DISQUS

We live in a world where there are always contributing factors to a problem. So how does one decide which factor contributes the most? In other words, how do you decide upon the essence of a problem versus that which is tangentially contributory? Here, we are at a site where the subprime problem has been variously blamed on illegal aliens, greedy borrowers, stupid borrowers, politicians, the GSE leadership, and even Hollywood. To Cons, there is always room to blame the media. Entirely absent from the list is anybody who marketed, wrote, underwrote, or insured the loans. All were 'forced' into lending to the unworthy, or so the story goes. Nowhere were mortgages written at the teaser rate of 3%, with a balloon rate of 12% buried in the footnotes.

An insane answer. So please, please answer just ONE question: Who put the gun to the head of Wall Street to invent the endless layer of derivatives that ULTIMATELY drove this debacle? This was the structural pillar that made all of this possible, and their creation both preceded this fiasco, and occurred entirely outside the GSE boardrooms. What irony: Cons blather on about the loss of individual responsibility in modern society, while simultaneously blaming everybody but themselves for their lead role in this mess. And then to have the balls to call Main Street ignorant and stupid for calling them on their BS.

Gary,

You say the root of the problem is 'better explained' by the WSJ article that ran today, and reject the Times piece as a mere opinion piece. Both pieces are opinion, with neither providing much in the way of facts to support their position. You just prefer the WSJ piece, because it is consistent with your worldview.

But the WSJ article does make one assertion utterly refuted by the facts. Calomiris and Wallison claim that 'without government encouragement, banks would never have offered such dodgy loans.' The implication is clear: "Only non-economic, political considerations would lead to such irrational decision-making." So what, then, accounts for the emergence - and collapse - of the derivatives market, and AIGs implosion? These players were under no such pressure to create these instruments, or step up and expose themselve to the risks of the 'dodgy loans' the banks were 'forced' to make. But they did. Kinda ruins the argument that Wall Street was strong-armed into taking these risks...

No need for a re-read, Chris. The article merely ASSERTS this as the cause of the problem, it doesn't provide factual evidence in support of that assertion. Ironically, i just got done reading one of the WSJ articles cited in one of these stories in support of the ASSERTION that this problem was caused by Fannie Mae/Freddie Mac. In it, the author offers that Fannie Mae/Freddie Mac went from writing 6% of the sub-prime loans to 20% of the total sub-prime loans written in an effort to curry favor from Congress regarding their GSE status. From this, they concluded that this was the 'driving force' behind the collapse. That is a bizarre conclusion to draw. Using their own math, that means at the outset of this mania, 94% of the loans were written by regular banks, and ultimately this dropped down to a mere 80%. So from that, we're supposed to get that the minority portion of the loans booked by the FMs was the driving force of the problem?

There are mountainous journalistic accounts of how these loans were marketed, and compliance with Fair Housing regulations were NOT a major consideration for these mortgage broker houses and banks. The boiler-room mentality was rampant, and the degree of fraud and deceit on the part of lenders was appalling. The willful ignorance of the actual facts here is amazing. I know of a person who got over $2 million in loans for 10 different properties, while having (unverifiable) self-employment income of less than a $100,000/year. All of the loans were piggy-backed, with 2nd mortgages on the early properties used as the down payments on the others. NONE of the loans were done as FHA loans, so none of the lenders had a governmental gun to their head to write the loans.

You ask how it could be that lenders would be so stupid as to lend money they knew couldn't be paid back? Can't the question as easily be asked why would a borrower commit to a mortgage they had no ability to pay back? The stupidity and greed cuts both ways, but the facts are the facts.
Market manias are time-honored, and they were occuring long before there was the bogeyman of 'Government' to lay the blame on. Free Marketers hate it when the marketplace demonstrates its capacity for irrational behavior, but it is a fact of life.

Look it, to see these facts doesn't mean you have to believe socialism is the answer. If you can bring yourself to get past the dogma and rhetoric of your blind faith in the marketplace, the thing to look at are the key ingredients of market bubbles. Certain conditions have to arise for their creation, and after nearly 60 years of of seeing only minor marketplace bubbles, we've seen 3 MAJOR cycles in the last 10 years (dot.com, housing, and now oil). That is a factual reality that cannot be dismissed. If you don't want the US to 'go 'socialist', then capitalism's defenders need to think harder about the cause of these problems instead of burying their heads in the sand, and trying to put the blame somewhere other than where it lies. This should be a design question: What is it about the DESIGN of our financial marketplace that is keeping it from working.

A

And so did the lender. They're both culpable. But sure am getting tired of
the focus on the borrowers when the investors are the ones getting bailed out.
The Dems are trying to extend the help to the borrowers, but they weren't the ones that put the bailout on the table. They're just saying what's good for the goose is good for the gander.

Hollywood as the cause of the subprime mess? Is this satire? Put that aside, though, and ask yourself why you are putting this problem on Hollywood, and the 'dumb' people of the world instead of Wall Street? The bailout is for the holders of the mortgage, not the borrower. And whose more stupid, the person who buys a $1 million house on a 40K income, or the lender?The lender is supposed to represent the smart half of the transaction, so where's your anger towards them? You put a label of 'stupid and greedy' on the borrower, but not the lender? Obviously, you are clueless as to how these mortgages were marketed, written, sold, securitized and insured.

I'm fine to agree with anyone who says too many people took loans they never should have. But for the life of me, cannot figure out how you give the other party to the transaction a free pass.

Follow-up: I read Westbury's article, and as far as armchair quarterbacking goes, it makes good sense. He acknowledges the validity of mark-to-market accounting as a general rule, which is what I was struggling with from other commentators. Others seemed to be saying this was inappropriate accounting when it is actually quite the opposite under normal circumstances.

Westbury does point out, though, that we are talking about extraordinary times, and if the sky is truly falling, why not 'fence off' those assets, and treat them differently in order to preserve marketplace liquidity?

But it still doesn't change who caused the problem in the first place.

Well, there is some progress here as far as the Free Marketers retreating from their original claims this mess was 'caused by government' to one of where the government has merely 'contributed' to the problem.

The debate here is being argued on two levels. On one level, there is the strategic question of how to best deal with the mess. On this front, good points are being made, but everyone here is largely acting as armchair quarterbacks, myself included. Everyone needs to admit we don't have sufficient information to presume which strategy is better than another. Believe me, I don't want to have to pay for Wall Street's mistake any more than the next guy; I'm just not certain that the temporary emotional satisfaction that would come from letting this thing collapse is worth it to me in the long run.

The more relevant debate is over whether or not Wall Street has any ability to police itself. And it shouldn't be a debate, as all the proof is before us, and there is no shades of gray behind the answer. Honest to God, how can anyone, after this long, long run of serial trainwrecks, still believe this particular marketplace - Wall Street - has the willingness or ability to fix itself? Truly, I'm fascinated by the fact that seemingly smart people - people who have the cognitive skills to write well - have lose their ability to reason this one through. If this marketplace could fix itself, wouldn't it have been done a long, long time ago? Still, we are fed explanations of how self-correction is just around the corner, or how some arcane regulatory rule keeps a fix just out of reach.

John,

I thought your point was simply that banks were having to take a write-off on their books, and thus a paper loss. My point back was the marketplace is free to discern a different value than the accounting rules allow anytime it pleases, and does all the time. Private equity groups, Warren Buffett, et al would be buying these loans like penny candy if the value was really there. The lack of activity on that front suggests there isn't a major difference between the market's impression of these loan's true value, and that required by the accounting rules.

That being said, I acknowledge your point that paper writedowns would affect the bank's ratios, and thus to a degree, their liquidity. But I still don't see it as a 'big picture' perspective. My viewpoint dissents from the others in this forum in that I think everyone here is working overtime to blame these continuing cycles of marketplace mania and fraud on the government instead of asking why the so-called discipline of 'reputation risk' has been unable to keep Wall Street in check.
Like the WSJ, everyone here tells us the marketplace is self-regulating even as it delivers fraud and catastrophe over and over again.

You can look backwards for some rule change, or subsidy that has set these events in motion, but it doesn't change anything. Wall Street has shown NO ability to police itself, and we wouldn't be facing yet another Wall Street-spawned crisis if they could.

What?? How was this industry 'regulated to the point of collapse'? There are millions of foreclosures in play now for loans written to people who were in no way qualified to support. How was that a problem created by regulation?? In turn, there were millions of homes made to meet this artificial demand.

No idea how you can put this one on the government. Just another Wall Street Ponzi scheme is all.

Another point. Why all the worry about 'the marked to market rules'? Again, Free Marketers are always on the hunt to put the blame on some regulation as the cause of a market-induced problem. Any buyer of this debt is free to disregard the regulatory rule for valuation and apply their own, so that can hardly be cause of the credit seizure. The seizure is a result of a lot of bad, bad loans being written that shouldn't have been.

And in no case was any one of those loans EVER written with a government gun to the head of the mortgage broker who booked it, or the bank that bought it, or the underwriter that securitized it, or the rating company that rated it, or the insurer who insured it. Those were ALL private market decisions made one-by-one by people that should have known better.

This forum is a case study in cognitive dissonance. As True Believers, you cannot bear to put this one on the workings of a Free Market, so you get busy trying to blame the Guv'ment for the stupid, greedy actions of Wall Street. As JK Galbraith said:

"Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof."

Empty analysis again. You don't even answer your own rhetorical questions. You defend the short seller for 'taking great risk', but don't explain why short sellers nonetheless failed to curb this series of bubbles (stock market (1996-2000),
subprime market (2001-2007), oil commodities (2007-2008). The idea that any of this has been caused by a WHOLE INDUSTRY thinking that the government will step in once their investment has gone to pennies-on-the-dollar is absurd. It makes no sense whatsoever.

The Sarbanes-Oxley rant is a joke too. All of Wall Street has whined about what a waste of money it has been, but they STILL cannot deliver a free-market mechanism for curbing the instability they create. There would be no need for intervention if they were capable of self-regulation. And they have proved over and over, they cannot do it. And each time it has happened, they try to put the blame elsewhere. Frauds.

Idiotic analysis. The rationale that these bubbles have been caused, or will be caused by, a mentality that assumes risk takers assumed a 'bailout safety net that would save them from ruin is inane. By the time the AIG bailout was put on the table the stock price was gone by 95%, and they were on their 3rd CEO in 3 years.
Likewise for all the others, so I'm not sure where the 'reward' for all this is.

And where was the bailout waiting for the dot.com bubble-bust? And we are in the middle of our THIRD bubble/bust cycle in less than 10 years, if you look at what has gone on with the price of oil over the last 18 months. Wall Street makes their money off of FEES, not the up-and-down value of the market itself. It's a fee-generating machine, and as long as that machine is intact, we will have an unstable economy.

Absentee investors get ruined by the bubble-bust cycle, not Wall Street. Their money is LONG gone by the time the implosion unfolds.

Rail on about the need for 'free market solutions.' This is EXACTLY what laissez-faire delivers: Rampant, de-stabilizing speculation. Everything we've seen on Wall Street over the past 25 years is a RESULT of deregulation. The SEC rules to limit this crap were in place and worked fine for 40+ years; they've been unwound bit-by-bit since the Reagan Administration, and now we're re-living history.

And last, If short sellers actually dampened irrational investing, why the 3 massive bubble cycles in 10 years? Sure, it works really well at stopping speculation...