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Monday, October 20, 2008




The Wall Street, voters and regulators

Last updated: October 23, 2008

October 19, 2008


Two comments I posted on the Economist's forums. I am copy pasting them here out of laziness and lack of time. Here is the first one:


SongTao wrote:
October 19, 2008 15:22

The fundamental issue with capitalism, besides its eye-popping "freedom of choice" that so many Americans treated as holy bible god given right that they will fight to the death for (not sure how many of them are having the 2nd thought now when reality kicks in), is its born nature ( or DNA as some one put it) of greedy when it comes to making profit... sometimes at all cost. That is why we need regulation, or state intervention, typical of socialism phrase, when things are really turning for the worse as we are now.

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You miss the point. The epicenter of the current crisis happened to be located squarely in one of the few remaining heavily regulated sectors of the American economy - housing market. And the fact of the matter is that what so called regulators were doing there can be hardly defined as an attempt to restrain the markets or regulate something. In fact the sector and economic stability have been all sacrificed by the would be regulators in the name of social humanism.

What was going on in the housing sector since Clinton's days was all about inflating the market and working private banks into lending frenzy. And to achieve this the government used a wide array of tools from legal ones that obliged banks to lend under looser or no criteria at all to financial means such as securitization of the market. In fact the US government itself was pushing towards greater securitization of the market by instructing Freddie and Fannie to buy mortgages and then resell them in the form of MBS. Private banks were mostly following the government's lead when they started issuing their own versions of MBS. The Wall Street has got its share of sins to atone for, but in many cases the initiative was coming from the government itself as it was busy buying risky assets from the banks and fanning them out across the economy and actually the whole world and with hardly any other purpose in mind but to encourage more reckless lending. So much about the Wall Street and its fancy financial tools.

The crux of the matter is that what the current crisis has exposed is the total inability of the regulators to regulate themselves. In the case of the US politicians it was a classical example of how ideology and lofty social concerns had trumped all practical considerations and economic common sense. In fact, as evident from this link published five years ago, it was free marketeers who were suggesting privatization and other measures, in a vain attempt to save the market from the regulators who went out of control.


And another one:


val19 wrote:
October 19, 2008 10:01

I'm no fan of the Chinese system. But still, it's a bit rich to blame the Chinese for this crisis, don't you think? It is like blaming the seller for selling you too cheap (nooo, you are unreasonable, please charge me more!).

The crisis was 100% made by reckless borrowing and by the fat cats in Wall Street, who discovered a system where they pocket the profits, but socialize loss. Now, thinking rationally, if you discovered such a system, you would you it, wouldn't you?

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Not necessarily. The fact remains that America's richest man and most successful profit seeker, Warren Buffet, had pulled out of the system, coining on the way that now famous notion of financial weapons of mass destruction. There is no reason why other fat cats could not do the same thing.

Your way of thinking also ignores the role the American society as a whole played in creating the bubble and encouraging risky lending by financial institutions. The US government had spent decades and trillions of dollars to encourage markets to do just this. What for example Fannie and Freddie were instructed to do by the government? To recycle mortgages so that banks could shed their risks and engage in even more risky lending.

These policies suited liberal politicians because expanding home ownership was deemed socially good. These policies appealed to voters who got access to cheap credit and many were themselves purchasing homes for no other reason but to resell them later with profit. At the same time nobody worried for deficits, debts and trade imbalances. The crisis in the US is much less about capitalism and regulation than it's about culture. It's a systematic failure of the culture and the system as a whole. In this culture technical solutions and pragmatism gave way to all sorts of lunacies that travel under the cover of political correctness and social humanism, proper investment was replaced by speculation and profit chasing on dubious markets, long term policies were forsaken for the sake of short term election promises given to voters that care for nothing beyond the next day.

If the Wall Street is responsible for this mess, then the American society has become one big Wall Street long time ago.



October 20, 2008

And more:


SongTao wrote:
October 19, 2008 19:30

TO blame the current crisis sorely on mortgage or housing sector as you would put it. Yes, the housing sector is heavily regulated, but not to the point to stop greedy people from Wall street to bundle these high risk sub-prime into investing securities and sold to other greedy folks who want to make big bulks out of nothing, nor did it prevent people with low income to be lured into buying houses that they could not offer. Actually the Congress did pass the bill requiring the separation of commercial and investment banks in the after mass of the recession in 1930s, but only to be reversed by the same Congress in the 80s~90s during the boom of the US economy. Again, the greedy nature of the capitalism was at work that makes all these flip-flap. And sinks into the core of the capitalism that can not be cured by the self-regulation.

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SongTao

Somebody on this thread was talking about the need for the government to move in and to regulate markets for the benefit of all society and not just profit seekers. In the case of the housing bubble this was exactly what was going on. The regulators were regulating the market in the interest of all sectors of the society and this interest was defined as expanding home ownership to all down to the last homeless sleeping under a bridge. And indeed the profit seekers were refusing to work for the benefit of all and provide cheap loans to people who failed the banks criteria.

So the CRA was imposed on the banks making this mandatory. But this was not enough because profit seekers have their ways to sabotage such a noble undertaking. No greedy person wants to go bust. So Fannie and Freddie were directed into this market to buy mortgages and then resell them. Given that these are state sponsored ventures, the idea was that the market won't shun their financial goods as they are virtually guaranteed by the US government. When the regulators removed the ban on Freddie and Fannie to buy sub prime and ALT-A, it all became what you call "greedy people from Wall street to bundle these high risk sub-prime into investing securities and sold to other greedy folks who want to make big bulks out of nothing, ...", only this was not the Wall Street but the government working through Freddie and Fannie.

The Wall Street of course has its own share of sins to atone for, but you are massively missing the point if you think that the regulators were trying to stop it. The regulators themselves were seeking means to increase liquidity in the market and provide banks with easy ways to rid themselves of risky loans they were making so as to allow them to make even more such loans. So any outside help was welcomed. The regulators were not interested to stop the Wall Street, since they were trying to regulate the market into doing the very same thing. In fact the regulators did not wait for the market to join their noble project, so the government had involved Freddie and Fannie and was doing it through these two itself !!!


SongTao wrote:
October 19, 2008 23:13

NB12:
Point taken, then what? over thrown the goverment, who makes sure that the new goverment will not repeat the same mistakes... Like I said, it is easy to blame the goverment for this, but then what, any better suggestion? I thougt this is what this forum is all about...

***************

SongTao

There may be a whole host of suggestions to offer but my first suggestion would be to prevent the politicians-regulators from getting away from taking responsibility. It's obvious that right now the easiest way for them to do this should be by shifting all the blame to the Wall Street. Given how hated the Wall Street is and how addicted to cheap populist rhetoric the US has become, it's almost sure that the politicians will get away. But it's important to ensure that before these people try to regulate something else, they will take full responsibility for everything their "regulation" has already achieved.


October 23, 2008

and another one...

Regarding the point made by some people about capitalism, its greed and the need for more regulation.... Capitalist ethics were traditionally based on saving, frugality and hard work, go read Weber. The current mess has nothing to do with capitalism and its ethics, but rather with a steady erosion of basic capitalist values in a society that in the last years was behaving more and more as if the end of history has arrived and money would be soon grown on trees. In fact what was going on in the US and some other countries rather looks like an ultimate demise of the last vestiges of the Protestant ethics that created capitalism in the first place. To single out the reckless adventurism of the Wall Street is to ignore its being a manifestation of society wide trends.

For starters, the project of universal home ownership and rehabilitation of distressed neighborhoods has had to be financed with public money, means raising taxes, the biggest no-go of all election campaigns. Neither the electorate, nor by extension the politicians, were ready to consider such an option. It thus led to increasing intervention by the government in the housing market and the regulation that basically destroyed the last traces of discipline in the matters of lending. There were reasons why private institutions were abstaining from lending to those distressed sectors, but the regulators were sure that by arm twisting or cajoling the private sector into doing it, they can actually manufacture something out of nothing.

In this sense there is absolutely no difference between the so called greed of the Wall Street, the socially oriented regulation of liberals and numerous renegades from the Republican camp, and the voting patterns of the mainstream American electorate. All three think that one can spend as if there is no tomorrow, that deficits and debts take care of themselves, and that another Great Depression can never happen again.


Mortgage Crisis and Politics wrote:
October 20, 2008 15:20

You may call the US housing market "one of the most regulated ones in the world", but than it was one where "Ninja" (No income, no job or assets) mortgages passed the regulatory screen of approval. Regulation should not be measured by the number of pages of law they take up, but rather by the degree in which they truely control target parameters like front and back end loan to value ratios and long-term versus current asset value.

Unfortunately, in the US, laws are nowadays written by special interest group, stuffed with unrelated tax breaks and payouts, approved by house and senate without reading their contents in a process with very little association to that of a democracy, since most politicians spend 80% or more of their time seeking re-election funding from these same special interest groups.

In the US, it is not so much a question of moving from a liberal to a command economy or back, but rather one of moving from a democratic to a non-democratic system and (hopefully) back.

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Mortgage Crisis

It all depends on the objectives the regulators set for themselves. And if these are socially aware regulators, who want to help socially weak classes to join the ranks of the middle class, then such regulators can approve Ninja loans, ShaoLin loans and whatever loans.

And special interest groups not necessarily include only those funding re-election campaigns. They also include people who actually re-elect politicians by casting ballots for them. And these include people who were taking these Ninja loans. So the process may have actually been about moving from what you call a non-democratic system to a democratic one. Let alone that these policies found some of their staunchest supporters in the Democrat camp (pun intended).

If a few years ago the regulators were to try to stop Ninja loans and other excesses of the financial system (never mind that on many occasions the regulators were deliberately encouraging them) you would have been posting here about special interest groups manipulating the regulators and depriving poor working classes of access to credit. And you would have been decrying the non democratic nature of the credit system and demanding a genuinely democratic regulation with cheap Ninja loans for all.

PS

In the US there exists one special interest group that excels in being irrational to the extreme while constantly suspecting and accusing other special interest groups of harming the society. This particularly nasty special interest group is actually quite huge. It's the American electorate.

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