US Politics Mega-thread - Page 1075

On May 27 2014 12:10 GreenHorizons wrote:
I wasn't intending to make a particular case, other than your claim that the financial crisis was started by a run on MMMF's seems incomplete at best.

I answered your question already?

On May 27 2014 12:58 IgnE wrote:
Your explanation is a little like someone saying that the cause of a heart attack was a relatively average, unpredictable, artery blockage as if these things just happen without context. A heart attack in a young athlete is a bit different from one in an obese middle aged man in a chronically high-stress environment.

Some economists have noted that recessions accompanied by banking crises tend to be deeper and more difficult
to recover from than other recessions — even those associated with other types of financial crises. For instance,
the bursting of the dot.com bubble in 2001 was a very important financial event that was not accompanied by a protracted
recession. The potential of banking crises to do lasting economic harm led policymakers to adopt safeguards in the 1930s that have essentially eliminated traditional banking panics in the U.S. Although the Great Recession of 2007-09 was associated with a protracted financial market disruption — and the failures of some large banks like Washington Mutual and IndyMac — we did not observe widespread withdrawals from commercial banks, as in a traditional banking crisis. However, economists Gary Gorton and Andrew Metrick show that it can be viewed as a banking crisis that originated in the shadow banking system. In the last 30 years, institutions very similar in function to traditional banks have grown outside regulatory oversight. One lesson of the financial crisis is that these institutions are as vulnerable to panics as traditional banks because they are subject to similar risks.

Some economists have argued that problems in another segment of the shadow banking system can be identified as the prime cause of the 2007-08 financial crisis. For example, in his discussion of Gorton and Metrick’s account of the crisis, Andrei Shleifer has provided evidence that the contraction in the asset-backed commercial paper (ABCP) market happened before the contraction in the repo market. Thus, he suggests that problems in the ABCP market may have triggered the financial crisis.
...
The main investors in ABCP are money market mutual funds. Similar to the investors in the repo market, money
market mutual funds also need a convenient place to invest some of their resources for short periods. These investors
also want their investments to be safe and to yield an attractive return. Provided that the assets securing ABCP
are of sufficiently high quality, such an investment vehicle is fairly safe, at least under normal market conditions. The
short-term duration of ABCP gives investors an opportunity to “withdraw” their funds in case they decide to invest
elsewhere or in case they have doubts about the quality of the assets securing ABCP.

On May 28 2014 11:18 oneofthem wrote:
the risk aggregation 'calculation' used in the valuation of securitization behind the ABCP's made them both attractive and able to be 'manufactured' from dangerous loans which were produced enmass to feed that market.

On May 28 2014 11:08 JonnyBNoHo wrote:
Conveniently, a blog I follow had a lengthy post on the very issue of shadow banking and MMMFs today.

The reason I was trying to separate the financial crisis from a normal or typical recession is that financial crisis, particularly banking crisis tend to be more devastating and long lasting than a typical recession:



Moving on to the importance of MMMFs:



The quotes come from a Philly Fed paper you can read here.

The blog post I got it from is here.

Rather than continue to argue over the relative importance of this issue, maybe we can at least agree that this is:

1) A very important issue.
2) A specific and tangible issue that can and should be addressed.

Also, from what I've heard, Dodd-Frank does not address this issue and the SEC isn't bothering with it either.

In regulators we trust...

The main reason we had a crisis was that there was a run in a part of the financial system that the Fed didn't have direct access to.

On May 28 2014 11:43 JonnyBNoHo wrote:

Sure and for the most part those securities performed fine (afaik).

On May 28 2014 12:01 GreenHorizons wrote:


I don't think those two points have ever been in contention for anyone here or elsewhere?

What Igne seemed to be suggesting and I was certainly suggesting, was that any perspective suggesting "a run on MMMF's was the 'main reason' for the financial crisis" is not appropriately representing an important observation noted even in the quotes you posted.



That's not to say regulation and oversight are always perfect (especially when one party fights them at practically every turn), but it's obvious that right leaning economists like Greenspan and his ilk could not have been more epically wrong about institutions like Lehman Brothers. And those problems unquestionably preceded the run, and had they been addressed when they were pointed out (they were unbelievable obvious to anyone who wanted to look), the entire crisis could of been averted, or at minimum, less harmful.

To use another analogy it's like saying the main reason a house burned down was because a child set fire to it. Well DUH!? But how did we get to a position where the child got to be unsupervised, got the fire source, and had time to make a fire bad enough that the whole house had to burn down instead of just where the fire started? It appears you are sourcing the crisis to the fire itself and not giving appropriate credit to the preceding events when you say



The main reason we had a crisis the house burned down was that there was a run in a part of the financial system the child set fire to it, and the Fed didn't have direct access to the parents didn't have access to the child.

It doesn't even get past the smell test let alone an in depth analysis.

On May 28 2014 12:14 oneofthem wrote:

clearly they did not perform fine based on how the market reacted. problem with this derivative thingy is that different pay priority/schedules were different products altogether. the problem was with the actual high risk but still AAA stuff, which is not all of the securitization in question. so you should clarify what actually performed well

On May 28 2014 12:47 JonnyBNoHo wrote:

Actual default rates for structured finance 'AAA' securities was quote low:



source

I think a lot of the price action was due to fear and forced selling.

Edit: When the reserve primary fund broke the buck, it's NAV fell all the way to $0.97 on the dollar. That's not a big move...

On May 28 2014 12:43 JonnyBNoHo wrote:

Obama's SEC is walking away from this issue and Dodd-Frank doesn't deal with it. Prior to the crisis Democrats were blocking GSE regulations.

Unless you can cite something specific, your overly played talking points don't cut it.

• We conclude this financial crisis was avoidable.

• We conclude widespread failures in financial regulation and supervision
proved devastating to the stability of the nation’s financial markets.

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis

• We conclude a combination of excessive borrowing, risky investments, and lack
of transparency put the financial system on a collision course with crisis.

• We conclude there was a systemic breakdown in accountability and ethics.

• We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. (I know this is true from my work with lenders who openly admitted to granting loans off of 'claimed' income they knew perfectly well were lies. [I personally refused to deal with clients who were obviously lying about their incomes to get into $0 down 1-3 year ARM's. I, like many whistle blowers, was shunned for pointing out/refusing to participate in this criminal behavior.)

• We conclude over-the-counter derivatives contributed significantly to this
crisis.

• We conclude the failures of credit rating agencies were essential cogs in the
wheel of financial destruction.

We conclude that these two entities (Fannie and Freddie) contributed to the crisis, but were not primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis.

In quick succession in September, the failure, near-failure, or restructuring of
ten firms triggered a global financial panic.

On May 28 2014 13:54 IgnE wrote:
I might be wrong but didn't you argue before in this thread that scrapping shadow banking is untenable because finance will find a way? That even if we try to get rid of or heavily regulate the shadow banking practices and institutions at the center of the 2008 collapse, the money will go elsewhere in an attempt to achieve the same end? Isn't this just an argument that crises will always and everywhere occur in a capitalist, market-based system?

I'm also not even sure what your argument is anymore. The blog post you linked makes the case that repo loaners stopped renewing their repo contracts in response to perceived increased risk in MBS. So they made a "run" on the repo market and fucked everything up because the shadow banking system ran out of liquidity. And this to you is an ordinary run on the bank rather than anything systemic related to the types and quality of financial products that were being traded on this market?

This description of a typical banking crisis clearly reveals why banks are fragile: They fund illiquid assets with deposits that can be withdrawn at will. Economists usually refer to this practice as maturity transformation. It is important to mention that this role played by banks has a value for society. People have a preference for holding highly liquid assets — assets that are easy to sell without taking a loss — but the most profitable investments take a long time to pay off. Banks offer demand deposit contracts that give people ready access to their funds and a higher rate of return than they would get by holding liquid assets directly. Banks are able to offer a higher rate of return to depositors because they pool resources in such a way that permits them to invest a significant fraction of their assets in higher-yielding, long-term projects such as mortgages and other types of long-term loans. Normally, funding illiquid assets with short-term liabilities works fine. But
when depositors begin to worry about losses, a bank run may ensue.

On May 28 2014 14:35 IgnE wrote:
So your solution moving forward is to prevent bank runs in any financial institution of sufficient size and scope by letting the Fed provide loans as a last resort, such that risk for most large financial institutions is socialized as much as possible. Risky credit default swaps? mortgage backed securities? don't worry. You can always get money from the Fed and ride it out.

On May 28 2014 12:47 JonnyBNoHo wrote:

Actual default rates for structured finance 'AAA' securities was quote low:



source

I think a lot of the price action was due to fear and forced selling.

Edit: When the reserve primary fund broke the buck, it's NAV fell all the way to $0.97 on the dollar. That's not a big move...