The FDIC

[Burke]

Oragator,

I'm reading John Allison's book on this subject right now. It has far too much detail to present here, but he blames:

1. The Federal Reserve
2. The FDIC
3. Freddie and Fannie, and
4. The SEC.

I'll try to condense it and start a thread on it after I finish the book.

Allison's book:

http://www.forbes.com/sites/johntamn...e-market-cure/

[oragator1]

Originally Posted by Burke

Oragator,

I'm reading John Allison's book on this subject right now. It has far too much detail to present here, but he blames:

1. The Federal Reserve
2. The FDIC
3. Freddie and Fannie, and
4. The SEC.

I'll try to condense it and start a thread on it after I finish the book.

Allison's book:

http://www.forbes.com/sites/johntamn...e-market-cure/

You can add the ratings agencies, borrowers, lack of government oversight on the entire process as mortgages qnd securities morphed into something other than what they had always been, repeal of Glass Steagal, banks (both traditional and investment) the CRA, fraud by brokers appraisers etc among other things.

It was a remarkably systemic bubble and subsequent collapse, but it takes a systemic set of failures to get something as severe as what we got.
For me though, if I had to say who I thought had the biggest single role it would be the Fed, because without cheap money that priced people into the market and forced those holding it to invest it somewhere it couldn't have happened. Next in line would be the ratings agencies because had they appropriately assessed the risk people might not have bought the MBSs they did and demand for them in the secondary market would have dried up, making them unprofitable to originate. Next would be Glass Steagal, which created the environment for the big investment banks to play the game of Roulette, and do so on massive leverage (over 97% on average)7 which is a recipe for disaster. Then borrowers who had eyes wider than their pocket books were thick at the same time regulators were looking the other way, and then the CRA which encouraged an environment to make riskier loans, and somewhere intermingled in the last few would be Fannie and Freddie who bought subprime to meet their government mandated goals and even guaranteed some nonconforming as well. They also priced Wall Street out of the conforming market because with their government guarantee they had a lower cost of funds, which allowed them to offer better pricing. This pushed Wall Street to nontraditional loans to make money, but I am saying that no one forced them to buy subprime as a result, it was a choice, one they made because it made them 100's of billions over a decade or more. The problem was that their entire investment strategy was based on a faulty premise, that home prices could never go down. Their models predicted a worst case scenario that was infinitely less severe than what happened, so imagine you are leveraged to 97% and the value of your holding goes down 20% in a few months, you are illiquid. That's exactly what happened to Lehman (among others), and why the market died overnight.

Fannie and Freddie had problems after Wall Street faltered because of contagion, subprime actually began dying in 2005, by 2006 many subprime companies were out of business. By mid/late 2007 and the spring of 2008 it was Wall Street (Bear Sterns was gobbled up in March 2008 and Lehman was already losing billions at that point) while Fannie/Freddie and much of Wall Street held on until fall of 2008. There is a reason it happened in that order.
Anyone who tries to make an argument that doesn't include all of the factors above is writing to place blame and not get to the truth, though one can fairly debate the relative weights of the causal factors. Everyone had a hand.

[Burke]

Oragator,

What institutions failed because of the repeal of Glass-Stegal?

I read a Wall Street Journal article a while back that went down the list of all of them, stating the reason each failed, and showing that the repeal of Glass-Stegal had absolutely nothing to do with it in every case.

It's the SOS.

Govt destroys.

Blames the victims and demands more power.

Gets it.

Uses it to destroy more.

Blames the victims, etc., and on and on.

Just like in Atlas Shrugged.

[T3goalie]

Originally Posted by oragator1

You can add the ratings agencies, borrowers, lack of government oversight on the entire process as mortgages qnd securities morphed into something other than what they had always been, repeal of Glass Steagal, banks (both traditional and investment) the CRA, fraud by brokers appraisers etc among other things.

It was a remarkably systemic bubble and subsequent collapse, but it takes a systemic set of failures to get something as severe as what we got.
For me though, if I had to say who I thought had the biggest single role it would be the Fed, because without cheap money that priced people into the market and forced those holding it to invest it somewhere it couldn't have happened. Next in line would be the ratings agencies because had they appropriately assessed the risk people might not have bought the MBSs they did and demand for them in the secondary market would have dried up, making them unprofitable to originate. Next would be Glass Steagal, which created the environment for the big investment banks to play the game of Roulette, and do so on massive leverage (over 97% on average)7 which is a recipe for disaster. Then borrowers who had eyes wider than their pocket books were thick at the same time regulators were looking the other way, and then the CRA which encouraged an environment to make riskier loans, and somewhere intermingled in the last few would be Fannie and Freddie who bought subprime to meet their government mandated goals and even guaranteed some nonconforming as well. They also priced Wall Street out of the conforming market because with their government guarantee they had a lower cost of funds, which allowed them to offer better pricing. This pushed Wall Street to nontraditional loans to make money, but I am saying that no one forced them to buy subprime as a result, it was a choice, one they made because it made them 100's of billions over a decade or more. The problem was that their entire investment strategy was based on a faulty premise, that home prices could never go down. Their models predicted a worst case scenario that was infinitely less severe than what happened, so imagine you are leveraged to 97% and the value of your holding goes down 20% in a few months, you are illiquid. That's exactly what happened to Lehman (among others), and why the market died overnight.

Fannie and Freddie had problems after Wall Street faltered because of contagion, subprime actually began dying in 2005, by 2006 many subprime companies were out of business. By mid/late 2007 and the spring of 2008 it was Wall Street (Bear Sterns was gobbled up in March 2008 and Lehman was already losing billions at that point) while Fannie/Freddie d much of Wall Street held on until fall of 2008. There is a reason it happened in that order.
Anyone who tries to make an argument that doesn't include all of the factors above is writing to place blame and not get to the truth, though one can fairly debate the relative weights of the causal factors. Everyone had a hand.

All of this was Predictable and Predicted. When Glass Staegal was repealed there were numerous harsh editorials warning of the dangerous consequences. It was also a hot topic of discussion among security and tax lawyers. The question wasn't if but when. When the housing market was raging with easy money and signature loans there were likewise calls of warning. When the Fed fixed low interest rates there were warnings. In re: fannie and freddie there were warnings... But those who spoke against the easy money, political expediency and greed were called Kooks and alarmists and negative nellies. They were talking down the economy or deemed to be attacking a favored politician Almost nobody form either party raised a voice above a whisper. If they did they were marginalized.

Today is no different. The bubble is now in the stock market and US bonds, the fed is pumping 85 billion a month, Gov't is expanding and spending at insane rates, the beloved reserve currency status is all but gone... Portfolio values are up and nobody cares why until the plug is pulled. AND NOBODY FROM EITHER PARTY HAS THE GUTS TO ROCK THE BOAT AND IF THEY DO THEY ARE A KOOK, AN EXTREMIST, or ACCUSED OF BAD MOUTHING A POLITICIAN OF THE DAY... As was the case in the 90's with Glass Steagal, the conversations are taking place again... it is not a question of if, but when.
There is nothing new under the sun.

[oragator1]

Originally Posted by Burke

Oragator,

What institutions failed because of the repeal of Glass-Stegal?

I read a Wall Street Journal article a while back that went down the list of all of them, stating the reason each failed, and showing that the repeal of Glass-Stegal had absolutely nothing to do with it in every case.

It's the SOS.

Govt destroys.

Blames the victims and demands more power.

Gets it.

Uses it to destroy more.

Blames the victims, etc., and on and on.

Just like in Atlas Shrugged.

It wasn't the primary cause, which is why I had it further down the list. But here is a good article on it. They call it a multiplier, which is probably a good way to describe it.

http://articles.washingtonpost.com/2...ages-lifeboats

[Burke]

These institutions and our economy are being destroyed by the govt.

More govt intervention is just more of the poison that's killing us.

The solution is a free market revolution, which we are unlikely to see anytime soon.

Which is why we are going to have a massive economic collapse.

And God only knows what after that.

When people are free to produce and trade and keep what they earn, you have the prosperity of the modern world. When they lose that freedom, they will lose that prosperity.

Simple as that.

One day we will be looking at the devastation, the ghettos, the suffering and death, and you will see that that is exactly what the left has wanted all along.

Because that's what being selfless and virtuous is to them.

It's why they sympathize with the Islamic fanatics who want to destroy the modern world.

They are soul brothers.