There’s a popular historical legend that goes like this: Once upon a time (for this is how stories of this kind should begin), back in the 19th century, the United States economy was almost completely unregulated and laissez-faire. But then there arose a movement to subject business to regulatory restraint in the interests of workers and consumers, a movement that culminated in the presidencies of Wilson and the two Roosevelts.
This story comes in both left-wing and right-wing versions, depending on whether the government is seen as heroically rescuing the poor and weak from the rapacious clutches of unrestrained corporate power, or as unfairly imposing burdensome socialistic fetters on peaceful and productive enterprise. But both versions agree on the central narrative: a century of laissez-faire, followed by a flurry of anti-business legislation.
Every part of this story is false. To begin with, there never was anything remotely like a period of laissez-faire in American history (at least not if “laissez-faire” means “let the market operate freely” as opposed to “let the rich and powerful help themselves to other people’s property”). The regulatory state was deeply involved from the start, particularly in the banking and currency industries and in the assignment of property titles to land. (Even such land as was not stolen from the natives was seldom appropriated in accordance with any sort of Lockean homesteading principle; instead, vast tracts of unimproved land were simply declared property by barbed wire or legislative fiat.)
The early republic’s two major political factions – to oversimplify a bit, call them the Jeffersonians (as represented by the Democrats) and the Hamiltonians (as represented successively by the Federalists, Whigs, and Republicans) – disagreed primarily about which forms of governmental interference to emphasise. To be sure, both sides paid lip service (and sometimes more than lip service) to the “Principles of ’76,” i.e., the libertarian ideals enshrined in the Declaration of Independence; but each side quickly deviated from those principles when doing so served its economic interest. The Hamiltonians, whose chief base of support was in the urban financial centers of the northeast, called for Read more
Category: Lending (page 43 of 56)
A few quotes and Gingrichian observations:
1) He called it a “stupid plan” that looks like it had been designed by autocrat Vladimir Putin. He also said it will be a “nightmare” to implement and full of corruption.
2) He said the Paulson Plan would be a “dead loser” on Election Day that will “break against anyone who votes for it.” It will hurt even worse with the 2010 election once Americans see what a drag it is on the economy when implemented.
3) He recently chatted with economic historian Alan Meltzer who advocated doing nothing rather than implanting the Paulson Plan. Meltzer apparently joked to Gingrich that this was about the third time he had seen Wall Street scream “the apocalypse was nigh” only to have the economy keep right on chugging along.
4) Gingrich thinks that if the Paulson Plan isn’t passed by this weekend, it is dead and the White House better have a Plan B, economic-growth package ready. Right now, he still thinks it has an 80 percent chance of passage, partly because of Paulson’s apocalyptic tone that if a bill isn’t passed, “the whole world will end on Tuesday.”
5) He advises McCain to play the maverick and come out against the Paulson Plan. Then it will be the Obama-Bush plan.
Much more here.
Technorati Tags: investment, real estate, real estate marketing
Totally absurd? Think twice:
In the dark of night over the weekend when most people were snoozing, the Treasury dramatically expanded its bailout plan to include buying student loans, car loans, credit card debt and any other “troubled” assets held by banks.
The changes, which were included in draft language that also opened the bailout program to foreign banks with extensive loan operations in the United States, potentially added tens of billions of dollars to the cost of the program.
Although it was a major addition to what was already the nation’s largest-ever bailout, it did not become part of the debate between Democrats and the Treasury over details of the program. A Monday counterproposal by Senate Banking Committee Chairman Christopher J. Dodd included such consumer loans as well as mortgages, just as the Treasury’s draft did Saturday night.
“The costs of the bailout will be significantly higher than originally considered or acknowledged,” said Joshua Rosner, managing director of Graham Fisher & Co., who charged that the Treasury and Federal Reserve have not been “forthright” about the ultimate cost to the public. The plan gives Treasury the discretion to buy the non-mortgage loans and securities in consultation with the Fed.
Conservatives cited the move as a sign that the massive plan to take over bad mortgage debt already is opening the door to further government bailouts.
“Such a large takeover by the government will surely be accompanied by adverse, unintended consequences,” said Pat Toomey, president of the Club for Growth, a conservative advocacy group. “Already, other companies and industries are lining up at government’s door asking for their own bailout.”
In my column for this week’s Republic, I argue that buyers should not even consider bidding on short sales: Too much hassle to catch a falling knife. In the same respect, in this climate, I can’t see any reason for sellers to participate in the short sale process — except, arguably, to extend the amount of time they remain in the home without making any payments.
Capitalism rewards thrift, zeal, planning, self-reliance. Socialism in all its many flavors rewards theft — so long as there is anything left to Read more
by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
We interviewed Matt Padilla, author of Chain of Blame- How Wall Street Caused the Mortgage and Credit Crisis. This book, released in May, 2008, details a history of non-prime lending, the S&L crisis, securitization of mortgages, and what went wrong.
Download and Listen to the 45 minute interview here
An excerpt from the book, by co-author Paul Muolo:
He had made this argument before subprime lending began to boom in 2003. He believed it down to his toes — that Wall Street (despite his contempt for it) would keep the housing market honest because the Street controlled the mortgage bond business, where most of the money for home lending came. It was in the Street’s best interests. I wasn’t so sure. I became even less sure when the losses (the nice word being write-downs ) at banks and Wall Street firms topped $300 billion in the spring of 2008. To me and my co – author, Mathew Padilla, something had gone awry. A million or so people had lost their homes to foreclosure. Two or three million would follow in their path by the end of the decade. It wasn’t just housing and mortgages that were ailing. It seemed as though the nation was getting hit from all different directions: rising energy and commodities prices, falling home values, banks pulling credit lines of all sorts including commercial and student loans. The mortgage virus had spread, infecting the entire body. It was as though the U.S. economy, which had burned so brightly during the Bush years, was a mirage. Angelo had been wrong. The capital markets — Wall Street — had failed us. This is the story of how it happened.
Matt is also a business and finance columnist at the Orange County Register, in Southern California and hosts Mortgage Insider Blog.
Since Secretary Paulson put his proposal in three pages, I’m going to lay out my proposal in less space than that. Here goes:
Point #1 – The Treasury is hereby authorized to spend up to $700 Billion to stabilize the banking and financial services sector in such manner as it sees fit. There will be two main priorities in their decision making: a) To increase the flow of credit in the banking and mortgage markets so that the healthy of the economy is improved, not hindered and b) To increase the likelihood that eventually the taxpayer will receive a profit rather than incur a loss.
Point #2 – Any institution that sells any “troubled” assets to the Treasury shall sell them at a price that is established by joint decision of the Treasury, the institution, and a committee formed of 2 members of the Senate Banking Committee, the Vice President of the United States, and 2 members of the House Banking Committee and the chairman of the SEC. The target price shall be no more than 45 cents on the dollar. Under no situation will the purchase price be more than 50 cents on the dollar without the joint approval of the House and Senate Banking Committees, and no more than 65 cents on a dollar without approval by the full Congress.
Point #3 – Any institution that sells troubled assets to the Treasury shall immediately reduce their dividend to 20% of what it was (can be adjusted for inflation annually according to the CPI), and all officer level employees (from the CEO down 3 levels on the corporate hierarchy) will have their salary reduced to a maximum of 3 times the average salary that they pay their employees. So if the average Bank of America employee makes $50,000 per year, the CEO’s salary will be no more than $150,000.
Point #4 – If the institution is currently servicing the debt, they will remain servicing the debt and will provide monthly reports to the Treasury on the status of the payment history, collection procedures and, if necessary, foreclosure efforts.
Point #5 – If a bank, like Read more
Things fall apart: Kevin Hassett at Bloomberg.com is getting death threats over this news analysis:
The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.
Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.
But really, it isn’t. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.
Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street’s efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.
In the times that Fannie and Freddie couldn’t make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.
The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.
Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
Technorati Tags: investment, real estate, real estate marketing
This is my column for this week from the Arizona Republic (permanent link).
This endless election season may give the real estate market time to self-correct before new legislation can make things worse
Looking for a silver lining amidst the black clouds of financial news? Here’s one: The fact that we’re in the middle of an election campaign gives us at least a fighting chance of solving our own problems without more government interference in the real estate market.
Everything that’s happened so far has been a triumph for the government approach to what should be free markets. Since the 1930s, the Federal government has been guaranteeing home loans. That made it easier for Americans to buy homes, but it dulled that flinty due diligence we expect in bankers.
Our tax laws favor homeownership with deductions, credits, capital gains exclusions and favorable loan terms. It’s nice to save on taxes, but these incentives induce us to own homes where we might otherwise do something else with our money.
In the recent past, the Federal government decided everyone should own a home, no matter what. After 9/11, the Federal Reserve Bank reduced the cost of money to almost nothing. Hundreds of different arms of government at all levels gave away financial incentives to homeownership. And the U.S. Treasury seemed to hint that American mortgage-backed securities were as safe as houses.
This has turned out to have unhappy consequences. That old-style flinty banker could never conceive of houses losing even 20% of their value, where the Phoenix market has given back twice that much since the market peaked.
Even so, the sky has not fallen. Wealth is not dollars, wealth is the productive power of the American economy. The majority of Americans still have significant equity in their homes, with many of them being owned outright.
What’s happened is that lenders and their financiers and, unfortunately, the American taxpayer, have taken a hit to the wallet. If the Federal government can restrain itself from overreacting, we’ll dig ourselves out in due course. And that’s why we’re blessed by this election: It will be at a least a year before the Feds Read more
I’ve got to tell you, I’d love to be able to write one of my Friday updates and tell you about some good news or tell you, “You know, the week was very non-eventful and everything just flowed on quite smoothly.” That certainly didn’t happen this week! To attempt to bring/keep you up to speed on what’s going on in the mortgage market, I’m going to first attempt to tell you a bit about what has happened this week, then do a little question and answer session (I know, kind of scary when I answer my own questions!) and end up with some thoughts about what it means and how things look going from here.
So, what happened this week? Well, frankly, the financial systems of the world almost had a total meltdown. Let me explain. There’s essentially two “main parts” to the financial markets. There’s the equity side (the stock markets) and the debt side (bonds, loans, mortgages, Fed Funds, and all other types of borrowings). The equity portion of the markets got hammered, but it wasn’t, with the exception of a few firms, a total meltdown. On the debt side, it really was very close to a nuclear reactor meltdown. I could go on and on with details of how the Fed Funds rate (supposed to be 2.0%) jumped to 6.0%. I could tell you how some treasury bonds were selling for less than what they were worth (meaning someone who bought them was guaranteed to lose money. I could tell you how there were auctions for certain financial instruments and no one showed up (AT ANY PRICE.) I could tell you the details about how AIG got basically an $85,000,000,000 margin call and the only way they could avoid defaulting on it and bringing down the entire financial markets was by giving 80% of the firm to the government and paying over 12% interest on the money. AIG is basically paying credit card rates! Let’s put it this way, I’ve had people ask me, “Was it really that bad out there?” Short answer, yes, it really was that Read more
Just for fun, let’s imagine a possible silver lining to the complete melt down on Wall Street. In this scenario, the next big shoe to drop will be access to consumer debt. No one is going to extend car loans, credit card debt, retail debt and so on. But this may not be all bad for our industry.
Imagine John & Mary Homeowner talking about their day. John says gas prices are up and his long commute is killing them. They need to buy a different car. “But no one is lending money for new cars,” Mary replies. John decides that if he can not have a better ride, he will have a better destination. “Let’s add on a nice deck for me to enjoy after my long commute.” Mary smiles pleasantly and reminds John that no one will extend an equity line for home improvement. Exasperated, John suggests they just buy a jacuzzi and settle for some easy relaxation. But Mary points out that no store is offering credit, so large purchases are largely impossible.
What do you suppose John and Mary do? What about next Sunday, out for a drive, when they see a nicer home, closer to work, with more square footage – and they realize they can own it for the same payments they are making now. What happens when the only money available is purchase money? Thanks to Fannie & Freddie (and FHA, VA) home loans will be plentiful while every other kind of debt will disappear for a while.
Supply and demand… the meltdown might be just what we needed.
Numerous stories in the press the past two days regarding the government bailout of AIG as well as the various financial sector failures. There were many talking heads and an even greater number of vacuous comments. But one quote stood out among all others. In relation to the AIG bailout, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee said:
Thank God for the Nanny State. Big-daddy government is going to ride in and “unscrew” all the problems arising from our lack of responsibility. This would be the same government, I might add, that bankrupted Social Security with criminal accounting practices, finds 44,000 pages of tax code reasonable, considers limiting their spending to their income irresponsible fiscal management, thinks nothing of paying $600 for toilet seats and bases most of its really, really important personnel decisions – not on talent or ability – but rather a thorough investigation into a person’s opinions on abortion!
Hypocrisy, thy name is government.
One:
If we go back to 20 percent down payments, the market will be more stable. I’m sure that in a free market we would see 20 percent down payments. Barney Frank is the only person I can think of who still wants to lend with little or no money down. He’s welcome to do it, but I dare him to use his own money instead of ours. –Arnold Kling, EconLog, via Cafe Hayek
Two, Donald Luskin at Poor and Stupid:
I’m quoted extensively in Debra Saunders’ column in today’s San Francisco Examiner.
On the campaign trail Wednesday, Obama bemoaned “the most serious financial crisis in generations.” He said the exact same words the day before…
“The most serious financial crisis in generations?”
Donald Luskin, a chief investment officer with the Menlo Park investment research firm TrendMacrolytics and an economic adviser to McCain – who tells me he has never talked to McCain – remarked that if Obama “had a little bit more experience,” he would “put these things in more context.” Luskin has lived through five or six recessions, and “this ain’t one.”
It isn’t a recession because the U.S. economy has grown in both of the last two quarters. Read: It is not receding. And while Luskin sees the unemployment rate as “a little high,” it is “not as high as it typically is in a recession.” Yes, Luskin is concerned about inflation, now at 5.4 percent. The drop in oil prices may help…
Luskin questioned what has happened to politics, when a candidate “must pretend this is a recession or you’re seen as hard-hearted.” And: “What does it say when we can’t be nuanced? And we can’t say, ‘Look, we’re in a little bit of a slowdown, but the fundamentals are strong’?”
The answer, of course, is that Democrats can’t win without trashing the economy. As Luskin pointed out in a piece in Sunday’s Washington Post, in Obama’s famed anti-Iraq war speech back in 2002, the then-Illinois state senator suggested the war was waged “to distract us from corporate scandals and a stock market that has just gone through the worst month since the Great Read more
I figured we haven’t had a Project Bloodhound post in a while and I can use some advice, so I thought I’d throw it up for discussion. Here’s the scenario first and then, after that, I’ll throw out my questions:
I’ve been asked to give a presentation to the board of Directors for the local board of Realtors next week Tuesday on the state of the mortgage market. The person who asked me is one of the owners of a local real estate firm and he’s been reading my Mortgage Market Week in Review for a long time. Without sounding like I’m patting myself on the back, I would have no problem putting together a 20 to 30 minute presentation on what’s happening in the mortgage market. But Greg Swan has taught me that that’s not good enough.
Using Greg’s analogy, I want to set the bar so high that my competition can’t compete. I want to set the bar so high that all of the members of the board (or at least most of them) go back to their firms and tells their agents that they need to at least talk to that “Vanderwell guy” because he’s where it’s at.
So, here are my questions (for those of you who are real estate agents, especially):
1. If you were going to be at the presentation what would you like to hear?
2. Is there anything that a mortgage lender can say about today’s market that will help you do your job better?
3. What else should I do or attempt to do in the 30 minutes that I’ll have?
4. What should I avoid doing? I’ve already learned (or relearned from Greg and the Gang) that I need to make something like this about the industry and my knowledge of it, not about me or my bank. So, if you were reading this and thinking that, we’re on the same page.
Thank you in advance for being willing to share the collective wisdom of the Bloodhound Gang. I’ll do another post and report back in afterwards as Read more
by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Have you been listening to Mortgage Mondays on Bloodhound Blog Radio? Each Monday afternoon, at 4PM, we invite REALTORs to listen to and participate in our 40-60 minute “radio broadcast”.
Our guest this Monday (September 22) is Matt Padilla. Matt is a regular business and finance columnist with OC Register. He co-authored a book about the mortgage crisis, Chain of Blame- How Wall Street Caused the Mortgage Crisis. Needless to say, Matt’s appearance on Radio Mortgage is timely.
California REALTORs do NOT want to miss this broadcast. Matt’s knowledge and experience is unparalleled in the media. He’s interviewed Angelo Mozilo among other industry leaders. We’ll spend 20-30 minutes with Matt and open the show for questions.
To participate or listen to the teleconference:
Scheduled Time:
Date: Mon, September 22, 2008
Time: 4:00 PM PDT
How to participate:
Call in:
- Dial: (724) 444-7444
- Enter: 81328 # (Call ID)
- Enter: 1 # or your PIN
Join from your computer:
The government is now in the mortgage business and the insurance business. I am sure others will expound on the AIG debacle and all of its implications in due course. I just wanted to point out the something that should make me laugh so hard it brings a tear to me eye… instead it just brings the tear.
Just before each financial giant goes down, there is a final blow. One last lynchpin pulled that leads to the immediate cessation of breath for a company: the ratings agencies lower the company’s credit rating. Standard & Poor’s, Moody’s, etc. take a look at the mortgage based assets the company is carrying, look at the write downs still to come and make an assessment on the credit worthiness of that company. Once their rating drops they cannot borrow money at a cost that allows them to remain solvent and “a-begging they will go.”
Now that is the job of the ratings agencies and I do not begrudge them their responsibility. Here’s the funny part though. The failing, mortgage-based assets that are crushing these financial companies (and now an insurance company) were originally purchased, to a large degree, based on the credit worthiness assigned them by… wait for it… wait for it… these self-same ratings agencies! Imagine the hubris of being so, so wrong in their primary mission of evaluating the creditworthiness of an investment vehicle, then lowering their evaluation of the creditworthiness of those companies that purchased the very investment vehicles they failed to correctly evaluate! Talk about having your bread buttered on both sides. I know there is a great joke in there somewhere. I am just too terrified to find it.
Welcome to the other side of the looking glass.
I wrote this for No Treason in July of 2002:
This morning’s New York Times has a curious piece on Alan Greenspan’s recent denunciation of greed.
The article consists of a series of quotations from Ayn Rand and from Greenspan in the days when he was incontestably in the Randian camp. On Usenet I wrote:
Well, I had wondered when someone here was going to remark upon Greenspan’s denunciation of greed, but I thought the article itself was very good. I expect the Times thought that merely quoting those texts was damning enough, but I thought they were nice selections. It would have been nice to point out that these events are the consequence not of capitalism but of our fascist mixed-economy, of Orren Boyle, not Hank Rearden, but I think the Times may have done its own cause more harm than good.
But wait. There’s more. The Times quotes Rand as saying “I make mincemeat out of the kind of businessman … that runs to government for assistance, subsidies, legislation and regulation.” Precisely what kind of corporate executive — not businessman — do they think has committed these awful crimes?
Does the New York Times think that the securities market, the sine qua non of these scandals, is free?
A year or two ago, conservatives were rejoicing that half or more of Americans were now ‘capitalists’, owners of the means of production, either directly or through retirement plans or mutual funds. Now that the New York Times is lamenting the sad fates of these — call them by their right names: Indiscriminate, uninformed, degenerate gamblers — is anyone happy to have the nation’s capital in the hands of such cry-babies?
Does the New York Times honestly believe that ordinary people should own securities? Does the New York Times believe that anyone who would gamble his retirement savings on the most volatile of stock issues should be pitied for suffering the predictable consequences of what Greenspan calls “infectious greed”?
Back when he was young and admirable, Alan Greenspan wrote that going off the gold-standard “put a penny in the fuse-box” of the American economy. Actually, the old and tired Read more