Link that works. (Alternatively remove the cruft after .html if you click the original link.)
Heh. I had just this AM read the New Yorker piece on this and was feeling semi-compelled to find a place to post the bit of cube farm doggerel that turned up in internal S&P e-mails (too hard to blockquote poetry/lyrics--someone (neb) needs to invent a /lyrics html tag):
Watch out
Housing market went softer
Cooling down
Strong market is now much weaker
Subprime is boi-ling o-ver
Bringing down the house
Hold tight
CDO biz--has a bother
Hold tight
Leveraged CDOs they were after
Going--all the way down, with
Subprime mortgages
Own it
Hey you need a downgrade now
Free-mont
Huge delinquencies hit it now
Two-thousand-and-six-vintage
Bringing down the house
A few minutes after sending this message, Analyst D followed up with another one:
For obvious professional reasons, please do not forward this song. If you are interested, I can sing it in your cube.Anyone here have a confession to make?
From the article:
While getting a ratings agency scalp is small potatoes compared to getting the executives at one of the many financial institutions that helped bring about the crisis, I'll take my victories where I can get them.
While one of my demented fantasies has me as the head of an ethical ratings agency that went bankrupt due to our refusal to doctor our ratings and subsequently sue S&P and Moody's for [little finger to mouth] ... ONE TRILLION DOLLARS!
"Overleveraged" isn't really the problem. Short answer is that the financial system is roughly as prone to meltdown now as it was in 2007 from a structural point of view, but it does not look like an actual crisis is going to happen very soon because people are not acting as stupidly as they were. But when they start acting stupidly again, there's nothing to stop another meltdown.
Short answer is that the financial system is roughly as prone to meltdown now as it was in 2007 from a structural point of view, but it does not look like an actual crisis is going to happen very soon because people are not acting as stupidly as they were. But when they start acting stupidly again, there's nothing to stop another meltdown.
Which is an argument for tackling overleveraging, surely - or whatever structural reasons you're referring to - as they cause the vulnerability-to-stupidity, and stupidity is much harder to regulate.
The TBTF (American) banks do have more real capital now. Plus they have more paranoid and aware examiners (although they didn't find the London whale), and also as Bave says there is more market attention to risk. Relatedly, the private securitization market has shrunk enormously. Also, we have nationalized the housing market (though not in a way that helps people enough). So I don't think we're that vulnerable to a 2008-style meltdown. A *lot* of things had to all go wrong over a couple of years to create that.
But we don't really have systemic fixes in yet as opposed to ad hoc regulatory discretion -- things that routinize and require safer practices. Credit rating agency reform is actually a good example; this lawsuit is awesome but the SEC has not finalized any good rules for better oversight of the big CRAs (and their proposed rules are crappy).
we have nationalized the housing market
What do you mean by that? The mortgage market or something else?
but it does not look like an actual crisis is going to happen very soon because people are not acting as stupidly as they were.
What does this mean?
But we don't really have systemic fixes in yet as opposed to ad hoc regulatory discretion
You mean our lawmakers are incapable of legislating, so the executive branch has to act on its own with the possibility that its policies could be reversed at any minute? Surely not!
7: Widespread private equity investment in distressed single-family real estate, for example.
"And you may ask yourself, what is that beautiful house?"
Housing looks better than last year, definitely better than 2008, partly because of HARP.
http://www.calculatedriskblog.com/2012/11/mortgage-delinquencies-by-loan-type-in.html
http://soberlook.com/2012/11/harp-and-qe3-will-keep-mortgage-refi.html
Who knows what type of toxic debt the banks are hiding distinct from housing, but the chicanery is less likely to affect ordinary people's month-to-month budgets. This, a UBS move to pay employees in debt that will lose value if the bank capitalization drops too much, is nice to see, would be good if GS did that.
I don't know how to think about the bond markets that supplement bank credit, not even to answer basic questions about the size of these markets.
8: They're applying their stupidity in different areas.
"And you may ask yourself, what is that beautiful house?"
Yeah, I guess this really is a big suit.
8
What does this mean?
They aren't giving out as many stupid mortgages for one thing. But the same slippery slope still exists and in five or ten years who knows.
How badly are banks overleveraged at this point? To what extent are we in the same mess as 2007?
I agree with the other commenters that we aren't currently in the same mess but little has been done to keep us out of similar messes in the future.
There seems little prospect for effective regulation as the measures needed would be politically unpopular and don't fit the popular narratives about what went wrong.
5: Absolutely. The financial system is somewhat more stable now because bankers are being somewhat more prudent, but obviously only fools rely on the prudence of bankers these days. Dodd-Frank (I always type is "Dood-Frank") did a few nice things but did not get at the fundamental regulatory issues that allowed the 2008 shitstorm to happen.
As for mortgages, it would be a little surprising if the next bubble and bust happened in the mortgage market. But who knows. I think it doesn't really make sense to make housing stability for individuals and households depend so closely on the fluctuations of an out-of-control global financial system, but that's US housing policy right now.
BTW, I enjoyed this recent Frontline about why no executives have been prosecuted for their actions that led to the crisis. Civil suits against financial firms often don't result in enough damages to deter bad behavior; even "massive" fines amount to little more than rounding errors, a cost of doing business. Put some of these guys in jail and the rest will pay attention.
7: mortage market. Well over 90% of new mortgages are now being backed by the taxpayer.
Well over 90% of new mortgages are now being backed by the taxpayer.
But isn't that because private issuers are in the reflexive super-cautious post-crisis state? In which case, we're just filling in until they return.
20: I wouldn't put it that way, although everyone involved certainly would put it that way publicly. The government is backing the vast majority of mortgages issued, based on selling guarantees for (much) less than they would be priced at in the private market. If it didn't do that then there would be a lot less total mortgages issued but probably a lot more privately backed ones (which would be more expensive). That's a nationalized market, the price is set by the government and the liquidity is created by the government.
They aren't giving out as many stupid mortgages for one thing.
I think that the giving out of stupid mortgages wasn't nearly as much a problem as the synthesizing of stupid mortgages because there weren't enough real ones to go around, and then taking bets on the notion that said synthesized stupid mortgages couldn't possibly all fail at once, and then applying AAA bond ratings to whole crooked enterprise.
22: There's some kind of exponential law of stupidity in there, I think.
Once the stupidity gets above critical mass, you get the danger of a stupid melt-down.
re:18 Instead we have incentivized this behavior. If you listen carefully, you can hear the quiet back room laughter of finance types recalling how they yet again managed to successfully privatize profit on public risk. You can bet they're looking forward to the next one.
21: How tightly coupled is the government's intervention in the MBS market to the number of mortgages issued? Also, potential bubble issues aside, are there good analyses of the distributional consequences of this financial asset inflation? The two are linked, I guess, in that it should increase the number of new loans which should raise house prices, effecting a broader swath of the public though still tilted towards the wealthy end, but my intuition worries that each of those steps dampens the effects.
Alternatively, what I wrote could be nonsense.
I have an issue with calling what happened leading up the financial crisis 'stupidity'. A lot of people made a whole lot of money of that bubble. Were they stupid?
26: I think the hope is that supporting/reflating the housing market will gradually help underwater homeowners. Plus, you know, we need people to be able to buy houses. Not sure what your final clause ('my intuition worries') meant.
It seems like an incredibly inefficient, Rube Goldbergian way of increasing home building. The government ends up subsidizing a lot of lending the banks were going to do anyway, and the banks take their cut from any new activity the government causes.
Also, when we keep the cost of houses up, there are a lot of people who therefore *can't* buy houses. We're just making sure that those who were relatively well-off remain so. I am dubious that this was an under-attended goal of our fiscal policy.
"distributed management means there's no way to " judge performance and responsibility: What the system does is the purpose of the system: toxic courtiership, part XII.
Writing down the principal of some loans would hurt banks but help homeowners. Doing this for people who could and would pay to live in the (now cheaper) houses rather than indiscrimnitaley was a legitimate goal; HARP was pitched as a way to do this.
The banks would prefer not to acknowledge that housing prices go down, since they need to set aside additional capital when that happens. My understanding is that they basically succeeded in foiling this via delays and bullshit fine print to weaken federal spending that did not suit them. Bankers roughly speaking ran Romney as their candidate, and opposed Warren. They lost in both cases, so new developments bear watching. Geithner is a boob, no offense to anyone's tits.
Individual convictions are apparently basically impossible to get because distributed management means there's no way to meet the standard necessary to send people like Angelo Mozillo away.
Bring back decimation!
OTOH, bubbles seem to rarely hit the same sector twice in a row. What's going on in the non-housing financial work?
Higher education in general, perhaps. The Law School Bubble is already popping.
Not sure how that leads to an investment bubble, since the government is taking over financing. Debt epidemic, sure.
The bubble pops when the combination of high debt and low job prospects causes people to refrain from "investing" in higher-ed, which is also being squeezed by reduced state subsidies, market competition from cheaper on-line degrees, and a demographic decline in the number of available 18 to 25 year-olds.
At some point, schools are going to start going under. In addition to staff losing their jobs, its going to be pretty devastating to the communities in which they are located.
The word "reflate" annoys me even more than the word "disenfranchise." Indeed, I've come to accept that the latter will be widely used, even by otherwise smart people. But I would rather die a thousand deaths than see "reflate" uttered even a single time by someone close to me.
38: Not to be obtusely nitpicky, but I still don't think that's a bubble in the same way - it's more akin to the collapse of manufacturing. I think of bubbles as involving assets and their popping having much greater multiplier effects than the decline of a single industry.
39: Disenfranchise annoys you? What about disembark?
I'm with the Wafer. "Disembark" is also unnecessary, when "debark" works just fine to denote the same thing as well as the stripping of bark from a tree.
Where would we be, I ask you, without disembowelment?
Its certainly different in that its not an asset bubble in the classic sense of the word. But a lot of people have invested a lot in their educations, and many consider it their most valuable asset. But its an asset that's turning out to be a lot less valuable than it was thought to be, and I don't think the ramifications of this problem are at all well understood.
It's not as if people are investing more in education because they expect the price to rise, as in a classic bubble. They're investing despite the rise in prices, and seeing the returns drop quickly. Healthcare is somewhat similar, only the absolute returns are climbing while the marginal returns are decreasing.
Antidisestablishmentarianism: better as "establishmentarianism", or "antiblishmentarianism"?
Deënfranchise of course sounds like a chain Kwanzaa cakery for those poor feebs what miss the dieresis.
It's not as if people are investing more in education because they expect the price to rise, as in a classic bubble. They're investing despite the rise in prices, and seeing the returns drop quickly.
Prices have been able to rise because of high demand caused by a high expected return on investment. Where does that demand go when it becomes clear the ROI is illusory? How are high prices going to continue to be supported?
reflate, reflate, reflate! I will not be disenfranchised!
I'm not convinced by the education bubble arguments that hinge on the fact that the asset is worth less than its owners anticipated (though yes, it's worth less than many of its owners anticipated). I only say this because it's my understanding that people with a college degree did MUCH better during the Great Recession than did those people without. In other words, sure, having a college/advanced degree has not been, in recent years, any guarantee that its owner will rocket ahead of the socio-economic pack, but such a degree has seemed to prevent a lot of people from falling even further behind. Or maybe not.
55: you're an economist. I'm only worried about people using the word.
29-31: The Obama administration blew housing policy really badly. Efforts at loan modification have been botched terribly.
There were some commodity bubbles going on over the last couple of years, but now they seem to be settling down again. Some people talk about a 'bond bubble', in the sense that people piled into bonds for the security but when interest rates rise a lot of bond values are going to drop suddenly and sharply. But it doesn't seem like interest rates will rise for a bit.
52
Prices have been able to rise because of high demand caused by a high expected return on investment. ...
Also because the government has been handing out student loans indiscriminantly.
I'm with the Wafer. "Disembark" is also unnecessary, when "debark" works just fine to denote the same thing as well as the stripping of bark from a tree.
No! "Decorticate"!
"Disembark" is also unnecessary, when "debark" works just fine to denote the same thing as well as the stripping of bark from a tree.
This is very true.
28
I have an issue with calling what happened leading up the financial crisis 'stupidity'. A lot of people made a whole lot of money of that bubble. Were they stupid?
I think the whole thing was negative sum so more people lost money. And a lot of the people who lost money were stupid and/or overly trusting.
I'm not an economist, but is an investment bubble ever negative sum? Is there is less overall credit in the economy after the bubble occurs?
52: Those are good questions, but misinvestment does not by itself a bubble make. Missing are positive feedback during the rise (rising tuition doesn't directly make education more desirable), and negative feedback during the fall (if tuition plummets for lack of demand will that cause even fewer people to seek degrees). The causality is wrong, and there is no burst mechanism.
65
I'm not an economist, but is an investment bubble ever negative sum? Is there is less overall credit in the economy after the bubble occurs?
The lenders are out all the money that doesn't get paid back but the defaulting borrowers often have not gotten an equivalent gain.
If you're talking about real resources lost in an investment bubble bursting, and not just the distribution of money, wouldn't you have to think in terms of opportunity cost?
I feel like I should issue one of my periodic disclaimers that I'm aware I don't actually know anything about economics or the financial industry; I merely enjoy blowing hard on the Internet.
69: Congratulation on the beej, old chap.
68
If you're talking about real resources lost in an investment bubble bursting, and not just the distribution of money, wouldn't you have to think in terms of opportunity cost?
Well it seems obvious that building large expensive houses that ended up empty and vandalized (or even just worth a lot less than they cost to build) was a waste of real resources. Although there are structural problems beyond the housing bubble, basically people are trying to save more than the system can safely accomodate.
One of the better parts of Dodd Frank was to not let some asset managers hide behind the AAA rating of the
junk paper they hold, but rather to oblige them to perform their own analysis to ascertain their holdings show
'an exceptionally strong ability to repay its short-term debt obligations and the lowest expectation of default.'
I thought this post was interesting (and it mostly makes sense to me).
Wow, that post is exactly what I've been trying to articulate, from the causes of the drop in interest rates during the Great Moderation to Krugman's superficial analysis of demand. As such, I credit SRW with great intelligence, perspecuity, and he's likely handsome as well.
Antidisestablishmentarianism: better as "establishmentarianism", or "antiblishmentarianism"?
IT'S GOOD JUST LIKE IT IS, PUNK!
It's perfectly conceivable that the same person would be an antidisestablishmentarian and not be an establishmentarian. You would be such a person if you thought that, given the existence of an established religion in a country, it shouldn't be disestablished, but, if the question arises in a country that doesn't have an established religion whether one should be established, none should be.
No! I'm for the Church of England, because it's established. And if you can get your damned religion established, I'll be for that too.