Financial Crisis

[kEiThZ]

It is not fair or smart to chide me for saying right wing policies allowing free markets (predatory lending as an example) to do whatever they want caused the mess.

And your hit job on cacruden is hardly appropriate either in this context. How is 'predatory lending' a right wing policy? First off, offering ARMs hardly qualifies as predatory lending (which tends to refer to payday loans, loan sharks, etc.). Next, how are any of these right wing policies? Things like payday loans, and ARMs came into being in the 90s during the Clinton years with a Democrat appointed Treasury secretary. Lastly, it's interesting to note, that many more southern states have regulations against predatory lending practices than northern states. What does that say about so called free market beliefs? And the whole MBS system was created right under the nose of Spitzer et al. So are we now to say that Democrats support fraudulent securities? Like I have said before, it's rather simplistic to say the policies are right or left wing.

In most cases, policies created to solve one problem created another....see my example on CEO pay. The key here is to come up with rules that stand the test of time, and to explain to the average person why these rules are there. If we had not heeded the outcry on CEO compensation in the 90s, we would not have started handing out millions of shares to motivate CEOs to raise the stock price with risky practices. That's a direct result of a lot of people crying out against the perceived inequity of CEO pay compared to worker pay.

 

[Brandon716]

And your hit job on cacruden is hardly appropriate either in this context. How is 'predatory lending' a right wing policy? First off, offering ARMs hardly qualifies as predatory lending (which tends to refer to payday loans, loan sharks, etc.). Next, how are any of these right wing policies? Things like payday loans, and ARMs came into being in the 90s during the Clinton years with a Democrat appointed Treasury secretary.

You're so misinformed and this point has already been addressed on this forum. Look at the history and read.

 

[Brandon716]

Here is a copy of post #39 on page 3 in this exact thread, for everyone's reference.

Keep in mind many of the market de-regulations (including the creation of mortgage backed securities) came from the Clinton/Greenspan era.....

There were a series of deregulation laws passed in the late 1990s, ironically many of which were helped with none other than John McCain.

Republicans controlled Congress in the late 1990's and Bill Clinton went along with most of it, unfortunately. They were busy impeaching him and all, so he had limited power at the very end of his Presidency.

The particular bill I am referring to was passed in 1999 just as Clinton was exiting.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

If you want to blame a bill pushed through a Republican Congress and enacted in November 1999 on Bill Clinton, a year after he was impeached, okay...

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services.

This is just one example, but it lead to the mortgage crisis.

If you want to know who voted for it in the US Senate, here is the roll call:

http://www.govtrack.us/congress/vote.xpd?vote=s1999-105

 

[cacruden]

It is not fair or smart to chide me for saying right wing policies allowing free markets (predatory lending as an example) to do whatever they want caused the mess. While your response to me is "it's quite possible that illegal behaviour..." which itself means you didn't do the research. So please continue spinning for our enjoyment.
Sadly, I was learning from you until you showed me you don't really know at all.

I chided you for saying "right wing policies" which is a reworded spin of the "deregulation is the cause" of the current crisis. Just past two weeks ago, every single Democrat that came on the TV started parroting the "deregulation" was the cause of the problem and it was "them" that were at fault. It was really obvious that they just signed onto the same talking points. NONE of them identified which deregulation lead to the problem, and how it caused the problem -- it was standard political spin. This spin of course allowed them to deny that THEY had anything to do with the problem (there is of course similar spin coming out from the other side as well). NONE of them could point to what THEY DID to bring the problem to the attention of Congress. The other reason I chided you is that you said it was definitively (use of definitive wording) caused by "right wing policies".

Now to be quite honest, I am not sure the root cause of the problem - only that it was sort-of a known potential problem years ago -- I can remember Greenspan trying to jawbone the "exuberance" that was causing an inflationary bubble - but at the same time he was dealing with another potential crisis and felt that his hands were tied. Was there a right decision that could be made? Maybe - maybe not.

I am also not going to lay the blame on "one" conveniently identified root cause - since I think there are a number of things that together have lead to the current situation. I do not believe anyone in government is absolutely sure of the right move right now -- which is why congress tried to close down - leaving it to Paulson to deal with (a few weeks ago). If they knew how to deal with the problem - they would have - and much earlier.

Why did I mention that it could very likely have been partially caused by criminal activity? Two reasons: 1. Both Fannie Mae and Freddie Mac are being investigated - which is done when there is some basis to believe that there was criminal activity. 2. If Mortgage loans were made - that were interest only because the borrower could not afford a standard mortgage (which by itself would not be likely illegal), but if those Mortgages were bundled in as debt rated A or above and sold off (or insured) - based on that lie -- that would be fraud. Why was I not definitive? Because it has not been proven yet.

 

[kEiThZ]

The particular bill I am referring to was passed in 1999 just as Clinton was exiting.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

First off, can you explain how a bill allowing consolidation in the financial services industry could have lead to poor lending practices? If anything consolidation would have resulted in tighter lending standards. That's the exact reason the government of Canada will not allow any of the big banks in Canada to merge....for fear of poor access to credit for consumers and small businesses. Next, tell me how a bill allowing consolidation led to the creation of mortgage backed securities? There was de-regulation no doubt, and were that to happen in Canada I would be at Parliament Hill holding a placard as soon as I heard about it. But it's sheer ignorance and a rather poor understanding of the finance sector on your part to assume that a single act lead to today's collapse.

You're so misinformed and this point has already been addressed on this forum. Look at the history and read.

Have you ever taken an economics course in your life? Any high school student can point out what I just did. But hey you are a product of an American High School so I guess we have to lower the bar a little.....

Republicans controlled Congress in the late 1990's and Bill Clinton went along with most of it, unfortunately. They were busy impeaching him and all, so he had limited power at the very end of his Presidency.
....
If you want to blame a bill pushed through a Republican Congress and enacted in November 1999 on Bill Clinton, a year after he was impeached, okay...

So because Bill couldn't keep it in his pants, it excuses his lack of oversight over a bill consolidating the industry? Now Bill was a great president. But your logic here is flawed. And at worst, what it shows is that Clinton lacked the gumption to do what is right. That was not the case. Simply removing regulations to allow mergers (and the US has an incredibly fractured and diverse finance industry...not like Canada) is hardly the de-regulation that led to today's crisis.

This is just one example, but it lead to the mortgage crisis.

It was not this example. That's your spin. Ask any credible economist. Actually ask any banker or financier or high school economics teacher. Crises rarely occur based on one act. There are often complex reasons that bring us to one. Your simplistic grade school analysis is exactly the type that would take us from this crisis to the next. You blame everything on bank mergers, forgetting about mortgage backed securities, a negative real interest rate under Greenspan, the glut of asian savings, poor documentation by banks, poor oversight of MBS by ratings agencies, etc. That's what those people on tv mean when they say de-regulation....not the grade school wikipedia answer you give here.

 

[Brandon716]

That bill went far beyond what Wikipedia says. Use google and do further research if you're interested in the topic. I think you need to understand the issue at hand before commenting further, because your comments are taking a harshly personal tone, much as you've taken in the past.

The deregulation of the mortgage industry was a series of steps made over 20 years. The resulting super boom and total collapse took less than 6 years. I'm the first to say this, and I didn't mean to place blame on a singular piece of legislation if you took that from what I said.

The Gramm bill was a key step in that direction, and it was supported by the deregulators in Congress and you clearly see the vote tally when the Senate voted for it.

Democrats in the Senate are as guilty as everyone, but I'm not sure Clinton had any choice. For what its worth, the Democrats were the side in the Senate that had the most questions and had successfully kept the bill from passing in earlier revisions. The final legislation was sent to Clinton's desk with a veto-proof majority. He didn't have any choice but to sign the document.

Republicans had a large majority in Congress in the late 1990's. It was the peak of supply side economics taking a hold of US governance.

I'm sure he had the right to veto it, but it would have no effect. And like Parliament, the Presidential US system has traditions, and he signed it due to it being veto proof.

Not sure that matters, but you seem to forget he was under immense pressure having been impeached just months before this legislation passed. The only point I was trying to make was that Clinton was under immense stress and had little power when this legislation was passed. I didn't say he wasn't guilty of signing the bill into law. I don't think you're just ignorant, but I do think you're just trying to argue for the sake of arguing keithz. Its amusing and everyone else can see things for what they are.

If people want to see what the Gramm Financial bill did, they have google at their disposal and literally thousands of pages to read at their disposal with all kinds of viewpoints.

I have very clearly stated there were a series of laws passed and didn't say the Gramm law was the only thing that mattered. I believe you to be intelligent enough to know that every bill passed has many subsections and footnotes, and its those fine details that matter more than the bill's stated summary. The Gramm Financial deregulation bill was a key player in this, not the sole player.

 

[kEiThZ]

Brandon,

I trust that you are referring to the repeal of the Glass-Stegall Act rules that came about as a result of the passage of the Gramm-Leahy-Bliley Act. While I have my reservations about the GLBA, one can hardly say that this single act in its entirety caused today's crisis. Indeed, the companies that merged as a result of the act have survived today's crisis specifically because they operated several financial services. Those that followed the Glass-Stegall rules and stayed in a single business are the one's who are paying the price. Case in point: Lehman Brothers. Had they diversified out of investment banking, they likely would have survived the crisis.

There are many critics of the act to be sure, but nobody seems to be able to point out a single provision that led to today's crisis. All they see is a Republican sponsored bill that has to do with the Finance industry. Therefore, it must be what led to today's crisis. Find me a credible economist who can pinpoint what portions of the bill contributed to today's problems and I'll concede to you on this. Otherwise, quit accusing me of being misinformed and quit providing such dumbed down simplistic analysis. It is exactly this lack of financial literacy that contributes to many of today's problems.

And neither party in the US seems to have the gumption to address the root cause of these problems...the millions of financially illiterate and irresponsible Americans who signed for mortgages without understanding the terms, purchased more house than they could afford, and use their home equity like ATMs to buy depreciating assets....cars, big screen TVs, etc. It is sickening to see politicians rushing to defend the 'poor customer' who was 'deceived' by the big, scary banks. What, just cause you make less than 100k a year, that gives you the right not to read contracts you sign? And the right to then claim that you were a victim of 'predatory lending'? Gimme a break. Forget de-regulation. You want the root cause, just look down the street at the neighbour who has a bank sale sign on his lawn and a new SUV in his driveway. It's fair game to blame banks for their poor lending practices, but let's forget to blame the many who thought it was okay to live on the financial edge.

 

[Brandon716]

keith,

good for you.

 

[kEiThZ]

A fairly simple guide for the many folks to blame:

http://www.urbantoronto.ca/showthread.php?p=227351#post227351

 

[Mot]

The fact remains companies like Lehman Brothers were allowed to take risks that are now costing the American taxpayer 700 billion dollars, as a start.

Right leaning liasses faire economic policies allowed them to do it.

Keith is also right that people are also responsible for their own economic security and many Americans failed to do protect themselves and spent far more than they should have. I've never been one of those Americans.

 

[screenplaying]

How about everybody takes a break, watches this...

http://video.google.ca/videoplay?docid=7065205277695921912

...and then tells me they still see things in the same way. Who's going first?

 

[kEiThZ]

The fact remains companies like Lehman Brothers were allowed to take risks that are now costing the American taxpayer 700 billion dollars, as a start.

But therein lies the problem. How do you regulate what companies can or cannot invest in? No country in the world does that.... Heck, even the Chinese state controlled banks are given the leeway on that decision. As we have seen from this crisis, even banks in very regulated and socialist countries have suffered. The only way to regulate decisions like that is to maintain the moral hazard and let banks go under.

I am not a fan of full blown laissez-faire capitalism, but people yelling about de-regulation and 'right wing' economic policies should at least know specifics of what they are talking about and criticizing.

 

[afransen]

You can, however, legislate the degree of leverage that is permitted. Government does this in all kinds of ways, as it is. These companies were significantly over-leveraged. Before the shit hit the fan, many people were expressing concern over Leveraged Buy-Outs, such as the BCE deal, and whether those arrangements would be stable if interests rates rose even slightly.

 

[unimaginative2]

Exactly, afransen. No goverment should try to determine banks' individual investments. They should, however, toughen reserve requirements and ensure banks enforce minimum equity requirements for loans. Nobody should be allowed to get a mortgage with no income and no down payment as people were during the recent American housing boom.

 

[cacruden]

Exactly, afransen. No goverment should try to determine banks' individual investments. They should, however, toughen reserve requirements and ensure banks enforce minimum equity requirements for loans. Nobody should be allowed to get a mortgage with no income and no down payment as people were during the recent American housing boom.

Well, Banks such as Citibank etc do have capital requirements, which is why it became much harder to lend when the banks lost money and therefore were either had to go out an raise new capital - or stop lending money.... which is one of the reasons why it became harder to borrow money. Any Mortgage Backed securities that were not sold off (i.e. still owned by the bank) - had to be written down - leading to less capital. Less capital, less ability to loan money. The majority of the Mortgage Backed Securities though is owned by investors -- not the bank. They bought a fixed income - backed by mortgages - insured by a third party.