The Goddamn Economy: A Civilized Version - Page 3

On October 01 2008 08:10 jgad wrote:
You know, I post on a ton of forums and no matter the theme of the place it's like suddenly the case that the entire world has become interested in economics, especially how it relates to politics. This alone brings joy to my heart - maybe this generation can grow up with better sense in its head than the last one (Sarah Palin's embarrassing demonstrations of oblivious ignorance, for example). Although the phenomenon here is far from unique, here are a bunch of Starcraft fans sitting around and having relevant, intelligent discussions which should, by all rights, be happening in a major public forum right now. Take what you can get, I suppose. For anyone with a bent curiosity, here's a great book by Murray Rothbard - Man, Economy, and State. I highly recommend it to anyone interested in what's going on.

On October 01 2008 04:27 ahrara_ wrote:

How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?

Rayzorblade: APPRECIATED as always

On October 01 2008 09:59 Sp1ralArch1tect wrote:

Because they let the little guy take the fall? I have no insider information or anything, or even an extensive knowledge of the world of investment banking. But I do know that the big wigs always walk away losing less than everyone else, and if they are smart they will make money off of it too.

On October 01 2008 08:32 Wolverine wrote:
This is quite interesting, me copying and pasting: http://myslu.stlawu.edu/~shorwitz/open_letter.htm

Steven Horwitz from St Lawence University does an open letter regarding the financial crisis:

In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.

And then he addresses the issue of greed:

One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

And then he looks at the facts:

For starters, Fannie Mae and Freddie Mac are “government sponsored enterprises”. Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a “free market.” All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie’s lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas.

Now think about this as the Government here passes a law requiring affordable housing in certain areas. The best of motives often lead to the worst of results.

At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What’s interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom’s effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.

Strict land use policies pushign up house prices.

The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were “greedy” for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the “free market.“

I suggest people read the full thing.

On October 01 2008 08:10 jgad wrote:
You know, I post on a ton of forums and no matter the theme of the place it's like suddenly the case that the entire world has become interested in economics, especially how it relates to politics. This alone brings joy to my heart - maybe this generation can grow up with better sense in its head than the last one (Sarah Palin's embarrassing demonstrations of oblivious ignorance, for example). Although the phenomenon here is far from unique, here are a bunch of Starcraft fans sitting around and having relevant, intelligent discussions which should, by all rights, be happening in a major public forum right now. Take what you can get, I suppose. For anyone with a bent curiosity, here's a great book by Murray Rothbard - Man, Economy, and State. I highly recommend it to anyone interested in what's going on.

On October 01 2008 06:37 FakeSteve[TPR] wrote:
This stuff is way out of my area of expertise, but

ahrara you're my favourite registered 2008 poster

On October 01 2008 04:08 ahrara_ wrote:
BAILOUT my ass

After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.

Essentially, the problem is one of liquidity, or liquid capital. Liquidity describes how easily an asset can be transferred into a different kind of asset, and at what cost. Cash is the most liquid asset possible: Anyone will accept cash for anything, except under excess inflation. A car, on the other hand, is less liquid. You have to go through a lot more trouble to trade a car for something else of equal value, and you will always sell for less than its real value. Before the housing crisis, mortgage backed securities retained some degree of liquidity. After the crisis, they became practically illiquid: Because of the risk associated with them and all the negative headlines, nobody would buy them at a reasonable cost. Essentially, these securities still have SOME worth, but because nobody will buy them for a reasonable price, banks may as well have a black hole where these securities are. It is because they lost so much money on these securities that is fueling the credit crisis.

To fix a liquidity problem, you have to create a market for the illiquid assets. You have to help these companies convert mortgage backed securities into capital they can use to help the economy get back on its feet. Treasury Secretary Henry Paulson teamed up with Fed Chairman Ben Bernanke to write up a plan that would allocate $700 billion to create a market for these securities. Meaning, the government would offer to buy up these securities: they would take them off the hands of investment banks and replace them with cash. Then, the government would either hold on to these securities until they mature (when they "put out" in other words) or sell them to someone else. A similar system was set up in the 80's during the Savings and Loan crisis, but not at this scale.

How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. It will become easier to buy a home, but not so easy the bubble will begin to inflate again. Demand for housing goes up, and prices stabilize. The losses will still be there, but at least the problem won't get any worse.

There's some kinda irrelevant and esoteric information about how the fed will determine prices for these securities. If you're really interested, it's in spoilers. But it wasn't fitting into the narrative as a whole so I cut it...
+ Show Spoiler +

So there's a few things about the bailout that are under debate... but it's hard to talking about that without inserting:

My Goddamn Opinion

At this point, there's not much more to tell you that you don't already know. So I reserve my right to soapbox for a few minutes.

1.) The Bailout is not as expensive as $700 billion.

As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.

2.) It's not a bailout.

The worst thing Bernanke did in selling the bailout was to call it a bailout. Nobody is coming in and arbitrarily injecting capital into companies that don't deserve it. They are doing it in exchange for these securities. What we're doing is trading much needed liquidity into companies that don't have it.

3.) Don't handicap the bailout.

All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.

Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.

4.) Not bailing out is much worse.

OK, here is the important part. The argument by free-market fundamentalists is two fold. First, they say that the market is undergoing a "correction". Second, they tell you that bailouts create a moral hazard.

First, it's true that the housing market is undergoing a correction. However, you have to keep in mind that most homes are bought through mortgages. A lot of banks are unwilling to lend even to qualified buyers, so the price of housing might even be BENEATH the ideal equilibrium price. So long as credit remains tight, housing prices will continue to fall, banks will keep bleeding money, and the economy goes down a vicious spiral into stagnation and recession.

Second, this is an inappropriate use of the concept. Bankers have already suffered plenty from the housing crisis. They know better than to let this happen again. Moreover, the costs of NOT bailing out are much higher than the cost of creating this minimal moral hazard.

The fix you mention is a little less than obvious. It may seem intuitive, but all you're doing is propping up a problematic system that is then destined to fail *again* at a later date.

On October 01 2008 08:32 Wolverine wrote:
This is quite interesting, me copying and pasting: http://myslu.stlawu.edu/~shorwitz/open_letter.htm

Steven Horwitz from St Lawence University does an open letter regarding the financial crisis:

In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.

And then he addresses the issue of greed:

One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

And then he looks at the facts:

For starters, Fannie Mae and Freddie Mac are “government sponsored enterprises”. Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a “free market.” All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie’s lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas.

Now think about this as the Government here passes a law requiring affordable housing in certain areas. The best of motives often lead to the worst of results.

At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What’s interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom’s effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.

Strict land use policies pushign up house prices.

The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were “greedy” for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the “free market.“

I suggest people read the full thing.

On October 01 2008 11:31 TeCh)PsylO wrote:
Great post. I don't know enough about this to hold a position about the bail out, but if the basic problem is houses foreclosing, how does this bill stop that? It stops the pain felt with the mortgage companies and gives them the liquidity to confidently continue to issue credit, but I don't see how it is going to stop foreclosures from taking place.