DISQUS

This issue of what happens to liabilities in these sales/bankruptcies that heavily involve the government is very widespread. In fact something similar is going on with JP Morgan and WaMu -- JPM, in its government-assisted siezure of WaMu, has asserted it can strip the assets (houses, etc.), without taking on the liabilities (litigation costs and losses stemming from lots of predatory and foolish lending).

The reason the levels of transparency the public demands may not be "possible" is because the United States was simply never chartered to engage in these sorts of ad-hoc, narrow (not general welfare), open-ended bailouts. The Constitution clearly states that all spending must be clearly appropriated; the government only has two choices in response to this requirement. One is to go with the level of transparency intended, but expose all the cronyism for all to see, the other is the declare a perpetual state of "emergency" and place all its actions under the rubric of emergency response. Obviously, they are on the horns of a dilemma, and neither route chosen is going to quell the masses (rightfully so).

Let's see...

1. Greenspan's PhD dissertation was ABOUT HOUSING BUBBLES (most notably, home equity extraction, and its effect on the economy). There goes any pretense to claim he couldn't "recognize the bubble". Now consider...

2. He declined to utilize authority granted the Fed in the mid-90s to regulate subprime, despite warnings from Fed Governor Gramlich.

3. He recommended ARMs in 2004, specifically over fixed mortgages, while rates were at all-time lows! He all but jeered at people who were stodgy enough to take on fixed mortgages (which, in fact, turns out to have been by far the smartest and most prudent course of action).

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There's more... the Fed, far from being a passive observer, enshrined the big 3 ratings agencies with "official" status. They could have exerted pressure. They didn't.

The Fed was getting the result it wanted.

And now it's doing what it always planned to do, and always has done -- shift the blame to externalities.

It would probably be more useful to fully-reserve and collateralize any speculative activities rather than banning them outright. In this sense Glass-Steagall really missed the point.

The Fed began lowering and allowing bypasses of basic reserve requirements (yes, in retail banks) back in the early 90s, far before Glass-Steagall was repealed, as a gambit to help lift us out of that recession. It worked -- the economy failed to dip into recession in 1995, when most of the data implied this was inevitable.

Fed system reserves collapsed from around $80 billion in 90/91 to $40 billion last year (then plummeted to negative in this crisis). Obviously, with the economy "growing" the whole time, this meant a dramatically lower reserve ratio. Again, nothing to do with Glass-Steagall.

The downside of this quiet regulatory shift was that it launched us on the massive financial bubble we're now having to come down from.

Until the 60s, unit banking laws prevented banks from becoming diversified across economic regions, which was disastrous for bank stability (if you were limited to one state, and it was hit hard by a drought, your bank would be toast).

Business and geographic restrictions are not the answer... reserves and collateral are.

Remember, if you lend to a bank for an interest-bearing account, you are telling them you *want* them to be engaging in speculative activities, to some extent. There is after all no reward without risk. Saying which kind of lending is "bad" speculative is rather arbitrary.

[Of course, things are so extreme today, that non-interest-bearing accounts are also exposed to general bank failure, FDIC notwithstanding.]

If you don't want to be exposed to risk, put your money in a vault. People can't have it both ways.

I agree, except I think the gov should have privatized them before it took them over. In other words, let them go bankrupt.

Now, we have the spigots being opened up, with Fannie and Freddie to be shamelessly turned into vehicles to prop up housing prices (or attempt to) at the expense of the taxpayer. This is not conservatorship; it is obviously nationalization.

I find it hard to believe they will be able to cleanly "privatize" Fannie and Freddie now, since they have set a precedent that they would make good even without an explicit guarantee.

If the government wants to do something about the housing market, it should do so with a separate measure that all private players can (or must) participate in. Its not as if banks don't need the help either!

However even the proposition that there should be intervention to prop up home prices is a little perverse... you are basically asking anyone who does not yet own a home to pay out of their own taxes in order to keep home prices propped, making it take longer for them to be able to afford a home.

This does not exactly strike me as a government that treats all citizens "equally."

Eric Janszen also comments on this topic:

http://www.itulip.com/forums/showthread.php?p=5...

Also I should point out we are in negative real interest rates right now, which is inflationary. It is tough to keep commodities down with that kind of backdrop (yes, demand for commodities will fall, but supply also falls as production is cut back due to cost and financing pressures).

I tend to agree more with Morgan on this issue. The long term trend for the real economy is stagflation. What I mean by "real economy" -- If we called every credit market or stock market decline a "deflation", would that really mean anything? Not really , because which market are you talking about? Further, what of people who aren't participating in these asset markets at all? For those that own no house and for whom expenses are more important than stock prices (or who own no stocks), this all doesn't feel very "deflationary" to them.

Maybe we can agree that its 1930s for the bankers (and those with a lot of home equity), and 1970s for everyone else!

The definition is wrong.

While it does acknowledge money and credit supply, it ignores many areas of prices that are up (food and fuel prices are actually up on a year-over-year basis, not down. People who look at just the month-to-month numbers will necessarily be deceived as to what the long-term trend is).

Second, there is nothing wrong with "gradual" deflation. We had it from 1800 to 1913. That is, the dollar was worth more at the end of this period than at the beginning. I guarantee you workers appreciated this. Bankers did not. During this time period the country did not lack for prosperity and attracted a massive wave of immigrants who came here to join in the prosperity and helped make the country even greater.

What we are really witnessing now is a panic, not a straight-out deflation or inflation. Nevertheless, monetarily, I would argue we are still in inflation (and even better, stagflation), going by demand/ "zero maturity" money as a particularly important measure. This is the "money" that is accessible to regular people, and circulates in the real economy.

Comparisons to 1929 fail on at least one key point: the US is a debtor nation now, not creditor. That means the dollar falls long-term as we cannot support our debt, and we "import" inflation -- regardless of what is happening with credit and money supply back at home.

These conditions did not exist at the same time in the US until now, so comparisons to the Panic of 1873 or the Great Depression are missing a key element.

A cynic might even suggest that the dollar has only rallied of late because arrangements have been put in place to allow foreigners to "launder" bad debt back into the US (some but not all of which was originated here), where the US authorities will then monetize it. This implies that the recent dollar rally will be coupled with a fall that is just as bad.

Oh cry me a freaking river.

Do you know how many imploded mortgage companies were voted/ranked "great places to work"? A lot. The reason should be obvious: companies that are flush with cash can afford to be generous to their employees, and bumper profits bring about euphoria in general. Believe me, plenty of now-extinct dot-coms were "great places to work" before the previous crash. That is no reason to wish it all back.

And the fact that the GSEs haven't tapped the Treasury line yet isn't too meaningful. The trajectory is not good; that is why they were seized. The reason they haven't tapped the line is that the government has suspend all sorts of reserve requirements and has moved the banking system to a "no cash until you crash" model.

Sorry for the annoyed tone, but Fannie and Freddie benefited inestimably from having an "implicit" government backing, and also by having DC in a lobbying stranglehold.

Any mortgage people wistful for this kind of largesse to come back need to grow up. Dot-com people seem to have learned a lot more quickly that their jobs weren't coming back, and in a sense weren't "real" in the first place. It was more like a nice dream.

Same goes for Fannie, Freddie, and the rest of the major players in the "mortgage bubble era."

Sure, the Republican-driven attempt to re-cast the whole mortgage crisis as the fault of the GSEs is revisionist at best, but I don't know how you can say Fannie and Freddie have "served the country well". It was a fraudulent scheme of privatized profits derived from an implicit government guarantee (backed by no formal provisions). So saying they have "served us well" is like saying FHA downpayment laundering scams have "served us well" because, of course, they get people into homes. Nevermind how, or what happens afterwards.

The final chapter hasn't been written on WaMu yet.

Billions in liabilities have been stashed somewhere. I'm not sure this was done "legally". Debt and shareholders may have valid complaints.

The JP Morgan value case depends on some massive, omnibus bailout plan passing, a-la Paulson. If it doesn't, there will be big fireworks.

I think the motivation behind this legislation was to kill a democratic patronage outlet, not to reign in the housing bubble.

Indeed, if Greenspan was so concerned about the fundamentals, why was he advocating ARMs in 2004, with interest rates at 1%?

Who says prices going down is a bad thing? (Call me biased: I don't own a home, and am waiting until I can own one on sound terms, without any government cheese involved, inside an actual city).

Further, how can price fixing of mortgage rates too-low, which was the source of the market collapse, also be the solution to it?

From an activist standpoint the most worrisome revelation of this article is that "family"-financed DPA is just as bad, and it will be allowed to stand.

Looks like housing "welfare" is just a bad idea in general. Which isn't a surprise, since there actually is no shortage of housing in general.