keep. The free rides have got to stop.
Dec 23, 2008 - 4:51 am 48. Peg C.:#37 Bob, have you ever known a mediocre intellect that was humble? In my experience the stupider a person is, the more arrogant he/she is. When you mix mediocrity with the arrogance of a politician, you get the most noxious and dangerous combination there is. There are too many examples to name.
#45 G. Alston, economics is humans behaving in their own best interest. When government subverts this, chaos ensues. Humans are actually relentlessly rational, but not in ways taught in the Ivy League or higher ed in general. Education bears no relation to the real world except in the hard sciences, as David T. said. This is one of the reasons the mediocre elites are trying to subvert science – you have to do this when you believe in a utopian world. What we are seeing now is a direct result of power exercised by those we have knowingly elected who cannot, do not and will not accept and understand the real world.
The truest thing I’ve read recently is something from Einstein; apologies if this is not verbatim:
“The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”
We elect idiots who create problems and then we expect the same idiots to fix them. We really do get the government we deserve.
Dec 23, 2008 - 5:06 am 49. Bill Dalasio:#45 G Alston,
With all due respect I have to disagree. The caveats of the models are hardly news. Before the housing bubble even started, the shortcomings of the models were well known. That people opted to blindly follow the models, even assuming historical correlations during a bubble, shows a disturbing lack of attention. The quants who developed and worked on these models were openly noting their limitations before the meltdown. Instead of backing off, the deals only expanded in analytical complexity. Trying to brush this off as “the world didn’t operate right” ignores the fact that there was ample evidence that the mortgage market had gotten out of control. I mean, seriously, are you going to try to tell us that no one knew when interest-only loans began circulating, that a prudent observer couldn’t tell that the lending had become speculative in nature?
Dec 23, 2008 - 6:04 am 50. chuck:A better analogy is Othello, with GWB as Cassio, taxpayers as Desdemona, and bankers as Othello. Iago? Congressional Democrats.
Dec 23, 2008 - 6:19 am 51. Alan:Excellent piece. I would add one big driver behind the current credit crisis that you did not include in your analysis. Alan Greenspan’s Fed with Ben Bernanke in the supporting cast. By keeping interest rates so low for so long after 9/11, the Fed’s actions triggered the massive credit bubble and overleveraging of business and personal balance sheets that is now unwinding.
Dec 23, 2008 - 7:11 am 52. Roger’s Rules » A tale of two pundits: Sowell v. Huffington:[...] financial meltdown.” In fact, that embarrassing piece was partisan reporting at its worst: a factually inaccurate political hit-job whose purpose was not to report or illuminate but to scapegoat and shift blame onto one’s [...]
Dec 23, 2008 - 7:17 am 53. Bilgeman:#24 Marc Boyd:
“Million? Trillion? Billion? Say what?”
Ahhh, I see that you too have read the graffiti scrawled above the urinals on the wall of the Ways and Means Committee’s restroom.
That’s an “all-day snicker” line…
Dec 23, 2008 - 7:54 am 54. indymaggie:There should be punishments, heavy fines and suspensions for journalists who tell untruths. It is difficult today to find any that give the facts.
Dec 23, 2008 - 8:28 am 55. SUS:One of the issues not mentioned is how people used their homes to buy stuff. They refinanced mortgages or took home equity loans out so they could have a Lexus or a state-of-the-art kitchen and then eat out all the time. Now they have their stuff, but also have a huge debt they can’t pay. The old American way of working hard, saving money and THEN buying stuff when able to afford it (a.k.a. leaving within your means) seems to have been forgotten. Our society punishes that old ethic.
Dec 23, 2008 - 8:32 am 56. Agoraphobic Plumber:“Bush and his croonies made millions off the backs of working people who are now losing their homes!”
Croonies? Is that like his backup band?
Dec 23, 2008 - 9:22 am 57. G Alston:#47 PegC — “Education bears no relation to the real world except in the hard sciences, as David T. said.”
Outside utter nonsense like “studies” (women’s and ethnic) the purpose of education is and has been to teach one how to think, to solve problems. That’s about as real world as it gets. College isn’t a vocational job program.
#49 Bill Dalasio — “Before the housing bubble even started, the shortcomings of the models were well known.”
Actually I’d been referring to the philosophies (mental models) that underpin things, the “school of thought” type of thing. Where one starts from. Re mathematics models, one of the big problems in the housing bubble was that appraisers were getting paid based on the value of the loan that was originated. Artificial inflation was the result. No this wasn’t the sole cause to the problem but was a contributing factor. The point being that models by definition aren’t able to incorporate X factors like that one, whether mental or spreadsheet. Intelligence and clairvoyance shouldn’t be conflated.
#47 David Thomson — “If somebody lacks the common sense not to loan money to people possessing poor credit histories—then they deserve to be ridiculed.”
The CRA/ACORN argument (and/or derivative thereof) you are forwarding here however isn’t the problem. It’s not been demonstrated to be true. It’s been asserted, but repeated assertion and proof are different things. As far as I can tell greedy loan officers forcing people with good credit to get rapacious ARMs was a larger factor yet.
And by the way, loaning money to people with poor credit histories is precisely how credit is repaired/created. That ought to be obvious on the face of it.
Dec 23, 2008 - 10:25 am 58. jldavid:Response to post #23…
“The idiots are usually the graduates who obtained a liberal arts degree of some sort. They are often dumber than a doornail. … “Elite” university liberal arts graduates should initially be perceived as fools until proven otherwise. It’s time we make sure these people earn everything they get in life. They have been looking out for each other for far too long—at the expense of the rest of America.”
Perhaps my memory is a little foggy, but didn’t George W Bush graduate from Yale with a Bachelor of Arts in History after only getting in because his daddy was an alumni? And, didn’t he graduate with a GPA barely above a C?? As far as I’m concerned, your explanation suits him to a T. I’ve never seen him prove otherwise. I’d love to hear the excuses detailing why GWB should be exempt from the scorn above.
Dec 23, 2008 - 11:06 am 59. Rex Flex: Politics » Who caused the global economic crisis? (Hint: it wasn’t George W. Bush):[...] I ran across a great article today that was sent to me in the Pajamas Media daily digest. (Source: Roger’s Rules) [...]
Dec 23, 2008 - 11:14 am 60. M. Simon:Agoraphobic Plumber,
I never knew Bush had a regular band. And now you tell me he has a backup band as well?
How is he ever going to make any money with his labor costs so high?
Dec 23, 2008 - 11:52 am 61. s sommer:” The subprime market was ultimately unworkable, not because of securitization, but rather the reverse was true securitization failed because the subprime market was unworkable. Firms found themselves relying on greater and greater complexity to preserve some qualities of a viable security.”
Um, in other words, they had to get super creative to find a way to disguise those securities as worthwhile investments. As in, making purses out of sow’s ears? If the securities had been properly identified for exactly the risks that they actually were, there would be no meltdown.
Yes, greedy idiots ran wild on the intake side, but what has caused our ultimate meltdown was the mislabeling of the risk of the financial instruments created out of them.
If the banks had not been able to resell the mortgages, this would not have gotten very far. Liar’s poker, hedge funds cheating each other, fake credit default swaps with no back up, led to massive destruction of thousands of high net individuals’ wealth, as well as destruction of much corporate wealth.
Now, who is left holding large amounts of cash? Their former potential competitors are sucked dry and cleaned out. A few must have dodged the bullet… who might they be?
Those left standing have more power than ever. Should be interesting to watch.
Dec 23, 2008 - 1:39 pm 62. s sommer:PS
In researching this mess since last Feb. I ran into a statement that Goldman Sachs stopped buying these CDO’s three years before they stopped selling them. And, at some point they could not find US buyers, so they concentrated on European and Asian buyers
Wish I could provide a link to that article, but maybe others also read it.
I am shocked by Paulson’s arrogance, and the banks’ lack of accountability under TARP.
Community banks and credit unions who did not participate in these stupid scams are screaming foul, as their unwise competitors now are “rewarded” by the government.
How does that make any sense? Only if you want to save your personal GS buddies? Hm.
Dec 23, 2008 - 1:47 pm 63. Steynianism 300 « Free Canuckistan!:[...] ROGER KIMBALL: “Who caused the global economic crisis? (Hint: it wasn’t George W. Bush)” …. [...]
Dec 23, 2008 - 1:58 pm 64. Loyola:Bush had to use all of his political capital on Iraq. Thus Bush had to concede the field to the Democrats in many other areas, such as reforming Fannie and Freddie.
Note to Republicans. If you fight Obama’s domestic agenda tooth and nail, he will likely concede the foreign policy field to you.
Dec 23, 2008 - 2:12 pm 65. Steven Earl Salmony:Does anyone have the feeling that our communication, here now and elsewhere in other moments, appears to be convoluted and confused because many too many of us do not yet recognize that the family of humanity literally lives within a modern version of an ancient edifice, the Tower of Babel? The new leviathan-like, distinctly human construction is not made of stone, but instead built out as a “house of cards”. This colossal, artificially designed structure is noticeably pyramidal in shape, organized as a patently unsustainable pyramid scheme, and named the global political economy.
For the people who are the primary beneficiaries of such a scheme, the global economy is effectively an object of idolatry. Nothing else really matters to them. These people are the self-proclaimed Masters of the Universe among us. They could not care less about the natural world, life as we know it for the children and future generations, the integrity of Earth. You can readily recognize the idolaters as the leading, self-righteous elders of my “Not So GREAT GREED GRAB Generation”. Endlessly consuming and hoarding resources as well as power-mongering are regarded as religious rituals.
Any thoughts?
Steven Earl Salmony
Dec 23, 2008 - 2:32 pm 66. Roderick Reilly:AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176
“”"”"”Pinch doesn’t care if the Times goes under: he has plenty. Like any liberal interested in the green economy, he’s someone that already has “his” and won’t be effected.”"”"”"”"”
I remember having dinner with a couple I no longer associate with. They were a prosperous pair of independent contractors, and should have been libertarian in their beliefs. They were, instead, stark, raving liberals in the modern, twisted sense of that word.
In the conversation we had that day, we talked about what Americans ought to aspire to or for. I suggested “prosperity” as one option. They were both offended by the term and the suggestion. No, seriously, they took offense. The word “prosperity” was a serious negative for them. I was dumbfounded. Here were these two people with a combined upper middle class income, a seriously nice house in a resort area, and — the kicker — a 44-foot power boat. THEY were offended by the idea of Americans wanting to strive for prosperity?
So, after I recovered from the awkward silence, I asked, “well, then, what SHOULD Americans strive for?”
The answer: “Adequacy. Yes, that’s it, Americans should strive for adequacy.”
ADEQUACY? Seriously, I aske them, adequacy? Like in a car, a TV, and an apartment? “Yeah, pretty much, yeah, like that.”
I was floored. The contempt these two “elitist wannabes” for the majority of Americans was disgusting. It was OK for them to have the good life, but it would be selfish for anyone but the true believers, or whatever.
Never have two people more acurately defined for me what modern “liberalism” and its practitioners are really, really like.
Dec 23, 2008 - 3:10 pm 67. Pat:Certainly, CRA, Fannie, Freddie, Dodd and Frank are wrong. And so are fiat currency and government bank insurance like the FDIC which has been causing ever widening banking recklessness since 1934. But these are still only symptoms, not root causes!
The root cause is the wrong premise that reason is impotent (as unleashed by Kant). If reason is impotent, then men must be ruled by the few who are somehow enlightened (as philosopher kings per Plato). And if reason is impotent, then it has nothing to say in the field of morality: morality must be relegated either to the irrelevant, or it must be practiced unquestioningly according to arbitrary edict – mystical or social (God says so or public good/society/fuhrer says so).
The Enlightenment, America, and the industrial revolution proved that reason is efficacious, and that when left free, self-reliance triumphs. Free markets never fail.
Ayn Rand proved that the basis of morality is reason: the true facts about man’s nature and the requirements of his life. Government-created inflation, business cycles and counterfeit money always fail.
The intellectuals began importing Kant here in the late 19th century. Today, virtually all schools, starting with Harvard, preach the impotence of reason, the necessity of “interdependence” among those who produce and those who only consume, and “access” by parasites to goods and services that producers have created.
Harvard is not the enemy. The ideas it teaches are. Stop supporting higher education until it teaches Ayn Rand along with Kant and Plato.
Dec 23, 2008 - 3:58 pm 68. Pat:To G Alston at #45:
While it is true that economics can be highly abstract and thereby “stump the best minds,” it is not true that economics is a floating abstraction as you imply. Just because economics deals with the man-made, does not mean it cannot be a science. Science is systematic knowledge about reality, and in the early 19th century under the ideas of men like J.B. Say, economics was a science.
Today’s economics profession is bankrupt because it embraces egalitarianism, the Marxist labor theory of value, the Keynesian notion that consumption is primary, and other fantastic rationalizations for statist interference like “pure and perfect competition” and its equally wrong foil: asymmetric information. Their models are repeatedly incorrect because their starting premises are repeatedly wrong.
For scientific, far more reliable economics, see: http://georgereisman.com/blog/ and his latest post: “Larry Summers: Heavyweight Centrist of Lightweight Leftist?”
Dec 23, 2008 - 4:30 pm 69. myth buster:Bush have gotten a BA from Yale, but he went on to get an MBA from Harvard. Bush’s problem is that he cares too much about what other people think, but he lacks the speaking ability to get them on his side.
Dec 23, 2008 - 5:04 pm 70. David Thomson:“I’d love to hear the excuses detailing why GWB should be exempt from the scorn above.”
George W. Bush is not exempt! I actually consider him to be a quintessential example of mindless “elite” thinking. Where do you think he got that big government, compassionate conservatism idiocy? Bush was severely damaged by his years at Harvard University. Ronald Reagan’s big advantage over him is that he attended Eureka College.
Dec 24, 2008 - 12:09 am 71. quasar:Does Harvard or Columbia have a G.E.D. program? One wonders when BHO has to speak w/o a teleprompter or notes. I’m still trying to scrape my jaw off of the floor from hearing Him extemporize about asthmatics only needing an “inhalator” to help the asthmatic inhalate! Ah, the wonders of the Ivy League. Maybe they should consider ESL programs.
Dec 24, 2008 - 6:53 am 72. Genecis:Where is Schumer in all this? Is he the homunculus sitting on Frank’s, among others, shoulder?
Dec 24, 2008 - 9:23 am 73. Bugs:It was me. Sorry, everyone.
Dec 24, 2008 - 9:37 am 74. Jim:The truth doesn’t matter any longer. Our national financial infrastructure has been destroyed, and we allowed it to happen by not holding the right politicians accountable. They did this so that they could win a silly election. The future looms, and it’s not a pretty sight! Get ready.
Dec 24, 2008 - 12:53 pm 75. Highlander:I was very, very involved in Bush’s 2000 election.
Dec 24, 2008 - 1:12 pm 76. Rubicon:Let’s face facts. His rather glaring deficits as a leader ie., he was either unable or unwilling to mobilse the population behind his policies, has directly resulted in the unlikly election of Obama and the left wing tsumani which is about to break over this nation. God help us all. Thanks for nothing Georgie.
Once again the New York Times has provided evidence it has become “the nation’s newspaper of record for insanity & outright lies.” Many want to defend practices that led to this situation. However, having been in banking during these times, I saw how the “Community Reinvestment Act” (CRA) was responded to by bankers. Most lived in fear a special interest group (ACORN) would “out” them if they did not make enough loans to the right people. Many had internal programs to calm their lending officers who immediately screamed “how can I make those loans when it is obvious the borrower will never be able to pay it back if home values decline even a fraction of what we are told they are worth?” Those lending officers were told its the law of the land & bad publicity was bad for the bank. So, they held their noses & made the loans.
Dec 24, 2008 - 6:43 pm 77. A tale of two pundits: Sowell vs Huffington - Southern Maryland Community Forums:The issue is NOT were loans made to minorities, as some want to portray this issue. The issue is, “why were loans made to those whose creditworthiness was lacking”? It mattered not what color of skin, what location, what religion, what political party or other sector. What mattered was, a federal government plan, pushed by those who used race as the hammer to force bad policies, & who used race to hammer anyone who wanted to introduce any sort of responsible controls.
Once again, social engineering proves it can destroy entire societies and nations.
It was NOT Bush or Republicans. This is one of many times they wanted regulation. They wanted “REASONABLE” regulation. All they got was the NYT & Democrats using race to vilify again, while others bought into the lies!
[...] financial meltdown.
Dec 25, 2008 - 1:34 pm 78. AST:It matters not a whit who caused the meltdown!
President-Elect Obama has already saved us, according to Adam Shell of USA Today! (See http://www.usatoday.com/money/markets/2008-11-30-obama-stock-market-economy_N.htm?loc=interstitialskip )
[Quote]President-elect Barack Obama hasn’t even moved into the White House yet. But Wall Street is already showering him with praise for injecting confidence into the battered psyche of investors and working quickly to hatch a plan meant to jolt the economy out of its worst funk in decades.. . .
So what has Obama done to restore hope to investors?
•He’s made the economy priority No. 1. Obama has said, “Help is on the way.” Wall Street believes him. “He’s willing to spend whatever it takes to solve the problem,” . . .
•He’s chosen a first-rate economic team. Obama is surrounding himself with experienced and well-respected economists and bankers to help find innovative ways to restore economic vitality.
•He’s moved quickly to fix things. Obama says he will have an economic plan ready the day he takes power. “The key is he said they wouldn’t be crafting policy when he takes office but signing (it) into law,” says Robert Barbera, chief economist at ITG. [End of Quote]
This was on Dec. 1, after the Dow had gone up for a week.
It seems plain now that what began as a benign idea for making home ownership more feasible has transmogrified into a hive of termites eating our banking system from within. Who’s to blame? We all are, for electing these idiots in the first place. There is evidence strewn throughout both parties and all administrations. Who had the last clear chance to prevent it? What difference does it make? There’s nobody to be sued who could cough up as much as one per cent of the losses.
One thing is clear. Any politician or businessman who mentioned increasing home ownership through government policy again should be the object of a public stoning.
Dec 25, 2008 - 9:12 pm 79. Ralph Eastland:Why blame George or anybody . We are certainly responsible for the world we live in and should do something to improve the economy by working hard and creating wealth for ourselves and country. There are many who think that getting paid for doing nothing is a legitimate existence and they are also a part of the problem, and they are not all CEOs. It is the culture of privilege that has brought us to this place. If we all produced more than we consume then everyone would be better off.
Dec 25, 2008 - 10:40 pm 80. Cybergeezer:So, basically, “We The People” are being mugged by the media, big business, the United Auto Workers Union, and “Entitled” Democrats. This sets a great precedent for future generations of entitled Americans, including illegal immigrants, all radical “religions”, and everyone who wants to marry their favorite animal.
Dec 26, 2008 - 8:05 am 81. eric:Oh, by the way; The Constitution does not say that America has to accommodate every perverted ideal mankind can devise.
Fannie and Freddie were not the problem.
It was not political either.
LOW LOW interest rates [which by the way should be illegal. Interest rates should float and not be manipulated by the gov] and securitization of loans from banks and mortgage brokers to wall st. caused these problems.
Bubbles happen. 90’s internet companies are an example.
People smell money and when money is CHEAP(interest rates) people then begin to gamble. Great depression was partly due to people wagering leverage.
Dec 26, 2008 - 9:00 pm 82. mac:The tinkering with the economy has its roots in a politic of subversion. The ungainly gain of political power through the redistribution of wealth by stealth. What better way to steal trillions right from under our noses and give it to the undeserving now bought and paid for constituency. The end justified the means…buying political power. You think they really care about underhanded tactics to get elected or take your tax dollars ? The ‘Chicago Political’ fund raising machine that elected Obama is nothing more than yet another manipulation of the system to maintain and grow an electoral power base spawned by FDR.
Dec 27, 2008 - 1:07 pm 83. Bugs:Does the “market” require more regulation rather than less? Can you regulate human fallibility and weakness out of the system?
Economics, it seems to me, is all about character. It should be studied and taught as a branch of psychology.
Dec 29, 2008 - 1:23 pm 84. Steven Earl Salmony:Why not lay blame for the current economic catastrophe and the looming environmental calamity where it belongs: at the feet of the economic powerbrokers who organize and manage a colossal pyramid scheme, a modern representation of the ancient Tower of Babel? Is the pernicious denial of anthropogenic global warming and the human-driven destabilization of Earth’s climate not primarily for the purpose of preserving the selfish material interests of a few wealthy and powerful people, and their minions?
Let’s look a bit more closely at the scandulous ‘business’ of Bernie Madoff, confidence games, Ponzi schemes and other financial vehicles for funneling, accumulating and concentrating billions of dollars in unearned wealth into the hands of a tiny minority of people who comprise the top of the global economy.
There are many minions of the wealthy and their bought-and-paid-for politicians who “spread the word” of these schemes. Con men operate pyramid schemes. They assure “plausible deniability” and “legal cover” for all that is said and done.
Only a telling of the truth about what they are doing is forbidden. That is the one and only thing that is verboten. Do not break their vow of silence by telling what is true about the perpetration of the schemes {ie, the only games in town, so they say}, because the “houses of cards” out of which a modern Tower of Babel is constructed immediately is exposed as fraudulent and patently unsustainable. These pyramidal constructions can withstand any force except that which is presented by speaking out loudly and clearly about what is happening in these enterprises. As soon as light of what is true was shed on Bernie’s scheme, the house of cards he had constructed fell.
Bernard Madoff may be the first of my “Not So GREAT GREED GRAB Generation’s” kingpins to find that his “house of cards” has collapsed; but I dare say, Bernie will not be the last. There are other kingpins and many too many minions ready, willing and able to play along in what looks like the greatest self-enrichment scam in human history.
Why not say that greed is not good and mean it? Why not assign value to personal honesty, accountability and transparency?
Steven Earl Salmony
Dec 31, 2008 - 2:21 pm 85. Roger’s Rules » A bad idea whose time has come–to go away!:AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176
[...] who believe that “all sin originates with the Community Reinvestment Act” (on which see here), but really he should pause to consider the disatrous effects of that piece of government [...]
Jan 1, 2009 - 1:23 pm 86. David S:The global economic crisis is a crisis of confidence, as well as a consequence of the collapse of the US housing bubble. The fundamental cause? Fiat currency, which we can blame on good ol’ Dick Nixon. This allowed the Federal reserve and US government to print money and run up debt at unprecedented rates.
Reagan-Bush policies on the economy have reduced the purchasing capacity of the average American, who at the same time was encouraged to purchase a home. With dwindling purchasing power and skyrocketing housing prices, many citizens expected that only a home purchase could secure their economic future.
The fundamental issue that caused the crisis, however, was not the issuance of these loans per se, but the fact that the risks involved were not disclosed to the ultimate holders of the mortgages. This is a failure to regulate. Compounding the problem was a Fed that continued to reduce interest rates in an effort to prevent a housing price collapse, ignoring the obvious folly of such a plan – rates can only be reduced for a finite period of time.
An economic policy of massive federal debt, coupled with the collapse of the middle class under Reaganomics, is the ultimate underpinning. A failure to regulate financial institutions allowed the problem to grow to a point where the current collapse was unavoidable.
DS
Jan 1, 2009 - 1:50 pm 87. Quote Of The Day (Part Deux) - Pejman_Yousefzadeh’s blog - RedState:[...] who believe that “all sin originates with the Community Reinvestment Act” (on which see here), but really he should pause to consider the disatrous effects of that piece of government [...]
Jan 3, 2009 - 12:46 pm 88. ChooseTheHero.com » Blog Archive » Quote Of The Day (Part Deux):[...] who believe that “all sin originates with the Community Reinvestment Act” (on which see here), but really he should pause to consider the disatrous effects of that piece of government [...]
Jan 3, 2009 - 1:07 pm 89. Roger’s Rules » My favorite American:[...] those losses–losses, by the way, which were caused as much by such Democratic policies as the Community Reinvestment Act as anything. And as for Mr. Gibbs’s disingenuous offer of a cup of decaf coffee, Mr. Santelli [...]
Feb 21, 2009 - 7:26 am 90. Roger’s Rules » Scylla and Charybdis, or regulation, risk, and the passion for “fairness”:[...] and overbearing regulation.” The problem — well, one problem — with the Community Reinvestment Act was that it stymied the operation of the market by refusing to acknowledge and price risk [...]
Apr 3, 2009 - 2:27 pm