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.

Regards,
Peter H.

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?

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.”

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

MARIA BARTIROMO

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.

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.

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.

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.

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.

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.

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.

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.

“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.

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.