Observations and inanities by a second-shift assistant supervisor in the Puppy-Grinding division of the Evil Atheist Conspiracy® (our motto: "Sure it's cruel, but think of the jobs!"), your host, Brent Rasmussen.
Got a few trillion to spare?
So, remember the S&L Crisis of the late 1980s? I do. It was a direct result of the deregulation pushed by Reagan which resulted in unwise real estate lending. In the end, it cost American taxpayers something like $160 billion to clean up the mess (that's about $270 billion in today's money). Notable names associated with this debacle include John McCain and Neil Bush.
Well, guess what happened this morning?
WASHINGTON -- U.S. federal regulators outlined their takeover of Fannie Mae and Freddie Mac Sunday morning, including control of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock.
The plan, outlined jointly by the Treasury Department and Federal Housing Finance Agency, also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.
OK, this is basically S&L Crisis, Part II: Revenge of the Greedoids. You, and me, and every other US taxpayer are now on the hook for trillions of dollars of bailout money. Why? Deregulation and unwise real estate lending.
Yes, that is a gross oversimplification. But it is essentially true, and even one of the men responsible said so last year. Between them, Fannie Mae and Freddie Mac control something like half of the mortgages in the US, to the tune of about $12 trillion. Now, not all of those mortgages are going to go 'bad'. But it'll probably take trillions of dollars to clean this mess up.
Why do it? Well, the argument is that this is just too large a component of the US economy to allow things to spiral down. So the government has stepped in to secure 'preferred stock' in these two entities - the kind of stock held by other banks and foreign governments - in order to cushion the impact of the ongoing credit crisis.
But there is a problem in doing this. From the Wikipedia entry on the 2007 Subprime Mortgage Crisis:
A taxpayer-funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans.[68]Additionally, there is debate among economists regarding the effect of the Community Reinvestment Act, with detractors claiming it encourages lending to uncreditworthy consumers[69] [70] and defenders claiming a thirty year history of lending without increased risk.[71][72][73]
Some have argued that, despite attempts by various U.S. states to prevent the growth of a secondary market in repackaged predatory loans, the Treasury Department's Office of the Comptroller of the Currency, at the insistence of national banks, struck down such attempts as violations of Federal banking laws.[74]
Yeah, you got that right: the feds *stopped* individual states from enacting legislation which would have limited the damage.
Your tax dollars at work. In the service of the big national banks who wanted to operate under the easier rules on the Federal level.
And now, we're going to wind up with the tab for the bulk of the mess. And, in doing so, will once again establish that we're not willing to let big businesses suffer the consequences of their errors in judgment (in this case the monetization of bundled subprime mortgages). I hold the current administration predominantly responsible for this debacle, just as I held the Reagan administration predominantly responsible for the failure to regulate the banking industry in the 1980s, but both political parties share some of the blame for refusing to stand up to the special interests who wanted to be insulated from their bad business practices.
I believe in the free market. But intelligent regulation has to temper the excesses of business. We learned that lesson in the 1930s. It looks like we're going to have to learn it again.
Jim Downey
(PS: yeah, I do have a degree in Economics. It doesn't usually come up here, but I actually understand this stuff.) Cross posted to my blog.
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Now I'm really confused about the S&L Crisis
Jim, you say you consider the S&L Crisis a direct result of the deregulation pushed by Reagan, but the Wiki article you link to doesn't seem to support that (at least, not as far as I can see.) The deregulation measures that article talks about were mostly taken under the Carter administration. I understand that later deregulation measures taken by Reagan contributed to the problem, but based on the article you linked to, I don't see how Reagan was primarily responsible.
According to the Wiki article, the S&Ls were already in crisis, which is why the Carter administration took the deregulation measures that it did. They were attempting to keep the S&Ls afloat so the the government wouldn't have to take them over. Reagan's measures were an extension of that, and those measure ultimately failed. So perhaps Reagan's (and Carter's) measures were wrong, and didn't fix the problem, but it seems that the problem was already there.
The deregulation measures may have worked with oversight, and both Carter and Reagan are responsible for not providing that in the S&L Crisis.
But I'm particularly confused by your saying that the Bush administration is primarily responsible for this current crisis, based on the Wiki article you linked to. Your quote from the 2007 Subprime Mortgage Crisis article implicates the Community Reinvestment Act, which was signed into law in 1980 by everybody's favorite, President Carter.
But you left out the first sentence in the paragraph you quoted:
Regulation Q of that Act, which allowed the Federal Reserve to regulate interest rates in savings accounts, was repealed in 1980, also by President Carter. The rest of the Act was repealed in 1999 by President Clinton.
I don't have a degree in economics, but it looks to me (based on the articles you linked to and a little additional reading) that there is plenty of blame to go around for previous and current
Crisises,Crisii...er, problems. Reagan and Bush certainly hold some responsibility, but so do Carter and Clinton (as well as the members of Congress who, as you say, didn't stand up and do the right thing). At least, that's how I see it. Can you elaborate on why you think Reagan and Bush are primarily responsible?Rob Miles
--
There are only 10 types of people in the world;
those who understand binary and those who don't.
Quickly . . .
Hey, just let me blame the Republicans, OK? ;)
OK, kidding. You're right that the legislation changes do date back to Carter, and I have no desire whatsoever to defend him (I voted for the Other Guy each time he was on the ballot). But in both the Reagan and Bush 43 administrations, the political aspect was paramount - enforcement of remaining regulations was lax, at best, and there was a concerted effort to get government out of the way of Wall Street. Democrats, both in Congress and in the White House, do deserve a lot of credit for the problems, what with pushing for easy credit to get more people into homes - a laudable goal, but it set the stage for the housing bubble.
This is why I'm *not* an economist (and that off-hand quip about having a degree should be excised, but I'll leave it as part of the record) - a proper economist would have taken at least a dozen pages just to summarize all the bits and pieces of the puzzle. I didn't have the stomach for that by the time I completed my degree, and so decided to do something else with my life.
Jim Downey
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Like Science Fiction? Read *or listen to* my novel, Communion of Dreams, for free.
I definitely understand
I'd planned to get a degree in Psychology until I discovered that I'd have to do post-graduate schooling to make any real use of the degree. Instead, I dropped out of college and joined the Army.
During this process I read on The Concise Encyclopedia of Economics an article by a guy named Bert Ely. I don't know anywhere near enough about this stuff to know if the points he makes are valid or not, but it sounds good and only took me most of the day of reading it, rereading it, looking up definitions, reading it again, and having someone explain what something he said meant.
I took two semesters of Economics: I aced the 101, and was totally and completely lost in (and failed) 201.
Rob Miles
--
There are only 10 types of people in the world;
those who understand binary and those who don't.
The funny thing is . . .
. . . that I had actually thought of going into international banking (my other degree is in German) until I saw what it did to a buddy of mine who was a couple years ahead of me in college (he went right into it with one of the big banks at the time, working on his MA simultaneously). Then I wanted no part of it, though I was enjoying the economics.
Back to the original topic: I do still blame Reagan and Bush 43 for allowing the crises to come to a head. Yeah, Congress was complicit (especially with the current crisis - Fanny and Freddie were buying congresscritters wholesale for the last fifteen years or so), but in both cases the administrations were approaching things from a free-market position and went out of their way to allow business interests to do what they wanted. And that was my point: we need to have some regulatory agencies in place, and the regulations enforced. I threw in the bit about having some background in econ simply because the subject comes up here (and on my personal blog) so seldom that I wanted to give people an idea that I had some basis for an informed opinion.
Jim Downey
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Like Science Fiction? Read *or listen to* my novel, Communion of Dreams, for free.
Whadaya know, an actual discussion!
Thanks for the additional information, Jim. I may not entirely agree with the amount of blame you give them, but I certainly understand more now about the whole situation than I did before, and can confidently say that I agree that they share a good bit of the blame (but so do others, specifically past, non-Repbublican presidents).
And though I don't expect any less from you, I do appreciate that we could discuss our differing view of all of the factors involved (at least as I understand them).
Rob Miles
--
There are only 10 types of people in the world;
those who understand binary and those who don't.
Shhh!
I won't tell anyone if you won't. ;)
Jim Downey
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Like Science Fiction? Read *or listen to* my novel, Communion of Dreams, for free.
"Between them, Fannie Mae
"Between them, Fannie Mae and Freddie Mac control something like half of the mortgages in the US, to the tune of about $12 trillion. Now, not all of those mortgages are going to go 'bad'. But it'll probably take trillions of dollars to clean this mess up."
Trillions? Really? Do you have a source for this prediction other than "I have a degree in economics"? You're predicting that 10% or more of these loans will go bad, or that interest rates on these mortgage backed securities will go up after the government starts guaranteeing them. Both of these outcomes seem unlikely.
Clearly this is a bad situation, and the creation/deregulation of Fannie and Freddie was not a good idea in the first place. Fannie and Freddie should be dismantled or heavily regulated--if there's an implicit guarantee of their loans, then there should be appropriate regulation to make sure this guarantee is less likely to be used.
Looking more broadly . . .
Fannie and Freddie wound up with some of the worst mortgage loan portfolios. From the WSJ:
So yeah, we may see upwards of 10% of the overall mortgage-backed financial instruments fail. And looking more broadly, this is having repercussions throughout the economy - just Friday the FDIC took over Silver State Bank in Nevada (which until July had on its board Andrew McCain, the son of John McCain). From the article:
There are now some 117 banks on the FDIC's list of "troubled banks" - the highest number ever reported - and the FDIC Chairperson expects things to get worse for several reporting quarters to come. For the first time, the FDIC is expected to start tapping into lines of credit from the Treasury to supplement funds raised through fees on member banks.
I'm not saying that we're in any kind of a financial melt-down. But this is a very serious situation, and I think that it is prudent to expect things to get significantly worse. And without even having to read too much between the lines, you can see that government officials and experts agree. Will it amount to a trillion or more? Possibly. This is much larger in scope than the S&L Crisis was, and that amounted a quarter-trillion when all was said and done. Hence my cautionary prediction.
Jim Downey
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Like Science Fiction? Read *or listen to* my novel, Communion of Dreams, for free.
And furthermore . . .
. . . here's something from the WSJ dated tomorrow:
Read the whole thing.
Jim Downey
Hat tip to ML for the link.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Like Science Fiction? Read *or listen to* my novel, Communion of Dreams, for free.
Good write up Jim
Jim,
An excellent write up. I was youngish so don't know much about the S&L crisis but do remember it causing much concern with my parents and the country.
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