It’s just a bit of snark, so I can’t get too deep in defending it. But how can anyone think that a major news magazine had a political column titled “Reliably Wrong”?
You sound surprised by this. The rating agencies got paid by the creators of the things that they rated, who naturally would move their business elsewhere if the rating was too low.
The Bush-era SEC didn’t even try, which is deregulation by fiat. Sure there will always be loopholes, but the can be patched and are often limited. There are loopholes in the tax code, but the situation today is a lot different from trusting everyone to pay a given amount.
I don’t even see how the lack of enforcement can be called overregulation, based on the quotes from the OP. Not that I disagree with your conclusion.
Housing bubbles before were regional. I almost got caught by the Texas/Louisiana one in 1980, and there were some in southern California. This was the first which was national. Which people at the time thought was impossible.
Greed or not, at each stage of the way it made sense for those in charge to take more and more risks in order to be competitive and increase their stock price. Calls for more regulation were met by claims that it would cause the US financial sector to not be competitive with London. This is why we need regulation - those claiming that execs are too smart to do suicidal things have been proven wrong again and again. Especially because the suicide results in the death of their companies, not the execs bank balances.
A revolution would be my choice.
In once sense the idea that under regulation caused the crisis is unfalsifiable. Mortgages are one of the most regulated parts of one of the most regulated parts of the economy. However, it is always possible looking back to say that certain regulations would have solved things. My mother believes in Vitamin C, if your healthy you should take it to prevent colds, and if you have a cold you should take more to get better. No matter the situation more Vitamin C is always called for.
One huge problem with regulation is that it exchanges small crisises with larger crises. If one investment bank is wrong about what makes a mortgage risky they go out of business. That sucks for that banks shareholders. If the regulator is wrong then all of the banks go out of business. That sucks for the entire economy. We saw that in the Euro crisis, Basel 2 classified all sovereign debt as equal and when that turned out to be wrong, there was a huge crisis.
Pick up your guitar and play.
True. Yet this system tends to work in the great majority of cases. Junk bonds entered the popular vocabulary because the ratings agencies devalued those bonds. From what I’ve read, the problem with the rating agencies was not corruption but their not understanding the underlying deficiencies in the way the tranches were created. Their AAA ratings made it all possible - people understand what junk bonds are and proceed accordingly - but they never got a proportionate share of blame. Note to puddleglum: it wasn’t the regulators who got this wrong. There may or may not be problems with mortgage regulation, but that had little to do with the American failures.
The OP says Ferguson blames overregulation. Two small quotes don’t prove that one way or the other. If the OP gets that flat wrong, then I apologize to Ferguson. But what I’ve read by him elsewhere makes it likely that the OP isn’t wrong overall.
The finance industry needs collateral. Virtually every time a contract (other than a simple outright purchase) is entered into collateral is exchanged. Collateral makes sure that if one party can’t make good on its obligations, the other party holding the collateral will be compensated. The need for collateral has grown enormously with the ballooning of all kinds of derivative assets because those types of contracts are not simple sales.
It used to be that collateral was US Treasury bonds in the repo market. (It doesn’t really matter if you understand what the repo market is). This form of collateral is essentially 100% safe. But the need for collateral has outstripped the supply of US Treasuries. So now lots of other things are used as collateral. To use something else as collateral, you usually have to take a “haircut.” That is, if I have a $1000 bond, I can only use it as collateral for $999 because there’s a chance it won’t be worth $1000.
We want to use as collateral not only things that are safe, but things that I don’t know more about than you. If I have special information about some asset, I might know it’s not really worth $1000 but only $995. In that case even if you “haircut” me to $999, I’m not really providing you enough collateral. Typically the originating bank would know more about a mortgage than any other bank, so it’s difficult to use a mortgage as collateral. If you package mortgages together, this becomes easier. If you package mortgages together and sell the package in tranches which divide things into safer and less safe parts, the safe parts are even easier to use as collateral.
You can also make things safer and better to use as collateral if you insure them. So companies like AIG will insure bonds so that if the debtor can’t pay, the insurance kicks in.
The problem now is, (i) since the banks used the safe parts of the mortgage packages as collateral, they’re left with the riskier portions, (ii) insurance on bonds doesn’t work right like life insurance. One death is pretty much independent of another, so if I insure one thousand people, I can predict with high reliability exactly how many will die each year and what my costs will be. (If there is a major war, I’ll be wrong, but many life insurance contracts don’t pay for war deaths for exactly the reason that the risk aren’t independent. But bond defaults are NOT independent. More bonds default when the economy goes sour, and that is exactly when the insurance company can less afford to pay off. (iii) with mortgages and CDO sold all over the country and world, markets become more linked so if one gets into trouble, there is the problem of contagion.
So we all wake up one morning and say "Wow housing prices are really high – too high. I’m going to charge you a much higher haircut on your collateral. You have to give me more. So everyone is looking for more collateral not only at the same time but exactly when prices begin to drop. Simultaneously insurance begins to look shaky. This exacerbates the problem driving prices lower.
What did Glass Steagall have to do with this? It used to be that banks and investment banks were separate. Banks had a monopoly on accepting deposits and offering checking accounts. Their charters which granted them these monopoly rights were valuable therefore they were cautious about doing things that might lead them into trouble and lose them their charter. They tended not to enter into risky business. Hence it didn’t matter too much if they were regulated closely because their caution made them want to self regulate.
When regulations like Glass Steagall were relaxed and things like money market funds ate into their monopoly power, banks started combining riskier investment banking with regular commercial banking, and the former was more profitable and their charter wasn’t quite so valuable so there was less incentive to be safe. (This is particularly true if they believe the government will bail them out if things go bad – that is exactly heads I win, tails you lose unless there’s a big enough spanking on the tails (pun intended).)
So banking becomes riskier, loaning becomes less important to banks. collateral dries up, and we get problems.
It’s simple, IMHO: There is a subset of conservatives who believe that all problems stem from “too much government” - meaning too much interference, involvement, regulation, oversight etc. This group is unable to see the mess of 2007-8 as anything but some aspect of “too much government” no matter how absurd that position is. They are used to being able to chant, “smaller government, smaller government” and have it taken as a soothing mantra.
Definitely not corruption, which actually is the scary part. I’m not sure if they understood tranches or not, but if they didn’t one would hope they wouldn’t stamp a rating on them until they did. But that would mean they’d have to give up revenue, so fat chance of that happening. I’ve also read that they published their criteria, so that the banks could create products just barely good enough to get the desired rating.
How were the non-bank mortgage sellers regulated again? Are you aware that a number of state AGs asked the Fed to regulate, and Greenspan turned them down?
And the big problem is that with the securitization of bad mortgages, and the fact that the riskier the mortgage the higher the return, the mortgage writers could write risky mortgages with what they thought was little risk to themselves. No one was forcing the mortgage writers to actively market to those who couldn’t really afford the houses - except the profits they made doing so.
My understanding of the cause of the collapse was a mix of factors all playing a role
-Banks didn’t need much collateral to back up loans (so they couldn’t cover their losses if an investment went bad)
-Mortgages weren’t held by individual banks, they were broken up and sold (creating incentive to make bad mortgage loans that were likely to default). These bad assets were spread all over the economy
-Commercial and investment banks became intertwined
-The rating agencies that are supposed to rate investments were ‘captured’ by the firms they were supposed to rate, so they gave too high ratings to various banks and assets.
I"m sure there are a lot of other things, but those don’t do anything to imply too much regulation was the problem. The incentives were to make bad loans and spread them all over the economy in a system that couldn’t handle risk.
It takes some seriously specious logic to argue that failures of post-facto enforcement are part of overreach in regulation efforts rather than part of the political advocacy project around deregulation, non-intervention and neutering existing regulation. We all know that it’s been a overt tactic of Wall Street lobbyists to obstruct effective regulation by appointing people who look the other way and to defund agencies charged with regulation so they can’t do their job. We see exactly the same tactics vis-a-vis the ATF and the NRA.
Deregulation.
The financial crisis was the culmination of a variety of factors. Though, the most significant factor was the the Glass-Steagall Act. You have to look it at this way, davidmich. Before 1933,** one of every five banks failed**, after the enactment of Glass-Steagall Act there was not a single bank failure for the next 50 years! When the Act was weakened in the 80’s and abolished at the end of the 90’s, it didn’t even take ten years before the crisis.
Many U.S citizens have been conned into believing that the government is too big, that’s its out to get their liberty, and take their precious guns. These same voters have vomited forth anti-government ideologues whom, presently, make up significant portion of the country’s Legislative branch and Governerships. It is mind-boggling to me that voters put candidates in office who emphatically make it clear their intent is to shrink government to the point where it be drowned in a bathtub. I’ll never, never understand it. So, when you combine the 1981 & 1986 tax cut the deregulation of S&L, abolition of Glass-Steagall Act, the 2001 & 2003 tax cut, and America’s insistence on electing anti-government ideologues to highest office, you have a dangerous concoction ready to explode.
Till this day, the banks are running wild, slurping up that free money (0.25% interest) from the government and using it line their pockets and bet on Wall Street. Despite it’s small size, the financial sector has a disproportionate effect on the rest of the economy. The financial sector, for example, determines how much the rest of us pay for food, clothing, and gas. Just a few months ago, JPMorgan Chase was found to be both simultaneously sequestering aluminum in warehouses and betting that the price of aluminum would go up. That’s fucking insane and should make everyone outraged.
If I were God-King of America, I’d want to see the U.S government open a bank or, conversely, turn the Federal Reserve into an actual lender. Whichever is easier. It is stupid that the banks pay 0.25% interest to the government on a loan then they turn around charge us 21.99% interest on a credit card. That’s >8000% increase. It means the entire financial industry could be summed up as a sector of “middle men” and we all know that middle men serve no useful purpose other than to drive up costs and increase inefficiency. By removing the middle man or adding public competition, you’ll drive down prices, and allow people to have free and fair access to capital.
- Honesty
Not lack of regulation but lack of research and feed back (or to make it simpler, lack of brains.) An industry that keeps growing fast is sure to become more sophisticated and evolve more complicated products. Unfortunately, the market’s IQ refuses to tag along. And when the premise for growth (in this case steady land value) is taken away, businesses discover they’ve exceeded all prudent limits.
If you are making a lot of money doing imprudent plan A, and would not be competitive in the short run doing prudent plan B, the problem is not brains. The problem is that there is an incentive to do risky things, and a disincentive to do safe things. Regulation is all about making a disincentive for being stupid.
None of the people responsible are living in boxes. I don’t think it is fair to say that they are stupid.
Deregulation and non-punishment went hand in hand, and by all accounts I’ve read contributed mightily to the crash.
Ferguson is IMO a great writer but he is also the Rothchild family historian. I don’t know if he was paid by the Rothchilds’, but he was given access to previously unseen source materials while writing his history of the family. I would take his pronouncements on economic matters with a huge grain of salt. In this vid he absolves the Rothchilds of all accusations, past and present,
http://www.youtube.com/watch?v=Nk4XYPNA1iQ
including some that I think are beyond question true, e.g. involvement in the creation of the US Fed.
To find out about the banking crisis the best guy IMO is Bill Black, he was a banking regulator in the S&L crisis so he speaks from first hand experience … I just used the search to find this vid, which I haven’t watched, but I’ve watched 30 BB vids, I guarantee it will be informative …