AMERICAN CONSERVATISM IN 2008 AND BEYOND

georgeob, You are essential correct; without the initial subprime mortgages encouraged by Freddie and Fannie, and purchased from other financial institutions, talking about "credit swaps" becomes moot.

This certainly has a ring of truth. After all the CDSs (Credit Default Swaps) in question were derived from the resultant sub-prime mortgages (hence the generic term derivative applies). Therefore, the value (or more accurately the risk of default) of the latter (sub-prime debts) figures into the calculus of the former (CDSs). But it needs further clarification.

Cyclops, however, does have a point, that, so far, I have not seen him elucidate clearly enough. That is CDSs are, essentially, insurance policies as to whether or not (like life insurance) the sub-prime based securities themselves would live or die, that is whether or not they would default. As I understand it, anyone could play this game whether they actually owned those securities or not. But Cyclops is correct in this: CDSs were not classified and, therefore, not regulated as insurance. Had they been, AIG would have been required to set aside a certain amount of capital to cover reasonably predictable losses (Like those insurance companies that underwrite fire, life, and auto policies) Since they were not regulated as insurance, AIG simply used these derivatives as sure bet cash cows. They were sure bets because of the government mandated rating agencies’ (Moodies, S&P, Fitch) faulty ratings and the implicit backing of the two FMs by the federal government, or at least everyone thought they were sure bets. Given the above, Cyclops has a valid point that the CDSs lacked the proper regulation.

JM

That's because you have already committed yourself to believing in the conservative storyline about the current crisis: Everything bad that happens to the economy must be the fault of Big Government. Every piece of evidence at odds with the story line must be an evasion (as in my case) or a distraction (as in Cycloptichorn's).

The problem is that your whole story line is wrong. That's the idea Cyclo are trying to put to you with our "distractions". But given the emotional investment you're protecting, we might as well be fighting windmills. If it doesn't give you pause that you can't answer my very simple questions about the factual basis underneath your theory, I'm afraid nothing else will.

Good points, JM, but the real blame inures to all those who played the game (from the people promoting subprime mortgages, those who gave credit to all those who shouldn't have been approved for those loans, the crediting agencies who failed at their jobs, and those finance companies that played monopoly with derivatives) based on greed, and the American People were the losers.

Don't forget the folks who created the idea of "bundling" those mortgages and then selling the bundles on the future's market! If anything is nutso, its the futures market. The nation would be in better shape if players there switched to WOW.

Hysterical!

http://www.youtube.com/watch?v=nyIZIiY81Ek&playnext=1&videos=ofFbvj4XLdA

And the principal buyers of third party mortgages; bundlers and sellers of mortgage based securities were ..... Fannie Mae and freddie Mac ! This was the process by which banks issuing mortgages (including Countrywide) replenished their capital for the issuing of even more mortgages. It was the conduit through which excess capital flowed to the expanding housing bubble. Other devices, including credit default swaps, preserved the illusion of security and risk-sharing. However the fuel for the fire was provided by Fannie and Freddy ... and now the public is liable for the still unrecouped losses.

I see that your primary tactic here is to stick with the party line and just refuse to engage anyone who shows that you are incorrect, George.

Mortgage-Backed Securities in themselves are not a pernicious thing and would never have led to the losses that we saw - without the CDswaps. You have the order of importance completely backwards, because you just can't admit that it was not government at fault in this crisis - other than their failure to regulate financial markets that they should have been watching, an affirmative decision made by the Bush SEC, who didn't want to be bothered with it and didn't have the staff to do it under the Bush 'self-regulation' scheme...

The housing bubble itself was not a problem.... it was the devices which allowed our financial institutions to be heavily exposed to it. As I have said all along and you have consistently ignored...

Cycloptichorn

pom, Those "bundles" were over-valued, but nobody bothered to question their over-values because they were all making money - until the bottom fell out. It was based on greed from the front-end all the way up to the banks and finance companies that played with those derivatives.

georgeob's views are not "party-line" nemes. They are part and parcel of the problems that were created through subprime mortgage loans that Freddie, Fannie, and Countrywide encouraged and loss. Nobody was watching the switch to stop this gambling and/or the over-valued packaged derivatives.

We made the mistake of joining AARP several years ago. But subsequently wised up when we recognized them to be just another group of parasites, and resigned from it.

I think you have hit the nail on the head, george. This has been my impression, that without Fannie and Freddie being willing to purchase bundles of loans, the banks would never have judged the practice to be a safe risk. But considering the government backed organizations like Fannie and Freddie being willing to buy a huge percentage of the home loan business, why wouldn't all the banks want to be on the bonanza of financial gain to be made? For somebody like cyclops to claim they had nothing to do with it is frankly silly on its face, and only serves to further demonstrate his blind partisanship to Democratic Party interests.

I once tried to illustrate the point to cyclops by posing the scenario of - what if the government set up a loan company that would buy loans from all banks that loaned money to anyone and everyone to buy vehicles and furthermore, the government would also set up regulations that stipulated loans be made to all people without proper regard for their ability to pay the loans? People without jobs and people with lousy credit should all be able to buy decent cars, right? There could be no red lining of areas or sectors of citizens that made less money and so forth. The loans could also be made with delayed terms for beginning payments, also unbelievably low interest rates, etc. What would be the obvious effect of such an action? Obviously, which I pointed out, the price of used cars, and new cars would skyrocket, creating a car bubble, while banks made as many of those loans as possible without regard for their soundness, because they could bundle huge numbers of those loans and resell them to the government loan company, or to other banks which would buy them so that they could sell them at a profit to the government loan company, or to other banks as well, that also figured they might be able to bundle the bundles and resell them. At the end of this whole mess would of course come the inevitable, too many cars out there with millions of people defaulting on their car loans, and the car price bubble would burst. When the government gets involved into any private enterprise, there will always be something called "unintended consequences."

Now, cyclops is posing the question about commercial properties. It should be obvious to anyone and to cyclops, but it is not obvious to cyclops because of his partisanship, there is always a domino effect, the home price bubble is also connected to commercial property, there is a relationship, so at least part of the commercial property bubble may be due to what has happened in the residential property bubble. Similarly in my auto loan example, the effects as would be played out in the auto industry would also spill over into the light and heavy duty truck markets, or perhaps a better parallel would be a spill over into a vehicle fleet bubble for business interests.

Most of what we are talking about here is so simple and elementary in terms of just simple economic common sense, economics 101, Supply and Demand principles, and human nature. It is not rocket science, not even close. I don't care if we were talking about nails, bread, houses, whatever, if the government set up regs and mandates for people to be able to borrow and buy anything, that industry would be screwed up in royal fashion.

okie, Wrong conclusion as usual; it's not because Fannie, Freddie, and Countrywide sold subprime mortgages; it's the financial institutions that played the derivative game; two separate issues.

It IS because "Fannie, Freddie, and Countrywide sold subprime mortgages." If Fan and Fred and Countrywide had not sold subprime mortgages, then "the financial institutions that played the derivative game" with those mortgages would not have been able to play "the derivative game" with those mortgages.

Worse, Fan & Fred under wrote those sold subprime mortgages, and thereby encouraged, and did not discourage, the financial institutions to play the derivative game.

By the way, CAUSE and its EFFECT(s) are not separate issues.

In fact there were several factors that interacted together to accelerate the bubble in housing prices and the proliferation of marginal (or worse) loans. The widespread sale by Mortgage originators to Fannie and Freddie and their securitization and subsequent sale to investors; (1) separated the loan originators from the loans (and borrowers) thereby relieving the originators of the consequences for default by the borrower; and (2) replenished the capital of the banks & credit unions originating the loans, enabling them to make (and sell) even more loans, also without fear of default. The mortgage securities themselves were carefully put together so that they just met the minimum standards for ratings in a poorly regulated market: the result was the bad loans were widely distributed among the securities and the rating system thereby further corrupted. Credit default swaps provided investors the illusion that their heavy bets in this market were safely hedged. However, as others have pointed out these instruments were in effect unregulated insurance policies and AIG didn't have the assets to back them up in large numbers.

Collapsing economic bubbles have widespread adverse economic effects. In my view the principal factor in accelerating this bubble was the sale and widespread securitization of mortgages which, by relieving the originators of default hazards, corrupted the standards for issuing loans; and attracted large amounts of capital to an already overheated market.

With due respect, I must disagree. Greed is a given constant but the common denominator throughout this story is governmental incentives. Greed (a bad term to use in this argument) is a known factor whereas government meddling, its degree, and final effect is an unkown. The only question nowadays seems to be when and how much the next governmental regulations will be increased. Heck, even the co-author of Frank-Dodd financial regulation tells us "we don't yet know how it will work", and this is shortly before its passage!

But about government regulation, can we really say:
“Yes, of course, it was the lack of government involvement thru 'financial regulation (FR)' that caused the financial crisis?”

It (the lack of FR), arguably, was the cause of the "great depression", too. But has it been demonstrated that the constant increase in FR from the Great Depression thru Sarbox to the meltdown in question helped prevent downturns during that 70 some year period?

It seems too easy and simplistic to blame the past conservative efforts to free up the economy by decreasing FR. But the question remains, given the flexibility and innovation of the financial sector, can the government play anything more than catch-up in this arms race between regulation and financial innovation? Actually one could argue this gives politicians a great reservoir of evil to point to while seemingly "doing something" so as to appear useful, but this is a political luxury that America may not be able to afford any longer.

The government increases regulation, then Wall Street, via its evil way of making a profit, finds a way to make money anyway (from which the government is only too happy to take its cut). When things go south, Washington then gets its whipping boy, passes more regulation, which is then legally circumvented...and so it goes. Regulation piled onto regulation which, if not decreasing transparency, certainly increases operating costs, decreases profit (lowering tax revenues), and forces smaller companies out of business thereby decreasing competition. Government actions tend to create oligarchies that then realize their business depends more and more upon the government and its ability to regulate its competition out of existence; their economic moat is now established by and deeply depends upon the federal government and its regulations.

The levels and reach of regulation now reached via Frank-Dodd are unprecedented. However, the CRA (Community Reinvestment Act), its misuse by government agencies and ACORN to force banks to lend and create sub-prime debt, the FED's low interest rates (for way too long), increasing the two FM's portfolios (to purchase said debt), and their implicit (now explicit) government backing of those GSEs (government sponsored enterprises) that allowed the purchase of that sub-prime debt-- all had major roles in the recent economic disaster. Can any one name the common denominator here? Greed perhaps? But that is a constant in any human enterprise (Problem with using the word greed is that it is judgmental and beside the point). The Point is that government actions promoted such behavior. The government's cumulative actions had the unintended effect of promoting all the behavior in the financial sector that some (especially, and ironically, legislators) would condemn, after the fact (of that previously passed legislation).

Ayn Rand was constantly puzzled as to how pure capitalism gets such a bad rap since it has never actually been tried. Indeed. So, given that and the fact that government FR is merely an exercise in futility combined with political expediency and populism designed to impress the voters, is it possible to move away from such political impulses that produce consequences that limit both economic and personal liberty? Is there an argument that champions a different more rational approach; an approach with shorter laws? Laws unlike Angelo Codevilla’s “Laws and regulations [that] nowadays are longer than ever because length is needed to specify how people will be treated unequally”? Laws that are informed by the U.S. Constitution and that would protect liberty and economic freedom of individual citizens?

But perhaps this is too much to ask from a ruling political class that refuses to, even, protect our international borders. Maybe in the future we may HOPE for a meaningful CHANGE. The answers to those above questions are contained in the first half of ICAN's posting and the rejection of that very progressive agenda we presently witness emanating from the Obama administration. It is now up to conservatives, and citizens in general, to take back our America, an America that respects all its citizens, their beliefs, and their aspirations.

JM

Bingo, exactly right, JM!!!!!!

I am so sick and tired of liberals labeling the problem "greed," when it is human nature and its self interest that simply takes advantage of the unintended consequences of government intrusion into the free market. There are already laws in place that exist for the purpose of controlling and punishing corruption and criminal behavior, such as took place in Fannie and Freddie, and for which we have seen absolutely nothing done to enforce or punish. Just in case liberals have not discovered it yet, greed is not against the law, but embezzlement and other illegal schemes are against the law and should be prosecuted. It would be nice if Obama would quit accusing us law abiding tax paying citizens of being greedy and begin to call to account his friends and supporters for their corruption. Yes, that would be nice and he might then for the first time have some hope of earning our respect.

Because like all right wingers, you refuse to ever take personal responsibility.

It's too bad that government had to intrude in business. If they hadn't there would be no such thing as embezzlement or illegal schemes.

On the one hand you argue government shouldn't be involved at all and on the other hand you argue that government should prosecute when laws are broken. What are laws if not involvement in business okie?

Last I checked, thoughts are not against the law according to the constitution, pom. Greed is not illegal. If however it causes a person to commit theft or embezzlement, that is illegal. If it causes a person to work 20 hours per day in order to lawfully earn more money to build a bigger house for himself and his family, that is entirely legal and perhaps even to be admired, as hard work is an admirable trait and would provide additional jobs for the people he hires to build him his bigger house.

You really need to educate yourself just a little in regard to how this country works, pom.