War on Prosperity
Posted by aogMonday, 24 May 2010 at 08:26 TrackBack Ping URL

Spain finally admits that it’s “green” policies are a financial disaster. While it wasn’t the NY Times reading public’s knowledge, surely our President (or his advisers) knew this when President Obama endorsed duplicating those policies here in the USA.

But, anyone who objects to this sort of government intervention is just an anarchist who wants no regulation at all. Better to fail on purpose.

Comments — Formatting by Textile
Harry Eagar Monday, 24 May 2010 at 13:50

As I understand it, Spain’s non-green policies also have been a disaster. Its unregulated real estate development approach seems worth a sneer.

So I am having a little trouble seeing your point.

Annoying Old Guy Monday, 24 May 2010 at 14:34

Spain hardly has an unregulated real estate development approach. You seem to be confusing “regulated to my desired level” with “unregulated”. These are not the same thing.

Some elements of my point are

  • The failure of the “green” policies are of particular significance because the current Administration and Congress want to specifically emulate them and hold them out as examples. I have not heard that of Spain’s other policies, except in general “let’s fail like Europe” rhetoric.
  • The “green” policies were a significant part of the “stimulus”, demonstrating in yet another way the failure of that intervention.
  • Most importantly, that our current leadership has good reason to be aware this failure yet still wants to implement the policies. One must conclude they are either completely cocooned from reality, or they don’t see that sort of failure as a problem regardless of their claims.
erp Monday, 24 May 2010 at 15:09

Another feature might be that the failure of our economy is the goal. No other scenario makes sense.

Annoying Old Guy Monday, 24 May 2010 at 15:25

Hey, the recent health care legislation encourages small businesses to stay small and not hire — another win for government regulation in the War on Prosperity.

erp;

I go back and forth. Having seen some of these people and listened to them, I think many of them simply can’t conceive of themselves being wrong about anything. Whatever happens, it’s the fault of the capitalist wreckers, not their own policies.

erp Monday, 24 May 2010 at 17:58

I hope you figure it out soon because from here if they’re not trying to ruin us, what in the expletive deleted are they trying to do and in the case of Europe, there isn’t a capitalist extant to blame anything on. The more read about Greece, the crazier it is. People get paid for 14 months a year!!

My kids were planning a trip to Greece this summer, but they decided to go to the Canadian Rockies instead. Grandma breathed a sigh of relief with only grizzlies to worry about. I doubt they’re the only ones who’ve decided to vacation elsewhere.

Harry Eagar Monday, 24 May 2010 at 23:04

Well, it would be hard to argue that it was regulated to anybody’s desired level, wouldn’t it?

Annoying Old Guy Tuesday, 25 May 2010 at 09:30

I think you are making a category mistake by using the word “level”, as if any set of regulations were functionally equivalent as long as they were the same “level”. What happened to all that rhetoric of yours about smart and appropriate regulation? Have you reverted to the “it’s all good” view of proper regulation?

Because of that, I find your question nonsensical. I am not even sure I would argue that it was regulated improperly, as it’s quite possible the cause was elsewhere and “better” regulation would not have improved the end result. It would be like cinching in your belt instead of going on a diet to reduce stomach overhang.

Bret Tuesday, 25 May 2010 at 09:59

It would be like cinching in your belt instead of going on a diet to reduce stomach overhang.

I dunno, works for me! :-)

Harry Eagar Tuesday, 25 May 2010 at 12:19

Results count with me. Within limits of decent behavior, I don’t much care how I get there as long as I get there.

Even some prominent Chicago School ideologues, for example, looked at Nevada housing and thought, hmmm, that isn’t working out as well as the guidebook said it would, is it? Or you could go to Spain and draw a similar conclustion, though the guidebook is different.

If you don’t hang around farmers, you may not know about the phenomenon of tractor envy. Most American farms have bigger tractors than efficiency would suggest. When I used to hang around farmers I used to tease them about having to find a neighbor with a littler tractor to drag their big ones out of the mud in the spring. At the same time, the USSR claimed to produce 100K tractors a year, but year over year, the number of tractors in the fields never went up.

From my point of view, both systems had a goal of getting tractors into fields, and neither one worked the way its proponents claimed it would.

We have heard much moaning about allowing people to sign no-down mortgages, but millions of GIs did so two generations ago, and the experience wasn’t so bad.

Annoying Old Guy Tuesday, 25 May 2010 at 12:32

Within limits of decent behavior, I don’t much care how I get there as long as I get there

Your viewpoint is far too static. Wherever it is you got to, you’re only there for a moment before moving on someplace else. You don’t see a difference in going to Times Square via a cab, or being dropped out of an airplane without a parachute? In both cases, there is a moment in which you are in Times Square in good health. It’s the future that differs.

I hang around farmers all the time. I grew up with farmers. SWIPIAW is a farm girl and all her relatives are farmers. We own actively farmed land. You seem to have this presumption that no one can have experience similar to yours yet draw different conclusions. You should try envisioning a greater diversity of thought.

I don’t see how the American system didn’t work as its proponents claimed. I can see how it didn’t work as you think it should, but that’s not quite the same thing (see previous paragraph).

P.S. I don’t hear moaning about people signing no-down mortgages. I hear moaning about massive government intervention in home mortgages. That’s certainly my view.

AVeryRoughRoadAhead Wednesday, 26 May 2010 at 16:21

As I understand it, Spain’s non-green policies also have been a disaster.

Indeed, the IMF says that the Spanish economy is doomed to collapse!! Doomed, I tells ya… Actually, what the IMF says is that the Spanish economy will collapse very soon unless certain changes are made - but IMO those changes are politically impossible for the Spanish gov’t to implement, prior to a collapse.

So yeah, doomed.

We have heard much moaning about allowing people to sign no-down mortgages, but millions of GIs did so two generations ago, and the experience wasn’t so bad.

The difference, I think, is that the VA strictly capped the max debt-to-income ratio that the veteran could carry, and they were fixed-rate loans.

In the latest real estate mania, there were people getting zero-down, teaser-rate, no doc loans that had 50%+ DTIs with the teaser rate. You can be pretty certain, as an objective observer, that roughly 100% of those kind of loans are going to blow up.

Annoying Old Guy Wednesday, 26 May 2010 at 17:19

Let’s remember that the VA didn’t securitize the loans nor did federal government regulations make them the preferred assets for bank reserves.

Harry Eagar Wednesday, 26 May 2010 at 18:56

Ah, so. The problem wasn’t the borrowers, it was the lenders.

Annoying Old Guy Wednesday, 26 May 2010 at 19:34

I would say the regulatory environment in which the lenders operated.

Harry Eagar Thursday, 27 May 2010 at 18:22

Let’s see, the genius of the market invents securitization, with no public input, and lenders who aren’t even in the United States buy the securities.

So it must be the gummint’s fault.

Oh yeah, and guys like Rubin, who are paid multimillions, recognize that the loans are nogoodniks but say they cannot prevent their private businesses from participating, although no law or regulation requires them to touch them.

Yeah, let’s blame regulation.

Annoying Old Guy Thursday, 27 May 2010 at 20:22

The genius of the market invents securitization, then the government abuses it (via Fannie Mae / Freddie Mac, government chartered rating agencies, and bank asset regulation) resulting in a crash. Lenders around the world race to get in on the action.

although no law or regulation requires them to touch them

Not required but government regulation very strongly encouraged it by making such financial instruments top grade assets for bank capitalization regulations. The government intervenes in the market front, back, and center, so yeah, let’s blame the market.

Harry Eagar Friday, 28 May 2010 at 11:31

I think the lenders were the guys who bought the paper. No regulations encouraged them to buy it.

Annoying Old Guy Friday, 28 May 2010 at 11:50

On the contrary, the regulations concerning capital requirements strongly encouraged such purchases because such assets were automatically valid, no further filing / registration / etc. required. This is even more so because of the government created cartel of ratings agencies.

AVeryRoughRoadAhead Friday, 28 May 2010 at 20:05

It wasn’t just the gov’t that abused securitization - it was also the lenders and some purchasers.

Why did the supporting documentation for each MBS run to thousands of pages?!? Obscuration, plain & simple. In fact, the structure of each instrument was (deliberately and unnecessarily) so arcane, and contained so many variables, that for all practical purposes they were impossible to reverse-engineer. That’s some major-league chaff.

And, although it’s true that by 2002 the ratings agencies were captured by the very firms whose offerings they were supposed to be evaluating, it’s also true that, absent a few gullible, naive and/or lazy local, state, and pension public officials, everybody knew that the ratings agencies were being gamed.

The buyers played along because many of them were allowed to purchase only investment-grade instruments for their funds, and rating agency malfeasence and misrating made “alt-A” securities, with their slightly-higher yields and INSANELY-HIGHER RISK, technically acceptable for the buyers.

Governments at all levels skew market signals and incentives ALL OF THE TIME. But bubbles and manias are fairly rare. Therefore, gov’t action may cause major market distortion, e.g. California auto insurance rates, but it’s not a given. We must certainly blame the drug dealers for enabling addiction, but that doesn’t let the addicts themselves off the hook - “lenders around the world race[d] to get in on the action” doesn’t sound like the pure and chaste being dragged kicking and screaming to their debasement.

Further, since we KNOW FOR A FACT that the U.S. Congress & White House had been captured by Wall Street along with the ratings agencies, since at least 1999, can we really separate “gov’t” action from “market” action? In this instance, the gov’t was being directed by some of the largest firms comprising this particular market.

In other words, it was ALL market action. We can blame public officials and institutions for being captured, compromised and corrupted, but we cannot reasonably claim that said gov’t officials and institutions “created” the situation, since they were acting on the specific behest of those who did create the situation. (But although desired, it was unwise, and those prime actors have gotten their hubristic comeuppance, since all of the largest American retail banks and investment banks are insolvent1 - although many are currently and indefinitely staggering on as the living dead.)

1 Yes, including Masters-of-the-Universe, smartest-guys-in-the-room Goldman Sachs, who would have collapsed in 2008 if not for the Federal Reserve Bank of New York. In the fullness of time, we may yet see criminal charges brought with regard to the peculiar manner in which that situation was handled.

Annoying Old Guy Friday, 28 May 2010 at 21:07

I didn’t write that government abused securitization. I wrote that government gamed the system in a way that strongly encouraged abuse.

Given the obfuscation of the MBS, the rating agencies should have rate them as “NR” — not rated.

I also don’t claim that government intervention creates bubbles. These arise naturally as an unfortunate side effect of a market. What I claim is government intervention turns minor bubbles in to major catastrophes. The government is an amplifier and almost always amplifies the worst of the market, not the best.

Further, since we KNOW FOR A FACT that the U.S. Congress & White House had been captured by Wall Street along with the ratings agencies, since at least 1999, can we really separate “gov’t” action from “market” action?

Yes, even though I find your “fact” non-factual. The idea that any single faction can capture two branches of government is ludicrous.

In other words, it was ALL market action.

Utterly wrong. But even if so, what solution would you propose? More government to be captured? Perhaps you could look at this and catch a glimmer of the libertarian position, which is (partially) that if such capture is inevitable, the best one can do is limit the damage by limiting the government to be captured. Yet so many people look at the tools used by these “bucket shops” and say “let’s build bigger and stronger tools for next time”. That strikes me as nigh insane.

AVeryRoughRoadAhead Friday, 28 May 2010 at 23:10

What I claim is government intervention turns minor bubbles in to major catastrophes. The government is an amplifier and almost always amplifies the worst of the market, not the best.

Agreed.

The idea that any single faction can capture two branches of government is ludicrous.

And yet, it was done.

You yourself have described how Congress thwarted GSE reform, they’ve also voted to hand over TRILLIONS OF TAX DOLLARS to Wall Street and the banking industry, and the failures of the Bush and Obama admins to rein in Wall Street are obvious, even to the casual observer.

…if such capture is inevitable, the best one can do is limit the damage by limiting the government to be captured.

Agreed.

Yet so many people look at the tools used by these “bucket shops” and say “let’s build bigger and stronger tools for next time”.

We don’t have to imagine a regulatory structure that would prevent banking-industry bubbles and implosions from becoming so large that they endanger the entire national economy - we merely have to go back to the regulatory structure that existed in 1998, a mere dozen years ago, before Phil Gramm and Hank Paulson were successful in hacking away “antiquated deadwood, superseded and made spurious by the march of progress and modern understanding. Besides, it’s different this time.”

I mean, it was only FOUR YEARS between the SEC’s repeal of the net capital rule, and the resulting banking industry meltdown. And yes, it was causation and not just correlation.

AVeryRoughRoadAhead Saturday, 29 May 2010 at 00:51

Well, here’s something sensible that the President has said - abominable, perhaps, but also unflinchingly realistic:

BP Suspends Top Kill Operation a Second Time, by Clifford Krauss - New York Times - [Mr. Obama] said oil and gas from beneath the Gulf, now about 30 percent of total domestic production, would be a part of the nation’s energy supply for years to come. “It has to be part of an overall energy strategy,” Mr. Obama said. “I mean, we’re still years off and some technological breakthroughs away from being able to operate on purely a clean-energy grid. During that time, we’re going to be using oil. And to the extent that we’re using oil, it makes sense for us to develop our oil and natural gas resources here in the United States and not simply rely on imports.”

Addendum: OK, the link now goes to a similar story, but with additional reportage by another individual, and the above quote’s gone. Maybe ‘cause it clashes with the “I feel your pain” storyline.

Some non-sensical stuff:

Placing the Blame as Students Are Buried in Debt, By RON LIEBER | May 28, 2010 | NYT

Like many middle-class families, Cortney Munna and her mother began the college selection process with a grim determination. They would do whatever they could to get Cortney into the best possible college, and they maintained a blind faith that the investment would be worth it.

Today, however, Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she’s been enrolled in night school, which allows her to defer loan payments.

This is not a long-term solution, because the interest on the loans continues to pile up. […]

Meanwhile, universities like N.Y.U. enrolled students without asking many questions about whether they could afford a $50,000 annual tuition bill. […]

The balance on Cortney Munna’s loans is about $97,000, including all of her federal loans and her private debt from Sallie Mae and Citibank. […]

Cortney could move someplace cheaper than her current home city of San Francisco, but…

She recently received a raise and now makes $22 an hour working for a photographer. It’s the highest salary she’s earned since graduating with an interdisciplinary degree in religious and women’s studies. [Emph. most definitely added].

While I am sympathetic to many of the points made in the full article… How on God’s green Earth did Cortney or her mother think that an interdisciplinary degree in religious and women’s studies would EVER be worth paying $50K/yr, and racking up an M.D.-worthy $100K in student loans????

A graduate degree in nuclear or petroleum engineering, sure, I can see that. The aforementioned medical degree. An air traffic controller or maybe a commercial airline pilot…

Oy.

Annoying Old Guy Saturday, 29 May 2010 at 07:52

And yet, it was done.

That’s what I dispute. For instance, in contrast to your view that the Glass-Steagall repeal was at the root of the problem, I find it more plausible that it was the actions of the FMs that were the amplifier. Absent that, I find it unlikely that this crisis would be of much note. On the other hand, given that activity, a crash such as we have had was inevitable regardless of what regulations were passed or repealed.

they maintained a blind faith that the investment would be worth it

There you go. It’s one of the reasons I tend to disparage college education despite my own experiences — it perpetuates the myths that a college education is beneficial for everyone in all circumstances, and that it is college, not education, that provides the benefit. It really bugs me when I hear people say “you have to go to college” when it clear they have no idea what their child would study in college.

I would note also that many have claimed (and I find plausible) that this is just another bubble created by massive government intervention, driving up the price while simultaneously encouraging suckers to get in to the action.

AVeryRoughRoadAhead Saturday, 29 May 2010 at 09:43

I find it more plausible that it was the actions of the FMs that were the amplifier.

The one change that I think was the biggest contributor to allowing the end of the housing mania to be a catalyst for the implosion and bankrupting of the entire national banking system, (which is what’s happening, in super-slo-mo), rather than simply a really, really big problem à la the S&L Crisis of the ‘80s, is the SEC’s repeal of the net capital rule. That changed juggling-with-running-chainsaws to juggling-with-lit-dynamite. Ka-BOOM!!!

If banks had been limited to 10:1 leverage, then a)they couldn’t have financed all of those silly end-of-the-bubble loans, therefore reducing the severity of the crash, (although also moving the crash forward from 2008, to perhaps 2006), and b) some of the major banks could have survived intact and independent.

By allowing financial institutions to leverage up to 60:1, and in the case of the GSEs to 100:1 or more, it set the stage for even an ordinary business-cycle downturn to be catastrophically damaging… And this ain’t no ordinary downturn, any more than the Poseidon Adventure was a routine cruise.

Other actions and policies enabled the bubble, and the crash, but it was removing the leverage limits that caused a disaster to become an unrecoverable catastrophe.

Three Mile Island vs Chernobyl.

Harry Eagar Saturday, 29 May 2010 at 13:43

Yeah, why DID Congress repeal G-S? Did some free-market theorist claim it would be an excellent idea? Did some free-market theorist believe it WAS IN THE WAY?

Annoying Old Guy Saturday, 29 May 2010 at 16:19

is the SEC’s repeal of the net capital rule

I don’t think that’s so clear. What difference did the capital rule make if the underlying capital was bogus? That was the real problem, that MBSs were rated AAA and automatically counted as capital. One can see this in the collapse of AIG, which had roughly equal losses from its unregulated and highly regulated investments. In both cases, it was the MBSs that were the problem, not the capital ratio.

Yeah, why DID Congress repeal G-S

At this point, I would say

  • Because corporatist interests paid off then President Bill Clinton and many other members of his party
  • So that MALists like Congressman Barney Frank would have a convenient scapegoat for the easily distracted when the FM house of cards finally ran aground.
AVeryRoughRoadAhead Sunday, 30 May 2010 at 07:42

What difference did the capital rule make if the underlying capital was bogus?

Because these instruments aren’t worth nothing, they’re just worth significantly less than face value. So, the lower the leverage, the less the hurt of the lower value of the MBS.

Harry Eagar Sunday, 30 May 2010 at 11:48

‘paid off then President Bill Clinton and many other members of his party’

I guess you imply Gramm did it for free, eh?

‘lower the leverage, the less the hurt of the lower value of the MBS.’

A shrewd remark. Nothing can save a bank leveraged 30:1 if the market swings 3%, and all markets swing that much. Some of those banks were leveraged a lot more than 30:1.

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