Observations From the Past 3.5 Years
by Mike Kimel
Observations From the Past 3.5 Years
Being alive in the past 3.5 years provides the following lessons:
1. Significant elements of the government, influenced to one or another degree by private sector lobbying and contributions, have done a poor job at leading the country.
2. Significant elements of the financial industry, influenced to one or another degree by government rules and regulations, have done a poor job of investing assets.
3. Significant elements of the home buying public, influenced to one degree or another by government policy and the financial sector, have done a poor job at buying houses.
4. Significant elements of the economics profession, influenced to one degree or other by ideology and a mercenary mindset, have done a poor job of understanding the economy.
That raises a few questions:
a. Is there any way to show that of the elements described above, the private sector or public sector is more or less inefficient at what they do?
b. Of the elements described above, which of those that failed at what they did on average, have paid or will pay a price, and which of those that failed at what they did, on average, have or will “failed upwards?”
c. Given b, which of the elements described above can be counted on to create a “next time around” or of making that next time around worse?
Mike,
which of those that failed at what they did, on average, have or will “failed upwards?”
The only one that failed upwards would be the government. For their stellar regulatory performance in doing, at best, absolutely nothing, and at worst being the major complicit factor (Freddie/Fannie), the Federal government rewards itself with more and broader powers through the Dodd-Frank Act.
Mike
Your question(s), being so broad in scope as to virtually defy a reasonable answer or set of answers, serves only to “open a can of worms,” so to speak. And as a result, as can bee seen in the first comment to appear above, provides the stage/soap box for the ever at the ready delusionist to echo cliches and distortions making it increasingly unlikely that a lucid discussion can proceed. Note the reference to “the government” with no acknowledgment that the label applies to an ever changing phenomenon rather than a static beast. Note also the intention to confuse that concept with the distinctly different body referred to parenthetically so as to imply a fact that has no evidential basis. And finally there is a conclusion that is unrelated to the misunderstandings which precede that result. The problem is that the multi-faceted question(s) you present as a challenge that might open a discussion does so without requiring the guidelines of a valid connection between points of fact and distorted conclusions. Again, as evidenced above. We are about to begin to chase our tails.
Jack,
We are about to begin to chase our tails.
I re-read your comment several times in an attempt to make sense of it, only to conclude it is not “we” chasing our tails, it is “you” chasing your tail.
Your usual passive-aggressive avalanche of bullshit is getting very tiresome. Just say what you think and back it up with some reasoning.
Sounds like a subject for a book, or maybe an epic series of movies at least twice as long as Star Wars or Lord of the Rings.
sammy,
Even assuming that Fannie and Freddie were the cause of the economic mess (and there is more than enough evidence that they were not), it still does not make the government complicit. Fannie has been a publicly traded company since 1968. Whatever explicit guarantee Fannie had from the government it lost in 1968. (FYI – Ginnie Mae got spun off of Fannie Mae at that time, and it retained that guarantee.)
Now, if you want to argue that they were implying they had government guarantees, fine. But then you are saying a private company passed on misinformation, and a bunch of entities in the private sector failed to do the most basic of due diligence (e.g., asking how it is that the government supposedly owns a company listed on the NYSE). But to put that on the government is the same as implying that if I claim Bill Gates is going to back my investments, and I have no such guarantee from Bill Gates, anything that happens to my investments is Bill Gates’ fault.
Sammy
Cedric has put it in much simpler terms that you should be able to understand. Mike has pointed out one of the glaring examples in your comment that I made veiled reference to. Read both of their comments repeatedly and take them to heart. If my manner of expressing my thoughts is too indirect for you please accept this more simplified revision. You cast wholly inadequate arguments in your effort to support your totally biased ideological conclusions. That you claim to understand the relationships between facts, data and conclusions, and that others here like Mike, Coberly and I try to address your misunderstandings is what I am referring to when I suggest that the circular circus is about to begin. That you don’t see yourself as being in the vortex of that storm is indicative of your own lack of understanding. That Dan allows you to continuously play the role of right wing propagandist in an obfuscatory manner here is only indicative of the progressive’s far greater tolerance for the free speech of others regardless of how baseless the content of that speech may be.
Yes.
I think the issue Mike raised about due dilligence, is a correct one. To many relied on the ratings agencies rather than do the hard work. To many consumers thought that if they could get a loan they could afford it.Witness the foreclosure mess as companies cut corners left and right. It appears that a lot of financial services folks were to busy or lazy to do their jobs right.
Everybody thought that Greenspan had found the magic tonic to solve the problem, rather than what he did is to store them up until the door to the closet burst.
It was the government that placed the GSEs conservatorship. The GSEs insured mortgages originated by the private sector. There’s been a lot written about how the downfall of Lehman was a catalyst in the crisis, but much less written about how much impact the action of placing the GSEs into conservatorship the week prior had on the crisis. The government chose to go in the capital stack above Preferred Equity, which was held as investments by many financial institutions and required a mark to zero, impairing capital. It’s fair to argue it may have been worth zero anyway, but it wasn’t going to zero overnight and many institutions would have been able to sell at higher marks absent government intervention.
Sigh, I want to take your question seriously. Maybe others are right, you didn’t mean it that way. And, if you need real answers, sigh again. Remember that it is just econoilliterate me.
a. Is there any way to show that of the elements described above, the private sector or public sector is more or less inefficient at what they do?
I see a problem here. Can the measures be known/chosen/found in such a way that efficiency can be analyzed as an independent variable? What is efficiency? Is there an economic definition that can be used? Can you account for or separate the interdependencies of government and the private sector and the role this plays in both efficiencies and inefficiencies? (See your question 2. The devil is in the details.) Is there enough data? (Now, I was just sitting here and picturing this study which seems difficult to me. But, even if it is a bit ignorant, I emotionally would like to see an evolution over time of this question, an honest one, as well as the pop goes the weasel times.)
b. Of the elements described above, which of those that failed at what they did on average, have paid or will pay a price, and which of those that failed at what they did, on average, have or will “failed upwards?”
This may be premature unless you just mean to have an answer at this point in time. Also, any attempt to add other groups to this (home buyers) begs to add groups elsewhere and personal gain even if their businesses paid a price (real estate agents, mortgage sellers, CEO salaries, etc.). I guess I am thinking, for example, that dragging or inviting home buyers into a party gone wild (your number 3) was very efficient to some when you consider what it was meant to accomplish – namely, keeping the party going longer by making it even wilder.
Pardon my flight of fancy above. Maybe a. is better without b. and c. And it seems that everyone has an answer already so you can claim some leisure time.
m. jed,
“It was the government that placed the GSEs conservatorship.”
Actually, the government also launched a number of rescue attempts aimed at keeping most of the (private) financial industry afloat despite item #2 in the main post. I’ve been railing against just about every bit of the bail-out since the beginning. I believe I first noted in March 2008 that the result of the bail-outs would not include seeing the banks increasing lending to the private sector. Where are we now?
So yes, your statement is true. But mine is true too. And my guess is the consequences I laid out in early 2008 are a bigger issue.
“ It’s fair to argue it may have been worth zero anyway, but it wasn’t going to zero overnight and many institutions would have been able to sell at higher marks absent government intervention.”
Meaning what? Is this the “bigger idiot” theory? Those who were idiots and bought the bad stuff could have found bigger idiots if only the government hadn’t somehow caused the bad stuff to reach its final resting place (i.e., zero) faster? Then we’d be getting complaints from the even bigger idiots, wouldn’t we?
The question was intended to be serious. I didn’t ask it the right way, perhaps. But my point is – a lot of pre-2008 dogma has been proven wrong by events on the ground.
Except for Bear Sterns, all of those rescue attempts were subsequent to the act of placing the GSEs into conservatorship. Besides, I believe lending by actual banks has increased. The shadow banking system has collapsed. Read a transcript of a bank earnings conference call – every single one of them want to grow but cannot because either demand isn’t there, creditworthiness is suspect, or banks are uncertain of how much regulatory capital they’re required to hold going forward.
Regarding “bigger idiot” – there is no such thing as “final resting place” or one theoretical value. Different investors have different liquidity needs and that impacts prices at what they’d be willing to transact. I’m sure in your mind, you’ve got an idea within a range of how much your house is worth. Given a reasonable time frame to sell, I’m also sure it’s fairly precise. But how much is your house worth if you have to sell it in the next six hours?
And to my knowledge no private equity fund nor hedge fund has been vocal regarding losses they sustained because they tried to buy assets cheaply and got burned. TPG bought a bunch of Merrill CDOs in the summer of 2008, other firms such as Blackstone injected capital into the bond guarantors like FGIC and I forget who, but another injected capital into WaMu. PE firms and hedge funds also did not receive bailout funds and if they profited it was because they timed the politics of their investments well.
Mike FWIW three of your four lessons prompted my simple brain to think of the word “Greenspan” and the fourth made me wonder if he took out a large home equity loan circa 2005. I doubt it. Therefore regarding your three questions, I suspect he and his ilk are doing just fine in terms of lifestyle (question b), drawing on compensation for negative-value work (question a) for the country; based on what they have been saying and writing, I think in the future we can count on them to provide similar value (question c).
I’ll try to take this seriously also. But I would also note that for the first 3 years of the Term the Democrats had overwhelming control of the House, had total control of the Senate and during the last 2 and half owned the Presidency to boot.
a. I agree with Anna Lee here. Define efficiency? I would say the government has continued to get less efficient with the add-on of 15-17(?) Czars and more layers of bureaucracy. We have also added more layers of regulations and increased government control over the personal and professional lives of the citizenry, thus in most cases decreasing the private sectors efficiency. This trend will continue as Obama care is implemented on roughly 20% of the economy. The government’s ability to get its work done, roughly the same over those 3.5 years, has declined as it requires ever increasing amounts of funds to get the same amount done. Definitely a drop in efficiency since the Dems took control in January 2008. And this is showing no signs of abating in the future as long as we continue on this course of ever-increasing government.
I’m not sure how to show how the economics profession has gained efficiently. But it’s becoming quite obvious that economics is scientifically on par with Astrology. The idea it’s a science has been totally discredited.
The financial industry, once unconstrained by regulations terminated since Bill Clinton, has proved itself incapable of either self-regulating or showing any constraint at all. In a case were MORE government regulation may have benefits, we see the one place were the government abandon the field. So I would say they got less-efficient.
b. Who will pay the price?
– Not the Government which will continue to grow and dominate every sector of the citizenry lives. A few individuals may pay by losing re-election. But even if Obama loses in 2012 he’ll still make out like a bandit on the speaking trail. He’ll be worth 9 figures by 2014…
– Not the financial industry – heck they got bailed out FIRST!
– The home-buying public is going to pay through the nose. They will pay the price for the housing bubble. And continue to […]
Alternate words to use when “efficiency” doesn’t sound right.
From engineering: Coefficient of Performance
caveat: We use math to arrive at the number.
From medicine: Efficacy
caveat: They use rating agencies to arrive at an acceptable level.
As to #3, the housing bubble was in only 7 or 8 states.
In this part of the country the foreclosures have been on-going because we have been in a recession effectively since 2000. Here unemployment and under employment is the culprit.
“ Read a transcript of a bank earnings conference call”
I think this is the flaw in your entire argument. A friend of mine in the investor’s relationship group of a well-known company where I used to have visibility into what was going on (you know what I used to do, and let’s leave the time frame out so I don’t get sued) used to say precisely the same eleven words after most earning’s calls: “I can’t believe those dimwits bought what our half-wits told them.” The exceptions came in those rare occasions where the price fell following the call.
I personally don’t take what is said on an investor call at face value. I’ll give you an(other) example. My most recent employer until recently cared a lot about the price of gas, as the price of electricity is dependent on the price of gas. In the past few years, there’s been a lot of talk about shale and how there’s going to be vast bounty of cheap gas available for a very long time. Within my company, I started advising almost two years ago that something wasn’t true – either there wasn’t as much gas as being reported, or costs were higher than reported. My tip-off: I looked at the behavior of several large independent gas producers, and found that in a few cases, companys’ pattern of acquisitions, sales of leaseholds, and joint-partnerships didn’t make sense if the story they were telling to investors (and the press) was true. I put my bet on the drop-off rate being much higher than reported. (Turned out I was right, but its not the right bet if the consensus among your superiors but that’s another story.)
“every single one of them want to grow but cannot because either demand isn’t there, creditworthiness is suspect”
Many banks behaved well. But many did not. And for those that didn’t, this is disingenuous. Demand isn’t there because a) we had a huge financial crisis and b) a huge percentage of the economy has been siphoned off to providing subsidies to the industry. (Being given funds at 0% by the Fed which are then invested in Treasuries is a subsidy from the public given the lack of need for a middle-man.)
One snippet flaws the *entire* argument? That’s beneath you.
Aside from that, look at how bank stocks are doing relative to the rest of the market. You IR friend may be correct in the case of one specific stock, but equity investors want to see loan growth out of banks right now and those that show growth are awarded higher valuations. This has been an issue plaguing bank stocks for several quarters, but by implication you’re suggesting that there’s not a single management that’s willing to show growth because why?
And if you’re willing to acknowledge that demand isn’t there, then you can’t very well blame the banks for the lack of increased lending.
As for financial industry subsidies, please explain why 0% Fed funds is a drain on the industrial economy and loan demand, I don’t see the relationship.
Make that 37 or 47 states and I can start taking this argument seriously.
In the initial bubble mania was in fact concentrated in a handful of states, that is most places didn’t go crazy just building units on specs and selling them to foreign investors and flippers, there was at least minimal attention paid to actual demand. But there is no doubt at all that the contagion of cheap lending based on flimsly or fraudulent underwriting went national and fed unsustainable levels of house price appreciation. Markets far removed from the pure Sun Belt Bubbles grew accustomed to double digit levels of appreciation that made even the most exotic mortgages workable, that is even a 2/28 with big pre-payment penalty made perfect sense if your carrying costs were low in the meantime while your equity gains high, paying a few thousand on the back end on resale penciling out just as well as a longer term borrower paying points on the front end.
I know, that was the business I was in, until 2006 on the regulatory/permitting side and then for a year on the private side with a real estate broker/investor. Our business model was rock solid seemingly, and the only thing that could sabotage it short term would be a total freeze up in secondary financing. And then boom, boom, boom over the course of a couple of months in late fall 2006 the big banks simply cut off financing to all the Greenlights of this world, underwriting standards actually started being enforced, and that absense of the ability to refinance out of those 2/28s and 3/27s etc became fatal. Leading to an evaporation not only of those double digit gains but an actual reset in values. When I first decided to sell my condo a realistic sales price was $225,000, by the end of the process identical units with better views were selling at $137,000.
So except under the most narrow definition of ‘bubble’ it is just not true that it was restricted to California, Colorado, Denver and Florida. You may not have seen it in Ohio where the boom was never more than a squib, but house appreciation in excess of economic fundamentals (like real wage) was endemic nationally and from what I read to some degree internationally. A predictable result of easy credit combined with a Bush Administration obsession with the Ownership Society. (People forget that Fannie and Freddie couldn’t have gone outside their original charter absent encouragement by regulators and admin officials, if they had just stuck with their original role of only buying ‘conforming’ mortgages they wouldn’t have got sucked into the maelstrom in the way they did. And there is good evidence that they were urged to do so to take bad paper off the hands of the major private banks, a quasi-governmental bailout prior to the big one.)
m. jed,
“One snippet flaws the *entire* argument? That’s beneath you.”
Actually, that was two snippets – my friend’s company, and the independent gas company. But actually this is an approach I’ve used regularly.
“ equity investors want to see”
Yes… and company’s feed investors what they want to see, even if it isn’t there sometimes.
“And if you’re willing to acknowledge that demand isn’t there, then you can’t very well blame the banks for the lack of increased lending. “
This comes perilously close to Alan Dershowitz’s definition of chutzpah – throwing oneself on the mercy of the court for being an orphan after killing one’s parents.
If the cause of the economic downturn in which we are living was a financial crisis caused in part by some players in the financial industry, there is a problem if some of those same players are now complaining that aggregate demand is down because of the financial crisis.
As to my last sentence, you misread. I assume we can agree that if an industrial firm can borrow at 5%, it will be less inclined to borrow than at 0%. The Fed has made a choice to loan money to the banks at 0%, and the banks then loan that some money out to industrial firms at higher rates. If the goal was to stimulate demand and get the economy going again, the Fed would be cutting out the middle man. (I originally wrote that post back in 2008, you may recall.) The only reason to have a middle man in this instance
is to prop up the middle man. Given a choice between whether to prop up the real economy or specific sectors of the financial economy, we collectively are going with specific sectors of the financial economy.
what does it say if those same players are now complaining that the economic
You pulled one snippet from my argument – reference on bank management commentary – to conclude that the crux of my argument: active government decisions such as the conservatorship of the GSEs was a primary cause of the crisis was flawed. I wasn’t talking about your use of anecdote from your experience as beneath you.
Banks have not been feeding growth to bank investors. Why do you think that is?
As for direct lending to companies, considering commercial banks can lever their balance sheets at roughly 10:1, it would have been quite a political feat to have gotten TARP passed at 7 trillion dollars, considering it failed to pass on it’s first attempt at 700 bn.
m. jed,
“considering commercial banks can lever their balance sheets at roughly 10:1″
Yes, but the Fed doesn’t even face those constraints. I keep coming to my post from 2008 about cutting out the middlemen. The Fed not lending directly to the public (a la Banco do Brasil, which competes with the commercial banks in Brazil) is a relic that makes no sense today. As I noted a few years ago, the Fed can misread FICO scores and make stupid loans to deadbeats as easily as any commercial banks.
m. jed,
“One snippet flaws the *entire* argument? That’s beneath you.”
Actually, that was two snippets – my friend’s company, and the independent gas company. But actually this is an approach I’ve used regularly.
“ equity investors want to see”
Yes… and company’s feed investors what they want to see, even if it isn’t there sometimes.
“And if you’re willing to acknowledge that demand isn’t there, then you can’t very well blame the banks for the lack of increased lending. “
This comes perilously close to Alan Dershowitz’s definition of chutzpah – throwing oneself on the mercy of the court for being an orphan after killing one’s parents.
If the cause of the economic downturn in which we are living was a financial crisis caused in part by some players in the financial industry, there is a problem if some of those same players are now complaining that aggregate demand is down because of the financial crisis.
As to my last sentence, you misread. I assume we can agree that if an industrial firm can borrow at 5%, it will be less inclined to borrow than at 0%. The Fed has made a choice to loan money to the banks at 0%, and the banks then loan that some money out to industrial firms at higher rates. If the goal was to stimulate demand and get the economy going again, the Fed would be cutting out the middle man. (I originally wrote that post back in 2008, you may recall.) The only reason to have a middle man in this instance
is to prop up the middle man. Given a choice between whether to prop up the real economy or specific sectors of the financial economy, we collectively are going with specific sectors of the financial economy.
what does it say if those same players are now complaining that the economic
The GSEs and indeed Angelo of Countrywide were enamoured of market share above all things, being a member of a bureaucracy of which all are concerned about the survival of the organization above all things. Market share determines how important you are and how much you can think you are better than the next guy. Angelo let his demand to maintain market share override his good judgement, being #1 was the biggest thing in his life. Likewise the CEO’s of the GSEs did not want to see their organizations shrink and their pay get cut, so again they threw caution to the wind to keep their pay up.
Then you had the usual turf battles between competing groups and regulators in competion for clients (The S&L regulator being a prime example) but again this was to keep their organization in existance.
The fallacy of your thinking is the assertion of ‘duality”
ie either the Private sector has it wrong or the Public sector has it wrong or BOTH. The fact is the Private/Public debate is a myth. Its all the same individuals when it comes to decisions. How much do you think Geithner will make after he leaves now to go to work on Wallstreet