Remember that email I got from Tim Evans flagging up this? Well someone called James Tyler responded to it, also sending his reply to all of us on Tim’s list, with a link to this, which I likewise recommend. It’s a piece in Portfolio.com called “The End of Wall Street”, by the guy who wrote Liar’s Poker. I’m still reading the piece, but this is my favourite bit so far, about the observations of a man called Eisner:
More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?'” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
Paragraphs like that make me optimistic that statists just will not be able to pass the catastrophe off as a mere failure of unregulated capitalism. Yes the whole Sub-Prime thing was aided and abetted by Wall Street, big time. But it was set in motion by Washington politicians, and in particular politicians of the Democrat persuasion. This was, as we cannot repeat too often, a failure of the mixed economy, not of the extreme free market of the sort we here favour.
The folly of the Republicans, which has already been electorally punished, deservedly, was that most of them didn’t see it all coming and panicked when it did, and those that did smell the coffee were unable to do anything to soften the blows when the coffee exploded, or whatever. My guess is that there will soon be a cull of Washington Democrats as soon as the voters next get a culling opportunity – two years from now, right? And the big question is, what will the new intake’s take be on it all? But, as I often say on my personal blog when discussing gadgetry of various kinds beyond my understanding, what do I know?
UPDATE: Although, I’ve now finished reading the piece, and it is clear that its author derives no such anti-statist moral from his wretched story. Wall Street is the villain, and Wall Street is being justly, although very insufficiently, punished. Not a word about Democrats, or for that matter Republicans.
Ah, your final paragraph suggests the problem with the Michael Lewis school of journalism. He’s great on the human drama, covering finance rather like sports, but when it comes to piecing it all together in an intellectual framework prefers the “pantomime villain” school of analysis to the “what brought this disaster about” school. I may of course be doing him an injustice, but I think not. I read a book by him about Silicon Valley and it was the same limited economics-as-entertainment approach: big egos, lots of drama, but bugger-all actual analysis.
Each bust has the same basic cause, but is different (sometimes horribly different) it its “details”.
This is something of which theory people who have little practical experience (people like me) need to be remined of.
Of course this bust (like all others) was created by the credit money boom caused by the expansion of the money supply (by the Federal Reserve, the Bank of England and the other Central Banks – magnified by the fractional reserve banking system).
However, the government policy of “affordable housing” set off a massive orgy of lending to people who should not have been lent to.
Fannie Mae and Freddi Mac were no more “independent” of Congressman Barney Frank and Senator Christopher Dodd than my hand is independent of my arm.
Its private ownership was in name only – (the government licensed ratings agencies, the same people who are still rating U.S. govenment securities as “triple A” just like the rated the mortgage backed securites “triple A”, are not much more “private”).
The rest of the banking industry had to play ball not just because of the Community Reinvestment Act – but because of the weight in the market of Fannie and Freddie and the vast web of regulations from the various agencies that control every aspect of this “deregulated industry”.
The last time there was a funny money credit bubble (also created by the Fed) it went into dotcom stuff – and that was much less harmful that this housing stuff.
Because at least the computer industry was basically free market – real estate (housing and commercial) is anything but.
The next crises will be in commercial real estate – shops and offices (it is already under way).
And the demented reaction to the “credit crunch” (the vast expansion of government spending) is going to create another crises.
The crises when people finally understand that the government is going to “pay” its securities with inflation.
U.S. and British government securities are worse than junk bonds.
But, as I say above, they are still rated “triple A” by the government licensed ratings agencies.
Of course there never really was a proper clearout of the funny money that went into the dotcom stuff.
Because Alan “saves the world” Greenspan (the man who created the credit bubble in the first place) would not let it fully deflate – he tossed in more credit money instead. Especially after 9/11 (that was a great excuse for the idiot – just as the stock market crash of 1987 had been a “reason” for him to push up the money supply, thus creating the boom-bust of the late 1980’s and early 1990’s).
Nor is there a proper clear out now – on the contrary we have seen (since the “rescue” of AIG) the most panic driven, wrong headed response of my lifetime.
The present financial system (much though I dislike it) has not died a natually death – it has been murdered by the American government (with the Bank of England and the British government going along with the madness, indeed egging on the American authorities).
They “saved” the parent company of AIG (as some people have long suspected) to save Goldman Sacs (the ultimate political enterprise).
And they have bought up vast amounts of debt paper from the insane conglomerate General Electic (which should have broken up years ago) because of its political connections.
And, of course, they “saved” Citigroup (yet again) and Bank of America (and the other biggest banks).
“Anti trust?”
Government loves vast companies that dominate markets – as long as they are DEPENDENT on the government.
It is only very big companies that are not totally dependent on the government (that do not act for the “social good”) like Exxon and Walmart, that are hated.
editor: I always delete comments that start with ‘lol’ as 100% of the time what follows is not worth reading
duberry provides nothing but empty criticism.
Don’t feed a troll.
Excellent analysis. Note one thing thing with respect to the proposed Obama bailout: it does not cover homes 2 through 5, but sure as can be, the specuvestor you’ve described will be bailed out on 1 or those 5 townhomes as a primary residence. Don’t believe the lie that it does not bailout flippers, etc.
Maybe someone can explain this to me. Let’s assume the story of the five townhouses is accurate in all details.
Did a speculator gamble and get burned or was an unsophisticated homeowner lured into an extremely high risk real estate pyramid scheme by a three-card monte dealer (excuse me, a mortgage lender)?
Which of those would be a regulatory failure?
Maybe someone can explain this to me. Let’s assume the story of the five townhouses is accurate in all details.
Did a speculator gamble and get burned or was an unsophisticated homeowner lured into an extremely high risk real estate pyramid scheme by a three-card monte dealer (excuse me, a mortgage lender)?
Which of those would be a regulatory failure?
Given that the entire transaction was encouraged by the knowledge on the part of the lender that he would be bailed out by the government (FannieMac) in the event of a default, what do you think?
“Government loves vast companies that dominate markets – as long as they afre DEPENDENT on the government.”
See Microsot anti-trust lawsuits vis-a-vis MSNBC
Before the anti-trust dust up with MSFT, it was not clear with whom MSNBC sided in terms of the political spectrum they slanted. Post anti-trust, post MSFT lobby money, it is a guaranteed fact these guys are payolla to get the anti-trust crap of their plate.
The big hub-bub about the role of “Wall Street” and the financial world’s involvement in passing onward essentially “garbage” was in the way garbage was re-packaged, in opaque wraps.
How the garbage got generated, and that ir was garbage has always been quite obvious (even to Barney Frank).
Ah, but then, Eisner notes, how packages of additional purported garbage (but actually empty) were produced and sent out.
Next, insurance (CDS) was sold to buyers of the packages to shore up the “value” of the packages.
That was such good biz that the insurances (CDS) were also sold to people who held no interest in the viabilty of garbage packages themselves; in fact the demise of garbage packs would be profitable.
Much the same thing occurred to derelicts in London, until the rule of insurable interest came into play.
It’s possible that some CDS are unenforcible as wagering arrangements.
On the U.S. housing (foreclosures) issue I have (through an intermediary with some clout) put a proposal under consideration by one of the larger regional bank systems (whose problems are diverse) to convert “owner-debtors” into rentors of the same premises:
Take a deed in lieu of foreclosure; rent back to same occupant; value property by rental flow (like commercial) instead of declining “market;” keep the place out of the housing glut to speed up price recovery; make up packages of rental flows that can be sold or traded (even guaranteed). Won’t work accross the board, but can put a plug in some of the holes.
Don’t forget Laura Richardson (D-Long Beach, CA).
She defaulted on four houses, used the equity to finance her congressional campaign, then complained she was a victim of the foreclosures.
She’s now a member of Congress, laughing.
The only certainty I can see right now is that Obama views his stimulus package as a win-win. If the economy recovers, he can claim credit for it, while if it continues to fall, he can blame it all on intransigent greedy rich people, all the while chuckling to himself about how easy it was to destroy capitalism. You can help him out if you want, for example by referring to “Wall Street” as if it were some sort of monolithic single-minded entity, rather than the loose collection of thousands of trading institutions, all competing with each other, that it really is. Like it or not, the future of the West is in the hands of the vast underinformed mass of voters, who are easily spooked and misled, and who have been trained over many years to imagine that everything that happens is the result of a vast conspiracy. Please remember that these are the same people who consider themselves experts on everything under the sun because they’ve seen it all on TV. They are the same people who fell for the Y2K fiasco and the global warming/cooling fiascos. Personally, I don’t much like the “big lie” technique, but it is demonstrably successful, and maybe we have reached the point that to defend ourselves against the depredations that our enemies have in mind for us, we need to use the same technique to turn the table.
Where to begin?
No one put a gun to the head of Wall Street and made them make the loans. They could have said “no”, and in fact many banks did say “no” to the folks who could not afford loans.
It was the Wall Street mutts who leveraged these terrible errors in judgment. And you know the definition of a lever, correct? Well, it was that leverage that allowed a lot of bad loans to bring a great economic engine to its knees.
And Republicans could have said “no” right along with Democrats. And they did not.
Look, you may disagree with Obama’s solution to the problem. I certainly do. But going back to the days of unfettered and hardly regulated Wall Street and everything that stank about Wall Street before the fall is not, repeat not an option.
It’s a good thing that hopefully morons without a conscience will no longer make the kinds of sums of money that those Financial Services morons made.
I repeat. It is a good thing.
Shame on you for missing this.
It’s a very enjoyable article, although I am not really qualified to judge his (limited) economic analysis. I first read it a couple of month’s ago, when Johnathan Pearce linked to it from here, but it’s worth a re-read.
It all comes down to fiat money.
Lets face it: it was rational for the banks to make the loans, so long as the Fed continued to inflate at it’s breakneck pace. Sure, the borrowers weren’t creditworthy. So what? If you lend $1,000,000 to a bum to secure the purchase of a $1,000,000 home, and he pays you back with interest, you win. If he doesn’t pay you back, and you foreclose on a $2,000,000 home 3 years later, you still win.
The Fed created the bubble. The Fed burst the bubble. Whose fault was the bubble? Uhhhh … maybe the Fed?
Remember the real problem with inflation: the real problem is not rising prices, which Milton Friedman correctly pointed out could be coped with using things like escalator clauses. The problem is that it obeys no economic law (since it is generated by a political actor, not by an economic actor), and is therefore impossible to predict. It makes rational economic calculation impossible, because somebody will always come along, sooner or later, and upset your apple-cart, by deciding that more or less inflation is needed. And since each and every actor in the economy uses money, nobody is spared. Some win, some lose, but the only way to win consistently is to know in advance what the Fed is going to do, and I am quite sure that knowledge is reserved for the ***REALLY*** well politically connected crooks.
Of course the war also made a huge difference, both by absorbing the productive energies of Americans and redirecting them to uses which did not improve anybody’s standard of living, and more importantly, by moving *HUGE* quantities of money out of the US for no return. They actually lost palettes (the ones you carry with a fork lift) of $100 bills. How many of those does one have to move before he becomes so careless as to start losing them.
Thus we had the rather odd spectacle of inflation on imported goods (especially oil and gold) at the same time we had deflation at home (housing). Pretty tricky. The sort of thing you might have great fun doing in a computer simulation of an economy. The kind of thing you *never*, *ever* would wish on real, live, human beings. Of course, destroying the Iraqi ability to produce oil also played into the oil bubble, which helped slow the economy, and magnified the Fed’s panic move to cut the price of gold by shrinking the money supply before somebody figured out where inflation comes from, and that the institution touted as “inflation fighters” is actually the one and only institution capable of creating one-way inflation. (banks can inflate, but when they go too far they cause runs, so rather than a monotonic downward movement in the value of money, they just create a wave in the money supply).
Lord Keynes wasn’t right about much, but he was right about this:
Paul A. Barge: Someone did put a gun to the head of mortgagers to make these loans (in the U.S.). Under President Clinton, the Community Reinvestment Act. was expanded to require mortgage lenders to show they were providing access to “non-traditional” borrowers. Lenders were required by the Justice Department and the Treasury Department to report their loan activity, and threatened with various sanctions if they did not achieve sufficient levels of such loans. Then, once the qualifications for loans were broken for ‘sub-prime’ borrowers, lenders started throwing money at everybody – and as long as the market was rising, they made money and all the people trading mortgage-backed securities made money.
Brian: Republicans did more than fail to see the problem coming. Some actively obstructed efforts to avert it; among them former Rep. Mike Oxley (R-OH; co-sponsor of the Sarbanes-Oxley corporate reform act), beneficiary of 19 fundraisers sponsored by Fannie Mae. In 2003, Bush tried to rein in Fannie and Freddie. Oxley (and Barney Frank) rewrote the bill, stripping all its effective parts. When Bush
then opposed the bill as worse than nothing, Oxley accused him of opposing reform. Then-House Speaker Denny Hastert covered for Oxley, transferring jurisdiction over Fannie and Freddie to his committee. Wall Street was enjoying the party, and too many Republicans were boguht off. Others (including Bush) liked the idea of promoting home ownership for the poor, or were afraid to be seen opposing it.
“No one put a gun to their head”.
The Community Reinvestment Act – first under President Carter then under the 1999 push by Clinton.
And Fannie Mae and Freddie Mac leading the charge – under the guidence of Congressman Barney Frank and Senator Christopher Dodd.
Of course the increase in the money supply (by the Fed) magnifed by the fractional reserve banks would have led to a bust anyway.
But not like this.
I hate this financial system with all my heart, but even I would not pretend that it has died a natural death.
It has been murdered – and the murderer is the compassionate government.
“No one put a gun to their head”.
The Community Reinvestment Act – first under President Carter then under the 1999 push by Clinton.
And Fannie Mae and Freddie Mac leading the charge – under the guidence of Congressman Barney Frank and Senator Christopher Dodd.
Of course the increase in the money supply (by the Fed) magnifed by the fractional reserve banks would have led to a bust anyway.
But not like this.
I hate this financial system with all my heart, but even I would not pretend that it has died a natural death.
It has been murdered – and the murderer is the compassionate government.