How Bad Will It Get?

Jay, some people in the mortgage business I've spoken to say that the bankruptcy bill that passed early in the administration played a major role in the subprime bubble. Essentially, by making it easier to go after people's assets, it made banks more likely to make risky loans.

Have you or others at Time every written about this?

"Maybe it'll turn out that all this Wall Street stuff is just less important than we think it is," he says. Let's hope so.

"this Wall Street stuff" is what passes for pensions these days in America.

The rise of racketeering as the preferred leadership style in America has wrecked our society. Unchecked selfishness does not lead to efficiency; it leads to criminal predation. Take a good look at your "Republican" administration, Mr. Carney, and the massive damage it has inflicted on our nation, with the active assistance of the Time-Warner Corporation.

At every opportunity, you and Stengel defended the gangsters in the White House as they lied, looted, tortured, and murdered their way through the last seven years. Take a good look at what your arrogance and stupidity have accomplished.

The lesson is: this is what Republican rule gets you.

Hopefully, the people will not forget.

Come now, the economy, the war? These issues pale in comparison to the Wrights of the election. Please, by all means, keep 10 stories about him on deck to every one of substance--that way Americans will cast votes about race/ID and thus embrace 4 mo' yrs. of Bush/Reaganomics.

TomT--

The bankruptcy bill contributed. You're a lot better off, credit-wise, getting foreclosed on than trying to declare bankruptcy. It encourages people to walk away from their mortgages.

But it really has to be laid at the doors of the lenders.

A buncha things happened:

1) Banks issuing loans were decoupled, by securitization from owning those loans. They did not bear the risk for issuing risky loans. Making the loans "conform" was supposed to resolve this, but nobody actually read through all that paperwork, it looks like.

2) Banks stopped caring about equity (which is related to 1) above). When we bought our co-op, it was literally impossible to get a loan without 20% down. Purchase packages brought to the board now frequently have a combination of a mortgage, with 20% down, and a HELOC for 15 percent of the remainder. If you read atrios or calculated risk, you know that in CA and other parts of the west, loans with 0 % equity were being written. This means there's no incentive to avoid foreclosure.

3) Homeowners were encouraged to think of their house as a financial asset, rather than hearth and home.

4) Non-bank lending agencies proliferated, paid fees for selling loans, and incurring no penalty for bad loans

5) State regulatory agencies worried about these issues were forbidden, by the Bush administration from tightening the rules.

6) The bubble became conventional wisdom. People really thought this would go on indefinitely, that they could keep cashing out their increases in equity, using part of that cash to make their payments.

Or, to put it more simply, as atrios says, there really aren't that many people who earn enough money to carry an 800,000 dollar mortgage.

Neither banks nor regulatory agencies cared to notice this.

Now there is a nefarious underpinning to this. The more formal name is "moral hazard." The people who made tens, perhaps hundreds of millions of dollars over the last 5 years are not at risk for those earnings. If shareholders and managers are bailed out, we'll have privatized the profits (false profits based on loans that were clearly bad) and socialized the losses. We will have rewarded the people who manipulated the financial system, at the expense of ordinary consumers.

Now, these are the same people who fund republican candidates. Bush and Greenspan continue to advocate "market" versus "regulatory" solutions. But the "market" solution to Bear was to let it go under, and not spend taxpayer dollars buying securities that are known to be overvalued. This isn't like the Ford bailout or the Mexican bailout or even the LTCM bailout, where time will turn things around. This isn't a liquidity crisis.

It's a solvency crisis. A large number of assets are worth less than loans issued against them. The only way out of this is to absorb the losses. The question is who is going to absorb them.

Yglesias made the point yesterday that one reason for progressive tax rates may well be that the people who receive the benefits of these bailouts should be the taxpayers paying for them. The idea that hedge fund managers who we are going to bailing out pay 15% is a pretty egregious state of affairs.

The more formal name is "moral hazard."

Interesting how some moral hazards seem to invite endless amounts of brow-knitting and scrutiny. Others don't.

Indeed, this is Republican economic policy. And predictable. If Time-Warner would allow liberal commentary, we would have seen headlines such as: "Bush wants to emulate the Gilded Age," and "Bush thinks Hoover was Greatest President."

Again, two months ago in a Wall Street Journal interview:

WSJ: What is your policy about the dollar?

Bush: Our policy is that we will have a strong dollar.

WSJ: That's it?

Bush: The market will decide.

No follow-up by the WSJ; little comment by Big Media. Obvious follow-up that should have been asked: Well, what if the market decides the dollar is going to drop in value? Bush and his toadie, Paulson, have no answer. And Big Media must continue to hide the fact that our President has no desire to help ordinary Americans.

Paul Krugman asks, Hellooo, any adults around?

I'm waiting for QH to show up and say "We IS going through a recession."

Yeah, JJ, the bizarre idea that having health care coverage is a moral hazard issue is typically republican. They're the same people who don't want to give girls vaccinations to prevent cervical cancer because knowing they won't get cancer will lead them down the path of promiscuity.

Which is scarier? Rev. Wright or this economy? Me thinks the American public is far less frightened of their daughters dating black men than losing their houses and jobs. It's the economy, stupid. And the war, which sucks for the GOP, too.

jayackroyd:

Excellent commentary, thank you so much.

Keep your head up Jay, you and your colleagues did everything you could to inform your readers as to the pitfalls of the current economic situation.

Furthermore, you and your colleague's sound analysis and coverage of the facts regarding Iraq in the run-up to the invasion was a counter to the overly optimistic scenarios offered by the Bush Admin...it's a shame no one listened.

You screamed from the mountain tops that the Bush Admin was playing fast and loose w/ the facts and that there was corruption afoot...again, sadly, you were met w/ silence.

You offered us intelligent voices like Bill Kristol and Dick Armey to convince us of the calamities that lay ahead, and of course, Joe Klein, a man of monumental judgment whose commitment to accuracy is unparalleled in modern journalism. Sadly we turned away and instead indulged our baser instincts and read blogs, w/ their crazy conspiracy theories, sex scandals and far left manifestos written by hippies w/ their heads in the clouds...we should have listened to you Jay.

You fought the good fight Jay, you really did.

titus (and everyone else,FTM)

I've been reading Greg Mitchell's So Wrong for So Long which is a chronological collection of his E&P columns about Iraq, and Iraq coverage.

It's really very good, and very depressing.

Brad Delong provides a more thorough analysis.

http://delong.typepad.com/sdj/2008/03/post-meltdown-a.html

I would add that Greenspan and Rubin did a third thing in the 1998 LTCM crisis: rate cuts, yes; shows of confidence, yes; but also following the Bagehot rule of lending freely on collateral that would be thought good in normal times in order to (a) provide the market with the liquid, safe assets it is suddenly demanding, and (b) provide those who want to make large bets that the economy will in fact make its way back to the good "H" equilibrium with the resources they need to make such bets.

This is my point about why this bailout is different.

Titus Pullo, uh, Jay and his colleagues didn't actually do anything remotely resembling what you wrote.:-)

And they still aren't - despite numerous requests and sarcastic comments from their readers.

If Time were really interested in journalism, they might actually have one of their employees research the history of the asset-backed-securitization financial products and provide such information to their readers. Because virtually everything these days is securitized - including mortgages, credit cards and all forms of bank credit - it isn't just "Wall Street stuff." It's real life.

But they seem SO uninterested in this sort of thing when they can lie with impunity about Senator Obama's attendance at a particular Trinity UCC church service.

"You fought the good fight Jay, you really did."

As Carney and Stengel huddle in the bunker of the last days of the Bush administration, they must trade emotional reminiscences about Dubya's carrier landing and Karl Rove's escape from indictment. The collapse of the US economy and our destruction of Iraq are a small price to pay for the glory years when they made an incompetent nonentity from Texas the President and shielded him from criticism as he bungled, lied, tortured, and murdered his way into the pages of history. What a fine record of journalistic achievement! These men deserve the Jeff Gannon Prize for Presidential patriotism.

Jay,

As always, Josh Marshall's Talking Points Memo is ALL OVER this story, front page, Muckraker, TPM cafe. You can learn much by perusing through their blog posts, items, and links. Brad DeLong is all over it too, if you want a deeper understanding of what went wrong. Keep up with Krugman too, but you already knew that.

Jes' trying to be helpful.

Uh, Patroclus...

Main Entry:
sar·casm
Pronunciation:
\ˈsär-ˌka-zəm\
Function:
noun
Etymology:
French or Late Latin; French sarcasme, from Late Latin sarcasmos, from Greek sarkasmos, from sarkazein to tear flesh, bite the lips in rage, sneer, from sark-, sarx flesh; probably akin to Avestan thwarəs- to cut
Date:
1550

1: a sharp and often satirical or ironic utterance designed to cut or give pain2 a: a mode of satirical wit depending for its effect on bitter, caustic, and often ironic language that is usually directed against an individual b: the use or language of sarcasm

Here's Mitchell's interview w/ Daniel Ellsberg 2/03:

"Just as press conferences are a vehicle for lying to the public, backgrounders are a vehicle for lying to the press, convincing the press they are getting the inside story when all they are getting is a story that is sellable to the press." (said while looking at Joke Line)
http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003702568

Not gonna get the book though...all funds going to weaponry and canned goods.

Oh, Paulsen just said we have a 'strong dollar policy'...I guess what he's not saying is that the policy is a total failure(redundant w/ Bush policies I know). He looks frazzled and worried BTW, and despite Chimpy's assurances, the US will indeed follow a path of socializing corporate losses it seems...no pulling up by bootstraps here. How much longer until our creditors demand interest payments in Euros?

Don't forget calculated risk, James. And for the Cliff Notes version, atrios.

Titus--

That interview is in the book.

I'd worry more about oil being repriced in euros.

BTW, I have very little sympathy for employees who were holding a lot of Bear stock. You shouldn't be holding a nickel more of your employers stock than you have to. Doing so shows a profound failure of understanding diversification.

The CEO, of course, should be an exception. And, indeed, he was.

James E. Cayne, Bear Stearns's former chief executive and one of its largest individual shareholders, will most likely walk away with a little more than $13.4 million, the value of his Bear stock holdings, according to James F. Redda & Associates. Those would have been worth $1.2 billion in January 2007, when Bear's stock was trading at a $171.51. Mr. Cayne has taken home more than $232 million in salary, bonus and other pay between 1993 and 2006, the time period for which there is publicly available data, according to Equilar, an as an executive compensation research firm.

I think he should have to convert that remaining 13.4 million into the securities the Fed accepted as collateral.

You'll have to call this the Great Depression of 2008 with George W Bush its architect. jayackroyd's analysis of the morally hazardous housing lending practices is spot on.

The administration's bailout of Bear Sterns was not rescuing a domino, it is going to help cripple JP Morgan Chase, even at $2/share. Adding junk to Chase's and Bank of America's portfolios (thank you Countrywide) will only serve to rotten the teetering foundations that are left to the American Capitalist system.

People will be put on the street, there will be food lines.

UPDATE: People ARE BEING PUT on the street.

Jay, and so it begins...

"Venezuela Now Demands Euro Payment In A Few Oil Deals"
http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=12b50447-0616-40f9-8553-6b180df08707

I realize we are all in the same boat and we can't just let these institutions crash, but...

Aren't the Repub Big Business supporters the ones who are always whining about not wanting the government interfering with their lives, no regulation, etc.

Guess that all applies until Ooopsey, We need a government bailout.

I just read Time's front page column about Bush's economic legacy being reassessed.

This incredible blindness about the poor state of the economy helps explain how we got in this mess.

Middle-income folks like me have known for the last three or four years that things suck. My yearly "raises" were not covering rising costs, especially my health insurance premiums. Three years ago, out of the blue, two of my credit cards (from US Bank) raised my interests forcing me to consolidate all my debt. I had never missed a payment in twelve years. It was at that point that I realized something really wrong was going on.

And on progressive blogs I kept hearing the same story, time after time.

People like Paul Krugman realized something bad was just around the corner but the majority of the MSM just ignored the situation.