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15 February 2009


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To address your points:

Corruption (i.e. 'being corrupted by something') does not have to be criminal. The crony capitalism that was at the core of the Asian financial crisis was certainly 'corruption' in any but the most legalistic sense of the word, but was largely not criminal (mainly because the corrupt also made the laws - which in many ways is not so different than our situation).

I'm not suggesting the government 'force companies' to do anything. I'm just saying that the government place CONDITIONS - one of which is to move their executive components - on federal aid. This particular condition would have the benefit of breaking up the clubby circle jerk that is Wall Street, expose the former masters of the universe to the real world, and help depressed areas.

Taxation is political. Politics reflects one's values. Therefore taxation necessarily reflects one's values.

My point is that if we really are in the beginning of an epic man-made crisis, then it is not logical to rely on the same individuals who created the ideas, laws, policies, and institutions that created the crisis to steer us out of it.

I agree completely about the road to hell.


Something is not right in this country. Listening to the bunch of bankers in front of Congress last week. When asked about their solvency, they gushed about some abstract ratio in trying to out-do each other like a bunch of preening peacocks. Then in the Roubini article you get the reality. Thus our banks have not really marked their books to today's market.

California and many other states are out of money. The property assessor in my town is overworked dropping real estate assessments. Obama's got his stimulus package plus whatever else he has coming down the road. Stores are boarding up their windows all over town as there is no demand for their goods.

Its obvious Deflation is upon us and coming quickly.

We need decisive action by honest people without ties to the present day financial system as right now all we are getting is the tossing of money at the problem in the hope something will work.

John Chavez

There is another component of the crisis is missing from this conversation: The failure of people to make difficult financial decisions. Here are two examples:

1. The refusal of certain state governments to make difficult budget decisions. A long-time resident of western Nebraska, my neigbors and I have for years paid some of the highest state taxes in the country. Guess where it got us? A balanced state budget and probably a very small slice of "bailout" pie for state governments. If we want the Legion baseball team to have a new infield, we raise the money to pay for it. Property taxes are high, but we pay our bills.

2. Personal financial decisions: As a banker at a small community bank, 2008 was our best year in my 35 year career. 2009 is on track to be better. No ARMs, no derivatives, "no stated income" mortgage applications. Just fixed - rate mortgages to homeowners and loans to ranchers to buy feed and equipment.

Were we as profitable as California - based mortgage originators in the early 2000s? No. Do you think we feel sorry for anyone who (1) bought an enormous house they obviously could not afford (or thought they could afford by spinning the the "my home value will always increase" wheel), (2) in a state that never raises property taxes to pay for government services? Maybe. Do we think they should be bailed out by the federal government. I think you know the answer to that one.


I disagree and I think there is a "housing crisis." To be clear, when I say "housing crisis" I am speaking of the bursting of the "housing bubble" that refers to the economically unsupportable rise in the supply, demand, and prices of homes. I agree that low interest rates made the cost of home loans lower thereby increasing demand. However, I believe that a more, and the most, significant distortion in the housing market came from the government sponsored entities (GSEs) Fannie Mae and Freddie Mae taking in subprime mortgages at unsupportable levels causing the "subprime debacle."

I disagree that Wall Street did not understand the high levels of risk involved in subprime mortgages. I believe the opposite, they did understand. However, they determined that there was no long term risk to their firms because the government sponsored entities Fannie Mae and Freddie Mac were willing recipients of the increasingly riskier subprime mortgages. Freddie Mac and Fannie Mae demand for sub-prime mortgages was driven by targets set by the federal government in an attempt to extend “affordable housing” to a larger segment of the population.

The statement that the government exercises no control over Fannie Mae and Freddie Mac is false.


Source: http://www.fanniemae.com/aboutfm/charter.jhtml

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992: "The Federal Housing Enterprises Financial Safety and Soundness Act ("FHEFSSA") of 1992 modernized the regulatory oversight of Fannie Mae and Freddie Mac. It created the Office of Federal Housing Enterprise Oversight ("OFHEO") as a new regulatory office within HUD with the responsibility to "ensure that Fannie Mae and Freddie Mac are adequately capitalized and operating safely." OFHEO is funded by assessments on Fannie Mae and Freddie Mac and is authorized to act without HUD oversight on a range of regulatory issues enumerated in the statute. FHEFSSA established risk-based and minimum capital standards for Fannie Mae and Freddie Mac. And, it established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas."

The Housing and Economic Recovery Act of 2008: “Strengthened governmental oversight of Fannie Mae and Freddie Mac. It established the Federal Housing Finance Agency (FHFA), which replaced OFHEO and HUD as Fannie Mae's safety and soundness and mission regulator. Among other things, FHFA has broad authority to require Fannie Mae to hold capital above statutory minimum levels, regulate the size and content of our portfolio, and approve new mortgage products. “


Would there still be economic downturn today due to excessive consumption over the past several years? Yes, I think so. But I think this downturn has been exacerbated by the actions of Fannie Mae and Freddie Mac in relation to subprime mortgages. I believe that the low Federal Reserve interest rates alone have resulted in a financial "blackout,” subprime mess is resulting in a full blown coma.

Cieran, I agree with your ending quote. Within the next decade there will undoubtedly be future bubbles caused by government market distortion. Right now, that government introduced distortion is, and will continue to be, the subsidizing “fiscal stimulus.” The federal government caused this crisis and it is now in the process of sowing the seeds of the next one. Specifically, I believe that the “green technology” sector will see a “bubble” in the next five to ten years.



A few hopefully-relevant comments...

I disagree and I think there is a "housing crisis."

(1) I didn't say there was no housing crisis: I said that what we are now experiencing is an excessive leverage crisis, not a housing crisis. There was definitely a huge bubble in housing (I saw that bubble forming almost ten years ago ago), but there have been booms and busts in housing for just about forever. I've lived through a couple doozies myself.

What makes this one different is exactly what I stated: that Wall Street used mortgages as collateral for highly-leveraged financial products (what Warren Buffett called "financial weapons of mass destruction"). And then they used those financial WMD's as collateral for more leverage. Uh-oh!

Had this leverage been prohibited by regulation, or had the reward systems on Wall Street required some due diligence to long-term profits instead of short-term shenanighans (as Buffett does, by the way), or had the outright fraud that resulted been prosecuted, the housing bubble would have more closely resembled other real-estate bubbles of the past, which we've all lived safely through.

(2) as far as this:

I disagree that Wall Street did not understand the high levels of risk involved in subprime mortgages. I believe the opposite, they did understand.

Then I have a bridge I'd like to sell you. Seriously.

(3) not to mention this:

The statement that the government exercises no control over Fannie Mae and Freddie Mac is false.

Damn right it's false! We practically own both GSE's thanks to the last administration, so we better have some control over them!

But I never said what you're disagreeing with. So what are you disagreeing with?

Jon, my best guess is that you are simply observing the current financial debacle through the prism of "everything that goes wrong is the government's fault". And your choice of how you view the world is exactly that: it's your choice.

I just prefer to observe the world with fewer filters. And unless you want to suggest that the likes of Angelo "Subprime" Mozillo and David "Liar" Lereah or the ratings agencies that slapped "AAA" ratings on MBS's are agents of the federal government, I believe that you are barking up the wrong tree, and missing the forest to boot.

William R. Cumming

Let's just agree on one fact--The present US banking system is dead and cannot be revived. We need an entirely new banking system. Perhaps loan officers for small mortages (up to the national median)and consumer loans and auto and business loans. The loan officers would be housed in the branch public libraries of the US. They would be federal employees. Nostalgia for the past no--just realizm. Note that the financial system as currently constructed is just a large dependency. Okay so those who made it will go down for the count but at least the rest of the country should not have to do so. And a start in recovery would mean cut the flag ranks by number in one-half by EASTER. We must start altering the militarizm in the US somewhere.

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