Once upon a time, moral hazard was a bright line that helped steer The Federal Reserve, the nation's financial banker. It is one of the very first lessons in Economics 101.
I have argued for over a year against federal bailouts in the credit crisis. Bailouts are a form of taxation without representation. Anyone who completed Econ 101 could have predicted that the subprime mortgage meltdown would be the tip of the iceberg.
It doesn't take a governing board member of the Federal Reserve to understand that once that moral hazard line is crossed, the next question is-- where do you stop? What will you not do, if you are a policy maker, to deform the meaning of contracts?
President Bush was caught on camera this week in Houston, apparently unaware the nation was watching when he uttered what just about everyone knows to be true: "Wall Street got drunk". The President's response is to pour the drunkard another drink.
The Miami Herald reports: "U.S. House leaders Wednesday approved a colossal housing package that allows the federal government to back up to $300 billion in refinanced loans for at-risk borrowers, a measure that could save thousands of South Florida homeowners from foreclosure and help slow the decline in property values."
The Herald does not challenge the enormous assumptions of "could". What the serial bailouts and abandonment of moral hazard will most certainly do is put even more downward pressure on the US dollar and equity markets.
Maybe that is the pragmatic course for politicians, preferable to watching long lines of depositors seeking withdrawals at Indymac or could happen at any number of Florida banks, as well.The Federal Reserve crossed the line with the bailout of Bear Stearns-- using taxpayer dollars to support not just the purchase of the cratered financial monster but to underwrite tens of billions of toxic junk debt originated by Wall Street and instigated in the chain of real estate speculation stretching through the builders associations to local power brokers and loan originators culled from the ranks of felons: more than 10,000 in Florida alone.
The bailouts-- now to include $300 billion from Congress to consumers who can't afford to pay their mortgages and at least $25 billion to Fannie Mae (which according to The Wall Street Journal includes 20 executives making more than $1 million in annual compensation a year) and Freddie Mac-- represent the destruction of contractual relationships and a de facto nationalization of the credit crisis.
Most Americans don't travel to Europe or Asia or other continents where the debasement of the US dollar is an instant fright in everything from a can of Coke to a cup of coffee.
Congress and the White House will have to increase the ceiling on the national debt by another trillion dollars; that is a real, tangible obligation that future taxpayers will bear. How much additional debt is "off the books" in the government's own versions of special purpose vehicles? No one knows; another reason for investor flight from the dollar.
We are in servitude to the worst fiscal recklessness that at any time in modern US history. Once the bailouts start, where do they end?
14 comments:
NO BAILOUT!!
Full agreement, but the crooks in charge do not care what we think.
GE,
Look, I haven't taken any courses on economics, and I really am unsure about the lay of this land so take this with a grain of salt.
I tend to agree with you, but here I think you may not be correct. These actions are not quite in the same league as government subsidies to corporate interests. Instead they are attempts at staving off the slowdown of circulation of money in the economy. Apparently, Bernanke is a Great Depression scholar, and these efforts stem from the lessons learned by that experience.
This is not to say that there should be not upside for the public. As it stands, there seems to be some push for regulation (although my sense would be that this would be fleeting). What I would appreciate would be something along the line of what Robert Reich proposes in which the public receives a cut on the up-side during the eventual recovery (and subsequent growth).
Thoughts? What am I missing (or misunderstanding)?
- g
Almost all of the thousands of homes in Florida are not first time home buyers who purchased to live in the homes, but greedy speculators who took a chance on prices always going up, they should not be bailed out unless they are living in the home. There are thousands of empty homes here in Florida.
Well stated. Where do you draw the line?
Eventually, the majority who did not participate in this fisaco will want to burn some at the stake. I, for one, want to go after the flippers, the liars, the crooked appraisers and then the bad local government officials that facilitated this mess.
That's practice. Then we go after the banks, the brokers, the insurers, and the rating agencies.
Finally, we go after the idiots in Congress and the professional regulators.
And stamp on Greenspan's grave. Forgot that one when I said Finally.
Where will we draw the line?
We should have drawn the line back in the 80s, and declined to bail out the S &Ls.
Because we didn't, we set ourselves up for this disaster, which I feel will not respond to the various interventions that are being done at such great cost to the taxpayers.
You can tell how little we learned from the S&L disaster by the fact that we let the Glass-Steagal Act be repealed a decade later. That's what you do when your financial community has almost collapsed the economy by fraud, malfeasance, and irresponsibility- throw them more rope, along with the assurances that the taxpayers will always be there to mop up the messes they leave behind after their multi-year binges of financial lunacy; and rampant greed and criminality.
And now we'll set ourselves up for still worse, even though I have a difficult time imagining anything worse than this cascading disaster that might end up taking down all the economies in the western world.
Prepare for the cure to do more harm than the disease. Very similar interventions were made by the Fed and our government between 1929 and 1933, and they did not mitigate the disaster but only drove the government to insolvency.
It's really hard to project just how various actions, or the failure to take any, will play out over the next few years, but since the original problem- a massive credit bubble with trillions of largely imaginary dollars being put into play by lending fiat money to people in amounts and on terms that they could never realistically hope to pay back- was caused by intervention by government authorities, it is hard to imagine how the further efforts of these same authorities will do any good.
Some things just have to work themselves out, and we will have to just work that much harder and suffer that much longer than we would have if, back during the S &L debacle, we had let people rediscover the concept of moral hazard. But we didn't, and so here we are, with the Mother of financial debacles.
Gimleteye writes: another view...
July 27, 2008
THE WAY WE LIVE NOW
No Free Bubble
By ROGER LOWENSTEIN
The short take on the economic crisis of the 1970s was that regulation failed. Price controls failed; high taxes failed; regulation was outmoded.
The mortgage and banking crisis of 2008 feels diametrically different. What failed this time were markets. The lenders who were supposed to regulate mortgage borrowing — and the credit-rating firms who monitored them — failed utterly. The investors whose job it was to monitor the capital of financial institutions were asleep at the switch.
It is not really that simple, because investors were encouraged by the creeping government doctrine of “too big to fail.” But if, after the ’70s, the solutions in one way or another were about opening industry to the fresh breath of markets, today the remedies issue from Washington. It is quite possible that the great experiment in laissez-faire has, for this generation, run its course.
The Federal Reserve and the U.S. Treasury have lately widened the federal safety net more quickly and more aggressively than at any time since the New Deal era. Indeed, a recent front-page headline in this newspaper, “Confidence Ebbs for Bank Sector and Stocks Fall,” had distinctly Depression overtones. (You could almost envision the next line: “Hoover Urges Calm.”) And not since the Depression (under the Reconstruction Finance Corporation) has the government bought significant equity in private firms, as the Treasury has sought the authority to do in the case of Fannie Mae and Freddie Mac. At least during the 1930s, legislation followed months of deliberation and public hearings. The proffered fixes to today’s fast-moving crises are worked out hastily and in private.
At a visceral level, it is deeply upsetting when institutions that once reaped fabulous profits (a goodly share of which were snared by their executives) are granted the protection of Uncle Sam. Robert Rodriguez, the C.E.O. of First Pacific Advisors (which has a fund I’m invested in), confessed to a “sickening” feeling at the news that the Treasury might guarantee the debts of Fannie and Freddie. Rodriguez was one of the few fixed-income investors who, having noticed the bloated balance sheets of the mortgage giants, refused to buy their debt securities. Ordinarily, less prudent investors would have suffered a loss; instead, any pain will be borne by the taxpayers.
More troubling than the unfairness is the potential that the solutions will exacerbate moral hazard: that people who feel inoculated will run greater risks. As Rodriguez observed: “Nobody wants to take the pain for excesses. Each time the problem gets bigger.”
The entire U.S. policy of promoting homeownership, which during the boom raised the ownership rate from 64 percent to 69 percent, now looks to be a case study in unintended consequences. Encourage more housing than markets will support and you get — voilà! — mortgages that fail. Fannie and Freddie were among the chief implements of the policy. Though judged by Standard & Poor’s to be only a Double A-minus credit, they were able, thanks to the widely held belief (since validated) that the United States would not allow them to fail, to borrow at lower than Triple A rates.
As the balance sheets of the agencies swelled, they grabbed the profit margin that traditionally went to savings and loans. The thrifts complained, but they were no match for Fannie and Freddie’s well-heeled lobbyists. And so housing was increasingly financed by lenders insensitive to market risk.
Recently, as mortgage companies began to fail, the U.S. encouraged Fannie and Freddie (which already owned or guaranteed $5 trillion in mortgages) to buy still more mortgages. This aggravated the problem. Since the agencies’ capital was inadequate, they should have been reducing risk.
In a similar vein, federal regulators seized IndyMac, a Pasadena bank whose depositors had crowded the door demanding their money and which became the second-biggest bank failure ever. The head of the Federal Deposit Insurance Corporation immediately announced that IndyMac would stop foreclosing on mortgages. No doubt this was pleasing to California homeowners, as well as to the 55 congressmen and senators who represent them (and who help to oversee the F.D.I.C.). But it amounted to yet another giant socialization of risk and to a dubious precedent.
What if politically mindful regulators now lean on Freddie and Fannie to halt foreclosures? Exactly which losses are immunized and, just as important, who gets to decide? Similar questions have been raised by the Fed’s various actions to protect Bear Stearns and other investment banks and their collective creditors. In the space of several months, a wide swath of American finance has ceased to operate under normal rules.
Fixes are being introduced, and the next administration will very likely initiate its own reforms. The Fed has tightened mortgage rules; higher capital requirements are coming. Also, better accounting and disclosure rules would help investors to understand the often-complex assets that banks own.
But there is a difference between increasing transparency, with regard to risk-taking, and underwriting losses. The government should get out of the business of assuming risk — which hinders markets in a function they can handle better. With investors conditioned to look for rescues, it will not be easy to get the genie back in the bottle. A good first step would be to draw a bright line between Fannie and Freddie’s outstanding obligations, which total $1.5 trillion, and the borrowings they undertake in the future as their current paper matures. Their current debt is presumably socialized. But if the Treasury were to announce that new obligations were not protected, markets would gradually force the beleaguered twins to both raise more capital and shrink their asset bases. The U.S. might even consider splintering the companies, AT&T style, into pieces. The goal should be to ensure not that they never fail, but that for Fannie and Freddie and for other institutions, failure reacquires its proper status in a capitalist society: that of a tolerable event.
Copyright 2008 The New York Times Company
Privacy Policy Search Corrections RSS First Look Help Contact Us Work for Us Site Map
I'm Just a little confused...Is it 3.9 billion or 300 billion?
And...Exactly, I say exactly...
Where is this money coming from?
China?...
So for those of us who chose to live within our means...where's our piece of this pie?
#######
#######
A trillion lost here and a
trillion lost there, but who
is counting?
Recall that on September 10th,
2001,Donald Rumsfeld reported
on the Pentagon's unaccountable
loss of nearly two-trillion
dollars. And recall that the
Pentagon's accounting depart-
ment had been commanded to
investigate the unaccountable
loss, and was moved next to
where the REINFORCEMENT con-
struction was underway, and
which section and accounting
department - and all those
investigative accountants
searching for the unaccount-
able loss - had been destroyed.
Coincidence or a very handy
cover-up?
Then, there were the two-trillion
more dollars that could not
be found in the Defense Depart-
ment's own books.
A trillion lost here and a
trillion lost there, but who is
counting?
#######
#######
I am fed up with the government and their schemes that are meant to help us, but only seem to help the most affluent. It sucks.
Bailout is the Name of the Game....... Read The Creature from Jeckyl Island
You know, a lot of this started with credit cards. Those crazy rates. Red lining turned into green lining and people paid off cc debt and got mortgages or refi'd. Why are we not also slamming the cc companies. We need usery laws to come back. Too much greed praying on too many people who spend conspicuously. Ouch.
Post a Comment