There are some interesting side issues to the sub prime housing crisis that are not so generally discussed. Are free markets efficient, as the GOP/corporate mantra goes, or prone to excess and economic dislocation? Who pays for the economic dislocation, those receiving the bonuses prior to the crash or John and Jane Doe? If the total housing market is in effect a commodity subject to ups and downs why were the financial big boys all invested in an ever upward scenario? Who lends trillions collateralized by a commodity with little or no equity margin? Greenspan et al, to some degree knowingly, destroyed the S&Ls so Wall Street could get their hands on mortgage paper. This sub prime crisis is actually Part Two of the earlier S&L takedown.
Also, while considering the effects of Congress, the Fed and Corporate (Bank) America's destruction of one institution, i.e. the Savings and Loan Industry, ask again why Bush, the GOP and Wall Street say trust us that privatizing social security is a guaranteed boon to our aging citizens.
First, the myth that free markets operate efficiently: In the 60's, financial institutions' equity got hammered by overlending to REITs. Then, as a result of a Latin America lending binge in the 70's and 80's, several household name banks disappeared via mergers. Followed on by the the S%L crisis which happened when the biggest commercial banks and investment houses talked Greenspan et al into deregulating these economically safe and efficient entities in order that they could get their hands on what would become known as securitized debt or mortgage obligations. Without legislation to destroy the Savings Industry's niche, what we now call the sub prime fiasco could not have occurred. It is interesting to note that this is actually the S&L debacle, Part two.
My labored point is that the financial big boys go on binges. They regularly wipe out enormous chunks of their equity capital and in so doing they wipe out their lending capacity. If free markets were efficient this would not occur. In this fiasco the financial industry bought crap assets. Forget both the borrower and the broker who made the loans. Billions of these mortgages were known to entail a high degree of risk and yet they were bought at par so to speak. There is no evidence of market efficiency here. The supposed best, biggest and brightest bought junk.
Let's hear Alan Greenspan's (hilarious) euphemism on this subject: "Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction." (As I said the big boys, hedge funds, etc bought crap loans.)(Hence gov't intervention.)
Another different light that could be shed on the Collateralized Mortgage crash is that, in overview, housing is or became a commodity. I was a lender in the oil patch in the early eighties when the collective equity of the Texas and other Southwest banks seemingly disappeared overnight. A barrel of oil had risen to $26-28 and when it fell to $12, a domino of bad loans left the US Government as the Southwest's banker.
Leading up to our present liqiuidity crisis, all housing became commodified. It had to increase in price for the sub prime CMO purchase and sale system to stay afloat. What I find interesting here is that there are written and unwritten rules that the financial world follows when retail or wholesale customers or the institutions take a position in a commodity. Common sense as well as in-place regulations mandate that a sensible liquid margin be in hand before, in this case, a person or an industry bets trillions on the price direction of a commodity or particular asset.
A regulator presenting a case for earlier intervention by using this commodity analogy might have presented a simpler, more cogent and forceful argument. Saving John and Jane Doe from resetting mortgages was not an argument likely to get a patient ear from our entwined Corporate America and Congressional decision makers.
And harken well to the underlying economic rationale and philosophy espoused when George Bush, the GOP and Wall Street attempt to entice the public that placing their retirement benefits in security related private accounts is a guaranteed boon to their retirement well being. The banks and the Fed and their Congressional enablers had their way with the Savings and Loan Industry and the results have not been pretty. When they come asking for commissions on the nation's social security assets ask them to explain that bit about how markets only rise in value.
At present living in the Berkshire Hills of MA; ex Int'l banker, Europe, Eastern Europe plus an IPO and a billion dollars in deals in the oil patch; had a play produced eons ago about teaching the Ten Commandments in public school, Arthur Miller said nice things and came to closing party; I've also pointed a shotgun at a very loved and respected CEO's corpus during a Mexico dove hunt (no foul), spent some Top Secret time around NSA folk and met a few 'household' names in my day.
The modern version of free market capitalism is little or no risk,tremendous reward. Big business and investment bankers can count on the good old government and its commy tax base to bail them out when they make stupid decisions. When things work as planned and profits are high its Why the hell do we have to pay taxes when we are creating jobs. Socialize the risks capitalize the profits is the game.
The privatization of social Security is a joke and you can bet that fraud and lack of oversight will produce a huge windfall for wall street and complete devastation for average or working class people, just the way Bush and his corporate elite friends would hope for.
If NASA and the land a man on the moon program would have been privatized we never would have made it to the moon. Most of the money would have wound up in an off shore bank account and the program continually stalled with ever more government money required to continue.
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Gary Denson (2 articles, 0 quicklinks, 1 diaries, 248 comments)
on Friday, December 21, 2007 at 6:16:22 PM
Your comment, "Socialize the risks capitalize the profits is the game." is a great coment.
I've been noodling around in my head the idea that the neo conservatives' screaming against 'socialized' this and 'socialized' that is a philosophically bankrupt argument for some time.
You have provided a way useful vantage point to view the discussion with your comment.
Example: Couldn't every tax break won by corporate/captalistic America via their K Street emissaries be called in effect actually social engineering? Presumably some argument, no matter how feeble or corruptly influenced, is made that any given tax break promotes some enterprise that is beneficial to the common weal. That being so, K Street is a conduit for (corporate induced) socialism. Et cetera.
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craig johnson (2 articles, 0 quicklinks, 10 diaries, 7 comments)
on Saturday, December 22, 2007 at 5:19:58 AM
While you are undoubtedly right in your comment about socializing the risk I do think you might be over thinking your argumentabout social engineering. While this is true any law passed is by definition contributes to social engineering.
Conservative politics were created to give the masses the illusion of determination while maintaining control and control structures. Claims against Socialism and greater efficiencies are simply smoke screens. Much like protection against home invasions is a reason for guns. The issues against Socializing anything is simply that it removes control and access to the profit from ‘private enterprise’.
They say “all politics are ultimately local” and I would submit so is greed. From my perspective what happens in capital markets is someone get a lucrative idea (note I didn’t say a good idea) Then every one jumps onto the act when it inevitably crashes “Private enterprise takes a bath” the government is then obliged to bail out. This is followed by a period of ‘wound licking’ and finding scapegoats then they move onto the next lucrative idea to make outrageous profits/bonuses.
Having already depleted 'blown' 'frittered away' most major sources of capital niche markets which make a comfortable profits for a limited few now become targets of the ‘big boys' , get governments to give them access, jump in. Often there is not as much profit potential expected and they become more cavalier ‘maximizing’.
So the cycle goes on except that the obvious sources of capital and profit are depleted they are now chasing the more marginal sources. One is inclined to ask where too next and what happens when internal sources have dried up? If much of this ‘squandered money has gone in non productive expenditure then sooner or later the ‘cake’ starts to shrink. Given US’s posture in the world all does not bode well. comment?
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Andris (4 articles, 0 quicklinks, 0 diaries, 531 comments)
on Saturday, December 22, 2007 at 4:09:17 PM
3 comments
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