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Why I can’t support the president’s “stimulus”

It’s not just the price tag, especially at a time of record deficits; it’s its ethos.  As the president just said in his press conference, “It is only government that can break the vicious cycle.”

Mr. President, with all due respect, it’s not government which can fix the economy, it’s government which got us into this mess.  Only by removing the heavy hand of the state we can break this vicious cycle.

Just ask Ronald Reagan.  Or take a look at FDR’s spendthrift record.  Just over four years ago, a team of UCLA economists calculated that FDR’s policies prolonged the Depression by 7 years.

In today’s Wall Street Journal, John B. Taylor showed How Government Created the Financial Crisis, echoing a point (but with different data) that Peter Wallison made in the American Spectator about the True Origins of the Financial Crisis.

UPDATE:  Love Althouse’s live-blogging, especially on his conclusion:

“There’s some ideological blockage there that needs to be cleared up.” That’s the characterization of the opposition to the stimulus. Make those of us who are hesitant sound like some kind of disease. “But I am the eternal optimist… People respond to civility and rational argument, and that’s the kind of leadership that I’m going to provide. Thank you guys!” Well, I respond to civility and rational argument, but I believe you just talked about me like I was some kind of disease!

UP-UPDATE: In the comments, Gene from Pennsylvania reminds about JFK’s tax cuts. At least the Gipper could follow the example of a president of the opposing party.

UP-UP-UPDATE:  “The Congressional Budget Office predicted that the current economic recession will end in the second half of 2009 without the trillion dollar stimulus.”

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45 Comments

  1. Another good piece in Barron’s that comes to much the same conclusions.

    Comment by American Elephant — February 9, 2009 @ 8:49 pm - February 9, 2009

  2. Obama said he is open to ideas that will solve the situation. His only guage is that they must be ideas that work. JFK and Reagan and Bush 43 tax rate reductions apparently don’t count. The failed FDR model of spending is viewed by leftists as proper, or not AGGRESSIVE ENOUGH. Either Obama is a moron or he is unteachable.

    Comment by Gene in Pennsylvania — February 9, 2009 @ 9:14 pm - February 9, 2009

  3. Gene–thanks for bringing up JFK. I wrote this in haste and forgot about his tax cuts. At least, the Gipper was willing to learn from history, even the successes of presidents of the opposing party. Would it that the incumbent could do the same.

    Comment by GayPatriotWest — February 9, 2009 @ 9:17 pm - February 9, 2009

  4. GPW, did you even read what you linked to? The policies that prolonged the GD according to your study were “specific anti-competition and pro-labor measures.” They also were passed after the recovery was underway. They have nothing to do with the stimulus package which the economists agree *is* necessary. And Krugman AND your linked article have discussed this already: the recovery from the GD was going well (“The economy was poised for a beautiful recovery”, from your article) until FDR listened to hyper-conservatives and tried to balance the budget, passed these other policies and CUT SPENDING, ie, worried about the deficit at a time when he shouldn’t have. And the only thing the Barron’s piece says is, “Don’t blame deregulation.”
    In short, nothing linked here says that stimulus spending isn’t the answer. In fact, your linked article explicitly says the economy was recovering. Why? Because FDR spent – and that started to fix things. It only stopped recovering when he stopped spending.
    When facing a downspiral like this, we have to spend to get out of the hole we’re in. Once again, GPW, even your own sources don’t back you.

    Comment by torrentprime — February 9, 2009 @ 9:18 pm - February 9, 2009

  5. torrent, from the link to the UCLA study:

    “In the three years following the implementation of Roosevelt’s policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

    Emphasis added.

    “With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.”

    The very release begins by noting that the study’s authors, “blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.” 1933, torrent, that was the first and supposedly less conservative New Deal.

    Oh, and torrent, so we’re supposed to ignore anti-competition and pro-labor policies because, um, why? Um, such policies are counter to those the Gipper promoted. So, they do merit study.

    And there’s this:

    Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

    Ended in 1936? 1936? That’s the year before FDR supposedly got more conservative.

    Maybe you followed a different link than I did.

    Not sure what you’re getting at. Here’s the last line of the release I linked, “our work shows that the recovery would have been very rapid had the government not intervened.” Hmmm. . . similar to my notion that it’s better that we do nothing than that we pass the so-called “stimulus.”

    Comment by GayPatriotWest — February 9, 2009 @ 9:35 pm - February 9, 2009

  6. The cost of this boondoggle combined with the pork is enough to reject it IMO. I do not think this will help the economy but instead my harm it.

    Comment by John — February 9, 2009 @ 9:40 pm - February 9, 2009

  7. Exactly, it was Congress that got us into this damn mess. The sad fact is that I think he knows it.

    Comment by Swampfox — February 9, 2009 @ 9:49 pm - February 9, 2009

  8. Of course you’re not supposed to ignore the negatives of what FDR did. But the study singled out twospecifics of FDR’s policies (anti-comp /pro-labor). These are only part of what he did. He also spent a *ton* of money. Works Progress Administration? Civilian Conservation Corps? Any of this ringing a bell? The study you linked, in no way, says that that spending prolonged the GD. It doesn’t even address spending at all! You claimed, in the OP, that we needed to “take a look at FDR’s spendthrift record” and and in the next sentence linked to this study, but all this study does is talk about the anti-competition and pro-labor measures. Therefore, you are clearly trying to use the study for something it doesn’t even address.

    Comment by torrentprime — February 9, 2009 @ 10:01 pm - February 9, 2009

  9. Hmm. I’m caught in your filter and may have doubleposted; if you could release my comment and eliminate the dupe; I’d appreciate it.

    Comment by torrentprime — February 9, 2009 @ 10:02 pm - February 9, 2009

  10. Just for the record, on Roosevelt: He the worst President, economically speaking, in United States history – even beating out Hoover because, bad as Hoover made things, Roosevelt made them even worse and prolonged the Depression by years. Here’s the newest article on that:

    http://online.wsj.com/article/SB123353276749137485.html

    And there are many other articles, books, studies, etc. on it. As for this, from TP:

    …the stimulus package which the only Establishment, politically left-liberal economists agree is necessary…

    Fixed it for ya. – Finally, as for this from Obama:

    “It is only government that can break the vicious cycle.”

    Indeed. Obama is right. Because it is only government that can GET OUT OF THE WAY and thus STOP INFLICTING ECONOMIC PROBLEMS on the People, by government slashing its punitive and destructive regulations, spending, taxes, bailouts and excessive money creation.

    Comment by ILoveCapitalism — February 9, 2009 @ 10:07 pm - February 9, 2009

  11. Oh, for heaven’s sake. I’ll retype:
    The study linked doesn’t address spending, GPW. It only addresses 2 specific policies that FDR instituted. And, if you read carefully, you’ll notice that the WSJ article only mentions the same types of bad business policies (“suppressing competition, and setting prices and wages in many sectors well above their normal levels.”). None of which is in the stimulus bill or has even been proposed. What we’re talking about now is spending. Works Progress Administration? Civilian Conservation Corps? Ring a bell? FDR spent money and it helped bring us back. That’s what Obama is doing now. None of the articles any of you have cited have had the courage to lie so baldly and say that the spending was part of FDR’s “bad” solution to, nor didn’t help solve the Great Depression. Why? Because the spending did help solve it.
    I say again, none of your links say, even a little, that spending isn’t necessary to get out of the hole we’re in. They don’t address it in the slightest. They explain what mistakes FDR made in addition to spending that diluted the impact of the money, and they give Obama lessons of what not to do, but they don’t ever say not to spend. Any of you want to try again?

    Comment by torrentprime — February 9, 2009 @ 11:30 pm - February 9, 2009

  12. And the only thing the Barron’s piece says is, “Don’t blame deregulation.”

    Not suprisingly Torrent’s reading comprehension skills leave something to be desired.

    What the Barrons piece actually says is not only that deregulation isnt to blame, but that big government meddling in the economy, particularly liberal socialization of the housing sector is exactly where people should be placing blame.

    And Obama and the Democrats dishonestly named “stimulus” bill not only doubles down on that pathetic failure of a policy that caused this recession to begin with, but drastically expands such socialization throughout the economy.

    I wonder how Obama will start the World War that will be necessary to rescue us from the coming Democrat Depression.

    Comment by American Elephant — February 9, 2009 @ 11:31 pm - February 9, 2009

  13. I agree that the Republicans’ messing with the banking industry safeguards in place since the Great Depression were a problem. A shame Senator Gramm couldn’t have left the Glass-Steagall Act alone. But somehow, I’m guessing that AE didn’t have *that* big government meddling in mind. He does remember who controlled Congress since 1994, right? And the WH since 2000?

    Comment by torrentprime — February 9, 2009 @ 11:39 pm - February 9, 2009

  14. torrent, did you even read the first paragraph of this post, the expression I quoted from the president, that only government can break the cycle?

    That’s why I linked the New Deal release, particularly the line I included in my comment above, “our work shows that the recovery would have been very rapid had the government not intervened.”

    Again, torrent, see the operative word in that first paragraph, “ethos.” Now with that in mind, re-read my post and understand my philosophical opposition to the “stimulus.”

    Comment by GayPatriotWest — February 10, 2009 @ 12:08 am - February 10, 2009

  15. Dan, Andrew Leonard at Salon poked many a hole in their thesis noting that a good deal of their argument is predicated on not counting people who were employed by the New Deal as employed.

    He cites Marshall Auerback’s paper outlining the significant accomplishments of those employed, including their contributions to infrastructure (hospitals, roads, bridges) we still benefit from today.

    Most importantly, he points to economist Michael Darby’s 1976 paper which debunked the “not really employed” argument resurrected by Cole etal., saying

    More than 30 years ago, Darby observed that correctly counting those 3 and a half million people as employed workers effectively debunked “the ‘un-fact’ that recovery was extremely slow from 1934 through 1941. From 1933 to 1936, the corrected unemployment rate fell by nearly 5 percentage points per year…”

    I don’t pretend to know all the ins and outs of the economics involved, but I will say that citing a outlier view that FDRs New Deal extended the Great Depression doesn’t make it true that, in fact, the New Deal extended the Great Depression. From what I can tell from a casual search of the literature, it’s not a broadly accepted view.

    So too, while the current economic mess may have been created by government intervention over the last 30 years, it doesn’t logically follow that government intervention isn’t the right course here. Those are two different arguments. The vast majority of economists are arguing very forcefully that government intervention is the best way to solve this problem.

    Comment by Jody — February 10, 2009 @ 12:34 am - February 10, 2009

  16. I agree that the Republicans’ messing with the banking industry safeguards in place since the Great Depression were a problem. A shame Senator Gramm couldn’t have left the Glass-Steagall Act alone.

    You mean the repeal of the Glass-Steagall Act Signed by President Gramm? OOOPS. Silly me, Gramm wasn’t the president, Bill Clinton was. President Bill Clinton signed the repeal into law in 1999, not any Republican. And the repeal was approved by all but 7 Democrats. That Glass Steagall Act? Why yes, that’s the only one.

    But your lame attempt to blame Phil Gramm for legislation signed by a Democrat president and supported by all but 7 Democrats really does illustrate how dishonest liberals have to be to try and blame Republicans. Furthermore it illustrates your ignorance.

    What is it the repeal of the Glass Steagall Act supposedly did to cause the sub-prime mortgage crisis? It allowed commercial banks to underwrite and buy up bundles of bad loans.

    But why on Earth would they WANT to? Banks are not in business to make or buy bad debt.

    Ah yes, because DEMOCRATS in congress, and DEMOCRATS at Fannie and Freddy were forcing banks to make loans to bad credit risks, and encouraging commercial banks to underwrite them by promising to buy them up. And the more bad loans to unqualified candidates Fannie and Freddy could get banks to make, the more millions of dollars Democrats Frank Raines(Obama adviser), Jim Johnson (Obama adviser), and Jamie Gorelick (Clinton crony also responsible for erecting the wall that prevented intelligence agencies from stopping the 9/11 attacks in order to hide illegal foreign campaign contributions to her boss) would reward themselves with.

    All of which Bush has been trying to REGULATE since his very first budget in 2001, joined by the entire Republican caucus and Alan Greenspan, but DEMOCRATS blocked them at every turn, a point which even Bill Clinton confesses.

    He does remember who controlled Congress since 1994, right? And the WH since 2000?

    Yes, unlike the vast majority of Obama supporters, I know who has controlled congress. But as we have all seen with the socialist stimulus bill, a minority can block legislation with a mere 40 votes, and Democrats, on a purely party-line basis have blocked reform of Fannie and Freddy since 2001 — again, as Bill Clinton is on video admitting.

    Had those reforms been in place, none of this would have happened.

    And by the way, Republicans havent controlled congress since the end of 2006. Democrats have controlled the laws, budgets and the purse strings since January 2007. When Republicans handed over control to Democrats, the economy was growing at a robust 3.6% and continued to grow for another year. The economy didnt go into recession until a year after Democrats started running the show.

    So yes, it was absolutely the socialization of the finance industry, for which Democrats are SOLELY responsible, and the refusal to regulate that socialization, for which Democrats are also SOLELY responsible, that caused the sub-prime mortgage crisis — the worst crisis since the great depression. And Democrats are working feverishly to turn it into ANOTHER great depression by doubling, tripling and quadrupling down on the FAILED socialist policies that caused this catastrophe to begin with.

    Comment by American Elephant — February 10, 2009 @ 1:18 am - February 10, 2009

  17. I can’t support the stimulus because I don’t think it does anything to fix the root problem. All it does is transfer debt-based spending from individual consumers to the feds in the hope of getting consumers to spend beyond their means again. That’s the stated goal – get consumers spending again. Reset the clock to 2006, as it were. With that as what the stimulus is supposed to achieve, we’re screwed. We’ll face another, meaner and nastier, debt bubble – because we’re trying to get people to spend money that they shouldn’t on things that they shouldn’t buy.

    It may buy enough affluence and prosperity to get the current crop of crooks out of DC and into a comfy retirement. They may even be able to escape into the grave before the bill comes due. But unless we figure out how to live within our means – as individuals, and as a society – then it’s just a case of robbing Peter to pay Paul. The music is gonna stop at some point.

    Comment by Rob — February 10, 2009 @ 1:35 am - February 10, 2009

  18. Jody, the simple facts show that the Great Depression lingered until 1943. The New Deal had been in place nearly a decade by then. And as the UCLA study shows, labor laws were relaxed at that time. Not just that, then we were in a war economy.

    Perhaps, it’s not a broadly accepted view, but how can you call a program a success when it didn’t restore the economy before the problem (Crash of ’29)–or even come close.

    Are the vast majority of economists arguing that government intervention is the best way to solve this problem? Maybe they are. But, I’ve seen lists upon lists of economists opposing it. They may well represent a minority, but I do believe a minority of economists said Reaganomics would work. And will the Gipper’s policies led to the largest period of uninterrupted economic growth at that point in American history.

    And some would argue that once the Republicans were elected to Congress in 1994, Clinton worked with them, in large measure, to restore Reagan’s economic policies, indeed that Democrat seemed more dedicated to them than did the great Republican’s designated successor.

    And if we did need a “stimulus” now, why isn’t the legislation limited to programs designed to “stimulate” the economy? Why does it include so many items from the Democrats’ wish list?

    Comment by GayPatriotWest — February 10, 2009 @ 2:40 am - February 10, 2009

  19. Rob,

    Its not that Americans have a problem living beyond their means, its that they had a government that enacted socialist policies requiring banks to encourage them to live beyond their means in pursuit of “social justice” and other liberal claptrap.

    Comment by American Elephant — February 10, 2009 @ 4:18 am - February 10, 2009

  20. why does it seem that the conservatives on here have never taken econ 101?

    Comment by bob — February 10, 2009 @ 7:22 am - February 10, 2009

  21. In case you didn’t notice there were tax cuts in the original stimulus bill and there are still more tax cuts in the current one. Pining away at the thought of Obama giving tax cuts a chance would be less disingenuous if you had called that out. The notion that the recession will magically fix itself by the middle of this year is also a bit comical when you look at the unemployment figures in this chart here (here ) and you can see the trend is not plateauing yet.

    Taylor’s article is also comical if it wasn’t trying to be serious. Once again we have the WSJ trying to abdicate pretty much all responsibility from the private sector for this mess. The private sector lobbied for ten years for the apparatus that was in place that allowed them to fuel the sub-prime business, both within a subset of the Fannie Mae/Freddie Mac system and on their own. They bear far more responsibility for the mess than the government does, although the government’s lack of true oversight and regulation (supported by both parties by the way) is a factor as well. We just lived through all this so it’s sad that the revisionist history is already starting.

    Comment by Mr. Moderate — February 10, 2009 @ 7:47 am - February 10, 2009

  22. why does it seem that the conservatives on here have never taken econ 101?

    Funny when its liberals who are the ones in abject denial of the laws of supply and demand.

    Comment by American Elephant — February 10, 2009 @ 9:24 am - February 10, 2009

  23. Funny when its liberals who are the ones in abject denial of the laws of supply and demand.

    Very true, but about what we come to expect from the boob.

    There is one very basic, simple question that no one is asking, and that is “Where is this 830 Billion dollars to come from?” The answer is it will be borrowed and printed. The former takes it out of the credit market, making it harder for businesses to borrow and invest money, and thus harder to create jobs. The latter causes inflation.

    Perhaps the left is so convinced that Obama is in fact a god that he can repeal the laws of economics: That he can waste gobs of money without stirring inflation or choking private investment.

    Comment by Gregory of Yardale — February 10, 2009 @ 9:44 am - February 10, 2009

  24. They bear far more responsibility for the mess than the government does, although the government’s lack of true oversight and regulation (supported by both parties by the way) is a factor as well.

    By all means! Cite the regulations and oversight that Republicans opposed that would have prevented any of this and spell out just how it caused the crisis.

    Ive already debunked the asinine idea that repeal of Glass Steagal had anything to do with it. As if banks were actually eager to snap up bad debt without government incentive.

    The only revisionism, as usual, is coming from liberals. Just like Senator Leahy who yesterday called for “truth commissions” to revise history on warrantless wiretapping (already settled as Constitutional by the FISA court), treatment of detainees (already settled by bipartisan investigation), and iraq intelligence (already settled by 5 separate bipartisan and non partisan investigations).

    Comment by American Elephant — February 10, 2009 @ 9:49 am - February 10, 2009

  25. #5: Nice rebuttal, GPW.

    Comment by Sean A — February 10, 2009 @ 9:50 am - February 10, 2009

  26. #22: “Funny when its liberals who are the ones in abject denial of the laws of supply and demand.”

    Right, AE. “Econ 101″ and its core axioms like supply and demand are treated like discredited, pre-historic hocus pocus like a flat Earth or deities living in volcanoes if the subject is, for example, drilling for oil domestically (“it will have NO EFFECT on the price of gas!”). And let’s not forget the liberal mantra that the Iraq War was just to line the pockets of Bush’s oil cronies (yeah, liberating 50 million Iraqi people and giving them back one of the richest oil reserves on the planet that was previously subject to UN restrictions and allowing them to sell it on the open market was going to “help” companies producing oil in Texas make MORE money).

    Yes, liberals are such RIGID enforcers of the principles of “Econ 101.” Liberals are dedicated to the principles taught at the “Paul Krugman School of Economic Theory” such as: whatever liberals do is SUPER TOTALLY AWESOME for the economy; whatever Republicans do will inevitably lead to an irreversible economic apocalypse. Another irrefutable Krugman economic axiom: deficit spending is a tremendous idea as long as the money is not being spent on the military, national defense, or protecting Americans from harm.

    Comment by Sean A — February 10, 2009 @ 10:14 am - February 10, 2009

  27. “Where is this 830 Billion dollars to come from?” The answer is it will be borrowed and printed. The former takes it out of the credit market, making it harder for businesses to borrow and invest money, and thus harder to create jobs. The latter causes inflation.

    Correct in principle, but a few corrections to reflect the current situation:

    - They will try to borrow it from foreigners (Chinese, Japanese, Arabs). This is when the Treasury auctions off new bonds, which it does regularly.
    - If the auctions succeed, said foreign bond-holders will probably be paid back later in “printed” new dollars.
    - If the auctions fail (because foreigners finally wise up to the above and pull out), the Fed will print the dollars outright and buy the un-auctioned bonds directly. The Fed recently stated its intention to do so, and may have done so in secret at the most recent Treasury auction, which nearly failed.
    - Bottom line is: They will be, and already are, printing the dollars. You can’t much argue that capital is being sucked out of the capital markets when interest rates to 0%. The meaning of the Fed pushing interest rates to 0% *is* that they are printing the dollars, and in mass quantities.

    Way bottom line: Future inflation is already baked into our economic ‘cake’. Obama could only prevent it now by slashing spending by a trillion (instead of boosting it) and asking the Fed to sop up all the excess money they’ve created in the last few months and years, thus jacking up interest rates. Which Obama and Geithner won’t do.

    Comment by ILoveCapitalism — February 10, 2009 @ 10:19 am - February 10, 2009

  28. Sorry, typo, “…when interest rates -are headed- to 0%”.

    Comment by ILoveCapitalism — February 10, 2009 @ 10:21 am - February 10, 2009

  29. As if banks were actually eager to snap up bad debt without government incentive.

    Uhm, yes they were! The banks made tons of $$$ buying and reselling the debt in the form of credit default swaps, which were mixed in with hedge funds and money market accounts and polluted the entire financial system. Look I know everyone want to lay blame on the government alone, but, if we’re going to tackle the problem, we need to face the whole thing and not focus on bits and pieces that mesh with our political POV. Lets go back to the initial push to increase home ownership for lower income families – Carters Community Reinvestment Act of 1977 . Carter’s CRA is not to blame for the current economic malaise. The concept of the measure plays a part, but it is much more complicated than that.

    Carter issued the CRA’s which were administered by Fannie and Freddie, then, later by mortgage banks. The CRA mandated that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution’s application for deposit facilities, including mergers and acquisitions. Note that the housing market didn’t implode right after this was passed. Why? Because the banks found it easy to easily meet the requirements without making stupid loans. Yes some loans were more risky than regular loans, but through the years the default rates were about as much as expected, and so there was an equilibrium of sorts. And the mortgage banks made some money off the loans, got good PR, so all is well. You have an economic balance of sorts.

    Then in the 1990′s Bill Clinton turned up the heat. He passed new regulations that not only allowed the relaxation of rules on writing loans, but also require more loans to be issued through Freddie and Fannie, and those govt backed lenders were allowed to hold just 2.5% of capital to back their investments, vs. 10% for banks. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market.

    The new rules, implemented during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were “risky mortgages.”

    In 2000, Bill Clinton signed the omnibus spending bill for that year, which contained the “Commodity Futures Modernization Act of 2000″. The measure, authored by Phil Gramm, deregulated the investment option know as derivatives, which includes credit default swaps, a favorite mode of new investment highly endorsed by, among others, Alan Greenspan and Larry Summers (yes the Obama economic advisor). Derivatives and CDS’s are way to complicated to explain (even if I could) but the are not unlike selling your long term lottery payment contract, say $1 mil over twenty years, to a financial institution for a lump sum of lesser value, $700 thousand dollars now. You get your money, and the bank gets the $300 thousand profit over time. This enabled banks and financial institutions to sell the long term unregulated contracts (debt collections) to other institutions, and those debts included the sub-prime mortgages.

    But why would a bank want to buy these more risky loans you ask? Why did Lehman Bros. go belly up?

    In business accounting, you can count the entire value of a long term payment package as a lump sum of profit on the books. When you buy a car, they look at how much money you make annually, and not how much you have on hand. Kinda the same thing. So, through an accounting quirk, the more debt collection accounts you have, the better your books look. Investment banks are in the business of long term debt, so it is only natural that they acquire much of this debt.

    Keep in mind that, although the government is wanting, pressuring mortgage banks to issue more loans at lower interest rates to lower income families, there are no requirements, NONE, to disregard basic sound accounting principles, like making sure the applicant has a steady income and such.

    Now that they can make an immediate profit from these risky loans, mortgage banks now go wild! Suddenly, they can sell these more risky contracts easy as pie to investment firms, with no government strings attached. And there are plenty of buyers. As more contracts get sold, there is more and more pressure by the bosses of the mortgage banks to make more loans. The bosses of the banks, not the government, are the ones who induce the loan officers to issue mortgages to any warm body that walks in off the street. Through the CDS and derivatives, each contract mean $$$ for the mortgage bank.

    The conditions for the crash are set. The system is just waiting for a trigger. Enter Lehman Bros., Wachovia, and everyone else. They buy the mortgages, and then repackage and resell the risky loans as mortgage backed securities, derivatives, and other money market type investments. As the housing market declines, investors complain that they can’t make heads or tails of some of the packages that contain mortgages, so the government changes the accounting of mortgage backed assets to mark to market value, instead of long term. Suddenly, these packages that had worth based on long term projections, were worth much less overnight. Everything came to a screeching halt.

    And the problem is compounded, because so much of the mortgage debt has been split up, and resold, and injected into various investment packages, via the CDS, that no one is sure exactly where all the poison debt is.

    That, my friends, is the crux of the financial mess we have today.

    So much for being a short explanation.

    Comment by Sonicfrog — February 10, 2009 @ 3:18 pm - February 10, 2009

  30. In short – the bad mortages were like a virus. As long as they were contained and stayed in the banks that issued them, the damage done to the body of the economic system would be minimal. When the CDS was deregulated, this allowed the mortgage virus along with other bad debt, to breed like crazy (mortgage banks wrote the loans then sold them as fast as they could), spread throughout the economy, and now the economy is sick!

    Comment by Sonicfrog — February 10, 2009 @ 3:24 pm - February 10, 2009

  31. sonicfrog, I don’t know about all that but in the housing finance field, I can tell you that a lot of investment houses made a handful of money from a lot of state housing finance agencies and state treasuries and state-controlled pension funds by creating investment vehicles/programs whereby the state investor could take a sheltered position against the bet that bond rates would go up/down and they could cash in their bonds for the lower/higher rates in order to make 50, 75, 100, 125 basis points on a deal with a face value of $65-80 million of bundled debt instruments.

    Goldman Sachs, Lehman et al came to the party selling these programs and making 10-15-20 basis points if the deal was sealed… to hell with what happens if they were advising the wrong bet or the market went in an adverse direction to the protected position. They made their money at the point of sale… golden all the way.

    In Michigan, a lot of pension fund and state investment mgrs thought they were being incredibly sophisticated by bringing these programs to their Boards’ attention and it was nothing more than what stock brokers do when they churn an account based on the marketplace’s latest greed/fear sell opportunity. Talk about leading a calf to slaughter.

    I have no interest in seeing any bank, S&L or investment house bailed out; what Bush43 and TARP1 allowed is criminally negligent to the taxpayers’ interest and to pump hundreds of billions into banks with zippo strings attached… someone should get the shotgun. To think we might be doing it for a round 2, 3, or 4 is incredible.

    It still all comes down to unchecked greed running the markets and consumers –and people/institutions betting on one direction but the marketplace going elsewhere. Should they have known better? Ask that of the people who over-mortgaged their homes, over-extended their credit, lived far beyond their means because they thought they were entitled to it and could pay it all off later with higher wages, raising homes values or hitting the lottery.

    The line of the last economic cycle: Greed is a Family Value.

    Comment by Michigan-Matt — February 10, 2009 @ 4:43 pm - February 10, 2009

  32. As if banks were actually eager to snap up bad debt without government incentive.

    Uhm, yes they were!

    Sonic,

    You were apparently so eager to rebut the first part of my sentence that you neglected to read the second half.

    What you neglect to mention is that Fannie and Freddie were for all intents and purposes guaranteeing these risky loans, therefore negating the risk to the banks. Banks are not in business to take bad risks, they are in business to take smart risks. A bad risk with a government guarantee becomes a smart risk.

    And as to your idea that the CRA didnt require banks to make loans to people who were not credit worthy that is simply untrue. Yes, it didnt require them to make loans with no guarantee of income, but it required loans to bad credit risks nonetheless, and you also overlook the role of “community organizers” like Barack Obama and ACORN who used the CRA to extort banks into making billions of loans to bad credit risks in shakedowns worthy of Jessie Jackson.

    And finally, you fail to note that all of the above would have been remedied if Democrats had not blocked over 25 attempts since Bush’s first budget in 2001 to regulate the socialist feeding frenzy at Fannie and Freddie.

    Sorry, I’m going to go with Barron’s, The WSJ, CATO and Heritage among others. They not only are very credible, but their explanations dont have the holes yours does.

    Comment by American Elephant — February 10, 2009 @ 4:46 pm - February 10, 2009

  33. Obama has put a salary cap on CEO´s of corporation who take government money. Maybe he is right but I don´t hear a peep about sports figures. So many are receiving obscene salaries and some of those guys aren´t that great and wouldn´t have had the years they´ve had if it weren´t for steroids. . When I migrated, baseball had a
    $!00,000. a year club with only two members, Joe Di Mggio and Ted Williams. That plateau was a magical mark. It upped to $200,000. with Willie Mays. That money is now probably about $!,000,000. but to think Ryan Howard will get 18 million this season and the next two from the Phillies. My favorite, the Yankees spent a half billion dollars for three players. The money major league baseball is throwing around they could payoff the debt that the stimulus package will cause. The MLS has a salary cap that requires league approval for attracting internationally known players, like Beckham. To think the goal tender for the champion Columbus Crew made only $12,000. last season. Now, that is love of the sport.

    Comment by Roberto — February 10, 2009 @ 4:46 pm - February 10, 2009

  34. What you neglect to mention is that Fannie and Freddie were for all intents and purposes guaranteeing these risky loans, therefore negating the risk to the banks. Banks are not in business to take bad risks, they are in business to take smart risks. A bad risk with a government guarantee becomes a smart risk.

    Except it’s not the guys shelling out the mortgages left holding the bag. They sold ‘em off and are long gone when it forecloses. So nobody needs to put a gun to their head when they’ve got a sucker begging to be fleeced.

    Comment by Rob — February 10, 2009 @ 5:40 pm - February 10, 2009

  35. I am very much aware that the Bush administration was trying to increase regulation on the “F” twins. Bush did sound the alarm. Here is a good round up of that.

    AE. don’t get me wrong. I’m not absolving the governments, or the Democrats role in this at all. But they are not the only culprit in this mess. We can play the “If” game all we want. If the banks were not allowed to sell this debt off, if the debt stayed in-house, where the banks that wrote the loans would be the ones who took responsibility if things went wrong, they would not have written so many outrageously bad, worthless loans, and only those banks stupid enough to write those loans would be suffering, not the whole financial infrastructure.

    Comment by Sonicfrog — February 10, 2009 @ 5:42 pm - February 10, 2009

  36. Oh, and just for the record – this “Stimulus Bill” or whatever they want to call it – stinks on ice!

    Comment by sonicfrog — February 10, 2009 @ 7:24 pm - February 10, 2009

  37. Read this today.

    Franklin Roosevelt’s own Treasury secretary, Henry Morgenthau, lamented in an address to Congressional Democrats in May of *1939*: “We have tried spending money. We are spending more than we have ever spent before and it does not work.[emphasis added] And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot!”*

    I said it at #10 and will say it again: Roosevelt was the worst President, economically speaking, in United States history.

    Comment by ILoveCapitalism — February 10, 2009 @ 8:24 pm - February 10, 2009

  38. And on top of that, Secretary Morgenthau had Harry Dexter White as his undersecretary, who was a communist sympathizer and managed to leak a lot of high-level government info to both the Silvermaster group and the Russian Secret Police (NKVD) in the late 1940s.

    Gee, the more things change, the more they appear to be the same. Except this time the communists are not hidden anymore.

    Regards,
    Peter H.

    Comment by Peter Hughes — February 10, 2009 @ 9:32 pm - February 10, 2009

  39. A shame Senator Gramm couldn’t have left the Glass-Steagall Act alone.

    Stand back, folks; torrentprime’s head is about to explode.

    MARIA BARTIROMO

    Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision?

    FORMER PRESIDENT BILL CLINTON

    No, because it wasn’t a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn’t signed that bill.

    MARIA BARTIROMO
    Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?

    FORMER PRESIDENT BILL CLINTON
    Not on this bill I don’t think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can’t possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence. But I can’t blame [the Republicans]. This wasn’t something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.

    Comment by North Dallas Thirty — February 11, 2009 @ 1:12 am - February 11, 2009

  40. CATO’s Arnold Kling – He was FOR National Deficits before he was against them.

    Obama and company are simply following the fiscal words of wisdom from Dick Cheney “Reagan proved deficits don’t matter”, and Sarah Palin: “We shouldn’t worry about government not having enough money. Government’s got plenty of money,” she said. “It’s a matter of how government prioritizes the expenditures of those public dollars.”

    Comment by Sonicfrog — February 11, 2009 @ 9:51 am - February 11, 2009

  41. sonic.

    I can’t access the link from work. but if ‘Government has pleanty of money’ per your Gov Palin attribute, then why does it want more?

    Comment by The Livewire — February 11, 2009 @ 10:54 am - February 11, 2009

  42. #39 – If it does explode, you are the one who has to clean up the mess. ;-)

    Regards,
    Peter H.

    Comment by Peter Hughes — February 11, 2009 @ 11:07 am - February 11, 2009

  43. sonicfrog, I don’t know about all that but in the housing finance field, I can tell you that a lot of investment houses made a handful of money from a lot of state housing finance agencies and state treasuries and state-controlled pension funds by creating investment vehicles/programs whereby the state investor could take a sheltered position against the bet that bond rates would go up/down and they could cash in their bonds for the lower/higher rates in order to make 50, 75, 100, 125 basis points on a deal with a face value of $65-80 million of bundled debt instruments.

    Agreed, and a great many, if not all of those investment vehicles involve highly leveraged, unregulated derivatives and / or CDS polluted hedge funds.

    Palin’s remark was in response to questions about the workability of the McCain budget plan he ran on, which just like the Obama plan, would have spent more money than the government was taking in. The last election, in terms of fiscal policy, was much like a rat race – no matter who wins, they’re all still rats.

    Comment by Sonicfrog — February 11, 2009 @ 7:20 pm - February 11, 2009

  44. [...] while but kept putting it off. About a month ago, I was in a serious blargument with a commenter at Gay Patriot about the underlying cause of the current financial crisis. The Conservative “Party [...]

    Pingback by sonicfrog.net » The Cresit Crisis Explained…. And Explained Again. — March 2, 2009 @ 4:06 pm - March 2, 2009

  45. [...] belief that “It is only government that can break the vicious cycle” will drive the country to [...]

    Pingback by Fausta’s Blog » Blog Archive » The press: not quite ready for prime time — May 15, 2009 @ 5:16 pm - May 15, 2009

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