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Financial Meltdown Blogging
FINANCIAL MELTDOWN BLOGGING....Hi there. Kevin here. Turns out the jury room here in the Orange County Superior Court has free WiFi and plenty of desks and carrels to work at. Hooray! So, since my number hasn't been called yet, here's some miscellaneous financial meltdown blogging for you. Today, Atrios says:
I think it's important to keep in mind the fact that this looming economic disaster was preventable. The Wise Old Men of Washington and Wall Street have fucked everything up due to a combination of greed and and adherence to ideology regardless of what the facts are. There were many moments in the past few years when something could have been done to at least minimize the problems, and at every step they've done the wrong thing.
No argument on the greed and ideology front, but I'm curious: was there really anyone who made the right call on all this at a policy level? There were, of course, plenty of people who recognized the housing bubble for the idiocy that it was (Alan Greenspan notably not one of them), but were there any major voices making specific policy proposals to slow down the bubble? Or rein in the mortgage market? Or regulate the CDO/CDS market in a way that would have prevented some of the damage? I'm talking specifics here, not just general observations that the FIRE sector was out of control. Arguments about interest rates being too low count, if they were made for the right reason, but I'm interested mainly in more detailed recommendations.
I don't have any big point to make here. I'm genuinely curious. There were many moments in the past few years when perhaps something could have been done, but what? And who was proposing serious measures that would have helped? Any major Dems? Economic pundits? Wall Street mucky mucks? Who were the unsung heroes? Help me out here.
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and — annoyingly but not surprisingly — it outperforms my desktop PC in almost every way. So far, the only drawback is that the touchpad is maddeningly sensitive, but hopefully I'll eventually figure out a way to tweak that. More later after I've used it more.
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and ? annoyingly but not surprisingly ? it outperforms my desktop PC in almost every way.
I'm going shopping tonight, and I blame you. ;-)
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and ? annoyingly but not surprisingly ? it outperforms my desktop PC in almost every way.
Windows or Linux?
Hi Kevin, you're correct.
I don't have any big point to make here. I'm genuinely curious.
You don't understand the financial industry, because you're stupid.
A. see above, and
B. you answered your own ignorant question with this:
There were, of course, plenty of people who recognized the housing bubble for the idiocy that it was (Alan Greenspan notably not one of them), but were there any major voices making specific policy proposals to slow down the bubble?
I thought we fixed this with Sarbanes-Oxley and associated Enron accounting legislation? And the wonderful analyst disclosure that occurs now, re: disclosure, ownership, and, as we say, "talking from a position."
Oh, that didn't work? I'm shocked.
I'm sure president Oprah will fix it?.
Howard,
I offer the following for your consideration:
1. From Dictionary.com: "strong arm" --to coerce by threats or intimidation; bully
2. From a White House press briefing, Dec 8, 1993:
Robert Rubin, Ass't to the Pres for Econ Policy:
"In July the President asked the four banking regulators to reform CRA, to reduce
paperwork in process and reward performance, and to get that done by January 1, 1994. We're delighted to report that that has been accomplished on schedule. And in conjunction with the President's Community Development Bank and financial institution legislation, which recently passed the House of Representatives, CRA reform will generate billions of dollars in new lending and extend basic banking services to the inner cities and to distressed rural communities around the country."
Later in the briefing Secretary of Treasury Lloyd Bensen:
"In a nutshell, what we're proposing to do is to make it easier for lenders to show how they're complying with the Community Reinvestment Act. For those who aren't familiar with the area of banking law, the changes we're proposing are important because banks now have a very clear, quantitative standard by which their compliance can be judged. And that is very important to banks when it comes to ask regulators to approve mergers, new branches and the like."
In the same briefing Mr. Ludwig, Comptroller of the Currency responds to a reporter's question:
"Q Okay. And then the second one was the enforcement mechanism for this -- is there a new mechanism for enforcing the CRA contained in here, because up until now, the Fed, for example, has not really denied very many banks merger applications because of CRA.
MR. LUDWIG: Yes, there is a new enforcement mechanism. Where a bank is rated "needs to improve," that is not a "satisfactory," needs to improve one of the lower tests, but not the lowest test, it would have two years, two examination cycles, to improve its rating. If it did not, it would fall back into substantial noncompliance -- the lowest rating. If a bank or thrift is substantial in substantial noncompliance, the regulators for the first time will have the right to use their other regulatory enforcement tools with respect to that institution to cause it to comply with the law.
Q Kind of along that line, what sort of projection would you make of merger and acquisition activity because of this rule change? Do you think it's going to suddenly go up?
MR. LUDWIG: I wouldn't think that it would affect merger and acquisition activity; that is to say, we believe that because this is more objective, it will be easier to judge whether or not there is a CRA reason to turn down an application. ?
And later in the briefing?
Q With regard to enforcement actions for an institution that's not applying for a merger, what specific enforcement actions might you envision being taken if it's in substantial noncompliance?
MR. LUDWIG: Well, we'll have the full panoply of all our enforcement armorarium, which includes cease and desist orders and civil money penalties in some cases.
Q So you could apply those, because you hadn't up until --
MR. LUDWIG: We have not, and it has not been part of the regulation. It will be part of this regulation."
3. And then from a recent article in the WSJ available at http://online.wsj.com/article/SB122626062814011765.html
"Then, in 1995, regulations adopted by the Clinton administration took the Community Reinvestment Act to a new level. Instead of forbidding banks to discriminate against blacks and black neighborhoods, the new regulations positively forced banks to seek out such customers and areas. Without saying so, the revised law established quotas for loans to specific neighborhoods, specific income classes and specific races. It also encouraged community groups to monitor compliance and allowed them to receive fees for marketing loans to target groups."
I'll give you three guesses at who one of the "community groups" was.
Hint: "Oak Tree"
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and ? annoyingly but not surprisingly ? it outperforms my desktop PC in almost every way.
I'm going shopping tonight, and I blame you. ;-)
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and ? annoyingly but not surprisingly ? it outperforms my desktop PC in almost every way.
Windows or Linux?
Hi Kevin, you're correct.
I don't have any big point to make here. I'm genuinely curious.
You don't understand the financial industry, because you're stupid.
A. see above, and
B. you answered your own ignorant question with this:
There were, of course, plenty of people who recognized the housing bubble for the idiocy that it was (Alan Greenspan notably not one of them), but were there any major voices making specific policy proposals to slow down the bubble?
I thought we fixed this with Sarbanes-Oxley and associated Enron accounting legislation? And the wonderful analyst disclosure that occurs now, re: disclosure, ownership, and, as we say, "talking from a position."
Oh, that didn't work? I'm shocked.
I'm sure president Oprah will fix it?.
Howard,
I offer the following for your consideration:
1. From Dictionary.com: "strong arm" --to coerce by threats or intimidation; bully
2. From a White House press briefing, Dec 8, 1993:
Robert Rubin, Ass't to the Pres for Econ Policy:
"In July the President asked the four banking regulators to reform CRA, to reduce
paperwork in process and reward performance, and to get that done by January 1, 1994. We're delighted to report that that has been accomplished on schedule. And in conjunction with the President's Community Development Bank and financial institution legislation, which recently passed the House of Representatives, CRA reform will generate billions of dollars in new lending and extend basic banking services to the inner cities and to distressed rural communities around the country."
Later in the briefing Secretary of Treasury Lloyd Bensen:
"In a nutshell, what we're proposing to do is to make it easier for lenders to show how they're complying with the Community Reinvestment Act. For those who aren't familiar with the area of banking law, the changes we're proposing are important because banks now have a very clear, quantitative standard by which their compliance can be judged. And that is very important to banks when it comes to ask regulators to approve mergers, new branches and the like."
In the same briefing Mr. Ludwig, Comptroller of the Currency responds to a reporter's question:
"Q Okay. And then the second one was the enforcement mechanism for this -- is there a new mechanism for enforcing the CRA contained in here, because up until now, the Fed, for example, has not really denied very many banks merger applications because of CRA.
MR. LUDWIG: Yes, there is a new enforcement mechanism. Where a bank is rated "needs to improve," that is not a "satisfactory," needs to improve one of the lower tests, but not the lowest test, it would have two years, two examination cycles, to improve its rating. If it did not, it would fall back into substantial noncompliance -- the lowest rating. If a bank or thrift is substantial in substantial noncompliance, the regulators for the first time will have the right to use their other regulatory enforcement tools with respect to that institution to cause it to comply with the law.
Q Kind of along that line, what sort of projection would you make of merger and acquisition activity because of this rule change? Do you think it's going to suddenly go up?
MR. LUDWIG: I wouldn't think that it would affect merger and acquisition activity; that is to say, we believe that because this is more objective, it will be easier to judge whether or not there is a CRA reason to turn down an application. ?
And later in the briefing?
Q With regard to enforcement actions for an institution that's not applying for a merger, what specific enforcement actions might you envision being taken if it's in substantial noncompliance?
MR. LUDWIG: Well, we'll have the full panoply of all our enforcement armorarium, which includes cease and desist orders and civil money penalties in some cases.
Q So you could apply those, because you hadn't up until --
MR. LUDWIG: We have not, and it has not been part of the regulation. It will be part of this regulation."
3. And then from a recent article in the WSJ available at http://online.wsj.com/article/SB122626062814011765.html
"Then, in 1995, regulations adopted by the Clinton administration took the Community Reinvestment Act to a new level. Instead of forbidding banks to discriminate against blacks and black neighborhoods, the new regulations positively forced banks to seek out such customers and areas. Without saying so, the revised law established quotas for loans to specific neighborhoods, specific income classes and specific races. It also encouraged community groups to monitor compliance and allowed them to receive fees for marketing loans to target groups."
I'll give you three guesses at who one of the "community groups" was.
Hint: "Oak Tree"
I remember that Republicans claimed to have been pushing for reform of Freddie and Fannie in 2005, but I haven't investigated to see what that means.
mk -- excuse me, but as usual the Republicans sound ridiculous. In 2005, with substantial control of both House and Senate, they could have passed anything they wanted to, except privatizing social security. If they didn't pass anything, it's because they didn't want to or didn't think it was necessary.
mk, the white house shut down that push, and given that freddie and fannie aren't the heart of the crisis, that's not really the answer to kevin's question.
i'd say the answer depends on time frame: warren buffet, for example, was, as far as i've read, the only person to oppose in writing the decision in 1999 not to regulate derivates. that could have made a huge difference.
i suppose a significant investigation into mortgage fraud could have made some difference, but i don't recall seeing anyone calling for that in 2004 or so.
i actually doubt that there's much of anything that could have been done in the last few years to head this off; it was too late.
what could, in fact, have been done is that someone could have been thinking about what do we do if the excrement hits the fan, and it looks pretty clear by the way that paulson is making it up as we go that no one did that, but that's more in the nature of ameliorative steps.
What kind of jury room has free wifi? No wonder Cali is in financial meltdown.
Here is some discussion which I haven't thoroughly read yet:
http://www.aei.org/publications/pubID.22514/pub_detail.asp
Here is a bill proposed by Sen. Richard Baker (R-LA) in 2005:
http://www.govtrack.us/congress/bill.xpd?bill=h109-1461&tab=summary
I can't immediately tell whether these criticisms and reform efforts were germane to the current crisis or whether they were tangential. But they could be relevant.
I would urge liberals to be open-minded about the possibility that Republicans may have pushed for reform in the past. No politician has completely clean motives, but these proposals are worth an honest look.
Anyone else have more background on this?
"I remember that Republicans claimed to have been pushing for reform of Freddie and Fannie in 2005, but I haven't investigated to see what that means."
Freddie and Fannie were VERY much lagging indicators here. The whole "Freddie and Fannie are the root of the problem" meme is just a convenient political trope by the Republicans because F & F were just as tight with the Dems while most of the other key players (e.g., Countrywide) were staunchly Republican.
But I'm with Kevin on this one. While I can remember lots of people warning that the sky was going to fall -- can't remember who produced it, but I saw a graphic TWO YEARS ago showing the number of housing defaults was going to set an all time high in Q2 08. Unfortunately the same graphic showed that Q2 09 was going to be even worse.
The only actual example (that I know of) of someone trying to change things was Brook Born trying to regulate the CDS market in the late 90s. She was shot down by Rubin & Greenspan.
were there any major voices making specific policy proposals to slow down the bubble? Or rein in the mortgage market?
Elliot Spitzer, god rest him, as AG went after subprime lenders with a vengeance until the Bush Administration shut him (and all other state AGs) down.
When you have a government that doesn't believe in a role for government you get things like Katrina and the financial crisis. Nothing was done because the people running our government do not believe in what they are doing.
Return to investment in infrastructure and workforce enhancement (health care, education and skill training) were in order but not done because they run counter to GOP ideology.
Increase in fuel efficiency standards should have happened but were blocked by GOP oil interests and Dem apologists for GM.
Housing loans should have required more downpayment and steps taken to tighten credit in bubble markets. However, these policies run counter to the financial market miscalculation that housing prices never go down and people do not default on their mortgages. Paulson and his buddies still don't understand that this belief has been proven false.
Economics professor Nouriel Roubini, aka Dr. Doom, predicted it...though people laughed and thought him a crackpot.
What kind of jury room has free wifi? No wonder Cali is in financial meltdown.
Yeah, the jury room out here has no wifi, but lets you see that the judges and attorneys have a taxpayer sponsored wifi....
Kevin,
I hope you'll get a chance to read this piece at common dreams -- http://www.commondreams.org/view/2008/11/12-1
It suggests that companies that are too big to fail should be broken up. Why isn't that discussed? How are we helping ourselves by bailing these companies out AND making them bigger?
TLM: Brook Born trying to regulate the CDS market in the late 90s. She was shot down by Rubin & Greenspan.
Excellent example, but you forgot to mention that Larry Summers was the third member of that anti-regulation troika.
Is a fulminating Category 4 "storm of the century" generated by unbridled greed about ready to explode?
$6+ Billion in bonuses for Goldman Sachs.
$6+ Billion in bonuses for Morgan Stanley.
$66 Billion in bonuses are being set aside this year for the 'engineers' of the financial system and economic globalization.
Are a tiny minority of the family of humanity, the ones in in dark, pin striped uniforms, often called "suits", who have pillaged the capitalist system and ruined humanity's political economy by turning it into a gambling casino and stealing its wealth for themselves and their minions, the same people who are now warning honorable people not to dismantle the global economy?
What is wrong with this picture?
Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176
>>you forgot to mention that Larry Summers
Good catch Alex, thanks.
As this thread shows, pretty much anyone who wanted to tighten down the financial screws (and was in a position to actually do so, which eliminates Roubini) was swimming up a strong current.
There's plenty of blame to go around, although if I had to pick "poster children" it would be Greenspan and Phil Gramm. Greenspan, to his credit, has owned up to his mistakes. Anyone want to bet me that Gramm will? He (and his even more extreme wife) have waged a non-stop war against financial regulation for 20 years. As the other Dr. Phil might say, "how's that workin' out?"
In fact, I'd argue that outside the 9/11 terrorists it would be hard to name a person who has done more damage to the US than Gramm. Remember that in addition to his role in the current mess he was also a leader of the "over my dead body" contingent against Clinton's health care reform effort in '93-94. Now there were certainly a lot of problems with Hillary-care (and Hillary) but Gramm's reason for opposing it didn't stem from policy disagreements or concerns about costs, it was because he wanted to run for president in '96 and he didn't want Clinton to have a victory on the subject. A vile human being if ever there was one.
Perhaps Atrios should apply for a job in an Obama Administration.
Oh wait.
That would entail him actually giving a shit about anything enough to act.
Whoops.
It makes some sense to me.
Would you be happier if they'd done a cost-benefit analysis which suggested that the state would spend less money hunting down no-shows, because more people would show up when called, in the first place?
Also consider - free wifi - does it come with any privacy guarantee? Do the packets belong to the state(as network provider), and may be logged or examined at will?
well, I very specifically argued back in 2002 that Alan Greenspan should have used his podium as Fed chair to carefully lay out the case that there is a housing bubble. That doesn't mean mumble "irrational exuberance," it means presenting the charts and tables that I had produced (the Fed could produce much better ones), that showed the evidence that there was a bubble and carefully explained who would be hurt by its collapse.
Not only would this get serious press attention, it would change the incentives for the bank boys and girls. They could not be sitting there right now telling shareholders who lost all their money "who could have known?"
Bank managers who ignored explicit warnings from the Fed and then lost their shareholders 90-100 percent of their money would almost certainly be out of their job and banished from the financial industry forever, they also might risk personal liability for negligence.
I know that economists dismiss the idea that this sort of talk could have been effective, but these same economists don't have a very good track record, so I can't say I value their opinion too highly.
The Fed also could have cracked down the mortgage abuses (these were widely known at the time) with its regulatory power. As a last resort, it should have raised interest rates as much as necessary to burst the bubble. I don't like this route, this it would have given us a recession, but it would have been much milder than the one we are looking at now.
Any competent macro economist should seen this disaster coming. There is no excuse for Greenspan's failure or the failure of the profession more generally.
"And who was proposing serious measures that would have helped? Any major Dems? Economic pundits? Wall Street mucky mucks? Who were the unsung heroes? Help me out here."
John McCain and George Bush, for a start. But congressional Dems (with some Republican support) stymied them.
Oh and Atrios's claim that this is due to ideology (his enemies', of course) is diametrically wrong, like so much else he says.
Sheila Bair argued in favor of limiting subprime mortgage lending.
Several states enacted disclosure standards for mortgages when it became apparent that people were being bamboozled regarding the terms of mortgages (teasers, prepayment penalties, etc.) (Bush admin aggressively moved to preempt these rules and won.)
Robert Shiller argued that there was a housing bubble shaping up for stocks.
Many, many people argued against Bush's tax cuts.
http://www.whitehouse.gov/news/releases/2008/09/20080919-15.html
All the way back to 2001.
"There were many moments in the past few years when perhaps something could have been done, but what?"
How about not breaking the fix?
CDO/CDS's were instrumental in causing the 1907 Crash. They closed the betting palors (called Bucket Shops)and this legistation remained in effect until the Commodity Futures Modernization Act of 2000 replealed it.(Thanks Bill and Phil!)
Since nothing happens by accident and given that Americans ignore history; bring back this scam was intentional. I expect it to repeat in a few decades after it fades from our collective memory.
Although writers at Counterpunch, Asia Times and elsewhere attempted to warn their readers of the terrible consequences of the economic policies being implemented during the past eight years, no one with political authority, Republican or Democratic, attempted to do anything about them. Even now, after the nightmare has begun, people like Krugman lament the fact the consumer is no longer borrowing in order to purchase more junk. Mainstream politicians and pundits have been bought by the schemers, preventing them from performing their civic duty.
It's prety clear that the answer to Kevin Drum's question is "No one." Brooksley Born, sort of, but she was shot down by the Democratic administration of which she was part, and anyway, it isn't clear that credit derivatives are a major component of the crisis. (That is a separate discussion.) A few Republicans who wanted to cut back Fannie and Freddie, but they didn't push it. Roubini, but he's not a policymaker. I think it's a bit of a joke to give Spitzer credit for anything. So there you are.
Predatory loans have been opposed by the Center for Responsible Lending for a while.
The late Edward Gramlich called for more regulation in 2000-2004.
"A Catastrophe Foretold": http://www.nytimes.com/2007/10/26/opinion/26krugman.html
Admittedly, locating those with serious proposals to curb CDOs, SIVs and the like is harder (Brook Born doesn't have an entry in wikipedia - is the name spelled correctly?).
Dean Baker,
Thanks for posting. I was going to look for a cite from you, but you seem to have done it for me!
McTee above mentioned Roubini too, so it's not like this stuff was any secret to anyone who was paying attention and not part of the "party hardy" crowd.
Diogenes: CDO/CDS's were instrumental in causing the 1907 Crash. They closed the betting palors (called Bucket Shops)and this legistation remained in effect until the Commodity Futures Modernization Act of 2000 replealed it.(Thanks Bill and Phil!)
Interesting. Here I've been saying that people have forgotten the lessons of the Great Depression, but it appears that some of the lessons are even older than that.
Maybe we should have a contest to see how far back we can go. The South Sea Bubble of 1720, Tulip Mania of 1637 ...
LTCM was the warning the political class needed. Instead of using LTCM's bailout to prevent future catastrophes, Washington continued to give Wall St. everything it wanted in the way of deregulation and taxation relief.
I also appreciate Dean Baker's chiming in with the perspective that this is a political problem as much as an economic problem. Bursting a bubble is not pleasant, and it would have been hard even for Bernanke to speak up. He would have been blamed for causing the recession.
Greenspan might have been able to get away with it, since he was near retirement when Dean made his recommendation.
The trade deficit is a more fundamental problem, and most of us who have been arguing for specifics such as more efficient health care, more progressive taxation, and stronger teeth in trade agreements deserve credit. The credit & housing problems are symptomatic of a society that was living beyond its means, enabled by countries that were our creditors...
Yeah, I was going to say 'Dean Baker' but he beat me to it. And Dr. Doom, of course. But these guys are our modern Cassandras and the world listened to Greenspan instead. Pretty much everyone thought Greenspan's bs on ARMs was just that, but blew off the implications. Given that Greenspan hopped from one bubble to another it should have been apparent to many what was up.
I too am happy to see a post from Dr. Baker. Dean, I've long enjoyed reading your stuff and hearing you on NPR, etc.
But I want to echo y81's comment -- I tried to say this but not as clearly -- that other than Brook Born I know of no one in a position of authority who was willing to risk their neck fighting for change. Sure there were *warnings*, with Dean and my old teacher Paul Krugman leading the charge. But no follow through from policy makers.
BTW Born's page can be found at
http://en.wikipedia.org/wiki/Brooksley_E._Born
Nobody seems to attribute the volatile price of gasoline, which cause the cost of food to rise and made it to where consumers could pay only for gas and groceries, but nothing more, which cause havoc in retail world.
Nobody says a word about greedy oil and YET it was certainly a major factor in our economic downfall
Now we're being told the bailout WILL NOT help most homeownder and GM is getting money, money that was supposed to be for "re-tooling" - but now it's just bailout money.
CHICAGO (Reuters) - President-elect Barack Obama is considering naming a point person to lead efforts to help the distressed auto industry return to health, an Obama aide said on Thursday.
General Motors Corp, Ford Motor Co and Chrysler LLC are seeking a federal bailout of up to $50 billion.
Apparently, those over paid CEO's need help to figure out how to make a profit. They don't have clue.
I say we let new poeple start an US auto company that will make it so we never have to stop at a gas pump or even have to plug our car into our already high electric bill.
was there really anyone who made the right call on all this at a policy level?
Here's the case for Spitzer and Georgia state legislators being on the ball.
http://www.cjr.org/the_audit/spitzers_ghost.php
Gretchen Morgenson
as a longtime fan of dean baker's, i appreciate seeing his comment here too, but i think dean is confusing several separate strands.
his direct policy argument is, after all, a pretty thin reed: if only alan greenspan had jawboned "irrational exuberance" in the housing market, the bubble could have been pricked earlier and things wouldn't have gotten so out of control.
maybe, maybe not: when greenspan said stock prices were irrationally exuberant, it didn't really make any substantive difference over time.
separately, he argues on much more solid ground: there should have been more awareness that housing prices were on an unsustainable course. that a $3 will get you a latte, but that doesn't mean that there shouldn't have been more public awareness.
and then he essentially conflates the two strands of argument by noting that people who question the likely utility of alan greenspan jawboning didn't all speak out against the housing bubble.
look: i was right about iraq, but this does not mean i will always be right. some people were wrong about iraq, but this doesn't mean they will always be wrong. the notion that getting a judgement that big that wrong means you can never be listened to again is rather presumptuous, to my way of thinking, assuming, as it does, that you will never get anything wrong.
i, for example, was also right about the housing market, and i've got the trail of emails to friends to prove it, but i too don't think alan greenspan jawboning would have made any significant difference.
the only way to have made a difference was a different regulatory environment....
"were there any major voices making specific policy proposals to slow down the bubble? Or rein in the mortgage market?"
I guess you mean around 2004 - 2006. Nouriel Roubini and Stephen Roach were practically lighting themselves on fire making specific policy proposals to avoid "economic Armageddon" (Roach 2004). Roubini and Roach are not exactly kooks or nobodies. I believed every word they said because they seemed reasonable and sober compared to most "hyper-power" era Americans.
howard: maybe, maybe not: when greenspan said stock prices were irrationally exuberant, it didn't really make any substantive difference over time.
Greenspan only said that once (1996 IIRC) and the shut up about it. Things would probably have been different if he'd made it a regular part of his mumblings - and gotten some Fed research and whatnot to back it up.
i too don't think alan greenspan jawboning would have made any significant difference
Dean already wrote his answer to that: the Fed also could have cracked down the mortgage abuses (these were widely known at the time) with its regulatory power. As a last resort, it should have raised interest rates as much as necessary to burst the bubble. I don't like this route, this it would have given us a recession, but it would have been much milder than the one we are looking at now.
So jawboning is just a first step. Don't work, try something else (just as FDR recommended).
"What kind of jury room has free wifi? No wonder Cali is in financial meltdown."
Way to obsess about the things that really matter. After all, the cost of a wifi box is about $30, and it lasts for 5 years. That's clearly a large part of the CA deficit.
What's next on your list of pointless items to complain about? Free drinking fountains? Free toilet paper?
I would say that this from Warren Buffett (in 2002) was as close to a prediction of the meltdown -- and its reasons -- as anyone could have expected:
I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counter-parties. Some of these counter-parties, are linked in ways that could cause them to run into a problem because of a single event, such as the implosion of the telecom industry. Linkage, when it suddenly surfaces, can trigger serious systemic problems.
...For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes. Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have sofar found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and annoyingly but not surprisingly it outperforms my desktop PC in almost every way.
I'm going shopping tonight, and I blame you. ;-)
Buffett's analysis puts the blame not on the housing bubble, but on the ways in which credit instruments are packaged and derivatives are constructed around them in ways that preclude effective risk management and make possible a chain reaction. He predicted that such a reaction could be triggered by a "single event" -- and mentioned the "implosion of the telecom industry" as a possible example. As it happened, the event that triggered the chain reaction was the implosion of the housing bubble. But his point was that it was what was happening on Wall Street, not the housing bubble itself, that made the chain reaction (and meltdown) inevitable. It could have been triggered by other events as well.
alex, let's clarify: kevin's requirement here was to demonstrate who in real time made a specific policy proposal to head off this disaster. dean's response was that he "specifically" in 2002 suggested jawboning.
the rest of his remarks were about what could the fed have done once jawboning failed, but note that he doesn't tell us he was busy suggesting in 2002 that the fed's approach should have been "raise rates until you see the whites of their eyes," because it wasn't.
hence my response.
now, separately we can argue whether dean is right that a massive jacking up of interest rates in 2002 would have caused us less pain than we are currently going through. i think that's an arguable, but far from certain, proposition.
but here we do get to a fundamental disconnect, which JS points to at 10:05. dean thinks the problem is housing.
i think that housing would have merely been a problem; what made a crisis was the toxic interplay of securitization of mortgages, leverage, and derivatives.
if you believe that this is entirely and totally a "housing crisis," i can imagine thinking that raising interest rates significantly would have caused less pain in that it would have headed off the worst of the bubble; if, on the other hand, you believe that housing was merely the catalyst, then it's not clear that long rates 200 to 300 basis points higher in 2002 wouldn't have led to cascading negative impact then.
PS. in terms of irrational exuberance, greenspan's remark was repeated everywhere and all the time, and the generic reaction (speaking as someone who emitted it) was that the chairman of the fed should stick to his knitting and stfu about stock prices. that's why he gave up. i believe the same outcome would have resulted in 2002.
By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and annoyingly but not surprisingly it outperforms my desktop PC in almost every way.
Windows or Linux?