A Catastrophe Foretold

How about we just "de-regulate" Ponzi schemes? They used to be such popular and successful "financial instruments." I'm sure Alan Greenspan would get behind the initiative--if he hasn't already--and, in fact, would probably like to get a piece of the action.

Good post, AndieG! No there are two of us that remember Bush`s vast ownership society plan. It went down the tube as it should have with all of his other stupid plans. They say ignorance is bliss, which explains how Bush can even function anymore.

Am I the only one left with a Pre 9/11 memory?

Bush, pushing for an 'Ownership Society', as part of his plan for eliminating Social Security? Everyone should own their own home and 401k, and be responsible for themselves?

Not everyone, should own a home! It's a lot of responsiblity, and requires planning. To do maintence, pay taxes, keep up with insurance. There isn't a landlord, paying the water bills, or heating costs.

Letting realtor's off the hook is wrong, they aren't giving back their 6% either! Now their using their insider position to buy back those same homes at pennies on the dollar, to rent them out, or turn them over to their 'investor' friends, to remodle and re-sell thru them at twice the price, and another 6%!

Lender's knew better, you don't lend 120%of the value of any asset! That's what they were/are doing!

Bush changed the rules, to promote his 'Ownership Society', and to make the economy look better then it was/is. Take out a second morgage, re-finance and Go Shopping! Pass a Bankrupcey Bill, so there's no getting out of paying, and you have a society of indentured servants! Just how he wanted it!!You'll be working to hard and to long, just to keep your head above water, to pay any attention to the fact that he's tranferred our entire Treasury over to his Oil Buddies, and Cheney's Military Industrialist!

Boy, don't we wish we had Gore's lock-box to laugh at instead!!

Nietzsche - Love the comparison of Greenspan to Dr. Strangelove. Allow me to expand on it --

Dr. Strangelove was called upon to offer a vision of hope to leaders who realized that their "oops" could doom them along with the rest of mankind.

Don't worry, he assured them, it is quite practical to immediately begin moving to a place where we "leaders" could go to avoid the incumbent nuclear meltdown.

Greenspan must have modeled his own character on Strangelove's. He was asked about the tax cuts, and he ok'd them. I mean, hell, we have the means to protect the real "leaders" from any meltdown that might ensue.

At every point that should have counted, Greenspan abrogated his responsbility to US and world citizenry, and threw his support behind the guys behind the curtain who were pulling the strings of destruction.

He looks like, and acts like, Dr. Strangelove. Somebody get this man a wheelchair, remove his kind but phony glasses, and teach him the seig heil(sp?) salute.

Years ago, consumer advocacy org's and some others were predicting that lax lending, toxic loans, and disposable shoddy new housing was going to lead to an economic crisis, and a lot of people would lose a great deal. No one in the industry or govt felt there was a problem. I believe the industry and govt both knew very well that what was going on varied from deceptive to criminal, but as long as companies were making money and supporting the politicians who provided favors, they just wanted the party to continue until the main players had what they wanted--millions of dollars. Their profit came at the expense of the economy and millions of citizens. If this scam had been perpetrated by a few individuals with no connections instead of the housing/finance industry, those individuals would be in prison.

This is not to discount the consumers' role in it. SOME consumers did let the hype blind them. They got greedy, stupid, and chose to ignore the red flags, because of the promise that they, too, would get rich overnight by "investing" in real estate. They were suckers, and many have already paid the price. More will continue to pay. NO bailout plan will save these people because bailouts are for the industry, no matter how they may be disguised as being "for the homeowners."

Some consumers were defrauded. I do not include them in the group above. If any help is available it should go to them but I seriously doubt it will be possible to sort out the victims from the suckers in time to help any victims. I feel that many people who do not deserve this will lose everything.

Many in the industry deserve to lose everything. They are/were "professionals" who should've known what they were doing, and I believe they did know. They just figured since the toxic loans are sold, it becomes someone else's problem. Instead of bailing out the industry the govt should stay out of it and let the markets work, just as these industries/corporations claim they all want, when consumers are saying there needs to be better regulation.

Blaming consumers also seems to hold consumers to a higher standard than professionals as I believe others have said, if not here then elsewhere. There is NO DOUBT; the industry created, promoted, and sold these bad loans. Consumers took the bait too easily but the industry created this mess. It deserves no help and no break. I want to see jail time for some of these crooks but I doubt I'll get my wish.

Perhaps nothing was done to avert the sub-prime meltdown because it was all part of a plan by the bankers to pull off a huge heist of property.

Hey, if J P Morgan and his pals could pull it off a hundred years ago, why not the bankers of today?

What easier way to relieve the working class of its most valuable assets? The same way Morgan was able to take over all those banks back then: real easy credit to inflate a nice bubble, then pop it by tightening lending standards.

Oh look, all those people getting foreclosed on, just like all those banks in Morgan's day. No different, really. Only the mark has changed.

I think Greenspan looks a lot like Dr. Strangelove.

Just more life in the box, where transferring money from the unders to the overs is really what it's all about - explained in more detail here "They're Building a Box and You're In It" - http://www.rudemacedon.ca/dlp/box/box-intro.html

Thanks Helix,

It seems that Jim Simons can afford to make much larger campaign contributions than the rest of us and that seems to be working quite well for him.

dmia October 26th, 2007 1:24 pm

>>Not all of the fault for the subprime crisis belongs to lenders. Over the last 15 years, the sense that each and every American is ENTITLED to a 2 story, 4 bedroom, 3 bath colonial in the burbs has emerged...

Isn't it strange how such erroneous assumptions just 'emerge' into the public consciousness?

Certainly the commercials beamed into the public living spaces could have nothing to do with this strange sense of entitlement. The Emergence Theory also ignores the beating of the drums by most financial advisors and columnists.

These are the same advisers who convince us sex is impossible without Viagra, cutting income will keep the bills paid, and everyone needs a new credit card to finance that 'well-deserved vacation'.

How sad that the suckers are always told to take responsibility for their own actions, while the perpetrators of the fraud retire to the Cayman Islands or Brazil with their fraudulently gained wealth.

Helix is right. It's a con game. Corruption is endemic to the financial system.
Krugman himself implicitly admits this in the last paragraph - "Mr. [Barney] Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he's facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance."
But Krugman is also right. It's about ideology as well. Ideology is the cover for the corruption. The amazing thing is that there is a phalanx of propagandists (look at the academic syllabus in finance for sources) that actually believe their own line.
THe financial press has been full of the ideology (aka 'regulation is worse than the problem').
But the conmen (persons?) and the ideologues have history on their side, at least recent history. The great populist awareness of and resistance to big money in the nineteenth century is a monumental battle with monumental consequences - the little guys lost and the big guys won.
What lessons were learned from the Savings and Loans crisis? that the casualties could conveniently be ignored, that the perpetrators would be exonerated, and that after some government subsidies to the key institutions that should known and done better, it would be business as usual.
WHich is why we got the subprime crisis, and which is why the key structural causes and consequences of this crisis will not be analysed, will not be redressed, and the casualties will disappear into history as have the casualties from preevious financial crises.

PaulBramcher___ I agree with you, it would be fair now to let the poor turn it around and screw the rich that finished them off, but that would probably finish all of us off.

Without some sensible regulation on lending practices and stable interest rates, we will continue our boom or bust economy.

Repulsives do not want big government unless it is needed to increase their fortunes, make war on most anything, pry into everyone`s private lives, stop evil abortion and contraception, etc.

It may well be that deregulation needs to work both ways if it is to be fair. If the wealthy may prey upon the middle-class and poor, the poor should be freed to prey upon the wealthy. Fair enough?

the subprime crisis is primarily the fault of the lenders because they did not assure that the loans were properly documented and reasonable risks.

The trigger was Congress and the Executive failing to provide adequate regulation of the transfer of risk to investors.

The credit rating agencies like Moodys also missed the risk.

Brokers and appraisers acted criminally in many cases - pumping up the value of property.

And YES many of the borrowers should have defied all the experts that were advising them to borrow too much on too little collateral and earnings.

But only the borrowers will be significantly punished.

Mr. Krugman professes concern about the 2 million subprime borrowers who, he writes will be "facing the humiliation and financial pain of losing their homes" by the end of next year.

Yet he offers no plan or program to help these people either remain in their homes, or to find new ones.

Yet another reason millions of Americans cannot take seriously "The Conscience of A[An Establishment] Liberal." Like other fellow-travellers of "The American Prospect" set, Mr. Krugman's concern for working Americans is shallow whenever it isn't merely false - his real concern is to preserve the faltering American capitalist system from its own self-destructive tendencies.

Americans need better advocacy for their interests than they will ever get from Paul Krugman and Company. Why, I wonder, do his op-eds appear repeatedly on a website which claims to be progressive in its political outlook?

Everybody keeps blaming the borrowers and the bankers or brokers for loans the borrowers can't repay. But in truth, they were all just following the rules. I think what most people are missing in this story is the fact that the Fed and the Treasury Dept did not only fail to regulate the subprime market, but they set it up for failure with their economy busting policies of the past 20+ years. Unrestrained, unnecessary spending has created a dollar drain. Iraq and Afghanistan, somewhere around a trillion and counting. Tax cuts for the wealthy, another trillion and counting. Just to name the two most obvious ones. The Fed debacle in the late 90's, that created, then killed the "dot com bubble", set up the lower interest rate party that was thought to be imperative to fend off depression after 2000. Rational minds, at this point, would have foreseen the housing crisis on the horizon, having the power and the inside information that the Fed and Treasury had at the time, i.e., their long term policies and their influence over the government and the markets. What we all know is that lower mortgage rates will spur the housing market, and they did. However, the unrestrained spending and the lower rates created a severe dollar trading problem along with its sister inflation. The solution, of course, raise the rates!! Subprime loans, or any adjustable for that matter, (and I am in the business; so I know this) are a recipe for disaster in a drastically increasing interest rate environment. The critical timing on subprime loans is two years; since that is the fixed rate time period. When that fixed rate time period expires, the loan will adjust up to its "full index", that is, margin plus index. If the rates during that period are jumping higher and faster than a jack rabbit, the borrower will have a bleak surprise at the end of his fixed term, not to mention that the margin on these loans is typically extremely high. But that's not all; many of these loans were 100% financing. With rates rising, the housing market was slowing and subsequently the prices began falling. When the subprime borrower's loan was due for adjustment, his 100% loan to value ratio was now 110% or 125% or in today's cases, even more. The common solution to maturing "short term fixed" rates is refinance. But guess what, these borrowers did not have that option. Not only were no banks lending at 125% of value over the past months, few banks are even lending at 100% these days. The result is nowhere to go for these borrowers if they can't make the new drasticlly increased payments, except foreclosure. The borrowers and the brokers, and to some degree the bankers, have no control over the markets. So let's don't blame them. Put the blame where it belongs. Why has the Fed and the treasury pursued these policies? Your guess is as good as mine. But much of it has to do with the planned destruction of the "safety net" and the orchestrated reemergence of a plutocracy in our society. There are many solutions if anyone would embrace them. But they would involve the opposite of what the plutocrats have been espousing for the last 20+ years, and that doesn't seem likely.
John Ordonez

Deregulation, whether of finance, firearms, environmental devastation and neglect, a secret unregulated government without constraint, are not too many steps away from open class and civil war. Spying on the general population and a corrupt justice system are the signature of fascist dictatorships. The now scandalous subprime loan swindle is the result of deliberate manipulation of the system to favor the cronies of the manipulators, and was a deliberate malicious act against the lower levels of society. A deregulated society favors those who have power to play with the remaining rules. The regulations that don't exist those that are meant to protect society and environment as a whole. Without those rules, society and environment are reduced to impoverished slaves. What the elite wish bring about regardless, is enslavement of the masses, and free access to the environment. Cheap expendable labor. When there are millions of them available, who cares if they live or die? Some will live to be enslaved another day. For the elite, regulation is for controlling and exploiting the masses, not for constraining the rich. Thats what a patriotic nation state is all about.

robscout, you said it all! Milton Friedman's market forces which say that all that counts is profit and too bad about people who get hurt. We are not to have communities or societies - we are to have markets and all peopel who just happen to live in those markets are just economic units, like a block of land or shares.

Like all ideologies, no amount of empirical evidence will dissuade them of its righteousness. From the S&L debacle and the sub-prime mess, there will follow several more economic seizures as long as Wall Street calls the shots and not the manufactures or managers of labors.

Deregulation causes irregularities to become regular.

When it applies to people governing themselves, they call it anarchy; when it applies to businesses 'governing' themselves, they call it 'deregulation'.

HERE LIE EARTH AND ITS INHABITANTS - DEATH BY DEREGULATION

If this is all some sort of grand plan for the US's design for Empiric control of the world.......stock up on pop-corn, chips and dip, and lots of Kleenex to wipe away the tears of laughter. One has to figure that the level of exasperation will over-shadow the establishments shabby efforts and blandishments to the point that they will be forced into nuking themselves as proof of success.

Financial Times FT.com
MarketsCloseView of the day: US dollar
By Steve Barrow, Bear Stearns

Published: October 26 2007 03:08 | Last updated: October 26 2007 03:08

The dollar's relatively sedate slide of late belies the fact that the fundamentals for the US currency are terrible at the moment, says Steve Barrow, economist at Bear Stearns.

"Inflows into US corporate bonds have ground to a standstill and that's over $50bn of monthly inflows that the US is missing," he says. "These flows are not going to come back quickly, leaving a black hole into which the dollar could easily disappear.

"In addition to this, there's the possibility of another Federal Reserve interest rate cut next week, which would leave the Fed playing even faster and looser with inflation.

"And, as if all this is not bad enough, the US Treasury has washed its hands of any responsibility for defending the dollar against currencies such as the euro."

But Mr Barrow says that while the fundamentals seem to be crying out for a dollar collapse, "automatic stabilisers" seem to be kicking in. "The dollar's weakness seems to be tempered by the fact that its slide creates risk aversion which, in turn, lifts the dollar against the 'high-risk' currencies."

He says dollar strength against these currencies also tends to bring about a modest recovery against others, like the euro.

"Hence we seem to have this strange situation whereby the dollar almost cannot plunge because the act of falling would create demand for the dollar against riskier currencies."

Copyright The Financial Times Limited 2007

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© Copyright The Financial Times Ltd 2007.

"I don't think anybody could have predicted that these people would take an airplane and slam it into the World Trade Center, take another one and slam it into the Pentagon..."

"Homeland Security Secretary Michael Chertoff argues that "government planners did not predict such a disaster ever could occur."

Helix makes good points. Why does Krugman think Greenspan is enthralled by a naive faith in the invisible hand? If he was driven by ideology, this still could not blind him to the consequences of deregulation, but perhaps inspired him with the malice of Ayn Rand who identified those who fell short of the Neitzschean ideal of an ubermensch as unfit for survival.

And, of course, Greenspan and his ilk do embody that ideal and they are part of that exalted cadre who look down with pity and loathing on the stupidity of the masses that are expected to exercise good judgment and behave with probity and prudence in a democratic system. They are fully aware, of course, of the stupidity and short-sightedness of those for whom they make policy and they have provided them with the opportunity to fully exercise their irresponsibility and destroy themselves.

Give them enough rope, said Lenin.

Is it possible that the assault on democracy going forth in this administration, this violation of the Constitution, and this supposed violation of common economic sense is not the stupidity of those in power, but a strategy?

If one wanted to pursue the ultimate globalization and create a one world economy liberated from the bottlenecks and other inconveniences caused by that obsolete entity called the "nation state", how would one go about it?

How would you go about it?

Would you, for example, weaken the world's largest economy, the world's most ardent proponent of individualism, and create the conditions whereby a North American Union concept would seem very appealing? Would you apply Naomi's "shock doctrine", in other words, to create a "clean slate" upon which you could draw your new political/economic vision of the future? Would you engage in some "creative destruction" and impose a little approach/avoidance situation for the ignorant masses under your control? Approaching the NAU provides relief when the choice is between the traditional model and the new one.

But, noooooo, those in power are not that smart. 911 was not an application of the shock doctrine designed to make the masses politically acquiescent. Greenspan's attack on the dollar was just his stupid ideology, not an element in a larger plan to make the NAU and the amero more probable.

Shit just happens, doesn't it?

And stay away from conspiracy thinking. It tends to actually make you think. That's not good for sheep. They are happiest when led.

No doubt the hedge fund managers, having been proved totaly wrong in their decisions, will return their bonuses -oh wait, that would be in a society where justice was not "whatever is in the interest of the powerful".

When Uncle Sam ran the country we had an economy that sustained the country. Now that Uncle Buck is running the country we have an economy that sustains corporate America.
Hoa binh

Aren't we glad that America's one million real estate agents did well during the bubble? And the appraisers, the mortgage writers, the title insurers, the home inspectors, the land speculators, the builders, the remodeling shows on TV, and even the Mexicans who came north and actually built a lot of the new houses? Weren't we well-entertained by the mortgage ads on TV?
And didn't the free-market competition of all those ads work well to make sure everybody got an effective loan at the lowest possible cost?

Aren't we glad now that someone else is going to pay for all the excess? Oh, they're not? It's our declining equity that's going to right the ship?
Oh dear. Perhaps we needed Democrats writing the regs instead of Republicans who thought no regs were needed.

Helix,

Well put. The policies promoted by the elite right always showed at best a cavalier disregard for the welfare of non-elites, but most likely they were designed to facilitate theft and parasitism, using the services of well-paid sophists like Milton Friedman and Alan Greenspan to keep the masses confused and to provide the media and the politicians with a simple and innocent cover story.

Affordable housing is an oxymoron.

So, once again, why was nothing done to head off this disaster? The answer is ideology... that this was the way the laissez-faire ideologues ruling Washington - a group that very much included Mr. Greenspan - wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.

On this point, I disagree with Mr. Krugman. It's not ideology. It's a con game.

It is clear to anyone who thinks about it for more than a few seconds that complete deregulation leads to chaos. Can you imagine what would happen if the cells of our bodies, for example, were not regulated in such a way as to work together harmoniously? Oh, yeah. I forgot. We don't have to try to imagine it. It's called cancer.

In exactly the same way that cancer kills its host, deregulation destroys societies and economies. To believe that those who espouse deregulation as beneficial are sincere, we would have to believe them to be incapable of following a train of thought. Quite frankly, I don't think Alan Greenspan is stupid.

The alternative is that they are, in fact, running a con on the American public. And so the question really becomes: who stands to benefit from deregulation? Electricity consumers in California? Joe Average working class American?

Oh, wait. The California consumers were subjected to rolling blackouts and PG&E was driven into bankruptcy while Ken Lay's minions rigged the (deregulated) energy market. And Joe Average American hasn't gotten a real pay raise since the mid 1980s -- curiously coincident with the rise of deregulation under Saint Ronnie. In fact, the Fed's tri-annual Survey of Consumer Finances showed the average family income falling by 2.3% from 2001 to 2004.

Ahhh, but hedge fund manager Jim Simons reportedly earned an estimated $1.7 billion in 2006, up from $1.5 billion in 2005. This income equals the combined pay of 42,500 average Americans, but that's another story -- as is the fact that Simons income was taxed at 15% whereas Joe Average's pay was taxed at nearly 20%, plus 6.2% social security (12.4% if you count the employer's contribution) plus 1.45% for medicare (yep, 2.9% if you include the employer's contribution). And while the average family's income fell between 2001 and 2004, the income of the top tier -- say the top 1% --

I don't know about you, but it looks to me like Joe Average is getting hosed.

Very curious. Those with the financial clout to give substantive support sympathetic politicians seem to be doing extraordinarily well, while average americans are taken to the cleaners.

Deregulation an ideology? I don't think so. It's a con -- a cover for a parasitic economic regime.

Cancer-1, healthy body-0.

Not all of the fault for the subprime crisis belongs to lenders. Over the last 15 years, the sense that each and every American is ENTITLED to a 2 story, 4 bedroom, 3 bath colonial in the burbs has emerged.

When a borrower has to take out a second mortgage to pay the down payment on their new house IN ADDITION to a 1st mortgage, doesn't that seem a little risky?

Similarly, where is the logic in getting an interest only loan? So you can afford the payments on an interest only loan. How are you going to pay the damn thing off making an interest only payment? It doesn't take a brain surgeon to figure that out.

There are legitimate purposes for some of these loans. Isn't it fair to expect the borrower to THINK about what he/she is getting him/herself into? Actually, lenders must by law provide borrowers with information about the risks of variable rate and interest only loans. Maybe we should all learn to read.

At the same time, maybe builders could try building some modest and moderate homes instead of 2 story, 4 bedroom, 3 bath colonial homes in the burbs with big price tags.

And maybe realtors could try actually showing their clients homes that they can afford. Not homes that are 20% over the price of the home the client can afford - but homes that are IN the price range that the client can afford.

"Why are the most risky loan products sold to the least sophisticated borrowers?" Because it is super profitable to do so. Free market means free, wild west style.

This feeds neatly into what Naomi Klein so eloquently explains in her new book "The Shock Doctrine" - do yourself a favor and pick up a copy. In the 70's, Milton Friedman "trained" neocons in the theory that deregulation was best, and a shock to the system even better, and time after time in actual practice (Chile, Argentina, and now Iraq) it has proven to be a failure. So why do we allow these bozos to remain in charge?

REGULATION HYPOCRITES

Ordinary, garden-variety regulation of the mortgage brokers and lenders on down through the supply chain could have prevented this - not the kind they kick and scream about - just the normal "just tell the consumer what you're selling them, in bold, not fine print, that's all".

But when it comes to macro-economics, then they kick and scream FOR regulation, the kind that lowers interest rates in a way both, to spur the economy but more importantly to get those bum loans bought up, even at pennies on the dollar for the most desparate ones who can't sell them at any price.

Rock solid republicans against big government ... except when they're not.

I think this has to be said: Most of us know lenders are generally sharkish, getting us to borrow money we have no business borrowing and, when we do, more than we need to borrow. Now, there may be times when we have no choice; when we have an emergency and credit is a godsend, but to live beyond your means is just plain foolish. In this regard, we must learn to take responsibility for ourselves and our finances, and when we do borrow money ALWAYS read the fine print (which usually requires a magnifying glass and speed reading course). Also, ask yourself a lot of what ifs, especially if the loan is slated to more than double in a few years. And don't worry about Mr. and Mrs. Jones; they will be going bankrupt right along with you. They are tying just as hard to keep up with you as you are with them. :) Spend and borrow responsibly.