Wrapping Things Up

I thought when I started this blog that if I or some guest blogger or reader wrote something especially well-reasoned and supported that it would be well received by nearly all readers, regardless their party affiliation or preference.  Wrong.  Naive.  Very naive.  I'm learning.  But the way a naive person learns.  Slowly.

This blog has gotten plenty of people mad at me, or if not mad then irritated, and if not irritated then agitated.  Readers have told me that they have read a post to a point and couldn't read any further, or that the blog should be renamed.  Not lately.  But, then, I haven't written much lately.  And most recent posts have dealt largely with a topic everyone knows is important but can't really grasp, somehow, and that's the financial crisis.  It's a topic which requires too much.  Too much detailed knowledge of things which don't really interest them that much, i.e. financial instruments and how financial products are bought, sold, and traded.  I think in truth it takes more self-study than most topics this blog or any political blog would typically address.  But it's doable.  And it's important.  After all, a collapse in the financial markets could and has brought us a depression.  That's 25% unemployment, and a lot of suffering, a lot of misery allowed to occur because finance - loans, lending, insurance, stocks, bonds, futures, and derivatives - is abstruse to most of us.  That's too high a price, I think.  So, this is my effort to wrap things up.  At least - since most don't want to hear it - it's likely to not irritate anyone too much.

As with most problems, you can get to the cause if you keep backing up.  We know the financial crisis is foremost a liquidity crisis.  Banks can't lend.  Why?  Because their capital (i.e. their assets, their worth) decreased dramatically, and statutorily they must lend in relation to their capital.  But why did their capital decrease?  Because their portfolios of mortgage-backed securities (MBS) decreased substantially, and it was a substantial portion of their assets.  But why did their MBS portfolios decrease so much?  Because backing the securities were loans, actual, physical home loans, which were being defaulted upon at record rates.  But why?  Because the housing bubble of the last several years burst, and home prices began falling, and rapidly, and this meant that folks whose mortgages had required a very small if any down payment now had negative equity, and folks whose mortgages were about to reset to a much higher rate (sub-prime loans) couldn't refinance to a straight mortgage due to lack of sufficient equity.  And they also couldn't afford the higher rate.  So many folks began to look at their mortgage as a very unwise thing to continue to pay for.  And they were right.  It was better for them to foreclose, and walk away.  But as soon as they did, their house was worth immediately less, hence the MBS backed by those loans were worth immediately less.

So, then, why did the housing bubble burst?  Because all bubbles burst.  So, then, why was there a bubble in the first place.  THIS, finally, after peeling this onion for a paragraph, begins to get at the cause of the financial crisis.  Because no bubble?..no crisis.  No bubble means no bursting.  No bursting means housing prices don't tumble, and MBS are worth plenty, specifically, about what their investors thought they'd be worth, and sub-prime loans don't default.  Why?  Because sub-prime borrowers are able to leverage the equity in their home - now nicely appreciated in value over the last 24 months or so - and refinance to a lower, fixed-rate mortgage.  So, no bubble, no crisis.  But there was a bubble.  Why?  And how do we avoid one in the future?  Are bubbles ever good?  No, hence the name "bubble", as something which always bursts, as I ask if you have ever encountered one that did not?

A bubble means an unnatural, unstable, unsustainable rise in prices.  Sounds like inflation, huh?  Inflation can occur because of a demand-push, as economists like to say.  That means when demand for something far outstrips supply, like when the price of bottled water or lumber goes through the roof (sorry) following a natural disaster.  Well, the housing bubble was a demand-push for mortgages.  Why?  Did all of the sudden a second baby boom come of age and need a house?  No.  A lot of the homes bought during the bubble were second homes or vacation homes or homes to use as rental properties or homes bought for pure speculation under the expectation that their value would increase and could be resold in a year or two for a handsome profit.  But, to be sure, there were also plenty of folks who saw it as a good time to stop renting and to buy.  Why?  Because interest rates were low, and banks weren't asking for much down payment or even proof of income.  Why and why?  Now we are really starting to get somewhere.

Interest rates were low.  Why?  Because George W. Bush and Fed Chairman Greenspan wanted them low.  They had dropped them to near nothing following the September 11 attacks, when Wall Street tumbled right along with the towers.  Well, the market then rebounded.  But the Fed kept interest rates low.  Why not raise them?  To keep them low is inflationary, especially to those products most sensitive to interest rates, like loans, and with that, homes.  I don't know why.  But Greenspan kept them low, and the President in no way pressured him to raise them.  With the lure of persistently low interest rates, people started to show up at banks and other lenders, looking for mortgages.  And home prices started to climb, and developers and home builders noticed, and started building lots of homes to meet the demand.  And deals abounded.  And banks couldn't make loans fast enough.  And more people bought, and prices climbed further and continued to climb.

At the same time, investors from around the world were looking for a safe investment that still would bring them a reasonable return.  The T-Bill, a favorite investment in the past, was out, because its interest rate was now too low, and the value of the dollar was plummeting (a not unrelated event).  And so T-Bills were not as attractive.  But America, to her credit (again, sorry) is always attractive for investors.  We are a good, safe place with free markets, where elections work and buildings rarely tumble.  Buying mortgages HAD BEEN in the past a very safe investment, since Americans rarely default on their mortgage.  Default rates had been fairly static for a long time, and that default cost had long been included in any MBS representing one or a bundle of mortgages.  So, MBS were "safe", or viewed as such by all of this international money looking for a home (zheesch).  So, as Carl Sagan would say, "billions and billions" of foreign cash began pouring into MBS, to where there weren't enough MBS.  That's right.  You can't buy a securitized mortgage if there is no mortgage to securitize.  So banks became HIGHLY incented to find new mortgagees (mortgagors?...folks buying houses) so that they could sell more mortgages, securitize them, and sell the securities to their foreign investors.  THAT'S when they started offering crazy, stupid mortgages, with little underwriting, little proof of income, little down payments, and little care in the world, because they were just going to package up the mortgages and sell the risk to someone else anyway.

Well, but aren't securities rated?  You know, A, AA, AAA, etc?  They sure are, and most of that foreign money was looking for safe, AAA-rated securities.  And here was a firewall, which, if it had held, I might not be blaming George Bush or Greenspan at all, even though they still would have screwed up by keeping interest rates so low for so long.  That's the firewall of securities ratings.  Standard and Poor, Moody's, those folks.  Somehow, somehow they rubber-stamped the grotesquely risky MBS - representing mortgages with large principal balances, no down payment, resetting interest rates, and low proven ability to pay by the borrowers -  which were coming out of the banks and their investment bank helpers like Lehman and Bear Stearns.  Whyyyyyyyyyy?

Well, partly, it's their profit model.  The more AAA ratings they give, the more banks go back to them for more ratings instead of going to one of their competitors.  That's just nuts, but it's true.  Why else?  Because banks often times had bought "insurance" for their MBS, effectively, insurance on their lendees' ability to pay.  They bought these from AIG and other large insurers, and these things were called Credit Default Swaps (CDS).  They were garbage, but, AIG was banking (grrrrh) on the same thing which the foreign investors were in going after MBS in the first place as an alternative to T-Bills - that mortgage foreclosure in America had been relatively static for a long time.  AIG built that level (far too low) of default cost into their CDS price, and with that, they thought they were good.  Easy money.  With the knowledge that an insurer was backing the credit worthiness of the utterly crummy MBS, ratings agencies went ahead and gave them AAA ratings.  And with the peace of mind of an AAA rating, and a higher return than T-Bills?....well, the foreign money bought them up as quickly as they could, guaranteeing that as soon as America sneezed, the rest of the world would catch the flu.

So, there it is.  My final wrap up on that horrible mess.  Feel free to point out my mistakes.  I would enjoy the exchange.  And the knowledge that I'm not the only one out here on this ("Is anybody out there?...there?...therrre?...therrrrrre?....").  It's a combination of bad management of the economy by the Bush administration, bad Fed policy on the part of mostly Alan Greenspan (and don't start going off about how the Fed is independent of the executive branch...blah, blah, blah...and Supreme Court Justices aren't political either), and bad securities regulation, which is the SEC, which, again, is the Bush administration.  So, there you are.  Feel free to begin hating me all over again.

Comments

[martylynch]

Joe - Your offer to begin hating you all over again would imply that I stopped. Anyhow, I can see that you spent a great deal of time on this and assuming everything you laid out is accurate, then I'd say, you did a nice job of "wrapping things up." I'd also say, "so what." I don't care if it's Greenspan's fault, I don't care if it's Bush's fault. I don't care what was then, I care what is now. I care that this congress, this president, and this president-elect decided, in the span of one week, to give $700B to an industry and not know what they were trying to solve. And worse yet, not have a way to find out how these companies are spending the people's money.

I'm still fairly ignorant on this topic, but it appears that what you describe as a mortgage backed securities calamity, now has caused credit to dry up. Wasn't the $700B supposed to allow these institutions to keep making loans so that people could buy cars? Or was this just a huge "mulligan" for these lenders and now they are actually going to do what they were supposed to do in the first place, give loans only to people who are credit worthy.

Since you're holding people's feet to the fire, how about you throw in a few hundred people who have something to lose, like a congressional seat.

My New Years wish for you is to get your blog back to things that foster debate and opinion. As much as you think partisan politics is bad and how we should find common ground; I say kiss my ass. If I believe in something, my job is to convince you I'm right. My job isn't to find a way for me to be half right and for you to be half right.

In the mean time, why don't you start asking questions like, why is Obama keeping Gates and Petraeus? Does that mean that all along he believed in the Bush policy? What's up with Gitmo? Will keeping it open be Barack's first broken campaign promise? What if he doesn't pull the troops out of Iraq? Will there be chants of "Obama lied, people died"? Change we can believe in; I'll be waiting payiently.

[Christine Clewell]

First, I would like to thank you for providing an informative, thoughtful, deliberate and insightful blog. In addition to my appreciation, I would like to congratulate you on Joe Biden's soon-to-be vice presidential status. You believed in him all along; from the "git-go" you supported him in Iowa to the White House. Obama was wise to choose a man who holds potential to contribute his formidable career in politics to an Obama administration. Yes, Senator Biden -who handled Palin with more grace than she will ever be able to deliver in a lifetime of reactionary Bush-league campaign tenor- tempers the youth of Obama, bringing a time-honored, deliberate foreign policy from his Senate-based perspective which convinces me daily that the US-American people have chosen well...for change...even if we see recycled clientele in the mix!

Now, insofar as my response to your opening paragraph sent today, I say this: Most people can't handle the truth. (It is a great line in "A Few Good Men"). It is for this reason that I say this: For those who wish to pursue the truth in all aspects of life, this takes work and requires tolerance to read material that agrees with us and that which aggravates and irritates us. If we are stirred to punch rhetorical fists and insults at a writer, then you have served us all well. You have moved us to feel...stirring us from our apathy and complacency and complaining! For those whose buttons have been sounding off like an alarm that won't quit, know that you have helped them in their journey to seek the truth in bringing change to our nation and its current state of economic and cultural disarray. You are not responsible for anyone's response -or reaction. Isn't the blog reader looking for someone to facilitate, inform and induce the journey in a pursuit of truth...more importantly, their own integrity? To this I say, keep on, keeping on. For those who wish to read, let the "Sojourner" of truth press on; to those who are disillusioned with the "Road Less Traveled" maybe they are looking for something else, in which case, the should read someone else or start their own blog!

We live in troubled, unsettled times where we prefer to blame; we don't want to be held accountable, not even to the economic mess we are in. However, to this I say: We are either part of the solution or we are part of the problem. We must choose.

So, to the first paragraph and a New Year's resolution, how 'bout this one: We can choose to read any blog...or not. Your call is to write them, the reader's call is to think, beyond their feelings, their present mindset and distill, filter and grow...or not. I say you have stirred the mind well. What a compliment!

So, thank you! Keep writing.

Final cadence: I once recall a wonderfully, wise music professor who told me, "Don't let the xxxxxxx get you down"!

Best of holiday wishes to you and your family.

Peace in all seasons Joe.
Christine Clewell Goehring

p.s. "My husband approves this message"!

[Joe Intili]

Your comments provoke comments. I'll start in reverse order that they arrived, a courtesy to the fairer sex my father would have insisted upon, and because flattery always works. Sorry, Marty. Give me just a minute.

Christine. Well. Congratulations, first off. Nicely done. Really, though, I should be offering that to Mr. Goehring. For having chosen so well. In those last two sentences, I'm reminded why we have poetry, with its significant demotion of grammar and sentence structure. Because "For having chosen so well" needs to be its own sentence.

Very, very nice. It makes me happy, and also sad, and that's how I know it makes me truly happy. You understand a sentence like that, instinctively, to your great credit.

To your comment, I say thank you, both for its admonition to keep writing, and its admonition of equal emphasis to illegitimi non carborundum. Both admonitions are good, helpful, wise, and much appreciated. Lastly, a compliment back to you, in that as I read your comment I had to resist the temptation to jump to the end and see who the author was, because the writing as writing was so good. I thought, as I read, "This person should have the blog."

Thanks, Christine. Don't be a stranger. I look forward to meeting the good Mr. Goehring one day soon.

Marty. It made me smile to know you had never stopped hating me. Truly. If I ever found I was on the verge of such a thing, I would try harder.

I wrote a post recently that said the $700 billion was right, because it is how liquidity crises throughout history have been fought and defeated. In the simplest possible terms, it's how they must be fought. Liquidity must be restored. But, your point is very well taken. Because in THIS crisis, these troubled, illiquid banks have received BILLIONS of taxpayer money, and, by all reports, not only have not started lending again, but, in a show of audacity only possible from something truly corrupt, don't even want to say what they have done with the money. It's more than the total spent on the U.S. military in a year. It's more than 3 times the GDP of Denmark, and smelling, now, every bit as fishy. I want hearings. I want prosecutions, as it's the only remedy for arrogance this grand.

And, to be clear, I don't advocate conjoining your 50% right with mine, to formulate some political centaur likely more than 50% wrong. I argue for argument without animus and diatribe, without postulating stupidity, without gamesmanship. If politicians or pundits or you or I or anybody wish to argue a problem's solution, each armed with the standard dogmatic arguments of his or her affiliated party, then I'm all for it, but let's do it without insinuations as to the opponent's obvious cognitive handicap, and with the capacity on both sides to say "Good point" to a good point, rather than deny it as the Black Knight in The Holy Grail, "'Tis but a scratch....just a flesh wound....had enough, eh?"