Eh, they should've privatized them, but beyond that, if Barney Frank thinks it's a good and necessary step, so do I!

"shouldn't have privatized them in the first place", if I'm going to be using my words, here.

The size of the transaction which you are facilitating may have a pretty large correlation with the good you are providing to the firm that is paying you the commission (although not necessarily).

Also I find the marketing industry despicable, while we're at it.

In heebie's Utopia, all the parasitic capitalists will be sent to trade schools to learn how to make things with their hands.

Cue dsquared and his "Masters of the Universe, we know where every penny, maybe just a tad bit of miscalculation on the risk" spiel in ....

Certainly the size of the transaction correlates with the amount of good. Consider this example.

A person hires five accomplices to rob the stage coach carrying the mine payroll. The strongbox contains $60,000. They share equally in the reward (having shared equally in the risk) and each gets $10,000.

The next month the same group robs the payroll coach, but this time the strongbox contains $120,000. Clearly they should each get $20,000 (their same commission rate) even though the risk was no greater than the month before. They've done twice the good for society, and should be paid commensurately.

This is simple Econ 100 stuff.

Heebie Geebie is a Communist, and that's a good thing!

Fannie Mae and Freddie Mac are the clearest possible example of privatizing profits and socializing losses -- or at least that's what all those motherfucking stockholders thought before the government basically wiped them out!

I think the government needs to do things that make rich people suffer. Just on principle -- I don't care if it does any good aside from the intrinsic good of harming the rich.

As far as I know, the only people who oppose the bailout are hardcore libertarians with a rather deontological bent: "let the market exact its punishment though heaven and earth may fall." The rest of us either don't understand the issue well enough or don't feel that a strong enough principle is being violated to have an opinion.

Does the form that the bailout is taking essential mean that Fannie and Freddie are no longer privatized? The news describes the government as taking them into "conservatorship." Is that like receivership? Do we have to return them to their old confusing semi-private status, or can we just nationalize them again?

Do you mean Lehman Brothers instead of Bear Sterns in the post, Heebie? I mean, Bear Sterns already went under and got handled in a pretty decent way with few knock-on effects. Lehman Brothers is the firm that seems to be in the longest inevitable death spiral ever. I thought they might be alright, but word is that they're looking to sell their asset management wing, which would fetch almost nothing in today's market, and has already suffered a major loss when the Osperie Fund collapsed. If they're that desperate, I'd hate to see what their finances look like.

Oh yeah, and FNMA and FDMC should be nationalized for a while, sure. Governments have made some surprising profits in the past by serving as last-resort liquidity providers so long as they demand proper equity stakes for their investments. It helps when you're basically forced to buy at the bottom by that "last-resort" part.

FNMA and FDMC should be nationalized for a while, sure.

Why "for a while"? You think they should later be re-privatized?

13: If we want to get the money out of it for the government, yeah!

I think financial organizations like those are probably best run privately, with some subsidies tied to behaviors the government wants to support (like a subsidy for each low-income person given an artificially low rate in order to make housing affordable, if that's the goal).

The key step is to make sure that, when the companies are about to go under, the government doesn't just step in and feed them money as basically low-interest loans. The government needs to demand equity stakes for rescuing the businesses, possibly all the equity if its truly doomed. Later, when the industry is back on its feet and valuations have increased, and hopefully some wiser regulation has been put in place to make sure at least that the next disaster will be a different one, then those stakes can be sold back onto the market.

But yeah, I'm mostly a pro-privatization person. Mortgages in particular seem like something that private firms can provide with as few distortions or fewer than the government, at least in most conditions.

What about student loans? I'm not convinced that involving private lenders has produced any benefit.

If privatization could be done honestly and efficiently, and not as a way of passing out goodies, then socialism could be done honestly and efficiently. I love the way people who deny that government can do anything right are confident that government can do privatization right.

Same with contracting out. Military procurement has been contracted out for decades, and military contracting is the biggest porkbarrel of all. Public choice economists know that contracting out won't work: you always have a low-paid public official with no incentive to protect the public (and who might be angling for a job with the person he's negotiating with) negotiating with a sharp private businessman who has every incentive to defraud and plunder the taxpayers. But public choice economists don't point this out, because they're free market ideologues who want to monkey-wrench government.

Kotsko's first comment was the most important one. All that was privatized here was profit. The risk remained in the hands of the government, as it would have to if mortgages are going to be insured.

The bankers here are doing what all good capitalists do: they are externalizing costs while keeping the profits. The only sane people in favor of such an arrangement are the few who profit from it, plus a few cheerleaders who basically admire it the way people admire well-executed scams. The cheerleaders might call themselves free market types, but there is nothing free going on here.

Rob that's not really true. Fannie and Freddie shareholders are taking a HUGE bath, and Po-Mo is probably right that the government will sometime down the road re-sell the equity they're acquiring.

If privatization could be done honestly and efficiently, and not as a way of passing out goodies, then socialism could be done honestly and efficiently.

Auctions and IPOs are a hell of a lot easier to run than total socialism. I'd say it's closer to the difficulty of fair redistribution and a humane floor being put in place, which is something else I think governments are very capable of even if they seem to screw it up pretty often.

The reason I have faith this can be done well is because it's been done in the past. I believe once the dust cleared from the Savings and Loan crisis, the U.S. government had made some money on the sale of the pounded-down assets they'd bought, and the Japanese government has made profits in the past as well by buying up the assets of dying banks in a crisis then later selling them off. Sorry it's so vague, but it's been a little while since I've read the stuff, and I'm not looking to hunt down sources at the moment though I may after some more sleep.

Social Security and Medicare are pretty easy to run, based on their administration costs.

15: I think student loans have a reasonable argument for at least some public provision, since we've seen that the first people to lose loans when the market gets squeezed are the low-income and people going to community colleges or lower-end universities. While it may make sense to not give too many loans to the person trying to pay top dollar for a shitty private university, I think we agree that the rest of the people being denied loans are the very people who could probably use them the most.

Also, one of the crucial differences on this issue between mortgages and student loans: It's a lot harder and less effective to "rent" college than to rent a home.

Recently people have been pointing out that both Social Security and VA medical are pretty well run. Bu the opponents of "total socialism" continually allege that they aren't.

The Fannie Mae / Freddie Mac business structure is messier than I can understand, but the banks were certainly protected. I have no idea who held the common stock. I'd just like to see a table showing who won, who lost, and who made the decisions and the non-decisions. I doubt that privatization and deregulation would come out looking good.

The problem with privatization isn't technical difficulty of auctions. It's just the feeding frenzy that happens when people who don't believe in government control government and are trying to destroy it.

One thing about Fannie and Freddie, as opposed to Medicare and Social Security, is that it's a huge amount of risk. Like, they own or back 5.3 trillion in debt. Is that debt really best attached to the government, with no last-resort recourse to soak the financial markets if a bailout turns out to be unfeasible? Thinking about it in my ignorant way, I'm not sure it makes sense to think of government recievership as actually the option of last resort; we are lucky enough to be able to keep them from failing, this time, but if we ever don't have that option then it'd be great if the loss didn't automatically torpedo the federal government.

The problem with privatization isn't technical difficulty of auctions. It's just the feeding frenzy that happens when people who don't believe in government control government and are trying to destroy it.

But of course, this isn't what happened when Fannie and Freddie were privatized, and it isn't what's happening no. I'll point out again, one of the primary architects of this process is Barney Frank.

Po-Mo raises a good point about Fannie and Freddie; it would actually probably be good if mortgage lending got tightened up, assuming that it was accompanied by policies that regulated private lenders and decreased the implicit and explicit subsidies given to homeowners over renters.

The worst-case historical loss for responsible mortgage lending is like 3%. That's not going to take down the federal government. Does anyone have any evidence that Fannie and Freddie were a huge burden on government before they were (kind of) privatized?

I agree about the homeowner subsidy. It's probably invulnerable, though. It was a way of making millions of people think that they're property-owners, when they're really not.

Like, they own or back 5.3 trillion in debt.

There things associated with that debt. IIRC, DeLong argued, a while back, that much of the required debt service was covered by payments coming in. So "5.3 trillion" may not be the best way to think of it.

Privatization probably wasn't worth it in that Fannie and Freddie bond holders were getting an undeserved premium over Treasuries. The takeover benefits them, even while it screws equity holders (who have already taken most of their bath, I think). I suppose it might turn out we're actually bailing the Chinese government, which would be ironic in the Alanis Morrisette sense.

I agree with Po-Mo that the government will probably make money on this. There is no market in mortgage debt now, but the debt itself has a worth considerably greater than zero.

Also, as of about 6/30/08, it seems that a large majority of Fannie Mae was owned by mutual funds. Especially large stakes were held by the giant investment company behind American Funds and AXA (not sure if it's part of their investment management side or their insurance portfolio). Lord Abbott and Dodge & Cox, two large mutual fund companies, also owned good-sized chunks. It looks like no major investment bank wants to touch the stuff. Merrill Lynch and Citigroup have fair-sized stakes, but even there it's probably held by their investment management wings rather than the bank's trading books.

So it seems that no institution's going to take a bath on this one, it'll be individuals. But capital-holding individuals. Plus, the size of the equity in these companies is already miniscule compared to the size of the debt, so there's not much wiping out that will occur. Even the most concentrated bets by non-crazy mutual funds are about 2-3% of assets.

29 was to 22, in particular.

Bu the opponents of "total socialism" continually allege that they aren't.

The key point here is that these people are lying, intentionally and on ideological grounds.

I wonder who was still holding this stock after the last few weeks. People not paying attention, mostly, ie widows and orphans.

In my line of work, you have to pay people more to get them to do socially unuseful stuff. They'll do socially useful stuff for way less money. Something to add to the Econ 101 explanations.

32: I know a financial planner guy who bought up a bunch of preferred stock after the first crack at a bailout; is that getting hit, too?

Ummm, it seems quite obvious to me that, on average, total social return (or loss!) does have some relationship to the size of the transaction.

I don't think the Fannie/Freddie debacle can be easily assigned to one end of the political spectrum. At least, it's certainly not a Republican/Democratic thing. Fannie/Freddie corrupted the entire system through their political activities. That includes the Democratic Barney Franks of the world. Over the past decade the right has been more active than the left in calling for tighter oversight on Fannie/Freddie. ( Here is a good WSJ editorial on the matter, which I will certainly be banned for linking to). Part of this is that the whole political class accepted the argument for lots of government interference in making home ownership more "affordable" -- although I would argue that Fannie/Freddie eventually made homes less affordable through its contributions to the price runup during the real estate bubble.

The left is right to point to privatized profits/socialized losses, but the libertarians are also right to highlight this as a significant danger of all government interference in private markets...it's very hard to prevent government entities from getting captured by private interests. (It was Marx who said government is the executive committee of the ruling classes). But it's especially difficult when you intermix (even implicit) government support and the profit motive in one entity, as happened with Fannie/Freddie.

In my line of work, you have to pay people more to get them to do socially unuseful stuff.

In other words, people have a natural urge to make the world a better place, and you have to really float large sums of money to subvert that, and plenty of people have invested a lot of money in subverting it.

Ummm, it seems quite obvious to me that, on average, total social return (or loss!) does have some relationship to the size of the transaction.

It seems to a lot of people that financial transactions among financial people are irrelevant to anything outside that world.

In my line of work, you have to pay people more to get them to do socially unuseful stuff. They'll do socially useful stuff for way less money. Something to add to the Econ 101 explanations.

Compensating differential. The economist Robert Frank at Cornell did a good journal article on this like 15 years ago -- he found Cornell undergrads were willing to take much lower starting salaries to work for do-gooder nonprofit organizations. I have seen this article taught in an actual Econ 101 class in a major university.

36 -- As you know, there are all kinds, including natural assholes. And also all levels of need. Among smart (no, I don't mean SAT or engineering smart; I mean human civilization smart) motivated people, there's definitely an evil premium. Put another way, a great many people who can do good at no cost to themselves will do so.

But yeah, I'm mostly a pro-privatization person. Mortgages in particular seem like something that private firms can provide with as few distortions or fewer than the government, at least in most conditions.

In view of the past year's events I find this really hard to understand. Why should there be any improvement in the management of the mortgage biz? It's not like people learn, or anything.

Oh, now it's 35. Gotta be faster.

33 - It's not clear yet.

The Chinese philosopher Chuang Tzu expressed the concept as "People who suck boils for a living charge more the closer the boil is to the asshole".

Yes, he really said that. See why I hate analytic philosophy?

39: Rigth, there isn't any empirical support for believing this. It's always a problem for people when empirical evidence contradicts ideological belief.

36 - Why? The money to lend you to buy a house has to come from somewhere.

39: Rigth, there isn't any empirical support for believing this. It's always a problem for people when empirical evidence contradicts ideological belief.

33: From this speech, it looks like your friend made a lucky bet. Since the government isn't actually looking to wipe out the shareholders (which makes the framing of this as a "takeover" faulty, unless they take the unusual step of giving the government's senior preferred stock hefty voting rights), the infusion of capital will likely shore up the existing preferred shares. Common shareholders are left flapping in the breeze under this agreement, since the government doesn't really care how small their stake gets. It still has the ordinary preferreds as a buffer, so the more senior issues will probably be maintained.

The real question shareholders need to ask is the dividend yield on the senior preferred shares that the government's going to get. Current senior preferred shares are yielding about 14-15%. If the government doesn't get something above 10-12%, this is an utter sop.

I have to admit that I haven't paid enough attention to the matter, since I had a huge amount of work to do on Thursday and Friday when all the announcements were going down and we've deliberately avoided any exposure to FNMA or FDMC in the portfolios we run at work. It should be interesting to see how it develops though.

46.2: shareholders s/b taxpayers

Shareholders want the sop, of course. We don't, since we'd be paying for it.

Since this is the public policy thread: This article in the NY Times today by David Frum is evidence that the Bush debacle may be leading to some actual intelligent rethinking of party ideology by conservative intellectuals.

Are people suggesting that the government take over mortgages entirely? All lending to buy a house should be by the government? That sounds like a terrible idea to me. I would defend this position, but I have to take a very small person to see a bunch of very big fish.

So it seems that no institution's going to take a bath on this one, it'll be individuals. But capital-holding individuals. Plus, the size of the equity in these companies is already miniscule compared to the size of the debt, so there's not much wiping out that will occur. Even the most concentrated bets by non-crazy mutual funds are about 2-3% of assets.

Things get trickier when you start looking at the preferred; I expect that they won't zero it, but they're going to have to suspend the dividend, aren't they? Big holders of various issues of preferred are companies like Liberty Mutual and AIG, so writedowns start to get creaky on insurance company balance sheets.

I've seen differing reports about what's happening to the preferred at the moment, though.

I have no actual knowledge of the issue at all. But I trust my innate suspicions, which only occasionally let me down.

50: They actually haven't suspended the dividend on the common stock yet, though it's dramatically reduced. I'm not familiar with the exact rules on the various levels of preferred shares out there on the two institutions, but I'm sure it's a hard-and-fast rule that preferred dividend payments can't be cut until nothing is being paid on the common.

I gotta get a haircut, but I'll try to look up the preferred stock positions being held by institutions when I get back. They're trickier to find, and I'm not sure if 13-F filings are forced to disclose preferred holdings as opposed to just common stock holdings.

You're right though, losses on the preferred will definitely tend to weigh down financial institutions like insurers a bit more, since the high yield on a relatively safe investment would've been an attractive position.

I'm not familiar with the exact rules on the various levels of preferred shares out there on the two institutions, but I'm sure it's a hard-and-fast rule that preferred dividend payments can't be cut until nothing is being paid on the common.

Also, if the preferred is non-cumulative, but Fannie has, like, a billion different issues so I'm not going to check.

I gotta get a haircut

so we know that you'll be among the losers.

The money to lend you to buy a house has to come from somewhere.

Does it? I thought that one of the points of fractional reserve lending is that it can create money out of thin air.

48: Mistake. If cigarette companies stop marketing cigarettes as relaxing and normal and start marketing them as cool, the companies haven't rethought selling cigarettes.

But what if they start making cigarettes that really are cool?

"For privacy's sake, let's call her Lisa S. Wait, that's too obvious. How about L. Simpson?"

Is there a joke-rephrasing blog as well as a joke-explaining blog?

I thought the Frum article was interesting enough: it'd've been better if he acknowledged the embrace of stupidity, tribalism, and dishonesty -- aka the Southern Strategy -- but I guess he can't say those things out loud and stay in the Village.

I've seen differing reports about what's happening to the preferred at the moment, though.

Looks like the stuff the feds are buying is senior to the existing preferred stock. So the preferred (held by your local bank and/or insurance company, apparently) is also going to take it in the shorts.

Hey Emerson, can you give me the location of the Zhuangzi quote about boils and assholes--I want to look it up when I get home and see how Burton Watson handled the translation.

P 357 of Watson. My version is pretty free but correct in gist. It may even be that Watson bowdlerized a little.

4--Well, we hate math professors! (Am I the only marketing puke here?)

I'm sure what you market is honest and informative, and doesn't rely on gender, race or class stereotypes.

Chopper goes door to door selling Darkie Toothpaste, Heebie. Never surpassed as a tooth bightener, it's making a big comeback.

No, Chopper is in the toy business.

Since we're regulated by the FDA, pretty much.

Well, we hate math professors! (Am I the only marketing puke here?)

Sure, but marketing hates everyone.

Since we're regulated by the FDA, pretty much.

Tell me another one, Chops.

69--Mainly just Sales.

70--No, seriously. I've been in medical device marketing communications for most of a decade--we mostly sell to docs on features and benefits, and we're watched like hawks by lawyers and regulatory specialists. We do a bit more direct-to-patient stuff at my current (for now) gig (see, e.g., www.itookcontrolofpain.com, the video featured there is why I was in nyc a few weeks ago), even that is fairly constrained.

28

"I agree with Po-Mo that the government will probably make money on this. There is no market in mortgage debt now, but the debt itself has a worth considerably greater than zero."

This is absurd. The government is almost certain to lose money on this and likely a lot of money. Fannie Mae and Freddie Mac guaranteed mortgages and apparently the government is going to honor the guarantees. For obvious reasons this is going to cost a lot of money.

And the government did not make money off the S&L crisis, it lost upwards of $100 billion IIRC.

||

I must say that I like Kevin Drum. It's that irreverence, you know?

||>

34

"... At least, it's certainly not a Republican/Democratic thing. Fannie/Freddie corrupted the entire system through their political activities. That includes the Democratic Barney Franks of the world. ..."

This is correct. Part of the reason they are broke is that liberals pushed them to lower their standards so more poor and minority people (aka bad credit risks) could obtain mortgages.

74 is false.

so more poor and minority people (aka bad credit risks)

Teasing out the distinction between the poor and minorities here should be worth several hundred comments as long as you're willing to stick with it, Shearer.

74: The conspiracy thread is elsewhere.

Here is a NYT article on the plan. Doesn't sound like the common and preferred shareholders are likely to get much.

I blame the illegal immigrants.

We call them aliens, MC.

Here is a Village Voice article on the origin of lower lending standards during Andrew Cuomo's term as Clinton's HUD secretary:

"... Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. ..."

"Cuomo's predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income." Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren't granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo's top aide, told The Washington Post: "We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible."

While many saw this demand for increasingly "flexible" loan terms and standards as a positive step for low-income and minority families, others warned that they could have potentially dangerous consequences. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory: "We have not been a major presence in the subprime market," he said, "but you can bet that under these goals, we will be." Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals. "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas," his report on the new goals noted."

Here is some analysis of what the plan will mean for Fannie Mae.

Wow, the Official Republican Talking Point is here. I'm not wasting my time.

James, no one is denying that the Clinton administration pushed the GSEs to make more loans to lower-income households. Your claim, however, is that Part of the reason they are broke is that liberals pushed them to lower their standards so more poor and minority people (aka bad credit risks) could obtain mortgages.

If you can show how lower lending standards from an administration that left office at the beginning of 2001 -- lower lending standards for fixed-rate mortgages on conforming loans (see, e.g., here, where they break down the numbers -- 89% of their mortgages are fixed-rate, 12% are alt-A, etcetera) are responsible for a blow-up that occured in 2008, after years (post-Clinton years, mind you) of increasingly high LTV and "credit enhancement" semi-frauds that occurred during a Greenspan-fueled real estate bubble, more power to you.

Their underwriting standards have been shoddy for years, and both parties deserve some blame for not fixing things, but that's not the same as blaming affordable housing efforts for the end of the great risk socialization experiment. I recognize that this is a terrific argument for the WSJ editorial page to make, and it's a tremendously valuable argument for Syron and the other executives, who in a more just world would be sent off to an island somewhere to make cheap tourist goods for Heebie and demonstrate some modicum of social value, but it's crap.

See also this from Calculated Risk's Tanta, who has forgotten more about the mortgage markets than I ever hope to know.

Ah, thanks snarkout. While I was preparing a response to James' crap, yours appeared and it's much better than mine. I'll simply add that the problems that downed Fannie and Freddie had little to do with low-income borrowers, and almost everything to do with reduced lending standards, appraisal fraud, and problems with derivative exposure. James will argue that the government made them do it, but it just isn't so.

I'm so sick and tired of America being controlled by poor and minority people. When will Wall Street get a chance to stand up for itself? Is there some movement I can join to help give it a greater voice in government?

83

"... the Official Republican Talking Point is here ..."

For the record I believe the major share of the blame for the debacle clearly lies with the Bush administration. While some of the problems had their roots in the Clinton administration they fully flowered under Bush. And I think the Bush administration could and should have done something to restrain the housing bubble. Is that an official Republican talking point?

84

I am contending that F&F were pushed to make more loans in poor and minority neighborhoods, that doing so required relaxing standards and that the resulting loans account for a disproportionate share of F&F's losses. Which of these points are you disputing?

"If you can show how lower lending standards from an administration that left office at the beginning of 2001 ..."

The thing about lower lending standards is that they don't necessarily cause problems immediately, the problems show up when prices are falling as they are today.

86

"... I'll simply add that the problems that downed Fannie and Freddie had little to do with low-income borrowers, and almost everything to do with reduced lending standards, ..."

Lending standards were reduced so that more low income people could qualify for loans.

87

"I'm so sick and tired of America being controlled by poor and minority people. When will Wall Street get a chance to stand up for itself? Is there some movement I can join to help give it a greater voice in government?"

For the record Wall Street has proven itself incompetent and needs to be regulated in such a way that its periodic fits of insanity do not damage the wider economy.

lower lending standards
shouldn't the loan interests be lower, then everybody could be happy without any collapses and disasters

lower lending standards

90

No, no, no, no, no, no. Lending standards were reduced by mortgage brokers so they could make a quick buck. They could do this without assuming any risk because of the magical securitization of loans, which guaranteed that you could sell the liability to others. Since no risk was assumed by mortgage brokers themselves, they had no incentive to write good loans, and so anyone with a pulse could get a mortgage. Some small percentage of these horrible loans (subprime and Alt-A) ended up in Fannie Mae's hands, and those, in conjunction with the housing crash, are largely responsible for Fannie's problems. The fact that they chose to buy those loans in 2006 and 2007, right at the top of the market, and right when smart people were predicting a crash was incredibly stupid, but not at all mandated by the federal government.

No one's taken on poor and minority people (aka bad credit risks) ? Y'all surprise me.

95: We're racists.

For the record Wall Street has proven itself incompetent and needs to be regulated in such a way that its periodic fits of insanity do not damage the wider economy.

Periodic fits of insanity... like bending over backwards just to give a good deal to poor and minority people? THE MADNESS MUST END.

96: Actually I was rather admiring that people answered on terms Shearer would actually (presumably) acknowledge as legitimate, rather than on touchy-feely terms about things like "sweeping generalizations" and "stereotypes" and suchlike.

No one's taken on poor and minority people (aka bad credit risks) ? Y'all surprise me.

See 76, b.

Kobe is a minority, but arguably not a bad credit risk.

like bending over backwards just to give a good deal to poor and minority people?

This is how you'd describe the housing mess? Since when are variable-rate ARMS bending over backwards to help anyone?

92

"... shouldn't the loan interests be lower, then everybody could be happy ..."

Actually no, since lenders prefer high interest rates. They also prefer to be paid back which for mortgages traditionally involved evaluating a prospective borrowers Capacity (ie income sufficient to comfortably make the loan payments), Collateral (ie property value sufficient to cover the amount of the loan should foreclosure be required) and Character (ie being willing and able to pay your debts). Credit standards refers to how strict lenders are about these things before giving you a loan. In recent years mortgage lenders became quite lax leading to the current large loan losses.

I bet I just fell for some sarcasm. Watch me back-pedal!

Fannie's in the mess it's in because of the housing bubble. Fannie's lending standards have almost zero to do with the housing bubble. Why argue with Shearer, though? I have belly button lint.

Fannie's lending standards have almost zero to do with the housing bubble.

Wait, that's not how they made it sound on TAL. At least, if I'm correctly placing Fannie Mae in the right spot in the ponzi scheme.

I don't remember what they said about Fannie on that episode -- not much at all, I thought -- but the housing bubble was driven by subprime and Alt-A lending products, along with other nonconforming mortgages, and Fannie by definition didn't touch the nonconforming stuff. The problem wasn't Fannie extending their standards so another 1 or 2 percent of employed low-income borrowers could get fixed rate mortgages; the problem was balloon payments and liar loans and NINJA loans and all the rest. When you heard about the military veteran in that story who got talked out of a reasonable loan and into a stupid loan because the initial costs seemed lower, the reasonable loan was almost certainly a Fannie product.

No, they didn't say much about Fannie Mae at all. I just assumed they were one up from the people selling the mortgages. Okay then, I'm square with Fannie Mae.

So if Fannie Mae didn't touch the variable-rate risky business, why are they in crisis? Is this a dumb question, that it's just the scope of the economic crisis in general? But why should sound loans be threatened more than they are in all the other economic downturns?

Lending standards were reduced so that more low income people could qualify for loans.

James, even if I knew nothing about the situation, you'd find it impossible to convince me that the Bush administration and the Republican Congress bankrupted two vital economic institutions out of misguided concern for the poor. I mean, seriously.

As he often is, Joe Nocera is on the case here, and can explain what happened.

The short version is that Fannie and Freddie got screwed by funky mortgages for the same reason everybody else did: Greed and moral hazard.

Was Fannie's Expanded Approval program so small as to have no impact on their current issues?

Was Fannie's Expanded Approval program so small as to have no impact on their current issues?

107: well, I think a piece of it is that they have a lot of products that aren't individual home loans -- multifamily stuff, among other things -- and a lot of those people got hammered. Another piece is that they really did get into riskier mortgages in the past few years, because of pressure to capture some of the business that was going to private lenders. Beyond that I'd be speculating even more wildly than I am right now.

Fannie's lending standards have almost zero to do with the housing bubble.

No, they did have something to do with it, although not nearly as much as the private sector banks and mortgage brokers pushing no-doc exotic variable rate mortgages. See snarkout's link to Tanta in 85 for details. Fannie/Freddie were also a key conduit for the Asian financing that helped keep mortgage rates so low. Finally, I don't agree with Shearer that concern for the poor was driving things. But I think as Fannie/Freddie pressured politicians to relax their lending standards (thus gaining market share and profits), "expanding low-income opportunity" was one of the fig leaf lobbying arguments they used.

Also, in other news Sifu: season-ending injury for Brady! Welcome to the world of three professional championships to defend.

99: I shoulda known. Jesus always did stand up for the disposessed. (You forgot to point out that there's are additional distinctions between "bad credit risks" v. "poor" and "bcr" v. "minorities" that also need discussing. I predict we hit a thousand comments again!)

Looking back up, the conversation had already moved well beyond what I was saying...sorry.

But I think as Fannie/Freddie pressured politicians to relax their lending standards (thus gaining market share and profits), "expanding low-income opportunity" was one of the fig leaf lobbying arguments they used.

Right. This is also responsive to w. moccasin: The looser standards with Fannie's Expanded Approval and Freddie's "A Minus" program weren't a result of a desire to help the poor, but of a desire to, um, "increase shareholder value," as they say.

113: I thought it might head in that direction, but I was really hoping for a reformulation into more poor and minority people and other low-IQ types (aka bad credit risks). The thread would've taken off.

115: Oh, without a doubt "helping the poor" was used in partial faith at best. It did get lapped up by people who should have known better, but whatever.

Saying that the lending standards of the GSEs have nothing to do with their current troubles, as some people did, is just wrong.

Also, in other news Sifu: season-ending injury for Brady! Welcome to the world of three professional championships to defend.

They were looking less-than-promising anyhow. Really gotta have an O-line in today's NFL. We'll see.

Ooh, is this the football thread now?

GO BEARS! WOO, HOOK, er, CLAW 'EM!

b's point is well taken, but "poor" is unequivocally correlated with "bad credit risk". It's why income is a required input for most loans, and why the rise of NINJA loans turned out to be so toxic.

Ooooh, yeah. Go Bears!

Bear down, Chicago Bears.

95...Leaving aside James B. Shearer's unmatched evil and racism, which is no doubt an issue we should explore ever more thoroughly, the article he links to from the Village Voice does plausibly implicate ACORN and other like organizations in calling for the loosening of standards which led to big problems. Of course, those who actually made the decision at the national level even in the Clinton administration were a lot more influenced by the mortgage industry than by ACORN, but there were definitely people pushing for more homeownership among disadvantaged people as a social good.

We'll never forget the way they thrilled the nation with their T formation.

Not much to contribute. I read everything and understand nothing.

Don'y know if this is pwnd, but here is Brad Setser adding an int'l perspective.

Seen ultimate costs guessed from 25B to about 1.6T. It will likely show up at the gas pump and grocery store (and no health care), so the cause will need a lot of work to get thru to the public.

122: but the thing is, there would never have been a housing bubble if the only problem was Fannie's standards. Without the Alt-As, particularly, you would never have gotten the level of speculation. Poor people might default, but they don't speculate.

120: Hello, heard of microlending?

122: There's nothing wrong with poor people owning homes, or even arguing for changing standards--depending on what the standards that are being changed, are. If you're giving someone a loan and they have no income, that's a stupid idea. But if you are, off the top of my head, being relaxed about a credit history of someone who's had health problems or something but has gotten their shit in order, then why the hell not?

Poor people don't own homes. People who own homes have stopped being poor.

By some definitions of "poor" sure. By others, no.

127: people who buy homes, on the other hand, may well have done just the opposite.

For the definition of "buy" commonly used before "home".

129: Yes.

128: House poor?

Yes, and microloans have very high interest rates and lend very small amounts of money exactly because the credit risk is higher.

I also don't get the obsession with homeownership in this country. People with limited resources (i.o.w. poor) are arguably better off without tying up much of their capital in a house. And the idea that homeownership is cheaper in the long run than renting is based on assumptions that are either no longer true or were misleading (the mortgage tax deduction being chief among these).

103: uh yeah.

122: There's nothing wrong with poor people owning homes, or even arguing for changing standards--depending on what the standards that are being changed, are. If you're giving someone a loan and they have no income, that's a stupid idea. But if you are, off the top of my head, being relaxed about a credit history of someone who's had health problems or something but has gotten their shit in order, then why the hell not?

Well, presumably because statistically they're a bad risk. I've no idea if that's true, but if they are a worse risk, then...

I'm sure the banks employ actuaries who could tell you about that sort of thing.

Of course, this is none of our business, given that it should be the glorious free market dealing with it.

113 I was really hoping for a reformulation into more poor and minority people and other low-IQ types ...

Be careful what you hope for, or you''l get something like this, which works hard to connect the dots usual suspects:
http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/

a list of the ten places with the lowest ratio of subprime to normal mortgages consists of sophisticated San Francisco and nine classic college towns, such as Ithaca, NY.

136: Taki Theodoracopulos and Steve Sailer, besides being idiots, are true fucking fascists, Godwin be praised. I know you knew that, I just needed to say it.

132: No, I was thinking of people who are legitimately poor but who have managed to scrape together enough for a down payment in a bad neighborhood, or who have grown old while the economy's passed them by, or what have you. There's a well-known mommyblogger who I am quite fond of who was indeed very, very poor for a long time, through a bankruptcy and clawing their way out of it, and yet the entire time they owned a house. At tiomes the house had no fucking *heat*, but they owned it. I don't buy this crap about how owning a house (or a cell phone, or a car) means you're not poor.

135: Well, think about, for example, payday loan places or rent-to-own stuff. The rates on those are *extortionate*, ostensibly because the people they loan to are "bad risks." But it's a catch-22, isn't it? If you're making those payments, you'll never fucking get ahead and sooner or later you're going to default and then oh well, you were a bad risk all along. But you might not have defaulted if you weren't being charged an arm and a fucking leg. I once had a scare with a bank over a ballooning series of overdrafts; turns out that if they close your account? You go on some fucking blacklist and then you *can't get* an account at any bank. Hello paycheck cashing agencies, at what, 5, 10% of your check?

I don't buy this shit that the poor won't repay their loans. All sorts of people default on loans; the rich and middle class have a lot more avenues that help them not get into situations that are structured to fuck them over in the first place.

Which isn't to say that the obvious point that loaning people--any people--more money than they can afford to pay back is stupid. And that if housing costs are ridiculous, then duh: people making below-average, or even average wages, won't be able to afford a house. But it sure as shit isn't "oh, let's make it easier for poor people to buy houses" that sent housing prices into the fucking stratosphere.

138 -- well, you'd have to actually look at the data to prove anything one way or the other, but I'd be surprised if there weren't a class bias involved.

You go on some fucking blacklist and then you *can't get* an account at any bank. Hello paycheck cashing agencies, at what, 5, 10% of your check?

I was on that list. Four or five banks turned me down, but the first credit union I went to gave me an account no problem.

I don't buy this shit that the poor won't repay their loans.

Poor people who repay their loans promptly and don't buy shit at rent-to-own places probably don't stay poor very long.

Poor people who repay their loans promptly and don't buy shit at rent-to-own places probably don't stay poor very long.

[Insert appropriate owl]

141: The bank that was trying to fuck me *was* a credit union.

Again, I'm not saying that generally people with v. low incomes aren't bad credit risks. What I am saying is that sweeping generalizations are bullshit.

Yes, there are many ways in which the poor get screwed, and sometimes it does end up being a Catch-22 (or more accurately, a big game of Asshole). And the rates on payday loans are evil (those are the folks the bible says will go to hell for usury). But there's no question that income (adjusted for the size of the loan) is the second best predictor of whether someone can repay a loan (the first being payment history). Acknowledging the first doesn't make the second not true.

Also, yes, rich and middle-class people also default sometimes, but less often, and when they do, there are assets to collect on.

The only way to break the cycle is for banks to take chances on poor credit risks. The only incentive a bank would have to do so is if they were community-based and they had some knowledge of the circumstances involved and could prevail on community pressure to force repayment. But those are essentially nonexistent at this point.

Shorter me: Sweeping generalizations are all that the big banks have to go on.

F, you might like Hernando De Soto.

145: I'm pretty sure that actuaries work on a lot more than sweeping generalizations. And that loan officers do actually look into people's specific circumstances. And, as you point out, there's also a word or two to be said about what's happened to community banks.

I just wanted to chime in again since I've now read DeLong's post on the deal, which includes a fair number of financial details that hadn't been spelled out in the speeches or articles I'd seen earlier.

The common stock warrants make a lot of sense, since the government needs to hold those rights in order to control the company. What they don't explain is whether Freddie and Fannie are issuing warrants equivalent to 80% of the current common shares outstanding, or 400% of the current common shares outstanding. Since warrants are dilutive (unlike options, companies do not need to purchase floated shares to make up for issued warrants, so they create new shares), the latter would be necessary to give the government 80% of the post-exercise common shares.

Also, the rate on the preferred shares seems reasonable, and is certainly a distressed rate. So when some degree of normalcy returns to the mortgage market, I think this deal should be a net benefit for the government finances.

After a brief look through Fannie's most recent 10-Q, there are a fair number of signs that make me cautiously optimistic for the rest of the (now junior) preferred shares given the new capital guarantees of the government and the small size of the existing preferred dividends relative to the cash flows from mortgage payments. I'll admit that financial companies are not my area of expertise, and I only have some basic familiarity with the quirks of their accounting, but there is pretty damn good disclosure in this filing. There an enormous amount of information here on what their books look like as it relates to their guaranties, their debt obligations, and their investments/reserves, so it doesn't seem like there's a major pig-in-the-poke problem.

The only way to break the cycle is for banks to take chances on poor credit risks.

Or for the government to get involved, either by offering lenders incentives or by extending credit directly.

when they do, there are assets to collect on.

Like oh, say, the house?

And that's where the popping of the housing bubble is screwing things up. You always lose money on a foreclosure, but with a 20% drop in house prices, you lose a lot more.

Indeed, but again: not exactly the responsibility of the borrowers, is it? (Also I liked M/tch's 149.)

Hernando De Soto

The conquistador? That's one way to deal with property ownership, I suppose.

149

Like Fannie and Freddie, for instance?

My problem is, 148 seems knowledgeable, and yet it reads "yadda yadda yadda" so it doesn't seem like there's a major pig-in-the-poke problem.

Which gets a bit more piggy at the end, but I'm left saying, "Huh?" Did you say pig? And some other stuff?

154: Yes. And?

And when he gets to yadda yadda yaddaing about mortgages, we call him Freddie.

Aw, fuck. Again?!

Indeed, but again: not exactly the responsibility of the borrowers, is it?

Nope. California purchase loans are non-recourse. Lenders can go after people who refinanced, but it's not clear that they'll get anywhere.

Declining home values does mean that lenders will require larger down payments, which hurts the poor more than those who merely have bad credit, but so it goes.

None of you want to hear me whine about having a cold and a sore throat and spitting up phlegm and not being sleepy b/c I've spent all day in bed doing nothing and not wanting to teach tomorrow, do you?

Too bad.

WM, you don't need to convince me that the mortgage bullshit is going to fuck over poor people more than anyone else.

Hope you feel better, B-Phud.

160: I'm sick and sleepless if it makes you feel better. I've got a 100 odd and am sleeping 2 hours at a time, waking up sweaty. So you're not the only one.

And I'm all for further whining.

Thanks, guys. FM wins, though. I'm not sick enough to really justify my whining.

164: Oh, well in that case, you should know that I *always* wake up sweaty, it being a side effect of Effexor.

That's what you think. I don't have shit to do tomorrow other than drink tea and watch crappy episodes of Law & Order. Have fun teaching.

Well, it's only an hour. But still. I now hate you.

104

"Fannie's in the mess it's in because of the housing bubble. Fannie's lending standards have almost zero to do with the housing bubble. ..."

Inferior construction doesn't cause hurricanes but it increases the damage when a hurricane occurs. Even if F&F didn't cause the bubble their reduced standards meant the bubble did more them more damage.

And relaxed lending standards by F&F (as well as others of course) certainly contributed to the bubble.

166: Is Effexor so great that it's worth waking up sweaty over? If it's anything like this it better be fucking heroin, so I imagine it's not, but what are the indications, if you don't mind my asking?

125

"... Poor people might default, but they don't speculate."

This is wrong of course, poor people will speculate if anyone is dumb enough to lend them the money required to buy houses on spec. Some lenders were in fact that dumb.

171: Righteous point, dude!!!!

127

"Poor people don't own homes. People who own homes have stopped being poor."

Even if the mortgage is for twice the value of the house and they have no hope of making all the payments? This was the stupid theory behind these programs, if we give poor people mortgages so they can buy houses this will magically lift them out of poverty.

173: Righteous point, dude!!!!

170: Dumb question, even if you were genuinely interested.

174: Oh, that helps.

139

"... But it sure as shit isn't "oh, let's make it easier for poor people to buy houses" that sent housing prices into the fucking stratosphere."

Easier credit standards in general contributed to the housing bubble by increasing the supply of buyers.

This is wrong of course, poor people will speculate if anyone is dumb enough to lend them the money required to buy houses on spec. Some lenders were in fact that dumb.

I think that there's another category that deserves mention here, but I'm not sure what to call it. Maybe "sucker" or more charitably "optimist". There are a bunch of people who bought multiple houses at incredibly high loan-to-values hoping to strike it rich in real estate. You might say that these people were idiots, and they certainly all ended up poor, but they didn't all start out that way.

148

"... I think this deal should be a net benefit for the government finances."

I think this is extremely unlikely.

151

"... You always lose money on a foreclosure, ..."

You don't always lose money. If the property is worth much more than the loan you hope the lender defaults because you want to foreclose. There are people who make a living via such foreclosures.

You don't always lose money. If the property is worth much more than the loan you hope the lender defaults because you want to foreclose. There are people who make a living via such foreclosures.

Really? Who? I know there are people who make a living selling books or seminars about how you can profit by buying foreclosed houses. But when a bank forecloses, don't they only get the outstanding balance on the loan?

178

"I'm not sure what to call it"

What's wrong with speculator?

181

"Really? Who? I know there are people who make a living selling books or seminars about how you can profit by buying foreclosed houses. But when a bank forecloses, don't they only get the outstanding balance on the loan?"

Generally foreclosed properties are sold at auction. The lender gets the proceeds up to the value of the loan with any excess going to the former owner. Generally the lender bids up to the amount of the loan and acquires title. In theory someone could outbid the bank (and in a perfect market would if the property was worth more than the loan) but in practice this rarely happens.

108

"James, even if I knew nothing about the situation, you'd find it impossible to convince me that the Bush administration and the Republican Congress bankrupted two vital economic institutions out of misguided concern for the poor. I mean, seriously."

The Clinton and Bush adminstrations stated they were pushing F&F to make more loans to poor people to help them. You are free to speculate about other motivations of course. The Village Voice article I linked above pointed out that private lenders wanted F&F confined to the low end of the mortgage market. In the case of the Bush adminstration I expect stupidity had a lot to do with it also.

180: If the property is worth much more than the loan you hope the lender defaults because you want to foreclose bet your ass the owner will refinance elsewhere to get that additional equity.

185: And to keep the house obviously...

Shearer, I'm not going to engage you further on this point, but the fact that you find the idea that the entire banking system is imperiled because poor people all suddenly moved into McMansions credible says something about you and your character. And it's not something good.

173: Even if the mortgage is for twice the value of the house and they have no hope of making all the payments? This was the stupid theory behind these programs, if we give poor people mortgages so they can buy houses this will magically lift them out of poverty.

The ones who still own their homes are not poor, but most of them have lost their homes. My point was pretty much Shearer's: if you get people out of poverty they can buy homes, but if you help them buy a home while leaving them poor, you don't change much.

There's an enormous discourse on the way the cost of credit drives farmers and small businessmen out of business, drives people from their homes, etc. Those that have, get. This most recent story is just a twist in the longer story.

Without the tax deduction, homeownership isn't that great a deal. Especially because a certain amount of the advantage of homeowning comes from the sweat equity involved in maintaining it -- it's not money for nothing. For a lot of people, buying, remodeling, landscaping, and decorating a home is an end in itself. They just love homes. If you don't feel that way, it's a much worse deal.

there's another category that deserves mention here, but I'm not sure what to call it. Maybe "sucker" or more charitably "optimist". There are a bunch of people who bought multiple houses at incredibly high loan-to-values hoping to strike it rich in real estate.

At the peak of the bubble, almost 30 percent of new home purchases were for speculative purposes (i.e. not owner-occupied), and an incredible 35-40 percent of all sales were not first homes (i.e. the owner owned other houses. The percentages can differ because some second homes are vacation homes).

Just to add a little color to your picture of who the buyers were here. I'm thinking that despite the infomercials, these speculators were not what one normally thinks of as poor.

I'm thinking that despite the infomercials, these speculators were not what one normally thinks of as poor.

No kidding.

People do not, by and large, speculate on their primary dwelling. That's why everybody figured mortgage securities were so safe.

119/121: this is the football thread?

So, um, can someone remind me when Vick's getting out of prison? In time for next Sunday, by chance?

Donovan McNabb had a great game on Sunday to try to get me to break my vow to not watch football anymore. It's not going to work, Donovan!

The lender gets the proceeds up to the value of the loan with any excess going to the former owner. Generally the lender bids up to the amount of the loan and acquires title.

And then sells, usually at a loss. Which was the original point. What part of this story is confusing you, Shearer?

So, um, can someone remind me when Vick's getting out of prison? In time for next Sunday, by chance?

Maybe Belichick will arrange a prison break.

My theory is that Bellichik is the actual indispensable genius on the Patriots, and every other individual -- even Brady -- is replaceable. I bet Matt Cassel surprises people, and the Pats end up 12-4 or something like that.

Did you know Cassel hasn't started a game since HS? Backup in college, backup in the pros.

195: there's pretty good evidence for the proposition that the Quarterback is a lot more replaceable than people seem to think, at least according to The Blind Side.

On the other hand, you really need a good, fast O-line, and I'm just not sure the Patriots have that, which may have something to do with why the star QB is looking forward to several months of gimpy fun in the LA sun.

And Whoops! I was totally wrong about the preferred stock. Turns out (announced late enough that it didn't show up in after-hours trading over the weekend) the dividends to the junior preferred shares are being cut as part of the rescue. Sure enough, they're down like 75-80% in value.

Still seems kind of odd to me, since the preferred share dividends for Fannie were only about 10-12% of their net cash flow from mortgages, but I guess the government doesn't want to take any chances with their investment and kind of wants all the equity holders to suffer.

Also, if anyone is invested in the Legg Mason Value Fund, run by the formerly legendary Bill Miller, I feel for you today. For those invested in American Funds (which is probably a fair number), it turns out a brand-spanking-new portfolio disclosure reveals that they managed to sell about 80% of their huge stakes in Fannie and Freddie over the month of July, so they probably had virtually no exposure to this crash.

EWING THEORY ALERT

Brady himself was a backup to Drew Henson for much of college, then nothing was expected of him when Drew Bledsoe catastrophically went down.

EVERYTHING IS GOING ACCORDING TO PLAN FOR THE PATRIOTS

LEAVE REX GROSSMAN ALOOOOOOOOOOONE

Are you serious? Bellichik single-handedly cost the Patriots the last two superbowls.

That said, Brady is definitely a system QB, and anyone who can step in any learn the system can help the Patriots win. They don't need anything spectacular, just someone who plays smart and with few mistakes. (I.e., 193 notwithstanding, Vick would be about the worst QB they could choose. Epsecially if he were out of prison.) Unfortunately, "plays smart and makes few mistakes" seem to be relatively rare qualities. But they do lend support to the idea that the Patriots just need someone servicable (Cassell?), not a star.

199 to 195.

I'M AVAILABLE, MISTER BELICHIMP!

198: hAs a "reverse Ewing theory" been postulated. Where an unheralded player who has won something ( but is regarded as a "weak link") is gladly replaced and things go in the downhill. Trent Dilfer - Baltimore Ravens is my canonical example.

Also, everyone should go read Krugman this morning. He doesn't talk about Bill Bellichik, but he does make the dreaded comparison with the Japanese financial crisis.

Po-Mo is probably right that the government will sometime down the road re-sell the equity they're acquiring.

This is sort of what happened in the Great Depression with the Federal Home Loan Corporation, or whatever it's called. The Feds bought up a bunch of depressed mortgages from banks for well below their face value, adjusted the mortgage payments down to the new lower value, then sold out five or six years later at a profit. Home values are dropping even faster now than during the depression.

I thought the Frum article was interesting enough: it'd've been better if he acknowledged the embrace of stupidity, tribalism, and dishonesty -- aka the Southern Strategy -- but I guess he can't say those things out loud and stay in the Village.

I think it was a pretty important piece. Between the lines he did acknowledge the weakness of the anti-elitist cultural strategy (or: embrace of stupidity and dishonestly). But the real critique was on the economic royalism aspect of the party -- the endless embrace of tax cuts for the rich to solve everything, the contempt for the economic problems of the middle class, the lack of belief in making government work and the hidden desire to sabotage it. That's pretty revolutionary for a Republican. I guess since Frum is a Canadian he has some understanding of egalitarianism as a social value.

I think there is a big political opening for a traditionalist values party that really embraces middle-class economic interests. The Clintons sort of got this in the 90s. If the Republicans get it now, it could be significant.

PGD you crack me up sometimes, you DC centrist, you.

204: C'mon Tweety that's exactly how it's going to go down. The adult Republicans will be back in charge. It feels so good to know that there really is a Dad!

Did Frum show any signs of remorse? A lot of rats are deserting the sinking ship.

In one sense it's be really interesting if McCain does win. The conservativs who didn't support him fully will become pariahs, and to the extent that they really do mistrust and fear him, they'll be almost as panicked as we are, with no friends and a big dose of guilt for their own hackery.

Probably, though, they'll suck it up, crawl back into the Republican Party, and return to their normal black ops activities. I really doubt that Frum or any of the others have learned anything. They're just hedging against an Obama victory.

I guess since Frum is a Canadian he has some understanding of egalitarianism as a social value.

Yeah. And since he utterly rejects egalitarianism as a social value, he has devoted his life to making sure it doesn't spread to America. E.g., his numerous and oft-cited misrepresentations (some might use a stronger term) of Canada's single-payer health care system.

I think there is a big political opening for a traditionalist values party that really embraces middle-class economic interests. ... If the Republicans get it now, it could be significant.

Hmm, and which "traditionalist values" are we talking about here? Not nominating black people?

The Republicans will court the middle class, economically, as a last resort. The middle class hasn't really made that necessary, so far, given that they are so eager to vote for massive transfers of wealth up the economic ladder.

The Democrats, God bless 'em, threw "traditionalist values" out the window with the Civil Rights Act, and I don't think they're ever going to have any credibility on that score ever again.

Greenwald's piece today pretty definitively debunks the idea that the media are center-right or right because of audience demand. Olbermann is the most popular show that MSNBC has ever had in history, but he's in hot water because of "liberal bias". (Donahue was also canceled when he was the most popular show on MSNBC).

The advertisers, the owners, and finance control the media, and most of them are anti-tax Republicans.

207: Yeah, he doesn't misrepresent the Canadian health-care system so much as outright lies about it. Having lived and worked in (barely) both health care systems, I'm pretty certain that guys like Frum contribute heavily to the success of the disinformation campaign run quite successfully in the US that confuses typical Americans into the false belief that a) the US has a better health care system than Canada (it doesn't) b) that even introducing parts of the Canadian system here would be impossible (that's silly).

Adam and Rob and probably others:

Fannie Mae and Freddie Mac are the clearest possible example of privatizing profits and socializing losses -- or at least that's what all those motherfucking stockholders thought before the government basically wiped them out!

Amen to that. In my opinion 'privatizing profits and socializing losses' is one of the biggest potential flaws in capitalism. I am a general supporter of capitalism but I do see that it has potential flaws and for that reason I think it needs regulation by an outside authority.

And I mean real regulation, not the voluntary or pretend stuff.

Otherwise we'll all essentially pay a dime so Wall-street broker can make $2.7 billion and that ain't good in the overall long run.

210 - Amen to that as well.

The beginning of my enlightenment was when I actually spent time outside the US and actually partook (is that a word) of the UK health system for me and my family and it was nothing like the common perception we'd been told in the US.

The thing about BS is once you find some of it you start looking for more. Obviously not everything is BS but there is such a large amount of it in the US, targeted to certain areas, that I think it is reasonable to start to deduce who benefits from it and thus who is behind it.

209: their ratings for the convention coverage per se weren't very good. Just based on that (reported in the Times article), I'd be hesitant to call Greenwald definitive. The on-air fighting was pretty fucking lame.

Not that I think any of the others are better, but I think it's probably not correct to say that the MSNBC convention coverage was a vast success that is now being undercut.

203: It was surprising to me that Frum didn't mention Ross and Reihan's "Sam's Club Republican" schtick. At least I didn't see them in my skim.

Come ON, you fucks. I'm not going to vote Republican. It's still a con game. They aren't going to become a responsible party. But it's still an important development if high-up Republicans get the fact that incompetent government, inequality and stagnant middle-class incomes are, like, a really bad thing. Anything that could lessen the amount of sheer highway robbery of the public treasury they do is important. Wouldn't you like it if the Republicans reformed enough to just be a bad party instead of an epochal-scale disaster?

Greenwald's piece today pretty definitively debunks the idea that the media are center-right or right because of audience demand.

It's not ratings, no. But Greenwald points out how this sort of thing works:

When the vice presidential nominee Sarah Palin lamented media bias during her speech, attendees of the Republican convention loudly chanted "NBC"

Democrats and liberals simply haven't learned to call out the media in this fashion (though there is evidence that they are catching on.)

What practical cost is levied on Fox News for being the way that it is? Well, Obama used to be reluctant to sit down with them - and Fox was definitely unhappy about it - but ultimately Fox was able to hold out longer than Obama was.

What practical cost is levied on Fox News for being the way that it is?

The highest ratings, consistently.

ultimately Fox was able to hold out longer than Obama was.

This is a shame, actually. I think if they spun it right, they could have got away with marginalizing the network the entire time. It would have pissed off a few people who never would have voted for him anyway, but if carefully handled could actually have worked, I think.

PGD, none of that is new. There are always a few Republicans who quibble around the edges about economic royalism. I'm sure that I've seen a Brooks' column in the last few years who said something similar. It never seems to make any difference, though.

187

"Shearer, I'm not going to engage you further on this point, but the fact that you find the idea that the entire banking system is imperiled because poor people all suddenly moved into McMansions credible says something about you and your character. And it's not something good."

You are misrepresenting my position, I didn't say this was the sole cause or even the major cause just that it contributed which it did.

The on-air fighting was pretty fucking lame.

I watched a lot of their coverage and found it surprisingly jarring and unpleasant. I draw no broad conclusions from that, though.

219: yeah, OK. If the Reps win the presidency, we have a greater chance of getting a terrifying theocracy led by Sarah Palin than we do of any real move toward egalitarianism in economic policy. I admit it. Disregard the wistful musing above. We better win this damn election.

193

"And then sells, usually at a loss. Which was the original point. What part of this story is confusing you, Shearer?"

The original claim was that foreclosures always result in a loss for the lender which is not true.

219: well, because none of them actually make policy or control the purse strings? Just throwing that out there. Republicans are perfectly happy to dabble in populism as long as it's effectively fenced off away from the gleeful plutocracy. Shit, David Brooks would never be so gauche as to suggest an economically pluralist take sometime when his opinion had a chance of actually mattering.

220: It was almost the first point you made on the thread. If you made list of contributions to the current crisis, that would come up maybe fifteenth on the list of possible contributors. So why would you bring it up immediately? I submit to you that it's no accident.

but if carefully handled could actually have worked, I think.

It's always easy to encourage somebody else to roll the dice in the name of the greater good, but yeah, in the end I think this needs to happen. And there are some signs it is happening/will happen. Obama hasn't completely capitulated to Fox.

Sifu,

The highest ratings, consistently.

I could be wrong but I thought Fox news' ratings were OK compared to CNN or other cable news, but not really all that high compared to the population of potential watchers.

Personally I think in the case of Fox news, the propaganda wing of the GOP, private contributions matter more than ad revenues don't matter so much for them. I can't prove that but it is what I suspect.

It's always easy to encourage somebody else to roll the dice in the name of the greater good

Agreed, this is the problem. Very few individuals could actually shift things though. It's a spiky problem.

Getting rid of Matthews would have solved the bickering problem. They didn't have to get rid of Olbermann too. Matthews has always been a lame, confused fuckup, and Olbermann can barely stand him, for good reason. (Or was it Buchanan?)

MSNBC's ratings might not have been good, but they've never been good. Olbermann has improved their ratings. It's pretty clear that Republican pressure was the reason, and against PF, I don't think that it's a matter of their mobilizing people better. Management, advertisers, owners, and finance all now have an anti-tax-Republican disposition. Around here that seems like an unthinkable thing to say, for reasons that remain mysterious to me after ever so many ungrounded assertions that I'm wrong.

PGD, these people are not going to change the Republican Party, and they're not going to quit being hacks either. They suspect that McCain will lose, and they're trying to salvage their reputations and avoid going down with the ship. If McCain wins, they'll put their tails between their legs and slink back to their Wurlitzer niche, accepting the inevitable demotions in good spirit and resuming their sliming operations.

It's nice to know that we still have people here to be fair to Republicans, though. God forbid that they be wrongly abused.

185 186

You are correct that normally if the property is worth more than the mortgage the owner will sell or refiance. However this does not always happen. For example suppose there is $200000 first mortgage on the property and second through fifth mortgages of $50000 each. And suppose the property is worth $300000. Since the mortgages total $400000 the owner is likely to just walk away. At the auction the first mortgage holder will bid $200000. In theory the second mortgage holder can bid say $210000 but they may not be willing or able to put up $200000 to protect their $50000 loan. So the first mortgage holder can end up with a $300000 property for his $200000 loan.

And of course some owners are irrational. Properties worth hundreds of thousands of dollars shouldn't be seized for a few thousand dollars in back taxes but it does happen. My town seized and sold a condo in my complex for a large profit. Rumor has it the owner was the subject of arrest warrents.

It's pretty clear that Republican pressure was the reason, and against PF, I don't think that it's a matter of their mobilizing people better.

Well, at least you have to acknowledge that they do mobilize better, right? From there we can deal with the correlation/causation problem.

Certainly advertisers and managers have their roles, but they, too, are influenced by the frothing masses.

Prediction: Rupert's media will be more accommodating of common sense and decency in the coming years than they were in the past decade, and this will be in part because liberals are finally catching on to what Republicans have known for a long time: intensity of feeling matters more than raw numbers.

Whats This Mean ...Agonist

Obama:

Democrat Barack Obama says he would delay rescinding President Bush's tax cuts on wealthy Americans if he becomes the next president and the economy is in a recession, suggesting such an increase would further hurt the economy. Nevertheless, Obama has no plans to extend the Bush tax cuts beyond their expiration date, as Republican John McCain advocates. Instead, Obama wants to push for his promised tax cuts for the middle class, he said in a broadcast interview aired Sunday.

"Even if we're still in a recession, I'm going to go through with my tax cuts," Obama said. "That's my priority."

What about increasing taxes on the wealthy?

"I think we've got to take a look and see where the economy is. I mean, the economy is weak right now," Obama said on "This Week" on ABC. "The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers, indicates that we're fragile."

It means Obama really is a University of Chicago Supply Sider. It means, as I have said for years, that the Bush tax cuts will not be rescinded. It means Obama is into upward redistribution and the bottom 80% are still fucked. It means I ain't voting for that asshole.

You are either a supply sider or not. Either trickle-down or not. You believe that letting the billionaires put their money into derivatives and hedge funds increase output and aggregate demand; or taxing income and letting the gov't put it into infrastructure works better.

I hate that fucker, because only a quasi-Democrat can betray the working class this completely.

Bob, they expire on their own in 2010, and he said he wouldn't do anything to prevent that.

Someone on another thread provided the answer: for media, readers and viewers are not the customers. They're the product. The customers are advertisers. Advertisers want lots of viewers, they want the right viewers, they want viewers who are in the right mood, and they don't want a message that bothers them (the advertisers). Would an advertiser accept lower ratings in order to control the media message? Probably yes, because they don't have to, because all the media outlets are angling for the same advertiser pool, so the advertisers get what they want everywhere.

The question was raised somewhere: why isn't anyone going for the niche liberal market? They'd never be #1, but Olbermann has shown that the market is there. For some reason everyone needs to compete to be #1 even if they know they'll lose. they seem more willing to fail to be #1 than to succeed at being #2.

35-45% of the public is not served by TV news.

35-45% of the public is not served by TV news.

100% of the public is not served by TV news, and 35-45% know it.

Bob, they expire on their own in 2010, and he said he wouldn't do anything to prevent that.

And that decision is Congress' anyhow, right? Try breathing into a bag, Bob Chicken Little.

233:Brock, he believes in the key Chicago principle that taxes decrease output and aggregate demand. And he said he has "no plans" to extend them.

Imagine the pressures on him & Congress in 2009-2010 (there will be at least recession). A passion for equality will be required, and a real Keynesian framework, not the bullshit taxcut Keynesianism.

Oh well, you will see. Newberry in comments says it simply:"Obama is a supply side Reaganite who will be nicer to gays."

Bob is right. Ever since he clinched the nomination, Obama has been moving to the center. I expect him to bet better than McCain, but not very good.

I don't know whether to blame him or not. You go into an election with the electorate, media, party, and donors you've got, not the ones you wish you had.

Obama's message has been persistent and unmistakable. Whether he could win without moving to the center, and whether he'd want to, I don't know.

Keynes would recommend against increasing taxes during a recession. Newberry's self-confidence considerably exceeds his actual insight.

Ever since he clinched the nomination, Obama has been moving to the center.

I really hope this didn't surprise anybody.

Someone on another thread provided the answer: for media, readers and viewers are not the customers. They're the product. The customers are advertisers.

Right, we've talked about this before. It's somewhat amazing how few people understand their role in cable television, but I suppose the misunderstanding is encouraged.

It's standard operating procedure, SB, but it's also SOP for Democrats to nominate weak candidates, run weak campaigns, and lose. The Democrats have not found the wisdom of the consultants to be very helpful.

Obama's message has been persistent and unmistakable. Whether he could win without moving to the center, and whether he'd want to

Isn't it more important to wait and see what he actually does as President, rather than squawk about what is said during the general election campaign? In a lot of ways it is why I don't put much stock in the policy pronouncements of either party. They will say anything, but what are they actually able to deliver?

239: Obama is reducing taxes on the majority of Americans. Increasing taxes on the wealthiest would still be a ned decrease.

238: Bob is not right. Bob thinks that Obama is a supply-sider, when there probably isn't a single person who's an actual supply-sider at U of Chicago in the sense that none of them think cutting taxes raises revenues.

Bob also feels that there is no measure of an economy's output other than big physical structures built by burly men with government money. I think most people on this board can suggest other fruitful forms of productivity that aren't so easily captured by measures of contruction activity.

Obama will raise taxes on the rich, sure enough. He may just wait it out until 2011 to do so, but it's going to happen. Centrist Democrats tend to be balanced-budget people anyway, so that's going to be the main pressure, and that demands a boost in taxes to accomodate universal health care spending.

I'm actually now mostly convinced of your "hillbilly theory of agency" explanation of the media, John. It was Cokie's crack about Obama and Hawaii that convinced me. It was so stupid that only someone whose job it was to say things that stupid would say it.

243: Yeah, Charlie Brown should be more trusting.

I'm willing to be favorably surprised, but I'm planning for what I just said.

239:Not so sure. And it might depend on what taxes.

Keynes "deficit spending" was not intended to be permanent, and probably not on top of a huge structural deficit.

The post-war Keynesian economists certainly favored very high marginal taxes and infrastructure/gov't spending, and I suspect they followed Keynes more closely than our current Friedman-infected tools.

If increasing taxes hurts during a recession, how can it help during a recovery?

Bob, they expire on their own in 2010, and he said he wouldn't do anything to prevent that.

But isn't he at least implicitly (by citing a "weak" and "fragile" economy as a reason to not rescind the tax cuts) lending support to the supply-side notion that the way to fix the economy is to cut taxes on the wealthy?

If McCain promises to extend the Bush tax cuts because he says they're good for the economy, and Obama promises he won't extend those tax cuts because he says they're bad for the economy, but then again, Obama says he won't rescind the tax cuts either because that would be bad for the economy...what is Obama saying, exactly? At best, a hopelessly muddled message from the Dems.

247. Well, politics is the art of the possible. Promise the moon, but if you don't have the votes all you have done is piss off your supporters. Even if Obama has huge coattails, getting the necessary legislation is not a slam dunk.

245:So much distortion.

1) The question wasn't ever really about tax cuts increasing revenues, it is about tax cuts increasing output and aggregate demand, thereby broadening the base for tax revenues.

2) No, I really don't believe that financial or service "output" is output, or at least good sustainable output. It is savings not investment.

3) No, he won't. He will deficit-spend or cut spending.

If increasing taxes hurts during a recession, how can it help during a recovery?

Basic behavioral economics: people are a little over twice as stung by a percieved loss as they are by a foregone gain.

Higher taxes when you're already feeling a lower (real or nominal) income: percieved loss

Higher taxes that take a bit more of that raise than they did before: foregone gain

The psychological effects of this stuff can be surprisingly powerful. Bear in mind that during a credit crunch like today, with real incomes hurting the most at the lower income levels, it actually is the rich who drive a fair amount of consumption and production since they're the only ones with asset reserves to draw upon. Making them feel extra squeezed is a great way to stop them from spending down their capital right when you need it the most.

Bob is not right.

How very sad that, even at this late date, this needs to be said. There's your real angle of contempt for the Dem base.

248: The Keynesian story is that during a recession the economy has slack in it. The government can pick up the slack by either cutting taxes or increasing spending. When the economy is functioning normally, it has less slack, and government actions don't have the same effect. (And in at least some versions of Keynesianism a tax cut when the economy is at full employment causes inflation, but doesn't affect real output.)

249: Agreed that it's not particularly adroit politicking.

We actually have no idea any more what would happen if Democrats followed a less-cautious strategy. The last time that happened was either 1984 or 1972. (Carter was a cnetrist "diminished expectations" guy). And yes, McGovern lost badly, 36 years ago.

Probably there's no one in the Democratic Party who's able to run anything but a cautious campaign any more. And a lot of Democrats are hawkish and neoliberal enough that they absolutely don't want to.

You know what I really like about bob's trolling technique? His timing is just impeccable. I bet that two days ago nobody would have taken the bait.

Bob is right at least half the time. I wish he'd quit the performance art part, though.

Bob is right at least half the time

Does that make bob heebie or geebie?

it is about tax cuts increasing output and aggregate demand

Err... They do. It's as simple as that.

The argument is:
1) How much do they cut demand and consequently output?
2) Is the reduction in the overall pie worthwhile given the benefits of redistribution?

Now, good research has shown that marginal tax hikes on the rich are probably the best trade-off one can get on these two factors because they 1) don't hurt overall productivity numbers too much, since rich people seem to just plain like work/money or get paid about the same no matter what they do, and 2) are wonderfully progressive in effect as opposed to consumption taxes, which are the other way to boost revenues with the least effect on output/productivity.

But the fact remains that the economy still gets a tiny pinch when taxes are hiked*. That's why there's no free lunch to be had. The answer to question 1 is a matter of empirical research and some theory, but the answer to question 2 is really a political issue. People like us are united by the common answer to question 2 typically being "yes".

*Unless, of course, you consider manufacturing and government-driven infrastructure spending to be the only "real" economy.

257: bob's an idiot who prefers McCain to Obama. If you can divide that in half, you're a finer parser than most.

Oops, my argument in 259.2 regards tax hikes not tax cuts.

Also, thanks for 254.1, Walt. It says just how much I think in microeconomic terms that I went straight for the individual demand side argument rather than the Keynesian macroeconomic explanation.

259:it is about tax cuts increasing output and aggregate demand

Err... They do. It's as simple as that.

They don't. It's as simple as that. Investment increases output.

See, everybody's a fucking supply-sider now.

FDR massively increased taxes in 1933, and real Democrats/liberals (and even Ike) kept them up until that Plutocrat Kennedy came into power.

255: We actually have no idea any more what would happen if Democrats followed a less-cautious strategy.

Edwards staked out a modestly leftish piece of turf, and Hillary and Obama tripped over themselves to reposition in his direction. I'd love to see a national Democrat try a genuinely populist line - especially one with a generous dose of loathing for malefactors of great wealth. How is it that the Democrats, of all people, are commonly accused in the media of promoting class warfare?

If Bob ever said preferred McCain to Obama, that was the performance art part. Same for Clinton and Obama, I think.

260:Fuck off, Tim. Even the quietest lurker knows I am to the left of Obama. I said I wouldn't vote, because I can't legitmate another Reaganite.

264: "No true bob...," eh?

Really, Tim, he's right about as often as you are. You've come up with some whoppers.

Look, even the most recent gov't handout, this summer's checks, went mostly into savings not consumption or investment. Links upon request.

Tax cuts, especially for the rich, go into savings and finance. Fucking look around a little.

Only gov't can be counted on for investment.

The current lefty plan, Sawicky & "paine' at Thoma's seems to be massive deficits, 1-2T level. I don't Obama or Congress will go that way, and I don't think it will help inequality. Hasn't for thirty years.

Fuck it. Gonna go read some Minsky.

Emerson has spoke, Tim. You have been judged and found wanting. You are awarded one geebie, for being "right" only one half of the time. PS, shouldn't the term be "correct", as the word "right" has political implications to be avoided?

267: I eagerly await the moment when you realize that Kaus must be a Democrat because he says he's one.

How is it that the Democrats, of all people, are commonly accused in the media of promoting class warfare?

Because that's part of the media's job, these days.

because if they aren't continually accused of it, they might start doing it.

Tim, you're the Kaus around here.

Bob claims to have left, but I have a question. If the rich put their tax cuts into"savings" and "finance", what happens then? Savings as in bank deposits, which are then lent to borrowers? And Finance is what? One of the problems of all of these asset bubbles is that there is too much money chasing yield. If, as bob advocates, government seizes some of that money to build infrastructure you get some "Bridge to Nowhere"activity. Boom and bust is not exactly a new concept.

225

"It was almost the first point you made on the thread. If you made list of contributions to the current crisis, that would come up maybe fifteenth on the list of possible contributors. So why would you bring it up immediately? I submit to you that it's no accident."

There are two separate issues, how much did lower standards at F&F contribute to the crisis in general and how much did they contribute to the problems of F&F in particular. To the general crisis not so much, to the problems of F&F in particular quite a bit (at least in my opinion).

Is it an accident that I tend to bring up things you don't want to hear? Probably not.

261: I was meaning to thank you for the detailed info you dug up on the Fannie and Freddie rescue.

262: Some amount of finance really does go to investment. When a company wants to build a new factory, they go to financial markets to pay for it. Some of the Internet boom crazy money went to pay for Internet infrastructure, and for companies like Google. (Some of went to The Who, which is arguably less deserving.)

FDR was in many ways a pre-Keynesian figure. I'm curious what, if anything, Keynes said about FDR's tax hike. Keynesian macroeconomics is purely a short-term explanation of the business cycle. The argument that government needs to invest more is a longer-term question.

Yes, James, I don't want to hear about how much you hate poor people and minorities. That's the kind of thing you should save for your therapist or your priest.

Is it an accident that I tend to bring up things you don't want to hear? Probably not.

Please don't bring up Bob Seger.

Apo, did you have a problem with the girl in the Hollywood Hills, or the thought of Tom Cruise in his underwear too much for you?

James, my problem is that you never come around except to disagree, and your first post is always a gotcha. Sometimes you're right, and sometimes you're interesting, and sometimes you're neither, but it's monotonous and annoying to deal only in gotchas.

There's a lot of disagreement here, but you're the only one I can think of who shows up only to disagree. The effect is very unfriendly, and we tend to be unfriendly in our responses too. We do give you credit for arguing rationally and for sometimes bringing information into the argument.

Keynesian macroeconomics is purely a short-term explanation of the business cycle. The argument that government needs to invest more is a longer-term question.

GT was a long term plan.

General Theory, Chapter 24

Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth [savings?], so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed.

Chapter 24 ain't easy, I certainly don't claim to understand it, but it is the purpose of the rest of the book.

Socialization of investment.

bah. the editorial "[savings?]" was suppose to follow "abstinence of the rich"

To the general crisis not so much, to the problems of F&F in particular quite a bit (at least in my opinion).

James, I was unable to follow the Village Voice link beyond the first page (incredibly slow loading time). Is there some justification for this opinion there? Or do you have some other independent justification?

There's a lot of disagreement here, but you're the only one I can think of who shows up only to disagree.

And as if on cue, bob writes the next comment.

These things are all matters of taste, but I enjoy Unfogged for its tradition of high-level trolling. The only reason SCMTim is the Kaus of Unfogged is he inherited that role from the Founding Mullah.

Bob often comes by to talk about non-political topics though, or just to chat.

284: I know. I understand the distinction you are making.

Gonna go read some Minsky.

Marvin? Because that'd be too funny.

||

Our trolls have got these trolls beat, that's for sure.

|>

286:Hyman Minsky John Maynard Keynes, McGraw-Hill 2008.

Some Minsky:

In the �nal chapter of The General Theory, Keynes touches on three
broad policy questions--in addition to employment policy--to which the
argument is relevant. These are income distribution, the socialization of
investment, and conflict among nations.
...
It may be that the euthansia of the rentier in the form that Keynes envisaged requires prior constraints on the growth of relative needs, and the constrained growth of relative needs requires an incomes distribution based on low or no income from capital owndership, i.e, the prior euthanasia of the rentier.
...
Thus the way the economy has developed is in marked contrast to the idea Keynes advocated, which was that if investment is inadequate to achieve full employment, then it is not desirable to induce a more rapid pace of investment by providing direct stimulants to private investment, but rather "measures for the redistribution of income in a way likely to raise the propensity to consume (GT, p 373" should be undertaken.

[ed. the point during recession isn't increasing ag demand thru deficits, the point is exactly redistribution. Tax increases during recession.]
...
skip the neo-angellism
...
Conclusion
Keynes believed that the policy implications of his theory were profound;
not only did the theory point to ways in which a closer approximation to
full employment can be sustained, but he envisaged that continuing full
employment combined with an emphasis on consumption and public goods
would lead to an egalitarian change in income distribution. The rentier
income of the capitalist would disappear and the upper tail of the income
distribution would be snipped off by taxation. He believed that both meas-
ures to raise the consumption function and the socialization of investment
were necessary to sustain full employment and were desirable as social goals
...
We are not talking about communism or even socialism here. We are simply talking about eating the rich. And I mean making the fuckers extinct.

And at least for Keynes and Minsky, this isn't directly a class-envy or social justice argument, but a macroeconomic argument that full employment and long-term stability is impossible when there is a rentier class that plays games with finance.

An econometric argument that the rich must be snack food.

Bob is rocking this thread. He's making a deep and important point. This kind of quote by PMP re whether tax cuts increase output during recession:

Err... They do. It's as simple as that.

is a massive oversimplification of the type encouraged by undergrad econ, the business pages of the papers, and the extreme simplifying assumptions built into macro models.

It doesn't have to be redistribution to lower classes to spend, though. It can be anything that channels money back into the investment cycle in a time of low aggregate demand.

But right now, I sort of wonder if our aggregate demand is lower than our total productive capacity at a reasonable dollar valuation. In other words, if other countries have been basically giving us stuff for free. That calls for a different solution than juicing aggregate demand. Just throwing it out as a possibility though -- it has austerity implications I don't like. As Bob says above, a lot of people on the left want to amp it up on deficits to sustain or even increase demand. It is true that, pre-Fannie and Freddie, anyway, our public debt was not out of line with other OECD countries. Fannie and Freddie might change that, though.

WHOOPS -- first sentence, last para, should be "I sort of wonder if our aggregate demand is HIGHER than our total productive capacity at a reasonable dollar valuation".

Totally changes the meaning, that was the worst word to screw up in the whole post!

287: great comments on that page too. My favorite:

oceanmermaidMY HUSBAND'S PERSONALITY RESEMBLES THE 2ND HALF OF ALL THE IRRITATING COMMENTATOR ARCHETYPES--HIS EMAIL IS SHAMOON_51@YAHOO.COM.....

Posted on 9/8/2008 8:26:00 AM

287 is great
i couldn't classify where ToS fits into

Can I just vent how infuriating it is that Wall Street types are paid according to commission? As though the size of the transaction which you are facilitating has ANY FUCKING CORRELATION with the amount of good you are providing to society?

This bothered me when I read it before, but I've only now accumulated enough real work here on my desk that I feel the need to comment on it.

Two problems:

(1) Heebie, are you under the impression that the amounts most people are paid are in any way based on any correlation to the amount of good they provide to society? No? So why single out Wall Street? (And, in the post, I think you're talking about Wall street firms, not individuals, which only makes the question more ludicrous. Do you think most firms' profits are in any way directly correlated to the good they provide to society?)

(2) Like everyone else, Wall Streeters are paid, generally, based on some rough correlation to the revenues they bring for their employers. (And Wall Street firms' profits are based on a rough correlation to the profits they help generate (or other value they help add) for their clients.) And bigger deal do mean bigger profits (at least anticipated), in absolute dollars. Factor in that complexity also generally scales with deal size, and commission-based compensation arrangements start to make sense.

This may have already all been said; I haven't read the thread.

So why single out Wall Street?

Perhaps because she thinks that the discrepancy is especially bad there. Perhaps, from reading the newspapers, she also suspects that Wall Street, finance in general, and the upper management of the larger corporations are overpaid, and in many cases doing harm rather than good.

That's my guess.

This kind of quote by PMP re whether tax cuts increase output during recession

I wasn't talking about short-term effects of tax cuts in a recession. Tax changes should not be made for short-run effects, though timing of those changes can be shifted. Of course you're right that some redistribution in the short-term can goose the economy since marginal dollars are much more likely to be spent by the poor than the rich, but I would think this is best accomplished by deficit spending in the short-run to be made up by progressive taxation covering that debt upon recovery.

I'm quite sure the data on long-term effects of tax increases or decreases is pretty clear, even without resorting to any theory. There's just not any evidence that raising the marginal tax rate on any group will lead to more long-term growth. And there certainly doesn't have to be in order to think it's still a good idea.

282

"James, I was unable to follow the Village Voice link beyond the first page (incredibly slow loading time). Is there some justification for this opinion there? Or do you have some other independent justification"

You might try the link again, it appears the server was having problems. The Village Voice story points out that Cuomo increased one affordable housing goal from .42 to .50 (it was increased further to .56 under Bush). This is a significant push towards lower quality loans. It seems reasonable to me to assume that if the government pushes an enterprise to make riskier loans on a large scale for political reasons and that the enterprise later goes bust that the government pressure contributed. Similarly I would assume this also in cases where the government pushes insurance companies to write policies for high risk drivers or homeowners in hurricane zones (etc.) which they would not have written voluntarily.

This Washington Post story gives additional details.

" In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders."

"In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals."

"William C. Apgar Jr., who was an assistant HUD secretary under Clinton, said he regrets allowing the companies to count subprime securities as affordable."

298

Btw here is a simple arithmetic problem. If F&F increase the fraction of loans they make to poor people from .42 to .56 and they do this solely by making additional lower quality loans to poor people which they would not have otherwise made (rather than by reducing the number of loans they make to rich people) what fraction of their new portfolio will consist of these riskier lower quality loans?

This is an attempt at blame spreading. Freddie's management was greedy and not especially competent. Their lobbyists were extremely capable, though; undesired government directives (for transparency or to limit profitable activity) were repeatedly blunted or reversed. This particular directive, which they interpreted to their great profit while housing prices rose was not something they fought.

Here is another: how many poor people buy second homes? WaPo's subprime includes "Alt-A", also once forbidden to Freddie. It is still not known what fraction of subprime loans went for speculative second homes, but not prime certainly does not imply a poor borrower.

It seems reasonable to me to assume that if the government pushes an enterprise to make riskier loans on a large scale for political reasons and that the enterprise later goes bust that the government pressure contributed.

There's that word "assume" again, James. I repeat my recommendation to read the link in 85. The GSEs changed their risk profile dramatically this century, but the first-order explanation is that it was an attempt to hold market share rather than an attempt to provide affordable housing, and the actions of this weekend have very little to do with the GSEs' participation in subprime.

There's just not any evidence that raising the marginal tax rate on any group will lead to more long-term growth

I consider This to be evidence. And the marginal rates in the US 1933-1981.

Now if you want to claim there is some politically-viable way to substantially decrease inequality without high marginal rates, I suppose I can listen. But my claim pretty much is that all tax cuts and gov't deficits tend to increase inequality, and decrease economic efficency. I made the argument above, way above, that tax cuts targeted at lower quintiles are matched by decreases in wages & benefits. There is evidence for that, too.

I think there is a lot of evidence, but I have come to realize there won't ever be enough proof for the likes of PoMo and Shearer.

I'm quite sure the data on long-term effects of tax increases or decreases is pretty clear, even without resorting to any theory.

You have got to be kidding.

Of course you're right that some redistribution in the short-term can goose the economy since marginal dollars are much more likely to be spent by the poor than the rich, but I would think this is best accomplished by deficit spending in the short-run to be made up by progressive taxation covering that debt upon recovery.

Sure, I understand, but it takes a lot of theory to get to even this conclusion. Also, what is the effect of deficit spending on interest rates? I don't know and neither do you. (Taxes may also affect interest rates, of course).

And following up on 304: Nobody is taxing for the sake of taxing. The impact of tax rates on growth depends on the effect of A) borrowing on growth B) government spending on growth. Those things vary on a case-by-case basis, they are very poorly understood and hard to generalize about.

Government borrowing is a very mysterious thing. Sure, theorizing about its effects is what half of macro is devoted to. But I don't think it's really understood all that well. I mean, one of the constructs underlying Keynesian theory is the aggregate productive *capacity* of the economy. We have a hard enough time measuring what we actually do produce, let alone what we *could* produce under all the different distributional arrangements we could have.

Jay Rosen says that the episode of This American Life that Heebie mentions in the original post is "their most popular episode ever. [...] It beats its nearest competitor by 50,000 downloads."

It's called The Giant Pool of Money. Rosen says it's valuable because:

Explanation leads to information, not the other way around.

I noticed something in the weeks after I first listened to "The Giant Pool of Money." I became a customer for ongoing news about the mortgage mess and the credit crisis that developed from it. (How one caused the other was explained in the program's conclusion.) 'Twas a successful act of explanation that put me in the market for information. Before that moment I had ignored hundreds of news reports about Americans losing their homes, the housing market crashing, banks in trouble, Wall Street firms on the brink of collapse.

In the normal hierarchy of journalistic achievement the most "basic" acts are reporting today's news and providing current information, as with prices, weather reports and ball scores. We think of "analysis," "interpretation," and also "explanation" as higher order acts. They come after the news has been reported, building upon a base of factual information laid down by prior reports.

In this model, I would receive news about something brewing in the mortgage banking arena, and make note it. (""Subprime lenders in trouble: check.") Then I would receive some more news and perhaps keep an even closer eye on the story[...] I thus graduate from the simpler to the more sophisticated forms of news as I learn more about a potentially far-reaching development. That's the way it works... right?

Wrong! For there are some stories--and the mortgage crisis is a great example--where until I grasp the whole I am unable to make sense of any part. Not only am I not a customer for news reports prior to that moment, but the very frequency of the updates alienates me from the providers of those updates because the news stream is adding daily to my feeling of being ill-informed, overwhelmed, out of the loop. I respond with indifference, even though I've picked up a blinking red light from the news system's repeated placement of "subprime" items in front of me.

The whole thing. And if you're not an audio person, read the TAL transcript (pdf).

'Twas a successful act of explanation that put me in the market for information

"'Twas", huh?

"'Twas", huh?

You ought to like him; he's another long-form blogger.

The GSEs changed their risk profile dramatically this century, but the first-order explanation is that it was an attempt to hold market share rather than an attempt to provide affordable housing, and the actions of this weekend have very little to do with the GSEs' participation in subprime.

If it wasn't for the GSE's foray into downmarket loans, would they be facing losses large enough to require them to be bailed out?

Good god, is that what I've become?

If it wasn't for the GSE's foray into downmarket loans, would they be facing losses large enough to require them to be bailed out?

Yes, because the value of the collateral has eroded to such a point. Didn't help, to be sure. I wonder if there isn't a better way to appraise the property other than last comp sold. I have no idea what that would be.

I wonder if there isn't a better way to appraise the property other than last comp sold. I have no idea what that would be.

Divergence from the historical levels of price to income (just as divergence from historical P/E ratios in equities) should make regulators start yelling for higher levels of capitalization etc.

The punchbowl does have to be taken away.

The punchbowl does have to be taken away.

A given asset is worth what someone is willing to pay. The market clearing price has yet to be established, but it does not establish the market going forward to know what the last guy paid.

Here is another good paper for those who claim Keynes.

The key is to increase money expenditures sufficiently to produce full employment. Keynes, however, did not endorse just any fiscal policy and he specifically objected to those that aimed to stabilize consumption as policies for full employment. This would rule out contemporary unemployment insurance, which he did not believe would solve the unemployment problem; it would also exclude modern tax rebates, various consumption subsidies, and other transfer payments

Keynes's objections would also rule out Post Keynesian proposals of a social dividend (as in
Robinson [1949]),4 and basic income guarantees (as in King [2001] and Sawyer [2005]).

It's about public works, both in contractions and expansions.

I'm a sucker for WPA murals.

311

"Yes, because the value of the collateral has eroded to such a point. ..."

Doesn't matter if the collateral is under water if the borrower is still willing and able to make the payments.

"... I wonder if there isn't a better way to appraise the property other than last comp sold. I have no idea what that would be."

Requiring loan values to be determined by the lowest market value over the previous 3 years would discourage bubbles. At least as long as the appraisals are honest.

A given asset is worth what someone is willing to pay.

No the price is determined by how much money/credit somebody who wants it has available. Your statement assumes an infinite amount of money & credit. If nobody has 50 million, Monets go a little cheaper.

I am that much of a Friedmanite.

Doesn't matter if the collateral is under water if the borrower is still willing and able to make the payments.

Yes and no. One of the regulatory changes from the last go round is having the lenders mark to market the underlying value of the collateral.

312

"The punchbowl does have to be taken away."

Stock buyers are limited to 50% margin. I think there is something to be said for limiting home buyers to 80% margin (ie you must put at least 20% cash down). Of course this doesn't help with fraud (seller lists $400000 house for $500000 and gives buyer $100000 for his down payment).

Sorry, bob. Willing and able to pay. I give you one geebie for being correct.

Which I guess is one of the main arguments about easy loan standards and housing prices.

If the credit hadn't been available, the McMansions wouldn't have been built or the loans approved. I think this is called an endogenous theory of money?

Demand certainly doesn't create output. Say died long ago. You need money.

Fuck, my brain is starting to hurt.

From the 314 link, which is pretty good.

If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semipublic bodies, a long-term program of a stable character should be capable of reducing the potential range of fluctuation... (Keynes 1980: 322)

Monetary Keynesianism is so fuckety fuck fucked it needs to fricking die. Now.

Goodnight.

I think monetary Keynesianism has been surprisingly successful, though only a certain very specific things. If it weren't for monetary Keynesianism (which is basically what the government has been practicing), we would already be in the midst of Great Depression II. It seems to be effective at smoothing out the business cycle, but leaves most other social problems (inequality, for example) untouched.

It seems to be effective at smoothing out the business cycle, but leaves makes most other social problems (inequality, for example) untouched worse.

One such problem, according to Minsky in the late 70s, being militarism/military Keynesianism.

(additional lengthy commenting suspended upon request of dogs.)

A guy on NPR just said that Fannie and Freddie are by far the largest corporations in human history. He then took it back and suggested that by some ways of calculating, the East India Company was larger.

Finishing, 325: historians is that right?

325: I could be out to lunch, but it seems to me any measurement of corporations that puts stuff like F & F ahead of EIC (or the Dutch, etc) is insane.

I certainly hope that you use plenty of spit when you say"dethspicable"

325: Yeah, I'd say it's faulty. I bet that reckoning counts all their guaranteed mortgages as part of their assets, even though an utterly unforeseen disaster in the U.S. mortgage market would cause maybe 5% of those guarantees to move directly onto their books.

If you want to measure it that way, I'd bet the FDIC is bigger since it actually covers the entirety (well, or a large proportion) of U.S. bank deposits while FNMA and FDMC only guarantee or hold about $10 trillion or less in mortgages.

Depends whether you define "large" as big or rich. The world is so much richer today than it once was, that a corporation that owned 2% of the planet today would be wealthier than a corporation that owned 100% of the planet in the year 1800.

330:Depends on how you define "rich"

Quiggin, who has an oil prediction held against him, nevertheless kicks some neoliberal ass.

His new point, that I haven't seen emphasized before, is that F & F would be much more easily managed if the entirety sum total everything of the private US Financial System wasn't in despicable incompent corrupt collapse.

Banker should mean "scum" for at last another generation.

330: Right, but that seems like a pretty silly way to go about comparing companies.

Here's Kenneth Rogoff via Thoma

Lehmann's going down.

I know there be people around these parts who make their money losing others (hi d`), but exactly why should I strain to see the few good folk in this morass? There are IIRC 100 small local bank failures and ten times as many on the watch list. And it has just begun. This is the systemic failure od a class.

If these were hospitals, showing some equivalent kind of corruption and incompetence, would we be righteously furious at the lack of self-regulation and peer pressure?

Scum, I say.

332: well, as soon as you say a company is the "largest in human history" you've committed yourself to silly comparisons, because there is no good way to compare "large" across vastly different eras in human history.

334 has a point.

well, as soon as you say a company is the "largest in human history" you've committed yourself to silly comparisons, because there is no good way to compare "large" across vastly different eras in human history.

Huh? I have the largest cock in human history. Notwithstanding any gaps in our historical cock-records, how is this a difficult comparison to make?

I think what you meant to say was that it's difficult to make this comparison unless we define what we mean by "large". But that doesn't really have anything to do with history, per se.

Between 330 and 334, my point was quite clear. Brock just wanted a chance to inform us about the size of his cock.

Yes, your point was quite clear, and it was quite clearly not at all what you in fact said. I was only pointing out that what you actually said was silly, and offering a correction that brought what you said in line with what you quite clearly meant.

I don't like being pedantic, but someone's got to do it around here, lest our standards go to hell.