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Absolute Greed

The rhetoric of class hatred from Prime Minister Kevin Rudd:

If you want a definition of social injustice this was it in brutal colour - millions of innocent workers losing their jobs because a few thousand financial executives around the world surrendered any pretence of social responsibility in their blind pursuit of absolute greed.

The facts from the AEI’s Peter Wallison:

Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?

The answer, of course, is that it was government policy for these poor quality loans to be made.

posted on 16 October 2009 by skirchner in Economics, Financial Markets

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Comments

I recently saw your presentation on the CIS website, arguing that the concept of bubbles is meaningless.  But what about the Austrian concept of ‘malinvestments’? That is, as I understand it, investments that are marginally profitable as long as interest rates are kept artificially low.

Posted by .(JavaScript must be enabled to view this email address)  on  10/16  at  01:05 PM


How much damage can this man do over 8 years (assuming he wins again) with beliefs like this?

Posted by .(JavaScript must be enabled to view this email address)  on  10/16  at  03:00 PM


ED, I would argue that the Austrian idea of malinvestment is a fundamental rather than a ‘bubble’ explanation.  Austrians are being too imprecise in conflating the two concepts.

Posted by skirchner  on  10/18  at  12:01 AM


OK, so should central banks avoid creating situations that encourage malinvestments?

Posted by .(JavaScript must be enabled to view this email address)  on  10/18  at  02:56 AM


ED: Remember, bubbles don’t exist and all problems everywhere are caused by government interference.  Rainy day?  Blame the government.  Got the flu?  Blame the government.

Private market players OTOH are perfect.  Some make mistakes, some don’t, but the overall result is always perfection.  Wall St bankers?  Blameless!  Mortgage brokers?  Blameless!  Securitization?  Had nothing to do with it.  Salary packages that encourage risk, but don’t punish failure?  Nothing to do with it.

It was all the government.

What an idiotic religion.

Posted by .(JavaScript must be enabled to view this email address)  on  10/19  at  10:53 PM


Remember, Say’s Law does not exist, monetary inflation during the ‘Great Moderation’ did not exist, and all problems everywhere are caused by the free market. Rainy day? Blame the market. Got the flu? Blame the market.

The political elites OTOH are perfect. Some make mistakes, some don’t, but the overall result is always perfection. Politicians? Blameless! Government regulators? Blameless! FHA, HUD, Fannie Mae, Freddie Mac, CRA, Federal Reserve? Had nothing to do with it. The ‘Too Big to Fail’ Doctrine; the Greenspan/Bernanke Put; the financial bailouts of AIG, investment banks, car manufacturers, Freddie and Fannie, etc., that encouraged risk, but didn’t punish failure? Nothing to do with it.

It was all the market.

What an idiotic religion.

Posted by .(JavaScript must be enabled to view this email address)  on  10/20  at  05:17 AM


I am more than willing to accept that government actions had a role to play, and I agree with every point above, especially TBTF, bailouts, moral hazard etc.

What I won’t accept is the blame lies exclusively with government.  That’s where libertarianism becomes a religion.  To claim that securitization and the onselling of MBS’s was somehow forced on Wall St bankers is complete nonsense.  It happened because laissez-faire capitalism encouraged it as ‘financial innovation’.

Besides guys, whatever you believe doesn’t really matter.  You’ve lost the battle of public opinion, and the bad guys are making the rules now.  History belongs to the victorious.

Posted by .(JavaScript must be enabled to view this email address)  on  10/22  at  12:05 AM


I don’t recall anyone saying capitalism is flawless.  On the contrary, the freedom to make mistakes and learn from them is fundamental to the operation of free market capitalism.

Posted by skirchner  on  10/22  at  04:23 AM


I never said it was all the government’s fault, just mocking those who think it was all the market’s fault.  Where did I “claim that securitization and the onselling of MBS’s was somehow forced on Wall St bankers?” Nonetheless, the role of the govt in the MBS market was significant.

“Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as “private-label” mortgage securities.”

And:
“The volume of pooled mortgages stands at about $7.5 trillion. About $5 trillion of that is securitized or guaranteed by GSEs or government agencies, the remaining $2.5 trillion pooled by private mortgage conduits.”

http://en.wikipedia.org/wiki/Mortgage_backed_securities

Apparently you think laissez-faire capitalism exists when 2/3 of the market is underwritten by the govt.

“You’ve lost the battle of public opinion, and the bad guys are making the rules now.”

On the first point, free-market economics has never been popular with the general public.  I agree on the second point.

Posted by .(JavaScript must be enabled to view this email address)  on  10/22  at  04:42 AM


“You’ve lost the battle of public opinion”.

The battle was never won and never will be won.  The struggle between liberty and power is a perpetual one.

Posted by skirchner  on  10/22  at  10:15 PM


The battle was never won and never will be won

You’ve been doing pretty well since the Thatcher/Reagan revolution.  The past 25 years has hardly been a triumphant period for socialism.

E.D.: Regardless of who guarantees the MBSs no-one forced Wall St bankers to slice and dice ‘em and flog them to unsuspecting victims like Aussie Councils.  They did that bit all by themselves.

Posted by .(JavaScript must be enabled to view this email address)  on  10/22  at  10:55 PM


“Regardless of who guarantees the MBSs no-one forced Wall St bankers to slice and dice ‘em and flog them to unsuspecting victims like Aussie Councils.  They did that bit all by themselves.”

Who said anything about ‘force’? Govt policies created the incentives for financial innovations. To make matters worse, the regulators even assisted in their construction and dissemination.

“The evolution of risk management as a discipline has thus been driven by market forces on the one hand and developments in banking supervision on the other, each side operating with the other in complementary and mutually reinforcing ways. Banks and other market participants have made many of the key innovations in risk measurement and risk management, but supervisors have often helped to adapt and disseminate best practices to a broader array of financial institutions…

The interaction between the private and public sectors in the development of risk management techniques has been particularly extensive in the field of bank capital regulation, especially for the banking organizations that are the largest, most complex, and most internationally active.”
- Ben Bernanke, June 2006

Posted by .(JavaScript must be enabled to view this email address)  on  10/23  at  09:14 PM



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