patrick.net

Vicente says

However theres' damn little evidence that the financiers seek to be efficient. If they were efficient, their costs would be contained as surely as any other service sector. The long-term effect of finance seems to be obfuscation, diffusion of responsibility, and hovering up an ever larger share of the real economy.

But of course. There is no personal responsibility. They get to keep the winnings and shift the losses through taxation, bailouts, and printing paper. This is much deeper than just a taxation issue.
Nothing wrong with the dogma though, it just wasn't designed for "I win or you lose" type of the world that we get to live in.

lenar says

But of course. There is no personal responsibility. They get to keep the winnings and shift the losses through taxation, bailouts, and printing paper. This is much deeper than just a taxation issue.
Nothing wrong with the dogma though, it just wasn't designed for "I win or you lose" type of the world that we get to live in.

See here's where I think you are wrong. The problem existed long before TBTF and other nonsense. In every boom and bust, the financiers gained. Like some email that was quoted saying "I hope we are all retired before this blows up" the mentality is NOT about creating an efficient economy. It's about enriching the middleman. They claim that an efficient economy is an inevitable byproduct of this, however the overriding drive for next quarter's profits and hitting a big score and cashing out young means the real goal now is simply diverting more for themselves to play circle jerk games with. One RESULT of this distortion is TBTF and bailouts, it's the ultimate expression of how powerful financiers have finally become. They cannot be questioned or as they claim the entire edifice will come crashing down.

Dan8267 says

Everyone needs to stop complaining about the top 20%. It's not the top 20%; it's the top 0.5%.

Yep, that is often totally ignored when people whine about the unjust burdens foisted upon the "top 20%". The person at the 95% mark has a lot more in common with just about anyone in the bottom 94% than they do with someone in the top .5%.

Nice graph BTW.

Vicente says

In every boom and bust, the financiers gained.

Not quite. See the results of the panics of 1825, 1866 in England. Many banks were left in ruins and bankers tried for fraud. Many riches had to readjust their lifestyles, including financiers.

But then again, they didn't have the benefit of infinite resource reallocation that comes with the power of Federal Reserve.

lenar says

But then again, they didn't have the benefit of infinite resource reallocation that comes with the power of Federal Reserve.

Exactly. They have hoodwinked everyone that they are THE most vital cog in the national machinery. Thus everything from our institutions to our view of economics considers them essential and untouchable. Federal Reserve is just a private banking cabal with a patina of government mandate. It's a matter of you BELIEVING that they have the power and importance that they want you to. Middlemen are always optional if useful. The way you described them above as being needed for efficient market function, is precisely one of the brainwashing planks they rest on.

America has had its two worst depressions during the reign of the Federal Reserve. That says everything.

Dan8267 says

America has had its two worst depressions during the reign of the Federal Reserve. That says everything.

? The 19th century wasn't anything to write home about.

The Fed didn't force people to borrow $14T by 2007:

http://research.stlouisfed.org/fred2/series/CMDEBT

We did that on our own.

Dan8267 says

America has had its two worst depressions during the reign of the Federal Reserve. That says everything.

No, we had the Panic of 1873, the Panic of 1837, the Panic of 1819, the Panic of 1857, the Panic of 1896, and the Panic of 1907.

The Panic of 1893 is considered to be the second worst depression in U.S. history.

Prior to 1929, the Panic of 1893 was actually referred to as The Great Depression.

Unemployment peaked at 18%.

Dan8267 says

America has had its two worst depressions during the reign of the Federal Reserve. That says everything.

Except that it doesn't. Before the Fed, we had more frequent and longer in duration recessions. Check out this article, which cuts short of the Panic of 1837:

http://www.usnews.com/news/blogs/rick-newman/2011/08/24/5-economically-illiterate-campaign-themes

Between 1854 and 1907, for example, there was a new recession every 4.1 years or so, according to the National Bureau of Economic Research. The average downturn lasted 22 months. Since 1945, which is generally considered the modern economic era, there has been one downturn every 5.5 years, with an average duration of just 11 months. Before the latest recession hit, that postwar period was known as the "Great Moderation."

As Bellingham Bob said, the Fed didn't force people to overleverage themselves.

People seem to complain about the Fed a lot (usually capitalized in certain circles as the FED, which makes it really obvious), but most of these complaints seem driven by ideology rather than any pragmatic solution.

Vicente says

The way you described them above as being needed for efficient market function, is precisely one of the brainwashing planks they rest on.

It's getting boring. Please re-read what I wrote and then see if you still feel like disagreeing.

corntrollio says

Except that it doesn't. Before the Fed, we had more frequent and longer in duration recessions. Check out this article, which cuts short of the Panic of 1837:

Greetings.
According to your quote, there was a recession every 4.1 year or so. This suggests a fairly short cycle and makes me question the "longer in duration" part of your statement. It also makes me wonder about their used definition of a recession.
By today's standards, a recession that lasts only 2 years (presumably) is almost a miracle.

Both Democrats and Republicans alike have been pushing for the housing inflation.

It just got heavily accelerated under Bush administration to a point it broke the country since everyone got onto that train.

Yes, Ft. Wayne. I'm really confused by some of the claims here.

The Fed sets the rates. The Fed sets the reserve requirements. The Fed also provides most of the information and advice on the banking industry.

People respond to incentives. The easy credit conditions set by the Fed were a major (but not the only) component of the Bubble.

There was also heavy marketing by mortgage brokers, investment banks, and commercial banks to bring in everybody who could fog a mirror to sign for loans, prime or subprime.

As somebody mentioned on another thread, when you see the poor aggressively marketed a particular asset - particularly one that has already been run up a great extent - it is a major red flag that a bubble is about to burst.

And in the mid 2000s, the Fed did not take any action to reign in the bubble until it was already bursting, because it didn't think there was a serious one to begin with.

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” - Bernake to Committee on Financial Services, 2006 (PDF p. 29)

A timeline of quotes from mostly Bernake during the bubble and burst:
http://robvstate.com/2010/01/04/bernanke-quotes/

(Yes, it's an AnCap blog, but includes links to all the original sources)

There seems to be no consequences for being wrong when it comes to these matters, no changing of the guard when there is a major incident on their watch. And many people, not just gold bug permabear newsletter pushers, from business to academia to various bloggers on all sides of the spectrum, saw it coming, stated their reasons. At the time, they were mocked by the same ones who now claim that "nobody could have seen it coming".

thunderlips11 says

And in the mid 2000s, the Fed did not take any action to reign in the bubble until it was already bursting, because it didn't think there was a serious one to begin with.

There was a time, not so long ago when long term interest rates, that is mortgage rates were determined by the treasury bond market. And the treasury bond market was somewhat independent of short term interest rate manipulation by the federal reserve.

For example at times, bonds would drop dramatically (interest rates going up) in reaction to perception that short term interest rates were too low. This was based on market prices. I do not claim to understand all of the reasons that this changed. Maybe part of it is that enough time had passed since the Volker era, that the market perceives inflation more or less permanently out of the system.

Maybe there was and still is an undercurrent of deflationary pressures under our economy which has allowed this to develop. At this point that is clearly the case. Extreme stimulus of several kinds and yet there still is not a fear of inflation driving interest rates up.

I guess my point is that the fed doesn't act in a vacuum. IF there isn't a market for treasuries at current interest rates, at least under normal circumstances, the fed can't keep interest rates lower than the market wants. As of recently the fed has participated in long term debt market in unprecedented way, which of course is another reason for current circumstances.

But that was not the case leading up to the bubble peak.

thunderlips11 says

The easy credit conditions set by the Fed were a major (but not the only) component of the Bubble.

The Fed certainly contributed to the housing boom of 2002-2004. These prices were not unsustainable as long as rates remained low (or wage income inflated along with rising rates).

The bubble was 2004-2007. This was when all the suicide lending programs (that are banned now -- pay option/negative am, teaser rates with prepay penalties, liar loans, etc) became widespread.

When you point your finger at the Fed you've got 3 fingers pointing at yourself.

Greatly complicating analysis was the fact that the boom/bubble was feeding itself. People were plowing money they got from housing investments back into their next housing investments. REIC employment boomed as the skimmers engorged on the skim from points, YSPs, and commissions. Retail and services boomed as the bubble money pinged through the economy.

Around $1T/yr flowed into housing during the bubble. It was one helluva flow.

I was kinda clueless until the Casey Serin broke in late 2006 tho. Before that, I thought things were only going to crash like the 1980s. Once all the suicide lending became clear, I knew things were going to be a lot lot worse.

marcus says

There was a time, not so long ago when long term interest rates, that is mortgage rates were determined by the treasury bond market. And the treasury bond market was somewhat independent of short term interest rate manipulation by the federal reserve.

That hasn't changed. It is still true.

Bellingham Bob says

The Fed certainly contributed to the housing boom of 2002-2004. These prices were not unsustainable as long as rates remained low (or wage income inflated along with rising rates).

Exactly. There is a big difference between home appreciation and a housing bubble. Personally, I don't think low interest rates were all that much to blame. Look at today's rates--there don't seem to be any bubbles inflating right now.

The lack of loan underwriting standards is much more to blame. Or people taking on more debt than they can afford. However you want to phrase it/whoever you want to blame.

Far more of the interest rate factors causing the bubble can be attributed to the "shadow banking system" and mortgage back securities, specifically CDOs.

As you know, they were rated as triple A even though they were made out of junk mortgages, and I guess those who knew they were junk figured they could hedge with derivatives such as credit default swaps. It seems like the very existence of those and the degree to which they were used to hedge CDOs must have meant that a lot of people had a clue that the CDOs were in fact not what they were made out to be.

corntrollio says

Dan8267 says

America has had its two worst depressions during the reign of the Federal Reserve. That says everything.

Except that it doesn't. Before the Fed, we had more frequent and longer in duration recessions. Check out this article, which cuts short of the Panic of 1837:

More frequent, yes. More severe or long lasting, hell no.

History of Depressions in the United States

Dates Years
1807-1814 7
1837-1844 7
1873-1879 6
1893-1898 5
1929-1939 10
2000-2011+ 11+

Of course, economists and journalists stop using the word depression after 1939, so there may be others.

In any case, the First Great Depression lasted 10 years and the Second Great Depression has so far lasted 11 years and is likely to last at least five more years. The housing bubble may have masked the Depression, but looking at job and income data, clearly the Housing Bubble was all glitter and no gold.

Of course, due to technological advancements and cheap food, this depression does not feel as bad as the last one, but the economics is just as bad.

I suspect that in the 19th century, journalists where just more willing to acknowledge depressions than they are now. Covering depressions, like covering falling housing prices, doesn't sell ad space -- except here on patrick.net.

Bellingham Bob says

The bubble was 2004-2007. This was when all the suicide lending programs (that are banned now -- pay option/negative am, teaser rates with prepay penalties, liar loans, etc) became widespread.

I agree with you both that financial innovation was a key contributor, maybe THE factor.

But what about the reserve requirements being reduced steadily over the time period?

The commercial banks had to write the loans to sell on to the investment banks to bundle, right? And the investment banks also leveraged even more heavily thanks to low reserve requirements?

A discussion here by Ritholtz:
http://www.ritholtz.com/blog/2011/05/excessive-leverage-helped-cause-the-great-depression-and-the-current-crisis-and-government-responds-by-encouraging-more-leverage/

Also, low rates encouraged investors to seek the better rates available in MBS, particularly the subprime tranches?

If rates had been higher, would MBS have been as attractive?

marcus says

Maybe part of it is that enough time had passed since the Volker era, that the market perceives inflation more or less permanently out of the system.

This, I think, is a potential weakness for us - we have experienced only mild inflation for so many years, that the possibility of it returning in the US is 'inconceivable'.

But there is no sign of inflation that I can see right now, except among certain commodities.

Part of me wondered if solid economic growth happens when inflation is low, and that much of the gains we have seen have really just been arbitrage and speculation.

In the case of Republicans, they don't want the government taking tax money and giving it to poor people who didn't earn it.

You mispelled two words. Allow me to correct.

In the case of Republicans, they don't want the government taking your money and giving it to other people who didn't earn it.

Much better.

This, I think, is a potential weakness for us - we have experienced only mild inflation for so many years, that the possibility of it returning in the US is 'inconceivable'.

Delusion? Meet thunderlips11.

Only if you subtract all the costs that make CPI look like the big fat joke that it is.

thunderlips11 says

If rates had been higher, would MBS have been as attractive?

But the rates were in large part determined by the demand for, and the price people were paying for the MBS. Here is where investors understanding the CDOs and the fraufulent ratings were big factors.

Clearly no money down or 3 percet down loans at decent interest rates would not have been occuring if not for the CDOs.

Could the Fed have understood what was happening, and made it more difficult, or even warned about what was happening. Sure.

When I look at the RE bubble, and also what happened to oil in 2005, I can't help but wonder whether at least many hoped this would cause a general inflation, not realizing that in the global market, it just wasn't going to happen (yet).

That is, is it possible that many stood by in hopes of a few years of extreme inflation ?

As you know, they were rated as triple A even though they were made out of junk mortgages, and I guess those who knew they were junk figured they could hedge with derivatives such as credit default swaps.

Not all the mortgages in an MBS were junk. Just a "marginal" percentage of the MBS was junk. But even that wasn't junk.

It was only junk once the mortgage holder stopped making payments.

Relax any standards and you'd get exactly what you asked for - eventual chaos and a breakdown of the system altogether.

Look at today's rates--there don't seem to be any bubbles inflating right now.

Higher education?

The re-inflating of the housing bubble to try to stablilize prices?

Are you looking with your eyes closed?

wtfcapinv says

Not all the mortgages in an MBS were junk. Just a "marginal" percentage of the MBS was junk. But even that wasn't junk.

Mortgage Backed Securities is a general term. And of course many are extremely high quality.

Mortgage CDOs are a more specific type of MBS that are (were) more likely to contain at least some junk. They were complex, containing multiple tranches and complicated rules for who gets paid first etc.. Somehow some CDOs were perceived to be far less risky than they were and not only because Real Estate prices turned around, they were mispriced even if Real Estate had flattened out at its peak.

wtfcapinv says

Only if you subtract all the costs that make CPI look like the big fat joke that it is.

Please be more specific. To what costs do you refer?

wtfcapinv says

The re-inflating of the housing bubble to try to stablilize prices?

Really? Where is the housing bubble re-inflating? Please show me some data of prices rising like a bubble.

wtfcapinv says

Higher education?

Sorry, forgot to address this one. Is it your theory then, that people are choosing to go to college because of low interest rates?

You can argue that the availability of loans increases the cost of higher education, but most studies I've seen still show that a college degree is a good investment. Hardly a bubble.

Please be more specific. To what costs do you refer?

Really? Are you not aware of the changes made to CPI in the last 25 years?

Energy and medical costs are subtracted. The figure just ignores them.

Where is the housing bubble re-inflating? Please show me some data of prices rising like a bubble.

What compelling factor builds the case that a home that sold for $200,000 in 1996 is worth $800,000 today despite having no improvements made to it in 15 years?

$800,000 is the prices that low interest rate policy is attempting to stablize, ie re-inflate, so that it does not fall back to its actual, pre-bubble blowing value.

Interest rates are not rising because of Fed policy that is losing support among the voting members of the FOMC. They are being held at their current, near zero, rates by design and the Chairman just told you that he's going to keep them there until 2013. 3q2012 is on or about the time that most of the alt-a, teaser, and adjustable rate 3/1 and 5/1 mortgages in the United States will reset.

Is it your theory then, that people are choosing to go to college because of low interest rates?

Consumers are choosing to borrow where credit issuers will approve them. The same 'borrow against the future to prevent infalation today' nonsense that has led us into this mess.

That process will not halt until the people start electing people to put a halt to it.

lenar says

According to your quote, there was a recession every 4.1 year or so. This suggests a fairly short cycle and makes me question the "longer in duration" part of your statement. It also makes me wonder about their used definition of a recession.

Did you even read what I wrote? Did you click through to the link on the NBER site?

http://www.nber.org/cycles/cyclesmain.html

tatupu70 says

The lack of loan underwriting standards is much more to blame. Or people taking on more debt than they can afford. However you want to phrase it/whoever you want to blame.

Right -- lending standards fell apart. When you look at the scope of loans, you will see that government-backed loans dropped during the boom and private lending went up.

Dan8267 says

History of Depressions in the United States

Yes, if you use inconsistent definitions, you get different results. Please explain your methodology of how you determined that 2000-2011+ is a depression. Even if you make the argument that the post dotcom bubble recovery got obscured by the credit bubble, as I have argued, there isn't really an identifiable depression there by any statistics.

marcus says

Far more of the interest rate factors causing the bubble can be attributed to the "shadow banking system" and mortgage back securities, specifically CDOs.

Honestly, I'm not sure that you understand securitization and why it has benefits. For many years before the current bubble, we successfully used securitization without having a massive bubble. The statement below shows you don't quite get it:

marcus says

Clearly no money down or 3 percet down loans at decent interest rates would not have been occuring if not for the CDOs.

This has nothing to do with whether the loans were securitized. It has to do with lending standards and whether bond holders were also enforcing lending standards. It seems like you superficially read something about mortgage backed securities once and are trying to repeat it.

wtfcapinv says

That process will not halt until the people start electing people to put a halt to it.

Who is your local congressperson, and why haven't you lobbied him/her to vote the way you want?

tatupu70 says

Really? Where is the housing bubble re-inflating? Please show me some data of prices rising like a bubble.

I believe the government is trying to re-inflate housing somewhat through its policies. I don't think it has achieved a "bubble" (however you define that), but it has certainly propped up housing in various ways.

tatupu70 says

You can argue that the availability of loans increases the cost of higher education, but most studies I've seen still show that a college degree is a good investment. Hardly a bubble.

Depends on the college. Paying $40K/year to Online Craphole State is probably not a good investment. Paying $55K/year to an Ivy League school probably is. The trajectory of tuition and student loan debt vs. CPI or other metrics seems out of whack, if not a "bubble."

wtfcapinv says

Consumers are choosing to borrow where credit issuers will approve them. The same 'borrow against the future to prevent infalation today' nonsense that has led us into this mess.

Please explain what this means -- it sounds like utter gibberish to me. What are you trying to say exactly?

You can argue that the availability of loans increases the cost of higher education, but most studies I've seen still show that a college degree is a good investment. Hardly a bubble.

Be wary of an industry policing itself. They have a way of never seeing the fallacy of the self serving paradigm of destruction.

wtfcapinv says

Energy and medical costs are subtracted. The figure just ignores them.

Energy and Medical costs are most definitely NOT subtracted.

Here's the last report for you:

http://www.bls.gov/cpi/cpid1107.pdf

wtfcapinv says

Really? Are you not aware of the changes made to CPI in the last 25 years?

Energy and medical costs are subtracted. The figure just ignores them.

Which measure of CPI are you talking about? CPI-U includes them. I haven't read the spec for the other CPI measures in a while. Have you ever read them?

wtfcapinv says

What compelling factor builds the case that a home that sold for $200,000 in 1996 is worth $800,000 today despite having no improvements made to it in 15 years?

Show me the house you are talking about, and I'll answer. The US, in general, is pretty much back to historical norms for housing prices. We are not in bubble territory by any means.

wtfcapinv says

Interest rates are not rising because of Fed policy that is losing support among the voting members of the FOMC. They are being held at their current, near zero, rates by design and the Chairman just told you that he's going to keep them there until 2013. 3q2012 is on or about the time that most of the alt-a, teaser, and adjustable rate 3/1 and 5/1 mortgages in the United States will reset.

Mortgages are not tied to any rate that the Fed sets. As has been pointed out several times before, mortgage rates follow 10 year Treasuries most closely and have very little correlation with Fed rates. If anything, the Fed usually follows rather than leads mortgage rates.

10 yr. treasuries and mortgage rates are not rising because of turmoil in Europe and the generally uncertain prognosis of economic health.

wtfcapinv says

Consumers are choosing to borrow where credit issuers will approve them. The same 'borrow against the future to prevent infalation today' nonsense that has led us into this mess.
That process will not halt until the people start electing people to put a halt to it.

That is complete nonsense. I don't even know what you are trying to say.

Dan8267 says

Instant runoff elections have been mathematically proven to be better representations of the public than our current system.

How have so-called "instant runoff" elections been mathematically proven to be better? My impression is that they are subject to tactical voting.

Dan8267 says

The fact that none of the politicians in either major party call for adopting instant runoff elections proves that none of them will place America's interests before their own.

This sounds like "because I disagree with a politician's choice, they clearly are not thinking in America's best interest."

corntrollio says

I believe the government is trying to re-inflate housing somewhat through its policies. I don't think it has achieved a "bubble" (however you define that), but it has certainly propped up housing in various ways.

The government is trying to stabilize housing prices, yes. Of course they are.

corntrollio says

Depends on the college. Paying $40K/year to Online Craphole State is probably not a good investment. Paying $55K/year to an Ivy League school probably is. The trajectory of tuition and student loan debt vs. CPI or other metrics seems out of whack, if not a "bubble."

Sure--if you have to pay 80% of an IVY league cost to go to a crappy online school, then that is a bad move. But people here throw around bubble all the time. If higher education is a decent investment then how can it be in a bubble?

tatupu70 says

wtfcapinv says

Consumers are choosing to borrow where credit issuers will approve them. The same 'borrow against the future to prevent infalation today' nonsense that has led us into this mess.
That process will not halt until the people start electing people to put a halt to it.

taputu says

That is complete nonsense. I don't even know what you are trying to say.

He is saying our government is inflating and creating a culture of borrowers and debtors with their inflationary policies. Policies which confiscate the earnings of the working class and pay off the debts of deadbeats and debtors.

FortWayne says

Policies which confiscate the earnings of the working class and pay off the debts of deadbeats and debtors.

What specific policies confiscate the earnings of the working class to pay off the debts of deadbeats and debtors?

By any standard, FortWayne and wtfcapinv tend to complain that the working class don't pay enough taxes given their constant haranguing that the bottom 47% (or whatever number) of taxpayers don't pay federal income tax.

How do you reconcile the two beliefs? Furthermore, how do you reconcile the fact that it was the working class who are some of the deadbeats and debtors, given that subprime lending rose sharply?