When Bad Things Happen to Good People Because of Bad Things done by Good People … A Morality Tale (or is it?)

by Daniel on December 12, 2011

Meet Marion and Herb Sandler. They’re good people, you’ll like them. As two of the most prolific and committed philanthropists currently supporting progressive causes, they are currently major funders of ProPublica (investigative journalism), the Centre for American Progress (activism), the Centre for Responsible Lending (anti- payday loans, financial fairness) and the American Asthma Foundation. The contribution of US$1.3bn that they gave to the Sandler Foundation was the second largest charitable contribution of 2006, according to Wikipedia. They are a bit too keen on testing and measurement in education for my taste but you can’t have everything, and they are at least advocates of “multiple measures”.

Meet the Pick-A-Pay Option ARM. This was a lending product that, among other features, allowed for “negative amortization” – a feature under which the principal was not repaid but rather rolled up, meaning that the borrower was effectively dependent on future refinancing. It was not a subprime product, but it allowed people to take on huge amounts of mortgage debt, and contributed to the “payment shock” which sent so many of them into repossession and bankruptcy. As the link above shows, the Pick-A-Pay mortgage product was the subject of a number of compensation settlements with affected borrowers.

What’s the connection? Well, as founders of Golden West Financial, a mortgage lender which was sold to Wachovia Bank in 2006 (the proceeds of which financed that very large charitable contribution), Herb and Marion Sandler were responsible for introducing the Pick-A-Pay mortgage to the market.

Ah.

Read on, there’s two or three more twists before the end of this story …

Obviously, this looks like it might be political gold for anyone wanting to do an “oh my god those hypocritical liberals” story. Which is more or less what Sixty Minutes did two and a half years ago, relying heavily on whistleblower testimony from a loan salesman who characterized Golden West (trading under the name “World Savings Bank”) as “sitting on an Enron”, and “granting people too many loans who simply didn’t qualify”. They interviewed a borrower called Betty Townes who had taken out sequential Pick-A-Pay mortgages, refinancing their way into a mountain of debt and inevitable bankruptcy when the cycle turned.

Except that …

Well, it turned out that the whistleblower in question had in fact been sacked for persistent incompetence and rudeness, and had his case thrown out of arbitration with an award of zero. Not very much of the rest of the story (or similar hatchet jobs in the New York Times and elsewhere) held up either. In fact, Golden West had always been almost parodically careful as a lender, carrying out far more due diligence and credit checks on their borrowers than most other banks. They also eschewed most of the aggressive marketing practices of the industry, and rather than securitizing their mortgages, they kept them on their own balance sheet. And the Sandlers for the most part managed to get apologies and at least part retractions from most of the media outlets that ran these stories. Even five years later, the pre-2007 vintages of Pick-A-Pay have performed vastly better than the ones which Wachovia (later taken over by Wells Fargo) continued to write in 2007 and 2008 under the same brand name.

So, it turns out that the doyens of the progressive funding sphere were also extremely careful, cautious and ethical bankers. If only everyone were so good.

Except that …

Except that well, do you remember Betty Townes from a few paragraphs ago? She was a real person, and what she said happened to her, did. And although I called the New York Times article on the Sandlers a “hatchet job” two paragraphs ago, and the NYT did make some changes to it (most prominently, changing the headline from “Once Mortgage Pioneers, Now Pariahs”), the newspaper basically stands by its reporting of all the factual claims made. And, although the performance of pre-07 Pick-A-Pays is definitely better than other option-ARMs out there, that still leaves room for them to be pretty bad.

What it shows is that a combination of the best will in the world, the most cautious and conservative funding structure and an utterly exemplary set of lending practices, will still leave you writing a whole lot of crap and causing huge amounts of suffering if there is a once in a lifetime asset price bubble going on. As I believe I have said both here and on my own blog, big macroeconomic problems like the US housing bubble and recession have macroeconomic causes, not microeconomic ones. And that’s an end to it.

Or is it?

Well, not quite. It should be noted that, although Herb Sandler vehemently denies having sold out in 2006 in order to cash out at the top of the market (ie, he does not claim to have had any foresight about the crash), 2006 was the cusp year; the year during which house prices, particularly in the Californian market where Golden West did the majority of its business. After the takeover (and things are complicated somewhat by the existence of an interregnum, when Sandler remained in charge of the business under new ownership), Wachovia started to write option-ARM business that couldn’t possibly have been justified under the Sandlers’ business practices. An awful lot of bankruptcy-creating, repossession-generating, outright bad business was done during this period and it has certainly contributed a lot of really bad securities to the market, helping to spread the contagion of the financial crisis, and contributed much more than its fair share to the overhang of foreclosures. It ought to be a sensible goal of regulation to prevent this sort of thing, and it could do so by helping to ensure that future mortgage banking is more like Golden West. And yes (oh god it kills me to admit this), that regulation would have to work by condign punishment of people who committed lending practices like those observed in the California market in 2007 and 2008, many of which were outright fraudulent. Are you happy now?

Well you shouldn’t be.

By definition, anything that was done in 2007 or 2008 isn’t really a “cause of the crisis”. The contagious financial panic of 2008 was, in fact, largely contained thanks to the prompt activity of the Federal Reserve (in America anyway, in Europe we have problems of our own). The USA is in a recession now because of a massive disappearance of housing wealth, not anything else. And the disappearance of housing wealth was due to the bubble built up before 2006, not in 07-08.

With the best will in the world, as I say, if there is a massive imbalance in the real economy (in this case, the decision to accommodate Chinese exchange rate policy and run a consequent current account deficit), there will be a similar imbalance in the financial sector which intermediates it (in this case, equilibrates the resulting capital flows). And doubly so if the official policy of the central bank at the time is to create a housing market boom, and the official anti-bubble policy of the central bank is to allow the bubble to grow, on a promise that action will be taken to mitigate the consequences when it pops. Although it’s had all sorts of twists and turns, at the end of this story, I’m not judging the main characters to be either heroes or villains, because economics isn’t a morality tale.

{ 115 comments }

1

Anderson 12.12.11 at 9:30 pm

Although it’s had all sorts of twists and turns, at the end of this story, I’m not judging the main characters to be either heroes or villains, because economics isn’t a morality tale.

The post cut off the last line, which was evidently supposed to be “P.S. – this means me.”

2

dsquared 12.12.11 at 9:34 pm

I did that joke last time and tbh, not many of the commenters got it.

3

Helen 12.12.11 at 9:49 pm

As an Australian, I read this blog with wide-eyed horror a couple of years ago. Although we don’t have such an animal and I was unfamiliar with the workings of it, “Option ARM” appeared regularly as an instrument of homeowners’ demise.
We do have the phenomenon of homeowners using repeated additions to their mortgage loan to finance consumption, but so far we seem to have escaped the worst financial products and consequences seen in the US.

4

Malaclypse 12.12.11 at 9:54 pm

FWIW, a good discussion of negative amortization mortgages can be found here.

5

Anders 12.12.11 at 10:48 pm

Daniel – this generalises well: current account imbalances really are the closest thing to a root cause of the various financial mishaps that have beset the US and the Eurozone in recent years.

6

David Margolies 12.12.11 at 10:49 pm

“… 2006 was the cusp year; the year during which house prices, particularly in the Californian market where Golden West did the majority of its business.”

When housing prices did what? I am guessing ‘peaked’ but you do not say.

7

marcel proust 12.12.11 at 10:52 pm

economics isn’t a morality tale.

Okeydoky. How about politics then? Can we judge the politicians who deregulated and the lobbyists they responded to and the regulators they appointed to as heroes or villains?[1] Or is this just a case of the free market at work and thus also not a matter for morality? Is it okay to apply notions of morality to anything other than sexual acts or consumption of drugs, or must we limit them to those situations?

The last incidence of “they” in this sentence is deliberately left ambiguous &/or obscure. Interpret it as it suits you.

8

marcel proust 12.12.11 at 10:54 pm

The [1] indicated a fn that I neglected to number. It begins with “The last incidence …”

9

dsquared 12.12.11 at 10:56 pm

Er yes, peaked. Sorry.

10

Bruce Wilder 12.12.11 at 10:57 pm

That argument doesn’t need an economist, so much as a literary critic. The narrative is driven forward by moral causes, until you end by denying moral causes. And, with a slogan like, big macroeconomic problems have macroeconomic causes, not microeconomic ones, I don’t think you should be making reservations for next year’s Nobel Week.

The economy is a system. And, no one is innocent, certainly not anyone, who has $1.3 billion to give away.

11

dsquared 12.12.11 at 11:01 pm

It isn’t an argument, it’s a story. The argument was in my last post (and in another, better one that I wrote somewhere else and didnt publish here because I was ticked off with you lot)

12

Walt 12.12.11 at 11:03 pm

But isn’t the historical evidence that banking crises are bigger deals than other kinds of crises? So it matters if banks run amok in a crisis, just because it makes it much more likely that the crisis will destroy the banking system. And the events of 2007 and 2008 matter because banks tried to get in on the housing bubble, which turned the asset bubble into something that imperiled the banking system.

13

chrismealy 12.12.11 at 11:13 pm

I buy the massive imbalance is going to be intermediated story (used to hear a lot about that back in 2004. Whatever happened to Brad Setser anyway?) I’m curious about the political-economic reasons for why the imbalance exists in the first place. Dean Baker hints at it when he talks about the Rubinite strong dollar policy, but it’s not obvious to me why a strong dollar is good for Wall Street. I saw a quote from Geithner about a year ago where he says that that America is only good at finance so our industrial policy should be based around finance (as if China and India aren’t smart enough to have their own banks) but I can’t find the reference.

14

dsquared 12.12.11 at 11:21 pm

Not sure about that one. I tend to agree with Dean Baker rather than Kenneth Rogoff. As far as I can see, the Fed did manage to save the banking system this time round – I’m not seeing evidence that credit is a constraint on growth.

15

Walt 12.13.11 at 12:01 am

Imbalances can’t be the whole story. Japan had a current account surplus before and after its banking crisis. The US had a current account deficit before and after its banking crisis.

16

shah8 12.13.11 at 12:04 am

Generally, I believe that the surest means of solving a severe current account crisis is regime change. By regime change, I mean changing to a more cheaply funded political system. Most countries suffer from inherited debts and obligations from fascist/very right wing regimes. These regimes tend to be preferred by international credit because they are cheaper to fund, initially–before the economy is destroyed/run down (or never built and becomes ever more outdated and left behind in GDP terms). As with the Wiemar example, international finance demands priority repayment, and to hell with building new houses or modernizing agriculture in the East–whups, a new regime with a central banker of exquisite moral flexibility changes the game and current accounts becomes not so much a problem–with the concomitant boom in the economy for all those weapons purchases. However, this creates its own current account crisis, and which drives certain other events to their conclusion. At the end of *that* wreckage, a new political system with yet another entirely new relationship with international credit shows up…

See where I’m going? Two can play this game all night long…

17

MQ 12.13.11 at 12:17 am

And doubly so if the official policy of the central bank at the time is to create a housing market boom, and the official anti-bubble policy of the central bank is to allow the bubble to grow, on a promise that action will be taken to mitigate the consequences when it pops.

huh? So the housing bubble wasn’t created by individual malfeasance enabled by lack of regulation, but instead by intermediation of a current account surplus enabled by regulators who actively wished to create a housing bubble and so presumably overlooked individual malfeasance…OK, I give up. The main complexity in this story is D-squared chasing his tail.

DD notes: This comment is a prime candidate for deletion, but I’m going to let it stay purely because it provides the occasion for a bit of exegesis of the comments policy. Note that MQ hasn’t sexually or racially abused anyone here, so the recent changes to the policy are not relevant. On the other hand, this comment does not contribute to the discussion at all. It’s just a blanket declaration of personal incredulity, followed by a mild and slightly incomprehensible insult at me. As a result I would tend toward deleting it, and if MQ made a habit of such comments (as he/she in fact does, and has been warned for it in the past by other editors) I would at this point be considering whether a ban was appropriate. I also note that MQ has not provided an active, working, genuine email address (a general requirement for commenting on CT) and I ask him/her to do so in future, when posting his/her comments in the new, polite and interesting style that I expect him/her to adopt.

18

marcel 12.13.11 at 12:18 am

I submitted a post (actually 2 in short order, the 2nd a correction to the 1st) about 2 hours ago, and it (they) went into moderation. Any chance of its (their) getting out, or am I on the sh*tlist now?

19

Sebastian 12.13.11 at 1:42 am

“With the best will in the world, as I say, if there is a massive imbalance in the real economy (in this case, the decision to accommodate Chinese exchange rate policy and run a consequent current account deficit), there will be a similar imbalance in the financial sector which intermediates it (in this case, equilibrates the resulting capital flows). “

Isn’t this the story in Europe right now? Yikes.

“And doubly so if the official policy of the central bank at the time is to create a housing market boom, and the official anti-bubble policy of the central bank is to allow the bubble to grow, on a promise that action will be taken to mitigate the consequences when it pops. “

Ackk, I thought you said earlier that this was largely a lack-of-regulation problem. But here you strongly suggest that it is a regulators-gone-bad problem.

It could be both, of course, but if the super-smart-technocrats can screw something basic like that up, what hope do we have with increased regulation?

(Note, I really do believe that regulation of the banking sector is both necessary and possible. But it will be through simple things like leverage controls.)

20

john c. halasz 12.13.11 at 2:21 am

@13:
“Whatever happened to Brad Setser anyway?”

He went back to work for his old boss, Tim Geithner.

21

ezra abrams 12.13.11 at 2:56 am

I don’t understand why you have a problem seeing the sandlers as un ethical
Is it disputed that they originated the Pick a pay, sort of crack cocaine of mortages ?
Is it disputed that they sold their company to a large amoral bank – thereby exposing both their current customers , their employees and their future customers (those lured in by the sandlers rep) to bad practices ?
you do good, and then sell you company to someone who is bad, you don’t get a pass (isn’t there a bank robbery movie with Denzel Washington and J Foster about this)
I think it was Pope Pius VII, who upon his election was being shown around the vatican.
He stopped to talk to a gardener, who told him that the vatican paid so little, he couldn’t afford to feed his family.
The pope turns to his cardinals and says we have to raise wages.
The cardinals say, but we will have less for charity.
And the pope says, the punchline here
Justice before Charity

22

john b 12.13.11 at 3:00 am

so far we seem to have escaped the worst financial products and consequences seen in the US.

Ish. On the other hand, Australia has some amazingly bad financial products that the US never even thought of. For example, it’s completely legal (and people are sometimes encouraged by crooked financial planners to *actually do this*) to put your entire tax-exempt, mandatory-saving superannuation fund into ETFs bought using a margin loan. Consequences? Meh, I’m sure nothing bad will ever happen…

So the housing bubble wasn’t created by individual malfeasance enabled by lack of regulation, but instead by intermediation of a current account surplus enabled by regulators who actively wished to create a housing bubble and so presumably overlooked individual malfeasance…

No, you’ve totally missed the point of the story, which is that individual malfeasance *isn’t required*. Pre-Wachovia Golden West wasn’t guilty of malfeasance, but its actions directly contributed to the housing bubble. Even if all the other banks in the US had behaved like pre-Wachovia Golden West, there would still have been a housing bubble.

While the collapse of the housing bubble has exposed a shedload of individual malfeasance, and the malefactors in question should be punished, said malfeasance isn’t the root cause of anything (and indeed, much of it was committed in 2007-08 when the bubble had already started to collapse, by people who figured they’d be stuffed otherwise).

23

Lee A. Arnold 12.13.11 at 6:19 am

Daniel, Is it solely Chinese exchange rate policy which is the instigator, or do you employ metonymy? To rephrase your last paragraph, outsourcing has led to all sorts of profit accumulation abroad. Some of that money has become hot money, sloshing around the world, looking for high returns and safe harbors, or harbors presumed to be safe. Property bubbles in lots of places were to fit the bill, and certainly U.S. mortgage derivatives were lucrative enough to accept shoddy reasonings about the risks. Meanwhile the torpor of the ’90’s domestic U.S. recovery was masked, i.e. it looked better than it really was, because this international credit flow into housing over-construction, cash-out refinancings, and the wealth effect of higher equity, all served to prop-up the U.S. consumers, who of course were happy to go along. This, it seems to me, may have no singular villains (though frauds, it would appear, were rife at almost every level) and there is no one person or group to blame. But I disagree with your conclusion. It is an enormous morality tale.

24

Daniel 12.13.11 at 6:29 am

Can we judge the politicians who deregulated and the lobbyists they responded to and the regulators they appointed to as heroes or villains?[1]

We can do, but doing so needs to be separated from our analysis of the causes of the current depression, because the bubble fundamentally wasn’t caused by deregulation.

25

Daniel 12.13.11 at 6:32 am

Is it solely Chinese exchange rate policy which is the instigator, or do you employ metonymy?

Largely metonymy, yes. I do have a much longer post on the subject which I decided not to publish, but Dean Baker’s “The End Of Loser Liberalism” has a very similar discussion.

Note that one can’t really blame Chinese exchange rate policy – the USA is a bigger and more important economic actor than China, so it was the US decision to accomodate Chinese policy (because it happened to look convenient at the time to get a massive surplus of cheap manufactured goods), not Chinese policy itself, that made the difference.

26

Bill Kaminsky 12.13.11 at 7:44 am

First of all, I’m very happy to see you back here, Daniel. I’m a big fan, and I mean that sincerely, not ironically. :)

Second, while I’m in full agreement the propositions:

1) the US’s current recession is fundamentally due to the negative wealth effect associated with the popping of a gigantic asset bubble, and

2) some sort of huge negative wealth effect would obtain even if lenders and borrowers restricted themselves practices that prevailed in more regulated eras,

… I’m some mix between befuddled and outraged on the following points:

A) How can it be anything other than grievously unethical to promote a negative amortization mortgage to a home buyer seeking to live in the home being bought? Negative amortization entails exponentially increasing debt as one pays interest on interest, truncated only due to some arbitrary and inevitably-hard-as-heck-to-understand “recasting” mechanism. Who the heck other than a professional short-seller should desire such a loan? (And even in the case of such a short-seller, aren’t most negative amortization loans the wrong loans for their purposes given that they usually come with rules on how quickly they can be paid off by lump sums?! So what’s the point of such a loan other than the ensnarement of a rube?) Am I confused on this issue?

B) Even if macroeconomic imbalances are the fundamental reason why some significant recession was inevitable, is it not the case that our present recession was significantly exacerbated by having the housing bubble pop with both lenders and borrowers in full panic mode because too many of their liabilities were in the form of complicated instruments that would’ve been hard to price even without the fear that they were issued with one or both parties cutting corners in the disclosure and due diligence departments?

C) Finally, is it not the case that a greater use of “vanilla” products and conservative risk management practices by the banks could’ve significantly lessened the amount they needed from their national governments in order to recapitalize, which in turn could’ve somewhat lessened the reactionary politics of the last few years?

Again, I’m some mix between befuddled and outraged. So the above question marks are all meant honestly. They’re not mere rhetorical devices. :)

27

john c. halasz 12.13.11 at 7:50 am

@25:

I agree that Red China was not really in the pre-dominant drive’s seat and the whole East Asian Co-Prosperity Sphere 2.0 involves much more than China, but the agency-less account of CA imbalances isn’t quite credible, least of all if it reduces to “cheap manufactured goods”. That utterly elides the MNC/Hi-Fi economic rents that were/are extracted from the FX arbitrage involved.

28

Daniel 12.13.11 at 8:23 am

How can it be anything other than grievously unethical to promote a negative amortization mortgage to a home buyer seeking to live in the home being bought? Negative amortization entails exponentially increasing debt as one pays interest on interest, truncated only due to some arbitrary and inevitably-hard-as-heck-to-understand “recasting” mechanism. Who the heck other than a professional short-seller should desire such a loan?

Basically the answer to your last question is “Herb and Marion Sandler, who have a track record of sensible and ethical behaviour in the mortgage industry going back to the 1980s”. The negative amortisation mortgage is basically a good product for someone who has volatile income (it allows you to miss monthly payments for a while without triggering disastrous consequences), or who is likely to move house soon in a market which doesn’t fall too fast (as long as the prepayment penalties aren’t too big). The Sandlers had been offering Pick-A-Pay for more than twenty years, including through one period of falling house prices, and it had worked out fine, because they had underwritten them sensibly and conservatively. Without the benefit of hindsight, I don’t think it can be sustained that negative amortisation was an intrinsically evil product.

on your B), I just don’t agree. I don’t think the recession was exacerbated in this way, because the Federal Reserve stepped in to mitigate exactly these consequences. And on C) (abstracting from whether the draconian policies are actually a consequence of the recession, rather than of neoliberals and assholes doing what they do), I think Brian summed up my view quite well – it is certainly possible that a very, very different regulatory regime could have prevented real estate prices rising, but only at the cost of making 2001-2011 into a lost decade of its own. What we would have been talking about here would have been, at the level of monetary policy, the “sterilisation” of the Chinese capital inflows by carrying out large-scale contractionary policy in the form of “quantitative tightening” in the banking system. Which, for an economy still suffering the consequences of the dot com and telecom bust, would have been a bit difficult to justify. There might possibly have been an optimal policy path which threaded the needle here, but this was the George W Bush era, remember, and since nobody else managed to find a way to neutralise Bush’s generally disastrous policies it seems a bit unfair to blame the financial system for failing to do so.

29

Bill Kaminsky 12.13.11 at 8:42 am

Thanks for the quick and detailed answers, Daniel :)

30

Pete 12.13.11 at 10:43 am

Just trying to understand, mechanically, why the trade imbalance leads to a housing bubble:

- Trade in goods & services from China to US result in dollars flowing to China
– Much smaller trade in other direction bringing the dollars back
– Normally this would result in moving exchange rates until the value of those flows equilibriates.
– However, Chinese central bank takes dollars off its exporters instead, and uses them to buy T-bills.
– That results in an increase in the proportion of the dollar money supply in the US financial system, and a reduction in $ circulating among US consumers
– The US consumers resupply themselves with $ by borrowing at extra-low rates secured on the rising house prices

Have I understood this correctly? If so, I can’t see much of a way out other than either dollar inflation or a chain of defaults all the way round the world until China is left holding defaulted T-bills. Printing $ would solve this except for the 1% controlling the US have bathtubs full of dollar bills they like to roll around in and are therefore opposed to inflation.

31

Pete 12.13.11 at 10:44 am

Those were supposed to be bullet points.

32

Alex 12.13.11 at 10:50 am

As awesome as Google Correlate is, it lacks one feature – although you can draw a curve and pull things that correlate with it, you can’t draw a curve and then search for specific terms as far as I can see. If you search for “Pick-A-Pay”, though, you get something very like a Bass diffusion curve peaking in autumn 2006.

33

marcel proust 12.13.11 at 11:33 am

Daniel wrote:

the bubble fundamentally wasn’t caused by deregulation.

Okay. But would better regulation (I know, might as well wish for a pony) have kept it from inflating, or inflating so much. Some possibilities, requiring:

- mortgage issuers to retain a share of every mortgage issued (skin in the game)
– financial firm bonuses to be based on a moving average of several years’ profits and to be delayed for 2-3 years until returns are in

Suggest others, I suspect you can come up with better ones.

Daniel also wrote:

it is certainly possible that a very, very different regulatory regime could have prevented real estate prices rising, but only at the cost of making 2001-2011 into a lost decade of its own.

If we are going to use bubbles to keep the economy out of recession, there are bubbles and bubbles. How much did the dot-com bubble directly impact the wealth of the lower 99%, or of the lower 80%? Employment in the US, by any measure I can think of, was better than it has been anytime since Nixon’s election in 1968, and this had widely distributed benefits for the U.S. It is not (necessarily) the case that preventing the real estate bubble would have ensured a lost decade in the aughties. The Fed could have identified other types of asset, ones that were narrowly distributed (like tech stocks in the nineties), and looked the other way as bubbles developed there. On the way up, there’s no reason to believe that employment could not have been stimulated as those holding or trying to hold that type of asset became increasingly giddy. On the way down, the collapse in a narrowly held type of wealth, would have had less impact on consumer demand.

Penultimately, about morality tales: yes, repeating you and Krugman, economics may not be a morality tale, but a tale based on morality is a political necessity, for gaining and retaining support and mobilizing people, especially when the minions of wealth and power use morality to support perverse, wrongheaded “solutions” to the problem.[1]

Finally, I echo Bill Kaminsky and am glad to see that you are back, posting and not just commenting. Any chance that you’ll remove the passport control kiosk on your own personal blog? I miss the (roughly) weekly dose of snark and analysis. (This is not meant to suggest that I regret or withdraw any opinions I expressed on your last post here in which, at the very least, you badly expressed the point you were trying to make).

[1] See Merkel, Angela and Party, Tea.

34

marcel proust 12.13.11 at 11:33 am

Agh! Back in moderation again.

[DD says: you're not having the luck, are you? I don't know why this is, the filter is sometimes capricious]

35

Daniel 12.13.11 at 11:45 am

@30 yes you have, basically – it is still worth reading Dean’s book (free!) though. Obviously option 1 is to be greatly preferred to option 2.

36

Daniel 12.13.11 at 12:01 pm

Marcel: I think that my problem here is that the correct policy was to allow the dollar to depreciate and carry out stimulative domestic policy, which is exactly what the Bush government didn’t do. Given that massive policy error, I don’t see the point in either a) speculating about what kind of cut-for-the-purpose financial regulatory regime might have had the effect of undoing the actual policy of the central bank and treasury of the time (in general, financial regulation is shaped toward the opposite goal), or b) blaming the banking sector specifically for not deciding to independently adopt their own monetary and exchange rate policy in opposition to that of the Federal Reserve.

I also don’t really agree that stories based on morality are a prerequisite for gaining political support for sensible policy, but that’s another subject I think.

37

Charlie W 12.13.11 at 12:30 pm

The Sandlers had been offering Pick-A-Pay for more than twenty years, including through one period of falling house prices, and it had worked out fine, because they had underwritten them sensibly and conservatively. Without the benefit of hindsight, I don’t think it can be sustained that negative amortisation was an intrinsically evil product.

Something here is bothering me, and I think it’s this: we don’t shy away from regulating dangerous products in other spheres, so why should we make an exception for financial products? All sorts of hazardous things can be used safely and successfully, given certain conditions; nonetheless, we don’t blithely put those things on the shelves for purchase by any and all. The best candidate for being the cause of a brush fire that wipes out a suburb might be an unusual lack of rain; nonetheless, it’s perhaps not a good idea for the suburbanites to be in the habit of storing drums of gasoline in their garages.

38

marcel 12.13.11 at 12:36 pm

Daniel responded:

I also don’t really agree that stories based on morality are a prerequisite for gaining political support for sensible policy, but that’s another subject I think.

As a Brit, you may well be unfamiliar with H.L. Mencken, one of the more entertaining observers misanthropes in U.S. history.

39

bjk 12.13.11 at 12:36 pm

The great thing about negative amortization, pick-a-pay loans is that the bank recorded the amortization as earnings. Not making payments? No problem! We’ll just record your non-payment in our earnings, inflate the stock price based on those bogus earnings, and sell out at the top! Thank you very much.

No, the Sandlers are right up there with Angelo Mozillo among the villains. I don’t think they can really point to the trade deficit as an extenuating factor.

40

bob mcmanus 12.13.11 at 1:01 pm

36:I think that my problem here is that the correct policy was to allow the dollar to depreciate and carry out stimulative domestic policy, which is exactly what the Bush government didn’t do.

(remembering that there are still some who think that tax cuts and deficit spending are stimulative domestic policy;

Then the question arises as to why this correct policy, which pretty much remains the correct policy, was not and is not being followed. I am unsatisfied with the usual explanations of ideology, insanity, incompetence, and/or Dark age Economics especially since one sector, the 1% have directly, obviously benefited from the policy.

30:Printing $ would solve this except for the 1% controlling the US have bathtubs full of dollar bills they like to roll around in and are therefore opposed to inflation.

I hope I don’t have to show the ways the 1% are connected to the banking and financial sectors. What benefits/harms the financial sector helps/harms the 1%, and vice versa.

…blaming the banking sector specifically for not deciding to independently adopt their own monetary and exchange rate policy in opposition to that of the Federal Reserve.

It is hard for me to imagine central bank policy that is opposition to the financial sectors and the interests of the 1%, although I can remember an age when it was possible.

stories based on morality are a prerequisite for gaining political support for sensible policy

Agreed. Stories based on class analysis are much more useful in the long run.

I don’t think we can usefully talk about trade deficits and currency valuations without talking about oil imports. I am not sure a depreciating dollar and stimulative domestic policy are not very limited by oil prices. Which is another leg of what I see as a triangular flow rather than a bilateral problem with China. China also wants restrained oil prices.

41

bjk 12.13.11 at 1:03 pm

“At Oakland (Calif.)-based Golden West Financial Corp. (GDW ), which has been selling option ARMs for two decades, deferred interest made up about 59.6% of the bank’s earnings in the first half of 2006.”

Let’s assume honest accounting, ie recognize earnings only when the cash actually comes through the door. Would banks have been so eager to make these loans in that scenario?If the Sandlers had wanted to be honest and prudent bankers, they would not have recognized fictitious earnings.

42

Charlie W 12.13.11 at 1:19 pm

Also, worth noting that there are some morality lectures being given ‘in the other direction’. James Surowiecki writes:

… while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”

The thing about morality lectures is that we give them because we want to affect people; we want people to stop doing something they’re doing, or start doing something they’re not doing. Which is normal; it’s almost our everyday, social business. As it happens, right now, something many people want is banking reform; a modified ethos of banking, reinforced by code.

43

Pete 12.13.11 at 1:38 pm

1% and inflation: here’s where it gets weird though, because the 1% are generally not keeping their wealth in cash, surely, but in assets, and increases in the money supply should not of themselves cause the prices of those assets to fall behind other prices. Moreover, people who work in the financial sector should know this.

My theory is that it’s a tea-party like brew between the libertarians who think inflation is theft and those rich Republicans who’ve made money in politics rather than a free market (pork barelling, logrolling, campaign contributions, thinktanks etc)

44

chris 12.13.11 at 2:22 pm

I am unsatisfied with the usual explanations of ideology, insanity, incompetence, and/or Dark age Economics especially since one sector, the 1% have directly, obviously benefited from the policy.

I see why that rules out incompetence or insanity (since it was effective at achieving its real goals), but why does it rule out ideology?

1. Devise policies that will benefit the 1%
2. Pay someone to come up with plausible-sounding bullshit about how those policies are actually good for the whole country
3. Win elections with plausible-sounding bullshit from step 2 and lots of campaign contributions from the 1%
4. Implement policies from step 1
5. Profit!

…ISTM that this is clearly-in-hindsight what happened (on the economic front at least) and that step 2 qualifies as an ideology.

here’s where it gets weird though, because the 1% are generally not keeping their wealth in cash, surely, but in assets

Sure, but among those assets are the dollar-denominated debts of everyone else in the economy — mortgages, corporate bonds, credit cards… Financial assets are not like other assets.

45

SamChevre 12.13.11 at 2:44 pm

But would better regulation (I know, might as well wish for a pony) have kept [the bubble] from inflating, or inflating so much.

I’m not dsquared, but I can’t see any way that better regulation of banking would have affected the bubble. What would have kept the bubble from getting to significant size would have been policies designed to keep leverage down at the household level, such as strict down payment requirements, retained equity rules for second mortgages, and so forth.

And those requirements were largely dropped because of the efforts of well-intentioned pro-equality groups, who saw 20% down requirements as something that reduced the ability of the less well off to own homes.

46

dsquared 12.13.11 at 3:25 pm

Let’s assume honest accounting, ie recognize earnings only when the cash actually comes through the door. Would banks have been so eager to make these loans in that scenario?

Yes they would, or at least the Sandlers did. Herb and Marion regularly fulminated against that accounting standard and made a big deal in their interviews and market presentations about the fact that for compensation purposes, they didn’t let anyone claim a bonus out of income that hadn’t been earned in cash (I think this actually referred to executives rather than to mortgage brokers, but even so). They had what they called the “forever file”, attaching a loan decision to an executive for his whole career until it was repaid or refinanced. At the end of the day, they had been making these loans for twenty years and the cash had showed up in the end. In my view, there is nothing particularly evil about rolling up interest as long as the original loan was underwritten properly, and if the loan wasn’t underwritten properly that is the problem right there, not the accounting.

47

bjk 12.13.11 at 3:59 pm

“Yes they would, or at least the Sandlers did.”

Actually, they didn’t. And the fact that their own compensation practices were at odds with their accounting is inculpating.

48

Tedra Osell 12.13.11 at 4:16 pm

D2, agreed that the problem was more widespread than “bankers are evil.”

However. “Bankers are evil”, in the US at least, is clearly a synecdoche, the larger meaning of which is “the outsized role of financiers and the financial industry in our government is evil.” At least, that’s how I read it. It isn’t about partisanship or progressives vs. conservatives; the complaint is that the US electoral system and the US legislature are entirely beholden to huge influxes of cash, and that this means they’re beholden to the groups that are able to get their hands on huge influxes of cash: major financial institutions (“too big to fail”), ultra-wealthy individuals, oil companies, defense contractors. “Bankers” get to be the symbol for all this because a lot of wall street guys pulled some boneheaded tone-deaf moves immediately following the financial crisis, including the jackass who went on YouTube and ranted and raved about how unfair it was to blame wall street.

49

dsquared 12.13.11 at 4:19 pm

bjk, you don’t get to choose your accounting standards. You have to use GAAP, which is set by an accounting body. The fact that they chose to use much more conservative accounting policies internally is exculpating.

50

elm 12.13.11 at 4:23 pm

If economics isn’t a morality tale, then you should stop using the language of the morality tale to talk about it; now “hatchet jobs” and “extremely careful, cautious and ethical bankers. If only everyone were so good.”, previously “The only way to get the people into the houses”.

I think I recognize (at least in broad strokes) the rhetorical tactic you’re applying, but I couldn’t be bothered to look into the details to see if you’re making a solid case or not.

51

Guido Nius 12.13.11 at 4:28 pm

Evil is knowing the system is flawd and then dressing it up such that it is hidden. Only when you have somebody that concretely shows both (e.g. because he or she milks it for his or her personal gain) should we accuse individuals.

That’s why I give Cameron the benefit of the doubt I would no longer give to Blair.

52

Tedra Osell 12.13.11 at 4:29 pm

“I can’t see any way that better regulation of banking would have affected the bubble”

Seriously?

Try divorcing commerical banks from savings and loans. There goes the motivation of your local savings and loan to talk you into a bullshit loan that they know you can’t afford.

53

Sebastian 12.13.11 at 4:44 pm

“The Sandlers had been offering Pick-A-Pay for more than twenty years, including through one period of falling house prices, and it had worked out fine, because they had underwritten them sensibly and conservatively. Without the benefit of hindsight, I don’t think it can be sustained that negative amortisation was an intrinsically evil product.”

They did so for more than twenty years of unsustainably quick housing price increases, which included one brief and localized period of falling house prices that quickly bottomed out. They were selling primarily in California, the bubbliest of the bubbly states–in which the housing market bubble began well in advance of that of the rest of the country, and in the San Francisco Bay area, one of the bubbliest of the bubbly areas in the bubbliest of the bubbly states. They were promoting a product which absolutely depends on the property remaining bubbly or it explodes into a completely unmanageable mess.

They were not straight up crooked like for example Bernie Madoff, but like his Ponzi scheme, the real worth of it wasn’t discoverable until a recession caused the merry go round to stop.

In another vein, I have a bit of a time with the “blame the Fed” concept as if it were somehow completely divorced from the interests of financeers. Am I wrong in stating that the Fed pretty much gave the macroeconomic policy that the bankers wanted? Am I wrong in suggesting that the Fed gave the macroeconomic policy it did because the bankers wanted it?

So what is all this “Given that massive policy error, I don’t see the point in either a) speculating about what kind of cut-for-the-purpose financial regulatory regime might have had the effect of undoing the actual policy of the central bank and treasury of the time (in general, financial regulation is shaped toward the opposite goal), or b) blaming the banking sector specifically for not deciding to independently adopt their own monetary and exchange rate policy in opposition to that of the Federal Reserve.”

The Fed policy wasn’t developed in a vacuum. It, just like the regulatory regime, was designed by the bankers for their own profit. Public choice theory in action.

54

Sebastian 12.13.11 at 4:45 pm

“I can’t see any way that better regulation of banking would have affected the bubble”

Leverage controls maybe?

55

Barry 12.13.11 at 4:45 pm

SamChevre 12.13.11 at 2:44 pm

” And those requirements were largely dropped because of the efforts of well-intentioned pro-equality groups, who saw 20% down requirements as something that reduced the ability of the less well off to own homes.”

This is a lie, which has been refuted. See Krugman (try googling on his blog for ‘CRA’).

56

dsquared 12.13.11 at 4:52 pm

clearly a synecdoche

The trouble is that it’s a synecdoche that is now driving policy agendas. Any attempt at expansionary monetary policy at the moment[1] is going to end up working through the banks (because they’re the monetary system), and it is going to end up creating profits for them (because monetary policy works through the price mechanism). If it’s politically impossible to do anything that generates wildly inaccurate headlines like that Bloomberg “SEKRIT $13BN GIVEAWAY TO BANKSTERS!!” thing, then it’s politically impossible to carry out expansionary policy.

[1] Of course, one could carry out all sorts of other expansionary policy that didn’t work through the banking system, but I really don’t think these are politically viable on the time scale needed.

57

Watson Ladd 12.13.11 at 4:56 pm

First off, the Bush administration did pursue loose money for a while, which drove down the dollar’s value. But I don’t see how a world awash in money looking for triple A rated bondlike things, and a country with people wanting to live in houses were going to stay apart from one another for long. Even if the local banks were separated from commercial banks, the loans would have been sold and bundled. If they had to hold on to the loans they originated, then the banks would have been unable to offer anywhere near enough mortgages, so other routes to origination would have been developed. If the US hadn’t enabled swaps, some other jurisdiction would have or some other trick was going to be developed. Worse case we would have seen special companies started to buy geographically diverse mortgages and hold them, issuing bonds and selling stock like any other company. So I don’t think regulation could have stopped the bubble.

58

dsquared 12.13.11 at 4:56 pm

Try divorcing commerical banks from savings and loans.

for all the time up to 2006, World Savings Bank/Golden West Financial was a savings and loan, with no commercial or investment banking activities. The S&L’s had their own crisis just fine. The Sandlers didn’t sell bullshit loans that nobody could afford, they really didn’t.

59

dsquared 12.13.11 at 4:58 pm

But I don’t see how a world awash in money looking for triple A rated bondlike things, and a country with people wanting to live in houses were going to stay apart from one another for long.

Bingo. And if it had been, per impossibile, then we would be in the Lost Decade 2001-2011, unless you can come up with some other sector of the economy which would have provided the GDP contribution of the construction industry in those years.

60

Walt 12.13.11 at 5:03 pm

So what’s your argument? Capitalism is permanently broken, and we just put off recognizing it for 10 years?

61

Lee A. Arnold 12.13.11 at 5:08 pm

@56 — Daniel, here I need education: Isn’t monetary policy up against zero interest rates anyway? Should central banks to start buying-up underwater mortgages? (Almost 30% of U.S. mortgages were still underwater in Nov.) What can monetary policy do now, to increase consumer demand?

62

bob mcmanus 12.13.11 at 5:29 pm

some other sector of the economy which would have provided the GDP contribution of the construction industry in those years.

Green equivalent of war.

But the fact is that the housing bubble is one of the prime ways, along with a ground war in the middle east, to increase the inelasticity of oil demand. And James Hamilton has shown that demand has become less elastic.

(Just looked up holders of T-Bills as of Sept 2011. China + Japan 2 trillion, UK 400B, Oil States 225B)

63

Rob in CT 12.13.11 at 5:36 pm

2001-2011 *was* a lost decade. We just papered over it.

64

bjk 12.13.11 at 6:06 pm

Companies pick their own accounting treatments all the time; accounting is not a rigorous application of hard and fast rules. And no accountant or regulator is going to object to a more conservative treatment. I really can’t believe that I’m hearing “Oh those poor Sandlers, forced to book fictitious earnings on risky loans!” Not really.

65

dsquared 12.13.11 at 6:37 pm

Companies pick their own accounting treatments all the time; accounting is not a rigorous application of hard and fast rules. And no accountant or regulator is going to object to a more conservative treatment.

This isn’t true. Accounting for interest income on an accruals (when earned) rather than cash basis is a pretty fundamental principle of bank accounting.

66

SamChevre 12.13.11 at 7:40 pm

Barry,

The elimination of 20% down (at the industry level) wasn’t done by the CRA, had little to do with the CRA, and the CRA wasn’t the problem.

The FHA underwriting standards allowing 97% LTV’s, and Fannie and Freddie allowing at least 90%, was a major contributor to the problem.

67

Steve LaBonne 12.13.11 at 7:43 pm

Sam, arguably true. The idea that it was advocates for poor people who were in any significant way responsible for those developments, however, needs some evidence to back it up. Got any?

68

TheWesson 12.13.11 at 7:49 pm

1% and inflation fears:

Theory: the 1% are likely to be creditors on a large scale. Wage+price inflation benefits debtors and hurts creditors.

69

SamChevre 12.13.11 at 8:07 pm

Steve LaBonne,

The most extreme example of low-down payments was/is “down payment assistance”, which made it possible to get 100% LTV loans through the FHA. Here is a fairly typical petition from the 2007 attempt by HUD to disallow down payment assistance, and if you google for Barney Frank and down payment assistance you can see him arguing with his usual sharp wittiness against disallowing it.

70

Steve LaBonne 12.13.11 at 8:23 pm

Not close to enough to support your assertions. That kind of thing was a drop in the bucket of sign-and-move-in loans (I got one myself and I’m not poor), the motivation for the rest of its contents being the desire of banks to make money from lots of new customers. Banks have much better lobbyists than poor people.

71

ISOK 12.13.11 at 8:53 pm

#63: 2001-2011 was a lost decade. We just papered over it.

I completely agree. That’s the whole point, in my opinion.

As for bankers not being evil and / or regulation being ineffectual, I understand it this way:

1) The financial sector was not lobbying for “deregulation” in general, but rather focusing on specific loopholes and accounting definitions that would allow them to make highly leveraged bets on instruments that accounting conventions would rate as “riskless.” In industry terms I believe this is called maximizing the efficiency of capital. On the asset side, the goal is to minimize risk discounts and on the liabilities side the goal is to maximize off-balance sheet leverage.

2) The regulators were ultimately very accommodating of the above approach, meaning they seemed sanguine about the fact that the financial sector was, as a whole, focused on “maximizing the efficiency of capital” in way that directly exploited all available regulatory loopholes. (The other way to maximize the efficiency of capital, of course, is to make investments in risky projects… well the successful ones anyways.)

3) As a result, the entire industry became geared toward this approach to risk-taking — it was too easy. Essentially the game was to minimize accounting risk while taking on mounds and mounds of risk related to liquidity and off-balance sheet leverage. My assumption is that regulators knew this was happening.

4) Therefore, it seems to me that it would have been quite straightforward for regulators to raise the costs of this strategy, particularly by regulating leverage more tightly. The effect, in my opinion, would be to re-orient the sector towards taking on credit and market risk again (a direct consequence of reducing leverage would be to make many “riskless” trades unprofitable), and therefore creating momentum towards finding riskier but ultimately more productive investments (that is why they are risky). But they chose not to, and here is where I agree with the regulatory capture story.

We did indeed experience a lost decade but we didn’t have too. If the banks had lobbied instead for, to take one simplistic example, significantly better subsidies for renewable energy investments, we may well have had a very productive decade. If the regulators had restricted leverage, the banks may well have been compelled to do just that. Pick ARMs would have had NOTHING to do with any of this.

ISOK

72

SamChevre 12.13.11 at 9:06 pm

ISOK,

My analysis is that household balance sheet leverage was the key portion of the off-balance sheet leverage to which the banking system was exposed.

73

Charlie 12.13.11 at 9:27 pm

The trouble is that it’s a synecdoche that is now driving policy agendas. Any attempt at expansionary monetary policy at the moment[1] is going to end up working through the banks (because they’re the monetary system), and it is going to end up creating profits for them (because monetary policy works through the price mechanism).

Maybe, but surely you wouldn’t say that no attempt at banking reform should be made because that would imply that banks have erred, to the prejudice of other policy decisions involving banks? Moral talk isn’t just a matter of identifying the bad guy for widespread condemnation. That’s not what’s in prospect here.

74

Daniel 12.13.11 at 9:39 pm

73: I don’t think I’ve said that, and there are actually huge amounts of banking reform going through right at the moment. But it shouldn’t be a constraint on the design of a new banking and regulatory system that it has to satisfy some sort of punitive urge. In actual fact, the most robust kind of banking system (Canada, for example) is almost always a highly profitable cartel. And that’s often going to be the case, because if you are going to regulate credit expansion by incumbents, then you have to find some way of preventing the pent up demand being met by entrants; the FSA report into the failure of RBS is quite good on how the objective of consumer regulation undermined the culture of financial soundness regulation.

75

Watson Ladd 12.13.11 at 9:45 pm

Banks lobbying to do business with poor people are lobbying on behalf of poor people. Poor person wants loan, bank wants to give a loan. Letting them come together helps them both. That’s why regulation was never going to prevent a housing bubble: many people wanted houses, and unless you were going to clamp down on all means for poor people to access capital there were lots of people going to give it to them. So while it might be nice to blame the people who lost money for the problems, someone used that money to have a house.

76

Tedra Osell 12.13.11 at 9:46 pm

“Any attempt at expansionary monetary policy at the moment[1] is going to end up working through the banks (because they’re the monetary system), and it is going to end up creating profits for them (because monetary policy works through the price mechanism). If it’s politically impossible to do anything that generates wildly inaccurate headlines like that Bloomberg “SEKRIT $13BN GIVEAWAY TO BANKSTERS!!” thing, then it’s politically impossible to carry out expansionary policy.”

Well, politically difficult, anyway. But no more politically difficult than, say, doing things that generate headlines like “GREEDY UNIONS WIN AGAIN” or “SHOULD YOUR TAX DOLLARS SUPPORT DRUG ADDICTS,” etc. The argument needs to be made from the point of view that, well, even if Bad People (bankers, drug addicts, union members) are going to benefit from this policy, the policy benefits the general public in X way. Because very few people want any policy to benefit X group of individuals who aren’t me.

Certainly people who are going to be swayed by “SEKRIT GIVEAWAY TO BANKERS” are not people who understand what “expansionary monetary policy” is, or why it might be a good idea. I sure as hell don’t. Even if you remove the moralizing aspect, you need to explain stuff to people as, basically, stories. Currently, the story that “bankers” (big finance) have way too much money and power resonates. I think reasonably intelligent liberals (like myself) who are inclined to feel like wall street guys are kinda scum are amenable to explanations of why, even if some of the scummy assholes are going to get off scot free,* X is a good idea. I mean, I’m okay with refinancing people’s loans on underwater properties even though I realize that that’s going to mean that a lot of people who bought way more house than I think they need and/or got stuck holding some stupid piece of property they were trying to flip will also benefit. (Okay, I expect that most house flippers probably just walked away right at the beginning, but I’m sure there are still people sitting in overpriced McMansions in Las Vegas who I would like to smack for thinking they needed a jet tub and a swimming pool.)

*It’s just occurred to me that that’s probably an anti-Scot slur. Can we agree that the English are assholes?

77

JanieM 12.13.11 at 9:58 pm

*It’s just occurred to me that that’s probably an anti-Scot slur.

OT but interesting: I don’t think it has anything to do with people from Scotland.

From Wikipedia/Wiktionary on scot:

Etymology

From Old Norse skot, later influenced by Old French escot (Modern écot), itself of Germanic origin. Compare shot.

Noun

scot (plural scots)

(UK, historical) A local tax, paid originally to the lord or ruler and later to a sheriff.

versus Scot:

A Scot is a member of an ethnic group indigenous to Scotland, derived from the Latin name of Irish raiders, the Scoti.

78

leederick 12.13.11 at 10:29 pm

‘The post cut off the last line, which was evidently supposed to be “P.S. – this means me.”’

LOL, this is clearly either a rather elaborate parable on recent events here at CT or I’m going to have to revisit my opinion on the psychoanalytic unconscious.

The Sandler’s, their charitable work and popularity represent Dsquared’s halcyon days of threads on Iraq and Guinness. Things sour with the introduction of the Pick-A-Pay Option ARM – a clear a reference to the ‘But who’s the real criminal’ post and subsequent banking related threads. The condemnation and Sixty Minutes expose, of course, representing most the comments those posts have received.

But wait, just as it turns out the whistleblower had been sacked for incompetence we find a rash of defamers and abusive sockpuppeteers infesting the threads here at CT, surely this clears D2? Except that well … most those posts still look pretty dubious and “the best will in the world … will still leave you writing a whole lot of crap”. And that’s an end to it… Or is it? Perhaps a sensible editorial and comment policy, would prevent the sort of stink we’ve had recently.

Are you happy now? Well you shouldn’t be. Surely, threadstorms are not caused by mere people, but rather are driven by massive imbalances in the real economy. Leaving us to conclude that “Although it’s had all sorts of twists and turns, at the end of this story, I’m not judging the main characters to be either heroes or villains, because [blogging] isn’t a morality tale.”

79

ezra abrams 12.14.11 at 12:42 am

foreign trade and housing bubbles and deficits.
I simply don’t understand what the economists say, but if you carefully work thru the math, I don’t think there is a connection, or at least not a strong one
Lets say you buy a 10,000$ car from china; you have a car, and ABC company in china has 10k, which does them no good – they can’t pay their employees.
So ABC gives the money to a bank, and gets 10K worth of remembi from the bank.
the bank then has to find people in china willing to take $ and give remembi (after, all, the bank in china doesn’t want dollars either)
although it is strange to us, around the world lots of people like crisp franklins under the bed, so the bank does some of this
the bank also buys stuff in the us that chinese want – stocks, real estate, Tbills, etc
So, in the end
We loose 10K, and get a car
ABC corp gets 10K, and trades that for 10K worth of remimbi
the bank gets 10K, turns that into stuff (tbills)
the bank sells the stuff to people, and gets remimbi
the people are happy – they have given up some savings, and gotten tbills
So, you can see that the willingness of the Chinese to buy tbills directly allows the us govt to run huge deficits at low interest rates, because if the chinese didn’t buy the tbills, the gov’t would have to find some other buyer, and those people might demand a higher interest rate.
so , in that sense, the chinese were keeping interst rates down, which is a large part of the bubble.
To put it another way, it is exactly as if the chinese paid our credit card month – as if “they” went to Visa every month and paid off billions in debt.
Because we had all this extra money, we could spend more on houses.

However, that is not the whole story: the Federal Reserve, headed by A Greenspan, has the ability to raise interest rates any time it wants; Paul Volcker, now for some wierd reason a liberal hero, did this early in Reagan’s 1st term, and caused millions of Americans to loose their jobs (no academic economists lost jobs, so they thought Volcker was good)
I don’t know why Greenspan, abetted by both dems and repubs, didn’t raise rates; ask him.
But even with low rates, the bubble was , in large part, by lowering standards for loans.
Its really simple; your brother asks you for 100 bucks, hes good for it.
Some random guy on the street asks, you have doubts about seeing your money again.
It is the same for bankers: when they lend you 100,000+ bucks, untill around 1990, they were really, really, really careful; only (think its a wonderful life) upright, white, employed people were allowed to borrow.
Then, all of a asudden bankers started giving money to anyone, and for awhile they got away with it because they gave the loans to wall street, who simply lied aobut them and resold them

80

Dan Hardie 12.14.11 at 2:05 am

Tedra Osell: ‘Certainly people who are going to be swayed by “SEKRIT GIVEAWAY TO BANKERS” are not people who understand what “expansionary monetary policy” is, or why it might be a good idea. I sure as hell don’t. ‘

Tedra, you have how many university degrees? And you want to discuss political responses to the economic crisis without finding out the meaning of some pretty basic, and actually rather relevant, terms in economics?

That’s a bit like me asking people to respect my opinions on, say, Mark Twain’s authorship of ‘David Copperfield’ and ‘The Merchant of Venice’. Oh, you’re saying he didn’t write them? I sure as hell don’t know that. Read up on the subject? Who, me, a poor underprivileged Oxford graduate? Take your fancy-pants elitism someplace else.

Also from Tedra, who is possibly not having her best ever day: ‘Can we agree that the English are assholes?’

No, can we not? Can we maybe- oh, let’s make a radical suggestion here… talk like adults instead, and drop the feeble ethnic slurs? Can we agree that that kind of, erm, ‘humour’ is frankly a bit rubbish whether the punch line is filled by the English, the Poles, the French or the Jews? Or, indeed, by the Welsh, or by Americans?

In case anyone wants to play the Celtic victimhood card, I have an Irish Catholic mother. As someone far more Celtic than 99.9% of ‘Irish-Americans’, I am *so* bored with all this Mel Gibson hating-on-the-Saxons shit. It’s not funny and it’s done nobody any good, ever, any more than cracks about greedy Jews or thick Micks. You want a second opinion on this, go ask Henry or Maria Farrell, who are considerably more Irish than I am, though no more so than my mother is.

Gosh, maybe someone at CT will even write a ‘Comments Policy’ along these lines, suggesting people don’t make idiot comments about race, or gender.

81

Dan Hardie 12.14.11 at 3:56 am

I make that, in order: one non-sequitur; one tautology with superfluous italics; one tautology without superfluous italics; one statement of the bleeding obvious, and one macho and rather sad* attempt at a heroic slogan.

(*It might be slightly less sad if there was a cat’s chance in hell of ‘an adult’ entering a rich man’s house in order to spit in his face, but of course there isn’t.)

82

Dan Hardie 12.14.11 at 5:53 am

The difference between you and Diogenes is that enough people gave a damn about him to give rise to the legend that he might have spat in a rich man’s face. I doubt you’ll feature in too many myths- if you’re looking for immortality, you might try one of Simon Cowell’s TV shows.

83

john c. halasz 12.14.11 at 6:17 am

@84:

Hardie, har, har…

84

dsquared 12.14.11 at 7:05 am

This is why I’m at heart still a technocrat (just one of the opposite tendency from the people currently trading under that brand – if we agree that the neoliberal policy infrastructure are the “permanent government”, I guess that makes me the permanent opposition). I don’t really expect the majority of the population to learn what expansionary monetary policy is, because I’m not really interested in learning about their jobs either.

But that doesn’t mean that it makes sense to turn these things into narratives or myths. That’s a) making really important political decisions dependent on which side has the best story tellers, a system tried in medieval Wales and rejected because it didn’t work, and b) almost certainly going to end up in confused disaster, as the policymakers start believing their own publicity material.

I think the operating principle ought to be “nothing succeeds like success”. Nobody would be worrying about “the deficit” if a proper stimulus package had been carried out, and we would be able to have a sensible discussion about financial regulation (including condign punishment for the authors of the post-2007 Pick-A-Pay vintages) if it wasn’t being all mixed up in our countercyclical policy and we had aggressive Federal Reserve and ECB policy aimed at recapitalising the banking system.

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Alex 12.14.11 at 10:59 am

Okay, so lemme have a go at laying out where I’m at.

I’m perfectly willing to accept the proposition that this crisis happens with or without actual corruption by individual bankers. That said, I think it reasonable to suggest that elites don’t go after white-collar crime nearly as hard as they go after working class crime. Still, while it’s worthwhile making sure those who committed crimes face justice, I don’t see much use in pointing too many fingers, given that if the Left makes it all about Bad People, all the government need do is prosecute them, and then close down any discussion of fundamental reform. Yes, what’s broken is the system – whether you define what’s broken as the neoliberal/managerial model, or capitalism itself more broadly.

But just because criminal acts weren’t the reason for this mess, doesn’t mean those individuals who kept clean bear no responsibility. I’m talking about incompetence.

Yes, it’s fine to examine this in terms of a structural issue and point to the balance of payments issue. But capital doesn’t flow by itself.

As I said month ago in a comment on Flying Rodent’s blog:

The job of someone working in the financial industry is to allocate capital correctly. They (the vast majority) failed.

Now, you could say, as dsquared has, that inflating the housing bubble was the only private sector led way out of the dotcom crash. That’s a plausible argument, but I’m mighty skeptical. It seems mighty convenient for one thing.

At worst, you’re suggesting that in 2001 there was literally no way for banks do their job without messing up. Which is a mighty fine argument against capitalism, I’ll give you that. No profitable, safe adventures to lend to for the past ten years at least sounds like a terrific reason for a more interventionist government.

But even granting this point, that doesn’t mean that banks still weren’t behaving irresponsibly by piling in on housing. By spiking the punchbowl, we all got badly hungover many more people lost their jobs and homes. Moreover, most (all?) of the gains of this last ten years went to the top (in this sense, the benefits accrued less like a simple “non-regulated drinking party”, and more like Girls Gone Wild). So the lost decade already happened. Plus, the US got out of that boom the ability to finance the $3 trillion Iraq war.

Or look at it from the perspective of shareholders. I doubt too many are particularly happy that their wealth was sacrificed in the name of short term profits by the people running the banks.

Yes, it’s true in many ways that the Bush Administration was an Epic Fail, and perhaps different policies at the start of the last decade would’ve seen a more sustainable boom. But many in the financial industry still failed to do their job. There’s enough blame to go around (direct link doesn’t seem to work – see Tim Wilkinson in that thread). As I went on, in that comment over at FR’s:

The job of economists is to understand the economy correctly. They failed.

The job of financial regulators is to prevent financial crises and bubbles. They failed.

The job of politicians is to look after the health of the economy. They failed.

The job of the media is to hold all of the above to account. They failed.

And:

None of those things is the job of the average Western citizen. Have the capitalists forgotten their Adam Smith (see your £20 note)? We have a division of labour in our society. This is why we aren’t all expected to be MDs. It is not the fault of the patient if the doctor fails to diagnose an obvious tumour. Sure, some people lied in order to get a loan and maybe this was a bit naughty (but before you rush to judge remember that we wouldn’t judge someone poorly if they stole a loaf of bread to feed their family), but that kind of thing should’ve been inconsequential in the grand scheme of things. It is only because the above groups failed abysmally in their duties that we had the clusterf**k of the last 3 years and counting.

It was one of the biggest financial crises in history. You don’t get that without an awful lot of human error. And trained professionals ought to be faulted for that.

Shorter me: Don’t reify capital flows.

So anyway, enough pointing fingers from me for now, let’s get the banking system right. I find it hard to believe such poor lending would’ve happened if the traders making the lending decisions had more at risk. The problem seems to be the disconnect between managers and shareholders. Simplest thing to do is to make the two groups one and the same. That is: require all banks to be partnerships or workers cooperatives (but then the latter is probably just the socialist in me talking), making sure liability is unlimited. Lending should be much more prudent.

Capitalism is fundamentally not a conservative beast. That’s not always a good thing.

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dsquared 12.14.11 at 11:28 am

The problem seems to be the disconnect between managers and shareholders. Simplest thing to do is to make the two groups one and the same. That is: require all banks to be partnerships or workers cooperatives (but then the latter is probably just the socialist in me talking), making sure liability is unlimited.

Then you get something like the Spanish cajas de ahorros (also I’m not sure how you organise an unlimited liability mutual?) The thing is that since this was a genuinely global crisis, I am nearly always going to be able to come up with a system that didn’t have the specific structural flaw that someone is fingering as the cause, but which still had a crisis.

I’m actually in favour of making sure that people like those named in the FSA reports into RBS and Northern Rock suffer severe consequences, starting but not ending with being banned from the industry for life. Quite apart from anything else, it creates space in the industry for people like me who didn’t screw things up. But the motive for doing this needs to be utilitarian, not retributive.

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dsquared 12.14.11 at 12:18 pm

Or indeed, Shorter me: do reify capital flows. They’re the most fundamental facts in international political economy.

It shouldn’t be underestimated, btw, that one of the actual effects of Fed policy was that it did in fact allow the Chinese communist party to administrate the transition to an industrial economy without major social stress or war, and this was certainly part of the policy calculus.

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Neville Morley 12.14.11 at 12:25 pm

#86: “But that doesn’t mean that it makes sense to turn these things into narratives or myths.”

In an ideal world, I think I’d be inclined to agree, but what concerns me as a historian is that all the evidence so far suggests the impossibility of avoiding doing just that – that is to say, people in general make sense of a complex world by telling stories about it, employing a range of literary and rhetorical techniques. Even if professional economists don’t do this (of course someone like Deidre McCloskey argues that they do it all the time without realising it), politicians, journalists and everyone else will do it nevertheless. The technocratic response – “my version is scientific truth, as opposed to your myths” – may convince other technocrats but is less decisive in the broader public sphere – cf. not only the morality tale of evil bankers, but the still more prevalent tale of profligate governments, and the power of the parable of the ‘national credit card’.

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Watson Ladd 12.14.11 at 12:53 pm

Neville, it’s almost like people make errors in thinking constantly. But why don’t we teach them how to be less wrong, instead of saying that’s how people think?

Anyway, I have real problems with the state creating a cozy den of cronies on Wall Street. If we are going to do that, why should we let the profits be taken by individuals?

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Cranky Observer 12.14.11 at 12:53 pm

> But that doesn’t mean that it makes sense to turn these
> things into narratives or myths.

What is modern Economics(tm) and High Finance if not a series of myths? Of the type that can be read every week on Prof. DeLong’s blog, of Princes of Wall Street and their heroic Nannys at the Treasury, doing Great Deeds, participating in perfectly competitive Markets and Allocating Capital while sipping only a tiny and richly deserved Bonus for themselves at the end of the year? What is dsquared’s “It shouldn’t be underestimated, btw, that one of the actual effects of Fed policy was that it did in fact allow the Chinese communist party to administrate the transition to an industrial economy without major social stress or war, and this was certainly part of the policy calculus.” above if not another version of this heroic mythology?

It’s not original with me, but this is surely the most amazing financial collapse in the history of money: not a _single_ criminal act, or even prosecutable civil violation, by a member of the ultra-wealthy financial elite. Not one. Amazing.

Cranky

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Alex 12.14.11 at 1:14 pm

That’s “some other Alex” speaking, by the way, but I agree with most of what he said, notably the point that housing bubbles are especially dangerous and evil thanks to the sheer numbers of people who can be involved and the size of the debt pile, and also to the generally ugly culture they promote.

Also that yes, corporate frauds should be prosecuted aggressively, but this is not a solution in itself, and a lot of people will think it is and be fooled by it into thinking everything is now OK, as with the Enron and WorldCom cases.

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ajay 12.14.11 at 2:17 pm

It shouldn’t be underestimated, btw, that one of the actual effects of Fed policy was that it did in fact allow the Chinese communist party to administrate the transition to an industrial economy without major social stress or war, and this was certainly part of the policy calculus

History fail. China’s been an industrial economy now for a wee while. And the transition killed millions.

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Gaspard 12.14.11 at 2:25 pm

On reifying capital flows – there seems to be a great deal of variation in Europe on how the cheap money fed into household indebtedness (NL and DK) and housing bubbles (ES and IE, not DE or GR or IT), so how is the step from cheap money to unsustainable housing bubble inevitable? Doesn’t it need a failure of risk management in the banking sector to get totally out of control?

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A H 12.14.11 at 2:44 pm

But can macro-financial crisis have macro-financial causes?

The two problems I have with D^2’s argument are

1. There is a plausible story that the over supply of sub-prime mortages was driven by demand for ABS CDOs, (particularly from Euro-Banks, so if there is a regulation to blame, it is Basel II), and that this demand was driven by these products being mis-rated as AAA products. This has the same effect as releasing a large amount of counterfeit money into the economy, and has nothing to do with imbalances in the real sector. Interestingly the “villians” in this story aren’t the bankers who made the loans and then cut them up, but the insurance providers and ratings agencies who failed miserably on accurately rating these products.

2. In support of this story is Brad Delong’s point that the peak of the housing boom was in 2005, but the recession didn’t start until the run on the Shadow banking system in 2008.

http://delong.typepad.com/sdj/2011/09/over-at-crooked-timber-daniel-davies-turns-into-an-internet-troll.html

It shouldn’t be underestimated, btw, that one of the actual effects of Fed policy was that it did in fact allow the Chinese communist party to administrate the transition to an industrial economy without major social stress or war, and this was certainly part of the policy calculus.

This is very true and under-appreciated. It’s one of Krugman’s major blind spots.

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Tom 12.14.11 at 2:55 pm

“And doubly so if the official policy of the central bank at the time is to create a housing market boom, and the official anti-bubble policy of the central bank is to allow the bubble to grow, on a promise that action will be taken to mitigate the consequences when it pops.”

But then can we say that, at least ex-post, the (keynesian) idea of the Fed to keep interest rates low in order to stimulate the economy was a bad one?

You do not seem to agree on this, even ex-post, when you say that we would have a lost a decade and that China would have had a much more difficult transition to an industrial society.

I do not know much about the second point. One could make the opposite argument, that is that if we end up stimulating the Chinese economy too much, then there will be a bust and social unrest will ensue.

But it is the first argument that I find most problematic. Maybe we would have instead grown more slowly but more stably. We would have added the houses we needed and not more than those. In general, one thing is to say that low interest rates may help us getting back to capacity when we are in a slump. Another thing is to say that low interest rates gives us higher long-term growth than we would have had. After all, at capacity we can only move along the frontier and producing more houses requires getting resources out of other sectors.

I am not saying that it is not possible to back up your “lost decade” claim but I argue that it is central to your argument and that it deserves more explanation.

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Chris Bertram 12.14.11 at 3:21 pm

_Arguments for the nobility of greed are a recent development._

If, by “recent” you mean 1705, you may be right.

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Charlie 12.14.11 at 3:54 pm

The thing is that since this was a genuinely global crisis, I am nearly always going to be able to come up with a system that didn’t have the specific structural flaw that someone is fingering as the cause, but which still had a crisis.

This doesn’t license the conclusion that no specific structural changes should now be contemplated. Again, with the fire analogy: if the fire is big enough, even the buildings with sprinklers will get torched, but that doesn’t mean we wouldn’t have been better off with sprinklers everywhere.

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William Timberman 12.14.11 at 4:19 pm

It shouldn’t be underestimated, btw, that one of the actual effects of Fed policy was that it did in fact allow the Chinese communist party to administrate the transition to an industrial economy without major social stress or war, and this was certainly part of the policy calculus.

Back when George the First was cobbling together his grand alliance to invade Iraq, I remember joking — at least I thought I was joking — that we clever Americans should augment the highly-touted successes of our economic partnership with the Chinese by leasing our aircraft carrier battle groups to the Chinese government to protect their incoming oil and outgoing trinkets. Doing so would not only have saved them a ton of money in research and development, but would also have gone a long way toward making our passions for nasty hardware more affordable.

Alas, unlike our bankers, our politicians are atavistic ninnies, and this perfectly sensible policy was never implemented.

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Tom Bach 12.14.11 at 4:23 pm

The original argument for greed and self interest, say in Pierre Nicole’s late 17th-century version, was more prudential than noble. People like Nicolas Barbon clearly praised greed but there was debate between greed and self-interest as prophylactic and greed and self interest as good. The loud trumpeting of greed as good is of more recent vintage than the 18th century.

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ajay 12.14.11 at 4:30 pm

Plus, anyone who thinks China hasn’t undergone “major social stress” over the last ten years hasn’t been paying attention either. It’s not major compared to, say, the Cultural Revolution or the Civil War, but it’s still a society wrestling with some massive stressors, some of which are assuaged by economic growth and some of which are exacerbated by it.

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Tom Bach 12.14.11 at 4:36 pm

102

Barry Freed 12.14.11 at 5:30 pm

On Wukan see Blood & Treasure.

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Sebastian 12.14.11 at 5:51 pm

“It’s not original with me, but this is surely the most amazing financial collapse in the history of money: not a single criminal act, or even prosecutable civil violation, by a member of the ultra-wealthy financial elite. “

My roommate was watching 60 Minutes about a week ago and they mentioned a statistic that scared me more than anything I’ve heard in quite a while: fraud prosecutions are at a 20 year low in the US.

Zoink??!?!?!?

I’m perfectly willing to believe that we would have had a nasty recession without fraud. But that fact that the fraud we know about isn’t being prosecuted (the robo-signing, the lying under oath re mortgage deeds, the entire Countrywide constellation of frauds) suggests to me that there is a systemic deference to the financial warlocks which isn’t healthy and which may have contributed to the severity of the recession.

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john c. halasz 12.14.11 at 6:24 pm

“It shouldn’t be underestimated, btw, that one of the actual effects of Fed policy was that it did in fact allow the Chinese communist party to administrate the transition to an industrial economy without major social stress or war, and this was certainly part of the policy calculus.”

By all accounts the Red Chinese peg the RMB to the U.S. $ well below its parity value. Admittedly it was a strong $ then, so it wasn’t necessarily undervalued to all currencies. And by most accounts even the 23.5% appreciation of the RMB to the $, since the peg was switched to a slow-crawling float, still leaves the RMB well below parity. So China has been selling their goods below full price, if not below cost, which will eventually be expressed through a large capital loss on its huge $ reserves. So, in effect, someone else must be reaping that surplus, not the Chinese. And I rather doubt that it gets passed on simply as a consumer surplus to U.S. workers, (which scarcely compensates then for leakage in domestic demand and employment anyway). So I’d guess that any Fed accommodation of the RMB peg wasn’t directed at catering to Chinese interests rather than U.S. corporate interests.

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geo 12.14.11 at 6:25 pm

Sebastian @108: there is a systemic deference to the financial warlocks which isn’t healthy and which may have contributed to the severity of the recession

Seems hard to quarrel with. Would dsquared agree?

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David 12.14.11 at 8:00 pm

Daniel: on your weblog you once wrote a story that went like this: Suppose everyone told the truth all the time. In the long run, this would be good for the economy since the large parts of the economy that basically just make sure people aren’t lying could be turned over to do productive work. If suddenly some people started lying, it would be a big negative shock, a recession, etc. since the liars could defraud everyone else and everyone else would have to respond in some way.

Elsewhere (One Minute MBA Part 2) you wrote about how “you get the error rate that you are prepared to tolerate.” In this case you would get “although [financial crimes] are inevitable in any process involving people, the way that you deal with [financial crimes] makes a big difference. If you wave it off as ‘no biggie’, then you will get more and more [financial crimes]“.

Combining these two, it seems possible a financial sector could become untrustworthy enough to become a macroeconomic effect of its own, maybe not one that results in a crash but rather in a permanently somewhat less productive economy.

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ragweed 12.14.11 at 10:52 pm

I am not sure I buy the whole current account deficit / excess savings argument, in large part due to the work that is coming out of the BIS and related economists – eg. Tobias and Shin, Shin , Borio and Disyatat , etc.

In a nutshell, they argue that the focus on net flows that are measured in current account balances ignore the much larger increases in gross flows, which increased dramatically through the bubble era, particularly between European finance and the US to a much greater extent than any changes in the current account balance. Gross capital inflows to the US fell by 1.6 trillion in 2008, which vastly dwarfed the $20 billion drop in net inflows that shows up on the current account balance. The majority of these inflows and corresponding outflows were from the UK and Euro region, again dwarfing inflows and outflows from China and the oil-producing regions.

Also noteworthy is the fact that while the bulk of Asian capital inflows (especially China) were invested in US treasuries, which indirectly influence other long-term rates, a much larger percentage of direct MBS funding was coming from Europe. Shin argues that European banks were essentially intermediating 4-5 trillion in US funds, borrowing from MMDA and other wholesale funding sources and lending back through the shadow banking system.

I find it implausible that a massive increase in financing that vastly outstripped any real activity would not have an impact. Call it shadow-banking or finance rather than banking, if you prefer, but this massive financialization seems a more likely candidate for inflating the housing bubble than the much smaller current account imbalances (though it could be that net flows have a larger impact on marginal cost of credit than gross flows).

As for Golden West –isn’t that just Minsky? As financial bubbles build, it becomes increasingly hard for anyone to keep out of it as they become increasingly less competitive. Golden West could vet its loan applicants more carefully, but it would have a much harder time writing any mortgages at all if it refused to accept RE valuations (even non-fraudulent ones) because they were 30%-50% above the rent-equivalent valuation. Its choice in California was to accept “market” property valuations, or get out of the mortgage game entirely.

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john c. halasz 12.15.11 at 9:09 am

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dsquared 12.15.11 at 9:51 am

Getting major moral conclusions is certainly a lot easier if you help yourself to premises like “let’s ignore their claims of innocence!”

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kidneystones 12.15.11 at 11:15 am

Can we agree that [...We can agree that you're banned from my threads, kidneystones. What part of "sexist abuse aimed at CT editors is not allowed" did you not understand?]

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Walt 12.15.11 at 12:10 pm

Ask yourself what we can learn from you, kidneystones.

112

faustusnotes (used to be sg) 12.15.11 at 12:21 pm

kidneystones, it’s not an ethnic slur and it’s clearly a comment about “scot-free.” Get over yourself.

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Daniel 12.15.11 at 12:22 pm

Just an admin note folks – if a comment strikes you as “obviously likely to be deleted”, please don’t reply to it. Let the moderators take the strain.

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roger 12.15.11 at 12:25 pm

I don’t believe that there are narratives without morals – without assumptions about what is good and bad. So I find the idea that this narrative is without a moral hard on my own belief. How would I defend it?
First, I’d look at the telling. For instance, in describing the Pick-a-pay mortgages, I notice that they aren’t described very completely. That is, they are described for the purposes of the story, to move us in one direction or another, rather than in terms of what they simply were.

In Banktown, Rick Rothacker’s history of the Charlotte banks, in particular Wachovia, there’s a much different description of the program. A, of course, is that there were four options offered to the customer. B., according to Rothacker, “Choosing the minimum payment, which didn’t always cover all the interest owed, could cause the loan balance to grow instead of shrink. But Golden West’s loans included consumer safeguards such as a cap on how much the minimum payment could increase each year. Compared to its competitor’s products, the loans also gave customers more time before the payment potentially recast – 10 years, versus five or less.“ And here’s the crucial C. „Unlike lenders that packaged their subprime and prime loans into mortgage backed securities for investors, Golden West kept its loans in its own portfolio, a major incentive to make good loans.“

C. is important. C. has a strong bearing on the regulatory question, because, of course, without the loosening of regulations that produced the whole mortgage backed security system, we would not have had the circumstances that were taking place in California where the bank had been making these loans.

So I’m going to say the moral of this story is that even banks that continue to follow good banking protocols, in an atmosphere in which injurious deregulation has altered the financial system generally, will be destroyed or at least severely injured in that regulatory regime.

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Tedra Osell 12.16.11 at 3:25 am

77: Ah, thanks!

80: Relax a bit. The joke about the English–who are hardly an oppressed minority–was totally a joke. Also, knowing what expansionary monetary policy is a far cry from knowing who Charles Dickens is. My 11-yo knows the latter, for chrissake.

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