Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch...

[BrainGlutton]

@Spartydog

Just to be snide, if there is a massive meltdown (as if it already isn’t massive) probably McCain and Obama will both pull out of the race citing the fact that they don’t want to touch this mess.

Didn’t stop Reagan in '80.

[BrainGlutton]

@gonzomax

Just think what a mess it would have been if the Repubs had been able to privatize Social Security.

Actually, that might have staved off this meltdown for another year or two. Which, whatever W might have told you, was actually the whole point of the privatization scheme – to give Wall Street a badly-needed infusion of cash. See here and here. There was certainly no other reason. The privatization scheme would not have affected the projected shortfall of SS tax receipts or had any net effect on the overall solvency of the system. Furthermore, the system as it stands is not financially unsound:

In comparison with the problem of healthcare cost inflation, the alleged crisis of social security is puny. Claims of a “crisis” revolve around two dates: 2017, when the social security surplus runs out and the programme becomes a pure pay-as-you-go system based on annual payroll taxation; and 2041, when payroll tax revenues fall short of expenditures. Even in 2041, social security will be able to pay most of its obligations. The crisis, then, is nothing more than the fact that taxes will have to be raised or benefits cut before 2041 in order to supplement a mostly sound system. (Great confusion is spread by the phrase “unfunded liabilities.” The only programmes with “unfunded liabilities” are those, like social security, paid for by dedicated taxes, in this case a payroll tax. This permits calculations of future divergences between dedicated tax revenues and expenditures. The Pentagon budget is paid from general tax, so the concept is inapplicable.)

The use of dates like 2017 and 2041, moreover, gives a specious precision to claims that in fact are extremely dubious. This is underlined by the fact that the US government regularly revises the date of the alleged social security apocalypse, as it reconsiders its assumptions. The “intermediate” calculations on which current estimates are based are almost certainly unrealistic. They assume a low rate of productivity growth in the US over the next half century of 1.7 per cent. This is only slightly higher than the average of 1.5 per cent in the long period of low productivity growth from 1973 to 1995. But from 1996 to 2006, US productivity growth boomed at an annual rate of between 2 and 3 per cent in most years. Productivity growth slowed after 2004, but surged ahead in the last quarter at 6.3 per cent. Nobody knows whether the resumption of high productivity growth in the last decade was a blip or the beginning of a new pattern. The point is that if US productivity grows at a rate near the historic average of 1945-2008, the picture for the solvency of social security is much brighter. (This is not the place for a full discussion of economic prospects, but it is worth noting that US industrial output rose nearly 35 per cent in the past ten years, faster than any other G7 country.)

Moreover, what the doomsayers neglect to tell the public is that if the cap on the amount of income subject to payroll taxation were lifted, the result would be such a flood of money from high earners that the problems of social security would be solved forever. And even if payroll taxes were raised on all workers, as a result of productivity growth the average earner in 2050 may well have wages that in real terms are at least 60 per cent higher than today’s. As a share of my income, I pay far higher taxes than my great-grandfather, but I am much better off because less of a lot is greater than more of a little.

[smiling_bandit]

Yup. The problem with Fannie and Freddie is that way back when some people tried to have their cake and eat it, too. The basic idea might have been sound, but in implementing it they gave the firm special privelages and excemted it from some normal regulation. Investors figured that the government would back it in any really bad situation. This meant the firm could go for riskier investments and blow money.

At the same time, Fannie and Freddie has an extremely close and very, very unethical relationship with the government. A suspicious number of their executives came from government service and left the company back for it. Plus, they bribed - err… - contributed, a lot to certain Representatives and Senators, including $125K to dear Senator Obama. There are a number of reports that they nakedly threatened lawmakers with legal actions or used other government officials to browbeat the Clinton administration into easing off regulation.

[ralph124c]

I mean, this is one way the USA can repudiate its debt: announce a crisis, then devalue the dollar. China’s $1 trillion surplus vanishes, the use foreign debt disappears, and wall street buys up trillions in assets on the cheap!:mad:

[gonzomax]

The financial channel is actually having experts on saying deregulation is the root of the problem. Who would ever have thought that was possible?
We voted in a den of thieves and then are surprised we got robbed. When the neocons said wage war and cut taxes ,it was a prescription for disaster. After the first tax cut Bush was relieved they got away so clean. Then they decided to have another. Bush hesitated. Cheney said stick with the program. …That conversation i read about about a few years ago.
This thing is snowballing. Credit will be hard to get. Therefore spending will drop. That is bad across the economy. Business failures will occur. Jobs will go. Then spending drops more. Just lovely.

[smiling_bandit]

@gonzomax

The financial channel is actually having experts on saying deregulation is the root of the problem. Who would ever have thought that was possible?

:dubious: I would be very curious as to just what “financial channel” you’re listening to. The financial markets have not been heavily deregulated. There’s not a whole lot of regulation there per se, but that’s beside the point. Fannie and Freddie died because the feds refused to make it fully private or keep it fully public. Lehman and ML are going down the drain because their management didnt’ do their job right.

[gonzomax]

CNBC Power Lunch, now. Other so called experts earlier. , including Cramer .

[ultrafilter]

@gonzomax

CNBC Power Lunch, now. Other so called experts earlier. , including Cramer .

Cramer is a so-called expert, but I wouldn’t go so far as to say he’s an actual expert. smiling bandit is right, though; there hasn’t been any significant deregulation of financial markets in the recent past. Anyone who says otherwise clearly doesn’t know what they’re talking about.

[gonzomax]

@ultrafilter

Cramer is a so-called expert, but I wouldn’t go so far as to say he’s an actual expert. smiling bandit is right, though; there hasn’t been any significant deregulation of financial markets in the recent past. Anyone who says otherwise clearly doesn’t know what they’re talking about.

I knew you would say that. there are 8 experts in little boxes . Cramer is just one of them.
http://losangeles.injuryboard.com/miscellaneous/the-subprime-mess-and-phil-gramm-an-experiment-in-deregulation.aspx?googleid=242468
Phil Graham authored a lot of this mess. He pushed for dereg for Enron and we know how that worked out. His wife was on the Enron Board. Coincidence I am sure. He is McCains financial adviser.

Foreclosure Phil

Do you think 2000 is a long time ago.

[erislover]

@gonzomax

The execs loot and run. They give themselves huge leaving bonuses and retirements. Even Fannie and Freddie execs expect to get about 30 mill for leaving. They are immune from the damages they cause. It is not an incentive to do the right thing.

It is an incentive to take risks. Risks are, well, risky, and don’t always pay off, but it is the only way to get stellar returns on investment capital. If your CEO has to worry about where his paycheck will come from tomorrow, he might not be the most objective person to deal with directing a company in ways that spurn growth an innovation. Whether this is what you want your CEO doing probably depends a lot on the company, and what dollar amount correlates well with healthy risk-taking is probably not something you just google to find out, but I think overall the idea makes a kind of sense.

[gonzomax]

@erislover

It is an incentive to take risks. Risks are, well, risky, and don’t always pay off, but it is the only way to get stellar returns on investment capital. If your CEO has to worry about where his paycheck will come from tomorrow, he might not be the most objective person to deal with directing a company in ways that spurn growth an innovation. Whether this is what you want your CEO doing probably depends a lot on the company, and what dollar amount correlates well with healthy risk-taking is probably not something you just google to find out, but I think overall the idea makes a kind of sense.

Banks have been historically the places not to take risks. The conservative banker is what we lauded for decades. When we allowed them to start gambling with the deposits in increasingly riskier adventures ,we put the financial system at risk. Let investors take risks if they wish. But banks should not be allowed to.
Paulson is on now talking about the need for more vigorous regulation.

[erislover]

@gonzomax

Banks have been historically the places not to take risks. The conservative banker is what we lauded for decades.

There is a difference between investment banking and commercial banking. You can’t just say “banking” as if it were some unified idea (in this topic, anyway!). Even if the line between a commercial bank and an investment bank does not exist any longer, the two practices still are conceptually different.

[Mr.Svinlesha]

erl! Brother! S’up! Long time no see!

[wmfellows]

@gonzomax

Banks have been historically the places not to take risks. The conservative banker is what we lauded for decades. When we allowed them to start gambling with the deposits in increasingly riskier adventures ,we put the financial system at risk. Let investors take risks if they wish. But banks should not be allowed to.
Paulson is on now talking about the need for more vigorous regulation.

Amigo, this is completely and utterly wrong:

The very business of banks is to take risk. Bank failure from the inherent tension of taking short deposits and lending them long is endemic in history. Of course banks have projected the image of conservative, but it has never been true, in the sense you are implying. NEVER.

Bank runs, collapses, etc. were a regular and frequent feature historically… indeed have never gone away even with regulation, rules, risk management, etc.

Lending is gambling. The only question is, are your bankers good gamblers playing a smart game, or are they not.

PS: try to get your bloody puncuation to English standard eh?

[wmfellows]

@erislover

There is a difference between investment banking and commercial banking. You can’t just say “banking” as if it were some unified idea (in this topic, anyway!). Even if the line between a commercial bank and an investment bank does not exist any longer, the two practices still are conceptually different.

True enough, but his characterisation was utterly bloody wrong regardless.

[BrainGlutton]

@wmfellows

The very business of banks is to take risk.

No, the business of banks (like the business of insurance companies) is to minimize risks – by allowing a vast number of depositors to lend their money to an institution purportedly too big to fail, and which can in turn lend money to a smaller number of borrowers at minimal risk to the institution should some of them default.

@wmfellows

Bank runs, collapses, etc. were a regular and frequent feature historically… indeed have never gone away even with regulation, rules, risk management, etc.

Certainly. But that is a bug, not a feature.

[wmfellows]

@BrainGlutton

No, the business of banks (like the business of insurance companies) is to minimize risks – by allowing a vast number of depositors to lend their money to an institution purportedly too big to fail, and which can in turn lend money to a smaller number of borrowers at minimal risk to the institution should some of them default.

Bollocks.

Taking deposits, which can flee, then lending them out for longer terms, up to 30 odd years is taking risk mate.

Minimizing risks? Of course one manages risk, but one doesn’t bloody minimize risk, else you’d make no damned money.

[Voyager]

@erislover

It is an incentive to take risks. Risks are, well, risky, and don’t always pay off, but it is the only way to get stellar returns on investment capital. If your CEO has to worry about where his paycheck will come from tomorrow, he might not be the most objective person to deal with directing a company in ways that spurn growth an innovation. Whether this is what you want your CEO doing probably depends a lot on the company, and what dollar amount correlates well with healthy risk-taking is probably not something you just google to find out, but I think overall the idea makes a kind of sense.

The problem is that if they make bets that pay off in the short term and crash in the long term (like bets on mortgages) they never have to give back the yearly bonuses - and usually get multi-million dollar exit packages. True they may have to scrape by on only ten or twenty million for a few years.

The real problem here is not the payouts - it is that these companies in particular felt they could make bets with money backed by the government, so heads they win tails we lose. Given that, more oversight was necessary, which is not likely when an administration is philosophically opposed to regulation.

[spazattak]

@DragonAsh

Well - I would first point out that we have yet to see even one quarter of negative GDP growth. We came close in 4Q 2007 - growth was only up 0.6%. But second-quarter 2008 GDP growth was revised up, from the preliminary 1.9% figure to 3.3%. Unemployment is up, true - but at 6% it’s hardly on par with the Great Depression, when unemployment was over 25%.

We are in a credit crunch. This is a housing market slump, not a massive economy-wide recession. Yes, it will mean slower growth - companies around the world are affected by the credit crunch, which means they are going to invest less in production. Companies scale back on inventories when they are uncertain if they will be able to sell them. Lower inventories means less production of machinery, components, and parts. The result is a nasty cycle of production cutbacks, lower sales, higher unemployment, declining wages, and the cycle starts over again.

But the underlying fundamentals of the economy are fine. There has been no damage to underlying productivity - in fact, the US is still far more efficient in terms of output per worker than, say, Europe or Japan. It’s one reason why the US economy is actually doing better than both of those two regions, even though the subprime problem itself started in the US.

What does our productivity have to do with economic fundamentals? GDP? Sure. Productivity has nothing to do with the consumption of goods or services though. Wages are stagnant or declining, unemployment is rising (though agreed, isn’t ‘high’ yet)… inflation is rising… the only ‘fundamental’ that says we’re not in trouble is GDP, and even that just says ‘we’re not totally screwed…yet’.

Is the worst over? Probably not. Will the economy recovery right away? No. But neither am I prepared to think that we’re facing another ‘Great Depression’. I think the US will see a year or so of relatively slow growth, but I would be surprised if we have more than one or two quarters of actual negative GDP growth overall.

If you’re a 20-something couple just getting married, save up for a year or two, and be ready to plunk money down on a house in late 2009/early 2010 or so. Not only will you get a great deal, you’ll be able to lock in at very low rates.

If inflation becomes a bigger problem, don’t count on those low rates. I generally agree with your conclusions about a slow-down. I don’t understand how you can say ‘fundamentals’ are strong in the same breath. We wouldn’t be heading towards a slow-down if the fundamentals were strong. It’s oxymoronic.

[Throatwarbler_Mangrove]

IANAEconomist, but you missed a bit out there. A liquidator will probably try and sell the good assets for as much money as possible. Unfortunately, dumping several tens of billions of dollars of real estate on to an already weak market will invariably depress prices. That in turn, depresses the value of everyone’s real estate assets. Someone is going to have pull a rabbit out of a hat to avoid upsetting the whole tower of cards.
Reply With Quote

You have a couple of fundamental misunderstandings here.

1. The “Assets” in this case is not real estate. Banks do not manage apartment buildings. The assets in question are the LOANS. For a bank, a loan is something that generates income in the form of interest, or in other words an asset. The asset may be a loan BACKED by real estate, but in this narrow sense, the actual value of the underlying real estate is neither here nor there - your loan obligations are not derived from the market value of your house.

2. The concept of “We don’t need to save for retirement because our real estate will continue to appreciate forever” is a relatively recent one. True, many more people bought into it than they probably should have, but fundamentally, real estate prices generally match inflation, and there is no reason why it won’t do so in the future. The economies of other countries are not based on real estate appreciating forever, they are based on increasing productivity and capital.

“Real estate appreciating forever”, or the idea that there will always be more new investors to pay off the old ones, is what’s called a “Ponzi scheme”. I’m no sage of the markets or anything, but those generally have a poor track record of being sustainable.