Conservative commentary: It's not the economy

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— The recent "bailouts" of Fannie Mae, Freddie Mac, and AIG, as well as the failures, sales and restructuring of virtually all the country's major investment banking houses have caused a lot of concern and misunderstanding.

First, if you look around you, you will notice that the fundamentals of the economy are good. Unemployment and inflation are low, worker productivity is high, the gross national product is high, and the standard of living (particularly of the lowest 25 percent of income earners) has increased dramatically in the past several years. So, it is hard to maintain that recent market problems are attributable to general economic weakness.

Second, although greed and stupidity are always with us, they do not explain a disruption of this magnitude.

The immediate cause has been the lack of liquidity for mortgages and mortgage backed securities. Generally, these instruments have traded like cash, but there is essentially no market for them. Companies holding large volumes of these instruments are unable to convert them to cash on reasonable terms and further (under Sarbanes Oxley - an overreaction to the Enron fraud) they must be immediately marked down to "market value" on accounting statements, even though there is no meaningful market. Thus, capital vanishes.

This is the 21st century version of a run on the bank, but how did we get here?

- Ultimately, much of the cause for this has been the Federal Reserve setting interest rates at artificially low levels - often below the rate of inflation in recent years. This is intended to limit the downturn that is inherent in the natural business cycle, but it subsidizes borrowing and pumps money into the economy that needs to be invested.

- Mortgages, having been among the safest of investments for decades, attracted too many investors. To get the necessary volume invested, lending standards decreased.

- This effect is compounded by the requirement for lenders to make risky loans to subprime borrowers under the Community Reinvestment Act, which has been around since 1977, but was the subject of vigorous enforcement in the late '90s. It should have been obvious that any housing market downturn would cause subprime defaults to shoot up.

- With the rise of the secondary market for mortgage backed securities promoted by Fannie and Freddie (both quasi-government entities), the "lender" with whom a borrower deals has no economic interest in whether the loan ultimately is paid. They get their commission anyway.

- This is enough of a prescription for disaster, but, compounding it, Fannie and Freddie carried a combined mortgage securities portfolio of more than $1 trillion, financing 97 percent of these holdings with debt and only 3 percent with equity. Clearly any significant market downturn would destroy entities so financed.

The cause of this debacle is essentially bad regulation. The way to affordable housing is not forcing lenders to make risky loans. The Federal Reserve cannot eliminate the business cycle - at best, it can cushion it somewhat. Governmental bodies, such as Fannie and Freddie, cannot be exempted from sound business practices - no matter how massive their political contributions. Ignoring these logical limitations to the abilities of government is bound to lead to problems.

Because the situation was allowed to go this far, we are probably in a situation where the government will need to invest in mortgages to provide liquidity to the market, much as it did in the Great Depression. However, there is no reason that this program cannot be profitable to the taxpayers, like the Depression program was. The devil will be in the details.

Additional regulation, however, is only likely to have the same effect as prior regulation and worsen the problem.

Comments

misterkindbuds 6 years, 2 months ago

Rick,

I've looked around and the fundamentals of the economy are not strong.

Last time I checked, unemployment was at 6.3 percent. And that is just the number of claims that are filled out weekly, not the number of people who are actually out of work.

As I have previously stated, most Republicans have become fools or liars.

Rick, I would have to put you in the liar catergory, as your well-written piece and well-spun views overshadow common logic.

Inflation is not low ... the dollar is struggling to survive in the currency markets and a flood of $700B into the market isn't going to strengthen it anytime soon.

Deregulation and unregulation of Fannie May and Freddie Mac have been points McCain prides himself on. He urged it, it happened, let the lying begin.

These "quasi-government agencies" as your slow waterbrained VP candidate calls them (isn't that socialism, which leads to communism???) have poojamed the American people because of the irresponsibility of such candidates as McCain.

The Fed appointees are another result of the Bush administration. Where is Alan Greenspan?

The main difference between Democrats and Republicans (aside from racism) is the mindset between the two parties.

Democrats have become increasingly proactive when it comes to problems. This stops the illegal payouts, greed and corruption that taints Washington before they begin.

Republicans have stayed reactionary. This way, they can profit from these "bailouts." Then, after they have made their money, say "we can't allow this to happen again."

You see, Rick, that is logical.

Fannie and Freddie could have been stopped before they started, but there was way too much money being made.

Bush refers to unregulation as a "house of cards."

The problem is, he dealt them.

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Jason Krueger 6 years, 2 months ago

Before the Republican noise machine continues down this road. Take a look at a bit of reality. It's lots of stuff but it refutes directly the above commentary.

http://www.traigerlaw.com/publication...


Summary Conclusions:

Our study concludes that CRA Banks were substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis.

Specifically, our analysis shows that:

(1) CRA Banks were significantly less likely than other lenders to make a high cost loan; (2) The average APR on high cost loans originated by CRA Banks was appreciably lower than the average APR on high cost loans originated by other lenders; (3) CRA Banks were more than twice as likely as other lenders to retain originated loans in their portfolio; and (4) Foreclosure rates were lower in MSAs with greater concentrations of bank branches.

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Murray Tucker 6 years, 2 months ago

Like most Americans. I deplore the various bailouts. However, the $700 billion one coming soon to a pocket-book near you became necessary because of EXPECTATIONS. The stock market has been balancing near a DJII support level of 10,500. Should it fall below this level, another $3 trillion of paper losses will occur.

Now as to what I perceive as the reason for the failure, beyond the greed and stupidity inherent in Wall Street is that when Ben Bernanke succeeded Alan Greenspan he moved almost immediately to increase interest rates. This policy had the dire impact on mortgages tied to prime or LIBOR that rose in proportion. So if you want to seek to place blame, it should be placed solely on the shoulders of the Depression Era expert- Professor Bernanke. Back in August 2007 I wrote of the problem that has developed into an episode: http://www.steamboatpilot.com/news/20...

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JLM 6 years, 2 months ago

I agree with almost everything Rick Akin writes in his article but take exception with the implication that low interest rates are in and of themselves a problem. It is the inferior and unsafe underwriting of loans which was compounded by the presence of vast amounts of capital willing to finance the entire process from origination to securitization which created the problem. That is tantamount to blaming the ammunition rather than the shooter.

Low interest rates are good for America as they provide the capital --- when loans are properly underwritten --- to fuel the American Dream.

It is just sheer nonsense to blame Sen John S McCain for the ills of the mortgage market. That problem is laid at the feet of Sen Dodd and Rep Frank. In fact, McCain sounded the alarm for some years before the problems became apparent; and, sponsored legislation with other like minded folks which would have addressed in part this problem. Take a look at the legislative history of this issue and it is obvious from whence the problem flows.

The future Sen Obama was smoking crack on a street corner when these things were taking place. {Please note gratuitous cheap shot but true nonetheless. LOL Sorry!}

While I lay the blame with Dodd and Frank, I must also say that I am a huge, huge, huge fan of home ownership as I believe it to be the greatest contributor to family cohesion, stability and sound retirement investment.

The challenge is how to "work out" problem mortgages. Banks are quick to foreclose and thereby sow the seeds of their own destruction. The impending bailout will show the wisdom of re-negotiating the mortgate with an owner occupant rather than placing the property on an otherwise glutted market.

The bailout (based upon the economics of the ML and GS deals) seems to imply current "mark to market" pricing of $0.05 - 0.22 on the dollar. It would be advisable to accept a payment of $75 monthly on a $100 mortgage from an existing borrower rather than selling the paper for such a low value.

This would require a different skill set than the average bank lender but it certainly can be done.

The real victim in all of this is the American taxpayer. There ain't gonna be any tax cuts for anybody because Congress just spent all the money on the bailout.

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JLM 6 years, 2 months ago

The white paper linked by Jason Krueger is actually quite a good reference for understanding this problem. It is typical of a lot of very good research which is out there and which helps folks to understand this problem.

His conclusions are probably not quite as pure --- no personal affront intended --- as he might think for the following reasons.

Virtually all banks segregate their mortgage banking and loan servicing operations in separate business units which are safeguarded by legal entity from the regulated banking business. This simply means the statistics of these wholly owned corporate subsidiaries are not in the numbers contained in the white paper. There is absolutely nothing nefarious about this and it is done for business reasons as the buying and selling of mortgage subs with servicing portfolios attached is a potentially lucrative business.

The magnitude of the differences in rates (e.g. APR on loans) is miniscule. Typically 50-100 bps or 0.5-1.0%. These numbers are not significant to create a factor of safety which would have any relevance to this dilemma.

While the CRA is an important piece of legislation and did in fact have a meaningful impact on the marketplace there were lots of other legislative issues which created other huge problems.

Kinda like making a perfect landing in a burning plane --- you still have a few problems left to deal with.

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misterkindbuds 6 years, 2 months ago

It is complete nonsense to hold John McCain accountable for the unregulation he supported?

???

And Obama wasn't a crackhead. He tried coke as a teen and admitted to it.

These attacks are further proof of the Republican Spin machine. They can't tell the truth, so they exaggerate and expect you to accept it as fact.

"The future Sen Obama was smoking crack on a street corner when these things were taking place."

How do you know he was on a street corner? Because his father was black?

You have some personal issues to deal with regarding race that have nothing to do with politics.

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JLM 6 years, 2 months ago

You are simply wrong as it relates to Sen McCain's position on Freddie and Fannie. You are wrong.

You're right I was too tough on Sen Obama but I was taking a gratuitious shot and I admitted it. So, I'm sorry!

OK, he was only snorting coke and not smoking crack. LOL

What does the "street corner" have to do with his skin color? Please 'splain.

And believe me, I have no race problems. I thoroughly oppose Sen Obama solely upon his voting record, his stated policies and his woeful inexperience. Oh, yeah, and the fact that he's the Anti-Christ! {Just kidding about the Anti-Christ crack. Sorry.}

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Matthew Stoddard 6 years, 2 months ago

That's weird- from every news report I've seen over the past 2 months, Unemployment was at it's highest rate in years- 6.1% for August. Somebody's been watching too much Hannity for getting talking points.

http://www.bls.gov/news.release/empsit.nr0.htm

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misterkindbuds 6 years, 2 months ago

JLM,

No. You are wrong. McCain supported (and still does - he wouldn't open his mouth the other day at the W.H. meeting if there were a turd in it) de-regulation.

I am not wrong. You need to check his voting record.

How is your statement racist?

Well, on a few levels.

While you are verifying McCain's voting record, look up and see how the punishment for crack cocaine and powder cocaine differs.

See Mr. Redneck from the sticks, blacks have a much higher likelihood to use crack cocaine.

Last time I checked, Blacks account for about 90 percent of crack cocaine use. Whites account for 90 percent of powder cocaine use.

When you check these facts, you will see that blacks are sentenced at an average of 5-10 times that of a white powder cocaine user/distributor.

So here is just one example of how you must not have realized you are a racist.

You say you oppose Obama for his lack of experience.

So you would rather vote in a 72-year-old man with a 1 in 3 chance of dying while in office, and have him replaced by a dimwit?

You think Sarah Palin is qualified to run the country? How about Ken Brenner?

Why not? Ken is a bright, good person and has served his community more than Sarah Palin.

Sure, he didn't preside over a state with the population of Wyoming nor did he deal with pregnancy while in office.

Another good point.

Sarah Palin is known in Alaska as "Sarah who?"

During her 1 1/2 years as governor, she spent 3/4 of her time in Wasilla (not Juneau) preparing for her pregnancy and delivering her baby.

Ken wouldn't do that.


JLM, Rick, Fred and Mary ... please try a news channel other than Fox News.

Not only do they fill you with misinformation, they really help you look stupid.

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Matthew Stoddard 6 years, 2 months ago

What's also weird? Looks like inflation has been higher June-August than since before Bush took office, even.

http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp

So...how 'bout them fundamentals, huh? And...what are them fundamentals?

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JLM 6 years, 2 months ago

"So here is just one example of how you must not have realized you are a racist."

Hahahaha, I guess I wasn't testing for "unconscious" racism. My bad!

You are absolutely right, crack is the choice of many black drug abusers.

And, you are again right that cocaine was the choice of Barack Obama. I acknowledge and agree with you that Barack Obama was a cocaine user. You are absolutely right.

He is after all an Ivy League guy, isn't he? So maybe the use of cocaine v crack is a product of his education?

Of course, he is also half white. I guess it could also have been those white genes coming out in him, eh? I know his white mother would be very, very proud. LOL

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Matthew Stoddard 6 years, 2 months ago

So JLM- do you still agree with Akin about how "low" inflation and unemployment are right now? I mean, obviously either Akin's using McCain-esqe comparisons on what's considered "low" considering McCain thinks that $5 million is the cut-off for what's considered "wealthy."

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