Posts Tagged ‘financial crisis’

Leftwards with John Corzine

Friday, November 30th, 2012

Urban Future tells us:

When the Right attains power, it is by becoming something other than itself, betraying its partisans not only incidentally and peripherally, through timidity or incompetence, but centrally and fundamentally, by practically advancing an agenda that almost perfectly negates its supposed ideological commitments. It builds that which it had promised to destroy, and further enthralls that which it had promised to liberate. Its victories mean ever less, its defeats ever more. To win is at most a lesser evil, whilst to lose opens new, unprecedented horizons of calamity, initiating previously unimagined adventures in horror.

The left theoretically wants equality, but, predictably, its unending victories cause ever more extreme and brutal inequality, as socialism somehow strangely manifests as crony capitalism. Soak the rich – except, of course, for friends of Obama. The ensuing social injustice results in louder cries to soak the rich. (more…)

The financial crisis inquiry report

Saturday, January 29th, 2011

The government has investigated the “2008” financial crisis and released a detailed report.   (Actually it was the 2005 crisis, in that the panic set in towards the end of 2005 , but the government successfully covered things up and managed to get all the major players to pretend that everything was normal until 2008.)

The summary and conclusions are of course, piles of lies, intended to divert attention from those actually guilty.

Overall, it sticks to the cover story that hardly anyone noticed anything out of the ordinary until 2007.  It correctly observes that regulators failed to use the authority that they had, and to the extent that they used their authority, used it corruptly in ways that worsened the crisis – from which it concludes that the regulators need more power and to exercise that power more forcefully.

It correctly observes that

The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of 2007, Fannie’s and Freddie’s combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1.

So the next time you hear someone say that leverage caused the crisis, that is actually a euphemism for saying that government-sponsored enterprises were the major players causing the crisis, not an explanation of the crisis. After all, as the Republicans on the committee point out, leverage only produces bad results if you lose money, and the question therefore is how such large amounts of money were lost. So what, then, did Fannie and Freddie do to piss away large amounts of money?

It also tells us that

As early as September 2004, Countrywide executives recognized that many of the loans they were originating
could result in “catastrophic consequences.”

Yet fails to quote that testimony or document in full.   Surely those who saw the crisis coming, knew what was causing the crisis, yet we don’t hear what they said back then.

The report is overcooked, presenting conclusions without the data from which those conclusions were drawn.

Crabtree testifies to large numbers of abandoned houses in 2006, of entire neighborhoods collapsing, of the lawns unmowed, the houses empty except for homeless people squatting. If the mortgages were busted in 2006, surely the crisis was in full swing in 2006? Why then is every commissioner telling a story that has the crisis suddenly manifesting in 2007/2008?

In November 2005 I said “Now is the time to panic”, and it appeared to me that everyone did panic, within a few days of me saying it. People gave the commission the same testimony.

Warren Peterson, a home builder in Bakersfield, felt that he could pinpoint when the world changed to the day. Peterson built homes in an upscale neighborhood, and each Monday morning, he would arrive at the office to find a bevy of real estate agents, sales contracts in hand, vying to be the ones chosen to purchase the new homes he was building. The stream of traffic was constant. On one Saturday in November 2005, he was at the sales office and noticed that not a single purchaser had entered the building. He called a friend, also in the home-building business, who said he had noticed the same thing, and asked him what he thought about it. “It’s over,” his friend told Peterson.

Why then does the commission stick to the story that this crisis happened in 2008?

Bad loans were made. The money was lost in bad loans. Why were those bad loans made?

The Democrats on the commission conclude that bad loans were made for profit:

We find that the risky practices of Fannie Mae—the Commission’s case study in this area—particularly from 2005 on, led to its fall: practices undertaken to meet Wall Street’s expectations for growth, to regain market share, and to ensure generous compensation for its employees. Affordable housing goals imposed by the Department of Housing and Urban Development (HUD) did contribute marginally to these practices.

Peter J. Wallison argues that affirmative action and affordable housing contributed massively to these practices, in particular the HUD “Best practices initiative”

If a financial entity was failed to follow HUD “best practices” it was likely to be sued for racism, redlining, and any number of vague crimes that can never be disproven, so everyone had to follow “best practices” and if a company followed HUD “best practices” it was bound to make huge numbers of bad loans.

“Best practices” required that the lender accept “non traditional” evidence of ability to pay – and the reason such evidence was non traditional is that it is not evidence.  If a mortgage business followed HUD “best practices”, as in practice it had to do, best practices meant in practice that they were allowing borrowers or their loan officers to make $#!% up.

Ambac argues fraud committed for profit caused the crisis

Thursday, January 27th, 2011

I of course, argue that government pressure to make mortgage loans caused the crisis.  After all, the specific examples bad loans that Ambac lists in its lawsuit against Bear Stearns, are all loans that were made to poor people, though Ambac provides no information that would identify the race of these poor people.  Ambac, however, argues that Bear Stearn made bad loans, lied that the loans were fine, and sold them on to the next sucker in order to collect fees.  Ambac in its lawsuit against Bear Stearns explains the global financial crisis as caused by fraud conducted for profit, rather than caused by government policy.

It is, however, apparent that Bear Stearns kept a lot of bad loans, and took losses on them, even though it unloaded most of the bad loans onto various suckers by means of fraudulent warranties and representations.  I argue therefore that Bear Stearns was under pressure to please regulators by lending to the supposedly poor and oppressed, which poor and oppressed are notoriously unable and unwilling to repay loans, and finding itself with a pile of bad loans, proceeded to unload as many of them as it could, by fair means and foul, many of them onto Ambac.

If, in the end, the government winds up compensating Ambac, and the Bear Stearns boys who made these fraudulent warranties and representations to Ambac go unpunished as individuals, we should conclude that Bear Stearns was carrying out government policy, that this fraud, like so many others, was committed out of political correctness.  If, on the other hand, those who committed these massive frauds are themselves individually punished, for committing lucrative frauds that sank the world economy, then this will be evidence for the fraud was committed for profit.

Against the theory that the fraud was conducted for profit, is the fact that this is a civil lawsuit, even though fraud, and fraud that cost the taxpayer trillions, is a criminal offense.  That there is not the slightest suggestion that any of these many acts of fraud will be punished criminally, suggests that these frauds were committed not for gain, but for political correctness.

Who called the financial crisis before it happened?

Tuesday, January 25th, 2011

Among others, Ron Paul, in his speech to the house, proposing amendments to the laws that caused the crisis

… the government’s policy of diverting capital into housing creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have been had government policy not actively encouraged over-investment in housing.

The connection between the GSEs and the government helps isolate the GSEs’ managements from market discipline. This isolation from market discipline is the root cause of the mismanagement occurring at Fannie and Freddie …

I hope my colleagues join me in protecting taxpayers from having to bail out Fannie Mae and Freddie Mac when the housing bubble bursts.

… The flip side of regulatory capture is that mangers and owners of highly subsidized and regulated industries are more concerned with pleasing the regulators than with pleasing consumers or investors, since the industries know that investors will believe all is well if the regulator is happy. Thus, the regulator and the regulated industry may form a symbiosis where each looks out for the other’s interests while ignoring the concerns of investors. …

… the government increases the likelihood of a painful crash in the housing market. …

Needless to say, there was only one vote for addressing the looming financial crisis.  Looking at the tea party candidates, I think if the Tea party did a clean sweep, if every single congressman had belonged to the tea party, I think there would have been two or three votes for addressing the looming financial crisis.


Monday, November 8th, 2010

Officially, America has near zero inflation and a mere ten percent official unemployment.  Odd that it has a mere ten percent unemployment when the proportion of young adult males with jobs has dropped a lot more than ten percent.

As with third world and Marxist countries, the government’s reaction to bad news is to declare a new era of prosperity.  The recession is officially over.  With an unprecedented proportion of the workforce on the government payroll, productivity has officially risen to amazing heights and somehow, despite the big increase in the proportion of people on the government payroll, public spending has officially not risen much.

Unofficial inflation, however, is starting to look quite frightening:

Market Ticker tells us:

I just got back from the grocery store.  Eggs, which were $1.60 two weeks ago, are now $1.99/dz.  Butter?  Two boxes for $6 – on sale.  The same two boxes were $4.50 a couple months ago.  Land-O-Lakes Brand?  $4.89 – each.
Cheese?  8oz bricks were commonly 3/$5 as recently as September.  Now?  $3.50 – for one.
But there’s no inflation, you see.
Oh, and on the way home I passed the gas station.  It was $2.59 for regular a couple of weeks ago.  Now?  $2.89.  30 cents in about 2 weeks, a 12% increase.

This is consistent with inflation rates of thirty to fifty percent per year, early hyperinflation rates.

Sarah Palin is, as usual, on the ball, while ruling class is floating away in La La Land, sincerely puzzled that the peasants are failing to eat cake.

This is the decisive test of Keynesianism.  Of course, we already had a decisive test of Keynesianism:  The Japanese crisis.  Keynesianism failed dismally, to which the Keynesians replied that Japan’s troubles were the result of not applying Keynesianism vigorously enough.    This time, however, it has been applied vigorously enough.  The results should be apparent by around 2012-2016.  The fat lady has not yet sung, but so far, things are not looking good for Keynesianism.

Money is a matter of functions four,
a medium, a measure, a standard, a store.

There is a conflict between the use of money as a store and the use of money as a standard, since if everyone wants to store value at the same time, the value of money is apt to rise, and if everyone wants to use their store at the same time, the value is apt to fall.  Keynesianism therefore addresses a real problem, but its proposed solution tells the ruling class what they want to hear – that they can buy votes with money they do not have, that they can eat their cake and have it to, which is of course not true, and not a solution to the problem.  Keynesianism addresses a real problem, but is not a real solution.

It seems to me that a sounder solution would be to target the long run value of money.  If people had confidence that in the long run, the value of money would be constant, that inflation would run for a few years to be followed by deflation, and deflation would run for a few years to followed by inflation, that what goes up must come down, then I doubt that natural fluctuations would be large or damaging.   Fluctuations are large and damaging because there is no telling what the future value of money is likely to be, because Keynesianism makes money dangerously ineffectual as either a standard or as a store.  This large uncertainty destabilizes the economy.  The objective of monetary policy should be to give people confidence that the value of money will be the same in twenty or thirty years, even if it fluctuates a bit from year to year.

Of course, I am prescribing what an honest issuer of fiat money should do, if he cares about the long term, and wants everyone to continue using the fiat money he issues.  Since issuers of fiat money sooner or later find themselves in a situation where the major question is whether the political leadership will survive another week, such advice is unlikely to be heeded.  Keynesianism will continue to be believed, not because it is true, but because issuers of fiat money are compelled to act as if it was true.

Falkenblog locates the guilty

Sunday, October 3rd, 2010

Falkenblog has an interesting quote from Harvard, wherein in 2003, back before the financial crisis, Angello Mozilla gives politically correct bullshit justifying every bad thing the banks did to cause the financial crisis on the basis of race and affirmative action.

That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide.

One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low-income and minority borrowers


the credit score bar dividing creditworthy from high-risk borrowers, must be substantially lowered by the GSEs, the secondary market in general, and with bank regulators.

These are all quotes from a publication of “The Joint Center for Housing Studies of Harvard University”, which endorsed all the actions the regulators took to destroy our financial system, and urged more of the same.

Please keep in mind that everything this wrecking crew did is still in place, still in force.  It became illegal to be an honest banker, that being raaaacist, and it still is illegal. Every single banker is a crook, is because no honest banker can make crooked loans, and the regulators require all bankers to make crooked loans. Undoing the damage would require an unthinkably radical transformation of our political system, something more akin to regime change and the collapse of democracy, than any mere election.  As I have said so many times before, to fix the financial system will require and result in a society where it is possible to laugh at the Nobel committee for giving Marie Curie two Nobel prizes that for work that was unexceptional when men did it, and laugh at Pierre Curie for pushing his wife into the lab, when he should have kept her in the bedroom and kitchen.

After mass democracy

Tuesday, September 7th, 2010

A couple of hundred years ago, the conventional wisdom was that democracy with broad voter participation was unstable, violent, ruinous, and short lived.

A hundred years or so ago the world moved to mass democracy, universal franchise.  Many people predicted that this would result in the masses trying to vote themselves rich, resulting in social and economic collapse

Well guess what.  The masses have been trying to vote themselves rich, social collapse is under way, and economic collapse looms.

The success stories of governance are Singapore, Hong Kong, China, and Botswana, which would suggest the future is not democratic.

Mass democracy is visibly self destructing.  In 2005 nearly half of births in California were on medi-cal, and the disappearance of statistics after 2005 suggests the situation is rapidly deteriorating, hence the present Californian meltdown.  The world of “the Marching Morons” is now.

Clearly this is unsustainable – Liverpool and Detroit represent the future of democracy – majority underclass. Detroit is the future of California, Liverpool the future of England if the Caliphate does not take England first.

I am hoping for anarcho capitalism, but a more likely outcome is military dictatorship evolving into monarchy, or gangs evolving into feudalism.

Mencius suggests an interesting form of futuristic government:  The sovereign corporation with cryptographic control over its weapons.  The vote of the board creates a cryptographic secret that gives the CEO control over the weapons of corporation’s security forces. If there is a coup by the armed forces against the CEO or the CEO against the board, the coupists weapons stop working.

Mencius’ proposal reflects the typical nerdly assumption that guns are all powerful. In practice, the way that power works is that the elite males settle things between themselves by means that are not overtly violent, and then the outsiders find they face a united, and violent front from the elite males. Once the elite males have agreed amongst themselves, the weapons are merely an afterthought, making the cryptographic locks irrelevant – which would suggest that if Kingship revives, it will have more resemblance to traditional kingship than to Mencius’s CEO.

Switzerland’s plebiscitary democracy is also an outstanding success, though it could be argued that this  mainly because it is sufficiently unwieldy to prevent the government from actually doing much, and therefore  prevents the government from vote buying in the fashion that led to the meltdowns in California and Detroit. Switzerland is a blast from the past.  The future is more likely to be China, though I think that anarcho capitalism, or the revival of feudalism are also possibilities.

The minimum necessary reforms are to stop the financial system leaking money, and put welfare on a sound basis – but only the most extreme elements of the tea party are proposing anything approaching this, and they are clearly far too extreme for the voters.  If reforms that would actually enable the system to survive were on the table, Christine O’Donnel would be unelectable left, not the unelectable right.

To put welfare and affirmative action a sound basis means imitating Singapore’s welfare, social security healthcare, and so forth.  Pigs will fly first.

Let us consider the seemingly more achievable problem of stopping the finance system from leaking money.  All bankers are criminals, for they were all party to the grossly improper loans that led to our present crisis.  Any honest banker was fired, because any honest banker got in the way of affirmative action and got run over.

To stop the system leaking money, have to fire crooked bankers, and replace them with honest bankers.  To replace them with honest bankers, have to end affirmative action lending.  That does not seem too hard.  After all 99% of the voters oppose affirmative action lending, and a clear and substantial majority oppose all affirmative action.  But it is hard.  We have affirmative action lending for a reason:  As I said before:

When they gave a Nobel prize to Marie Curie for being female, that did not hurt anyone except more deserving potential Nobel prize winners.   But handing out phony Nobels on the basis of sex, race, and nationality necessitated handing out phony degrees on the basis of race and sex, and handing out phony degrees on the basis of race and sex necessarily led to a crisis where these phony degrees were being ignored by employers, so employers necessarily had to be forced to give out well paid phony jobs on the basis of race and sex.   But being given well paid phony jobs on the basis of race and sex failed to result in recipients living a middle class lifestyle, so lenders had to be forced to give out a middle class lifestyle on the basis of race and sex.  Which has led to our present financial crisis.  It all began with Marie Curie.

So if you roll back the most unpopular, extreme, and disastrous form of affirmative action, you then immediately face a problem with less extreme and more popular forms.  And if you roll them back … All solutions are either radical or unworkable.  Roll back affirmative action loans, and pretty soon you are going to have to restrict the franchise, or bring affirmative action loans back.

How to fix the financial crisis

Friday, May 21st, 2010

Proposed reforms, both left and right, are unlikely to have any effect on the continuing massive misappropriation from the financial system.  It is absurd that people are discussing obscure details of the credit swap market.

To fix the financial crisis, we have to revoke, or at least denounce and denigrate, Marie Curie’s Nobel prize.

When they gave a Nobel prize to Marie Curie for being female, that did not hurt anyone except more deserving potential Nobel prize winners.  But handing out phony Nobels on the basis of sex, race, and nationality necessitated handing out phony degrees on the basis of race and sex, and handing out phony degrees on the basis of race and sex necessarily led to a crisis where these phony degrees were being ignored by employers, so employers necessarily had to be forced to give out well paid phony jobs on the basis of race and sex.

But being given well paid phony jobs on the basis of race and sex failed to result in recipients living a middle class lifestyle, so lenders had to be forced to give out a middle class lifestyle on the basis of race and sex.

Which has led to our present financial crisis.  It all began with Marie Curie.  Each lie required a new and bigger lie.  We need to start by acknowledging that genders and races tend to have different abilities – that if you are looking for people that are the best at something, whether the fastest runners or the greatest mathematicians, they will almost all be of one particular race and gender, and some races will be completely absent, and if you are merely looking for people that are acceptably good at something, for example accountants, basketball players, or donut makers, they will be mostly of one particular race and gender.

We cannot end the crisis unless we admit who is defaulting on their mortgages, we cannot admit who is defaulting without admitting that they cannot perform their jobs either, we cannot admit they cannot perform their jobs without admitting that their degrees are phony, and we cannot admit their degrees are phony without admitting that many Nobel prizes, starting with Marie Curie, were phony.

Yale Harvard and Basel style Free Enterprise

Sunday, May 16th, 2010

After the collapse of socialism, the elite support free enterprise – they support it the way they support free speech.

If anyone is allowed to disagree with the orthodoxy taught at Yale and Harvard, or even doubt it, this endangers the free speech of people from Harvard and Yale, and similarly if any enterprise run by people from Harvard or Yale could go bust, this endangers the free enterprise of people from Harvard and Yale.

Basel II is tens of thousands of pages of regulations, no one knows how vast it is, because not all the regulations can be found in any one place, but it could all be replaced by two simple rules:  Politically correct victim groups shall always find it easy to borrow money, regardless of their ability or intention to pay it back, and politically well connected businesses shall always make money, regardless  of whether they are competently run or not.

The seeds of the crisis were the CRA and the ratings agencies.  I have discussed the CRA at length, but the CRA would have been resisted had it not been for other changes in the system that insulated the players against the consequences of making bad loans.  These changes, guaranteeing that badly run businesses would succeed, started with the bailout of the ratings agencies in the seventies, forty years ago.

Back then, the ratings agencies were in trouble, because they had made a lot of bad calls.  It seemed that whenever an institution was going under, the guys at the credit rating agencies were the last to know about it.  Back then, they sold their assessments of credit risk to subscribers. So no one wanted to subscribe.

So in the seventies, the regulators stepped in to make people use the credit rating services. In 1975 the SEC created the Nationally Recognized Statistical Rating Organization (NRSRO) designation. Credit rating agencies so designated received what was in effect a grant of governmental power. The SEC then relied on the NRSRO’s credit risk assessment in establishing capital requirements on SEC-regulated financial institutions – which meant that for SEC-regulated financial institutions to borrow and lend, they had to get rated.  A cascade of regulatory decisions followed over the years, each decision forcing more and more reliance on the risk assessments issued by these demonstrably incompetent institutions – and less and less reliance on other people’s risk assessment.  For more and more organizations, it became illegal for them to make their own judgments about risk.

By the 1990s, as Levine and Partnoy tell us, the NRSROs were not selling assessments of credit risks, but licenses to issue securities.  The rating agencies did not genuinely assess risk, nor did anyone really expect them to.  Nor could repeatedly demonstrated incompetence reduce demand for their services, so the ratings agencies had no incentive to provide correct credit ratings.  Since their income was entirely dependent on the state granting them power, they did, however, have an incentive to make politically correct credit ratings.  If you lend to the poor, the oppressed, etc, and you are run by good old boys from Yale and Harvard, and you make donations to the right politicians, the NRSROs have a very powerful incentive to give you a good credit rating.  And if you have a good credit rating, you can borrow as much as you like – and if you go bust, the government will bail you out.

Badly run companies that had been empowered to borrow as much as they pleased got in trouble – and were bailed out for the same reasons as they had been empowered to borrow as much as they pleased.

In addition to corruptly favorably rating the politically correct, the NRSROs corruptly favorably rated those who simply gave them money, which is perhaps what those who complain about “deregulation” have in mind.  The banks creating structured financial products would first pay the rating agencies for “guidance” on how to package the securities to get high ratings and then pay the rating agencies to rate the resultant products – a glaring conflict of interest, though one less apt to lead to bailouts when the proverbial hits the fan.

Now since all this dirty dealing has cost the taxpayer trillions, you may well ask what measures have been taken to punish the NRSROs for bad conduct, or give them incentives for better conduct in future, or indeed restrain them from continuing to do this stuff?

All the strengthened regulation is regulation to make people continue to treat NRSRO ratings as true, even though it has become horrifyingly apparent that the ratings are generally false.  All the strengthened regulation is more of what caused this mess in the first place.  Any real reform would necessarily start by abolishing the legal privilege of NRSROs, would have to start by rolling back regulations to what they were in 1974.  Instead, compulsion and bailouts are being applied to make NRSRO ratings true, or to enable people to continue pretend that they are true.  Their power has been increased, their misconduct unpunished, and their incentives have become even worse.

Where the money went

Monday, February 15th, 2010

The government has been shuffling the money around to obfuscate who stole it.  It lends money, and then announces that there is no problem, the money has been paid back.

But after much fiddling, the money has mostly come to rest, in that the government is now the proud owner of about one trillion dollars of mortgage backed securities guaranteed by Fannie, Freddie, and the FHA, plus some Fannie, Freddy, and FHA debt.

The first graph in the above link is the money wizzing around in complicated circles to obfuscate who is at fault, the second graph is the bailout of private entities, other than General Motors, and the third graph is primarily the bailout of Fannie, Freddy, and the FHA.

That these Mortgage Backed Securities are “Fully guaranteed by Federal Agencies” implies that the vast majority of the crisis, the vast majority of the bailout, was dud mortgages rubber stamped Fanny, Freddie, and the FHA, that privately issued mortgage backed securities have been liquidated – that the dud mortgages underlying privately issued mortgage backed securities have been settled by foreclosure and bancruptcy, but the dud mortgages underlying Fannie, Freddy, and FHA issued mortgage backed securities are on the tax payers tab to the tune of about a trillion dollars.

Overtime, as the mortgages are resolved, the trillion dollars of mortgage backed securities will diminish with time.  In proportion as they were worthless, the agency debt will correspondingly increase.