The Next Big Stink, The killjoys are back. What do they have in store for us?

[Lurker]

Is it better for people to starve instead or remain unemployed because the private sector is unable or willing to hire them?  People don't feel too good about themselves in bread lines, that's why the new deal came about.

Those people have no relatives?  Will they really starve to death?  Or will they suck up their entitlement attitude and go earn food/money somewhere?  They might not have felt good about themselves in the bread lines but they didn't starve to death either.  Studies have shown that it wasn't the New Deal that pulled the country out of recession but the start of WWII and the buildup of the manufacturing sector.

If the govt wasn't sucking 50% or more from each worker (Social Sec 15%  Fed income tax 20-25%  state income tax 5% not to mention property taxes, sales taxes, govt fees, etc) then think how much more disposable income the consumer...who drives the economy...would have to spend.

You can't have it both ways rick.  Either the govt gets into socialism supporting an ever growing segment of the population or the govt lets the market place and social network (friends, family, church) be the safety net.  The social support was started by FDR, expanded by LBJ and now is being expanded even further by BHO.  AZNd with each expansion more & more people are made to feel that they are entitled to be supported by the govt.

Are you really going the route of the New Deal did not work and did not benefit this country?  I've heard the Republican spokesholes say this a lot over the last few days.

Depends on how you define "work".  Did the New Deal establish and build some great public works like dams, bridges and the interstate system?  Yes, in those terms it was successful.  Did the New Deal pull us out of a recession?  No, it did not.  Gearing up for war (incl selling supplies to our allies - don't forget the main reason the US got involved in Europe during WWII was Nazis attacking shipping of war goods) as well as pentup domestic demand is what pulled America out of the recession.  Putting people back to work in a free market society producing goods lifted America up.  The social programs put in place have been a constant drain on our economy by sucking money out (by taxation) and then putting it back very inefficiently (govt handouts).   

Btw, the days of war pumping back up an economy is long gone.

Not necessarily.  If the govt waging the war is not mired generations deep in debt then deficit funding of war can be a stimulus.  It puts more people on govt payroll (soldiers) and pumps money into the industrial complex.  But when a govt funds the war through more & more borrowing then it doesn't add to the economy it actually hurts it by sucking the capital needed by businesses out of the system through govt borrowing..

[westkoast]

Is it better for people to starve instead or remain unemployed because the private sector is unable or willing to hire them?  People don't feel too good about themselves in bread lines, that's why the new deal came about.

Those people have no relatives?  Will they really starve to death?  Or will they suck up their entitlement attitude and go earn food/money somewhere?  They might not have felt good about themselves in the bread lines but they didn't starve to death either.  Studies have shown that it wasn't the New Deal that pulled the country out of recession but the start of WWII and the buildup of the manufacturing sector.

If the govt wasn't sucking 50% or more from each worker (Social Sec 15%  Fed income tax 20-25%  state income tax 5% not to mention property taxes, sales taxes, govt fees, etc) then think how much more disposable income the consumer...who drives the economy...would have to spend.

You can't have it both ways rick.  Either the govt gets into socialism supporting an ever growing segment of the population or the govt lets the market place and social network (friends, family, church) be the safety net.  The social support was started by FDR, expanded by LBJ and now is being expanded even further by BHO.  AZNd with each expansion more & more people are made to feel that they are entitled to be supported by the govt.

Are you really going the route of the New Deal did not work and did not benefit this country?  I've heard the Republican spokesholes say this a lot over the last few days.

Depends on how you define "work".  Did the New Deal establish and build some great public works like dams, bridges and the interstate system?  Yes, in those terms it was successful.  Did the New Deal pull us out of a recession?  No, it did not.  Gearing up for war (incl selling supplies to our allies - don't forget the main reason the US got involved in Europe during WWII was Nazis attacking shipping of war goods) as well as pentup domestic demand is what pulled America out of the recession.  Putting people back to work in a free market society producing goods lifted America up.  The social programs put in place have been a constant drain on our economy by sucking money out (by taxation) and then putting it back very inefficiently (govt handouts).   

Btw, the days of war pumping back up an economy is long gone.

Not necessarily.  If the govt waging the war is not mired generations deep in debt then deficit funding of war can be a stimulus.  It puts more people on govt payroll (soldiers) and pumps money into the industrial complex.  But when a govt funds the war through more & more borrowing then it doesn't add to the economy it actually hurts it by sucking the capital needed by businesses out of the system through govt borrowing..

But I thought the government has never produced work!  Boy it's hard to keep up with Michael Steele and Rush Limbaugh saying two different things at once.  I don't see how people can do it.

I say it is long gone because we tend to be farther ahead of our opponents when it comes to war that we don't really need to gear up to fight.  If you look at the last 3 major wars, starting with Desert Storm, what we have at any given time is still quite a bit more than what the enemy has.  We don't really need to start a massive build up in anticipation of large scale battles against large enemies.  Right now we are fighting primitive opponents in the sense of their weapons and technology.  Much different than going to war with entire countries like Germany or Japan.

[Ted]

I've taken a few graduate level finance and economic classes, but I don't pretend to know as much as Zig, Rick, or Lurker. Every day I hear people blaming Reaganomics or Republicans or Conservatives for the current problems in the financial sector.

Some of you smarter people, please correct me if I'm wrong in the following line of thought:

Banks failing, Lehman Brothers bankrupted, billions of losses at Merrill Lynch . . . all of this was precipitated primarily by the loss of value in complex financial instruments made up of sub-prime or high-risk mortgages, many of which should have never been made. These instruments were bought, sold, traded back and forth until they were grossly overvalued and their inherent risk was almost completely ignored. When the people who couldn't afford homeownership or those who were allowed to "buy" too much house (thanks in large part to aggressive ARMs, interest-only loans, and no-money-down loans) began to default on their mortgages, these complex financial instruments began to lose value quickly. Large banks and financial institutions that had invested heavily in these instruments began to take heavy paper losses, and later, began to experience major cash shortages due to rising costs of insuring themselves against such losses. Insurance giants like AIG began to fold up and die because they were having unprecedented loss claims against their policies on these complex financial instruments made up of largely bad mortgages.

Bad news piled on top of bad news and the American public began to get worried once the news media began sounding the alarm and once politicians started using the crisis as political capital. The stock market crashed, property values tanked, the credit market shriveled up, giving people less money to spend, companies cut jobs, and widespread panic set in.

As I see it, at the bottom of all of this are just a few factors, one big fat one being all of these aggressive loans. Why were so many bad loans made so aggressively? Here's the chain as I understand it.

1. The 1977 Community Reinvestment Act (which had noble intentions IMO) requires banks and lenders to give people from low-income areas or minorities the same access to credit as everyone else. It did not, however, require those banks to make bad loans.
2. During the Clinton Administration, government-backed companies, Fannie Mae and Freddie Mac (the FMs) were instructed to lower their standards for the loans they purchased from primary lenders. The two companies began purchasing more aggressive, more risky loans at an impressive rate. Credit to buy a home would soon be available to millions who before would never have qualified.
3. Lending institutions, knowing that their loans would be purchased by Fannie Mae and Freddie Mac, invented aggressive, highly accessible, but absurdly unwise (for the average consumer) and even predatory lending instruments. No money down, no interest, two-year adjustable rates--no sane person could really think these things were a good idea for the consumer. But they got people into homes, and that's all that mattered.
4. The market for homes exploded, millions who were not part of the consumer base joined the market, and spent trillions on new homes. Homebuilders erected hundreds of thousands of homes each year. The market was flush with money; the economy rode unprecedented highs.
5. When ARMs came up for adjustment, people started to get hit. Payments went from $750 on a $150K home to $1200, and people couldn't come up with the money. Their credit card balances started to balloon, and bankruptcy and foreclosure loomed close.
6. Around 2000-2003, wise people start to notice what is brewing. Regulators begin to take a closer look at the situation. Eventually, they find what they think is danger at Fannie Mae and Freddie Mac. Evidence shows that Fannie Mae is cooking books so their earnings reach, to the penny, the maximum EPS goals that allow executives to take the highest possible bonuses. Regulators blow the whistle. Congress holds hearings. Some politicians cry that the sky is falling and we must have better regulation of Fannie Mae and Freddie Mac or we'll be hit with a crisis of epic proportions. Others like Barney Frank or Maxine Waters, say there is no crisis, stop crying wolf, without the FMs, we wouldn't have no-interest, no-money-down loans that make homeownership available to the unwashed masses. This is a good thing!
7. The hearings go on for a while, but little real action comes of them. The McCain-sponsored bill (S.190) didn't make it out of committee with an 11 to 9 vote split exactly on party lines. Things are left basically as they are.
8. Time passes, the crisis brews. Fannie Mae and Freddie Mac have to be rescued, beginning the chain reaction that results in losses at the financial institutions that built and bought the bad instruments based on the loans the FMs bought. Those institutions have to be rescued. The companies that insured those institutions against losses have to be rescued. And we're in a crap-hole. Now everyone needs to be rescued.

Am I off base on this chain of events? Have I got it wrong? Did the sub-prime EPIC FAIL not precipitate much of this crisis?

[Ted]

I say it is long gone because we tend to be farther ahead of our opponents when it comes to war that we don't really need to gear up to fight.  If you look at the last 3 major wars, starting with Desert Storm, what we have at any given time is still quite a bit more than what the enemy has.  We don't really need to start a massive build up in anticipation of large scale battles against large enemies.  Right now we are fighting primitive opponents in the sense of their weapons and technology.  Much different than going to war with entire countries like Germany or Japan.

We are far ahead of many opponents, at least the ones we dare to fight. The truth is, we haven't fought a "major" war since WWII. Vietnam wasn't exactly a skirmish, and we did lose tens of thousands of people. Korea was a case of intense, bloody fighting confined to a small area. The Gulf War was an annhialation. The Iraq War is a messy cluster foxtrot, but a relatively small, inexpensive one.

But World War 2 required the efforts of the entire country to win. We committed and lost hundreds of thousands of people. Tens of millions (including women) went to work in factories for no other reason than to support the war effort. People underwent rationing and participated in iron and metal recycling drives. We were fighting on multiple GIGANTIC fronts against dozens of countries. We can't even conceive of that kind of war these days. That kind of war can still rescue any economy. But it's not worth the price.

If fact, just for fun, here's a list of the countries who sent troops to war:

ALLIES
Poland
Australia
France
French Indochina
French Morocco
New Zealand
United Kingdom
Indian Empire
Crown Colonies
British Burma
British Malaya
Newfoundland
Nepal
South Africa
Canada
Czechoslovakia (government-in-exile)
Norway
Denmark
Belgium
Belgian Congo
Luxembourg
Netherlands
Dutch East Indies
Free France
Greece
Yugoslavia
Soviet Union
Tannu Tuva
Mongolia
Panama
United States
Alaska
American Samoa
Guam
Hawaii
Puerto Rico
U.S. Virgin Islands
Costa Rica
Dominican Republic
El Salvador
Haiti
Honduras
Nicaragua
Republic of China
Philippine Commonwealth
Guatemala
Cuba
Mexico
Brazil
Ethiopia
Iraq
Bolivia
Colombia
Iran
Yugoslavia
Liberia
Peru
Bahawalpur
Ecuador
Paraguay
Uruguay
Venezuela
Turkey
Lebanon
Syria
Saudi Arabia
Argentina
Chile

vs.

AXIS
Germany
Japan
Italy
Hungary
Romania
Bulgaria
Yugoslavia
Finland
Iraq
Thailand
Manchukuo (Manchuria)
Mengjiang (Inner Mongolia)
Wang Jingwei Government of China
Burma (Ba Maw regime)
Philippines (Second Republic)
India (Provisional Government of Free India)
Vietnam
Cambodia
Laos
Montenegro
Slovakia (Tiso regime)
Albania
Croatia
Greece
Pindus and Macedonia
France (Vichy regime)
Denmark
Soviet Union
Spain

[ziggy]

I simply want to know why Obama's stimulus is a putrid representation of all that is filthy about liberal free-spending idealogy and Bush's stimulus was necessary for our economic survival if you read 3rd rate conservative hacks like the guy who wrote your article.

Let's label this, what, 836, maybe $837 billion pakcage the greatest liberal tragedy for fiscal responsibility in the (cue Bill Walton) HISTORY OF MANKIND!!  I'll bet my lunch money for the month, this guy was nowhere to be found when Reagan's wee liddle nephew Georgie Dubya got a free pass for $700 billion spent mostly on Corporate junkets and Executive bonuses.  Give me a break!

Skandery,
I am not going to try and rationalize TARP.  As I have said on a number of occasions if you are going to have government intervention first and foremost it should be to support the money supply.  That is one of the absolute fundamental functions of government. 

I have many concerns with TARP, how it was implemented and how it was changed and modified as time went on.  I also am not going to make any rationalizations about the behaviors and actions by bankers, and traders in regards to bonuses and salaries.  The garbage that was going on in this regard is beyond the pale.  These people live in a land of make believe, and the fundamental lack of corporate and board oversight is absolutely egregious.

At the same time I want to place TARP in its proper context.  On Sept 13 and 14 Lehman was imploding, and basically became insolvent on that weekend.  On Monday as a result of Lehman?s default AIG was on the verge of collapse as well, and the US Gov?t let Lehman fail and bailed out AIG.  Then on Sept. 15 the government shut down the redemption of money market funds, and within a couple of days they placed an FDIC guarantee of money market funds where none existed before.  By Thursday of that week Wa-Mu was taken over by the FDIC, as well as another bank, can?t recall which right now.  TARP was a response to this circumstance.

I heard recently an interview from a Congressman for Pennsylvania on CSPAN.  Now I know that politicians have a tendency towards exaggeration, so I am not going to say that what he is saying is absolutely true, but this is what he said.

On September 15 there was a ?tremendous draw-down of money market accounts in the United States, to the tune of $550 billion."?..?The Treasury opened its window to help. They pumped a $150 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened. If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion  would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

Obviously you can see the urgency and potential devastating effects of this.  As I said, if the government is going to do anything it must protect the money supply first.  Here are two graphs plus the websites where I got them.  As you can see from the first deflation fears exploded almost as this crisis was happening.  Deflation in the sense that we were seeing a run on the banks, and debt was being liquidated on an unprecedented scale.  Slow measured deflation is not an issue, but rampant irrational deflation is potentially cataclysmic.  As you look at the first graph deflation fears are abating, and that is what TARP was about.  Look at the second graph, and this is the Fed balance sheet.  It exploded in response to the run on money market funds, and the fear of uncontrolled deflation.  It has since declined in concert with the deflation fears.

http://gregmankiw.blogspot.com/
Deflation Fears Subside

For some reason I can't get the image to display in this message so here is the path

http://3.bp.blogspot.com/_djgssszshgM/SZLTDhXMy3I/AAAAAAAAAzY/lVpzLYqHI9M/s1600-h/inflation+compensation.png





http://stefanmikarlsson.blogspot.com/2009_02_01_archive.html

Fed Balance Sheet Contraction Continues
 


So while I have some serious concerns with some things regarding TARP, it did what it was initially intended to do, and without it the results would have been undeniably far, far worse.

With regards to the present stimulus package and TARP.  Hold Bush accountable for all that he was accountable for.  In fact Bush and his party were held accountable for many things by the voters, and were summarily ejected from office.  No doubt there were abuses of TARP, but the notion that the majority was spent on corporate junkets and executive bonus is patently absurd on its face, and you know it.

At the same time to choose to use the portions of TARP that were failures as justification for the stimulus bill just assures that we will get more corruption and lack of accountability.  Bush is gone and his party was trounced.  Obama is now the guy in charge.  He should be held accountable for what he does and does not do.  This bill is a reflection of him, and his policies, and it has nothing at all to do with the previous occupant of the White House.  If you are happy and content with running up nearly a trillion $?s in debt for what is effectively one gigantic uncontrollable giveaway to favored constituencies, with little to no expectation that it will make any impact on what ails us is certainly your prerogative.  That of course doesn?t mean that the rest of us should just shut-up about this just because Obama won the last election, or because some executives took bonuses after taking TARP money.  You subsidize something you get more of it, you tax something you get less of it, and if you tolerate something rest assured you will keep on getting it.

[westkoast]

I say it is long gone because we tend to be farther ahead of our opponents when it comes to war that we don't really need to gear up to fight.  If you look at the last 3 major wars, starting with Desert Storm, what we have at any given time is still quite a bit more than what the enemy has.  We don't really need to start a massive build up in anticipation of large scale battles against large enemies.  Right now we are fighting primitive opponents in the sense of their weapons and technology.  Much different than going to war with entire countries like Germany or Japan.

We are far ahead of many opponents, at least the ones we dare to fight. The truth is, we haven't fought a "major" war since WWII. Vietnam wasn't exactly a skirmish, and we did lose tens of thousands of people. Korea was a case of intense, bloody fighting confined to a small area. The Gulf War was an annhialation. The Iraq War is a messy cluster foxtrot, but a relatively small, inexpensive one.

But World War 2 required the efforts of the entire country to win. We committed and lost hundreds of thousands of people. Tens of millions (including women) went to work in factories for no other reason than to support the war effort. People underwent rationing and participated in iron and metal recycling drives. We were fighting on multiple GIGANTIC fronts against dozens of countries. We can't even conceive of that kind of war these days. That kind of war can still rescue any economy. But it's not worth the price.

If fact, just for fun, here's a list of the countries who sent troops to war:

ALLIES
Poland
Australia
France
French Indochina
French Morocco
New Zealand
United Kingdom
Indian Empire
Crown Colonies
British Burma
British Malaya
Newfoundland
Nepal
South Africa
Canada
Czechoslovakia (government-in-exile)
Norway
Denmark
Belgium
Belgian Congo
Luxembourg
Netherlands
Dutch East Indies
Free France
Greece
Yugoslavia
Soviet Union
Tannu Tuva
Mongolia
Panama
United States
Alaska
American Samoa
Guam
Hawaii
Puerto Rico
U.S. Virgin Islands
Costa Rica
Dominican Republic
El Salvador
Haiti
Honduras
Nicaragua
Republic of China
Philippine Commonwealth
Guatemala
Cuba
Mexico
Brazil
Ethiopia
Iraq
Bolivia
Colombia
Iran
Yugoslavia
Liberia
Peru
Bahawalpur
Ecuador
Paraguay
Uruguay
Venezuela
Turkey
Lebanon
Syria
Saudi Arabia
Argentina
Chile

vs.

AXIS
Germany
Japan
Italy
Hungary
Romania
Bulgaria
Yugoslavia
Finland
Iraq
Thailand
Manchukuo (Manchuria)
Mengjiang (Inner Mongolia)
Wang Jingwei Government of China
Burma (Ba Maw regime)
Philippines (Second Republic)
India (Provisional Government of Free India)
Vietnam
Cambodia
Laos
Montenegro
Slovakia (Tiso regime)
Albania
Croatia
Greece
Pindus and Macedonia
France (Vichy regime)
Denmark
Soviet Union
Spain

I love history.  Kind of a history channel nerd but I didn't realize all those countries fell under the axis though.  Finland?  Iraq?  Hmmm.

[Ted]

I love history.  Kind of a history channel nerd but I didn't realize all those countries fell under the axis though.  Finland?  Iraq?  Hmmm.

Me too. I was surprised about some of them, too. Didn't realize that some, including big ones like the Soviet Union, actually fought on both sides. Crazy.

[Skandery]

If fact, just for fun, here's a list of the countries who sent troops to war:

Yeah Ted, I believe Denmark sent a one submarine for OIF in 03.

One thing is confusing, those lists have Soviet Union on both sides?

Am I off base on this chain of events? Have I got it wrong? Did the sub-prime EPIC FAIL not precipitate much of this crisis?

Quite a list though I didn't see anything about deregulation and Mark-to-Market accounting (Enron, Worldcom, Arthur Anderson, etc.)  

Hard for me to believe corporations and financial institutions driven by the profit motive needed coaxing by lefties to play fast and loose.  When it comes to things like banks, I have to believe GREED plays a large part.  I think GREED is more powerful than Bill Clinton and Barney Frank, but you can disagree.

=============================================

Education

Unemployment

Farm Subsidies

Food Stamps

School Lunch Programs

Arts Endowments

Right, Lurker.  And what percent of the total national budget to these things comprise.  Its like telling someone to lose weight by getting a haircut!

The social support was started by FDR, expanded by LBJ and now is being expanded even further by BHO.

Yet it was budgets under Nixon, Reagan, and Dubya that drove deficit spending to unparalleled heights, ballooned the national debt everytime, leading to a feedback that will drown your grandchildren's generation in Government interest owed.  By 2080, the GAO estimates Debt Interest will be higher than Soc. Sec, HC, Defense, and Discretionary Spending combined!  

Lockheed Martin tends to be a bigger drain on society's wealth than indigents using foodstamps at your supermarket.  You see, Lockheed Martin has a better lobby.

[Skandery]

First, so that there is no confusion on my stance.  I was against Bush's stimulus (TARP i guess) and I am against Obama's stimulus.  I don't want politicians telling me how best to use MY money to "save" ME. 

On September 15 there was a ?tremendous draw-down of money market accounts in the United States, to the tune of $550 billion."?..?The Treasury opened its window to help. They pumped a $150 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened. If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion  would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

Legitimate fear or a likely story.  Either way we'll never know will we?

So while I have some serious concerns with some things regarding TARP, it did what it was initially intended to do, and without it the results would have been undeniably far, far worse.

I can't help but be skeptical.  You are using Graph 1 to support the above quoted statement, which happens to come from the blog of one Greg Mankiw, Harvard Economics Professor.  And former Head of Council of Economic Advisors in the George W. Bush administration.  A stale, supply sider who argued Bush's tax cuts would stimulate the economy instead of cause the dramatic increases in the deficit we saw.  I have to question the source when a Bush man argues Bush policy. 

That of course doesn?t mean that the rest of us should just shut-up about this just because Obama won the last election

Who said you should?

If you are happy and content with running up nearly a trillion $?s in debt for what is effectively one gigantic uncontrollable giveaway to favored constituencies, with little to no expectation that it will make any impact on what ails us is certainly your prerogative.

1 Trillion, 2 Trillion.  Does anyone in the government really care?  Whether we're lining the pockets of defense contractors or teamsters, does it really matter?  I will continue to have problems with someone drawing a line in the sand, pointing their finger across it, and sniveling "its all THEIR fault!"  Which is essentially how I took that lame article---not that it wasn't that author's right to write it.

[ziggy]

I've taken a few graduate level finance and economic classes, but I don't pretend to know as much as Zig, Rick, or Lurker. Every day I hear people blaming Reaganomics or Republicans or Conservatives for the current problems in the financial sector.

Some of you smarter people, please correct me if I'm wrong in the following line of thought:

Banks failing, Lehman Brothers bankrupted, billions of losses at Merrill Lynch . . . all of this was precipitated primarily by the loss of value in complex financial instruments made up of sub-prime or high-risk mortgages, many of which should have never been made. These instruments were bought, sold, traded back and forth until they were grossly overvalued and their inherent risk was almost completely ignored. When the people who couldn't afford homeownership or those who were allowed to "buy" too much house (thanks in large part to aggressive ARMs, interest-only loans, and no-money-down loans) began to default on their mortgages, these complex financial instruments began to lose value quickly. Large banks and financial institutions that had invested heavily in these instruments began to take heavy paper losses, and later, began to experience major cash shortages due to rising costs of insuring themselves against such losses. Insurance giants like AIG began to fold up and die because they were having unprecedented loss claims against their policies on these complex financial instruments made up of largely bad mortgages.

Bad news piled on top of bad news and the American public began to get worried once the news media began sounding the alarm and once politicians started using the crisis as political capital. The stock market crashed, property values tanked, the credit market shriveled up, giving people less money to spend, companies cut jobs, and widespread panic set in.

As I see it, at the bottom of all of this are just a few factors, one big fat one being all of these aggressive loans. Why were so many bad loans made so aggressively? Here's the chain as I understand it.

1. The 1977 Community Reinvestment Act (which had noble intentions IMO) requires banks and lenders to give people from low-income areas or minorities the same access to credit as everyone else. It did not, however, require those banks to make bad loans.
2. During the Clinton Administration, government-backed companies, Fannie Mae and Freddie Mac (the FMs) were instructed to lower their standards for the loans they purchased from primary lenders. The two companies began purchasing more aggressive, more risky loans at an impressive rate. Credit to buy a home would soon be available to millions who before would never have qualified.
3. Lending institutions, knowing that their loans would be purchased by Fannie Mae and Freddie Mac, invented aggressive, highly accessible, but absurdly unwise (for the average consumer) and even predatory lending instruments. No money down, no interest, two-year adjustable rates--no sane person could really think these things were a good idea for the consumer. But they got people into homes, and that's all that mattered.
4. The market for homes exploded, millions who were not part of the consumer base joined the market, and spent trillions on new homes. Homebuilders erected hundreds of thousands of homes each year. The market was flush with money; the economy rode unprecedented highs.
5. When ARMs came up for adjustment, people started to get hit. Payments went from $750 on a $150K home to $1200, and people couldn't come up with the money. Their credit card balances started to balloon, and bankruptcy and foreclosure loomed close.
6. Around 2000-2003, wise people start to notice what is brewing. Regulators begin to take a closer look at the situation. Eventually, they find what they think is danger at Fannie Mae and Freddie Mac. Evidence shows that Fannie Mae is cooking books so their earnings reach, to the penny, the maximum EPS goals that allow executives to take the highest possible bonuses. Regulators blow the whistle. Congress holds hearings. Some politicians cry that the sky is falling and we must have better regulation of Fannie Mae and Freddie Mac or we'll be hit with a crisis of epic proportions. Others like Barney Frank or Maxine Waters, say there is no crisis, stop crying wolf, without the FMs, we wouldn't have no-interest, no-money-down loans that make homeownership available to the unwashed masses. This is a good thing!
7. The hearings go on for a while, but little real action comes of them. The McCain-sponsored bill (S.190) didn't make it out of committee with an 11 to 9 vote split exactly on party lines. Things are left basically as they are.
8. Time passes, the crisis brews. Fannie Mae and Freddie Mac have to be rescued, beginning the chain reaction that results in losses at the financial institutions that built and bought the bad instruments based on the loans the FMs bought. Those institutions have to be rescued. The companies that insured those institutions against losses have to be rescued. And we're in a crap-hole. Now everyone needs to be rescued.

Am I off base on this chain of events? Have I got it wrong? Did the sub-prime EPIC FAIL not precipitate much of this crisis?

Agree with what you have here.  Would also add that HUD had very aggressive goals on this as well, and they pushed FM and FM and the Banks to go from 12% of these kinds of loans in late 1990's to a goal of 28% in 2009.  Subsidize something you get more of it, tax it you get less of it.  We subsidized housing, specifically housing for people with low income, and we got a lot more of it.  The more we subsidized it the more that was demanded, and until supply caught up with demand the prices continued to rise.  Once prices exceeded a level that could be economically justified, even with the excessive subsidization we provided, then demand crashed.  As demand crashed, supply was still peaking.  Suddenly we have excessive supply, with little demand and prices fell.  As prices fell, more and more people went underwater on what they had bought.  This coupled with refinancing led to default rates increasing which further increased supply, which cause prices to fall even more.

I will say though that this housing crunch is a manifestation of something far larger.  That is this situation is at its core a monetary issue.  The subprime/housing crisis is only a symptom of a far larger issue of money supply manipulation by the Fed, and also from currency manipulation through currency pegs most specifically in China  (interesting article today from Michael Pettis on China  http://mpettis.com/2009/02/more-terrible-trade-numbers-from-china/), but also throughout SE Asia and also the Gulf countries.  Inflation is always and everywhere a monetary function.  The inflation we experienced in housing was directly related to monetary issues.  The inflation we had in oil was directly related to monetary issues.  The inflation we had inthe 1990's in another asset class, equities was a direct result of monetary issues.  We don't have the monetary manipulation and we don't have the subprime crisis, (or for that matter $147 oil, the Asian currency crisis, the Carter era inflation), because we don't have the "CHEAP MONEY" available to finance this problem.  The problem would have stopped sooner, and as a result the correction would have been far less severe.

There were lots of ways in which money was effectively created.  Sterilized currency in China and other pegged regimes.  Excessively low interest rates.  Naked CDS which is a bet for or against the default on a security that you do not own.  Very high leverage rates at hedge funds and the like to the tune of 30-1 to 70-1.


Just read a very good book over Christmas  http://www.mises.org/store/Causes-of-the-Economic-Crisis-The-P323.aspx  It was written in the 1920's and 1930's.  It is a typically dry economics book, but it explains as clearly you can find what is happening today.

For those of you who prefer your economics to be of the Keynesian variety, Nouriel Roubini wrote a paper in early July called "Will Bretton Woods 2 collapse like the original regime did".  He sees the problem clearly as well.  You cannot access he article from RGE monitor as it firewalled off be subscription requirements, but I have a pdf if anyone is interested.

Here is a good article by a Swede Stefan Karlsson in 2004
http://www.mises.org/story/1670

[ziggy]

First, so that there is no confusion on my stance.  I was against Bush's stimulus (TARP i guess) and I am against Obama's stimulus.  I don't want politicians telling me how best to use MY money to "save" ME. 

On this we are in general agreement, other than my only point if you are going have the government step in they step in first and foremost to protect the money supply.

On September 15 there was a ?tremendous draw-down of money market accounts in the United States, to the tune of $550 billion."?..?The Treasury opened its window to help. They pumped a $150 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened. If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion  would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

Legitimate fear or a likely story.  Either way we'll never know will we?

Skandery, like I said I recognize that politicians exaggerate so he very well could be exaggerating.  As far as knowing if we were in a serious crisis or not, I don't believe there is a doubt.  There can be an argument as to how severe the crisis was, but there was a crisis, and the crisis was not unlike other crashes of the past. We saw it happening before our eyes.  So if you choose to ignore what was clearly obvious, because it Bush and Paulson, then so be it.  Irrationality comes in many forms.  If on the other hand you want to say screw it, don't do it even if it means a money supply crashes then so be it as well.  Just be straight out and stake your claim to that.

So while I have some serious concerns with some things regarding TARP, it did what it was initially intended to do, and without it the results would have been undeniably far, far worse.

I can't help but be skeptical.  You are using Graph 1 to support the above quoted statement, which happens to come from the blog of one Greg Mankiw, Harvard Economics Professor.  And former Head of Council of Economic Advisors in the George W. Bush administration.  A stale, supply sider who argued Bush's tax cuts would stimulate the economy instead of cause the dramatic increases in the deficit we saw.  I have to question the source when a Bush man argues Bush policy. 

Come on Skandery, just because he says it or posts doesn't automatically make it false.  Lest you note this is from the Federal Reserve in St. Louis.  The graph is a fact.  Be skeptical all you want, but skepticism does not change an underlying fact.

My only point, if you look at it from the perspective of keeping the monetary system from crashing, I believe it has at least accomplished part of that.  Deflation fears have subsided.  Monetary velocity is improving.  The Fed balance sheet is shrinking.  We are not out of the woods yet, but at least we averted a catastrophe.  That was simply my point.

Now regards to Obama's stimulus package.  He is talking about a potential catastrophe.  Based upon how the jobs market is going, he has a legitimate point.  It is getting very very bad.  He has made a proposal to address this.  Now we can argue that we don't want to do something with regards to this or not.  We can say screw it, let it play out and if unemployment gets to 25% then so be it.  I don't support that notion.  I also don't believe that the bill that just passed will have any real measurable impact on this underlying problem.

If you are happy and content with running up nearly a trillion $?s in debt for what is effectively one gigantic uncontrollable giveaway to favored constituencies, with little to no expectation that it will make any impact on what ails us is certainly your prerogative.

1 Trillion, 2 Trillion.  Does anyone in the government really care?  Whether we're lining the pockets of defense contractors or teamsters, does it really matter?  I will continue to have problems with someone drawing a line in the sand, pointing their finger across it, and sniveling "its all THEIR fault!"  Which is essentially how I took that lame article---not that it wasn't that author's right to write it.

Place blame and accountability where it should be placed.  You want to place blame and accountability on Bush.  Great I am right there with you.  Like I said he and his party got completely trounced.  I voted for the man twice, and while I believe he did some good things, he was a great great disappointment to me in the end.

If you want to place blame and accountability on Obama, then a response of "Well look at what Bush did" is not holding him accountable.  It is just a rationalization and will get us more of what we don't want.  Take it from someone who for too long tried to rationalize away mis-management.  I recognize you have to take the bad with the good, that doesn't mean you should excuse the bad.  Excusing the bad by shifting the blame doesn't make it less bad.

[JoMal]

Yeah Ted, I believe Denmark sent a one submarine for OIF in 03.

One thing is confusing, those lists have Soviet Union on both sides?

You and Ted should know your history regarding the Soviet Union in the Second World War better then that.

Hitler and Stalin were "BBF" at first, both carving out chunks of Poland with equal glee. But Hitler was a false BBF to the Soviet Union. He actually wanted to just be nearer to Mother Russia so his troops could Blitzkrieg Stalin from closer range. Which he did to the complete and utter surprise of Josef, who reportedly was so taken aback by the hideous move he was catatonic for weeks after. But when he got his wits back, he finally did something about it.

This one move by Hitler was probably the single most stupid thing he did to lose that war. The Battle of Stalingrad, where the Germans lost an entire army of 350,000 men - prime German soldiers who were superior warriors - gave the Allies their victory. How things would have played out without this stupidity is one scenario I for one am glad we do not need to consider.

[WayOutWest]

In his inaugural address, President Barack Obama said, "The question we ask today is not whether our government is too big or too small, but whether it works -- whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified." Or as administration spokeswoman Stephanie Cutter said in January, the touchstone is, "What will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class? We're guided by what works, not by any ideology or special interests."

Unfortunately, this rhetoric is not true. Mr. Obama's economic policy is following not what has been proven to work but liberal ideology.

The best way to understand this is to compare what's being proposed now with what Ronald Reagan accomplished. In 1980, amid a seriously dysfunctional economy, Reagan campaigned for president on an economic recovery program with four specific components.

The first was across-the-board reductions in tax rates to provide incentives for saving, investment, entrepreneurship and work. The second component was deregulation to remove unnecessary costs on the economy. In today's world, that would especially mean removing the onerous restrictions on energy production -- allowing drilling offshore and onshore for oil and natural gas, revival of the nuclear power industry, and construction of more electric power plants.

Third was the control of government spending. In 1981, Reagan forced through Congress not only his famed, historic tax cuts, but also a package of budget cuts close to 5% of the federal budget -- equivalent to roughly $150 billion today. In constant dollars, nondefense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan's two terms. By 1988, this spending was still down 14.4% from its 1981 level in constant dollars.

Even with the Reagan defense buildup, which helped win the Cold War, total federal spending declined to 21.2% of GDP in 1989 from 23.5% of GDP in 1983. That's a real reduction of 10% in the size of government relative to the economy.

The fourth component of the Reagan recovery plan was tight, anti-inflation monetary policy, which was spectacularly successful. Inflation was cut in half to 6.2% in 1982 from 13.2% in 1980, and cut in half again to 3.2% in 1983.

We know such policies work because they turned around in just two years an economy far worse than today's. We were suffering from multiyear, double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes, and rising poverty. In fact, what we suffer with today is not the worst economy since the Great Depression, but the worst economy since Jimmy Carter -- the last time liberals were dominant politically and intellectually.

The Obama administration's economic policies do not include any of the four Reagan components. In fact, the stimulus plan is the greatest increase in government spending in the history of the planet. Meanwhile, the Fed is furiously reinflating, sowing more havoc down the line. Mr. Obama is still promising future increases in tax rates by letting the Bush tax cuts lapse, because for ideological reasons he thinks even current rates are too low. And instead of deregulating for more energy production, he is still promising massive increases in regulatory barriers -- through global warming cap-and-trade legislation -- to increased production from proven energy sources to serve an extreme environmentalist ideology.

This is why America seems so hopeless right now, and so depressed. We are stuck going in exactly the wrong direction on economic policy because of currently dominant ideological fashions.

A natural economic recovery will begin sometime this year, not because of the president's policies, but because soon this will be the longest recession since World War II. However, thanks to the administration's retrograde policies -- cut from the cloth of the 1970s and even the 1930s -- the recovery will not be what it should be. Rather, unemployment will remain too high, and inflation will resurge, recreating the disastrous economic results we suffered the last time Keynesian policies were dominant.

I don't have the depth of knowledge regarding economics but you would have to be a moron to beleive that article.  Why is it that so many people buy into the utter BS that was Reaganonics?  Maybe we should revive the search for weapons of mass destruction in Iraq if we are reliving the glory of Reaganonics?  The biggest #@ck rammed up the a#$ of working middle class families was the tax refrom act of 1986.  Thanks Mr. Reagan, may I have another?

I hope Obamanomics is NOTHING like Reaganonics.  Reagan was the first guy I can remember who eased the tax burden of the RICH by shifting it to the middle class.  I hope Obama is nothing like that POS Reagan in any way shape or form, especially on taxes and the economy.  

[Lurker]

In his inaugural address, President Barack Obama said, "The question we ask today is not whether our government is too big or too small, but whether it works -- whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified." Or as administration spokeswoman Stephanie Cutter said in January, the touchstone is, "What will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class? We're guided by what works, not by any ideology or special interests."

Unfortunately, this rhetoric is not true. Mr. Obama's economic policy is following not what has been proven to work but liberal ideology.

The best way to understand this is to compare what's being proposed now with what Ronald Reagan accomplished. In 1980, amid a seriously dysfunctional economy, Reagan campaigned for president on an economic recovery program with four specific components.

The first was across-the-board reductions in tax rates to provide incentives for saving, investment, entrepreneurship and work. The second component was deregulation to remove unnecessary costs on the economy. In today's world, that would especially mean removing the onerous restrictions on energy production -- allowing drilling offshore and onshore for oil and natural gas, revival of the nuclear power industry, and construction of more electric power plants.

Third was the control of government spending. In 1981, Reagan forced through Congress not only his famed, historic tax cuts, but also a package of budget cuts close to 5% of the federal budget -- equivalent to roughly $150 billion today. In constant dollars, nondefense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan's two terms. By 1988, this spending was still down 14.4% from its 1981 level in constant dollars.

Even with the Reagan defense buildup, which helped win the Cold War, total federal spending declined to 21.2% of GDP in 1989 from 23.5% of GDP in 1983. That's a real reduction of 10% in the size of government relative to the economy.

The fourth component of the Reagan recovery plan was tight, anti-inflation monetary policy, which was spectacularly successful. Inflation was cut in half to 6.2% in 1982 from 13.2% in 1980, and cut in half again to 3.2% in 1983.

We know such policies work because they turned around in just two years an economy far worse than today's. We were suffering from multiyear, double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes, and rising poverty. In fact, what we suffer with today is not the worst economy since the Great Depression, but the worst economy since Jimmy Carter -- the last time liberals were dominant politically and intellectually.

The Obama administration's economic policies do not include any of the four Reagan components. In fact, the stimulus plan is the greatest increase in government spending in the history of the planet. Meanwhile, the Fed is furiously reinflating, sowing more havoc down the line. Mr. Obama is still promising future increases in tax rates by letting the Bush tax cuts lapse, because for ideological reasons he thinks even current rates are too low. And instead of deregulating for more energy production, he is still promising massive increases in regulatory barriers -- through global warming cap-and-trade legislation -- to increased production from proven energy sources to serve an extreme environmentalist ideology.

This is why America seems so hopeless right now, and so depressed. We are stuck going in exactly the wrong direction on economic policy because of currently dominant ideological fashions.

A natural economic recovery will begin sometime this year, not because of the president's policies, but because soon this will be the longest recession since World War II. However, thanks to the administration's retrograde policies -- cut from the cloth of the 1970s and even the 1930s -- the recovery will not be what it should be. Rather, unemployment will remain too high, and inflation will resurge, recreating the disastrous economic results we suffered the last time Keynesian policies were dominant.

I don't have the depth of knowledge regarding economics but you would have to be a moron to beleive that article.  Why is it that so many people buy into the utter BS that was Reaganonics?  Maybe we should revive the search for weapons of mass destruction in Iraq if we are reliving the glory of Reaganonics?  The biggest #@ck rammed up the a#$ of working middle class families was the tax refrom act of 1986.  Thanks Mr. Reagan, may I have another?

I hope Obamanomics is NOTHING like Reaganonics.  Reagan was the first guy I can remember who eased the tax burden of the RICH by shifting it to the middle class.  I hope Obama is nothing like that POS Reagan in any way shape or form, especially on taxes and the economy.  

You should actually look at tax revenues and which portion of the population pays how much.  Under Reagan the total percentage of taxes paid by the rich rose.  Their rates went down but so did the rates for lower incomes as well as larger brackets for those lower rates.  EVERYBODY got a tax break under Reagan.  The surpluses in Clinton's admin was due to the tax cuts as well as spending cuts that Reagan & his gang pushed through.

[WayOutWest]

You should actually look at tax revenues and which portion of the population pays how much.  Under Reagan the total percentage of taxes paid by the rich rose.  Their rates went down but so did the rates for lower incomes as well as larger brackets for those lower rates.  EVERYBODY got a tax break under Reagan.  The surpluses in Clinton's admin was due to the tax cuts as well as spending cuts that Reagan & his gang pushed through.

The poor got anywhere from a 3% decrease to a 15% INCREASE.

The middle class America got anywhere from a 3% increase to a 12% decrease

The wealthiest Americans got a 44% DECREASE.

Yea, that seems fair.