PeakTrader.com

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PeakTrader said...

The financial crisis was caused by a giant government unfunded social program that the government assumed it didn't have to fund.

It created so much "moral hazard" that the entire U.S. financial system was on the verge of collapse.

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Bush Administration Tried to Reform Freddie and Fannie Five Years Ago
CBS News
February 19, 2009

Karl Rove, “We were briefed as far back as 2001 about the problems with Fannie and Freddie; in fact, we moved aggressively in 2004 to regulate Fannie and Freddie, actually got a bill through the Senate Banking and Finance Committee only to have it filibustered by [Sen.] Chris Dodd.”

Rove said Fannie Mae and Freddie Mac “accelerated their imprudent behavior after we attempted to regulate them. They bought almost as much mortgage debt from 2005 through 2008” as they bought in their first 30 years of their existence.

“In fact, in 2003, when we sent our first members of the Cabinet up to talk about this on Capitol Hill, Barney Frank had a hearing in which they basically beat up everybody we sent up there in pretty vociferous language.

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Wall Street, not Silicon Valley, is the archenemy of the Obamanites, although Wall Street helped build the most efficient economy the world has ever seen, created and captured trillions of dollars of real wealth in the global economy, distributed that wealth to America's masses, and diversified the risk globally.

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In the 2000s, U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, two million houses a year were built, 16 million autos per year were sold, U.S. real GDP expanded 3% annually, in spite of 6% annual current account deficits (which subtract from GDP).

The U.S. economy was most efficient, while Americans stocked-up on real assets and goods, and capital was built-up.

Wall Street vastly improved the lives of America's masses.

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Zachriel said...

Peak Trader: "Jon, the financial crisis was caused by a giant government unfunded social program that the government assumed it didn't have to fund."

Well, no. The problem, like all such bubbles, was demand side. The rise of the market in toxic securities originated on Wall Street, and resulted in a shadow market that was global in scope.

Peak Trader: Bush Administration Tried to Reform Freddie and Fannie Five Years Ago

Freddie and Fannie weren't the cause of the problem. They were the "greater fools."

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PeakTrader said...

Zachriel, the government not only approved, but encouraged risky behavior by financial firms.

The government believed it could help lower income Americans without paying for it.

Those politicians must have thought they were pretty smart, until reality crashed upon them.

Of course, they've been successful shifting blame on someone else.

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Zachriel said...

PeakTrader: "The government not only approved, but encouraged risky behavior by financial firms."

If there was no demand for the securities, the mortgages wouldn't have been made. There was a rush to originate the loans, package them and sell them off as quickly as possible. There was a shadow market outside of regulatory oversight, and though the U.S. was the epicenter, it was global in scope.

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower.” — Alan Greenspan

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PeakTrader said...

Zachriel, so, Wall Street was successful selling mortgage backed securities, "recycling dollars," to make more loans, and make more money, while buyers made lots of money.

What's your point?

The government created and promoted the economic conditions for that to happen.

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Zachriel said...

PeakTrader: The government created and promoted the economic conditions for that to happen.

Well, the government certainly had a role in allowing a bubble in the shadow banking system, but the toxic assets at the root of the problem were an invention of Wall Street.

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PeakTrader said...

Zachriel, the reactions and adaptations to government policies, which spun out of control, was not the root cause of the financial crisis.

What Caused the Financial Crisis
November 16, 2010

"Starting in the late 1990s, the government, as a social policy to boost homeownership, required Fannie Mae and Freddie Mac to acquire increasing numbers of "affordable" housing loans. (An "affordable loan" is made to people who normally would not qualify.)

By 2007, 55 percent of all loans made by Fannie and Freddie had to be "affordable." By June 2008, there were 27 million subprime housing loans outstanding (19.2 million of them directly owed by government or government-sponsored agencies), with an unpaid principal amount of $4.6 trillion."

"What we know is that almost 50 percent of all mortgages outstanding in the United States in 2008 were subprime or otherwise deficient and high-risk loans.

The fact that two-thirds of these mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations, is irrefutable evidence that the government's housing policies were responsible for most of the weak mortgages that became delinquent and defaulted in unprecedented numbers when the housing bubble collapsed.

The tragedy is that the financial crisis continues because Congress misdiagnosed the problem and came up with a 2,000-page "solution" that will only make matters worse."

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Zachriel said...

PeakTrader: "The fact that two-thirds of these mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations, is irrefutable evidence that the government's housing policies were responsible for most of the weak mortgages that became delinquent and defaulted in unprecedented numbers when the housing bubble collapsed."

Quoting a blog that quotes an article that cites Peter J. Wallison doesn't constitute "irrefutable evidence." The article itself points out there are other proposed explanations.

The toxic securities were designed and marketed by Wall Street. Freddie and Fannie were late players to the game. They were the "greater fools." Just because you got holding the bag doesn't mean you engineered the scam (though it doesn't mean you're innocent either).

The majority of subprime loans were made by private lenders, and the vast majority of firms making subprime loans were not covered by CRA. The problem was a weakening in underwriting standards, in response to the huge demand for PMBS. The runup was a classic bubble, with people buying only in order to sell to the next sucker in line, with the public left holding the bag.

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Hydra said...

I still believe that the securitizaion that resulted in the mortgage collapse wich so damaged the economy would not have been possible without basically fraudulent risk ratings.

Without those, the securities ould not have been sold, mortgage originators could not have originated bad mortgages, etc. etc.

There is plenty of blame to go around, and hanging it all on "government interference" in a purely benevolent and free marketplace is sheer fantasy.

Mortgage crash aside, I am not so sure that there are not structural economic problems that would have caused the collapse. How many iPhones do we need, anyway?

I know it will be a very long time before some corporation sells me another television, whether it be an eveil corporation or a benevolent one.

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PeakTrader said...

Hydra, financial firms wouldn't make so many bad loans without "government interference."

And investors bought those securities, that later became "toxic," because they made a lot of money, not because of excuses like "fraudulent risk ratings."

The government created the bubble, not only because of its policies on the way up, but also because of its policies on the way down.

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Current account deficits subtract from GDP, i.e. Y = C + I + G + NX.

Negative net exports have a negative effect on GDP.

The U.S. had up to $800 billion a year trade deficits in the 2000s (up to 6% of GDP).

It's remarkable U.S. real GDP expanded in the 2000s, given those huge trade deficits.

The U.S. was more than the engine of global growth.

It was a "Black Hole" in the global economy, attracting imports and capital, and even attracting the owners of that capital themselves.

So, U.S. living standards improved at a steeper rate in the 2000s (in the 1970s, the U.S. was basically a closed economy).

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